FINANCIAL INFORMATION
CONTENTS
PAGE
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Selected Financial Data................................ 3
Financial Review....................................... 4
Consolidated Balance Sheet............................. 14
Consolidated Statement Of Earnings..................... 16
Consolidated Statement Of Cash Flows................... 17
Consolidated Statement Of Shareholders' Equity......... 18
Notes To Financial Statements.......................... 19
Report Of Independent Public Accountants............... 37
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2
SELECTED FINANCIAL DATA
The following table sets forth selected financial data of Coltec for the
five years ended December 31, 1993. The selected financial data, with the
exception of order backlog and employee data, were derived from the financial
statements of Coltec, certain of which statements have been audited by Arthur
Andersen & Co., independent public accountants, as indicated in their report
included elsewhere herein.
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1993 1992 1991 1990 1989
--------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
STATEMENT OF EARNINGS DATA:
Sales............................................. $ 1,334.8 $ 1,368.7 $ 1,373.0 $ 1,487.2 $ 1,516.7
--------- --------- --------- --------- ---------
Operating income (a).............................. 211.7 243.1 229.0 268.9 272.8
--------- --------- --------- --------- ---------
Earnings from continuing operations before
interest, income taxes and extraordinary item
(b).............................................. 211.7 243.1 230.4 278.1 278.6
Interest and debt expense, net.................... 110.2 135.8 199.9 203.4 211.8
Provision for income taxes........................ 36.3 42.6 28.3 33.8 16.8
--------- --------- --------- --------- ---------
Earnings from continuing operations before
extraordinary item (a)........................... 65.2 64.7 2.2 40.9 50.0
Discontinued operations (c)....................... -- -- -- 17.7 3.6
Extraordinary item (d)............................ (17.8) (106.9) .6 (4.5) (6.1)
--------- --------- --------- --------- ---------
Net earnings (loss)............................... 47.4 (42.2) 2.8 54.1 47.5
--------- --------- --------- --------- ---------
Earnings (loss) per common share:
Continuing operations (a)....................... .94 1.11 .09 1.64 2.00
Discontinued operations......................... -- -- -- .70 .14
Extraordinary item.............................. (.26) (1.83) .02 (.18) (.24)
--------- --------- --------- --------- ---------
Net earnings (loss)............................. .68 (.72) .11 2.16 1.90
--------- --------- --------- --------- ---------
Ratio of earnings to fixed charges (e)............ 1.9 1.8 1.2 1.4 1.3
--------- --------- --------- --------- ---------
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital................................... 163.1 95.3 168.8 162.9 207.3
Total assets...................................... 806.4 828.8 834.2 876.8 952.3
Long-term debt (including current portion)........ 1,033.6 1,122.1 1,622.9 1,646.3 1,747.4
Shareholders' equity.............................. (625.5) (666.6) (1,194.5) (1,188.4) (1,241.3)
OTHER OPERATING DATA:
Operating margin (a).............................. 15.9% 17.8% 16.7% 18.1% 18.0%
Cash provided by operating activities............. 105.2 119.9 149.2 155.5 114.3
Capital expenditures.............................. 38.6 25.0 26.2 23.2 28.7
Depreciation of property, plant and equipment..... 33.2 35.3 36.9 36.8 36.7
Order backlog (at end of period).................. 669.7 709.1 808.8 864.2 831.0
Number of employees (at end of period)............ 10,000 10,700 11,400 12,400 13,300
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
<FN>
- ------------
(a) Operating income for 1993 includes a $25.2 million ($15.3 million after
taxes, or 22 cents per common share) restructuring charge to cover the
cost of consolidation and rearrangement of certain manufacturing
facilities and related reductions in work force, primarily in the
Aerospace/Government segment, as well as at Central Moloney Transformer
Division. If the restructuring charge was excluded, operating income,
earnings from continuing operations before extraordinary item, earnings
per common share from continuing operations and the operating margin would
have been $236.9 million, $80.5 million, $1.16 and 17.7%, respectively, in
1993. Central Moloney Transformer was sold in January, 1994.
(b) Earnings from continuing operations before interest, income taxes and
extraordinary item include for 1991, 1990 and 1989, $1.4 million, $9.2
million and $5.8 million, respectively, of dividend income from Coltec's
minority interest in Crucible Materials Corporation. If such item was
excluded, earnings from continuing operations before interest, income
taxes and extraordinary item would have been $229.0 million, $268.9
million and $272.8 million for the years ended December 31, 1991, 1990 and
1989, respectively.
(c) On March 22, 1990, Coltec sold substantially all the assets of the Colt
Firearms Division to a company formed by a group of private investors for
total proceeds of $51.6 million and a gain of $17.3 million. Coltec has
accounted for the sales, expenses, assets and liabilities of Colt Firearms
as a discontinued operation.
(d) Coltec recognized extraordinary items in each of the five years ended
December 31, 1993 in connection with debt refinancings and early
retirement of debt; and, in addition, in the year ended December 31, 1992
in connection with the recapitalization.
(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. Fixed
charges consist of interest expense, capitalized interest and that portion
of rental expense deemed to be representative of the interest factor.
3
FINANCIAL REVIEW
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1993, COMPARED TO YEAR ENDED DECEMBER 31, 1992
Earnings before extraordinary item for 1993 were $80.5 million, equal to
$1.16 per common share, excluding a restructuring charge of $25.2 million ($15.3
million after taxes, or 22 cents per common share) recorded by Coltec in the
second quarter of 1993. This compared with earnings before extraordinary item of
$64.7 million, or $1.11 per common share, in 1992. In January 1994, Coltec
entered into a $415.0 million reducing revolving credit facility (the "1994
Credit Agreement"). Had this facility been entered into at the beginning of
1993, earnings before extraordinary item for 1993 would have increased by $10.1
million, or 14 cents per common share. Sales were $1,334.8 million in 1993
compared with $1,368.7 million in 1992. Operating income for 1993 was $236.9
million and the operating margin was 17.7%, excluding the restructuring charge;
and for 1992, operating income was $243.1 million and the operating margin was
17.8%. Although sales and operating income declined slightly in 1993, Coltec was
able to maintain its operating margin at about the same level as in 1992. This
performance was achieved despite 1993 being a difficult year for two of the
major markets served by Coltec. The aerospace industry continued to be impacted
by declining orders for new commercial aircraft and cuts in defense spending;
and the nation's manufacturing sector, the primary market for the Industrial
segment, remained weak.
Excluding the restructuring charge, the Aerospace/Government segment
reported a 16% decline in operating income in 1993 on a 13% sales decline and an
operating margin of 18.9% compared with 19.5% last year. Operating income for
1993 was $85.5 million on sales of $453.3 million, compared with operating
income of $102.1 million on sales of $523.7 million in the prior year. The
Automotive segment achieved a record 23.8% operating margin in 1993, compared
with 21.1% in 1992, a 25% improvement in operating income and an 11% increase in
sales. Operating income was $106.2 million on sales of $445.7 million compared
with operating income of $85.1 million on sales of $402.6 million in 1992. This
strong performance reflects higher new car and truck production, increased
applications for segment components and the introduction of new automotive
products. In the Industrial segment, operating income and sales were down 6% and
2%, respectively, and segment operating margin declined to 18.2% from 19.0% in
1992. Segment operating income was $79.6 million and sales were $436.7 million,
compared with operating income of $84.4 million and sales of $443.8 million in
1992. Record sales and earnings performances were reported by Quincy Compressor
and Garlock Bearings Divisions, while Central Moloney Transformer, Garlock
Mechanical Packing and France Compressor Products Divisions, and FMD Electronics
reported lower results in 1993. Excluding Central Moloney Transformer, which was
sold in January 1994, sales were up 2% to $372.5 million compared with $365.3
million in 1992, operating income was $80.7 million, down slightly from $81.9
million in 1992, and segment operating margin for 1993 was 21.7% compared with
22.4% in 1992.
Following is a discussion of the results of operations for the year ended
December 31, 1993, compared to the year ended December 31, 1992.
SALES. Sales of $1,334.8 million in 1993 were 2% lower than the $1,368.7
million in 1992. In the Aerospace/Government segment, sales were $453.3 million
compared with $523.7 million last year. The decline in Aerospace/Government
segment sales reflects lower demand for new commercial aircraft resulting from
the excess capacity of the world airline fleets, as well as continued declines
in defense spending. In spite of the weak economic conditions in the aerospace
industry, Coltec began shipping components for new commercial programs in 1993,
including landing gear systems for the Boeing 777 aircraft and flight controls
for the Fokker Fo-70 aircraft. In 1993, sales to the military and other branches
of the United States Government accounted for $173 million, or 38%, of total
sales for the Aerospace/Government segment, compared with $192 million, or 37%,
in 1992 and $223 million, or 40%, in 1991. For Coltec, sales to the military and
other branches of the United States Government were $190 million, $210 million
and $224 million, or 14%, 15% and 16%, in 1993, 1992, and 1991, respectively. In
1993, Menasco Aerosystems Division reported lower commercial sales of landing
gear systems for both the Boeing 757 and 767 aircraft and lower military sales,
primarily for spare parts. Menasco Aerospace Ltd in Canada reported lower
shipments of landing gear systems for the Boeing 737 and McDonnell Douglas MD-80
aircraft and flight
4
controls for the Fokker Fo-100 aircraft. Sales of overhaul and repair services
declined at Menasco Overhaul Division due mainly to increased competition and
the economic slowdown in Europe. The decline in sales at Fairbanks Morse Engine
Division was due to completion of government programs and lower shipments of
engines to the commercial sector. Late in 1993, Fairbanks Morse Engine was
awarded a contract to provide engines for the U.S. Navy Sealift program. Sales
at Chandler Evans Control Systems Division declined in 1993 on lower demand for
fuel pumps from both the commercial and military markets. Walbar reported higher
sales in 1993 on increased demand for repair and coating services for gas
turbine engine components, and on increased shipments of turbine blades and
vanes for commercial aircraft engines.
For 1993, Automotive segment sales increased 11% to $445.7 million,
reflecting the recovery of the domestic automotive industry that began last year
and continued to accelerate in 1993. Also contributing to the sales improvement
were increased applications for segment components and the introduction of new
automotive products. Sales were higher at Holley Automotive Division on
increased demand for manifold assemblies and transmission solenoids, and on the
introduction of new automotive products. Coltec Automotive Division reported
increased shipments of oil pumps into the European automotive market and
mechanical emission control air pumps for use on light trucks and vans. The
sales improvement at Stemco Truck Products Division was due to the continued
demand for wheel lubrication systems from original equipment manufacturers,
reflecting increased truck and trailer production, and to increased aftermarket
shipments, resulting from gains in market share. Farnam Sealing Systems reported
higher sales on increased demand from the original equipment market for engine
and transmission products. Holley Replacement Parts reported lower sales in 1993
reflecting the continuing decline in demand for carburetors in the aftermarket.
Sales for the Industrial segment in 1993 were $436.7 million, or 2% lower
than in 1992. Sales were higher at Quincy Compressor on increased shipments of
rotary screw air compressors, strong demand for compressor parts and
accessories, and new product introductions. Garlock Bearings reported higher
sales on new applications for DU bearings and strong demand from the truck
market for DX bearings. Sales were up at Sterling Die and Haber Tool due
primarily to increased demand from the automotive market, and at Garlock
Plastomer Products on strong acceptance from the aerospace industry for its new
PTFE insulating tape. At Garlock Mechanical Packing Division, sales of KLOZURE
oil seals and industrial seals were higher on increased demand from original
equipment manufacturers; while sales of gasketing and compressed sheet products
declined due to softness in the petrochemical market. Sales were lower in 1993
at Central Moloney Transformer reflecting the low level of demand for
transformers and competitive pricing pressures, and at Garlock Valves &
Industrial Plastics Division due to the slowdown in the European economy.
Delavan Commercial Products Division reported lower sales due to the foreign
exchange translation impact on sales of its U.K. affiliate and to lower demand
for agricultural nozzles and pumps, resulting from the flooding in the Midwest.
COST OF SALES. Cost of sales decreased 4% in 1993 reflecting lower sales
volume for the Aerospace/ Government segment and Central Moloney Transformer,
improved manufacturing processes, lower maintenance cost and depreciation
expense, and benefits realized from the restructuring program. As a percent of
sales, cost of sales declined to 67.6% from 69.0% in 1992.
SELLING AND ADMINISTRATIVE EXPENSE. Selling and administrative expense,
including other income and expense, increased 6% in 1993. This increase results
primarily from a full year of amortization expense on restricted stock awards
granted in 1992 and from the inclusion in 1992 of a nonrecurring reduction in
insurance cost and receipt of a license fee by Menasco Aerosystems. The increase
in 1993 selling and administrative expense was offset in part by recovery of
previously incurred engineering expense by Coltec Automotive. As a percent of
sales, selling and administrative expense increased to 14.4% from 13.2% in 1992.
RESTRUCTURING CHARGE. The $25.2 million restructuring charge recorded in
the second quarter of 1993 covers the cost of consolidation and rearrangement of
certain manufacturing facilities and related reductions in work force, primarily
in the Aerospace/Government segment, as well as at Central Moloney Transformer.
Key elements of the restructuring program include closing a landing gear
manufacturing
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facility and consolidation of landing gear production at two existing Menasco
facilities, closing a turbine engine components facility and consolidating
production of these components at three existing Walbar facilities, and closing
one of two Central Moloney Transformer plants. At Chandler Evans Control
Systems, the manufacturing area was reduced; and at Holley Replacement Parts,
administrative offices and the distribution operation are being relocated to one
of the division's manufacturing facilities. During 1993, significant progress
was made toward achieving the objectives of the restructuring program and the
program is expected to be completed in 1994.
INTEREST AND DEBT EXPENSE, NET. Net interest expense declined $25.7
million, or 19%, in 1993. Included in 1992 was substantial interest expense that
was reduced significantly by the recapitalization completed by Coltec on April
1, 1992.
PROVISION FOR INCOME TAXES. The effective income tax rate for 1993 was
35.75% compared with 39.7% in 1992. The lower effective tax rate for 1993 is
principally due to the disaffiliation of Coltec from Coltec Holdings Inc.
("Holdings") as a result of the recapitalization and the adjustment of reserves,
partially offset by the increase in the U.S. statutory rate from 34% to 35%.
EXTRAORDINARY ITEM. In 1993, Coltec incurred extraordinary charges of $17.8
million in connection with debt refinancings and the early retirement of debt.
This included $14.7 million from a debt refinancing completed in January 1994.
In 1992, Coltec incurred extraordinary charges of $105.3 million, in connection
with the recapitalization, and $1.6 million, from the early retirement of debt.
YEAR ENDED DECEMBER 31, 1992, COMPARED TO YEAR ENDED DECEMBER 31, 1991
In 1992, earnings before extraordinary item were $64.7 million, equal to
$1.11 per common share, compared with $2.2 million, or 9 cents per common share,
in 1991. The lower 1991 earnings reflected substantial interest expense, reduced
significantly by the recapitalization. Giving pro forma effect to the
recapitalization as if it had occurred on January 1, 1991, Coltec would have
reported earnings before extraordinary item for 1992 of $82.4 million, or $1.19
per common share, compared with earnings of $56.5 million, or 82 cents per
common share, in 1991. Operating income for 1992 increased 6% over 1991 on a
slight decline in sales. Operating income was $243.1 million in 1992 on sales of
$1,368.7 million, compared with operating income of $229.0 million on sales of
$1,373.0 million in 1991. Coltec's operating margin improved from 16.7% in 1991
to 17.8% in 1992. The 1992 results were achieved in spite of continued
reductions in defense spending and the slowdown in certain commercial programs
that unfavorably impacted the Aerospace/Government segment and resulted in a 12%
decline in Coltec's order backlog from the level at year-end 1991. Both sales
and operating income in the Aerospace/Government segment declined 7% in 1992,
however the segment maintained its 1991 operating margin of 19.5%. Operating
income for the Aerospace/Government segment in 1992 was $102.1 million on sales
of $523.7 million, compared with operating income of $109.6 million on sales of
$562.8 million in 1991. In the Automotive segment, operating income was up 44%
in 1992 on an 8% sales increase and segment operating margin improved to 21.1%
from 15.9% in 1991. Segment operating income was $85.1 million and sales were
$402.6 million compared with operating income of $59.3 million and sales of
$372.6 million in 1991. This strong performance by the Automotive segment was
aided by increased new car and truck production, the introduction of new
automotive products having higher margins and recovering aftermarket sales. In
the Industrial segment, operating income increased 5% on a slight improvement in
sales and segment operating margin improved to 19.0% from 18.3% in 1991, despite
the lack of significant growth during 1992 in many of the markets served.
Operating income and sales for the Industrial segment were $84.4 million and
$443.8 million, respectively, in 1992. This compared with operating income and
sales of $80.2 million and $439.3 million, respectively, in 1991. The segment's
improved results were paced by the strong performances of Garlock Bearings and
Quincy Compressor. Following is a discussion of the results of operations for
the year ended December 31, 1992, compared to the year ended December 31, 1991.
SALES. For 1992, sales totaled $1,368.7 million, which was slightly lower
than the $1,373.0 million reported in 1991. In the Aerospace/Government segment,
sales declined 7% to $523.7 million compared with $562.8 million in 1991. The
sales decline was due to continued reductions in defense spending and
stretch-out of certain commercial programs. Lower sales at Menasco Aerosystems
were due primarily to a
6
reduction in military spare parts sales and, to a lesser extent, a reduction in
commercial spare part sales. This sales decline was offset in part by increased
shipments of landing gear systems for the Lockheed/Boeing 16 and Boeing 757
aircraft. Sales were down at Menasco Aerospace reflecting a program stretch-out
on the McDonnell Douglas MD-80 aircraft and lower spare parts sales. The weak
economic condition of the airline industry resulted in lower demand for landing
gear overhaul services at Menasco Overhaul. Walbar reported a decline in sales
on lower shipments of compressor blades and vanes to aircraft engine
manufacturers for military applications. Chandler Evans Control Systems reported
lower sales of spare parts to both the military and commercial markets, however
the division was able to offset this sales decline with sales of new products.
Higher sales at Delavan Gas Turbine Products resulted from increased overhaul
services and at Lewis Engineering from improved pricing.
Sales for the Automotive segment increased 8% to $402.6 million, reflecting
increased new car and truck production, the introduction of new automotive
products having higher margins and recovering aftermarket sales. Contributing to
the higher sales was the initial production of the Chrysler LH car models which
use Holley throttle bodies and other fuel system components. All divisions
within the Automotive segment reported increased sales in 1992. Higher sales at
Holley Automotive were due to strong demand for transmission solenoids and the
introduction of new automotive products. At Coltec Automotive, shipments of both
mechanical air pumps and oil pumps were above 1991 levels. In addition, tooling
and prototype sales were higher. In 1992, Coltec Automotive began initial
shipments of oil pumps into the European automotive market. The sales increase
at Holley Replacement Parts was due to improved pricing and higher volume for
remanufactured and performance carburetors resulting from increased market
penetration. The sales improvement at Stemco Truck Products was due to selected
price increases and to an increase in shipments of wheel lubrication systems to
the original equipment market. Farnam Sealing Systems reported higher sales on
the introduction of new engine and transmission products.
Industrial segment sales of $443.8 million were slightly higher in 1992.
Sales were up significantly at Garlock Bearings on increased demand for DU
bearings from the automotive market and new applications for DX bearings. Sales
were higher at Quincy Compressor on increased demand for reciprocating and
rotary screw air compressors and from improved pricing. The Sterling Die and
Haber Tool operations benefited from increased sales to the automotive market.
At Delavan Commercial Products, sales of fuel spray nozzles were up to the home
heating market, reflecting cooler weather in the Northeast and higher sales to
Europe and Japan, and to the industrial market, reflecting increased
pollution-control applications. Sales were down at Central Moloney Transformer
due to lower pricing and reduced volume, attributable to a fall off in demand
for transformers related to a decline in housing starts. Due to weak market
conditions in 1992, Garlock Mechanical Packing reported sales declines in Canada
and Mexico and in its hydraulic components, compression packing and mechanical
seals product lines. These declines were offset in part by increased sales of
industrial sealing and gasketing products, price increases and new product
sales. Lower sales were also reported in 1992 by France Compressor Products.
COST OF SALES. Cost of sales decreased 2% in 1992 reflecting the lower
sales volume in the Aerospace/ Government segment, reductions in work force and
benefits realized from manufacturing efficiencies and cost-reduction programs.
As a percent of sales, cost of sales declined to 69.0% from 70.4% in 1991.
SELLING AND ADMINISTRATIVE EXPENSE. Selling and administrative expense,
including other income and expense, increased 2% in 1992. Selling and
administrative expense for 1992 reflected a $3.5 million reduction in insurance
cost compared with a $6.5 million reduction in 1991. These reductions were
realized from the sale of stock in a company formed in 1986 to provide insurance
coverage then largely unavailable. The increase in 1992 selling and
administrative expense was offset in part by higher license fee receipts
received by Menasco Aerosystems in 1992. As a percent of sales, selling and
administrative expense was 13.2% in 1992 compared to 12.9% in 1991.
INTEREST AND DEBT EXPENSE, NET. Net interest expense declined $64.1
million, or 32%, in 1992. Included in 1991 was substantial interest expense that
was reduced significantly by the recapitalization.
7
PROVISION FOR INCOME TAXES. The effective income tax rates were 39.7% and
92.8% for 1992 and 1991, respectively. The lower effective rate for 1992
reflected a lower tax cost to repatriate non-U.S. earnings and no adverse effect
of unutilized operating losses as a result of higher income for 1992.
EXTRAORDINARY ITEM. In 1992, Coltec incurred extraordinary charges of
$105.3 million in connection with the recapitalization, primarily for premiums,
expenses and write-off of deferred financing costs from early retirement of
debt; and $1.6 million from the write-off of deferred financing costs from early
retirement of debt and from a debt refinancing. In 1991, Coltec recognized an
extraordinary gain of $.6 million resulting from the purchase of its debentures.
INDUSTRY SEGMENT INFORMATION
The following table shows financial information by industry segment for the
five years ended December 31, 1993.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- ----------
(DOLLARS IN MILLIONS)
Sales:
Aerospace/Government............. $ 453.3 $ 523.7 $ 562.8 $ 581.9 $ 570.5
Automotive....................... 445.7 402.6 372.6 436.1 479.3
Industrial....................... 436.7 443.8 439.3 470.2 468.8
Intersegment elimination (a)..... (.9) (1.4) (1.7) (1.0) (1.9)
---------- ---------- ---------- ---------- ----------
Total.......................... $ 1,334.8 $ 1,368.7 $ 1,373.0 $ 1,487.2 $ 1,516.7
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Operating income (b):
Aerospace/Government............. $ 67.8 $ 102.1 $ 109.6 $ 107.6 $ 118.7
Automotive....................... 102.4 85.1 59.3 93.9 92.6
Industrial....................... 75.9 84.4 80.2 96.1 86.7
---------- ---------- ---------- ---------- ----------
Total segments................. 246.1 271.6 249.1 297.6 298.0
Corporate unallocated (c)........ (34.4) (28.5) (20.1) (28.7) (25.2)
---------- ---------- ---------- ---------- ----------
Operating income............... $ 211.7 $ 243.1 $ 229.0 $ 268.9 $ 272.8
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Operating margin (b):
Aerospace/Government............. 15.0% 19.5% 19.5% 18.5% 20.8%
Automotive....................... 23.0 21.1 15.9 21.5 19.3
Industrial (d)................... 17.4 19.0 18.3 20.4 18.5
---------- ---------- ---------- ---------- ----------
Total.......................... 15.9% 17.8% 16.7% 18.1% 18.0%
Return on total assets (e):
Aerospace/Government............. 17.6% 26.3% 26.7% 25.1% 25.6%
Automotive....................... 82.2 71.8 48.1 66.3 57.2
Industrial....................... 42.1 45.2 42.2 49.1 41.5
---------- ---------- ---------- ---------- ----------
Total.......................... 26.3% 29.3% 27.5% 30.7% 28.9%
Backlog (f):
Aerospace/Government............. $ 524.5 $ 576.9 $ 697.2 $ 738.5 $ 696.4
Automotive....................... 77.6 64.8 47.0 51.5 56.4
Industrial....................... 67.6 67.4 64.6 74.2 78.2
---------- ---------- ---------- ---------- ----------
Total.......................... $ 669.7 $ 709.1 $ 808.8 $ 864.2 $ 831.0
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
<FN>
- ---------
(a) Reflects elimination of intercompany sales between divisions in different
segments.
(b) The $25.2 million restructuring charge is included in 1993 segment
operating income as follows: $17.7 million in Aerospace/Government, $3.8
million in Automotive and $3.7 million in Industrial. Excluding
8
the restructuring charge, operating income and the operating margin for
1993 would have been $85.5 million and 18.9% for Aerospace/Government,
$106.2 million and 23.6% for Automotive and $79.6 million and 18.2% for
Industrial.
(c) Represents corporate selling and administrative expense, including other
income and expense, that is not allocable to individual industry segments.
(d) Excluding Central Moloney Transformer Division, which was sold in January
1994, the operating margins for the Industrial segment would have been
21.7% in 1993, 22.4% in 1992, 21.7% in 1991, 23.2% in 1990 and 20.0% in
1989.
(e) Return on total assets is calculated for each segment by dividing segment
operating income by segment total assets for December 31, and for total
Coltec by dividing total Coltec operating income by total assets at
December 31, less assets of discontinued operations.
(f) Of the $669.7 million backlog at December 31, 1993, $255.2 million was
scheduled to be shipped beyond 1994.
DISCONTINUED OPERATIONS
On March 22, 1990, Coltec sold substantially all of the assets of the Colt
Firearms Division to the parent company of Colt's Manufacturing Company, Inc.
(collectively with its parent company, "Colt's Manufacturing"), a company formed
by a group of private investors, for cash and certain securities of Colt's
Manufacturing. At December 31, 1993, Coltec's investment in Colt's Manufacturing
was fully reserved.
On March 18, 1992, Colt's Manufacturing filed a petition for bankruptcy
protection under Chapter 11 of the United States Bankruptcy Code and on January
19, 1993, the Official Committee of Unsecured Creditors of Colt's Manufacturing
Company, Inc. filed a fraudulent conveyance action against Coltec and other
defendants. Coltec believes that it has adequately provided for any liabilities
Coltec may incur with respect to Colt's Manufacturing and accordingly does not
believe that the Chapter 11 filing or the associated financial condition of
Colt's Manufacturing or the fraudulent conveyance action will have a material
adverse effect on Coltec's results of operations and financial condition.
LIQUIDITY AND FINANCIAL POSITION
On April 1, 1992, Coltec completed a recapitalization that included a public
offering of common stock, two debt offerings and a new bank financing
arrangement. The recapitalization reduced the aggregate indebtedness of Coltec
and Holdings, refinanced a substantial portion of remaining indebtedness on more
favorable terms and improved Coltec's operating and financial flexibility. On
November 18, 1993, Holdings became a wholly-owned subsidiary of Coltec as a
result of a reorganization that resulted in the exchange by the Holdings
shareholders of their shares of common stock of Holdings for 35.5% or 24,830,000
shares of common stock of Coltec (the "Holdings Reorganization"). Immediately
before this exchange, Holdings owned 35.7% or 25,000,000 shares of the common
stock of Coltec.
Funds from operations continue to be the main source of financing for
Coltec's businesses and for repaying its debt. In 1993, cash provided by
operating activities was $105.2 million compared with $119.9 million in 1992 and
$149.2 million in 1991. The lower cash from operations in 1993 was due primarily
to increased working capital requirements. In addition to the $105.2 million of
cash generated in 1993, Coltec received $26.7 million of cash in the Holdings
Reorganization. These funds were used to reduce indebtedness by $92.1 million
and invest $38.6 million in capital expenditures. As a result of an agreement
with one of its insurance carriers, Coltec began collecting in the third quarter
of 1993 its receivable from insurance carriers for asbestos product liability
claims and related litigation costs. Included in current receivables at December
31, 1993 was $35.8 million due from insurance carriers. Excluding this amount,
receivables increased 2% to $125.7 million at December 31, 1993 and receivable
days outstanding were 36 compared with 35 days at year-end 1992. Inventories of
$167.8 million at December 31, 1993, were slightly higher than at year-end 1992,
and inventory turnover was 4.76 times in 1993 compared with 4.83 times in 1992.
Cash and cash equivalents at December 31, 1993, were $5.7 million compared with
$7.2 million at December 31, 1992.
9
Working capital at December 31, 1993, was $163.1 million and the current ratio
was 1.83. This compares with working capital of $95.3 million and a current
ratio of 1.39 at December 31, 1992. The increase in working capital results from
the receivable from insurance carriers and the reduction in current maturities
of long-term debt, reflecting the debt refinancing completed in January 1994.
At December 31, 1993, total debt was $1,033.6 million compared with $1,122.1
million at December 31, 1992. During 1993, Coltec redeemed $50.0 million of its
11 1/4% debentures and refinanced $15.1 million of its 9 7/8% industrial revenue
bonds with like bonds having interest rates of 6.4% to 6.55%. The 1994 Credit
Agreement, which expires June 30, 1999, has resulted in reducing Coltec's
mandatory debt repayments over the next five years by approximately $120.0
million and will result in lower interest cost in future years. The 1994 Credit
Agreement also provides up to $100 million for issuance of letters of credit and
will be reduced $50.0 million on both January 11, 1997 and 1998. On January 11,
1994, borrowings of $324.0 million were outstanding and letters of credit of
$43.6 million were issued under the 1994 Credit Agreement leaving $47.4 million
available for additional borrowings and the issuance of additional letters of
credit. The 1994 Credit Agreement was used to prepay indebtedness outstanding
and replace letters of credit issued under a credit agreement entered into in
1992 (the "1992 Credit Agreement"). The remaining balance of the 1994 Credit
Agreement will be used for working capital and general corporate purposes.
Coltec's loan agreements contain various restrictions and conditions, with which
Coltec is in compliance. Management believes that cash generated from operations
and borrowings available under the 1994 Credit Agreement will be adequate to
meet Coltec's operating needs, planned capital expenditures and debt service
requirements for the next several years.
The negative balance in shareholders' equity of $625.5 million at December
31, 1993 compares with a negative balance of $666.6 million at year-end 1992.
The $41.1 million increase in equity during 1993 reflects $47.4 million of net
earnings, $2.8 million of amortization of unearned compensation related to
restricted shares and $.2 million of proceeds and tax benefits from the exercise
of stock options and the expiration of restrictions on restricted stock, offset
by a $4.2 million minimum pension liability, a $3.6 million reduction in foreign
currency translation adjustments, and $1.5 million of expenses incurred in
connection with the Holdings Reorganization.
Other assets at December 31, 1993, were $87.9 million or $41.7 million less
than the balance at year-end 1992. This reduction results from the write-off of
deferred financing cost as a result of the early retirement of the 1992 Credit
Agreement and from the increase in amounts currently due from insurance
carriers. Other liabilities increased $52.5 million during 1993 to $132.4
million at December 31, 1993. This increase results from recognition of a
minimum pension liability, the assumption of liabilities in connection with the
Holdings Reorganization and a reserve for environmental and product liability
claims, established from proceeds to be received from insurance settlements. The
$46.4 million in liabilities of discontinued operations at December 31, 1993,
represented reserves to cover total future estimated costs of the disposition of
Crucible Materials Corporation, the steelmaking facility in Midland,
Pennsylvania, and Colt Firearms.
CAPITAL EXPENDITURES
Capital expenditures were $38.6 million in 1993 compared to $25.0 million in
1992 and $26.2 million in 1991, as Coltec continues to invest in capital
improvements to increase efficiency, reduce costs, pursue new opportunities,
expand production and maintain facilities. The level of capital expenditures has
and will vary from year to year, affected by the timing of capital spending for
new production equipment for new products, periodic plant and facility expansion
as well as cost reduction and labor efficiency programs. Capital expenditures
during 1993 included construction of a manufacturing facility in Greenwood,
South Carolina, for Walbar Metals; consolidation of landing gear production at
the Ft. Worth, Texas, facility of Menasco Aerosystems, and production equipment
to manufacture a new oil pump at Coltec Automotive. At December 31, 1993, Coltec
had $14.9 of planned capital expenditures that included $4.7 million for a new
landing gear overhaul facility in Ontario, Canada, and $1.7 million for
consolidation of administrative offices and distribution operations of Holley
Replacement Parts at Bowling Green, Kentucky.
10
ENVIRONMENTAL
Coltec, in the ordinary course of conducting its business, is subject to
numerous federal, state and local environmental laws and is a potentially
responsible party under the Comprehensive Environmental Response Compensation
and Liability Act of 1980, as amended, or similar state laws, in connection with
alleged contamination at several sites. Coltec's annual expenditures (including
capital expenditures) relating to environmental matters over the three years
ended December 31, 1993 ranged from $4 million to $6 million, and Coltec expects
such expenditures to range from $8 million to $11 million in each of 1994 and
1995. Coltec does not believe that costs for environmental matters will have a
material effect on Coltec's results of operations and financial condition.
ASBESTOS LITIGATION
With respect to asbestos product liability and related litigation costs, in
1993 two subsidiaries of Coltec received approximately 27,400 new lawsuits, with
a comparable number of lawsuits received in 1992 and 1991. The subsidiaries made
payments aggregating $38.7 million in 1993, $39.8 million in 1992 and $48.4
million in 1991, substantially all of which were covered by insurance.
As of December 31, 1993, certain actions had been settled on a group basis
with payments to be made to individual plaintiffs over periods of one to four
years. In addition, in accordance with Coltec'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 Coltec can reasonably estimate the cost to dispose of these actions.
Coltec estimates that the aggregate cost of the disposition of the foregoing
settled actions and actions in advanced stages of processing, including
associated legal costs, is approximately $52.6 million and expects that this
cost will be substantially covered by insurance.
As of December 31, 1993, the two subsidiaries were among a number of
defendants in approximately 68,500 actions, including approximately 6,100
actions in advanced stages of processing as described above. As of December 31,
1992, the number of outstanding actions approximated that as of December 31,
1993. The remaining 62,400 outstanding actions as of December 31, 1993 are in
preliminary procedural stages. Coltec 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
liability or costs to Coltec. 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, Coltec is generally
unable to obtain the information necessary to analyze the actions in sufficient
detail to estimate the ultimate liability or costs to Coltec, 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
Coltec's subsidiaries will receive in the future. Coltec has noted that, with
respect to recently settled actions or actions in advanced stages of processing,
the nature of the injuries alleged and the occupation of the plaintiffs are
changing from those typically associated with asbestos-related disorders. Coltec
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
plaintiffs, the presence or absence of other possible causes of plaintiffs'
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 the preliminary procedural stages or of
actions that may be filed in the future. However, Coltec believes that it is 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 Coltec and
other defendants in asbestos litigation, the likely sharing of judgments among
multiple responsible defendants,
11
and the amount of insurance coverage that Coltec expects to be available
(approximately $1.5 billion as of December 31, 1993 from its solvent carriers),
Coltec believes that pending and reasonably anticipated future actions are not
likely to have a material effect on Coltec's results of operations and financial
condition.
Effective in the first quarter of 1994, Coltec will adopt the requirements
of Financial Accounting Standards Board Interpretation No. 39, "Offsetting of
Amounts Related to Certain Contracts." In accordance with Interpretation No. 39,
Coltec will record an accrual for its liabilities for asbestos-related matters
that are deemed probable and can be reasonably estimated, and will separately
record an asset equal to the amount of such liabilities that is expected to be
recovered by insurance. Accordingly, the liabilities and assets to be recorded
in 1994 will relate only to settled actions and actions in advanced stages of
processing which approximated $52.6 million as of December 31, 1993. Coltec does
not expect that the adoption of Interpretation No. 39 will have a material
effect on Coltec's results of operations and financial condition.
OTHER FINANCIAL INFORMATION
PRO FORMA RESULTS OF OPERATIONS
Giving pro forma effect to the recapitalization as if it had occurred on
January 1, 1991, Coltec would have reported earnings before extraordinary item
as follows:
YEAR ENDED DECEMBER 31,
-------------------------------
1992 1991
------------ ------------
(IN MILLIONS, EXCEPT PER SHARE
DATA)
Earnings before interest, income taxes and extraordinary
item....................................................... $ 243.1 $ 230.4
Interest and debt expense, net.............................. 116.7 117.6
Provision for income taxes.................................. 44.0 56.3
------ ------
Earnings before extraordinary item.......................... $ 82.4 $ 56.5
------ ------
Earnings per common share before extraordinary item (a)..... $ 1.19 $ .82
------ ------
------ ------
<FN>
- ---------
(a) Pro forma earnings per common share before extraordinary item by quarter
would have been 22 cents, 33 cents, 29 cents and 35 cents for the first,
second, third and fourth quarters of 1992, respectively; and 15 cents, 23
cents, 29 cents and 15 cents for the like quarters of 1991.
EFFECT OF INFLATION
Inflation has not had a major impact on the operations of Coltec during the
past three years. Coltec generally has been able to offset the effects of
inflation with price increases, cost-reduction programs and operating
efficiencies.
IMPACT OF NEW ACCOUNTING STANDARDS
Coltec adopted Financial Accounting Standards No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions", and No. 109,
"Accounting for Income Taxes" effective January 1, 1993; and No. 112,
"Employers' Accounting for Postemployment Benefits" effective January 1, 1994.
The adoption of these standards did not have a material effect on Coltec's
results of operations and financial condition.
Based on preliminary analyses, Coltec does not expect that the future
adoption of Financial Accounting Standards No.114, "Accounting by Creditors for
Impairment of a Loan," and No. 115, "Accounting for Certain Investments in Debt
and Equity Securities" will have a material effect on Coltec's results of
operations and financial condition.
DIVIDENDS
No dividends were paid in 1993 and 1992, and no dividends are expected to be
paid in 1994.
12
COMMON STOCK DATA
Coltec's common stock (symbol COT) is listed on the New York and Pacific
Stock Exchanges. The high and low prices of the stock since it began trading on
March 25, 1992, based on the Composite Tape, were as follows:
1993 1992
---------------- ----------------
HIGH LOW HIGH LOW
------- ------- ------- -------
First quarter............ 191/4 161/4 19 17
Second quarter........... 171/2 147/8 213/4 17
Third quarter............ 18 151/4 191/4 153/8
Fourth quarter........... 193/8 16 191/4 141/8
At December 31, 1993, there were 591 shareholders of record.
ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION ON FORM 10-K AVAILABLE
The annual report on Form 10-K, without exhibits, will be made available
free of charge to interested shareholders upon written request to the Corporate
Secretary, Coltec Industries Inc., 430 Park Avenue, New York, N.Y. 10022.
13
COLTEC INDUSTRIES INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
DECEMBER 31,
--------------------
1993 1992
-------- --------
(IN THOUSANDS)
CURRENT ASSETS
Cash and cash equivalents (Notes 1 and 7)............ $ 5,749 $ 7,155
Accounts and notes receivable (Notes 7 and 15)
Trade.............................................. 124,640 123,331
Other.............................................. 41,051 4,959
-------- --------
165,691 128,290
Less allowance for doubtful accounts............... 4,170 4,614
-------- --------
161,521 123,676
Inventories (Note 1)
Finished goods..................................... 39,206 42,044
Work in process and finished parts................. 103,166 102,787
Raw materials and supplies......................... 25,405 22,075
-------- --------
167,777 166,906
Deferred income taxes (Note 5)....................... 17,036 33,080
Other current assets................................. 8,587 7,710
-------- --------
Total current assets............................... 360,670 338,527
PROPERTY, PLANT AND EQUIPMENT, AT COST (NOTE 1)
Land and improvements................................ 18,202 18,637
Buildings and equipment.............................. 130,085 132,013
Machinery and equipment.............................. 479,220 462,992
Leasehold improvements............................... 8,445 8,491
Construction in progress............................. 21,285 17,988
-------- --------
657,237 640,121
Less accumulated depreciation and amortization....... 431,908 413,312
-------- --------
225,329 226,809
Costs in excess of net assets acquired, net of
amortization (Note 1)................................. 132,550 133,883
Other assets (Notes 6, 7 and 15)....................... 87,863 129,557
-------- --------
$806,412 $828,776
-------- --------
-------- --------
The accompanying notes to financial statements are an integral part of this
statement.
14
COLTEC INDUSTRIES INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
LIABILITIES AND SHAREHOLDERS' EQUITY
DECEMBER 31,
---------------------------
1993 1992
----------- -----------
(IN THOUSANDS, EXCEPT SHARE
DATA)
CURRENT LIABILITIES
Current maturities of long-term debt (Notes 6, 7 and
16)................................................. $ 1,543 $ 48,645
Accounts payable..................................... 64,791 59,287
Accrued expenses
Salaries, wages and employee benefits.............. 40,946 49,661
Taxes.............................................. 30,103 30,876
Interest........................................... 23,887 20,626
Other.............................................. 32,272 29,100
----------- -----------
127,208 130,263
Current portion of liabilities of discontinued
operations.......................................... 4,000 5,046
----------- -----------
Total current liabilities........................ 197,542 243,241
Long-term debt (Notes 6, 7 and 16)..................... 1,032,089 1,073,450
Deferred income taxes (Note 5)......................... 27,543 53,116
Other liabilities...................................... 132,367 79,854
Liabilities of discontinued operations................. 42,361 45,759
Commitments and contingencies (Note 15)
Shareholders' equity (Notes 1, 8, 9 and 13)
Preferred stock
$.01 par value, 2,500,000 shares authorized, shares
outstanding -- none................................. -- --
Common stock
$.01 par value, 100,000,000 shares authorized,
69,943,341 and 69,853,464 shares issued at December
31, 1993 and 1992, respectively (excluding
25,000,000 shares held by a wholly-owned subsidiary
at December 31, 1993)............................... 699 699
Capital in excess of par value....................... 636,846 634,088
Retained earnings (deficit).......................... (1,251,465) (1,298,899)
Unearned compensation -- restricted stock awards..... (5,552) (7,221)
Minimum pension liability............................ (4,205) --
Foreign currency translation adjustments............. 1,077 4,689
----------- -----------
(622,600) (666,644)
Less cost of 179,309 shares of common stock in
treasury at December 31, 1993....................... (2,890) --
----------- -----------
(625,490) (666,644)
----------- -----------
$ 806,412 $ 828,776
----------- -----------
----------- -----------
The accompanying notes to financial statements are an integral part of this
statement.
15
COLTEC INDUSTRIES INC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1992 1991
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
Net sales.................................................................. $1,334,829 $1,368,703 $1,372,979
---------- ---------- ----------
Costs and expenses
Cost of sales............................................................ 905,464 944,405 966,791
Selling and administrative............................................... 192,437 181,176 177,168
Restructuring charge (Note 3)............................................ 25,219 -- --
---------- ---------- ----------
Total costs and expenses............................................... 1,123,120 1,125,581 1,143,959
---------- ---------- ----------
Operating income........................................................... 211,709 243,122 229,020
Dividend income............................................................ -- -- 1,431
---------- ---------- ----------
Earnings before interest, income taxes and extraordinary item.............. 211,709 243,122 230,451
Interest and debt expense, net............................................. 110,190 135,862 199,942
---------- ---------- ----------
Earnings before income taxes and extraordinary item........................ 101,519 107,260 30,509
Provision for income taxes (Note 5)........................................ 36,293 42,577 28,300
---------- ---------- ----------
Earnings before extraordinary item......................................... 65,226 64,683 2,209
Extraordinary item (Note 4)................................................ (17,792) (106,930) 591
---------- ---------- ----------
Net earnings (loss)........................................................ $ 47,434 $ (42,247) $ 2,800
---------- ---------- ----------
---------- ---------- ----------
Earnings (loss) per common share (Note 1)
Before extraordinary item................................................ $ .94 $ 1.11 $ .09
Extraordinary item....................................................... (.26) (1.83) .02
---------- ---------- ----------
Net earnings (loss)...................................................... $ .68 $ (.72) $ .11
---------- ---------- ----------
---------- ---------- ----------
Weighted average number of common and common equivalent shares............. 69,591 58,413 25,000
---------- ---------- ----------
---------- ---------- ----------
The accompanying notes to financial statements are an integral part of this
statement.
16
COLTEC INDUSTRIES INC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-----------------------------------
1993 1992 1991
---------- --------- ----------
(IN THOUSANDS)
Cash flows from operating activities
Net earnings (loss)...................................................... $ 47,434 $ (42,247) $ 2,800
Adjustments to reconcile net earnings (loss) to cash
Extraordinary item..................................................... 17,792 106,930 (591)
Restructuring charge................................................... 25,219 -- --
Depreciation and amortization.......................................... 49,092 49,129 44,916
Noncash interest expense, net.......................................... -- 25,180 92,991
Deferred income taxes.................................................. (10,766) (17,829) 22,607
Receivable from insurance carriers..................................... 3,056 (15,660) (2,816)
Payment of liabilities of discontinued operations...................... (4,444) (6,166) (4,152)
Other operating items.................................................. (11,809) 2,032 (13,702)
---------- --------- ----------
115,574 101,369 142,053
---------- --------- ----------
Changes in assets and liabilities
Accounts and notes receivable............................................ (2,007) (7,896) 13,158
Inventories.............................................................. (2,871) 15,261 25,099
Deferred income taxes.................................................... 3,501 (216) (6,658)
Other current assets..................................................... (877) 738 1,235
Accounts payable......................................................... 4,067 (4,819) (4,587)
Accrued expenses......................................................... (12,169) 15,450 (21,060)
---------- --------- ----------
Changes in assets and liabilities...................................... (10,356) 18,518 7,187
---------- --------- ----------
Cash provided by operating activities.................................. 105,218 119,887 149,240
---------- --------- ----------
Cash flows from investing activities
Cash received in Holdings reorganization................................. 26,749 -- --
Proceeds from sale of an investment...................................... -- 3,733 12,035
Capital expenditures..................................................... (38,587) (24,997) (26,239)
Other -- net............................................................. 1,948 (3,503) 1,547
---------- --------- ----------
Cash used in investing activities...................................... (9,890) (24,767) (12,657)
---------- --------- ----------
Cash flows from financing activities
Proceeds from issuance of long-term debt................................. 46,069 150,000 5,557
Retirement of long-term debt............................................. (138,179) (242,192) (117,659)
Net proceeds from issuance of common stock in recapitalization........... -- 625,575 --
Net retirement of long-term debt in recapitalization..................... -- (433,836) --
Payment of premiums, fees and expenses in recapitalization and debt
refinancing............................................................. -- (153,061) --
Distribution to Holdings pursuant to preferred stock redemption and tax
sharing procedure....................................................... (4,624) (48,585) (14,000)
---------- --------- ----------
Cash used in financing activities...................................... (96,734) (102,099) (126,102)
---------- --------- ----------
Cash and cash equivalents
Increase (decrease)...................................................... (1,406) (6,979) 10,481
At beginning of period................................................... 7,155 14,134 3,653
---------- --------- ----------
At end of period......................................................... $ 5,749 $ 7,155 $ 14,134
---------- --------- ----------
---------- --------- ----------
The accompanying notes to financial statements are an integral part of this
statement.
17
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
COLTEC INDUSTRIES INC AND SUBSIDIARIES
THREE YEARS ENDED DECEMBER 31, 1993
-----------------------------------------------------------------------------------------------------------------
UNEARNED FOREIGN
COMMON STOCK CAPITAL IN RETAINED COMPENSATION- MINIMUM CURRENCY TREASURY STOCK
------------------ EXCESS OF EARNINGS RESTRICTED PENSION TRANSLATION ------------------
SHARES AMOUNT PAR VALUE (DEFICIT) STOCK AWARDS LIABILITY ADJUSTMENTS SHARES AMOUNT TOTAL
---------- ------- ---------- ----------- ------------- -------- ---------- --------- ------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
Balance, January
1, 1991......... 25,000,000 $250 $ -- $(1,201,630) $ -- $ -- $13,019 -- $ -- $(1,188,361)
Net earnings..... 2,800 2,800
Distribution to
Holdings
pursuant to tax
sharing
procedure....... (14,000) (14,000)
Proceeds from
Holdings applied
to purchase of
Holdings senior
discount
debentures...... 4,763 4,763
Foreign currency
translation
adjustments..... 271 271
---------- ------- ---------- ----------- ------------- -------- ---------- --------- ------- -----------
Balance, December
31, 1991........ 25,000,000 250 -- (1,208,067) -- -- 13,290 -- -- (1,194,527)
Net loss......... (42,247) (42,247)
Issuance of stock
in
recapitalization.44,275,000 443 625,132 625,575
Distribution to
Holdings
pursuant to
preferred stock
redemption and
tax sharing
procedure....... (48,585) (48,585)
Issuance of
restricted
stock, net...... 578,464 6 8,956 (7,221) 1,741
Foreign currency
translation
adjustments..... (8,601) (8,601)
---------- ------- ---------- ----------- ------------- -------- ---------- --------- ------- -----------
Balance, December
31, 1992........ 69,853,464 699 634,088 (1,298,899) (7,221) -- 4,689 -- -- (666,644)
Net earnings..... 47,434 47,434
Issuance of
restricted
stock, net...... 89,877 -- 1,389 1,669 (14,309) (229) 2,829
Exercise of stock
options......... (4) 5,000 79 75
Tax benefit from
stock option and
incentive
plan............ 133 133
Stock exchange in
the Holdings
reorganization.. 1,240 (170,000) (2,740) (1,500)
Minimum pension
liability....... (4,205) (4,205)
Foreign currency
translation
adjustments..... (3,612) (3,612)
---------- ------- ---------- ----------- ------------- -------- ---------- --------- ------- -----------
Balance, December
31, 1993........ 69,943,341 $699 $ 636,846 $(1,251,465) $ (5,552) $(4,205) $1,077 (179,309) $(2,890) $ (625,490)
---------- ------- ---------- ----------- ------------- -------- ---------- --------- ------- -----------
---------- ------- ---------- ----------- ------------- -------- ---------- --------- ------- -----------
The accompanying notes to financial statements are an integral part of this
statement.
18
COLTEC INDUSTRIES INC AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: Investments in which Coltec Industries Inc
("Coltec") has ownership of 50% or more of the voting common stock are
consolidated in the financial statements. Intercompany accounts and transactions
are eliminated.
CONSOLIDATED STATEMENT OF CASH FLOWS: Cash equivalents consist of
short-term, highly liquid investments with original maturities of three months
or less. The effect of changes in foreign exchange rates on cash balances is not
significant.
Interest paid and federal and state income taxes paid and refunded were as
follows:
1993 1992 1991
---------- ---------- ----------
(IN THOUSANDS)
Interest paid............................................ $ 105,713 $ 107,236 $ 105,377
Income taxes --
Paid................................................... 31,873 40,767 30,327
Refunded............................................... 3,913 4,417 4,470
FOREIGN CURRENCY TRANSLATION: The financial statements of foreign
subsidiaries were prepared in their respective local currencies and are
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. Foreign currency transaction gains and
losses are included in net earnings. For 1993, 1992 and 1991, such gains and
losses were not significant.
INVENTORIES: Inventories, including inventories under long-term commercial
and government contracts and programs, are valued at the lower of cost or
market, less reserves of $18,086,000 and $16,789,000 at December 31, 1993 and
1992, respectively, for potential losses from excess and slow-moving
inventories. At December 31, 1993 and 1992, $45,150,000 and $64,464,000,
respectively, of contract advances have been offset against inventories under
long-term commercial and government contracts and programs in the Consolidated
Balance Sheet. Losses on commercial and government contracts and programs are
recognized in full when identified. At December 31, 1993 and 1992, an accrual
for loss contracts and programs was not required. Cost elements included in
inventory are material, labor and factory overhead, primarily using standard
cost, which approximates actual cost. Cost on approximately 53% of the domestic
inventory at December 31, 1993 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. The excess of current cost over last-in, first-out cost at
December 31, 1993 and 1992 was approximately $21,800,000 and $24,500,000,
respectively.
PROPERTY AND DEPRECIATION: Depreciation and amortization of plant and
equipment are provided generally by using the straight-line method, based on
estimated useful lives of the assets. For U.S. federal income tax purposes, most
assets are depreciated using allowable accelerated methods.
The ranges of estimated useful lives used in computing depreciation and
amortization for financial reporting were as follows:
YEARS
---------
Land improvements........................................................... 5-40
Buildings and equipment..................................................... 10-45
Machinery and equipment..................................................... 3-20
For leasehold improvements, the estimated useful life used in computing
amortization is the lesser of the asset life or the lease term.
Interest cost incurred during the period of construction of plant and
installation of equipment is capitalized as part of the cost of such plant and
equipment.
19
COLTEC INDUSTRIES INC AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
Renewals and betterments are capitalized by additions to the related asset
accounts, while repair and maintenance costs are charged against earnings.
Coltec generally records retirements by removing the cost and accumulated
depreciation from the asset and reserve accounts.
At December 31, 1993 and 1992, Coltec had the following assets recorded
under capital leases:
1993 1992
--------- ---------
(IN THOUSANDS)
Land and improvements................................................ $ 285 $ 294
Buildings and equipment.............................................. 7,867 8,583
Machinery and equipment.............................................. 11,059 11,023
Leasehold improvements............................................... 1,003 1,028
--------- ---------
20,214 20,928
Less -- Accumulated depreciation and amortization.................... 15,548 15,062
--------- ---------
$ 4,666 $ 5,866
--------- ---------
--------- ---------
ENVIRONMENTAL EXPENDITURES: Expenditures for environmental activities are
expensed or capitalized in accordance with generally accepted accounting
principles. 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.
START-UP COSTS: Start-up costs related to new operations and new product
lines are expensed as incurred.
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 Coltec has the contractual right to bill.
COSTS IN EXCESS OF NET ASSETS ACQUIRED: It is Coltec's policy to amortize
the excess costs arising from acquisitions on a straight-line basis over periods
not to exceed 40 years. At December 31, 1993 and 1992, accumulated amortization
was $52,063,000 and $47,036,000, respectively.
SHAREHOLDERS' EQUITY AND EARNINGS PER SHARE: In November 1991, Coltec
increased the amount of authorized common stock to 100,000,000 shares and
decreased the par value of the preferred stock and the common stock to $.01 per
share. In January 1992, Coltec effected a 250,000 for 1 split of its common
stock. Reference is made to Note 2 for information relating to the
Recapitalization.
In November 1993, all the shareholders of Coltec Holdings Inc. ("Holdings"),
the former parent company of Coltec, exchanged their shares of common stock of
Holdings for 35.5% or 24,830,000 shares of common stock of Coltec. Reference is
made to Note 13 for information relating to the Holdings Reorganization.
Earnings per common share are computed by dividing earnings by the weighted
average number of common and common equivalent shares outstanding during each
period. Common equivalent shares are shares issuable on the exercise of stock
options and shares of restricted stock, net of shares assumed to have been
purchased using the treasury stock method. All applicable share and per share
data has been adjusted for the 250,000 for 1 split.
20
COLTEC INDUSTRIES INC AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. RECAPITALIZATION
On April 1, 1992, Coltec completed a plan of recapitalization which included
its initial public offering of 44,275,000 shares of Coltec common stock for net
proceeds of $625,575,000 (the "Equity Offering") and the public offering of
$200,000,000 aggregate principal amount of its 9 3/4% senior notes due 2000 and
of $250,000,000 aggregate principal amount of its 10 1/4% senior subordinated
notes due 2002 (the "Note Offerings"). Coltec's recapitalization consisted of
(i) the Equity Offering, the net proceeds of which were used to redeem all of
the outstanding $355,493,000 aggregate principal amount of 12 1/2% senior
subordinated debentures due 1997-2001 at 106.25% of principal amount, together
with accrued interest to the date of redemption (the "12 1/2% Debenture
Redemption") and to repay the outstanding $225,000,000 indebtedness under the
Letter of Credit and Revolving Credit Facility Agreement (the "1989 Credit
Agreement"), (ii) bank borrowings under a Term and Working Capital Facility (the
"1992 Credit Agreement") of which $429,772,000 was initially drawn down, and
(iii) the Note Offerings. Proceeds from the 1992 Credit Agreement and the Note
Offerings were used (a) to retire a dividend note payable from Coltec to
Holdings, the proceeds of which were used by Holdings to effect its tender offer
for the outstanding Holdings 14 3/4% senior discount debentures (the "Holdings
Debentures") ($881,000,000 aggregate principal amount and $733,115,000 accreted
value) (the "Debt Tender Offer"), the related consent solicitation and the
redemption of the Holdings preferred stock (the "Preferred Stock Redemption"),
(b) to repay the remaining indebtedness outstanding under the 1989 Credit
Agreement not repaid from the proceeds of the Equity Offering and (c) to pay
fees and expenses in connection with the foregoing transactions (the
"Recapitalization").
In connection with the Recapitalization, Coltec incurred extraordinary
charges in the second quarter 1992 of $105,347,000, net of a $28,000,000 tax
benefit. The extraordinary charges were primarily payment of premiums and
expenses, and write-off of deferred financing costs resulting from early
retirement of debt.
Pursuant to the Recapitalization, the consolidated statement of earnings for
the year ended December 31, 1991 and for the first quarter 1992 reflect the
interest and finance cost related to the outstanding Holdings Debentures because
the net proceeds of the Note Offerings and the 1992 Credit Agreement were used
to repay such indebtedness.
3. RESTRUCTURING CHARGE
Coltec recorded a restructuring charge of $25,219,000 ($15,300,000 after
taxes, or $.22 per common share) in the second quarter 1993 to cover the cost of
consolidation and rearrangement of certain manufacturing facilities and related
reductions in work force, primarily in the Aerospace/ Government segment, as
well as at Central Moloney Transformer Division.
4. EXTRAORDINARY ITEM
In 1993, Coltec incurred extraordinary charges of $17,792,000, net of a
$9,581,000 tax benefit, in connection with debt refinancings and the early
retirement of debt, including $14,675,000, net of a $7,902,000 tax benefit, from
a debt refinancing completed in January 1994. Reference is made to Note 16 for
information on the refinancing.
In 1992, Coltec incurred extraordinary charges of $105,347,000, net of a
$28,000,000 tax benefit, in connection with the Recapitalization and
extraordinary charges of $1,583,000, net of a $816,000 tax benefit, in
connection with a debt refinancing and early retirement of debt. Reference is
made to Note 2 for information on the Recapitalization. In 1991, Coltec
recognized an extraordinary gain of $591,000, net of taxes of $305,000, in
connection with the early retirement of debt.
21
COLTEC INDUSTRIES INC AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES
Effective January 1, 1993, Coltec adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes", which requires that the
deferred tax provision be determined under 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.
The significant components of deferred tax assets and liabilities at
December 31, 1993 and 1992 were as follows:
1993 1992
---------------------- ----------------------
DEFERRED DEFERRED DEFERRED DEFERRED
TAX TAX TAX TAX
ASSETS LIABILITIES ASSETS LIABILITIES
---------- ---------- ---------- ----------
(IN THOUSANDS)
Excess tax over book depreciation................................. $ -- $ (32,049) $ -- $ (34,001)
Recognition of income on contracts reported on different methods
for tax and financial reporting.................................. -- (30,068) -- (31,256)
Employee benefit plans............................................ 31,057 -- 29,408 --
Administrative and general expenses period costed for tax
purposes......................................................... -- (8,357) -- (10,454)
Foreign tax credit carryforwards.................................. 29,000 -- 19,000 --
Other............................................................. 28,910 -- 26,267 --
---------- ---------- ---------- ----------
88,967 (70,474) 74,675 (75,711)
Less -- Valuation allowance....................................... (29,000) -- (19,000) --
---------- ---------- ---------- ----------
Total deferred taxes.............................................. $ 59,967 $ (70,474) $ 55,675 $ (75,711)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
The valuation allowance is attributable to foreign tax credit carryforwards
which expire in the years 1994 through 1998.
Domestic and foreign components of earnings before income taxes and
extraordinary item were as follows:
1993 1992 1991
---------- ---------- -----------
(IN THOUSANDS)
Domestic................................................. $ 71,126 $ 67,217 $ (11,758)
Foreign.................................................. 30,393 40,043 42,267
---------- ---------- -----------
Total.................................................... $ 101,519 $ 107,260 $ 30,509
---------- ---------- -----------
---------- ---------- -----------
Provision for income taxes was as follows:
1993 1992 1991
---------- ---------- ---------
(IN THOUSANDS)
Current --
Domestic................................................. $ 36,254 $ 43,026 $ (5,575)
Foreign.................................................. 9,568 17,596 17,926
---------- ---------- ---------
45,822 60,622 12,351
Deferred --
Domestic................................................. (11,553) (14,527) 16,187
Foreign.................................................. 2,024 (3,518) (238)
---------- ---------- ---------
(9,529) (18,045) 15,949
---------- ---------- ---------
Total.................................................. $ 36,293 $ 42,577 $ 28,300
---------- ---------- ---------
---------- ---------- ---------
22
COLTEC INDUSTRIES INC AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
Reconciliation of tax at the U.S. statutory income tax rate, 35% in 1993 and
34% in 1992 and 1991, to the provision for income taxes was as follows:
1993 1992 1991
--------- --------- ---------
(IN THOUSANDS)
Tax at U.S. statutory rate....................................................... $ 35,532 $ 36,468 $ 10,373
Tax cost (benefit) --
Repatriation of non-U.S. earnings.............................................. 3,201 4,600 8,662
Non-U.S. rate differential..................................................... 954 1,708 3,317
Adjustment of reserves......................................................... (6,692) (2,636) (1,663)
Unutilized operating losses.................................................... -- -- 5,245
Other (not individually significant)........................................... 3,298 2,437 2,366
--------- --------- ---------
Provision for income taxes....................................................... $ 36,293 $ 42,577 $ 28,300
--------- --------- ---------
Effective tax rate............................................................... 35.75% 39.7% 92.8%
--------- --------- ---------
--------- --------- ---------
The provisions, prior to the disaffiliation noted below, were determined
pursuant to the tax sharing procedure between Coltec and Holdings and would have
been the same if determined by Coltec on a separate group basis.
Holdings, subsequent to its disaffiliation from Coltec, realized during the
fourth quarter 1992 the benefit of unutilized operating losses for 1991 by
filing a refund claim based on the carryback of such losses.
As a consequence of the Recapitalization, Coltec became disaffiliated from
Holdings. For 1991 and the first quarter of 1992, Coltec and all of its 80% or
greater owned U.S. subsidiaries ("Coltec Separate Group") joined with Holdings
in the filing of consolidated U.S. federal income tax returns with Holdings as
the parent company. For the nine month period ended December 31, 1992, Coltec
Separate Group filed a consolidated U.S. federal income tax return with Coltec
as the parent company. During the periods of affiliation with Holdings, Coltec's
portion of the resulting tax liability for each of the periods was the lesser of
(i) Coltec's tax liability determined on a Coltec Separate Group basis, or (ii)
Coltec's ratable share of Holdings' consolidated tax liability, including,
pursuant to the tax sharing procedure between Coltec and Holdings, part of the
determined tax benefits from Holdings' losses. Upon consummation of the
Recapitalization, the tax sharing procedure was terminated and Coltec and
Holdings entered into a Tax Disaffiliation Agreement. On November 18, 1993,
Holdings became a wholly-owned subsidiary of Coltec. Reference is made to Note
13 for information relating to the Holdings Reorganization.
The excess of Coltec's U.S. federal income tax liability, for each period of
affiliation with Holdings, determined in accordance with the tax sharing
procedure, over its U.S. federal income tax liability if determined on a
separate group basis was paid to Holdings and is included as a distribution to
Holdings in the Consolidated Statement of Shareholders' Equity.
23
COLTEC INDUSTRIES INC AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT
1993 1992
------------ ------------
(IN THOUSANDS)
1992 Credit Agreement -- 7.5%*................................. $ 308,618 $ 350,922
9 3/4% senior notes due 1999................................... 150,000 150,000
9 3/4% senior notes due 2000................................... 200,000 200,000
11 1/4% debentures due 1996-2015............................... 91,625 141,625
10 1/4% senior subordinated notes due 2002..................... 250,000 250,000
Other due 1994-2010............................................ 33,389 29,548
------------ ------------
1,033,632 1,122,095
Less -- Amounts due within one year............................ 1,543 48,645
------------ ------------
$ 1,032,089 $ 1,073,450
------------ ------------
------------ ------------
<FN>
- ---------
*Indicates average interest rate for 1993.
(a) In connection with the Recapitalization, Coltec entered into the 1992
Credit Agreement with various banks. The 1992 Credit Agreement consisted of
a $404,772,000 term loan facility and a $160,000,000 revolving loan
facility. In addition, up to $85,000,000 of letters of credit could be
issued under or outside the facility. At December 31, 1993, $259,618,000
and $49,000,000 of borrowings were outstanding under the term loan and
revolving loan facilities, respectively; and $43,608,000 of letters of
credit had been issued. In January 1994, Coltec completed a bank
refinancing that resulted in the repayment of the 1992 Credit Agreement.
Reference is made to Note 16 for information on the refinancing.
Interest on borrowings under the 1992 Credit Agreement was computed, at
Coltec's option, at an annual rate equal to (i) the base rate plus 1.5% or
(ii) the Eurodollar rate plus 2.75%. The base rate was the higher of (x) 1/2
of 1% in excess of the Federal Reserve reported certificate of deposit rate
and (y) the prime lending rate, as in effect from time to time. Letter of
credit fees of 3% were payable on outstanding letters of credit and a
commitment fee of 1/2 of 1% was payable on the unutilized revolving loan
facility.
The 1992 Credit Agreement contained various restrictions and conditions
including a fixed charge coverage ratio, current ratio, leverage ratio and
cash flow coverage ratio. In addition, the 1992 Credit Agreement limited or
restricted purchases of Coltec's common stock, payment of dividends, capital
expenditures, the incurrence of additional indebtedness, mergers, asset
acquisitions and dispositions, investments, prepayment of other debt and
transactions with affiliates. At December 31, 1993, Coltec was in compliance
with the above covenants.
(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 were issued in connection with the
Recapitalization and are not redeemable prior to maturity on April 1, 2000.
(d) The 10 1/4% senior subordinated notes were issued in connection with the
Recapitalization and are redeemable at the option of Coltec on or after
April 1, 1997 at 105.125% of par, declining to 100% of par on or after
April 1, 1999.
(e) Coltec has purchased in the open market and redeemed $58,375,000 principal
amount of its 11 1/4% debentures. The remaining 11 1/4% debentures are
redeemable at the option of Coltec at 106.750% of par, declining to 100% of
par on or after December 1, 2005. Mandatory annual sinking fund payments
24
COLTEC INDUSTRIES INC AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT (CONTINUED)
of $7,125,000 beginning December 1, 1996 are calculated to retire 90% of
the debentures prior to maturity. Coltec, at its option, may redeem up to
an additional $14,250,000 annually, beginning December 1, 1996 through
2014.
(f) At December 31, 1993 and 1992, $1,550,000 and $9,550,000, respectively, of
defeased notes have been offset against trustee funds included in other
assets in the Consolidated Balance Sheet. The defeased notes include
$1,550,000 at both December 31, 1993 and 1992 of 9 7/8% industrial revenue
bonds issued in 1980 and $8,000,000 at December 31, 1992 of 9 3/4% senior
promissory notes issued in 1976.
(g) The amounts payable under capital lease obligations as of December 31, 1993
were as follows:
(IN
THOUSANDS)
1994........................................................................... $ 1,333
1995........................................................................... 1,333
1996........................................................................... 1,333
1997........................................................................... 1,333
1998........................................................................... 1,288
Remainder...................................................................... 28,397
-------------
Total minimum lease payments................................................... 35,017
Less -- Amount representing interest........................................... 17,399
-------------
Total minimum lease payments at present value, included in
long-term debt................................................................ $ 17,618
-------------
-------------
(h) Minimum payments on long-term debt, after reflecting the bank refinancing
completed in January, 1994, due within five years from December 31, 1993
are as follows:
(IN
THOUSANDS)
1994........................................................................... $ 1,543
1995........................................................................... 941
1996........................................................................... 522
1997........................................................................... 50,750
1998........................................................................... 50,814
7. FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of Coltec's financial instruments:
Cash and cash equivalents: The carrying amount of cash and cash equivalents
approximates fair value due to the short-term maturity of the investments.
Accounts and notes receivable, other: The carrying amount of accounts and
notes receivable, other approximates fair value due to the short-term nature of
the receivables.
Long-term receivables and investments: The fair value of certain long-term
receivables and investments 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 Coltec's publicly traded long-term debt is
based on the quoted market prices for such debt and for non-publicly traded
long-term debt, on quoted market prices for similar publicly traded debt. The
fair value of interest rate swap agreements is based on quotes from commercial
banks.
25
COLTEC INDUSTRIES INC AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair value of Coltec's financial instruments at December 31,
1993 and 1992 is as follows:
1993 1992
-------------------------- ----------------------
CARRYING CARRYING
VALUE FAIR VALUE VALUE FAIR VALUE
------------ ------------ ---------- ----------
(IN THOUSANDS)
Cash and cash equivalents......................... $ 5,749 $ 5,749 $ 7,155 $ 7,155
Accounts and notes receivable, other.............. 41,051 41,051 4,959 4,959
Long-term receivables and investments --
Practical to estimate fair value................ 38,041 38,041 17,479 17,466
Not practical to estimate fair value............ 21,759 -- 63,928 --
Long-term debt.................................... 1,033,632 1,082,164 1,122,095 1,153,820
It was not practicable to obtain independent estimates of the fair value of
Coltec's minority interest, consisting principally of preferred stock, in
Crucible Materials Corporation ("Crucible"), a private corporation in 1993 and
1992, or of the receivable from insurance carriers for asbestos product
liability claims and related litigation costs in 1992 without incurring
excessive costs. The $21,759,000 carrying value of the investment in Crucible at
December 31, 1993 and 1992, and the $42,169,000 receivable from insurance
carriers at December 31, 1992 are included in other assets in the Consolidated
Balance Sheet. Reference is made to Note 15 for information relating to the
receivable from insurance carriers.
It is Coltec's policy to enter into forward exchange contracts to hedge U.S.
dollar denominated sales, under long-term contracts, of certain foreign
subsidiaries. Coltec does not engage in speculation. Coltec's foreign exchange
contracts do not subject Coltec to risk due to exchange rate movements because
gains and losses on these contracts offset losses and gains on the sales and
related receivables being hedged. At December 31, 1993 and 1992 Coltec had
$251,610,000 and $298,990,000, respectively, of forward exchange contracts,
denominated in Canadian dollars, which had a fair value of $240,131,000 and
$283,240,000, respectively, based on quotes from commercial banks. The contracts
have varying maturities with none exceeding five years.
In addition, Coltec has outstanding as of December 31, 1993:
(a) interest rate swap agreements with major financial institutions, the
carrying and fair values of which are included with long-term debt in the
above table, having a total notional principal amount of $150,000,000, an
average fixed interest rate of 6.34% and an average remaining life of 1 1/4
years;
(b) a contingent liability for guaranteed debt and lease payments of
$27,140,000; and
(c) letters of credit, other than with respect to guaranteed debt, of
$40,733,000. In the opinion of management, nonperformance by the other
parties to the interest rate swap agreements and the contingent liabilities
will not have a material adverse effect on Coltec's results of operations
and financial condition.
8. STOCK OPTION AND INCENTIVE PLAN
On March 19, 1992, Coltec adopted the 1992 Stock Option and Incentive Plan
(the "Option Plan"). The Option Plan provides for the granting of incentive
stock rights, stock options, stock appreciation rights, restricted stock and
dividend equivalents to officers and key employees. The number of shares that
may be issued under the Option Plan may not exceed 3,000,000 shares of common
stock. Stock options outstanding under the Option Plan were granted at a price
equal to 100% of the market price on the date of grant and are exercisable in
annual installments of 20%, commencing one year from date of grant.
26
COLTEC INDUSTRIES INC AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. STOCK OPTION AND INCENTIVE PLAN (CONTINUED)
Information on stock options for the two years ended December 31, 1993 is as
follows:
OPTION PRICE
NUMBER OF RANGE PER
SHARES SHARES
--------- ------------
Outstanding January 1, 1992......... -- --
Granted............................. 2,015,000 $15.00-8.25
Exercised........................... -- --
Canceled............................ -- --
--------- ------------
Outstanding December 31, 1992....... 2,015,000 15.00-18.25
Granted............................. 290,000 16.38-18.75
Exercised........................... (5,000) 15.00
Canceled............................ (40,000) 15.00
--------- ------------
Outstanding December 31,1993........ 2,260,000 15.00-18.75
--------- ------------
Exercisable December 31:
1992.............................. -- --
1993.............................. 398,000 15.00-18.25
--------- ------------
--------- ------------
In addition to the granting of stock options, Coltec has granted shares of
restricted stock under the Option Plan. Restrictions on certain shares lapse in
annual installments of 33 1/3% commencing one and three years from date of
grant. Restrictions on the remaining shares lapse 100% three years from the 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 Sheet and is being charged to earnings over the period the restricted
shares vest.
Information on restricted stock for the two years ended December 31, 1993 is
as follows:
NUMBER OF SHARES
--------------------
1993 1992
--------- ---------
Outstanding January 1................................................ 578,464 --
Granted.............................................................. 89,877 578,464
Restrictions expired................................................. (99,772) --
Forfeited............................................................ (14,309) --
--------- ---------
Outstanding December 31.............................................. 554,260 578,464
--------- ---------
--------- ---------
Shares available for grant at December 31, 1993 and 1992 under the Option
Plan were 66,659 and 406,536, respectively.
9. PENSION AND RETIREMENT PLANS
Coltec 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. Coltec's funding
policy is consistent with the funding requirements of the Employee Retirement
Income Security Act ("ERISA") of 1974, as amended. Plan assets consist
principally of publicly traded equity and fixed-income securities.
Pension coverage for employees of the non-U.S. subsidiaries is provided, to
the extent deemed appropriate, through separate plans. Obligations under such
plans are systematically provided for by depositing funds with trustees, or
through book reserves.
27
COLTEC INDUSTRIES INC AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. PENSION AND RETIREMENT PLANS (CONTINUED)
In a number of the 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").
As of December 31, 1993 and 1992, the status of Coltec's pension plans was
as follows:
1993 1992*
----------------------- -----------------------
OVERFUNDED UNDERFUNDED OVERFUNDED UNDERFUNDED
PLANS PLANS PLANS PLANS
---------- ----------- ---------- -----------
(IN THOUSANDS)
Actuarial present value of projected benefit
obligation, based on employment service to date and
current salary levels:
Vested employees................................... $ 246,597 $ 115,724 $ 229,120 $ 103,126
Nonvested employees................................ 7,040 6,447 6,718 5,781
---------- ----------- ---------- -----------
Accumulated benefit obligation..................... 253,637 122,171 235,838 108,907
Additional amounts related to projected salary
increases......................................... 21,060 436 22,982 3,162
---------- ----------- ---------- -----------
Total projected benefit obligation................. 274,697 122,607 258,820 112,069
---------- ----------- ---------- -----------
Assets available for benefits:.......................
Funded assets...................................... 305,411 82,421 293,921 82,839
Accrued pension expense, per books................. 1,069 40,614 4,542 27,549
---------- ----------- ---------- -----------
Total assets....................................... 306,480 123,035 298,463 110,388
---------- ----------- ---------- -----------
Assets in excess of (less than) projected benefit
obligation.......................................... $ 31,783 $ 428 $ 39,643 $ (1,681)
---------- ----------- ---------- -----------
Consisting of:
Unamortized net asset existing at date of adoption
of FAS No. 87..................................... $ 2,492 $ 19,098 $ 1,526 $ 10,508
Unrecognized net gain (loss)....................... 34,589 (11,813) 43,613 (6,244)
Unrecognized prior service cost.................... (5,298) (6,857) (5,496) (5,945)
---------- ----------- ---------- -----------
$ 31,783 $ 428 $ 39,643 $ (1,681)
---------- ----------- ---------- -----------
---------- ----------- ---------- -----------
<FN>
- ---------
*Restated to reflect funding classification as of December 31, 1993.
For U.S. plans, discount rates of 7.5% and 8.0% were used as of December 31,
1993 and 1992, respectively, for the valuation of the actuarial present value of
benefit obligations.
In accordance with the requirements of Statement of Financial Accounting
Standards No. 87, "Employers' Accounting for Pensions", Coltec recorded a
minimum pension liability for underfunded plans. The minimum liability is equal
to the excess of the accumulated benefit obligation over plan assets. A
corresponding amount is recorded as either an intangible asset or a reduction of
shareholders' equity. As of December 31, 1993, Coltec recorded a $13,571,000
additional minimum liability included in other liabilities in the Consolidated
Balance Sheet, a $7,102,000 intangible asset included in other assets in the
Consolidated Balance Sheet, and a $4,205,000 charge to shareholders' equity, net
of a $2,264,000 tax benefit.
28
COLTEC INDUSTRIES INC AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. PENSION AND RETIREMENT PLANS (CONTINUED)
Assumptions as of January 1 used to develop the net periodic pension cost
for U.S. plans were:
1993 1992 1991
----------- ----------- -----------
Discount rate for benefit obligations.......................................... 8.0% 8.0% 8.5%
Expected long-term rate of return on assets.................................... 8.5% 8.5% 8.5%
Rate of increase in compensation levels........................................ 5.0% 6.0% 6.0%
For non-U.S. plans, which were not material, similar economic assumptions
were used.
The components of net periodic pension cost were as follows:
1993 1992 1991
---------- ---------- ----------
(IN THOUSANDS)
Service cost -- benefits earned..................................... $ 9,423 $ 9,947 $ 9,087
Interest cost on projected benefit obligation....................... 28,496 27,993 26,511
Actual return on assets............................................. (7,770) (233) (32,541)
Amortization and deferral, net...................................... (30,968) (38,394) (1,282)
---------- ---------- ----------
Net periodic pension cost (credit).................................. $ (819) $ (687) $ 1,775
---------- ---------- ----------
---------- ---------- ----------
For discontinued operations, Coltec's total projected benefit obligation at
December 31, 1993 and 1992 was $263,751,000 and $263,660,000, respectively, and
is fully funded. Interest accrued for 1993, 1992 and 1991 on the projected
benefit obligation was $20,450,000, $21,555,000, and $24,200,000, respectively,
and was fully offset by return on assets resulting in no net periodic cost.
10. OTHER POSTRETIREMENT BENEFITS
Coltec provides health care and life insurance benefits to its eligible
retired employees, principally in the United States. Effective January 1, 1993,
Coltec adopted Statement of Financial Accounting Standards No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions", ("FAS 106") using
the delayed recognition transition option whereby the transition obligation is
being amortized on a straight-line basis over 20 years. FAS 106 requires that
the cost of postretirement benefits be recognized in the financial statements
during the years the employees provide services. Prior to 1993, Coltec
recognized the cost of postretirement benefits by expensing the premiums, net of
retiree contributions.
Coltec's accumulated postretirement benefit obligation, none of which is
funded, and the postretirement benefit cost liability at December 31, 1993 and
January 1, 1993 were as follows:
DECEMBER 31, JANUARY 1,
1992 1993
------------ -----------
(IN THOUSANDS)
Actuarial present value of projected accumulated postretirement
benefit obligation
Retirees.......................................................... $ 17,511 $ 16,390
Fully eligible active participants................................ 4,613 3,987
Other active participants......................................... 3,441 3,546
------------ -----------
Total............................................................. 25,565 23,923
Unamortized transition obligation................................... (22,727) (23,923)
Unrecognized net loss............................................... (1,482) --
------------ -----------
Postretirement benefit cost liability............................... $ 1,356 $ --
------------ -----------
------------ -----------
29
COLTEC INDUSTRIES INC AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. OTHER POSTRETIREMENT BENEFITS (CONTINUED)
The components of postretirement benefit cost for the year ended December
31, 1993 were as follows:
(IN THOUSANDS)
Service cost -- benefits earned................................................ $ 249
Interest cost on accumulated postretirement benefit obligation................. 1,838
Amortization of transition obligation.......................................... 1,196
------
Postretirement benefit cost.................................................... $ 3,283
------
------
Discount rates of 7.5% and 8.0% were used in determining the accumulated
postretirement benefit obligation at December 31, 1993 and January 1, 1993,
respectively. The health care cost trend rates used in determining the
accumulated postretirement benefit obligation at December 31, 1993 were 13.1% in
1994 gradually declining to 5.0% in 2005. The effect of a 1% increase in the
health care cost trend rates in each year would be to increase the total service
and interest cost components of the postretirement benefit cost for 1993 by
$234,000 and to increase the accumulated postretirement benefit obligation at
December 31, 1993 by $1,800,000.
11. SEGMENT INFORMATION
Coltec's financial results are reported in three industry segments:
Aerospace/Government, Automotive, and Industrial.
Information on sales and operating income by industry segment for the years
1993, 1992 and 1991 included on page 22 in the Financial Review is incorporated
herein by reference.
Information on total assets; depreciation of property, plant and equipment;
and capital expenditures by industry segment for the three years ended December
31, 1993 is as follows:
1993 1992 1991
--------- --------- ---------
(IN MILLIONS)
Total assets:
Aerospace/Government..................................................... $ 386.2 $ 388.7 $ 410.0
Automotive............................................................... 124.6 118.6 123.3
Industrial............................................................... 180.1 186.7 189.8
Corporate unallocated.................................................... 115.5 134.8 111.1
--------- --------- ---------
Total.................................................................. $ 806.4 $ 828.8 $ 834.2
--------- --------- ---------
--------- --------- ---------
Depreciation of property, plant and equipment:
Aerospace/Government..................................................... $ 16.1 $ 17.3 $ 18.4
Automotive............................................................... 7.4 7.9 8.7
Industrial............................................................... 9.5 9.9 9.6
Corporate unallocated.................................................... .2 .2 .2
--------- --------- ---------
Total.................................................................. $ 33.2 $ 35.3 $ 36.9
--------- --------- ---------
--------- --------- ---------
Capital expenditures:
Aerospace/Government..................................................... $ 21.8 $ 13.3 $ 14.2
Automotive............................................................... 9.6 6.5 5.7
Industrial............................................................... 7.2 5.2 6.3
--------- --------- ---------
Total.................................................................. $ 38.6 $ 25.0 $ 26.2
--------- --------- ---------
--------- --------- ---------
30
COLTEC INDUSTRIES INC AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. SEGMENT INFORMATION (CONTINUED)
Information by geographic segment for the three years ended December 31,
1993 is as follows:
OPERATING TOTAL
SALES INCOME ASSETS
--------- ----------- ---------
(IN MILLIONS)
1993
Domestic operations.................................................. $ 1,155.4 $ 215.9 $ 619.4
Foreign operations................................................... 206.7 30.2 207.6
Intersegment elimination............................................. (27.3) -- (136.1)
--------- ----------- ---------
Total segments..................................................... 1,334.8 246.1 690.9
Corporate unallocated.................................................. -- (34.4) 115.5
Total.............................................................. $ 1,334.8 $ 211.7 $ 806.4
1992
Domestic operations.................................................. $ 1,160.8 $ 228.3 $ 623.7
Foreign operations................................................... 232.8 43.3 217.4
Intersegment elimination............................................. (24.9) -- (147.1)
--------- ----------- ---------
Total segments..................................................... 1,368.7 271.6 694.0
Corporate unallocated.................................................. -- (28.5) 134.8
--------- ----------- ---------
Total.............................................................. $ 1,368.7 $ 243.1 $ 828.8
--------- ----------- ---------
--------- ----------- ---------
1991
Domestic operations.................................................. $ 1,132.9 $ 204.3 $ 632.2
Foreign operations................................................... 264.3 44.8 224.0
Intersegment elimination............................................. (24.2) -- (133.1)
Total segments..................................................... 1,373.0 249.1 723.1
Corporate unallocated.................................................. -- (20.1) 111.1
--------- ----------- ---------
Total.............................................................. $ 1,373.0 $ 229.0 $ 834.2
--------- ----------- ---------
--------- ----------- ---------
12. SUPPLEMENTARY EARNINGS INFORMATION
The following costs and expenses are included in the Consolidated Statement
of Earnings:
1993 1992 1991
--------- --------- ---------
(IN THOUSANDS)
Maintenance............................................................ $ 25,363 $ 27,444 $ 28,651
--------- --------- ---------
Taxes, other than federal income taxes:
Payroll.............................................................. 28,700 28,764 28,725
--------- --------- ---------
Property............................................................. 4,764 4,793 4,745
--------- --------- ---------
State and local...................................................... 4,785 5,195 4,427
--------- --------- ---------
Rent................................................................... 12,235 12,849 12,803
--------- --------- ---------
Research and development costs......................................... 22,079 22,947 23,773
--------- --------- ---------
--------- --------- ---------
13. RELATED PARTY TRANSACTIONS
On November 18, 1993, Holdings became a wholly-owned subsidiary of Coltec as
a result of the exchange by all of the Holdings shareholders of their shares of
common stock of Holdings for 35.5% or 24,830,000 shares of common stock of
Coltec (the "Holdings Reorganization"). Immediately before this exchange,
Holdings owned 35.7% or 25,000,000 shares of common stock of Coltec. As a result
of the exchange, Morgan Stanley Group Inc. became a direct shareholder of
Coltec. The 25,000,000 shares of
31
COLTEC INDUSTRIES INC AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. RELATED PARTY TRANSACTIONS (CONTINUED)
common stock of Coltec which Holdings owned before this exchange and continues
to own after the exchange are reported in the Consolidated Balance Sheet as a
reduction of the total common shares issued. Expenses of $1,500,000 incurred in
connection with this exchange were charged to capital in excess of par value. In
connection with an industrial revenue bond refinancing in 1993, Morgan Stanley &
Co. Incorporated ("MS & Co."), a wholly-owned subsidiary of Morgan Stanley Group
Inc., received a fee of $309,000.
During 1992, in connection with the Recapitalization, MS & Co. received a
portion of the total underwriting commission of $36,527,000 in connection with
the Equity Offering, an underwriting commission of $11,250,000 in connection
with the Note Offerings, and fees of $1,049,000 as one of the dealer managers
for the Debt Tender Offer. In addition, MS & Co. received an underwriting
commission of $2,625,000 in connection with the offering of the 9 3/4% senior
notes due 1999.
During the two years ended December 31, 1992, MS & Co. acted as a dealer in
the placement of a portion of Coltec's commercial paper and as one of the
brokers in the purchase of Coltec's debentures.
32
COLTEC INDUSTRIES INC AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
14. QUARTERLY SALES AND EARNINGS (UNAUDITED)
The following table sets forth quarterly sales, gross profit and earnings
for the three years ended December 31, 1993.
QUARTER
----------------------------------------------
1ST 2ND 3RD 4TH
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1993
Net sales........................................................ $ 339,934 $ 334,591 $ 316,077 $ 344,227
---------- ---------- ---------- ----------
Gross profit..................................................... 107,903 107,729 104,585 109,148
---------- ---------- ---------- ----------
Operating income................................................. 54,967 37,040 56,800 62,902
---------- ---------- ---------- ----------
Earnings before extraordinary item............................... 17,490 6,013 18,490 23,233
Extraordinary item............................................... (264) (375) (378) (16,775)
---------- ---------- ---------- ----------
Net earnings..................................................... 17,226 5,638 18,112 6,458
---------- ---------- ---------- ----------
Earnings (loss) per common share
Before extraordinary item...................................... .25 .09 .27 .33
Extraordinary item............................................. -- (.01) (.01) (.24)
---------- ---------- ---------- ----------
Net earnings................................................... .25 .08 .26 .09
---------- ---------- ---------- ----------
1992
Net sales........................................................ $ 337,557 $ 359,973 $ 330,640 $ 340,533
---------- ---------- ---------- ----------
Gross profit..................................................... 98,867 109,122 106,447 109,862
---------- ---------- ---------- ----------
Operating income................................................. 52,293 65,480 59,537 65,812
---------- ---------- ---------- ----------
Earnings (loss) before extraordinary item........................ (2,713) 23,280 19,905 24,211
Extraordinary item............................................... -- (105,347) -- (1,583)
---------- ---------- ---------- ----------
Net earnings (loss).............................................. (2,713) (82,067) 19,905 22,628
---------- ---------- ---------- ----------
Earnings (loss) per common share
Before extraordinary item...................................... (.11) .33 .29 .35
Extraordinary item............................................. -- (1.51) -- (.02)
---------- ---------- ---------- ----------
Net earnings (loss)............................................ (.11) (1.18) .29 .33
---------- ---------- ---------- ----------
1991
Net sales........................................................ $ 337,087 $ 357,297 $ 338,205 $ 340,390
---------- ---------- ---------- ----------
Gross profit..................................................... 95,362 107,176 102,951 100,699
---------- ---------- ---------- ----------
Operating income................................................. 48,934 58,988 64,098 57,000
---------- ---------- ---------- ----------
Earnings (loss) before extraordinary item........................ (2,263) 2,554 5,831 (3,913)
Extraordinary item............................................... 591 -- -- --
---------- ---------- ---------- ----------
Net earnings (loss).............................................. (1,672) 2,554 5,831 (3,913)
---------- ---------- ---------- ----------
Earnings (loss) per common share
Before extraordinary item...................................... (.09) .10 .23 (.16)
Extraordinary item............................................. .02 -- -- --
---------- ---------- ---------- ----------
Net earnings (loss)............................................ (.07) .10 .23 (.16)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
33
COLTEC INDUSTRIES INC AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
14. QUARTERLY SALES AND EARNINGS (UNAUDITED) (CONTINUED)
Reference is made to Note 3 for restructuring charge, Note 4 for
extraordinary item and Note 1 for earnings per share. Earnings (loss) per common
share for the year ended December 31, 1992 does not equal the sum of earnings
(loss) per common share for each of the four quarters of 1992 due to the Equity
Offering.
15. COMMITMENTS AND CONTINGENCIES
Coltec and certain of its subsidiaries are liable for lease payments and are
defendants in various lawsuits, including actions involving asbestos-containing
products. With respect to asbestos product liability and related litigation
costs, in 1993 two subsidiaries of Coltec received approximately 27,400 new
lawsuits, with a comparable number of lawsuits received in 1992 and 1991. The
subsidiaries made payments aggregating $38,677,000 in 1993, $39,810,000 in 1992
and $48,442,000 in 1991, substantially all of which were covered by insurance.
In May 1993, in a case in which neither Coltec nor any of its subsidiaries
were parties, the Supreme Court of Pennsylvania confirmed that the continuous
trigger theory of coverage was applicable to relevant insurance policies
governed by Pennsylvania law and held that the insured could trigger any policy
during the applicable policy period in full without allocating among all
policies providing coverage and without allocating to the insured responsibility
for policy periods in which there was insufficient coverage. As a result of such
decision, agreement was reached by Coltec with certain of its insurers regarding
the balance of Coltec's primary and most of its first-layer excess coverage and
payments are being made in accordance with the agreement.
Based on the favorable resolution of the primary and most of the first-layer
excess coverage, Coltec anticipates that the continuous trigger theory of
coverage should apply to the balance of Coltec's excess insurance. Therefore,
Coltec believes that it is likely to have coverage for a substantial portion of
foreseeable future asbestos-related actions and litigation costs, and has
reflected payments made for asbestos product liability actions and related
litigation costs, net of recoveries, as a receivable from its insurance
carriers. At December 31, 1993, and 1992, the receivable balance was $59,535,000
and $42,169,000, respectively, and is included in other assets in the
Consolidated Balance Sheet, except for the current portion at December 31, 1993,
$35,838,000, which is in accounts and notes receivable, other.
As of December 31, 1993, certain actions had been settled on a group basis
with payments to be made to individual plaintiffs over periods of one to four
years. In addition, in accordance with Coltec'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 Coltec can reasonably estimate the cost to dispose of these actions.
Coltec estimates that the aggregate cost of the disposition of the foregoing
settled actions and actions in advanced stages of processing, including
associated legal costs, is approximately $52,600,000 and expects that this cost
will be substantially covered by insurance.
As of December 31, 1993, the two subsidiaries were among a number of
defendants in approximately 68,500 actions, including approximately 6,100
actions in advanced stages of processing as described above. As of December 31,
1992, the number of outstanding actions approximated that as of December 31,
1993. The remaining 62,400 outstanding actions as of December 31, 1993 are in
preliminary procedural stages. Coltec 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
liability or costs to Coltec. 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, Coltec is
34
COLTEC INDUSTRIES INC AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
15. COMMITMENTS AND CONTINGENCIES (CONTINUED)
generally unable to obtain the information necessary to analyze the actions in
sufficient detail to estimate the ultimate liability or costs to Coltec, 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
Coltec's subsidiaries will receive in the future. Coltec has noted that, with
respect to recently settled actions or actions in advanced stages of processing,
the nature of the injuries alleged and the occupation of the plaintiffs are
changing from those typically associated with asbestos-related disorders. Coltec
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
plaintiffs, the presence or absence of other possible causes of plaintiffs'
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 the preliminary procedural stages or of
actions that may be filed in the future. However, Coltec believes that it is 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 Coltec and
other defendants in asbestos litigation, the likely sharing of judgments among
multiple responsible defendants, and the amount of insurance coverage that
Coltec expects to be available (approximately $1.5 billion as of December 31,
1993 from its solvent carriers), Coltec believes that pending and reasonably
anticipated future actions are not likely to have a material effect on Coltec's
results of operations and financial condition.
Effective in the first quarter of 1994, Coltec will adopt the requirements
of Financial Accounting Standards Board Interpretation No. 39, "Offsetting of
Amounts Related to Certain Contracts." In accordance with Interpretation No. 39,
Coltec will record an accrual for its liabilities for asbestos-related matters
that are deemed probable and can be reasonably estimated, and will separately
record an asset equal to the amount of such liabilities that is expected to be
recovered by insurance. Accordingly, the liabilities and assets to be recorded
in 1994 will relate only to settled actions and actions in advanced stages of
processing which approximated $52,600,000 as of December 31, 1993. Coltec does
not expect that the adoption of Interpretation No. 39 will have a material
effect on Coltec's results of operations and financial condition.
Under operating lease commitments, expiring on various dates after December
31, 1994, Coltec and certain of its subsidiaries are obligated as of December
31, 1993 to pay rentals totaling $28,283,000 as follows: $6,104,000 in 1994,
$5,021,000 in 1995, $4,085,000 in 1996, $3,042,000 in 1997, $2,796,000 in 1998,
and $7,235,000 in later years. These rent payments are before reduction for
related sublease rental income of $1,375,000.
16. SUBSEQUENT EVENT
On January 11, 1994, Coltec entered into a $415,000,000 reducing revolving
credit facility (the "1994 Credit Agreement"), with a syndicate of banks, which
expires June 30, 1999. The facility also provides up to $100,000,000 for the
issuance of letters of credit and will be reduced $50,000,000 on both January
11, 1997 and 1998. Obligations under the facility are secured by substantially
all of Coltec's assets. Borrowings under the facility bear interest, at Coltec's
option, at an annual rate equal to (i) the base rate or (ii) the Eurodollar rate
plus 1%. The base rate is the higher of (x) 1/2 of 1% in excess of the Federal
Reserve reported certificate of deposit rate, and (y) the prime lending rate, as
in effect from time to time. Letter of credit fees of 1% are payable on
outstanding letters of credit and a commitment fee of 3/8 of 1% is payable on
the unutilized facility.
35
COLTEC INDUSTRIES INC AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
16. SUBSEQUENT EVENT (CONTINUED)
The facility contains various restrictions and conditions. The most
restrictive of these require that the fixed charge coverage ratio be at least
2.25 to 1 for any period of four consecutive quarters to and including the
fourth quarter of 1994 and thereafter 2.5 to 1. The ratio of current assets to
current liabilities must be at least 1.25 to 1. In addition, the facility limits
or restricts purchases of Coltec's common stock, payment of dividends, capital
expenditures, indebtedness, liens, mergers, asset acquisitions and dispositions,
investments, prepayment of certain debt and transactions with affiliates.
Upon completion of the refinancing on January 11, 1994, borrowings of
$324,000,000 were outstanding and letters of credit of $43,608,000 were issued
under the 1994 Credit Agreement. The 1994 Credit Agreement was used to prepay
indebtedness outstanding and replace letters of credit issued under the 1992
Credit Agreement. The remaining balance of the facility will be used for working
capital and general corporate purposes. In December, 1993, Coltec recorded an
extraordinary charge of $14,675,000, net of a $7,902,000 tax benefit, in
connection with the early retirement of the 1992 Credit Agreement.
36
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Coltec Industries Inc:
We have audited the accompanying consolidated balance sheet of Coltec
Industries Inc (a Pennsylvania corporation) and subsidiaries as of December 31,
1993 and 1992, and the related consolidated statements of earnings,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1993. These financial statements are the responsibility of
the company's management. Our responsibility is to express an opinion on these
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 financial statements referred to above present fairly,
in all material respects, the financial position of Coltec Industries Inc and
subsidiaries as of December 31, 1993 and 1992, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1993, in conformity with generally accepted acccounting principles.
ARTHUR ANDERSEN & CO.
New York, N.Y.
January 24, 1994
37