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, 1997.
Years Ended December 31,
- --------------------------------------------------------------------------------------------------------------------------
(Dollars in millions, except per share data) 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
STATEMENT OF EARNINGS DATA:
Net sales $1,314.9 $1,159.7 $1,099.6 $1,000.2 $1,061.4
------------------------------------------------------------------
Operating income(a) 197.8 157.6 142.0 165.2 148.5
Interest expense, net 54.0 74.9 89.9 89.5 110.2
Income taxes 48.9 28.1 17.6 27.2 13.7
------------------------------------------------------------------
Earnings from continuing operations
before extraordinary item(a) 94.9 54.6 34.5 48.5 24.6
Discontinued operations(b) - 57.1 36.7 45.5 40.6
Extraordinary item(c) - (30.6) (.3) (1.5) (17.8)
------------------------------------------------------------------
Net earnings $ 94.9 $ 81.1 $ 70.9 $ 92.5 $ 47.4
------------------------------------------------------------------
Earnings per common share:(d)
Before extraordinary item $ 1.42 $ .79 $ .49 $ .70 $ .35
Discontinued operations - .82 .53 .65 .59
Extraordinary item - (.44) - (.02) (.26)
------------------------------------------------------------------
Net earnings $ 1.42 $ 1.17 $ 1.02 $ 1.33 $ .68
------------------------------------------------------------------
Ratio of earnings to fixed charges(e) 3.5 2.1 1.6 1.8 1.3
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital $ 187.9 $ 215.6 $ 208.9 $ 189.6 $ 163.1
Total assets 933.0 849.5 894.5 847.5 796.5
Total debt 759.4 720.3 945.8 970.1 1,033.6
Shareholders' equity (359.2) (417.0) (453.8) (525.6) (625.5)
------------------------------------------------------------------
OTHER OPERATING DATA:
Operating margin(a) 15.0% 13.6% 12.9% 16.5% 14.0%
Cash provided by operating activities $ 61.4 $ 49.5 $ 91.0 $ 98.2 $ 105.2
Capital expenditures 81.2 44.6 42.5 38.2 38.6
Depreciation of property, plant and equipment 29.7 27.0 26.8 25.3 28.3
Order backlog (at end of period) $ 875.6 $ 678.3 $ 657.1 $ 594.2 $ 598.6
------------------------------------------------------------------
Number of employees (at end of period) 9,072 8,153 8,213 8,387 8,449
------------------------------------------------------------------
(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.
(d) Represents diluted earnings per common share. See note 5 to consolidated
financial statements.
(e) 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.
18
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 1996 discontinued operations discussed in note 2 to
consolidated financial statements and the Company's two operating segments,
Aerospace and Industrial. The 1995 information has been restated to reflect the
discontinued operations and the Company's two realigned operating segments (see
Industry Segment Information). Earnings per share information represents diluted
earnings per common share (see note 5 to consolidated financial statements).
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
1997 COMPARED TO 1996
------------------------
COMPANY REVIEW
Net sales for 1997 increased 12.9% to $1.31 billion from $1.16 billion in 1996
primarily driven by increases in the Aerospace Segment. Gross profit increased
to $416.6 million in 1997 from $348.6 million in 1996. The gross profit margin
increase in 1997 to 31.7% from 30.1% in 1996 primarily resulted from the 1996
bankruptcy of a major aerospace customer (Fokker). Selling and administrative
expenses totaled $218.8 million, or 16.6%, of sales in 1997 compared to $191.0
million, or 16.5% of sales (15.9% excluding the Fokker impact) in 1996. The
increase resulted from costs associated with expanding the Company's businesses,
both domestically and internationally.
Operating income amounted to $197.8 million in 1997 compared to $157.6
million for 1996. The 1996 amount includes the effect of the $14.2 million
charge related to the bankruptcy of Fokker. Operating margin for 1997 was 15.0%
and was 13.6% (14.8% excluding the effect of the charge related to Fokker) for
1996.
Interest expense decreased 27.8% from $74.9 million in 1996 to $54.0
million in 1997, a result of lower interest rates primarily from refinancing
high-cost, fixed-rate debt with lower-cost, variable-rate bank debt, and a full
year impact of applying a substantial portion of the proceeds from the 1996
second quarter sale of the Company's automotive original equipment (OE)
components operations to debt reduction.
The effective tax rate was 34% in 1997 and 1996.
The 1996 results of discontinued operations reflect the aforementioned 1996
second quarter sale of the automotive OE components operations as well as the
1996 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.
Net earnings and earnings from continuing operations were $94.9 million, or
$1.42 per share, in 1997 while 1996 net earnings amounted to $81.1 million, or
$1.17 per share with earnings from continuing operations for 1996 of $54.6
million, or $0.79 per share. The 1996 charge related to Fokker impacted earnings
by $0.13 per share. The reduction in interest expense increased earnings by
$0.20 per share in 1997.
SEGMENT REVIEW - AEROSPACE
Sales in 1997 for the Aerospace Segment aggregated $558.3 million, a 28.8%
increase over 1996 sales of $433.5 million. At Menasco, sales increased
significantly due to rising commercial aircraft production as well as improved
military sales. Menasco deliveries of main landing gear systems for the Boeing
737 increased to 196 shipsets in 1997 from 72 shipsets in 1996, while military
sales benefited primarily from higher shipset deliveries for the F-15 and F-16
programs (151 shipsets in 1997 versus 83 shipsets in 1996). At Chandler Evans,
higher sales were primarily due to increased sales of spare parts while original
equipment sales also improved. Aerospace Segment sales were favorably impacted
by the acquisition of AMI Industries Inc. in July 1997 (see note 2 to
consolidated financial statements). Sales in 1997 for the other aerospace
businesses increased due to increased sales volumes resulting from the continued
strengthening of the commercial aircraft market and regional airlines.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS
COLTEC INDUSTRIES INC
Operating income for the Aerospace Segment increased 33.3% to $87.7 million
in 1997 from $65.8 million in 1996, excluding the 1996 charge for the Fokker
bankruptcy. The Segment's operating margin for 1997 was 15.7% versus 15.2% in
1996 excluding the Fokker bankruptcy charge. At the Menasco Aerospace division,
operating margin was impacted by improved manufacturing efficiencies due to
higher production. Chandler Evans realized higher margins due to higher
after-market sales and selling price increases for certain products. The
increase was also driven by higher sales volumes and improved margins for the
other engine components businesses.
SEGMENT REVIEW - INDUSTRIAL
Industrial Segment sales increased to $757.6 million in 1997 from $726.9 million
in 1996. During 1997, Quincy Compressor and Fairbanks Morse Engine (FM Engine)
divisions had significant sales volume increases. The FM Engine increase was due
to increased orders and the recovery from a ten-week strike in 1996. Garlock
Sealing Technologies (Garlock) also experienced sales increases in part as a
result of the Company's acquisition of the sheet rubber and conveyor belt
business from Dana Corporation's Boston Weatherhead division (see note 2 to
consolidated financial statements). The above increases were partially offset by
lower sales volumes at Holley Performance Products (Holley).
Operating income for the Industrial Segment was $149.8 million in 1997
compared to $147.1 million in 1996. The Segment's operating margin for 1997 was
19.8% compared to 20.2% in 1996. Operating income increased for Quincy
Compressor and FM Engine due to the higher sales volumes as mentioned above
while Garlock was impacted by increased costs related to international
initiatives. Holley's operating income was lower as a result of decreased sales
volumes.
------------------------
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 due to increases in the Aerospace Segment. Gross profit decreased to
$348.6 million in 1996 from $355.4 million in 1995. The gross profit decline in
1996 to 30.1% from 32.3% in 1995 stemmed from the impact of the bankruptcy of a
major aerospace customer (Fokker), increased spending related to asbestos (see
note 16 to consolidated financial statements) and higher other manufacturing
costs. 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 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.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS
COLTEC INDUSTRIES INC
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. Earnings from continuing operations in 1996 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 earnings
by $0.13 per share while the 1995 special charge affected 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%. These increases more than offset the lost business for 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 were the significant improvement in 1996 operating results of Walbar's
Canadian operations due to the closing of the compressor blade facility as well
as higher margins which 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 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 and France
Compressor Products (France Compressor) divisions. FM Engine 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).
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; AMI flight attendant seats.
Industrial: Garlock seals, gaskets, packings, bearings, valves and tape;
Quincy air compressors; Delavan spray nozzles; France Compressor products; FM
Engine large diesel and dual-fuel engines; Haber and Sterling dies; Holley
aftermarket automotive products; Ortman Fluid Power cylinders.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS
COLTEC INDUSTRIES INC
The following table shows financial information by industry segment for the
five years ended December 31, 1997.
Years Ended December 31,
- --------------------------------------------------------------------------------------------------------------
(Dollars in millions) 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------
Net sales:
Aerospace $ 558.3 $ 433.5 $ 378.3 $ 339.2 $ 356.9
Industrial 757.6 726.9 722.6 662.7 705.4
Intersegment elimination(a) (1.0) (.7) (1.3) (1.7) (.9)
-------------------------------------------------------------------
Total $1,314.9 $1,159.7 $1,099.6 $1,000.2 $1,061.4
-------------------------------------------------------------------
Operating income:(b)
Aerospace $ 87.7 $ 51.6 $ 32.4 $ 51.0 $ 44.5
Industrial 149.8 147.1 146.6 145.4 135.6
-------------------------------------------------------------------
Total segments 237.5 198.7 179.0 196.4 180.1
Corporate unallocated(c) (39.7) (41.1) (37.0) (31.2) (31.6)
-------------------------------------------------------------------
Total $ 197.8 $ 157.6 $ 142.0 $ 165.2 $ 148.5
-------------------------------------------------------------------
Operating margin:(b)
Aerospace 15.7% 11.9% 8.6% 15.0% 12.5%
Industrial 19.8 20.2 20.3 21.9 19.2
-------------------------------------------------------------------
Total 15.0% 13.6% 12.9% 16.5% 14.0%
-------------------------------------------------------------------
Return on total assets:(b)(d)
Aerospace 20.1% 12.4% 8.3% 14.3% 12.7%
Industrial 48.2 51.2 49.1 53.3 49.8
-------------------------------------------------------------------
Total 21.2% 18.5% 15.9% 19.5% 18.6%
-------------------------------------------------------------------
Backlog:(e)
Aerospace $ 734.3 $ 560.7 $ 538.0 $ 445.7 $ 475.1
Industrial 142.0 117.8 119.5 148.5 124.0
Intersegment elimination (.7) (.2) (.4) - (.5)
-------------------------------------------------------------------
Total $ 875.6 $ 678.3 $ 657.1 $ 594.2 $ 598.6
-------------------------------------------------------------------
(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 $875.6 million backlog at December 31, 1997, $267.2 million was
scheduled to be shipped after 1998.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS
COLTEC INDUSTRIES INC
------------------------
LIQUIDITY AND
CAPITAL RESOURCES
------------------------
CASH FLOWS
The Company generated cash from operations of $61.4 million in 1997 compared to
$49.5 million in 1996. The increase in operating cash flows stemmed from the
increase in net earnings. The increase in inventory in response to the ramp-up
for certain aircraft was offset by the increase in accounts payable. Working
capital at December 31, 1997 of $187.9 million was $27.7 million lower than
year-end 1996 as a result of the sale of $82.5 million of trade accounts
receivable (see note 6 to consolidated financial statements) partially offset by
a $12.5 million increase of accounts receivable prior to sale and a $52.5
million increase of inventories. The 1997 ratio of current assets to current
liabilities was 1.78 compared to 1.95 in 1996. Cash and cash equivalents
decreased to $14.7 million in 1997 from $15.0 million in 1996.
Net cash used in investing activities in 1997 included $81.2 million of
capital expenditures and $60.7 million for business acquisitions (see note 2 to
consolidated financial statements). Net cash provided by investing activities of
$284.6 million in 1996 consisted of proceeds from divestitures amounting to
$329.1 million (see note 2 to consolidated financial statements) with capital
expenditures totaling $44.6 million.
Financing activities in 1997 generated $80.2 million primarily from the
$82.5 million proceeds from sale of accounts receivable (see note 6 to
consolidated financial statements). The purchase of $42.7 million of treasury
stock was offset by a $39.5 million net increase in the Company's revolving
facility. Financing activities in 1996 used cash of $323.0 million. A
substantial portion of the proceeds from the 1996 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 with a cost of $46.4 million.
CAPITAL EXPENDITURES
Capital expenditures increased to $81.2 million in 1997 from $50.0
million in 1996 and $42.5 million in 1995, 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 1997 included amounts for the construction and equipment purchases
for significant production expansions at Menasco's original equipment
facilities. The Company estimates capital expenditures for 1998 to
approximate $60.0 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 which 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.
The Company's policy is to accrue environmental remediation costs when it
is both probable that a liability was incurred and the amount can be reasonably
estimated.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS
COLTEC INDUSTRIES INC
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 $27.0 million and $50.0 million. In connection with these
expenditures, the Company had accrued $31.7 million at December 31, 1997,
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 1997, costs
associated with environmental remediation and ongoing assessment were not
significant. See notes 1 and 16 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 16 to consolidated financial
statements for information on asbestos litigation.
OTHER COMMITMENTS
Liabilities of discontinued operations at December 31, 1997 of $159.9 million
relate to contingent contractual obligations, 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.
As in the case with most other companies, the Company recognizes the need
to ensure its operations will not be adversely impacted by the Year 2000 date
transition and is faced with the task of addressing related issues. The Company
is evaluating whether the effect of the Year 2000 transition issues resulting
from relationships with customers, suppliers and other constituents will have an
impact on the Company's results of operations or financial condition. At
December 31, 1997, the Company estimates that expenditures over the next two
years for the cost of modifying its existing software for the Year 2000 date
transition will have an immaterial impact on consolidated operating results.
FINANCIAL RESOURCES
At December 31, 1997, total debt was $759.4 million compared with $720.3 million
at year-end 1996. 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. In December 1997, the Company amended this credit facility to
establish an $80.0 million sublimit for Canadian borrowings under the existing
facility. At December 31, 1997, $697.5 million of borrowings and $40.1 million
of letters of credit were outstanding under the credit facility, leaving
availability of $112.4 million. 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.
During 1997, 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 $405.0
million, fixed interest rates ranging from 5.78% to 6.40% and maturity dates
ranging from April 1998 to October 2002.
24
MANAGEMENT'S DISCUSSION AND ANALYSIS
COLTEC INDUSTRIES INC
------------------------
QUARTERLY FINANCIAL DATA
------------------------
The following table sets forth quarterly financial data for the years ended 1997
and 1996.
Quarter
- ----------------------------------------------------------------------------------------------------------------
(In thousands, except per share data) 1st 2nd 3rd 4th
- ----------------------------------------------------------------------------------------------------------------
1997
Net sales $309,172 $322,227 $324,453 $359,017
----------------------------------------------------------
Gross profit 97,497 105,090 102,981 111,032
----------------------------------------------------------
Operating income 44,928 48,754 49,194 54,916
Earnings from continuing operations before
extraordinary item 21,492 23,808 23,321 26,253
Discontinued operations - - - -
Extraordinary item - - - -
----------------------------------------------------------
Net earnings $ 21,492 $ 23,808 $ 23,321 $ 26,253
----------------------------------------------------------
Earnings per common share(a)
Before extraordinary item $ .32 $ .36 $ .35 $ .39
Discontinued operations - - - -
Extraordinary item - - - -
----------------------------------------------------------
Net earnings $ .32 $ .36 $ .35 $ .39
----------------------------------------------------------
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(b) 7,649 43,507 1,509 4,518
Extraordinary item(c) (1,822) - (59) (28,733)
----------------------------------------------------------
Net earnings $ 5,954 $ 59,724 $ 18,012 $ (2,551)
----------------------------------------------------------
Earnings per common share(a)
Before extraordinary item $ - $ .23 $ .24 $ .32
Discontinued operations .11 .63 .02 .06
Extraordinary item (.02) - - (.42)
----------------------------------------------------------
Net earnings $ .09 $ .86 $ .26 $ (.04)
----------------------------------------------------------
(a) See note 5 to consolidated financial statements.
(b) See note 2 to consolidated financial statements.
(c) See note 3 to consolidated financial statements.
25
CONSOLIDATED STATEMENTS OF EARNINGS
COLTEC INDUSTRIES INC
Years Ended December 31,
- -------------------------------------------------------------------------------------------------
(In thousands, except per share data) 1997 1996 1995
- -------------------------------------------------------------------------------------------------
Net sales $1,314,869 $1,159,691 $1,099,624
Cost of sales 898,269 811,123 744,201
-------------------------------------------------
Gross profit 416,600 348,568 355,423
Selling and administrative 218,808 190,993 186,401
Special charges - - 27,000
-------------------------------------------------
Operating income 197,792 157,575 142,022
Interest expense and other, net 54,043 74,894 89,886
-------------------------------------------------
Earnings from continuing operations before
income taxes and extraordinary item 143,749 82,681 52,136
Income taxes 48,875 28,111 17,615
-------------------------------------------------
Earnings from continuing operations
before extraordinary item 94,874 54,570 34,521
-------------------------------------------------
Discontinued operations (net of tax)
Income from operations - 19,252 36,639
Gain on sale - 37,931 -
-------------------------------------------------
Total discontinued operations - 57,183 36,639
-------------------------------------------------
Extraordinary item (net of tax) - (30,614) (254)
-------------------------------------------------
Net earnings $ 94,874 $ 81,139 $ 70,906
-------------------------------------------------
Basic earnings per common share
Before extraordinary item $ 1.44 $ .79 $ .49
-------------------------------------------------
Discontinued operations
Income from operations - .28 .53
Gain on sale - .55 -
-------------------------------------------------
Total discontinued operations - .83 .53
-------------------------------------------------
Extraordinary item - (.44) -
Net earnings $ 1.44 $ 1.18 $ 1.02
Weighted-average common shares 65,896 69,091 69,839
-------------------------------------------------
Diluted earnings per common share
Before extraordinary item $ 1.42 $ .79 $ .49
-------------------------------------------------
Discontinued operations
Income from operations - .28 .53
Gain on sale - .54 -
-------------------------------------------------
Total discontinued operations - .82 .53
-------------------------------------------------
Extraordinary item - (.44) -
Net earnings $ 1.42 $ 1.17 $ 1.02
Diluted weighted-average common shares 66,911 69,376 69,839
-------------------------------------------------
The accompanying notes to consolidated financial statements are an integral part
of these statements.
26
CONSOLIDATED BALANCE SHEETS
COLTEC INDUSTRIES INC
December 31,
- -------------------------------------------------------------------------------------------------------
(In thousands, except share data) 1997 1996
- -------------------------------------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 14,693 $ 15,029
Accounts and notes receivable, net of allowance
of $2,894 in 1997 and $2,007 in 1996 120,311 190,325
Inventory, net 256,736 204,198
Deferred income taxes 15,195 10,524
Other current assets 20,508 22,895
-----------------------------
Total current assets 427,443 442,971
Property, plant and equipment, net 287,619 214,790
Costs in excess of net assets acquired, net 157,751 132,872
Other assets 60,221 58,869
-----------------------------
$ 933,034 $ 849,502
=============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt $ 1,811 $ 2,528
Accounts payable 93,799 55,410
Accrued expenses 138,969 155,229
Current portion of liabilities of discontinued operations 4,999 14,229
-----------------------------
Total current liabilities 239,578 227,396
Long-term debt 757,578 717,722
Deferred income taxes 79,229 50,646
Other liabilities 60,892 100,005
Liabilities of discontinued operations 154,918 170,740
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, 70,501,948 and 70,398,661 shares issued
at December 31, 1997 and 1996, respectively (excluding
25,000,000 shares held by a wholly owned subsidiary) 705 704
Capital surplus 642,828 643,221
Retained deficit (912,029) (1,006,903)
Unearned compensation (2,721) (2,136)
Minimum pension liability (1,646) (3,200)
Foreign currency translation adjustments (6,745) (1,151)
-----------------------------
(279,608) (369,465)
Less cost of 4,666,406 and 3,182,822 shares of common stock
in treasury at December 31, 1997 and 1996, respectively (79,553) (47,542)
-----------------------------
(359,161) (417,007)
-----------------------------
$ 933,034 $ 849,502
=============================
The accompanying notes to consolidated financial statements are an integral part
of these statements.
27
CONSOLIDATED STATEMENTS OF CASH FLOWS
COLTEC INDUSTRIES INC
Years Ended December 31,
- -------------------------------------------------------------------------------------------------------------------------
(In thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 94,874 $ 81,139 $ 70,906
Adjustments to reconcile net earnings to cash
provided by operating activities
Gain on divestitures - (66,791) -
Extraordinary item - 51,001 390
Special charge provision - - 27,000
Depreciation and amortization 38,415 36,014 42,086
Deferred income taxes 24,791 39,146 5,665
Payments of liabilities of discontinued operations (25,052) (19,563) (2,504)
Special charge payments (11,746) (6,309) (8,945)
Foreign currency translation adjustment (5,594) 665 (1,135)
Other operating items (6,951) (4,370) 19,791
Changes in assets and liabilities, net of effects from
acquisitions and divestitures:
Accounts and notes receivable (4,263) (42,602) (6,632)
Inventories (42,508) 2,704 (32,373)
Other current assets 3,455 (617) 3,762
Accounts payable 35,963 (55) (4,283)
Accrued expenses (18,972) (21,302) (21,071)
Accrued pension liability (20,993) 443 (1,649)
------------------------------------------------
Cash provided by operating activities 61,419 49,503 91,008
------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from divestitures - 329,113 -
Capital expenditures (81,218) (44,550) (42,496)
Acquisition of businesses (60,711) - (21,750)
Other - - - (2,512)
------------------------------------------------
Cash provided by (used in) investing activities (141,929) 284,563 (66,758)
------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from debt refinancing - 542,000 -
Issuance of long-term debt 813 - 19,070
Repayment of long-term debt (8,113) (622,582) (13,537)
Increase (decrease) in revolving facility, net 39,500 (196,000) (30,000)
Purchase of treasury stock (42,695) (46,426) -
Proceeds from sale of accounts receivable 82,500 - -
Proceeds from exercise of stock options 8,169 - -
------------------------------------------------
Cash provided by (used in) financing activities 80,174 (323,008) (24,467)
------------------------------------------------
Increase (decrease) in cash and cash equivalents (336) 11,058 (217)
Cash and cash equivalents - beginning of year 15,029 3,971 4,188
------------------------------------------------
Cash and cash equivalents - end of year $ 14,693 $ 15,029 $ 3,971
------------------------------------------------
Supplemental cash flow data:
Cash paid for:
Interest $ 50,207 $ 74,870 $ 92,292
Income taxes 19,327 27,667 41,685
================================================
The accompanying notes to consolidated financial statements are an integral part
of these statements.
28
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COLTEC INDUSTRIES INC
Foreign
Common Stock Minimum Currency Treasury Stock
-------------- Capital Retained Unearned Pension Translation --------------
(In thousands) Shares Amount Surplus Deficit Compensation Liability Adjustments Shares Amount Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 70,016 $700 $638,407 $(1,158,948) $(3,480) $ - $ (681) (99) ($1,599) $(525,601)
Net earnings 70,906 70,906
Issuance of restricted stock, net 61 1 1,006 1,072 (26) (422) 1,657
Exercise of stock options (30) 25 405 375
Tax benefit from stock option
and incentive plan 36 36
Foreign currency translation
adjustments (1,135) (1,135)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 70,077 701 639,419 (1,088,042) (2,408) - (1,816) (100) (1,616) (453,762)
Net earnings 81,139 81,139
Repurchase of common stock (3,129) (46,426) (46,426)
Issuance of restricted stock, net 322 3 3,941 272 (10) (142) 4,074
Exercise of stock options 56 642 642
Tax benefit from stock option
and incentive plan (139) (139)
Minimum pension liability (3,200) (3,200)
Foreign currency translation
adjustments 665 665
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 70,399 704 643,221 (1,006,903) (2,136) (3,200) (1,151) (3,183) (47,542) (417,007)
Net earnings 94,874 94,874
Repurchase of common stock (2,160) (42,695) (42,695)
Issuance of restricted stock, net 103 1 2,173 (585) (4) (51) 1,538
Exercise of stock options (2,566) 681 10,735 8,169
Minimum pension liability 1,554 1,554
Foreign currency translation
adjustments (5,594) (5,594)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 70,502 $705 $642,828 $ (912,029) $(2,721) $(1,646) $(6,745) (4,666) $(79,553)$(359,161)
===================================================================================================================================
The accompanying notes to consolidated financial statements are an integral part
of these statements.
29
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 1996 and 1995 amounts have been reclassified to conform to the 1997
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.
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, 1997 and 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
are 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. In evaluating the value and future benefits of the
excess costs arising from acquisitions, the recoverability from operating income
is measured. Under this approach, the carrying value would be reduced if it is
probable that management's best estimate of future operating income from related
operations before amortization will be less than the carrying amount of the
excess costs arising from acquisitions over the remaining amortization period.
At December 31, 1997 and 1996, accumulated amortization related to all completed
acquisitions was $74,013 and $68,045, respectively.
Income Taxes: Income taxes are 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.
Environmental Expenditures: Expenditures that relate to an existing condition
caused by past operations, and 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.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COLTEC INDUSTRIES INC
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 all short-term investments
purchased with a maturity of three months or less to be cash equivalents.
Foreign Currency Translation: The financial statements of foreign subsidiaries
were prepared in their respective local currencies and 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. For 1997,
1996 and 1995, such gains and losses were not significant.
--------------------------------
2. ACQUISITIONS AND DIVESTITURES
--------------------------------
On June 30, 1997, the Company acquired the assets of AMI Industries Inc.
(AMI), a Colorado-based manufacturer of flight attendant and cockpit seats for
commercial aircraft, for approximately $25,000. The purchase agreement also
includes contingent payments based on earning levels for the years ended
December 31, 1997-2000. These contingent payments will be recorded as additional
purchase price and amortized over the remaining life of goodwill. For financial
statement purposes, the acquisition was accounted for as a purchase and,
accordingly, AMI's results are included in the Company's consolidated financial
statements since the date of acquisition. The purchase price, which was financed
through available cash resources, has been allocated to the acquired assets
based upon their fair market values. The $12,200 excess of the purchase price
over net assets is being amortized over 25 years. AMI expects annual sales to
approximate $40,000.
On October 7, 1997, the Company acquired the assets of the sheet rubber and
conveyor belt business of Dana Corporation's Boston Weatherhead division for
$28,000. Annualized sales are expected to approximate $35,000. The acquisition
was accounted for as a purchase and its results are included in the Company's
consolidated financial statements since the date of acquisition. The purchase
price, which was also financed through available cash resources, has been
allocated to the acquired assets based upon their fair market values. The $6,900
excess of the purchase price over net assets is being amortized over 25 years.
The impact of these acquisitions was not material in relation to the
Company's results of operations. Consequently, pro forma information is not
presented. The Company also had several small acquisitions during 1997, which
were not material to the Company's financial position or results of operations.
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 obligations relating to the sales. The sale of
the automotive OE components businesses represented a disposal of the Company's
Automotive Segment. Accordingly, the 1996 and 1995 Consolidated Statements of
Earnings were restated to reflect the operations of the automotive OE components
businesses as a discontinued operation. Net sales of the discontinued automotive
OE components businesses were $182,599 and $302,260 in 1996 and 1995,
respectively.
In December 1996, the Company also sold the exhaust systems and components
business of its Stemco division for $11,863 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 and $20,503 in 1996 and 1995, respectively.
---------------------
3. EXTRAORDIANRY 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 redemption of
these notes 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, in 1995 in connection with early retirement of debt.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COLTEC INDUSTRIES INC
------------------
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 charge
also covered selected workforce reductions throughout the Company. 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.
At December 31, 1997 all related costs had been charged and the
remaining accrual was reversed. The activity in the related reserve
through December 31, 1997 was as follows:
Contractual Asset
Obligations Writedowns Severance Other Total
- --------------------------------------------------------------------------------
1995 charge $ 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
1997 activity (1,200) - (517) (29) (1,746)
Reversal (6,839) (1,421) (913) (827) (10,000)
- --------------------------------------------------------------------------------
December 31,
1997 $ - $ - $ - $ - $ -
- --------------------------------------------------------------------------------
In the third quarter of 1997, the Company recorded a special charge of
$10,000, to cover the restructuring of its Industrial Segment. This special
charge included the costs of closing its FMD Electronics operations in Roscoe,
Illinois and its Ortman Fluid Power operations in Hammond, Indiana. The special
charge also included the costs to restructure the Company's Industrial Segment
businesses in Canada and Germany and certain termination costs related to the
relocation of the Delavan Commercial divisional headquarters to North Carolina.
The third quarter 1997 charge included costs resulting from cancellation of
contractual obligations, asset writedowns, severance and employee-related costs
and other costs to shut down these facilities that will not benefit future
operations. The related reserve activity for the year ended December 31, 1997
was as follows:
Contractual Asset
Obligations Writedowns Severance Other Total
- --------------------------------------------------------------------------------
1997 charge $641 $1,049 $5,425 $2,885 $10,000
1997 activity 641 1,049 5,425 2,885 10,000
- --------------------------------------------------------------------------------
December 31,
1997 $ - $ - $ - $ - $ -
- --------------------------------------------------------------------------------
---------------------
5. EARNINGS PER SHARE
---------------------
In 1997, the Company adopted Statement of Financial Accounting Standards (SFAS)
No. 128, Earnings per Share, effective December 15, 1997. The Company's reported
earnings per common share for 1996 and 1995 equaled diluted earnings per share
as set forth in SFAS No. 128. As a result, the Company's reported earnings per
share for 1996 and 1995 were not restated.
Basic earnings per common share is computed by dividing net income by the
weighted-average number of shares of common stock outstanding during the year.
Diluted earnings per common share is computed by using the treasury stock method
to determine shares related to stock options and restricted stock.
(In thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
Weighted-average
common shares 65,896 69,091 69,839
Stock options and restricted
stock issued 1,015 285 -
- --------------------------------------------------------------------------------
Diluted weighted-average
common shares 66,911 69,376 69,839
- --------------------------------------------------------------------------------
------------------------------
6. SALE OF ACCOUNTS RECEIVABLE
------------------------------
In September 1997, the Company and certain of its subsidiaries sold their U.S.
and Canadian customer trade receivables to CNC Finance LLC (CNC Finance), a
wholly-owned bankruptcy remote subsidiary of the Company. CNC Finance entered
into a three-year agreement to sell without recourse, on a revolving basis, an
undivided fractional ownership interest in the receivables, based on the level
of eligible receivables, up to a maximum of $85,000 to a special purpose entity
of a financial institution. At December 31, 1997, $82,500 of the Company's
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COLTEC INDUSTRIES INC
receivables were sold under this agreement and the sale was reflected as a
reduction of accounts receivable in the 1997 Consolidated Balance Sheet. The
undivided interests were sold at a discount which was included in Interest
expense and other, net in the 1997 Consolidated Statement of Earnings.
------------
7. INVENTORY
------------
Inventories consisted of the following at December 31, 1997 and 1996:
1997 1996
- --------------------------------------------------------------------------------
Finished goods $ 53,748 $ 48,813
Work in process and finished parts 158,937 122,817
Raw materials and supplies 44,051 32,568
- --------------------------------------------------------------------------------
Total $256,736 $204,198
- --------------------------------------------------------------------------------
At December 31, 1997 and 1996, $54,441 and $45,371, 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,
1997 and 1996 was $22,022 and $20,152, respectively.
--------------------------------
8. PROPERTY, PLANT AND EQUIPMENT
--------------------------------
Property, plant and equipment consisted of the following at December 31,
1997 and 1996:
1997 1996
- --------------------------------------------------------------------------------
Land and improvements $ 14,517 $ 16,182
Buildings and equipment 135,173 121,515
Machinery and equipment 486,335 415,749
Leasehold improvements 12,209 11,239
Construction in progress 30,535 23,010
- --------------------------------------------------------------------------------
Total 678,769 587,695
Less accumulated depreciation 391,150 372,905
- --------------------------------------------------------------------------------
Total $287,619 $214,790
- --------------------------------------------------------------------------------
----------------------
9. ACCRUED LIABILITIES
----------------------
Accrued liabilities consisted of the following at December 31, 1997 and 1996:
1997 1996
- --------------------------------------------------------------------------------
Salaries, wages and
employee benefits $ 34,603 $ 37,979
Taxes 13,728 18,995
Interest 7,115 3,032
Asbestos 50,688 60,659
Other 32,835 34,564
- --------------------------------------------------------------------------------
Total $138,969 $155,229
- --------------------------------------------------------------------------------
----------------
10. INCOME TAXES
----------------
Domestic and foreign components of earnings from operations before income taxes
and extraordinary item were as follows for the years ended December 31, 1997,
1996 and 1995:
1997 1996 1995
- --------------------------------------------------------------------------------
Domestic $114,517 $68,199 $25,426
Foreign 29,232 14,482 26,710
- --------------------------------------------------------------------------------
Total $143,749 $82,681 $52,136
- --------------------------------------------------------------------------------
Income taxes on earnings from continuing operations were as follows for the
years ended December 31, 1997, 1996 and 1995:
1997 1996 1995
- --------------------------------------------------------------------------------
Current -
Domestic $18,094 $ (2,912) $ 4,717
Foreign 6,872 13,634 7,638
- --------------------------------------------------------------------------------
24,966 10,722 12,355
- --------------------------------------------------------------------------------
Deferred -
Domestic 17,706 24,126 3,836
Foreign 6,203 (6,737) 1,424
- --------------------------------------------------------------------------------
23,909 17,389 5,260
- --------------------------------------------------------------------------------
Total $48,875 $28,111 $17,615
- --------------------------------------------------------------------------------
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 of the sale of $25,332. As discussed in note 3 to consolidated
financial statements, the Company incurred extraordinary charges related to
early retirement of debt resulting in income taxes of $20,387 in 1996 and $136
in 1995.
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COLTEC INDUSTRIES INC
Reconciliation of tax at the U.S. statutory income tax rate of 35% for the
years ended December 31, 1997, 1996 and 1995 to income taxes on earnings from
continuing operations was as follows:
1997 1996 1995
- --------------------------------------------------------------------------------
Tax at U.S. statutory rate $50,312 $28,938 $18,248
Repatriation of
non-U.S. earnings (1,195) 1,900 2,692
Non-U.S. rate differential 2,844 1,828 (287)
Utilization of tax credits (997) (1,104) (960)
Adjustment of reserves (2,736) (6,979) (6,172)
Other 647 3,528 4,094
- --------------------------------------------------------------------------------
Income taxes $48,875 $28,111 $17,615
- --------------------------------------------------------------------------------
Effective tax rate 34.0% 34.0% 33.8%
- --------------------------------------------------------------------------------
The significant components of deferred tax assets and liabilities at
December 31, 1997 and 1996 were as follows:
1997 1996
- --------------------------------------------------------------------------------
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Assets Liabilities Assets Liabilities
- --------------------------------------------------------------------------------
Excess tax
over book
depreciation $ - $(21,828) $ - $(26,754)
Book/tax
differences
on contract
income - (24,230) - (27,154)
Employee
benefit plans 7,747 - 19,749 -
Accrued expenses
and liabilities 5,375 - 10,625 -
Foreign tax credit
carryforwards 3,700 - 6,600 -
Capital
transactions, net - (27,901) - (28,127)
Other - (3,194) 11,538 -
- --------------------------------------------------------------------------------
16,822 (77,153) 48,512 (82,035)
Less valuation
allowance (3,700) - (6,600) -
- --------------------------------------------------------------------------------
Total $13,122 $(77,153) $41,912 $(82,035)
- --------------------------------------------------------------------------------
The valuation allowance is attributable to foreign tax credit carryforwards,
which expire in 1998 through 2002.
------------------
11. LONG-TERM DEBT
------------------
Long-term debt consisted of the following at December 31, 1997 and 1996:
1997 1996
- --------------------------------------------------------------------------------
Credit Agreement 6.7%*(a) $697,500 $658,000
9 3/4% senior notes due 1999(b) 7,507 7,507
9 3/4% senior notes due 2000(c) 7,405 7,405
10 1/4% senior subordinated
notes due 2002(d) - 3,909
Other due 1998-2010 46,977 43,429
- --------------------------------------------------------------------------------
759,389 720,250
Less current portion 1,811 2,528
- --------------------------------------------------------------------------------
$757,578 $717,722
- --------------------------------------------------------------------------------
* Indicates average interest rate for 1997 and 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, 1997, $40,089 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.
During 1997, 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
$405,000, fixed interest rates ranging from 5.78% to 6.40% and maturity
dates ranging from April 1998 to October 2002.
(b) The 9 3/4% senior notes due 1999 are not redeemable prior to maturity on
November 1, 1999.
(c) The 9 3/4% senior notes due 2000 are not redeemable prior to maturity on
April 1, 2000.
(d) The 10 1/4% senior subordinated notes were redeemed on April 1, 1997 at
105.125% of par.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COLTEC INDUSTRIES INC
Minimum payments on long-term debt due within five years from December 31,
1997 are as follows:
- --------------------------------------------------------------------------------
1998 $ 1,811
1999 23,797
2000 9,180
2001 699,831
2002 1,361
Thereafter 23,409
- --------------------------------------------------------------------------------
Total $759,389
- --------------------------------------------------------------------------------
-----------------
12. 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 which 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).
During 1997, the Company merged several of its underfunded plans with its
overfunded plans.
As of December 31, 1997 and 1996, the funded status of the Company's
pension plans was as follows:
1997 1996
- --------------------------------------------------------------------------------
Over- Under- Over- Under-
funded funded funded funded
Plans Plans Plans Plans
- --------------------------------------------------------------------------------
Actuarial present
value of benefit
obligations:
Vested benefit
obligations $ 396,189 $ 30,604 $259,200 $119,158
- --------------------------------------------------------------------------------
Accumulated
benefit
obligations $ 406,385 $ 30,878 $265,396 $124,022
- --------------------------------------------------------------------------------
Projected benefit
obligations $ 427,737 $ 34,039 $289,973 $127,234
Plan assets at
fair value 568,094 1,551 408,979 79,735
- --------------------------------------------------------------------------------
Funded status 140,357 (32,488) 119,006 (47,499)
Unrecognized
net (gain) loss (120,839) 6,889 (89,702) (205)
Unrecognized
transition (asset)
obligations (2,192) 1,525 (1,389) 628
Unrecognized prior
service cost 15,255 2,571 2,837 15,033
Minimum liability
adjustment - (7,824) - (12,200)
- --------------------------------------------------------------------------------
(Accrued) prepaid
pension cost $ 32,581 $(29,327) $ 30,752 $ (44,243)
- --------------------------------------------------------------------------------
Included in the underfunded plans are amounts for unfunded, non-qualified
defined benefit plans.
At December 31, 1997 and 1996, the Company recorded a minimum liability of
$7,824 and $12,200, respectively, for underfunded plans with a partial offset to
other assets of $5,292 and $7,300, respectively, and an after-tax charge to
shareholders' equity of $1,646 and $3,200, respectively.
Assumptions as of December 31 used to develop the net periodic pension cost
for U.S. plans were:
1997 1996 1995
- --------------------------------------------------------------------------------
Discount rate for
benefit obligations 7.25% 7.75% 7.50%
Expected long-term rate
of return on assets 9.00% 9.00% 9.00%
Rate of increase in
compensation levels 4.75% 5.00% 5.00%
- --------------------------------------------------------------------------------
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COLTEC INDUSTRIES INC
For non-U.S. plans, which were not material, similar economic assumptions
were used.
The components of net periodic pension cost for the years ended December
31, 1997, 1996 and 1995 were as follows:
1997 1996 1995
- --------------------------------------------------------------------------------
Service cost $ 8,404 $ 9,377 $ 7,618
Interest cost on projected
benefit obligations 31,996 31,142 30,317
Actual return on assets (95,430) (52,049) (91,611)
Amortization and deferral, net 47,782 11,443 52,953
- --------------------------------------------------------------------------------
Net periodic pension cost $ (7,248) $ (87) $ (723)
- --------------------------------------------------------------------------------
For discontinued operations, the total projected benefit obligations at
December 31, 1997 and 1996 were $203,737 and $214,822, respectively, and are
fully funded. Interest cost on the projected benefit obligations for 1997, 1996
and 1995 was $16,097, $16,502 and $19,609, respectively, and was fully offset by
return on assets resulting in no net periodic pension cost.
---------------------------
13. 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, 1997 and 1996 were as follows:
1997 1996
- --------------------------------------------------------------------------------
Actuarial present value of accumulated postretirement benefit
obligations:
Retirees $ 16,980 $ 13,493
Fully eligible plan participants 1,925 2,416
Other plan participants 3,113 3,053
- --------------------------------------------------------------------------------
Total 22,018 18,962
Unrecognized transition obligations (15,330) (16,614)
Unrecognized net loss (4,611) (561)
Unrecognized prior service cost 1,964 2,495
- --------------------------------------------------------------------------------
Accrued postretirement benefit cost $ 4,041 $ 4,282
- --------------------------------------------------------------------------------
The components of postretirement benefit cost for the years ended December
31, 1997, 1996 and 1995 were as follows:
1997 1996 1995
- --------------------------------------------------------------------------------
Service cost $ 187 $ 395 $ 198
Interest cost on accumulated
postretirement benefit
obligations 1,433 1,951 1,927
Amortization of transition
obligations 1,022 1,107 1,373
Amortization and deferral, net (756) (124) (63)
- --------------------------------------------------------------------------------
Postretirement benefit cost $1,886 $3,329 $3,435
- --------------------------------------------------------------------------------
Discount rates of 7.25% and 7.75% were used in determining the accumulated
postretirement benefit obligations at December 31, 1997 and 1996, respectively.
The health care cost trend rates used in determining the accumulated
postretirement benefit obligations at December 31, 1997 were 8.7% in 1998
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 1997 by approximately
$142 and increase the accumulated postretirement benefit obligations at December
31, 1997 by approximately $1,400.
-------------------------
14. 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 and interest rate hedges: The fair value is based on
quoted market prices of similar contracts.
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COLTEC INDUSTRIES INC
The estimated fair value of the Company's financial instruments at December
31, 1997 and 1996 was as follows:
1997 1996
- --------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
- --------------------------------------------------------------------------------
Long-term receivables
and investments $ 35,017 $ 42,737 $ 32,427 $ 39,817
Long-term debt 759,389 760,609 720,250 720,824
Forward exchange
contracts - (8,384) - 87
Interest rate hedges - (3,555) - -
- --------------------------------------------------------------------------------
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, 1997 and 1996,
the Company had $162,000 and $216,000, respectively, of forward exchange
contracts, denominated in Canadian dollars, which had a fair value of $153,616
and $216,087, respectively. 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 $30,772, and for letters of credit of $55,969. 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.
------------------------------------
15. 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. Under the stock option plans, 7,468,000 shares of common
stock may be issued. 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% or 33%, commencing one year from
date of grant and expiring ten years from date of grant.
The Company applies Accounting Principles Board Opinion #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 pro
forma net earnings would have been $92,137 for 1997, $79,425 for 1996 and
$69,487 for 1995 and earnings per share would have been $1.38 in 1997, $1.15 in
1996 and $1.00 in 1995.
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 6.75% for 1997 and 7.0% for 1996 and
1995, no dividends paid, expected life of 3.7 years for 1997 and five years for
1996 and 1995, and volatility of 21% for 1997 and 23% for 1996 and 1995. The
weighted-average fair value of options granted was $5.75 for 1997, $4.76 for
1996 and $4.00 for 1995.
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COLTEC INDUSTRIES INC
A summary of the status of the Company's fixed stock option plans as of
December 31, 1997, 1996 and 1995 was as follows:
Weighted-
Number Option Price Average
of Shares Range Per Exercise
(000s) Share Price
- --------------------------------------------------------------------------------
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
Granted 1,069 18.88-22.88 21.09
Exercised (1,004) 10.75-18.75 14.64
Canceled (217) 10.75-18.75 12.08
- --------------------------------------------------------------------------------
December 31, 1997 5,260 $10.75-22.88 $14.59
- --------------------------------------------------------------------------------
Stock options exercisable were 2,156,000, 2,103,000 and 1,188,000 at
December 31, 1997, 1996 and 1995, respectively.
The following summarizes information about the Company's stock options
outstanding as of December 31, 1997:
Options Outstanding
- --------------------------------------------------------------------------------
Weighted- Weighted-
Number Average Average
Range of Outstanding Remaining Exercise
Exercise Prices (000s) Life Price
- --------------------------------------------------------------------------------
$10.75 to $15.75 3,559 7.1 years $12.05
$16.25 to $20.13 744 6.9 years 18.02
$21.19 to $22.88 957 9.6 years 21.35
- --------------------------------------------------------------------------------
$10.75 to $22.88 5,260 7.6 years $14.59
- --------------------------------------------------------------------------------
Options Exercisable
- --------------------------------------------------------------------------------
Weighted-
Number Average
Range of Outstanding Exercise
Exercise Prices (000s) Price
- --------------------------------------------------------------------------------
$10.75 to $15.75 1,755 $12.79
$16.25 to $20.13 383 17.91
$21.19 to $22.88 18 21.25
- --------------------------------------------------------------------------------
$10.75 to $22.88 2,156 $13.77
- --------------------------------------------------------------------------------
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, 1997 under the stock option
plans were 138,569.
---------------------------------
16. 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, 1997 and 1996, two subsidiaries of the Company were among a
number of defendants (typically 15 to 40) in approximately 110,000 and 94,700
actions, respectively (including approximately 2,400 and 5,100 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 1997, 1996 and 1995, two subsidiaries of the Company received
approximately 38,200, 39,900 and 44,000 new actions, respectively. Through
December 31, 1997, approximately 199,000 of the approximately 309,000 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 nor 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
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COLTEC INDUSTRIES INC
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 $59,247 in 1997, $71,354 in 1996 and $56,739 in 1995, 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 in
1997, $8,000 in 1996 and $5,000 in 1995.
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, 1997, 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 $47,350, and the Company expects that this cost will be
substantially covered by insurance.
With respect to the 107,600 outstanding actions as of December 31, 1997,
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 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
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COLTEC INDUSTRIES INC
Company. Likewise, the insignificant number of claims remaining to be resolved
are not expected to have a material effect on 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, 1997 and 1996:
1997 1996
- --------------------------------------------------------------------------------
Accounts and notes receivable $56,039 $67,012
Other assets 16,249 18,728
Accrued expenses 50,688 60,659
Other liabilities 2,682 10,879
- --------------------------------------------------------------------------------
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
$27,000 and $50,000. In connection with these expenditures, the Company has
accrued $31,716 at December 31, 1997 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, 1997, the Company and certain of its subsidiaries are obligated as of
December 31, 1997, to pay rentals totaling $30,658 as follows: $5,482 in 1998,
$4,970 in 1999, $3,573 in 2000, $2,673 in 2001, $1,973 in 2002 and $11,987 in
later years.
At December 31, 1997, the Company had committed to a minimum employer
contribution of $15,806 to the Company's 401K plans.
-----------------------
17. 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.
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, 1997, 1996 and 1995:
(In millions) 1997 1996 1995
- --------------------------------------------------------------------------------
Total assets:
Aerospace $437.3 $415.5 $391.3
Industrial 310.6 287.2 298.3
Corporate unallocated 185.1 146.8 134.3
- --------------------------------------------------------------------------------
Subtotal 933.0 849.5 823.9
Discontinued operations - - 70.6
- --------------------------------------------------------------------------------
Total $933.0 $849.5 $894.5
- --------------------------------------------------------------------------------
Depreciation of property,
plant and equipment:
Aerospace $ 13.4 $ 12.2 $ 12.3
Industrial 14.0 12.9 12.9
Corporate unallocated 2.3 1.9 1.6
- --------------------------------------------------------------------------------
Subtotal 29.7 27.0 26.8
Discontinued operations - 3.5 5.7
- --------------------------------------------------------------------------------
Total $ 29.7 $ 30.5 $ 32.5
- --------------------------------------------------------------------------------
Capital expenditures:
Aerospace $ 46.9 $ 26.9 $ 17.6
Industrial 31.4 13.7 13.7
Corporate unallocated 2.9 4.0 2.6
- --------------------------------------------------------------------------------
Subtotal 81.2 44.6 33.9
Discontinued operations - 5.4 8.6
- --------------------------------------------------------------------------------
Total $ 81.2 $ 50.0 $ 42.5
- --------------------------------------------------------------------------------
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COLTEC INDUSTRIES INC
Information by geographic segment was as follows for the years ended
December 31, 1997, 1996 and 1995:
Operating Total
(In millions) Sales Income Assets
- --------------------------------------------------------------------------------
1997
Domestic operations $1,027.2 $198.4 $590.1
Foreign operations 287.7 39.1 157.8
- --------------------------------------------------------------------------------
Total segments 1,314.9 237.5 747.9
Corporate unallocated - (39.7) 185.1
- --------------------------------------------------------------------------------
Total $1,314.9 $197.8 $933.0
- --------------------------------------------------------------------------------
1996
Domestic operations $ 888.6 $182.5 $554.2
Foreign operations 271.1 16.2 148.5
- --------------------------------------------------------------------------------
Total segments 1,159.7 198.7 702.7
Corporate unallocated - (41.1) 146.8
- --------------------------------------------------------------------------------
Total $1,159.7 $157.6 $849.5
- --------------------------------------------------------------------------------
1995
Domestic operations* $ 854.0 $168.7 $554.8
Foreign operations 245.6 10.3 205.4
- --------------------------------------------------------------------------------
Total segments 1,099.6 179.0 760.2
Corporate unallocated - (37.0) 134.3
- --------------------------------------------------------------------------------
Total $1,099.6 $142.0 $894.5
- --------------------------------------------------------------------------------
*Includes total assets from discontinued operations.
--------------------------------------
18. SUPPLEMENTARY EARNINGS INFORMATION
--------------------------------------
The following expenses were included in the Consolidated Statements of Earnings
for the years ended December 31, 1997, 1996 and 1995:
1997 1996 1995
- --------------------------------------------------------------------------------
Maintenance $24,000 $22,816 $22,633
Taxes, other than
federal income taxes:
Payroll 30,025 24,633 24,379
Property 4,928 4,626 4,226
State and local 6,241 5,121 2,601
Rent 8,950 9,965 8,604
Research and
development costs 46,548 44,125 45,130
- --------------------------------------------------------------------------------
---------------------
19. SUBSEQUENT EVENTS
---------------------
On January 30, 1998, the Company acquired Marine and Petroleum Mfg. Inc.'s
manufacturing facilities based in Texas for approximately $17,000. The plants
acquired produce flexible graphite and Teflon sealing products used in the
petrochemical industry. Combined annual sales for these facilities are expected
to approximate $18,000. The Company also acquired Tex-o-Lon and Repro-Lon for
approximately $25,000. These two Texas businesses have combined annual sales of
$15,000. Tex-o-Lon manufactures, machines and distributes Teflon products,
primarily for the semiconductor industry. Repro-Lon reprocesses Teflon compounds
for the chemical and semiconductor industries. The acquisitions were accounted
for as purchases; accordingly, the purchase price, which was financed through
available cash resources, was allocated to the acquired assets based upon their
fair market values.
On February 2, 1998, the Company purchased the Sealing Division of Groupe
Carbone Lorraine for $45,600. This division, with facilities in France and South
Carolina, produces high-technology metallic gaskets used in the nuclear,
petroleum and chemical industries. Sales for 1998 are expected to approximate
$38,000. This acquisition will be accounted for as a purchase and the purchase
price, also financed through available cash resources, will be allocated to the
acquired assets based upon their fair market values.
In February 1998, the Company amended its existing credit facility
increasing the total commitment to $900,000 from $850,000.
41
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 and Executive Vice President
Chief Executive Officer and Chief Financial Officer
42
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 and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of earnings, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ Arthur Andersen LLP
Charlotte, North Carolina
February 2, 1998
43