- --------------------------------------------------------------------------------
SELECTED CONSOLIDATED FINANCIAL DATA Coltec Industries Inc
- --------------------------------------------------------------------------------
The following table sets forth selected consolidated financial data of Coltec
Industries Inc and subsidiaries (the Company) for the five years ended December
31, 1996:
Years Ended December 31,
(Dollars in millions, except per share data) 1996 1995 1994 1993 1992
-------------------------------------------------------------------
STATEMENT OF EARNINGS DATA
Net sales $ 1,159.7 $ 1,099.6 $ 1,000.2 $ 1,061.4 $ 1,136.5
-------------------------------------------------------------------
Operating income(a) 157.6 142.0 165.2 148.5 198.1
Interest expense, net 74.9 89.9 89.5 110.2 135.8
Income taxes 28.1 17.6 27.2 13.7 24.7
-------------------------------------------------------------------
Earnings from continuing operations
before extraordinary item(a) 54.6 34.5 48.5 24.6 37.6
Discontinued operations(b) 57.1 36.7 45.5 40.6 27.1
Extraordinary item(c) (30.6) (.3) (1.5) (17.8) (106.9)
-------------------------------------------------------------------
Net earnings (loss) $ 81.1 $ 70.9 $ 92.5 $ 47.4 $ (42.2)
==================================================================
Earnings per common share:
Before extraordinary item $ .79 $ .49 $ .70 $ .35 $ .64
Discontinued operations .82 .53 .65 .59 .47
Extraordinary item (.44) -- (.02) (.26) (1.83)
-------------------------------------------------------------------
Net earnings (loss) $ 1.17 $ 1.02 $ 1.33 $ .68 $ (.72)
==================================================================
Ratio of earnings to fixed charges(d) 2.1 1.6 1.8 1.3 1.5
==================================================================
BALANCE SHEET DATA
(AT END OF PERIOD)
Working capital $ 215.6 $ 208.9 $ 189.6 $ 163.1 $ 95.3
Total assets 839.4 894.5 847.5 796.5 817.9
Total debt 720.3 945.8 970.1 1,033.6 1,122.1
Shareholders' equity (417.0) (453.8) (525.6) (625.5) (666.6)
==================================================================
OTHER OPERATING DATA
Operating margin(a) 13.6% 12.9% 16.5% 14.0% 17.4%
Cash provided by operating activities $ 49.5 $ 91.0 $ 98.2 $ 105.2 $ 119.9
Capital expenditures 44.6 42.5 38.2 38.6 25.0
Depreciation of property, plant and equipment 27.0 26.8 25.3 28.3 30.3
Order backlog (at end of period) 678.3 657.1 594.2 598.6 651.8
==================================================================
Number of employees (at end of period) 8,153 8,213 8,387 8,449 9,258
==================================================================
(a) Operating income for 1996 included a charge of $14.2 million related to the
bankruptcy of a major aerospace customer (Fokker).
Operating income for 1995 included a special charge of $27.0 million
primarily to cover the costs of closing the Walbar compressor blade
facility in Canada. The charge also covered selected workforce reductions
throughout the Company.
Operating income for 1993 included a special charge of $25.2 million to
cover the cost of consolidation and rearrangement of certain manufacturing
facilities and related workforce reductions primarily in the Aerospace
Segment.
(b) See note 2 to consolidated financial statements.
(c) See note 3 to consolidated financial statements. The 1992 charge relates to
a recapitalization.
(d) For purposes of calculating the ratio of earnings to fixed charges,
earnings are determined by adding fixed charges (excluding capitalized
interest) and income taxes to earnings from continuing operations before
extraordinary item. Fixed charges consist of interest expense, capitalized
interest and that portion of rental expense deemed to be representative of
the interest factor.
22
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS Coltec Industries Inc
- --------------------------------------------------------------------------------
FINANCIAL REVIEW
The financial review that follows is based on continuing operations excluding
the impact of the discontinued operations discussed in note 2 to consolidated
financial statements and the resultant two operating segments, Aerospace and
Industrial. Prior year information has been restated to reflect the discontinued
operations and the Company's two realigned operating segments (see Industry
Segment Information).
The following discussion of operating results has been structured to
provide an analysis from the perspective of the Company as a whole, followed by
a more detailed analysis for each operating segment.
RESULTS OF OPERATIONS - 1996 COMPARED TO 1995
Company Review
Net sales for 1996 increased 5.5% to $1.16 billion from $1.10 billion in 1995
primarily driven by increases in the Aerospace Segment. Gross profit decreased
to $348.6 million in 1996 from $355.4 million in 1995. The decline in gross
profit margin for 1996 to 30.1% from 32.3% in 1995 stemmed from the impact of
the bankruptcy of a major aerospace customer (Fokker) and increased spending
related to asbestos (see note 14 to consolidated financial statements). Selling
and administrative expenses totaled $191.0 million, or 16.5% of sales (15.9%
excluding the Fokker impact), in 1996 compared to $186.4 million, or 17.0% of
sales, in 1995.
Operating income amounted to $157.6 million in 1996 compared to $142.0
million for 1995. These amounts include the effect of the $14.2 million charge
in 1996 related to the bankruptcy of Fokker and the 1995 special charge of $27.0
million. Operating margin for 1996 was 13.6% (14.8% excluding the effect of the
charge related to Fokker) and for 1995 was 12.9% (15.4% excluding the special
charge). The margin decrease to 14.8% from 15.4% related to the same reasons as
those stated to explain the decrease in overall gross profit margin (excluding
Fokker).
Interest expense decreased 16.7% from $89.9 million in 1995 to $74.9
million in 1996, a direct result of applying a substantial portion of the
proceeds from the second quarter sale of the Company's automotive original
equipment (OE) components operations to debt reduction. The Company also
benefited from the January 1996 redemption of $46.4 million of 11-1/4%
debentures which was funded with lower-cost, variable-rate bank debt.
The effective tax rate was 34.0% in 1996 versus 33.8% in 1995.
The results of discontinued operations reflect the aforementioned second
quarter sale of the automotive OE components operations as well as the fourth
quarter sale of Farnam Sealing Systems. Note 2 to consolidated financial
statements describes these transactions.
The 1996 extraordinary charge of $30.6 million relates to the refinancing
of high-cost, fixed-rate debt with lower-cost, variable-rate bank debt. In
January and December 1996, the Company redeemed $605.8 million of such high-cost
debt.
As a result of the foregoing, net earnings were $81.1 million, or $1.17 per
share, in 1996 while 1995 net earnings amounted to $70.9 million, or $1.02 per
share. 1996 earnings from continuing operations were $54.6 million, or $0.79 per
share, compared to 1995 earnings from continuing operations of $34.5 million, or
$0.49 per share. The 1996 charge related to Fokker impacted net earnings by
$0.13 per share while the 1995 special charge affected net earnings by $0.25 per
share. The aforementioned reduction in interest expense increased earnings by
$0.14 per share in 1996.
Segment Review - Aerospace
Sales in 1996 for the Aerospace Segment aggregated $433.5 million, a 14.6%
increase over 1995 sales of $378.3 million. At Menasco, deliveries doubled in
1996 (41 versus 20) for shipsets of landing gear systems for the Boeing 777
while shipset deliveries for the McDonnell Douglas MD-80 increased more than
50%. This more than offset the lost business for
23
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) Coltec Industries Inc
- --------------------------------------------------------------------------------
the F-70 and F-100 programs due to the bankruptcy of Fokker. Sales for Walbar
increased significantly due to a change in the billing practices for consigned
inventory at its Arizona facility, although profitability levels were not
affected. Sales in 1996 for the other aerospace businesses increased due to
higher sales volumes resulting from the continued strength of the commercial and
regional airline markets as well as higher selling prices for certain products
and new product sales.
Operating income for the Aerospace Segment increased 18.0% to $65.8 million
in 1996 from $55.8 million in 1995, excluding the 1996 charge for the Fokker
bankruptcy and the 1995 special charge. Excluding such charges, the Segment's
operating margin for 1996 was 15.2% versus 14.7% in 1995. Contributing to this
increase was the significant improvement in 1996 operating results of Walbar's
Canadian operations due to the closing of the compressor blade facility as well
as to higher margins that were obtained for its turbine blade business. The
increase was also driven by higher sales volumes and improved margins for the
other engine components businesses. At Menasco, operating results were flat
compared to 1995 with the improvement from the Boeing 777 and MD-80 programs
offsetting the loss of the Fokker business. Menasco was also impacted by a less
favorable mix of landing gear systems for certain commercial airline programs.
Segment Review - Industrial
Industrial Segment sales increased slightly to $726.9 million in 1996 from
$722.6 million in 1995. During 1996, Garlock Sealing Technologies (Garlock)
realized the full year benefit of its December 1995 acquisition of certain
assets of Furon Company's metallic gasket business. Garlock's sales were also
favorably impacted by continued volume increases for KLOZURE oil seals, cut
gaskets and GYLON gasketing products. Moderate sales increases were registered
by the Holley Performance Products (Holley) and France Compressor Products
(France Compressor) Divisions. Fairbanks Morse Engine (FM Engine) Division sales
were unfavorably affected by lower shipments of commercial, government and Alco
engines due to the effects of a ten-week strike. The Stemco Division also
experienced a downturn in sales due to lower trailer production levels.
Operating income for the Industrial Segment was essentially unchanged at
$147.1 million in 1996 compared to $146.6 million in 1995. The Segment's
operating margin for 1996 was 20.2% compared to 20.3% in 1995. Operating income
increased for Garlock, Holley and France Compressor primarily due to higher
sales volumes. The negative impact of the strike at FM Engine was offset by the
gain on the sale of Stemco's truck exhaust business (see note 2 to consolidated
financial statements).
RESULTS OF OPERATIONS - 1995 COMPARED TO 1994
Company Review
Net sales for 1995 increased 9.9% to $1.10 billion from $1.0 billion in 1994 due
to increases in both the Aerospace and Industrial Segments. Gross profit
increased to $355.4 million in 1995 from $351.9 million in 1994. The gross
profit margin for 1995 was 32.3% compared to 35.2% in 1994. Margins decreased
for both the Aerospace and Industrial Segments with 1995 results being impacted
by higher material cost and depreciation expense, increased spending for new
product development and competitive pressures limiting price increases. Selling
and administrative expenses totaled $186.4 million, or 17.0% of sales, in 1995
versus $186.7 million, or 18.7% of sales in 1994.
In the third quarter of 1995, the Company recorded a special charge of
$27.0 million, primarily to cover the costs of closing the Walbar compressor
blade facility in Canada. The facility was closed during 1996. The special
charge included $9.1 million for the cancellation of contractual obligations
resulting from the decision to close the Walbar facility, $7.8 million for asset
writedowns, $5.1 million for severance and employee-related costs and $5.0
million for other costs necessary to implement the shutdown of
24
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) Coltec Industries Inc
- --------------------------------------------------------------------------------
the Walbar facility. The charge also covered selected workforce reductions
throughout the Company. See note 4 to consolidated financial statements.
Operating income totaled $142.0 million in 1995 compared to $165.2 million
in 1994, with 1995 reflecting the $27.0 million special charge. Operating margin
for 1995 was 12.9% (15.4% excluding the special charge) and for 1994 was 16.5%.
The margin decrease to 15.4% related to the same reasons as those stated to
explain the decrease in overall gross profit margin although savings achieved
through cost reduction efforts helped to minimize such decrease.
Interest expense increased slightly in 1995 due to higher interest rates
which was offset in part by a net repayment of debt.
The effective tax rate was 33.8% in 1995 compared to 36.0% in 1994 as 1995
benefited from the utilization of certain tax credits.
The results of discontinued operations reflect the 1996 sale of the
automotive OE components operations described in note 2 to consolidated
financial statements.
As a result of the foregoing, net earnings were $70.9 million, or $1.02 per
share, in 1995 while 1994 net earnings amounted to $92.5 million, or $1.33 per
share. 1995 earnings from continuing operations were $34.5 million, or $0.49 per
share, compared to 1994 earnings from continuing operations of $48.4 million, or
$0.70 per share. The 1995 special charge affected earnings by $0.25 per share.
Segment Review - Aerospace
Sales in 1995 for the Aerospace Segment aggregated $378.3 million, an 11.5%
increase over 1994 sales of $339.2 million. At Menasco, sales were higher on
increased shipments of landing gear systems for the Boeing 777 (20 shipsets
versus 13 shipsets), Fokker 70 and 100, and McDonnell Douglas MD-80 aircraft;
and flight controls for the Fokker 100 and Canadair RJ aircraft. Walbar and
Delavan Gas Turbine Products realized significant sales increases primarily due
to a more favorable economic environment for commercial and regional airlines. A
majority of the Company's other aerospace businesses also had their 1995 sales
increase due to higher sales volumes resulting from the strengthening conditions
in the aerospace industry as well as higher selling prices for certain products.
Operating income for the Aerospace Segment increased 9.4% to $55.8 million
in 1995 from $51.0 million in 1994, excluding the 1995 special charge. Excluding
that charge, the Segment's operating margin for 1995 was 14.7% compared to 15.0%
in 1994. The increase in operating income was due to higher sales volumes which
were directly related to the increasing strength in the aerospace industry.
Segment Review - Industrial
Sales for the Industrial Segment increased 9.1% to $722.6 million in 1995 from
$662.7 million in 1994. At Garlock, sales were higher on improved pricing and
increased demand in the U.S. market for KLOZURE oil seals, cut gaskets and GYLON
gasketing products. Also contributing to the division's sales improvement was
higher international sales. In December 1995, Garlock acquired certain assets of
Furon Company's metallic gasket business, which manufactures gaskets for
high-temperature applications. FM Engine reported higher shipments of engines
for certain U.S. Navy programs and began deliveries in 1995 of Alco engines, a
business acquired in 1994. Quincy Compressor reported record sales in 1995 from
strong demand for rotary screw air compressors and from the increased level of
compressor parts and accessories business. A majority of the Segment's other
divisions reported solid sales increases reflecting improved economic conditions
for the markets they serve.
Operating income for the Industrial Segment increased to $146.6 million in
1995 from $145.4 million in 1994. The Segment's operating margin for 1995 was
20.3% compared to 21.9% in 1994. The higher operating results in this Segment
were driven by a strong domestic industrial economy and new product
introductions. A majority of the Segment's operations realized increased
operating income primarily due to higher sales volumes. Operating margin was
impacted by higher than expected start-up costs on the Alco engine product line
at FM Engine.
25
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) Coltec Industries Inc
- --------------------------------------------------------------------------------
INDUSTRY SEGMENT INFORMATION
In conjunction with the divestitures of the automotive OE components operations
during 1996 (see note 2 to consolidated financial statements), the Company was
realigned into two operating segments. Following are the major products in each
industry segment:
Aerospace: Menasco landing gear and flight control actuation systems;
Walbar blades, vanes and discs for jet and other gas turbine engines; Chandler
Evans fuel pumps and control systems; Delavan gas turbine products; Lewis
Engineering cockpit instrumentation and sensors.
Industrial: Garlock seals, gaskets, packings, bearings, valves and tape;
Quincy air compressors; Delavan spray nozzles; France compressor products;
Fairbanks Morse large diesel and dual-fuel engines; Haber and Sterling dies;
Holley Performance aftermarket automotive products; Ortman Fluid Power
cylinders.
The following table shows financial information by industry segment for the
five years ended December 31, 1996 (see note 15 to consolidated financial
statements):
Years Ended December 31,
(Dollars in millions) 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------
Net sales:
Aerospace $ 433.5 $ 378.3 $ 339.2 $ 356.9 $ 410.2
Industrial 726.9 722.6 662.7 705.4 727.7
Intersegment elimination(a) (.7) (1.3) (1.7) (.9) (1.4)
- -------------------------------------------------------------------------------------------
Total $ 1,159.7 $ 1,099.6 $ 1,000.2 $ 1,061.4 $ 1,136.5
===========================================================================================
Operating income:(b)
Aerospace $ 51.6 $ 32.4 $ 51.0 $ 44.5 $ 77.8
Industrial 147.1 146.6 145.4 135.6 146.0
- -------------------------------------------------------------------------------------------
Total segments 198.7 179.0 196.4 180.1 223.8
Corporate unallocated(c) (41.1) (37.0) (31.2) (31.6) (25.7)
- -------------------------------------------------------------------------------------------
Total $ 157.6 $ 142.0 $ 165.2 $ 148.5 $ 198.1
===========================================================================================
Operating margin:(b)
Aerospace 11.9% 8.6% 15.0% 12.5% 19.0%
Industrial 20.2 20.3 21.9 19.2 20.1
- -------------------------------------------------------------------------------------------
Total 13.6% 12.9% 16.5% 14.0% 17.4%
===========================================================================================
Return on total assets:(b)(d)
Aerospace 12.4% 8.3% 14.3% 12.7% 21.7%
Industrial 51.2 49.1 53.3 49.8 56.8
- -------------------------------------------------------------------------------------------
Total 18.8% 15.9% 19.5% 18.6% 24.2%
===========================================================================================
Backlog:(e)
Aerospace $ 560.7 $ 538.0 $ 445.7 $ 475.1 $ 518.0
Industrial 117.8 119.5 148.5 124.0 133.9
Intersegment elimination (.2) (.4) -- (.5) (.1)
- -------------------------------------------------------------------------------------------
Total $ 678.3 $ 657.1 $ 594.2 $ 598.6 $ 651.8
===========================================================================================
(a) Reflects elimination of intercompany sales between divisions in different
segments.
(b) Operating income for 1996 included a charge of $14.2 million related to the
bankruptcy of a major aerospace customer (Fokker). Excluding this charge,
operating income, operating margin and return on total assets for 1996
would have been $65.8 million, 15.2% and 18.1%, respectively, for Aerospace
and $171.8 million, 15.9% and 22.0%, respectively, for the Company.
Operating income for 1995 included a special charge of $27.0 million as
follows: $23.4 million in the Aerospace Segment and $3.6 million in
Corporate Unallocated. Excluding the special charge, operating income,
operating margin and return on total assets for 1995 would have been $55.8
million, 14.7% and 13.4%, respectively, for Aerospace.
Operating income for 1993 included a special charge of $25.2 million as
follows: $17.2 million in the Aerospace Segment and $8.0 million in the
Industrial Segment. Excluding the special charge, operating income,
operating margin and return on total assets for 1993 would have been $61.7
million, 17.3% and 17.6%, respectively, for Aerospace, and $143.6 million,
20.4% and 52.7%, respectively, for Industrial.
(c) Represents corporate selling and administrative expense, including other
income and expense, that is not allocable to individual industry segments.
(d) Return on total assets is calculated for each segment by dividing segment
operating income by segment total assets at December 31, and for total
Company by dividing total Company operating income by total assets at
December 31.
(e) Of the $678.3 million backlog at December 31, 1996, $218.1 million was
scheduled to be shipped after 1997.
26
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
The Company generated cash from operations of $49.5 million in 1996 compared to
$91.0 million in 1995. Operating cash flows in 1996 were impacted by
approximately $60 million due to the following nonrecurring items: increased
accounts receivable prior to the sale of the automotive OE components operations
as well as income taxes paid related to this divestiture, payments of
liabilities of discontinued operations and an overpayment of income taxes.
Asbestos-related receivables also increased by $15.8 million. Partially
offsetting these items was a slight decrease in inventories, reversing a trend
of the prior two years in which inventory was built up in response to the
start-up of certain aircraft and engine programs. The deferred tax increase in
1996 related to net capital transactions. Working capital at December 31, 1996
of $215.6 million was $6.7 million higher than year-end 1995. The 1996 current
ratio of current assets to current liabilities was 1.99 compared to 1.87 in
1995. Cash and cash equivalents increased to $15.0 million in 1996 from $4.0
million in 1995.
Net cash provided by investing activities of $284.6 million in 1996 was
comprised of proceeds from divestitures amounting to $329.1 million (note 2 to
consolidated financial statements describes these transactions) with capital
expenditures totaling $44.6 million. In 1995, investing activities used cash of
$66.8 million principally for capital expenditures and two acquisitions.
Financing activities in 1996 used cash of $323.0 million. A substantial
portion of the proceeds from the second quarter sale of the Company's automotive
OE components operations was applied to debt reduction. During 1996, the Company
refinanced $617.0 million of high-cost, fixed-rate debt with lower-cost,
variable-rate bank debt. The Company also purchased treasury stock at a cost of
$46.4 million.
Capital Expenditures
Capital expenditures were $44.6 million in 1996 compared to $42.5 million in
1995 and $38.2 million in 1994, as the Company continues to invest in capital
improvements to increase efficiency, reduce costs, pursue new opportunities,
expand production capacity and improve facilities. The level of capital
expenditures has and will vary from year to year, affected by the timing of
capital spending for production equipment for new products, periodic plant and
facility expansion as well as cost reduction and labor efficiency programs.
Capital expenditures during 1996 included amounts for the initial construction
and equipment purchases for significant production expansions at Menasco's
original equipment facilities with completion scheduled for 1997. The Company
estimates capital expenditures for 1997 to approximate $75.0 million, including
amounts for equipment purchases related to capacity expansions and upgrades.
Environmental Matters
The Company's operations are subject to extensive laws and regulations governing
air emissions, wastewater discharges and solid and hazardous waste management
activities. The Company takes a proactive approach in addressing the
applicability of these laws and regulations as they relate to its manufacturing
operations and in proposing and implementing any remedial plans that may be
necessary. The Company has identified certain situations that will require
future capital and non-capital expenditures to maintain or improve compliance
with current environmental laws and regulations. The majority of the identified
situations relate to remediation projects at former operating sites that have
been sold or closed and primarily deal with soil and groundwater remediation.
The Company has been notified that it is among Potentially Responsible
Parties under federal environmental laws, or similar state laws, relative to the
costs of investigating and in some cases remediating contamination by hazardous
materials at several sites. Such laws impose joint and several liability for the
costs of investigating and remediating properties contaminated by hazardous
materials. Liability for these costs can be imposed on present and former owners
or operators of the properties or on parties who generated the wastes that
contributed to the contamination.
27
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) Coltec Industries Inc
- --------------------------------------------------------------------------------
The Company's policy is to accrue environmental remediation costs when it
is both probable that a liability has been incurred and the amount can be
reasonably estimated. While it is often difficult to reasonably quantify future
environmental-related expenditures, the Company currently estimates its future
non-capital expenditures related to environmental matters to range between $23.0
million and $48.0 million. In connection with these expenditures, the Company
had accrued $35.0 million at December 31, 1996 representing management's best
estimate of probable non-capital environmental expenditures. These non-capital
expenditures are estimated to be incurred over the next 10 to 20 years. In
addition, capital expenditures aggregating $5.0 million may be required during
the next two years related to environmental matters. Although the Company is
pursuing insurance recovery in connection with certain of these matters, no
receivable has been recorded with respect to any potential recovery of costs in
connection with any environmental matter. During 1996, costs associated with
environmental remediation and ongoing assessment were not significant. See notes
1 and 14 to consolidated financial statements.
The measurement of liability is based on an evaluation of currently
available facts with respect to each individual situation and takes into
consideration factors such as existing technology, presently enacted laws and
regulations and prior experience in remediation of contaminated sites. As
assessments and remediation progress at individual sites, these liabilities are
reviewed periodically and adjusted to reflect additional technical and legal
information which becomes available.
The Company believes it is either in material compliance with all currently
applicable regulations or is operating in accordance with the appropriate
variances and compliance schedules or similar arrangements.
Actual costs to be incurred for identified situations in future periods may
vary from the estimates, given inherent uncertainties in evaluating
environmental exposures due to unknown conditions, changing government
regulations and legal standards regarding liability and evolving related
technologies. Subject to the imprecision in estimating future environmental
costs, the Company believes that compliance with current laws and regulations
will not require significant capital expenditures or have a material adverse
effect on its consolidated results of operations or financial position.
Asbestos Litigation
The Company and certain of its subsidiaries are defendants in various lawsuits
involving asbestos-containing products. See note 14 to consolidated financial
statements for information on asbestos litigation.
Other Commitments
Liabilities of discontinued operations at December 31, 1996 of $185.0 million
relate to contingent contractual obligations, environmental matters, reserves
for postretirement benefits and other future estimated costs for various
discontinued operations. The Company expects future cash payments will extend at
least over the next five to ten years.
At December 31, 1996, the Company estimates that expenditures over the next
three years for the cost of modifying existing software for the Year 2000 date
transition will have an immaterial impact on consolidated operating results.
Financial Resources
At December 31, 1996, total debt was $720.3 million compared with $945.8 million
at year-end 1995. In December 1996, the Company amended its existing credit
facility increasing the total commitment to $850.0 million from $465.0 million
and extending the maturity date to December 15, 2001. The additional commitment
was used to redeem substantially all of the Company's outstanding high-cost,
fixed-rate debt. The amended credit facility also provides for a maximum
issuance of $125.0 million for letters of credit and reductions in the total
commitment of $75.0 million and $100.0 million at December 15, 1999 and 2000,
respectively. At December 15, 1996, $658.0 million of borrowings and $45.2
million of
28
letters of credit were outstanding under the credit facility, leaving
availability of $146.8 million. The Company's financing agreements contain
normal financial and restrictive covenants. The Company believes that internally
generated funds and borrowings available under its credit facility will be
sufficient to meet its foreseeable working capital, capital expenditure and debt
service requirements.
Subsequent to year-end, the Company entered into interest rate swaps to
reduce (hedge) the impact of interest rate changes for variable-rate borrowings
under its credit facility. The agreements include an aggregate notional amount
of $265.0 million, fixed interest rates ranging from 5.78% to 6.40% and maturity
dates ranging from January 1999 to February 2002.
QUARTERLY FINANCIAL DATA
The following table sets forth unaudited quarterly financial data for the years
ended 1996 and 1995:
Quarter
(In thousands, except per share data) 1st 2nd 3rd 4th
- ---------------------------------------------------------------------------------------
1996
Net sales $ 281,198 $293,015 $ 287,216 $ 298,262
- ---------------------------------------------------------------------------------------
Gross profit 73,182 93,654 85,858 95,874
- ---------------------------------------------------------------------------------------
Operating income 21,331 44,888 42,140 49,216
- ---------------------------------------------------------------------------------------
Earnings from continuing operations before
extraordinary item 127 16,217 16,562 21,664
Discontinued operations(a) 7,649 43,507 1,509 4,518
Extraordinary item(b) (1,822) -- (59) (28,733)
- ---------------------------------------------------------------------------------------
Net earnings $ 5,954 $ 59,724 $ 18,012 $ (2,551)
=======================================================================================
Earnings per common share
Before extraordinary item $- $ .23 $ .24 $ .32
Discontinued operations .11 .63 .02 .06
Extraordinary item (.02) -- -- (.42)
- ---------------------------------------------------------------------------------------
Net earnings $ .09 $ .86 $ .26 $ (.04)
=======================================================================================
1995
Net sales $ 273,306 $287,330 $ 265,519 $ 273,469
- ---------------------------------------------------------------------------------------
Gross profit 90,252 94,559 87,913 82,699
- ---------------------------------------------------------------------------------------
Operating income 42,140 46,657 13,529 39,697
- ---------------------------------------------------------------------------------------
Earnings from continuing operations before
extraordinary item 12,960 15,059 (5,803) 12,305
Discontinued operations(a) 10,526 9,010 7,607 9,496
Extraordinary item(b) (82) -- -- (172)
- ---------------------------------------------------------------------------------------
Net earnings $ 23,404 $ 24,069 $ 1,804 $ 21,629
=======================================================================================
Earnings per common share
Before extraordinary item $ .18 $ .22 $ (.08) $ .17
Discontinued operations .15 .13 .11 .14
Extraordinary item -- -- -- --
- ---------------------------------------------------------------------------------------
Net earnings $ .33 $ .35 $ .03 $ .31
=======================================================================================
(a) See note 2 to consolidated financial statements.
(b) See note 3 to consolidated financial statements.
29
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF EARNINGS Coltec Industries Inc
- --------------------------------------------------------------------------------
Years Ended December 31,
(In thousands, except per share data) 1996 1995 1994
---------------------------------------
Net sales $ 1,159,691 $ 1,099,624 $ 1,000,218
Cost of sales 811,123 744,201 648,337
---------------------------------------
Gross profit 348,568 355,423 351,881
Selling and administrative 190,993 186,401 186,712
Special charge -- 27,000 --
---------------------------------------
Operating income 157,575 142,022 165,169
Interest expense, net 74,894 89,886 89,472
---------------------------------------
Earnings from continuing operations before
income taxes and extraordinary item 82,681 52,136 75,697
Income taxes 28,111 17,615 27,251
---------------------------------------
Earnings from continuing operations
before extraordinary item 54,570 34,521 48,446
---------------------------------------
Discontinued operations (net of tax)
Income from operations 19,252 36,639 45,543
Gain on sale 37,931 -- --
---------------------------------------
Total discontinued operations 57,183 36,639 45,543
---------------------------------------
Extraordinary item (net of tax) (30,614) (254) (1,472)
---------------------------------------
Net earnings $ 81,139 $ 70,906 $ 92,517
=======================================
Earnings per common share
Before extraordinary item $ .79 $ .49 $ .70
---------------------------------------
Discontinued operations
Income from operations .28 .53 .65
Gain on sale .54 -- --
---------------------------------------
Total discontinued operations .82 .53 .65
---------------------------------------
Extraordinary item (.44) -- (.02)
---------------------------------------
Net earnings $ 1.17 $ 1.02 $ 1.33
---------------------------------------
Average common shares 69,376 69,839 69,815
=======================================
The accompanying notes to consolidated financial statements are an integral part
of these statements.
30
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS Coltec Industries Inc
- --------------------------------------------------------------------------------
December 31,
(In thousands, except share data) 1996 1995
-------------------------
ASSETS
Current assets
Cash and cash equivalents $ 15,029 $ 3,971
Accounts and notes receivable, net of allowance
of $2,007 in 1996 and $4,174 in 1995 190,325 192,011
Inventory, net 204,198 229,436
Deferred income taxes 10,524 13,902
Other current assets 12,769 10,174
-------------------------
Total current assets 432,845 449,494
Property, plant and equipment, net 214,790 230,473
Costs in excess of net assets acquired, net 132,872 140,811
Other assets 58,869 73,724
-------------------------
$ 839,376 $ 894,502
=========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt $ 2,528 $ 226
Accounts payable 55,410 72,735
Accrued expenses 145,104 164,617
Current portion of liabilities of discontinued operations 14,229 3,000
-------------------------
Total current liabilities 217,271 240,578
Long-term debt 717,722 945,606
Deferred income taxes 50,646 14,878
Other liabilities 100,004 120,670
Liabilities of discontinued operations 170,740 26,532
Commitments and contingencies
Shareholders' equity
Preferred stock - $.01 par value, 2,500,000 shares authorized,
issued and outstanding - none -- --
Common stock - $.01 par value, 100,000,000 shares authorized, 70,398,661
and 70,077,350 shares issued at December 31, 1996 and 1995, respectively
(excluding 25,000,000 shares held by a wholly-owned subsidiary) 704 701
Capital surplus 643,221 639,419
Retained deficit (1,006,903) (1,088,042)
Unearned compensation (2,136) (2,408)
Minimum pension liability (3,200) --
Foreign currency translation adjustments (1,151) (1,816)
-------------------------
(369,465) (452,146)
Less cost of 3,182,822 and 100,346 shares of common stock in treasury
at December 31, 1996 and 1995, respectively (47,542) (1,616)
-------------------------
(417,007) (453,762)
-------------------------
$ 839,376 $ 894,502
=========================
The accompanying notes to consolidated financial statements are an integral part
of these statements.
31
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS Coltec Industries Inc
- --------------------------------------------------------------------------------
Years Ended December 31,
(In thousands) 1996 1995 1994
--------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 81,139 $ 70,906 $ 92,517
Adjustments to reconcile net earnings to cash
provided by operating activities
Gain on divestitures (66,791) -- --
Extraordinary item 51,001 390 2,264
Special charge -- 27,000 --
Depreciation and amortization 36,014 42,086 42,131
Deferred income taxes 39,146 5,665 (17,460)
Payments of liabilities of discontinued operations (19,563) (2,504) (3,174)
Other operating items (9,571) 8,062 13,695
Changes in assets and liabilities, net of effects from divestitures:
Accounts and notes receivable (42,602) (6,632) (11,808)
Inventories 2,704 (32,373) (33,511)
Other current assets (617) 3,762 (1,961)
Accounts payable (55) (4,283) 14,362
Accrued expenses (21,302) (21,071) 1,163
--------------------------------
Cash provided by operating activities 49,503 91,008 98,218
--------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from divestitures 329,113 -- --
Capital expenditures (44,550) (42,496) (38,191)
Acquisition of businesses -- (21,750) (4,048)
Other -- (2,512) 864
--------------------------------
Cash provided by (used in) investing activities 284,563 (66,758) (41,375)
--------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from debt refinancing 542,000 -- --
Issuance of long-term debt -- 19,070 335,042
Repayment of long-term debt (622,582) (13,537) (393,446)
Decrease in revolving facility, net (196,000) (30,000) --
Purchase of treasury stock (46,426) -- --
--------------------------------
Cash used in financing activities (323,008) (24,467) (58,404)
--------------------------------
Increase (decrease) in cash and cash equivalents 11,058 (217) (1,561)
Cash and cash equivalents - beginning of year 3,971 4,188 5,749
--------------------------------
Cash and cash equivalents - end of year $ 15,029 $ 3,971 $ 4,188
================================
Supplemental cash flow data:
Cash paid for:
Interest $ 74,870 $ 92,292 $ 92,304
Income taxes 27,667 41,685 40,046
The accompanying notes to consolidated financial statements are an integral part
of these statements.
32
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Coltec Industries Inc
- --------------------------------------------------------------------------------
Foreign
Common Stock Minimum Currency
------------ Capital Retained Unearned Pension Translation
(In thousands) Shares Amount Surplus Deficit Compensation Liability Adjustments
- ------------------------------------------------------------------------------------------------------------
Balance, December 31, 1993 69,943 $699 $636,846 $(1,251,465) $(5,552) $(4,205) $ 1,077
Net earnings 92,517
Issuance of restricted stock, net 73 1 1,370 2,072
Exercise of stock options (114)
Tax benefit from stock option
and incentive plan 305
Minimum pension liability 4,205
Foreign currency translation
adjustments (1,758)
- ------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 70,016 700 638,407 (1,158,948) (3,480) - (681)
Net earnings 70,906
Issuance of restricted stock, net 61 1 1,006 1,072
Exercise of stock options (30)
Tax benefit from stock option
and incentive plan 36
Foreign currency translation
adjustments (1,135)
- ------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 70,077 701 639,419 (1,088,042) (2,408) - (1,816)
- ------------------------------------------------------------------------------------------------------------
Net earnings 81,139
Repurchase of common stock
Issuance of restricted stock, net 322 3 3,941 272
Exercise of stock options
Tax benefit from stock option
and incentive plan (139)
Minimum pension liability (3,200)
Foreign currency translation
adjustments 665
- ------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 70,399 $704 $643,221 $(1,006,903) $(2,136) $(3,200) $(1,151)
============================================================================================================
Treasury Stock
----------------
(In thousands) Shares Amount Total
- -----------------------------------------------------------------
Balance, December 31, 1993 (179) $ (2,890) $(625,490)
Net earnings 92,517
Issuance of restricted stock, net (18) (293) 3,150
Exercise of stock options 98 1,584 1,470
Tax benefit from stock option
and incentive plan 305
Minimum pension liability 4,205
Foreign currency translation
adjustments (1,758)
- -----------------------------------------------------------------
Balance, December 31, 1994 (99) (1,599) (525,601)
Net earnings 70,906
Issuance of restricted stock, net (26) (422) 1,657
Exercise of stock options 25 405 375
Tax benefit from stock option
and incentive plan 36
Foreign currency translation
adjustments (1,135)
- -----------------------------------------------------------------
Balance, December 31, 1995 (100) (1,616) (453,762)
Net earnings 81,139
Repurchase of common stock (3,129) (46,426) (46,426)
Issuance of restricted stock, net (10) (142) 4,074
Exercise of stock options 56 642 642
Tax benefit from stock option
and incentive plan (139)
Minimum pension liability (3,200)
Foreign currency translation
adjustments 665
- -----------------------------------------------------------------
Balance, December 31, 1996 (3,183) $(47,542) $(417,007)
=================================================================
The accompanying notes to consolidated financial statements are an integral part
of these statements.
33
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Coltec Industries Inc
- --------------------------------------------------------------------------------
(Dollars in thousands)
1. SUMMARY OF ACCOUNTING POLICIES
Organization: Coltec Industries Inc (the Company) is a diversified manufacturing
company serving the aerospace and general industrial markets primarily in the
United States, Canada and Europe.
Basis of Presentation: Investments in which the Company has ownership of 50% or
more of the voting common stock are consolidated in the financial statements.
Intercompany accounts and transactions are eliminated.
Certain 1995 and 1994 amounts have been reclassified to conform to the 1996
presentation.
Accounting Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.
Revenue Recognition: Revenue, including revenue under long-term commercial and
government contracts and programs, is recorded at the time deliveries or
customer acceptances are made and the Company has the contractual right to bill.
Inventories: Inventories, including inventories under long-term commercial and
government contracts and programs, are valued at the lower of cost or market. In
accordance with industry practice, inventories include amounts related to
contracts and programs having long production cycles, portions of which are not
expected to be realized within one year. Cost elements included in inventory are
material, labor and factory overhead, primarily using standard cost, which
approximates actual cost. Cost on approximately 50% of the domestic inventory at
December 31, 1996 was determined on the last-in, first-out basis. Cost on the
remainder of the inventory is generally determined on the first-in, first-out
basis.
Property, Plant and Equipment: Property, plant and equipment is carried at cost.
Depreciation of plant and equipment is provided generally by using the
straight-line method, based on estimated useful lives of the assets. The ranges
of estimated useful lives used in computing depreciation for financial reporting
were as follows:
Years
- --------------------------------------------------------------------------------
Land improvements 5 - 40
Buildings and equipment 10 - 45
Machinery and equipment 3 - 20
================================================================================
For leasehold improvements, the estimated useful life is the lesser of the
asset life or the lease term.
Renewals and betterments are capitalized by additions to the related asset
accounts, while repair and maintenance costs are charged against earnings.
Costs in Excess of Net Assets Acquired: It is the Company's policy to
amortize the excess costs arising from acquisitions on a straight-line basis
over periods not to exceed 40 years. At December 31, 1996 and 1995, accumulated
amortization was $66,698 and $62,275, respectively.
In 1996, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, which requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the related undiscounted cash flows estimated to be generated
are less than the assets' carrying value. No such impairment losses were
recorded during 1996.
Income Taxes: Income taxes have been provided using the liability method. Under
this method, deferred tax assets and liabilities are recognized based on
differences between the financial statement and tax bases of assets and
liabilities using presently enacted tax rates.
34
Environmental Expenditures:
Expenditures that relate to an existing condition which do not contribute to
current or future revenue generation, are accrued when it is probable that an
obligation has been incurred and the amount can be reasonably estimated.
Expenditures incurred for environmental compliance with respect to pollution
prevention and ongoing monitoring programs are expensed as incurred.
Expenditures that increase the value of the property are capitalized.
Start-up Costs: Start-up costs related to new operations and new product lines
are expensed as incurred.
Cash and Cash Equivalents: The Company considers short-term investments with a
maturity of three months or less to be cash equivalents for purposes of the
Consolidated Statements of Cash Flows.
Foreign Currency Translation: The financial statements of foreign subsidiaries
were translated into U.S. dollars at year-end rates for assets and liabilities
and at monthly weighted average rates for income and expenses. Translation
adjustments are included in shareholders' equity in the Consolidated Balance
Sheets. Foreign currency transaction gains and losses are included in net
earnings.
Earnings Per Share: Earnings per common share are computed by dividing earnings
by the weighted average number of common and common equivalent shares
outstanding during each period. Common equivalent shares are shares issuable on
the exercise of stock options and shares of restricted stock, net of shares
assumed to have been purchased using the treasury stock method.
2. DIVESTITURES
In June 1996, the Company sold Holley Automotive, Coltec Automotive and
Performance Friction Products to Borg-Warner Automotive, Inc. for $296,522 in
cash. In December 1996, Coltec sold Farnam Sealing Systems Division to Meillor
SA for $20,728 in cash and a note receivable for $3,000. The sale of these
automotive original equipment (OE) components businesses resulted in an
after-tax gain of $37,931 (net of income taxes of $25,332), net of liabilities
retained, transaction costs and contingent contractual obligations relating to
the sales. The sale of these businesses represented a disposal of the Company's
Automotive Segment. Accordingly, the Consolidated Statements of Earnings have
been restated to reflect the operations of the automotive OE components
businesses as a discontinued operation. Net sales of the discontinued operations
were $182,599, $302,260 and $326,543 in 1996, 1995 and 1994, respectively. At
December 31, 1995, the current and non-current net assets of the automotive OE
components businesses were $25,291 and $32,967, respectively.
Liabilities of discontinued operations at December 31, 1996 of $185.0
million relate to contingent contractual obligations, environmental matters,
reserves for postretirement benefits and other future estimated costs for
various discontinued operations.
In December 1996, the Company also sold the exhaust systems and components
business of its Stemco Division for $11,863 in cash resulting in a pre-tax gain
of $3,528. Such gain is reflected in the 1996 Consolidated Statement of Earnings
in continuing operations. Net sales of the exhaust systems and components
business were $18,085, $20,503 and $19,300 in 1996, 1995 and 1994, respectively.
3. EXTRAORDINARY ITEM
In 1996, the Company redeemed all of its outstanding 11-1/4% debentures and
substantially all of its outstanding 9-3/4% and 10-1/4% senior notes at
redemption prices ranging from 105.125% to 106.987% of par. The redemptions
including consent payments resulted in an extraordinary charge of $30,614, net
of income taxes of $20,387.
The Company incurred extraordinary charges of $254, net of income taxes of
$136, and $1,472, net
35
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Coltec Industries Inc
- --------------------------------------------------------------------------------
of income taxes of $792, in 1995 and 1994, respectively, in connection with
early retirement of debt.
4. SPECIAL CHARGES
In the third quarter of 1995, the Company recorded a special charge of $27,000,
primarily to cover the costs of closing the Walbar compressor blade facility in
Canada. The facility was closed during 1996. The special charge included costs
to cover the cancellation of contractual obligations resulting from the decision
to close the Walbar facility, asset write-downs, severance and employee-related
costs and other costs necessary to implement the shutdown of the Walbar facility
and selected workforce reductions throughout the Company. The related reserve
for the years ended December 31, 1996 and 1995 was as follows:
Contractual Asset
Obligations Writedowns Severance Other Total
- --------------------------------------------------------------------------------
Original reserve $ 9,065 $ 7,845 $ 5,084 $ 5,006 $ 27,000
1995 activity (65) (4,549) (1,778) (2,553) (8,945)
- --------------------------------------------------------------------------------
December 31, 1995 9,000 3,296 3,306 2,453 18,055
- --------------------------------------------------------------------------------
1996 activity (961) (1,875) (1,876) (1,597) (6,309)
- --------------------------------------------------------------------------------
December 31, 1996 $ 8,039 $ 1,421 $ 1,430 $ 856 $ 11,746
================================================================================
5. INVENTORY
Inventories consisted of the following at December 31, 1996 and 1995:
1996 1995
- --------------------------------------------------------------------------------
Finished goods $ 48,813 $ 55,533
Work in process and finished parts 122,817 146,916
Raw materials and supplies 32,568 26,987
- --------------------------------------------------------------------------------
Total $204,198 $229,436
================================================================================
At December 31, 1996 and 1995, $45,371 and $36,750, respectively, of
contract advances were offset against inventories under long-term commercial and
government contracts and programs in the Consolidated Balance Sheets. Losses on
commercial and government contracts and programs are recognized in full when
identified.
The excess of current cost over last-in, first-out cost at December 31,
1996 and 1995 was $20,152 and $20,400, respectively.
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at December 31, 1996
and 1995:
1996 1995
- --------------------------------------------------------------------------------
Land and improvements $ 16,182 $ 17,562
Buildings and equipment 121,515 134,320
Machinery and equipment 415,749 481,538
Leasehold improvements 11,239 10,028
Construction in progress 23,010 22,837
- --------------------------------------------------------------------------------
Total 587,695 666,285
Less accumulated depreciation 372,905 435,812
- --------------------------------------------------------------------------------
Total $214,790 $230,473
================================================================================
7. ACCRUED LIABILITIES
Accrued liabilities consisted of the following at December 31, 1996 and 1995:
1996 1995
- --------------------------------------------------------------------------------
Salaries, wages and
employee benefits $ 37,979 $ 47,348
Taxes 8,870 25,008
Interest 3,032 14,918
Asbestos 60,659 47,791
Other 34,564 29,552
- --------------------------------------------------------------------------------
Total $145,104 $164,617
================================================================================
36
8. INCOME TAXES
Domestic and foreign components of earnings from continuing operations before
income taxes and extraordinary item were as follows for the years ended December
31, 1996, 1995 and 1994:
1996 1995 1994
- --------------------------------------------------------------------------------
Domestic $68,199 $25,426 $55,093
Foreign 14,482 26,710 20,604
- --------------------------------------------------------------------------------
Total $82,681 $52,136 $75,697
================================================================================
Income taxes on earnings from continuing operations were as follows for the
years ended December 31, 1996, 1995 and 1994:
1996 1995 1994
- --------------------------------------------------------------------------------
Current
Domestic $ (2,912) $ 4,717 $ 31,148
Foreign 13,634 7,638 11,253
- --------------------------------------------------------------------------------
10,722 12,355 42,401
- --------------------------------------------------------------------------------
Deferred
Domestic 24,126 3,836 (12,457)
Foreign (6,737) 1,424 (2,693)
- --------------------------------------------------------------------------------
17,389 5,260 (15,150)
- --------------------------------------------------------------------------------
Total $ 28,111 $ 17,615 $ 27,251
================================================================================
As discussed in note 2 to consolidated financial statements, the Company
sold its original equipment components businesses in 1996 resulting in income
tax on the gain on sale of $25,332 and income tax on income from discontinued
operations of $9,919, $19,043 and $25,617 in 1996, 1995 and 1994, respectively.
As discussed in note 3 to consolidated financial statements, the Company
incurred extraordinary charges related to early retirement of debt resulting in
an income tax benefit of $20,387 in 1996, $136 in 1995 and $792 in 1994.
Reconciliation of tax at the U.S. statutory income tax rate of 35% for the
years ended December 31, 1996, 1995 and 1994 to income taxes on earnings from
continuing operations was as follows:
1996 1995 1994
- --------------------------------------------------------------------------------
Tax at U.S.
statutory rate $ 28,938 $ 18,248 $ 26,494
Repatriation of
non-U.S. earnings 1,900 2,692 2,713
Non-U.S. rate
differential 1,828 (287) 1,349
Utilization
of tax credits (1,104) (960) --
Adjustment
of reserves (6,979) (6,172) (6,381)
Other 3,528 4,094 3,076
- --------------------------------------------------------------------------------
Income taxes $ 28,111 $ 17,615 $ 27,251
- --------------------------------------------------------------------------------
Effective tax rate 34.0% 33.8% 36.0%
================================================================================
The significant components of deferred tax assets and liabilities at
December 31, 1996 and 1995 were as follows:
1996 1995
- --------------------------------------------------------------------------------
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Assets Liabilities Assets Liabilities
- --------------------------------------------------------------------------------
Excess tax
over book
depreciation $ -- $(26,754) $ -- $(29,932)
Book/tax
differences
on contract
income -- (27,154) -- (29,299)
Employee
benefit plans 19,749 -- 22,011 --
Accrued expenses
and liabilities 10,625 -- 12,527 --
Foreign tax credit
carryforwards 6,600 -- 7,300 --
Capital
transactions, net -- (28,127) -- --
Other 11,538 -- 23,717 --
- --------------------------------------------------------------------------------
48,512 (82,035) 65,555 (59,231)
Less valuation
allowance (6,600) -- (7,300) --
- --------------------------------------------------------------------------------
Total $ 41,912 $(82,035) $ 58,255 $(59,231)
================================================================================
The valuation allowance is attributable to foreign tax credit
carryforwards, which expire in 1997 through 2001.
37
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Coltec Industries Inc
- --------------------------------------------------------------------------------
9. LONG-TERM DEBT
Long-term debt consisted of the following at December 31, 1996 and 1995:
1996 1995
- --------------------------------------------------------------------------------
Credit Agreement 6.7%*(a) $658,000 $261,000
9-3/4% senior notes due 1999(b) 7,507 150,000
9-3/4% senior notes due 2000(c) 7,305 200,000
10-1/4% senior subordinated
notes due 2002(d) 4,009 218,080
11-1/4% debentures due
1996-2015 -- 67,782
Other due 1997-2010 43,429 48,970
- --------------------------------------------------------------------------------
720,250 945,832
Less current portion 2,528 226
- --------------------------------------------------------------------------------
$717,722 $945,606
================================================================================
*Indicates average interest rate for 1996.
a) In 1996, the reducing revolving credit facility (the Credit Agreement),
entered into with a syndicate of banks, was amended to expire December 15,
2001 with the total commitment increased to $850,000 from $465,000 (see
note 3 to consolidated financial statements). The facility will be reduced
by $75,000 on December 15, 1999 and an additional $100,000 on December 15,
2000. The Credit Agreement provides up to $125,000 for the issuance of
letters of credit. At December 31, 1996, $45,232 of letters of credit had
been issued under the Credit Agreement. Obligations under the facility are
secured by substantially all of the Company's assets. Borrowings under the
facility bear interest, at the Company's option, at an annual rate equal to
the base rate or the Eurodollar rate plus 0.875%. The base rate is the
higher of 0.50% in excess of the Federal Reserve reported certificate of
deposit rate and the prime lending rate. Letter of credit fees of 0.875%
are payable on outstanding letters of credit and a commitment fee of 0.375%
is payable on the unutilized facility.
Subsequent to year-end, the Company entered into interest rate swaps
to reduce (hedge) the impact of interest rate changes for variable rate
borrowings under its credit facility. The agreements include an aggregate
notional amount of $265,000, fixed interest rates ranging from 5.78% to
6.40% and maturity dates ranging from January 1999 to February 2002.
b) The unsecured 9-3/4% senior notes due 1999 are not redeemable prior to
maturity on November 1, 1999.
c) The unsecured 9-3/4% senior notes due 2000 are not redeemable prior to
maturity on April 1, 2000.
d) The remaining unsecured 10-1/4% senior subordinated notes are redeemable at
the option of the Company on or after April 1, 1997 at 105.125% of par,
declining to 100% of par on or after April 1, 1999.
The Company's financing agreements contain normal financial and restrictive
covenants.
Minimum payments on long-term debt due within five years from December 31,
1996 are as follows:
- --------------------------------------------------------------------------------
1997 $ 2,528
1998 560
1999 23,629
2000 7,676
2001 658,371
Thereafter 27,486
- --------------------------------------------------------------------------------
Total $720,250
================================================================================
10. PENSION PLANS
The Company and certain of its subsidiaries have in effect, for substantially
all U.S. employees, pension plans under which funds are deposited with trustees.
The benefits under these plans are based primarily on years of service and
either final average salary or fixed amounts for each year of service. The
Company's policy is to fund amounts that are actuarially determined to provide
the plans with sufficient assets to meet future benefit payment requirements.
Plan assets consist principally of publicly traded equity and fixed-income
securities. Pension coverage for employees of non-U.S. subsidiaries is provided
in accordance with local requirements and customary practices.
For certain pension plans, the plan assets exceed the accumulated benefit
obligations (overfunded plans); and in the remainder of the plans, the
accumulated benefit obligations exceed the plan assets (underfunded plans).
38
As of December 31, 1996 and 1995, the funded status of the Company's pension
plans was as follows:
1996 1995
- --------------------------------------------------------------------------------
Over- Under- Over- Under-
funded funded funded funded
Plans Plans Plans Plans
- --------------------------------------------------------------------------------
Actuarial present
value of benefit
obligations:
Vested benefit
obligations $ 259,200 $ 119,158 $ 252,612 $ 125,481
================================================================================
Accumulated
benefit
obligations $ 265,396 $ 124,022 $ 259,139 $ 130,740
================================================================================
Projected
benefit
obligations $ 289,973 $ 127,234 $ 287,433 $ 135,176
Plan assets at
fair value 408,979 79,735 365,704 91,894
- --------------------------------------------------------------------------------
Funded status 119,006 (47,499) 78,271 (43,282)
Unrecognized
net (gain) loss (89,702) (205) (57,992) 4,220
Unrecognized
transition
(asset)
obligations (1,389) 628 (1,747) 757
Unrecognized
prior service
cost 2,837 15,033 2,724 10,947
Minimum
liability
adjustment -- (12,200) -- (2,044)
- --------------------------------------------------------------------------------
(Accrued)
prepaid
pension cost $ 30,752 $ (44,243) $ 21,256 $ (29,402)
================================================================================
Included in the underfunded plans are amounts for unfunded, non-qualified
defined benefit plans.
At December 31, 1996, the Company recorded a minimum liability of $12,200
for underfunded plans with a partial offset to other assets of $7,300 and an
after-tax charge to shareholders' equity of $3,200. At December 31, 1995, the
Company recorded a minimum liability of $2,044 for underfunded plans with a
matching offset to other assets.
Assumptions as of December 31 used to develop the net periodic pension cost
for U.S. plans were:
1996 1995 1994
- --------------------------------------------------------------------------------
Discount rate for
benefit obligations 7.7% 7.5% 9.0%
Expected long-term rate
of return on assets 9.0% 9.0% 9.0%
Rate of increase in
compensation levels 5.0% 5.0% 5.0%
================================================================================
For non-U.S. plans, which were not material, similar economic assumptions
were used.
The components of net periodic pension income for the years ended December
31, 1996, 1995 and 1994 were as follows:
1996 1995 1994
- --------------------------------------------------------------------------------
Service cost $ 9,377 $ 7,618 $ 9,763
Interest cost on
projected benefit
obligations 31,142 30,317 27,793
Actual return
on assets (52,049) (91,611) 7,353
Amortization and
deferral, net 11,443 52,953 (47,687)
- --------------------------------------------------------------------------------
Net periodic
pension income $ (87) $ (723) $ (2,778)
================================================================================
For discontinued operations, the total projected benefit obligations at
December 31, 1996 and 1995 were $214,822 and $224,934, respectively, and are
fully funded. Interest cost on the projected benefit obligations for 1996, 1995
and 1994 was $16,502, $19,609 and $18,684, respectively, and was fully offset by
return on assets resulting in no net periodic pension cost.
39
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Coltec Industries Inc
- --------------------------------------------------------------------------------
11. POSTRETIREMENT BENEFITS
The Company provides certain health care and life insurance benefits to its
eligible retired employees, principally in the United States, with some of these
retirees paying a portion of the related costs. The Company's accumulated
postretirement benefit obligations, none of which are funded, and the accrued
postretirement benefit cost at December 31, 1996 and 1995 were as follows:
1996 1995
- --------------------------------------------------------------------------------
Actuarial present
value of accumulated
postretirement benefit
obligations:
Retirees $ 13,493 $ 17,449
Fully eligible plan participants 2,416 4,228
Other plan participants 3,053 5,415
- --------------------------------------------------------------------------------
Total 18,962 27,092
Unrecognized transition
obligations (16,614) (18,076)
Unrecognized net loss (561) (4,827)
Unrecognized prior
service cost 2,495 (1,033)
- --------------------------------------------------------------------------------
Accrued postretirement
benefit cost $ 4,282 $ 3,156
================================================================================
The components of postretirement benefit cost for the years ended December
31, 1996, 1995 and 1994 were as follows:
1996 1995 1994
- --------------------------------------------------------------------------------
Service cost $ 395 $ 198 $ 179
Interest cost on
accumulated
postretirement
benefit obligations 1,951 1,927 1,810
Amortization of
transition obligations 1,107 1,373 1,101
Amortization and
deferral, net (124) (63) (127)
Curtailment loss -- -- 427
- --------------------------------------------------------------------------------
Postretirement
benefit cost $ 3,329 $ 3,435 $ 3,390
================================================================================
Discount rates of 7.7% and 7.5% were used in determining the accumulated
postretirement benefit obligations at December 31, 1996 and 1995, respectively.
The health care cost trend rates used in determining the accumulated
postretirement benefit obligations at December 31, 1996 were 9.5% in 1997
gradually declining to 5.0% by 2005. The effect of a 1% increase in the health
care cost trend rates in each year would increase the total service and interest
cost components of the postretirement benefit cost for 1996 by approximately
$189 and to increase the accumulated postretirement benefit obligations at
December 31, 1996 by approximately $1,300.
12. FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
the Company's financial instruments:
Cash and cash equivalents, accounts and notes receivable and accounts payable:
The carrying amount approximates fair value due to the short-term nature of
these items.
Long-term receivables and investments: The fair value is based on quoted market
prices for similar publicly-traded securities or on the present value of
estimated future cash flows.
Long-term debt: The fair value of variable-rate long-term debt approximates
carrying value.
Forward exchange contracts: The fair value is based on quoted market prices of
similar contracts.
The estimated fair value of the Company's financial instruments at December
31, 1996 and 1995 was as follows:
1996 1995
Carrying Fair Carrying Fair
Value Value Value Value
- --------------------------------------------------------------------------------
Long-term receivables
and investments 32,427 39,817 33,497 42,336
Long-term
debt 720,250 720,824 945,832 965,065
Forward
exchange
contracts -- (87) -- 11,147
================================================================================
40
The Company utilizes forward exchange contracts to hedge U.S.
dollar-denominated sales, under long-term contracts, of certain foreign
subsidiaries. The Company does not engage in speculation. The Company's forward
exchange contracts do not subject the Company to risk due to exchange rate
movements because gains and losses on these contracts offset gains and losses on
the sales and related receivables being hedged. At December 31, 1996 and 1995,
the Company had $216,000 and $268,400, respectively, of forward exchange
contracts, denominated in Canadian dollars. The contracts have varying
maturities with none exceeding five years. Gains and losses on forward exchange
contracts are deferred and recognized over the life of the underlying long-term
contract being hedged.
The Company has an outstanding contingent liability for guaranteed debt and
lease payments of $30,795, and for letters of credit of $45,232. It was not
practical to obtain independent estimates of the fair values for the contingent
liability for guaranteed debt and lease payments and for letters of credit
without incurring excessive costs. In the opinion of management, non-performance
by the other parties to the contingent liabilities will not have a material
effect on the Company's results of operations and financial condition.
13. STOCK OPTION AND INCENTIVE PLANS
Pursuant to the Company's stock option plans, stock options and shares of
restricted stock have been granted to officers and key employees and stock
options to directors. 7,468,000 shares of common stock may be issued under the
stock option plans. Stock options outstanding under the stock option plans were
granted at a price equal to 100% of the market price on the date of grant and
are exercisable in annual installments of 20%, commencing one year from date of
grant and expiring ten years from date of grant.
The Company applies Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, in accounting for its stock option plans.
Accordingly, no compensation expense has been recognized for these plans. Had
compensation expense for the Company's stock option plans been determined based
on the fair value at the grant dates for awards under these plans consistent
with SFAS No. 123, Accounting for Stock-Based Compensation, the Company's net
earnings would have decreased by approximately $1,700 ($0.02 per share) and
$1,400 ($0.02 per share) in 1996 and 1995, respectively.
The fair value of each option was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions: risk-free interest rate of 7.0%, no dividends paid, expected life
of five years for 1996 and 1995, and volatility of 23% for both 1996 and 1995.
The weighted-average fair value of an option granted during 1996 and 1995 was
$4.76 and $4.00, respectively.
A summary of the status of the Company's fixed stock option plans as of
December 31, 1996, 1995 and 1994 was as follows:
Weighted-
Number Option Price Average
of Shares Range Per Exercise
(000s) Share Price
- --------------------------------------------------------------------------------
December 31, 1993 2,260 $15.00-18.75 N/A
Granted 295 16.25-21.25
Exercised (98) 15.00
Canceled (140) 15.00-20.25
- --------------------------------------------------------------------------------
December 31, 1994 2,317 15.00-21.25 N/A
Granted 2,960 10.75-18.08
Exercised (25) 15.00
Canceled (64) 15.00-18.25
- --------------------------------------------------------------------------------
December 31, 1995 5,188 10.75-21.25 $13.16
- --------------------------------------------------------------------------------
Granted 516 11.00-15.75 13.43
Exercised (56) 10.75-11.63 11.37
Canceled (236) 10.75-21.25 12.82
- --------------------------------------------------------------------------------
December 31, 1996 5,412 $10.75-21.25 $13.22
================================================================================
Stock options exercisable were 2,103,000, 1,188,000 and 772,000 at December
31, 1996, 1995 and 1994, respectively.
41
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Coltec Industries Inc
- --------------------------------------------------------------------------------
The following summarizes information about the Company's stock options
outstanding as of December 31, 1996:
Options Outstanding
- --------------------------------------------------------------------------------
Weighted- Weighted-
Number Average Average
Range of Outstanding Remaining Exercise
Exercise Prices (000s) Life Price
- --------------------------------------------------------------------------------
$10.75 to $15.00 4,672 7.7 years $ 12.42
16.25 to 21.25 740 7.3 years 17.89
- --------------------------------------------------------------------------------
$10.75 to $21.25 5,412 7.6 years $ 15.82
================================================================================
Options Exercisable
- --------------------------------------------------------------------------------
Weighted-
Number Average
Range of Outstanding Exercise
Exercise Prices (000s) Price
- --------------------------------------------------------------------------------
$10.75 to $15.00 1,758 $13.78
16.25 to 21.25 345 18.07
- --------------------------------------------------------------------------------
$10.75 to $21.25 2,103 $14.49
================================================================================
In addition to the granting of stock options, the Company has granted
shares of restricted stock. Restrictions on certain shares lapse 100% three
years from the date of grant. Restrictions on the remaining shares lapse in
annual installments of 33% commencing one year from date of grant. The unearned
compensation resulting from the grant of restricted shares is reported as a
reduction to shareholders' equity in the Consolidated Balance Sheets and is
being charged to earnings over the period the restricted shares vest.
Shares available for grant at December 31, 1996 under the stock option
plans were 747,339.
14. COMMITMENTS AND CONTINGENCIES
The Company and certain of its subsidiaries are liable for lease payments and
are defendants in various lawsuits, including actions involving
asbestos-containing products and certain environmental proceedings.
With respect to asbestos product liability and related litigation costs, as
of December 31, 1996 and 1995, two subsidiaries of the Company were among a
number of defendants (typically 15 to 40) in approximately 94,700 and 105,300
actions, respectively, (including approximately 5,100 and 4,900 actions,
respectively, in advanced stages of processing) filed in various states by
plaintiffs alleging injury or death as a result of exposure to asbestos fibers.
During 1996, 1995 and 1994, two subsidiaries of the Company received
approximately 39,900, 44,000 and 29,800 new actions, respectively. Through
December 31, 1996, approximately 177,500 of the approximately 272,200 total
actions brought have been settled or otherwise disposed of.
The damages claimed for personal injury or death vary from case to case,
and in many cases plaintiffs seek $1,000 or more in compensatory damages and
$2,000 or more in punitive damages. Although the law in each state differs to
some extent, it appears, based on advice of counsel, that liability for
compensatory damages would be shared among all responsible defendants, thus
limiting the potential monetary impact of such judgments on any individual
defendant.
Following a decision of the Pennsylvania Supreme Court, in a case in which
neither the Company or any of its subsidiaries were parties, that held insurance
carriers are obligated to cover asbestos-related bodily injury actions if any
injury or disease process, from first exposure through manifestation, occurred
during a covered policy period (the "continuous trigger theory of coverage"),
the Company settled litigation with its primary and most of its first-level
excess insurance carriers, substantially on the basis of the Court's ruling. The
Company has negotiated a final agreement with most of its excess carriers that
are in the layers of coverage immediately above its first layer. The Company is
currently receiving payments pursuant to this agreement. The Company believes
that, with respect to the remaining carriers, a final agreement can be achieved
without litigation and on substantially the same basis that it has resolved the
issues with its other carriers. Settlements are generally made on a group basis
with payments made to individual claimants over periods of one to four years.
Payments were made with respect to asbestos liability and related costs
aggregating $71,354 in 1996, $56,739
42
in 1995 and $46,374 in 1994, substantially all of which were covered by
insurance. Related to payments not covered by insurance, the Company recorded
charges to operations amounting to $8,000 and $5,000 in 1996 and 1995,
respectively. No charges were recorded in 1994.
In accordance with the Company's internal procedures for the processing of
asbestos product liability actions and due to the proximity to trial or
settlement, certain outstanding actions have progressed to a stage where the
Company can reasonably estimate the cost to dispose of these actions. As of
December 31, 1996, the Company estimates that the aggregate remaining cost of
the disposition of the settled actions for which payments remain to be made and
actions in advanced stages of processing, including associated legal costs, is
approximately $71,538, and the Company expects that this cost will be
substantially covered by insurance.
With respect to the 89,600 outstanding actions as of December 31, 1996,
which are in preliminary procedural stages, the Company lacks sufficient
information upon which judgments can be made as to the validity or ultimate
disposition of such actions, thereby making it difficult to estimate with
reasonable certainty the potential liability or costs to the Company. When
asbestos actions are received, they are typically forwarded to local counsel to
ensure that the appropriate preliminary procedural response is taken. The
complaints typically do not contain sufficient information to permit a
reasonable evaluation as to their merits at the time of receipt, and in
jurisdictions encompassing a majority of the outstanding actions, the practice
has been that little or no discovery or other action is taken until several
months prior to the date set for trial. Accordingly, the Company generally does
not have the information necessary to analyze the actions in sufficient detail
to estimate the ultimate liability or costs to the Company, if any, until the
actions appear on a trial calendar. A determination to seek dismissal, to
attempt to settle or to proceed to trial is typically not made prior to the
receipt of such information.
It is also difficult to predict the number of asbestos lawsuits that the
Company's subsidiaries will receive in the future. The Company has noted that,
with respect to recently settled actions or actions in advanced stages of
processing, the mix of the injuries alleged and the mix of the occupations of
the plaintiffs have been changing from those traditionally associated with the
Company's asbestos-related actions. The Company is not able to determine with
reasonable certainty whether this trend will continue. Based upon the foregoing,
and due to the unique factors inherent in each of the actions, including the
nature of the disease, the occupation of the plaintiff, the presence or absence
of other possible causes of a plaintiff's illness, the availability of legal
defenses, such as the statute of limitations or state of the art, and whether
the lawsuit is an individual one or part of a group, management is unable to
estimate with reasonable certainty the cost of disposing of outstanding actions
in preliminary procedural stages or of actions that may be filed in the future.
However, the Company believes that its subsidiaries are in a favorable position
compared to many other defendants because, among other things, the asbestos
fibers in its asbestos-containing products were encapsulated. Considering the
foregoing, as well as the experience of the Company's subsidiaries and other
defendants in asbestos litigation, the likely sharing of judgments among
multiple responsible defendants, and the substantial amount of insurance
coverage that the Company expects to be available from its solvent carriers, the
Company believes that pending and reasonably anticipated future actions are not
likely to have a material effect on the Company's results of operations and
financial condition.
Although the insurance coverage which the Company has is substantial, it
should be noted that insurance coverage for asbestos claims is not available to
cover exposures initially occurring on and after July 1, 1984. The Company's
subsidiaries continue to be named as defendants in new cases, some of which
allege initial exposure after July 1, 1984.
In addition to claims for personal injury, the Company's subsidiaries have
been involved in an
43
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Coltec Industries Inc
- --------------------------------------------------------------------------------
insignificant number of property damage claims based upon asbestos-containing
materials found in schools, public facilities and private commercial buildings.
Based upon proceedings to date, the overwhelming majority of these claims have
been resolved without a material adverse impact on the Company. Likewise, the
insignificant number of claims remaining to be resolved are not expected to have
a material effect the Company's results of operations and financial condition.
The Company has recorded an accrual for its liabilities for
asbestos-related matters that are deemed probable and can be reasonably
estimated (settled actions and actions in advanced stages of processing), and
has separately recorded an asset equal to the amount of such liabilities that is
expected to be recovered by insurance. In addition, the Company has recorded a
receivable for that portion of payments previously made for asbestos product
liability actions and related litigation costs that is recoverable from its
insurance carriers. Liabilities for asbestos-related matters and the receivable
from insurance carriers included in the Consolidated Balance Sheets were as
follows at December 31, 1996 and 1995:
1996 1995
- --------------------------------------------------------------------------------
Accounts and notes receivable $67,012 $53,677
Other assets 18,728 16,243
Accrued expenses 60,659 47,791
Other liabilities 10,879 11,450
================================================================================
With respect to environmental proceedings, the Company has been notified
that it is among the Potentially Responsible Parties under federal environmental
laws, or similar state laws, relative to the costs of investigating and in some
cases remediating contamination by hazardous materials at several sites. Such
laws impose joint and several liability for the costs of investigating and
remediating properties contaminated by hazardous materials. Liability for these
costs can be imposed on present and former owners or operators of the properties
or on parties who generated the wastes that contributed to the contamination.
The Company's policy is to accrue environmental remediation costs when it is
both probable that a liability has been incurred and the amount can be
reasonably estimated. While it is often difficult to reasonably quantify future
environmental-related expenditures, the Company currently estimates its future
non-capital expenditures related to environmental matters to range between
$23,000 and $48,000. In connection with these expenditures, the Company has
accrued $35,000 at December 31, 1996 representing management's best estimate of
probable non-capital environmental expenditures. These non-capital expenditures
are estimated to be incurred over the next 10 to 20 years. In addition, capital
expenditures aggregating $5,000 may be required during the next two years
related to environmental matters. Although the Company is pursuing insurance
recovery in connection with certain of these matters, no receivable has been
recorded with respect to any potential recovery of costs in connection with any
environmental matters.
Under operating lease commitments, expiring on various dates after December
31, 1996, the Company and certain of its subsidiaries are obligated as of
December 31, 1996, to pay rentals totaling $38,675 as follows: $7,158 in 1997,
$6,413 in 1998, $5,440 in 1999, $4,176 in 2000, $2,941 in 2001 and $12,547 in
later years.
44
15. SEGMENT INFORMATION
As discussed in note 2 to consolidated financial statements, the Company
divested all of its automotive OE components businesses in 1996. As a result of
the divestitures, the Company is now reporting the results of its business units
in two operating segments, Aerospace and Industrial. One customer in the
Aerospace Segment represented approximately 12% of the Company's 1996 total
sales.
Information on total assets, depreciation of property, plant and equipment
and capital expenditures by industry segment was as follows for the years ended
December 31, 1996, 1995 and 1994:
(In millions) 1996 1995 1994
- --------------------------------------------------------------------------------
Total assets:
Aerospace $ 415.5 $ 391.3 $ 355.6
Industrial 287.2 298.3 272.8
Corporate unallocated 136.7 134.3 151.2
- --------------------------------------------------------------------------------
Subtotal 839.4 823.9 779.6
Discontinued operations -- 70.6 67.9
- --------------------------------------------------------------------------------
Total $ 839.4 $ 894.5 $ 847.5
================================================================================
Depreciation of property,
plant and equipment:
Aerospace $ 12.2 $ 12.3 $ 12.6
Industrial 12.9 12.9 12.5
Corporate unallocated 1.9 1.6 .2
- --------------------------------------------------------------------------------
Subtotal 27.0 26.8 25.3
Discontinued operations 3.5 5.7 5.5
- --------------------------------------------------------------------------------
Total $ 30.5 $ 32.5 $ 30.8
================================================================================
Capital expenditures:
Aerospace $ 26.9 $ 17.6 $ 16.1
Industrial 13.7 13.7 18.4
Corporate unallocated 4.0 2.6 --
- --------------------------------------------------------------------------------
Subtotal 44.6 33.9 34.5
Discontinued operations 5.4 8.6 3.7
- --------------------------------------------------------------------------------
Total $ 50.0 $ 42.5 $ 38.2
================================================================================
Information by geographic segment was as follows for the years ended
December 31, 1996, 1995 and 1994:
Operating Total
(In millions) Sales Income Assets
- --------------------------------------------------------------------------------
1996
Domestic operations $ 928.8 $ 182.5 $ 713.4
Foreign operations 271.1 16.2 148.5
Intersegment elimination (40.2) -- (159.2)
- --------------------------------------------------------------------------------
Total segments 1,159.7 198.7 702.7
Corporate unallocated -- (41.1) 136.7
- --------------------------------------------------------------------------------
Total $1,159.7 $ 157.6 $ 839.4
================================================================================
1995
Domestic operations* $ 887.1 $ 168.7 $ 673.9
Foreign operations 245.6 10.3 205.4
Intersegment elimination (33.1) -- (119.1)
- --------------------------------------------------------------------------------
Total segments 1,099.6 179.0 760.2
Corporate unallocated -- (37.0) 134.3
- --------------------------------------------------------------------------------
Total $1,099.6 $ 142.0 $ 894.5
================================================================================
1994
Domestic operations* $ 821.7 $ 167.6 $ 629.2
Foreign operations 208.1 28.8 202.0
Intersegment elimination (29.6) -- (135.0)
- --------------------------------------------------------------------------------
Total segments 1,000.2 196.4 696.2
Corporate unallocated -- (31.2) 151.3
- --------------------------------------------------------------------------------
Total $1,000.2 $ 165.2 $ 847.5
================================================================================
*Includes total assets from discontinued operations.
16. SUPPLEMENTARY EARNINGS INFORMATION
The following expenses were included in the Consolidated Statements of Earnings
for the years ended December 31, 1996, 1995 and 1994:
1996 1995 1994
- --------------------------------------------------------------------------------
Maintenance $22,816 $22,633 $21,807
Taxes, other than
federal income taxes:
Payroll 24,633 24,379 23,684
Property 4,626 4,226 4,159
State and local 2,901 2,601 2,105
Rent 9,965 8,604 8,937
Research and
development costs 44,125 45,130 41,747
================================================================================
45
- --------------------------------------------------------------------------------
REPORT OF MANAGEMENT Coltec Industries Inc
- --------------------------------------------------------------------------------
The management of Coltec Industries Inc is responsible for the preparation of
the consolidated financial statements and related financial information included
in this Annual Report and for their integrity and objectivity. The consolidated
financial statements have been prepared in conformity with generally accepted
accounting principles and contain estimates and judgments by management as
appropriate.
The Company maintains a system of internal accounting control designed to
provide reasonable assurance that assets are safeguarded, transactions are
executed and recorded in accordance with management's authorization and
accounting records may be relied upon for preparation of financial statements.
Management is responsible for maintenance of these systems, which is
accomplished through communication of established written codes of conduct,
policies and procedures; selection of qualified personnel; and appropriate
delegation of authority and segregation of responsibilities. Adherence to these
controls, policies and procedures is monitored and evaluated by the Company's
internal auditors.
Coltec Industries Inc's consolidated financial statements have been audited
by Arthur Andersen LLP, the Company's independent public accountants. In
planning and performing their audit of the Company's consolidated financial
statements, the independent public accountants consider the internal control
structure in determining their auditing procedures. The independent public
accountants also prepare recommendations for improving policies and procedures
and such recommendations are communicated to management and the Audit Committee
of the Board of Directors.
The Audit Committee, composed solely of outside directors, meets
periodically with management, the independent public accountants and the
internal auditors, to review matters relating to the system of internal
accounting control and the Company's consolidated financial statements. Both the
independent public accountants and internal auditors have direct access to the
Audit Committee, with or without the presence of management, to discuss the
scope and results of their audits and their comments on the adequacy of the
Company's internal accounting control system.
/s/ John W. Guffey, Jr. /s/ David D. Harrison
John W. Guffey, Jr. David D. Harrison
Chairman, President and Executive Vice President
Chief Executive Officer and Chief Financial Officer
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS Coltec Industries Inc
- --------------------------------------------------------------------------------
To the Board of Directors and Shareholders of Coltec Industries Inc:
We have audited the accompanying consolidated balance sheets of Coltec
Industries Inc (a Pennsylvania corporation) and subsidiaries as of December 31,
1996 and 1995, and the related consolidated statements of earnings,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Coltec Industries Inc and subsidiaries as of December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
/s/ Arthur Andersen LLP
Charlotte, North Carolina
January 31, 1997
46