EXHIBIT 13.1
FINANCIAL INFORMATION
CONTENTS
Page
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Selected Financial Data.............................................. 17
Financial Review..................................................... 18
Consolidated Balance Sheet........................................... 26
Consolidated Statement Of Earnings................................... 28
Consolidated Statement Of Cash Flows................................. 29
Consolidated Statement Of Shareholders' Equity....................... 30
Notes To Financial Statements........................................ 31
Report of Management................................................. 42
Report Of Independent Public Accountants............................. 42
COLTEC INDUSTRIES INC SELECTED FINANCIAL DATA
The following table sets forth selected financial data of Coltec for the five
years ended December 31, 1994. 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 LLP,
independent public accountants, as indicated in their report included elsewhere
herein.
YEAR ENDED DECEMBER 31,
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(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) 1994 1993 1992 1991 1990
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STATEMENT OF EARNINGS DATA:
Sales $1,326.8 $1,334.8 $1,368.7 $ 1,373.0 $ 1,487.2
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Operating income(a) 236.3 211.7 243.1 229.0 268.9
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Earnings from continuing operations before
interest, income taxes and extraordinary item(b) 236.3 211.7 243.1 230.4 278.1
Interest and debt expense, net 89.5 110.2 135.8 199.9 203.4
Provision for income taxes 52.8 36.3 42.6 28.3 33.8
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Earnings from continuing operations
before extraordinary item(a) 94.0 65.2 64.7 2.2 40.9
Discontinued operations(c) -- -- -- -- 17.7
Extraordinary item(d) (1.5) (17.8) (106.9) .6 (4.5)
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Net earnings (loss) 92.5 47.4 (42.2) 2.8 54.1
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Earnings (loss) per common share:
Continuing operations 1.35 .94 1.11 .09 1.64
Discontinued operations -- -- -- -- .70
Extraordinary item (.02) (.26) (1.83) .02 (.18)
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Net earnings (loss) 1.33 .68 (.72) .11 2.16
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Ratio of earnings to fixed charges(e) 2.6 1.9 1.8 1.2 1.4
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BALANCE SHEET DATA (AT END OF PERIOD):
Working capital 189.6 163.1 95.3 168.8 162.9
Total assets 847.5 796.5 817.9 823.2 867.2
Long-term debt (including current portion) 970.1 1,033.6 1,122.1 1,622.9 1,646.3
Shareholders' equity (525.6) (625.5) (666.6) (1,194.5) (1,188.4)
OTHER OPERATING DATA:
Operating margin(a) 17.8% 15.9% 17.8% 16.7% 18.1%
Cash provided by operating activities 98.2 105.2 119.9 149.2 155.5
Capital expenditures 38.2 38.6 25.0 26.2 23.2
Depreciation of property, plant and equipment 31.1 33.2 35.3 36.9 36.8
Order backlog (at end of period) 668.8 669.7 709.1 808.8 864.2
Number of employees (at end of period) 9,800 10,000 10,700 11,400 12,400
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<FN>
(A) OPERATING INCOME FOR 1993 INCLUDED A $25.2 MILLION 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 AND THE
OPERATING MARGIN WOULD HAVE BEEN $236.9 MILLION, $80.5 MILLION AND 17.7%,
RESPECTIVELY, IN 1993. CENTRAL MOLONEY WAS SOLD IN JANUARY 1994.
(B) EARNINGS FROM CONTINUING OPERATIONS BEFORE INTEREST, INCOME TAXES AND
EXTRAORDINARY ITEM INCLUDE FOR 1991 AND 1990, $1.4 MILLION AND $9.2 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 AND $268.9 MILLION FOR THE YEARS ENDED DECEMBER 31, 1991
AND 1990, 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, 1994 IN CONNECTION WITH DEBT REFINANCINGS AND EARLY RETIREMENT
OF DEBT AND, IN 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.
17
COLTEC INDUSTRIES INC FINANCIAL REVIEW
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994, COMPARED WITH
YEAR ENDED DECEMBER 31, 1993
For 1994, earnings before extraordinary item were $94.0 million compared with
$65.2 million last year; and earnings per share before extraordinary item were
$1.35 per common share compared with 94 cents per common share in 1993.
Excluding a restructuring charge of $25.2 million that was recorded in the
second quarter of 1993, earnings before extraordinary item were $80.5 million in
1993 equal to $1.16 per common share. The higher 1994 earnings were due to a
significant reduction in interest expense which resulted from refinancing bank
debt in January 1994, as well as to strong performances by the Automotive and
Industrial segments. Sales of $1,326.8 million were slightly less than the
$1,334.8 million in 1993; however, excluding the sales of the Central Moloney
Transformer Division, sales were up 4% from $1,270.6 million last year.
Operating income was $236.3 million and the operating margin was 17.8% in 1994
compared with operating income of $211.7 million and an operating margin of
15.9% in 1993. Excluding the restructuring charge and Central Moloney
Transformer, operating income was $238.0 million and the operating margin was
18.7% in 1993. Central Moloney Transformer was sold in January 1994 at a price
approximating book value.
Aerospace/Government segment operating income was level compared with 1993 on
a 7% decline in sales and the operating margin was 16.0% compared with 15.0%
last year. Excluding the restructuring charge, operating income was down 21%
and the 1993 operating margin was 18.9%. Operating income for the
Aerospace/Government segment was $67.7 million on sales of $422.1 million,
compared with operating income of $67.8 million, $85.5 million excluding the
restructuring charge, on sales of $453.3 million in 1993. The Aerospace/
Government segment continued to be affected in 1994 by the
difficult market conditions in the aerospace industry, reflecting fewer
deliveries of commercial aircraft and the downward trend in military
spending. Also contributing to the lower segment results were a gap
in shipments for U.S. Navy programs at the Fairbanks Morse Engine Division
and production inefficiencies at Walbar that resulted from the consolidation
of facilities, which began in 1993, and the introduction of new products and
technologies. In the Automotive segment, operating income improved 12% on a
14% sales increase and the operating margin was 22.4% compared with 23.0% in
1993. Excluding the restructuring charge, operating income improved 8% and
the operating margin was 23.8% in 1993. Operating income and sales for the
Automotive segment were $114.2 million and $508.7 million, respectively, in
1994. This compared with operating income of $102.4 million, $106.2 million
excluding the restructuring charge, and sales of $445.7 million in 1993. The
operating results for the Automotive segment benefited from a strong
automotive industry and from increased applications for segment components.
Record sales and earnings performances were reported by the Stemco Truck
Products and Farnam Sealing Systems Divisions. The Industrial segment
reported a 16% improvement in operating income and a record 22.2% operating
margin in 1994, compared with 17.4% in the prior year. Sales for
the Industrial segment declined 9% in 1994; however, excluding the
restructuring charge and Central Moloney Transformer, sales were up 5%,
operating income improved 9% and the operating margin was 22.4% compared with
21.7% in 1993. Segment operating income was $88.4 million and sales were
$397.7 million compared with operating income of $75.9 million and sales of
$436.7 million in 1993. Excluding the restructuring charge and Central
Moloney Transformer, operating income and sales were $80.7 million and $372.5
million, respectively, in 1993. Record sales and earnings were reported by
the Quincy Compressor, Garlock Bearings, and Delavan Commercial Products
Divisions; and the Sterling Die and Haber Tool Operations.
Following is a discussion of the results of operations for the year ended
December 31, 1994, compared with the year ended December 31, 1993.
SALES. Sales of $1,326.8 million were slightly less than the $1,334.8 million in
1993 but 4% higher after excluding Central Moloney Transformer. Sales in the
Aerospace/Government segment were $422.1 million compared with $453.3 million
last year. The sales decline reflected the continued general weakness in the
aerospace industry and lower military sales. In 1994, sales to the military and
other branches of the United States Government accounted for $138 million, or
33%, of total sales for the Aerospace/Government segment, compared with $173
million, or 38%, in 1993 and $192 million, or 37%, in 1992. For Coltec, sales to
the military and other branches of the United States Government were $143
million, $190 million and $210 million, or 11%, 14% and 15%, in 1994, 1993 and
1992, respectively. Sales at Menasco were down in 1994 due to lower shipments of
flight controls for the Fokker 100 aircraft and landing gear systems for the
Boeing 757 and 767 aircraft. Sales of landing gear systems in total were
slightly higher in 1994 reflecting shipments on new programs for the Boeing 777
aircraft and the Fokker 70 and 100 aircraft. In 1994, Menasco delivered 13
shipsets of landing gear systems for the Boeing 777 aircraft compared to three
shipsets in 1993. Sales were lower at Fairbanks Morse Engine due to a gap in
shipments for U.S. Navy programs. The division will
18
begin shipping engines for the U.S. Navy Sealift program in 1995. In the first
quarter of 1994, Fairbanks Morse Engine acquired equipment and other assets
related to the Alco engine business from GE Transportation Systems. The first
Alco engines being built by Fairbanks Morse Engine will be delivered in 1995.
Sales were down at Chandler Evans Control Systems Division due to lower demand
for fuel controls from both commercial and military markets; and at Walbar, due
to lower shipments of blades and rotating parts for gas turbine engines to
aircraft engine manufacturers. The sales decline at Walbar was offset in part by
strong demand for repair and coating services for gas turbine engine components.
Delavan Gas Turbine Products Division reported lower sales on continued
reductions in defense spending.
Sales for the Automotive segment increased 14% to $508.7 million, reflecting the
continued strong automotive industry and increased applications for segment
components. All divisions within the Automotive segment reported increased sales
in 1994. Sales were higher at Holley Automotive on strong market acceptance for
new transmission solenoid products that were introduced in 1992 and 1993 and on
increased demand for transmission modulators and manifold assemblies. Shipments
of oil pumps and both mechanical and electrical emission-control air pumps were
up at Coltec Automotive Division. The higher sales of electrical
emission-control air pumps reflected the acquisition late in 1993 of General
Motor's air pump manufacturing operation and Coltec Automotive becoming sole
source of these components to the automaker's North American operations. The
sales improvement at Farnam Sealing Systems was due to strong demand for
transmission gaskets and seals from both original equipment manufacturers and
the aftermarket. Contributing to the higher sales at Stemco Truck Products were
increased shipments of wheel lubrication systems and muffler and exhaust system
components to manufacturers of heavy trucks and trailers; and selected price
increases. Shipments were up at Holley Performance Parts Division on improved
pricing and higher shipments of performance carburetors and fuel injection
systems, reflecting increased consumer spending in 1994.
Industrial segment sales were $397.7 million in 1994 compared with $436.7
million last year; however, excluding Central Moloney Transformer, sales
increased 5% to $392.9 million from $372.5 million in 1993. The higher sales
reflected continuing improvements in the markets served by our Industrial
businesses, as well as selected price increases and new product introductions.
Quincy Compressor reported record sales of compressors on improved market
conditions, increased market penetration and higher selling prices. Shipments
were significantly higher for Quincy's QSI rotary screw compressor. At Garlock
Bearings, sales were higher as a result of new applications for DU bearings and
greater demand for bearings from all markets served. The sales improvement at
Delavan Commercial Products was due to higher shipments of oil burner nozzles to
the home heating market; and to price increases and the introduction of new
products. The increased demand for oil burner nozzles reflected the unusually
cold 1993-1994 winter in the Northeast and Midwest, as well as expanded market
share. Strong demand for metal-cutting and metal-forming tools from the
automotive industry resulted in the strong sales improvement at Sterling Die and
Haber Tool. Sales at Garlock Mechanical Packing and France Compressor Products
Divisions benefited from improving market conditions in the chemical and
petroleum industries, higher selling prices and new product introductions. The
increase in Industrial segment sales was offset in part by lower demand for
Garlock Plastomer's PTFE insulating tape from the aerospace market.
COST OF SALES. Cost of sales declined slightly in 1994; however, excluding
Central Moloney, cost of sales was 5% higher. This increase reflected the higher
sales volume in the Automotive and Industrial segments as well as production
inefficiencies at Walbar that resulted from the consolidation of facilities,
which began in 1993, and the introduction of new products and technologies. Also
contributing to the increase in cost of sales were higher manufacturing costs at
Fairbanks Morse Engine attributable to the Alco engine business, increased
spending for research and development, and higher maintenance costs. The higher
cost was offset in part by benefits realized from cost-reduction programs and
the restructuring program that was completed in 1994. As a percent of sales,
cost of sales increased to 67.2% from 66.6%, after excluding Central Moloney.
SELLING AND ADMINISTRATIVE EXPENSE. Selling and administrative expense,
including other income and expense, increased 3% in 1994 and, after excluding
Central Moloney, the increase was 6%. This increase was due mainly to
higher state and local income taxes and to the recovery in 1993 of
previously incurred engineering expense by Coltec Automotive. The higher
selling and administrative expense was offset in part by cost savings
resulting from reductions in the sales force at Garlock Mechanical
Packing. As a percent of sales, selling and administrative expense
increased to 15.0% in 1994 from 14.7% in 1993, after excluding Central
Moloney.
INTEREST AND DEBT EXPENSE, NET. Interest and debt expense, net declined $20.7
million or 19% in 1994 due to lower borrowing costs, under the $415.0 million
reducing revolving credit facility (the "1994 Credit Agreement") and to
repayments of long-term debt.
19
PROVISION FOR INCOME TAXES. The effective income tax rate for 1994 was 36.0%
compared with 35.75% for 1993. During 1994, the U.S. Internal Revenue Service
completed its examination of the consolidated federal income tax returns of
Coltec and Coltec Holdings Inc. ("Holdings"), the former parent of Coltec, for
the years 1990, 1991 and 1992, and the resulting tax assessments previously
provided for were paid.
EXTRAORDINARY ITEM. Coltec incurred extraordinary charges of $1.5 million
in 1994 in connection with the early retirement of debt and $17.8 million
in 1993 in connection with debt refinancings and the early retirement of debt.
YEAR ENDED DECEMBER 31, 1993, COMPARED WITH
YEAR ENDED DECEMBER 31, 1992
Earnings before extraordinary item for 1993 were $65.2 million, equal to 94
cents per common share, or $80.5 million, equal to $1.16 per common share,
excluding the $25.2 million restructuring charge. This compared with earnings
before extraordinary item of $64.7 million, or $1.11 per common share, in
1992. Sales were $1,334.8 million in 1993 compared with $1,368.7 million in
1992. Operating income for 1993 was $211.7 million and the operating margin
was 15.9%. Excluding the restructuring charge, operating income was $236.9
million and the operating margin was 17.7%. 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, excluding the restructuring charge, 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.
The Aerospace/Government segment reported a 34% decline in operating income in
1993 on a 13% sales decline and an operating margin of 15.0% compared with 19.5%
in 1992. Excluding the restructuring charge, operating income declined 16% in
1993 and the segment's operating margin was 18.9%. Operating income for 1993 was
$67.8 million, $85.5 million excluding the restructuring charge, on sales of
$453.3 million, compared with operating income of $102.1 million on sales of
$523.7 million in 1992. The Automotive segment achieved a record 23.0% operating
margin in 1993, compared with 21.1% in 1992, a 20% improvement in operating
income and an 11% increase in sales. Excluding the restructuring charge, the
Automotive segment's operating margin was 23.8% and operating income improved
25%. Operating income was $102.4 million, $106.2 million excluding the
restructuring charge, 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 10% and 2%, respectively, and
segment operating margin declined to 17.4% from 19.0% in 1992. Excluding the
restructuring charge, Industrial segment operating income was down 6% and the
operating margin for 1993 was 18.2%. Segment operating income was $75.9 million,
$79.6 million excluding the restructuring charge, and sales were $436.7 million,
compared with operating income of $84.4 million and sales of $443.8 million in
1992. Higher sales and earnings performances were reported by Quincy Compressor
and Garlock Bearings, while Garlock Mechanical Packing, France Compressor
Products and FMD Electronics reported lower results in 1993.
Following is a discussion of the results of operations for the year ended
December 31, 1993, compared with 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 in 1992. The decline in Aerospace/Government segment sales
reflected 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,
Menasco began shipping components for new commercial programs in 1993, including
landing gear systems for the Boeing 777 aircraft and flight controls for the
Fokker 70 aircraft. In 1993, Menasco reported lower sales of landing gear
systems for the Boeing 737, 757 and 767 aircraft and the McDonnell Douglas
MD-80 aircraft; flight controls for the Fokker 100 aircraft; and lower
military sales, primarily for spare parts. Sales of overhaul and repair
services by Menasco declined due mainly to increased competition and the
economic slowdown in Europe. The decline in sales at Fairbanks Morse Engine
was due to completion of certain 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 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, 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
20
began in 1992 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. Higher volume, including increased
applications for segment components, and new product sales contributed 7% and
4%, respectively, to the total sales increase. Sales were higher at Holley
Automotive on increased demand for manifold assemblies and transmission
solenoids, and on the introduction of new automotive products. Coltec Automotive
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 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 Performance Products 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 acceptance from the aerospace industry for its new PTFE
insulating tape. At Garlock Mechanical Packing, 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 Garlock Valves & Industrial Plastics due to the slowdown in the
European economy. Delavan Commercial Products 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.
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 67.8% 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 $8.7 million 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 restructuring charge of $25.2 million recorded in the
second quarter of 1993 covered the cost of consolidation and rearrangement of
certain manufacturing facilities and related reductions in work force by
approximately 570 employees, primarily in the Aerospace/Government segment, as
well as at Central Moloney Transformer. Key elements of the restructuring
program included closing a landing gear manufacturing 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 Performance Products, administrative offices and
the distribution operation were relocated to one of the division's manufacturing
facilities. The objectives of the restructuring program were completed in 1994.
The liability for the restructuring charge, funded from operations in
approximately equal amounts in 1993 and 1994, has been fully utilized as of
December 31, 1994 and there were no revisions to the restructuring charge
subsequent to the second quarter of 1993.
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 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 was
principally due to the disaffiliation of Coltec from 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.
21
INDUSTRY SEGMENT INFORMATION
The following table shows financial information by industry segment for the
five years ended December 31, 1994.
YEAR ENDED DECEMBER 31,
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(DOLLARS IN MILLIONS) 1994 1993 1992 1991 1990
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- ------------------------------------------------------------------------------------------------------------------------
Sales:
Aerospace/Government $ 422.1 $ 453.3 $ 523.7 $ 562.8 $ 581.9
Automotive 508.7 445.7 402.6 372.6 436.1
Industrial(a) 397.7 436.7 443.8 439.3 470.2
Intersegment elimination(b) (1.7) (.9) (1.4) (1.7) (1.0)
------------------------------------------------------------------------
Total $1,326.8 $1,334.8 $1,368.7 $1,373.0 $1,487.2
------------------------------------------------------------------------
Operating income(c):
Aerospace/Government $ 67.7 $ 67.8 $ 102.1 $ 109.6 $ 107.6
Automotive 114.2 102.4 85.1 59.3 93.9
Industrial(a) 88.4 75.9 84.4 80.2 96.1
------------------------------------------------------------------------
Total segments 270.3 246.1 271.6 249.1 297.6
Corporate unallocated(d) (34.0) (34.4) (28.5) (20.1) (28.7)
------------------------------------------------------------------------
Operating income $ 236.3 $ 211.7 $ 243.1 $ 229.0 $ 268.9
------------------------------------------------------------------------
Operating margin(c):
Aerospace/Government 16.0% 15.0% 19.5% 19.5% 18.5%
Automotive 22.4 23.0 21.1 15.9 21.5
Industrial(a) 22.2 17.4 19.0 18.3 20.4
------------------------------------------------------------------------
Total 17.8% 15.9% 17.8% 16.7% 18.1%
------------------------------------------------------------------------
Return on total assets(e):
Aerospace/Government 16.8% 17.6% 26.3% 26.7% 25.1%
Automotive 88.2 82.2 71.8 48.1 66.3
Industrial(a) 53.8 42.1 45.2 42.2 49.1
------------------------------------------------------------------------
Total 27.9% 26.6% 29.7% 27.8% 31.0%
------------------------------------------------------------------------
Backlog(f):
Aerospace/Government $ 547.3 $ 524.5 $ 576.9 $ 697.2 $ 738.5
Automotive 84.2 77.6 64.8 47.0 51.5
Industrial(a) 37.3 67.6 67.4 64.6 74.2
------------------------------------------------------------------------
Total $ 668.8 $ 669.7 $ 709.1 $ 808.8 $ 864.2
------------------------------------------------------------------------
------------------------------------------------------------------------
<FN>
(A) EXCLUDING THE CENTRAL MOLONEY TRANSFORMER DIVISION, WHICH WAS SOLD IN JANUARY 1994,
AND THE 1993 RESTRUCTURING CHARGE, INDUSTRIAL SEGMENT SALES,
OPERATING INCOME, OPERATING MARGIN, RETURN ON TOTAL ASSETS AND BACKLOG
WOULD HAVE BEEN AS FOLLOWS:
(DOLLARS IN MILLIONS) 1994 1993 1992 1991 1990
----------------------------------------------------------------------------------
SALES $392.9 $372.5 $365.3 $349.7 $370.7
OPERATING INCOME 88.3 80.7 81.9 75.9 86.0
OPERATING MARGIN 22.4% 21.7% 22.4% 21.7% 23.2%
RETURN ON TOTAL ASSETS 53.7% 50.2% 49.9% 46.0% 50.6%
BACKLOG 37.3 33.5 31.7 30.7 34.0
(B) REFLECTS ELIMINATION OF INTERCOMPANY SALES BETWEEN DIVISIONS IN
DIFFERENT SEGMENTS.
(C) OPERATING INCOME FOR 1993 INCLUDED A $25.2 MILLION RESTRUCTURING CHARGE
AS FOLLOWS: $17.7 MILLION IN AEROSPACE/GOVERNMENT, $3.8 MILLION IN
AUTOMOTIVE AND $3.7 MILLION IN INDUSTRIAL. EXCLUDING 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 23.8%
FOR AUTOMOTIVE AND $79.6 MILLION AND 18.2% FOR INDUSTRIAL.
(D) REPRESENTS CORPORATE SELLING AND ADMINISTRATIVE EXPENSE, INCLUDING
OTHER INCOME AND EXPENSE, THAT IS NOT ALLOCABLE TO INDIVIDUAL INDUSTRY
SEGMENTS.
(E) RETURN ON TOTAL ASSETS IS CALCULATED FOR EACH SEGMENT BY DIVIDING
SEGMENT OPERATING INCOME BY SEGMENT TOTAL ASSETS AT DECEMBER 31, AND FOR
TOTAL COLTEC BY DIVIDING TOTAL COLTEC OPERATING INCOME BY TOTAL ASSETS
AT DECEMBER 31.
(F) OF THE $668.8 MILLION BACKLOG AT DECEMBER 31, 1994, $250.8 MILLION WAS
SCHEDULED TO BE SHIPPED AFTER 1995.
22
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. 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.
On September 30, 1994, Colt's Manufacturing's plan of reorganization was
approved by the United States Bankruptcy Court. Pursuant to this approval,
Coltec and Colt's Manufacturing entered into a settlement agreement which
included the dismissal of the fraudulent conveyance action against Coltec. All
liabilities assumed by Coltec in this settlement agreement and the previously
held securities of Colt's Manufacturing were fully reserved at the time of the
sale of the Colt Firearms Division in 1990.
LIQUIDITY AND FINANCIAL POSITION
Coltec ended 1994 with total debt of $970.1 million compared with $1,033.6
million in 1993. The negative balance in shareholders' equity of $525.6 million
compares with a negative balance of $625.5 million at year-end 1993. Cash and
cash equivalents were $4.2 million at December 31, 1994 and $5.7 million in
1993. Working capital of $189.6 million was higher by $26.5 million; and the
current ratio was 1.79 compared with 1.83 at year-end 1993.
Cash from operations continues to be the principal source of funds for meeting
Coltec's operating needs and repaying its debt. In 1994, $98.2 million was
generated from operating activities compared with $105.2 million in 1993 and
$119.9 million in 1992. The lower cash generated from operations in 1994 was due
to higher working capital requirements reflecting the build up of inventory for
new programs and a higher level of receivables. The increase in receivables was
due to higher sales in the Automotive and Industrial segments in December 1994
compared with the like period a year ago. Offsetting in part the decline in cash
from operations was the net receipt in 1994 of $10.8 million from insurance
carriers for asbestos-related matters compared with $3.1 million in 1993. The
1993 decrease in cash from operations compared with 1992 was attributable to
increased working capital requirements. The $98.2 million of cash generated in
1994 was used to reduce indebtedness by $58.4 million and invest $38.2 million
in capital expenditures. Included in receivables at December 31, 1994 and 1993
were $68.2 million and $35.8 million, respectively, of receivables due from
insurance carriers for asbestos product liability claims and related litigation
costs. Excluding these amounts, receivables increased 3% to $130.0 million and
receivables days outstanding were 36 days at both year-end 1994 and 1993.
Inventories increased 18% to $198.2 million and inventory turnover was 4.61
times in 1994 compared with 4.76 times in 1993. The increase in inventories was
due to the build up of inventory for the Boeing 777 and Fokker 70 and 100
programs at Menasco and the U.S. Navy Sealift program and Alco engine business
at Fairbanks Morse Engine; and also to reductions in contract advances. The
increase in accrued expenses is due to recording a $34.1 million liability for
asbestos-related matters in 1994 in connection with the adoption in the first
quarter of 1994 of Financial Accounting Standards Board Interpretation No. 39,
"Offsetting of Amounts Related to Certain Contracts." In accordance with
Interpretation No. 39, Coltec has recorded liabilities for asbestos-related
matters that are deemed probable and can be reasonably estimated (settled
actions and actions in advanced stages of processing), and has separately
recorded an asset equal to the amount expected to be recovered by insurance.
Total debt of $970.1 million at December 31, 1994 was $63.5 million or 6% lower
than the total balance at year-end 1993. On January 11, 1994, Coltec entered
into the 1994 Credit Agreement, with a syndicate of banks, which expires June
30, 1999. This facility has provided Coltec with greater financial flexibility
and lower borrowing costs; and has resulted in the ratio of earnings to fixed
charges improving to 2.6 to 1 in 1994 from 1.9 to 1 last year. The 1994 Credit
Agreement was used to prepay indebtedness outstanding and replace letters of
credit issued under a term and working capital facility entered into in 1992. At
December 31, 1994, $291.0 million of borrowings were outstanding and $26.4
million of letters of credit had been issued under the facility leaving $97.6
million of borrowings available for working capital and general corporate
purposes. The 1994 Credit Agreement provides up to $100.0 million for the
issuance of letters of credit and the facility will be reduced $50.0 million on
both January 11, 1997 and 1998. 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
23
through 1998. In 1999, $441.6 million of debt matures and it is planned that a
portion of this debt will be repaid from cash generated from operations with the
remainder to be refinanced.
During 1994, shareholders' equity increased by $99.9 million to a negative
balance of $525.6 million at the end of 1994. This increase reflects $92.5
million of net earnings, $3.2 million of amortization of unearned compensation
related to restricted shares, $1.8 million of proceeds and tax benefits from the
exercise of stock options and the expiration of restrictions on restricted stock
and elimination of a $4.2 million minimum pension liability; offset by a $1.8
million reduction in foreign currency translation adjustments.
Other assets declined $14.4 million to $63.6 million at December 31, 1994 due
mainly to a $10.6 million reduction in the noncurrent portion of the receivable
from insurance carriers. The $32.0 million in liabilities of discontinued
operations at December 31, 1994, represented reserves to cover postretirement
benefits for the former employees of the discontinued operations and other
future estimated costs of the disposition of Crucible Materials Corporation in
1985, the steelmaking facility in Midland, Pennsylvania in 1982, and Colt
Firearms in 1990. Payments covering the liabilities of discontinued operations
in 1994, 1993 and 1992 were $3.2 million, $4.4 million and $6.2 million,
respectively. Coltec expects future cash payments covering the liabilities of
discontinued operations will extend over the remaining lives of the former
employees at the discontinued operations.
CAPITAL EXPENDITURES
Capital expenditures were $38.2 million in 1994 compared with $38.6 million
in 1993 and $25.0 million in 1992, as Coltec continues to invest in capital
improvements to increase efficiency, reduce costs, pursue new opportunities,
expand production and improve facilities. The level of capital expenditures
has and will vary from year to year, affected by the timing of capital
spending for production equipment for new products, periodic plant and
facility expansion as well as cost reduction and labor efficiency programs.
Capital expenditures during 1994 included a landing gear overhaul facility
and production equipment for new landing gear programs at Menasco, production
equipment to manufacture Alco diesel engines at Fairbanks Morse Engine, and
consolidation of administrative offices and the distribution operation at
Holley Performance Products. At December 31, 1994 Coltec had $16.6 million of
planned capital expenditures that included $4.9 million for production
equipment to manufacture a new engine oil pump at Coltec Automotive.
ENVIRONMENTAL
Coltec and its subsidiaries are subject to numerous federal, state and local
environmental laws, many of which are becoming increasingly stringent, giving
rise to increased compliance costs. For example, the Clean Air Amendments will
regulate emissions at certain of Coltec's facilities that were previously
unregulated. Most significantly, certain existing and many newly constructed or
modified facilities will be required to obtain air emission permits that were
not previously required. Although many of the standards under the Clean Air
Amendments have not yet been promulgated, Coltec has made a preliminary
determination of their impact on its operations. Based upon this determination,
Coltec believes that it will not be at a competitive disadvantage in complying
with the Clean Air Amendments and that any costs to comply with the Clean Air
Amendments will not have a material effect on Coltec's results of operations and
financial condition.
Coltec and its subsidiaries are also subject to the federal Resource
Conservation and Recovery Act of 1976 ("RCRA"), and its analogous state
statutes. Although the costs under RCRA for the treatment, storage and disposal
of hazardous materials generated at Coltec's facilities are increasing, Coltec
does not believe that such costs will have a material effect on Coltec's results
of operations and financial condition.
Coltec has been notified that it is among the Potentially Responsible
Parties ("PRPs") under the federal Comprehensive Environmental Response
Compensation and Liability Act of 1980, as amended ("CERCLA"), or similar
state laws, for the costs of investigating and in some cases remediating
contamination by hazardous materials at several sites. See Note 15 of the
Notes to Financial Statements for information on the impact of CERCLA on
Coltec.
Coltec's annual expenditures (including capital expenditures) relating to
environmental matters over the three years ended December 31, 1994 ranged from
$4.5 million to $7.0 million, and Coltec expects such expenditures to
approximate $14.0 million in 1995 and $10.5 million in 1996. Over the three
years ended December 31, 1994 annual expenditures for recurring environmental
matters approximated $2.0 million, annual capital expenditures approximated $1.0
million, and annual expenditures for remediation and other nonrecurring
environmental matters ranged from $1.5 million to $4.0 million. Expenditures for
recurring environmental matters are expected to approximate $2.5 million in each
of 1995 and 1996, capital expenditures are expected to approximate $5.5 million
in 1995 and $2.0
24
million in 1996, and expenditures for remediation and other nonrecurring
environmental matters are expected to approximate $6.0 million in each of 1995
and 1996. Capital expenditure requirements for 1995 and 1996 include estimates
of annual expenditures pursuant to the Clean Air Amendments of $4.5 million and
$2.0 million, respectively. The estimate of annual environmental expenditures
for 1995 and 1996 is based upon the expected timing of expenditures pursuant to
currently identified environmental matters. Because environmental laws
frequently change, Coltec is unable to estimate with certainty the future costs
to comply with such laws; however, Coltec does not foresee a continuous upward
trend in annual expenditures on environmental matters, nor does it believe that
it will be at a competitive disadvantage in complying with any such laws.
ASBESTOS LITIGATION
Coltec and certain of its subsidiaries are defendants in various lawsuits
involving asbestos-containing products. See Note 15 of the Notes to Financial
Statements for information on asbestos litigation.
OTHER FINANCIAL INFORMATION
PRO FORMA RESULTS OF OPERATIONS
On April 1, 1992, Coltec completed a recapitalization which included a public
offering of its common stock, two long-term debt offerings and a new
financing arrangement. The recapitalization reduced aggregate indebtedness,
refinanced a substantial portion of remaining indebtedness on more favorable
terms and improved Coltec's operating and financial flexibility.
Giving pro forma effect to the recapitalization as if it had occurred on
January 1, 1992, Coltec would have reported earnings before extraordinary
item for the year ended December 31, 1992 as follows:
(IN MILLIONS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------
- --------------------------------------------------------------------
Earnings before interest, income taxes
and extraordinary item $243.1
Interest and debt expense, net 116.7
Provision for income taxes 44.0
-------
Earnings before extraordinary item $ 82.4
-------
-------
Earnings per common share
Before extraordinary item(a) $1.19
-------
-------
<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.
EFFECTS OF INFLATION AND FOREIGN CURRENCY FLUCTUATIONS
Inflation and foreign currency fluctuations have not had a material impact on
the operating results and financial position 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. Coltec's
foreign operations are primarily located in Canada.
DIVIDENDS
No dividends were paid in 1994 and 1993, and no dividends are expected to be
paid in 1995.
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 for each quarter during
1994 and 1993, based on the Composite Tape, were as follows:
1994 1993
---------------------------------
High Low High Low
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
First quarter 21 7/8 18 3/4 19 1/4 16 1/4
Second quarter 20 1/2 18 1/4 17 1/2 14 7/8
Third quarter 19 7/8 18 1/8 18 15 1/4
Fourth quarter 19 16 19 3/8 16
At December 31, 1994, there were 523 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.
25
COLTEC INDUSTRIES INC AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
DECEMBER 31,
------------------------
(IN THOUSANDS) 1994 1993
- ----------------------------------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents (Notes 1 and 7) $ 4,188 $ 5,749
Accounts and notes receivable (Notes 7 and 15)
Trade 129,790 124,640
Other 72,483 41,051
------------------------
202,273 165,691
Less allowance for doubtful accounts 4,124 4,170
------------------------
198,149 161,521
Inventories (Note 1)
Finished goods 46,316 39,206
Work in process and finished parts 126,097 103,166
Raw materials and supplies 25,790 25,405
------------------------
198,203 167,777
Deferred income taxes (Note 5) 15,222 17,036
Other current assets 13,936 8,587
------------------------
Total current assets 429,698 360,670
Property, plant and equipment, at cost (Note 1)
Land and improvements 17,973 18,202
Buildings and equipment 133,940 130,085
Machinery and equipment 474,053 479,220
Leasehold improvements 8,071 8,445
Construction in progress 18,870 21,285
------------------------
652,907 657,237
Less accumulated depreciation and amortization 429,793 431,908
------------------------
223,114 225,329
Costs in excess of net assets acquired, net of amortization (Note 1) 131,024 132,550
Other assets (Notes 7 and 15) 63,614 77,980
------------------------
$847,450 $796,529
------------------------
------------------------
26
DECEMBER 31,
--------------------------------
(IN THOUSANDS, EXCEPT SHARE DATA) 1994 1993
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt (Notes 6 and 7) $ 886 $ 1,543
Accounts payable 76,648 64,791
Accrued expenses (Note 15)
Salaries, wages and employee benefits 47,746 40,946
Taxes 33,157 30,103
Interest 18,616 23,887
Other 60,009 32,272
--------------------------------
159,528 127,208
Current portion of liabilities of discontinued operations 3,000 4,000
--------------------------------
Total current liabilities 240,062 197,542
Long-term debt (Notes 6 and 7) 969,261 1,032,089
Deferred income taxes (Note 5) 10,533 27,543
Other liabilities (Note 15) 124,159 132,367
Liabilities of discontinued operations 29,036 32,478
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,
70,016,384 and 69,943,341 shares issued
at December 31, 1994 and 1993, respectively
(excluding 25,000,000 shares held by a
wholly-owned subsidiary) 700 699
Capital in excess of par value 638,407 636,846
Retained earnings (deficit) (1,158,948) (1,251,465)
Unearned compensation - restricted stock awards (3,480) (5,552)
Minimum pension liability - (4,205)
Foreign currency translation adjustments (681) 1,077
--------------------------------
(524,002) (622,600)
Less cost of 98,862 and 179,309 shares of common stock in
treasury at December 31, 1994 and 1993, respectively (1,599) (2,890)
--------------------------------
(525,601) (625,490)
--------------------------------
$ 847,450 $ 796,529
--------------------------------
--------------------------------
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THIS
STATEMENT.
27
COLTEC INDUSTRIES INC AND SUBSIDIARIES CONSOLIDATED STATEMENT OF EARNINGS
YEAR ENDED DECEMBER 31,
----------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------
Net sales $1,326,761 $1,334,829 $1,368,703
----------------------------------------
Costs and expenses
Cost of sales 891,942 905,464 944,405
Selling and administrative 198,489 192,437 181,176
Restructuring charge (Note 3) - 25,219 -
----------------------------------------
Total costs and expenses 1,090,431 1,123,120 1,125,581
----------------------------------------
Operating income 236,330 211,709 243,122
Interest and debt expense, net 89,472 110,190 135,862
----------------------------------------
Earnings before income taxes and extraordinary item 146,858 101,519 107,260
Provision for income taxes (Note 5) 52,869 36,293 42,577
----------------------------------------
Earnings before extraordinary item 93,989 65,226 64,683
Extraordinary item (Note 4) (1,472) (17,792) (106,930)
----------------------------------------
Net earnings (loss) $ 92,517 $ 47,434 $ (42,247)
----------------------------------------
----------------------------------------
Earnings (loss) per common share (Note 1)
Before extraordinary item $ 1.35 $ .94 $ 1.11
Extraordinary item (.02) (.26) (1.83)
----------------------------------------
Net earnings (loss) $ 1.33 $ .68 $ (.72)
----------------------------------------
----------------------------------------
Weighted average number of common and common equivalent shares 69,815 69,591 58,413
----------------------------------------
----------------------------------------
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THIS
STATEMENT.
28
COLTEC INDUSTRIES INC AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31,
---------------------------------------
(IN THOUSANDS) 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net earnings (loss) $ 92,517 $ 47,434 $ (42,247)
Adjustments to reconcile net earnings (loss) to cash
provided by operating activities
Extraordinary item 1,472 17,792 106,930
Depreciation and amortization 42,131 49,092 49,129
Deferred income taxes (19,274) (10,766) (17,829)
Receivable from insurance carriers 10,843 3,056 (15,660)
Payment of liabilities of discontinued operations (3,174) (4,444) (6,166)
Restructuring charge - 25,219 -
Noncash interest expense - - 25,180
Other operating items 3,644 (11,809) 2,032
---------------------------------------
128,159 115,574 101,369
---------------------------------------
Changes in assets and liabilities
Accounts and notes receivable (11,808) (2,007) (7,896)
Inventories (33,511) (2,871) 15,261
Deferred income taxes 1,814 3,501 (216)
Other current assets (1,961) (877) 738
Accounts payable 14,362 4,067 (4,819)
Accrued expenses 1,163 (12,169) 15,450
---------------------------------------
Changes in assets and liabilities (29,941) (10,356) 18,518
---------------------------------------
Cash provided by operating activities 98,218 105,218 119,887
---------------------------------------
Cash flows from investing activities
Capital expenditures (38,191) (38,587) (24,997)
Cash received in Holdings reorganization - 26,749 -
Proceeds from sale of an investment - - 3,733
Other - net (3,184) 1,948 (3,503)
---------------------------------------
Cash used in investing activities (41,375) (9,890) (24,767)
---------------------------------------
Cash flows from financing activities
Issuance of long-term debt 335,042 46,069 150,000
Payment of long-term debt (393,446) (138,179) (242,192)
Issuance of common stock in recapitalization - - 625,575
Payment of long-term debt in recapitalization, net - - (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)
---------------------------------------
Cash used in financing activities (58,404) (96,734) (102,099)
---------------------------------------
Cash and cash equivalents
Decrease (1,561) (1,406) (6,979)
At beginning of period 5,749 7,155 14,134
---------------------------------------
At end of period $ 4,188 $ 5,749 $ 7,155
---------------------------------------
---------------------------------------
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THIS
STATEMENT.
29
COLTEC INDUSTRIES INC AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS'
EQUITY
THREE YEARS ENDED DECEMBER 31, 1994
-----------------------------------------------------------------------------------------
UNEARNED
COMPENSATION- FOREIGN
COMMON STOCK CAPITAL IN RETAINED RESTRICTED MINIMUM CURRENCY
--------------------- EXCESS OF EARNINGS STOCK PENSION TRANSLATION
(IN THOUSANDS, EXCEPT SHARE DATA) SHARES AMOUNT PAR VALUE (DEFICIT) AWARDS LIABILITY ADJUSTMENTS
- ---------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1992 25,000,000 $ 250 $ - $(1,208,067) $ - $ - $13,290
Net loss (42,247)
Issuance of stock
in recapitalization 44,275,000 443 625,132
Distribution to Holdings
pursuant to preferred
stock redemption and tax
sharing procedure (48,585)
Issuance of restricted stock, net 578,464 6 8,956 (7,221)
Foreign currency translation
adjustments (8,601)
-------------------------------------------------------------------------------------
Balance, December 31, 1992 69,853,464 699 634,088 (1,298,899) (7,221) - 4,689
Net earnings 47,434
Issuance of restricted stock, net 89,877 - 1,389 1,669
Exercise of stock options (4)
Tax benefit from stock option
and incentive plan 133
Stock exchange in the
Holdings reorganization 1,240
Minimum pension liability (4,205)
Foreign currency translation
adjustments (3,612)
--------------------------------------------------------------------------------------
Balance, December 31, 1993 69,943,341 699 636,846 (1,251,465) (5,552) (4,205) 1,077
Net earnings 92,517
Issuance of restricted stock, net 73,043 1 1,370 2,072
Exercise of stock options (114)
Tax benefit from stock option
and incentive plan 305
Minimum pension liability 4,205
Foreign currency translation
adjustments (1,758)
--------------------------------------------------------------------------------------
Balance, December 31, 1994 70,016,384 $ 700 $ 638,407 $(1,158,948) $(3,480) $ - $(681)
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
THREE YEARS ENDED DECEMBER 31, 1994
---------------------------------------
TREASURY STOCK
-------------------
SHARES AMOUNT TOTAL
- ----------------------------------------------------------------------------
Balance, January 1, 1992 - $ - $(1,194,527)
Net loss (42,247)
Issuance of stock
in recapitalization 625,575
Distribution to Holdings
pursuant to preferred
stock redemption and tax
sharing procedure (48,585)
Issuance of restricted stock, net 1,741
Foreign currency translation
adjustments (8,601)
---------------------------------------
Balance, December 31, 1992 - - (666,644)
Net earnings 47,434
Issuance of restricted stock, net (14,309) (229) 2,829
Exercise of stock options 5,000 79 75
Tax benefit from stock option
and incentive plan 133
Stock exchange in the
Holdings reorganization (170,000) (2,740) (1,500)
Minimum pension liability (4,205)
Foreign currency translation
adjustments (3,612)
---------------------------------------
Balance, December 31, 1993 (179,309) (2,890) (625,490)
Net earnings 92,517
Issuance of restricted stock, net (17,553) (293) 3,150
Exercise of stock options 98,000 1,584 1,470
Tax benefit from stock option
and incentive plan 305
Minimum pension liability 4,205
Foreign currency translation
adjustments (1,758)
---------------------------------------
Balance, December 31, 1994 (98,862) $ (1,599) $ (525,601)
---------------------------------------
---------------------------------------
<FN>
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THIS
STATEMENT.
30
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. Certain amounts for prior periods have been reclassified to
conform to the 1994 presentation.
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:
(IN THOUSANDS) 1994 1993 1992
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Interest paid $ 92,304 $105,713 $107,236
Income taxes -
Paid 42,308 31,873 40,767
Refunded 2,262 3,913 4,417
FOREIGN CURRENCY TRANSLATION: The financial statements of foreign subsidiaries
were prepared in their respective local currencies and were translated into U.S.
dollars at year-end rates for assets and liabilities and at monthly weighted
average rates for income and expenses. Translation adjustments are included in
shareholders' equity. Foreign currency transaction gains and losses are included
in net earnings. For 1994, 1993 and 1992, 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. At
December 31, 1994 and 1993, $34,411,000 and $45,150,000, 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, 1994 and 1993, 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 56% of the domestic inventory at
December 31, 1994 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,
1994 and 1993 was approximately $18,800,000 and $21,800,000, 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.
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.
ENVIRONMENTAL EXPENDITURES: Expenditures that relate to an existing condition
caused by past operations, and which do not contribute to current or future
revenue generation, are accrued when it is probable that an obligation has been
incurred and the amount can be reasonably estimated. Expenditures incurred for
environmental compliance with respect to pollution prevention and ongoing
monitoring programs are expensed as incurred. Expenditures that increase the
value of the property are capitalized.
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. In evaluating the value and future benefits of the
excess costs arising from acquisitions, the recoverability from operating
income is measured. Under this approach, the carrying value would be reduced
if it is probable that management's best estimate of future operating income
from related operations before amortization will be less than the carrying
amount of the excess costs arising from acquisitions over the remaining
amortization period. At December 31, 1994 and 1993, accumulated
31
amortization related to all completed acquisitions, which are amortized on a
straight-line basis over a 40-year period, was $57,186,000 and $52,063,000,
respectively.
SHAREHOLDERS' EQUITY AND EARNINGS PER SHARE: In November 1993, 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.
IMPACT OF NEW ACCOUNTING STANDARDS: Coltec adopted Financial Accounting
Standards No. 112, "Employers' Accounting for Postemployment Benefits", No.
115, "Accounting for Certain Investments in Debt and Equity Securities", and
No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of
Financial Instruments", 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", will have a material
effect on Coltec's results of operations and financial condition.
2. RECAPITALIZATION
On April 1, 1992, Coltec completed a recapitalization which included a public
offering of its common stock, two long-term debt offerings and a new
financing arrangement (the "Recapitalization"). The Recapitalization reduced
aggregate indebtedness and refinanced a substantial portion of remaining
indebtedness. 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
first quarter 1992 reflects the interest and finance cost related to outstanding
debt of Holdings because the net proceeds from the public offering of the debt
securities and the bank refinancing were used to retire a dividend note payable
from Coltec to Holdings, the proceeds of which were used by Holdings to repay
Holdings' indebtedness.
3. RESTRUCTURING CHARGE
Coltec recorded a restructuring charge of $25,219,000 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 the Central Moloney Transformer
Division.
The objectives of the restructuring program were completed in 1994.
The liability for the restructuring charge, funded from operations in
approximately equal amounts in 1993 and 1994, has been fully utilized as of
December 31, 1994 and there were no revisions to the restructuring charge
subsequent to the second quarter of 1993.
4. EXTRAORDINARY ITEM
Coltec incurred extraordinary charges of $1,472,000, net of a $792,000 tax
benefit, and $17,792,000, net of a $9,581,000 tax benefit, in 1994 and 1993,
respectively, in connection with the early retirement of debt, and in 1993 in
connection with debt refinancings.
In 1992 Coltec, in addition to the extraordinary charges referred to in
Note 2, incurred extraordinary charges of $1,583,000, net of a $816,000 tax
benefit, in connection with a debt refinancing and early retirement of debt.
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, 1994 and 1993 were as follows:
(IN THOUSANDS) 1994 1993
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
DEFERRED DEFERRED DEFERRED DEFERRED
TAX TAX TAX TAX
ASSETS LIABILITIES ASSETS LIABILITIES
-----------------------------------------------------
Excess tax over
book depreciation $ - $(30,076) $ - $(32,049)
Recognition of income
on contracts reported
on different methods for
tax and financial reporting - (29,003) - (30,068)
Employee benefit plans 26,184 - 31,057 -
Accrued expenses
and liabilities 13,062 - - (8,357)
Foreign tax credit
carryforwards 6,000 - 29,000 -
Other 24,522 - 28,910 -
-----------------------------------------------------
69,768 (59,079) 88,967 (70,474)
Less - Valuation allowance (6,000) - (29,000) -
-----------------------------------------------------
Total deferred taxes $ 63,768 $(59,079) $59,967 $(70,474)
-----------------------------------------------------
-----------------------------------------------------
32
The valuation allowance is attributable to foreign tax credit carryforwards
which expire in the years 1997 through 1999.
Domestic and foreign components of earnings before income taxes and
extraordinary item were as follows:
(IN THOUSANDS) 1994 1993 1992
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
Domestic $ 126,254 $ 71,126 $ 67,217
Foreign 20,604 30,393 40,043
-----------------------------------
Total $ 146,858 $101,519 $ 107,260
-----------------------------------
-----------------------------------
Provision for income taxes was as follows:
(IN THOUSANDS) 1994 1993 1992
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
Current -
Domestic $ 56,812 $36,254 $ 43,026
Foreign 11,253 9,568 17,596
-----------------------------------
68,065 45,822 60,622
-----------------------------------
Deferred -
Domestic (12,503) (11,553) (14,527)
Foreign (2,693) 2,024 (3,518)
-----------------------------------
(15,196) (9,529) (18,045)
-----------------------------------
Total $ 52,869 $36,293 $ 42,577
-----------------------------------
-----------------------------------
Reconciliation of tax at the U.S. statutory income tax rate, 35% in 1994 and
1993 and 34% in 1992, to the provision for income taxes was as follows:
(IN THOUSANDS) 1994 1993 1992
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
Tax at U.S. statutory rate $ 51,400 $35,532 $36,468
Tax cost (benefit)-
Repatriation of non-U.S. earnings 2,713 3,201 4,600
Non-U.S. rate differential 1,349 954 1,708
Adjustment of reserves (5,789) (6,692) (2,636)
Other (not individually significant) 3,196 3,298 2,437
--------------------------------------
Provision for income taxes $ 52,869 $36,293 $42,577
--------------------------------------
Effective tax rate 36.0% 35.75% 39.7%
--------------------------------------
--------------------------------------
The provision, prior to the disaffiliation noted below, was 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. Coltec became
disaffiliated from Holdings as a consequence of the Recapitalization. For 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 a
consolidated U.S. federal income tax return 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 period of affiliation with Holdings, Coltec's portion of the
resulting tax liability 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 part of the determined tax benefits from
Holdings' losses. The excess of Coltec's U.S. federal income tax liability on a
separate group basis, for the period of affiliation with Holdings, over Coltec's
share of the U.S. federal income tax liability determined in accordance with the
tax sharing procedure was paid to Holdings and is included as a distribution to
Holdings in the Consolidated Statement of Shareholders' Equity. 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.
During 1994, the U.S. Internal Revenue Service completed its examination of
the consolidated federal income tax returns of Coltec and Holdings for the
years 1990, 1991 and 1992 and the resulting tax assessments previously
provided for were paid.
6. LONG-TERM DEBT
(IN THOUSANDS) 1994 1993
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
1994 Credit Agreement - 5.3%* $291,000 $ -
1992 Credit Agreement - repaid in 1994 - 308,618
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 67,782 91,625
10 1/4% senior subordinated notes due 2002 231,465 250,000
Other due 1995-2010 29,900 33,389
-----------------------
970,147 1,033,632
Less - Amounts due within one year 886 1,543
-----------------------
$969,261 $1,032,089
-----------------------
-----------------------
<FN>
*INDICATES AVERAGE INTEREST RATE FOR 1994.
A) 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. This facility was used to prepay indebtedness
outstanding and replace letters of credit issued under a term and working
capital facility entered into in 1992. At December 31, 1994, $291,000,000 of
borrowings were outstanding and $26,410,000 of letters of credit had been
issued under the 1994 Credit Agreement. The 1994 Credit Agreement provides up
to $100,000,000 for the issuance of letters of credit and the facility 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 the base rate or the Eurodollar rate plus 1%. The base rate is the higher
of 1/2 of 1% in excess of the Federal Reserve reported certificate of deposit
rate and the prime lending rate. Letter
33
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.
The facility contains various restrictions and conditions. The most
restrictive of these requires 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. At December 31, 1994, 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 are not redeemable prior to maturity on
April 1, 2000.
D) Coltec has purchased in the open market $18,535,000 of the 10 1/4% senior
subordinated notes. The remaining 10 1/4% senior subordinated notes 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 $82,218,000 of its
11 1/4% debentures. The remaining 11 1/4% debentures are redeemable at the
option of Coltec at 106.188% of par, declining to 100% of par on or after
December 1, 2005. Mandatory annual sinking fund payments 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) Minimum payments on long-term debt due within five years from December 31,
1994 are as follows:
(IN THOUSANDS)
- -------------------------------------------------------------------
- -------------------------------------------------------------------
1995 $ 886
1996 569
1997 607
1998 652
1999 441,562
7. FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
Coltec's financial instruments:
CASH AND CASH EQUIVALENTS AND ACCOUNTS AND NOTES RECEIVABLE, OTHER: The
carrying amount approximates fair value due to the short-term maturity of the
investments and the short-term nature of the receivables.
LONG-TERM RECEIVABLES AND INVESTMENTS: The fair value is based on quoted
market prices for similar publicly traded securities or on the present value
of estimated future cash flows.
LONG-TERM DEBT: The fair value of 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.
INTEREST RATE SWAP AGREEMENTS: The fair value is based on quotes from
commercial banks.
FORWARD EXCHANGE CONTRACTS: The fair value is based on quoted market prices
of similar contracts.
The estimated fair value of Coltec's financial instruments at December 31,
1994 and 1993 is as follows:
(IN THOUSANDS) 1994 1993
- -------------------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
Assets:
Cash and cash
equivalents $ 4,188 $ 4,188 $ 5,749 $ 5,749
Accounts and notes
receivable, other 72,483 72,483 41,051 41,051
Long-term receivables
and investments -
Practical to estimate
fair value 36,008 39,364 41,205 47,206
Not practical to
estimate fair value 8,711 - 8,711 -
Interest rate
swap agreements - 27 - -
Liabilities:
Long-term debt 970,147 962,647 1,033,632 1,077,642
Interest rate
swap agreements - - - 4,522
Forward exchange
contracts - 21,026 - 11,479
34
It was not practicable to obtain an independent estimate of the fair value of
Coltec's stock investment in Crucible Materials Corporation ("Crucible"), a
private corporation. The carrying value of the investment in Crucible is
included in other assets in the Consolidated Balance Sheet.
As of December 31, 1994, Coltec has outstanding interest rate swap agreements
with major financial institutions having a total notional principal amount of
$150,000,000, an average fixed interest rate of 6.34% and an average
remaining life of three months. Interest rate swap agreements effectively
hedge interest rate exposures and, as such, the differential to be paid or
received is accrued and recognized in interest expense as market interest
rates change. Net payments or receipts under interest rate swap agreements
are recorded as adjustments to interest expense. Gains or losses on the
termination of an interest rate swap agreement which has been an effective
hedge, are deferred and amortized over the remaining original life of the
swap when the underlying debt is not extinguished, or are recognized in the
period when the underlying debt is extinguished.
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 forward 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, 1994 and 1993 Coltec had
$306,230,000 and $251,610,000, respectively, of forward exchange contracts,
denominated in Canadian dollars, which had a fair value of $285,204,000 and
$240,131,000, respectively. The contracts have varying maturities with none
exceeding five years. Gains and losses on forward exchange contracts are
deferred and recognized at the completion of the underlying long-term contract
being hedged.
Coltec has an outstanding contingent liability for guaranteed debt and lease
payments of $30,836,000, and for letters of credit of $26,410,000. It was not
practical to obtain independent estimates of the fair values for the contingent
liability for guaranteed debt and lease payments and for letters of credit
without incurring excessive costs. In the opinion of management, nonperformance
by the other parties to the contingent liabilities will not have a material
effect on Coltec's results of operations and financial condition.
8. STOCK OPTION AND INCENTIVE PLANS
Coltec stock option plans provide for the granting of incentive stock rights,
stock options, stock appreciation rights, restricted stock and dividend
equivalents to officers and key employees and stock options to directors. In
1994, shareholders approved an increase in the number of shares of common stock
that may be issued under the stock option plans to 7,468,000 shares. Stock
options outstanding under the stock option plans were granted at a price equal
to 100% of the market price on the date of grant and are exercisable in annual
installments of 20%, commencing one year from date of grant.
Information on stock options for the three years ended December 31, 1994 is
as follows:
OPTION
NUMBER PRICE RANGE
OF SHARES PER SHARE
- -----------------------------------------------------------------
Outstanding January 1, 1992 - -
Granted 2,015,000 $15.00-18.25
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
Granted 295,000 16.25-21.25
Exercised (98,000) 15.00
Canceled (140,000) 15.00-20.25
-----------------------------
Outstanding December 31, 1994 2,317,000 15.00-21.25
-----------------------------
Exercisable December 31:
1992 - -
1993 398,000 15.00-18.25
1994 772,000 15.00-18.75
-----------------------------
-----------------------------
In addition to the granting of stock options, Coltec has granted shares of
restricted stock. Restrictions on certain shares lapse in annual installments of
33 1/3% commencing one or 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.
35
Information on restricted stock for the three years ended December 31, 1994 is
as follows:
NUMBER OF SHARES
---------------------------------
1994 1993 1992
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
Outstanding January 1 554,260 578,464 -
Granted 73,043 89,877 578,464
Restrictions expired (92,264) (99,772) -
Forfeited (17,553) (14,309) -
---------------------------------
Outstanding December 31 517,486 554,260 578,464
---------------------------------
---------------------------------
Shares available for grant at December 31, 1994 and 1993 under the stock
option plans were 4,306,616 and 66,649, 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 in accordance with local requirements and customary practices.
For certain pension plans, the plan assets exceed the accumulated benefit
obligations ("overfunded plans"); and in the remainder of the plans, the
accumulated benefit obligations exceed the plan assets ("underfunded plans").
As of December 31, 1994 and 1993, the status of Coltec's pension plans was as
follows:
1994 1993*
------------------------------------------------------------
OVERFUNDED UNDERFUNDED OVERFUNDED UNDERFUNDED
(IN THOUSANDS) PLANS PLANS PLANS PLANS
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Actuarial present value of projected benefit obligation, based
on employment service to date and current salary levels:
Vested employees $252,924 $63,135 $286,094 $76,227
Nonvested employees 8,875 1,178 11,672 1,815
----------------------------------------------------------
Accumulated benefit obligation 261,799 64,313 297,766 78,042
Additional amounts related to
projected salary increases 22,310 2,430 21,060 436
----------------------------------------------------------
Total projected benefit obligation 284,109 66,743 318,826 78,478
----------------------------------------------------------
Assets available for benefits:
Funded assets 350,198 33,789 348,978 38,854
Accrued (prepaid) pension expense, per books (9,554) 31,552 (478) 42,161
----------------------------------------------------------
Total assets 340,644 65,341 348,500 81,015
----------------------------------------------------------
Assets in excess of (less than)
projected benefit obligation $ 56,535 $(1,402) $ 29,674 $ 2,537
----------------------------------------------------------
Consisting of:
Unamortized net asset existing
at date of adoption of FAS No. 87 $ 13,274 $ 3,005 $ 4,905 $ 16,685
Unrecognized net gain (loss) 49,590 1,836 32,745 (9,969)
Unrecognized prior service cost (6,329) (6,243) (7,976) (4,179)
----------------------------------------------------------
$ 56,535 $ (1,402) $ 29,674 $ 2,537
----------------------------------------------------------
----------------------------------------------------------
<FN>
*RESTATED TO REFLECT FUNDING CLASSIFICATION AS OF DECEMBER 31, 1994.
36
For U.S. plans, discount rates of 9.0% and 7.5% were used as of December 31,
1994 and 1993, 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 of $13,571,000 at December
31, 1993, which is included in other liabilities in the Consolidated Balance
Sheet. This liability was equal to the excess of the accumulated benefit
obligation over plan assets and was offset by a $7,102,000 intangible asset,
included in other assets in the Consolidated Balance Sheet, for previously
unrecognized prior service cost. The amount in excess of previously
unrecognized prior service cost, $4,205,000, was recorded as a reduction of
shareholders' equity, net of a $2,264,000 tax benefit. At December 31, 1994,
a minimum pension liability was not required.
Assumptions as of January 1 used to develop the net periodic pension cost for
U.S. plans were:
1994 1993 1992
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
Discount rate for benefit obligations 7.5% 8.0% 8.0%
Expected long-term rate of
return on assets 8.5% 8.5% 8.5%
Rate of increase in
compensation levels 5.0% 5.0% 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:
(IN THOUSANDS) 1994 1993 1992
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
Service cost - benefits earned $ 9,763 $ 9,423 $ 9,947
Interest cost on projected
benefit obligation 27,793 28,496 27,993
Actual return on assets 7,353 (7,770) (233)
Amortization and deferral, net (47,687) (30,968) (38,394)
---------------------------------
Net periodic pension cost (credit) $ (2,778) $ (819) $ (687)
---------------------------------
---------------------------------
For discontinued operations, Coltec's total projected benefit obligation at
December 31, 1994 and 1993 was $215,121,000 and $263,751,000, respectively, and
is fully funded. Interest accrued for 1994, 1993 and 1992 on the projected
benefit obligation was $18,684,000, $20,450,000, and $21,555,000, 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 on a
cash basis.
Coltec's accumulated postretirement benefit obligation, none of which is
funded, and the postretirement benefit cost liability at December 31, 1994
and 1993 were as follows:
(IN THOUSANDS) 1994 1993
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
Actuarial present value of projected
accumulated postretirement
benefit obligation:
Retirees $ 16,224 $ 17,511
Fully eligible active participants 3,568 4,613
Other active participants 3,126 3,441
------------------------------
Total 22,918 25,565
Unamortized transition obligation (19,736) (22,727)
Unrecognized net loss (1,279) (1,482)
------------------------------
Postretirement benefit cost liability $ 1,903 $ 1,356
------------------------------
------------------------------
The components of postretirement benefit cost were as follows:
(IN THOUSANDS) 1994 1993
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
Service cost - benefits earned $ 179 $ 249
Interest cost on accumulated
postretirement benefit obligation 1,810 1,838
Amortization of transition obligation 1,101 1,196
Amortization and deferral, net (127) -
Curtailment loss 427 -
------------------------------
Postretirement benefit cost $3,390 $3,283
------------------------------
------------------------------
During 1994, Coltec recognized a curtailment loss in connection with a plan
amendment which accelerated the recognition of the related unamortized
transition obligation.
Discount rates of 9.0% and 7.5% were used in determining the accumulated
postretirement benefit obligation at December 31, 1994 and 1993, respectively.
The health care cost trend rates used in determining the accumulated
postretirement benefit obligation at December 31, 1994 were 10.9% in 1995,
gradually declining to 6.0% 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 1994 by $174,000
and to increase the accumulated postretirement benefit obligation at December
31, 1994 by $1,900,000.
37
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
1994, 1993 and 1992 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, 1994 is as follows:
(IN MILLIONS) 1994 1993 1992
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
Total assets:
Aerospace/Government $402.3 $386.2 $388.7
Automotive 129.5 124.6 118.6
Industrial 164.4 180.1 186.7
Corporate unallocated 151.3 105.6 123.9
-----------------------------------
Total $847.5 $796.5 $817.9
-----------------------------------
Depreciation of property,
plant and equipment:
Aerospace/Government $ 14.7 $ 16.1 $ 17.3
Automotive 7.5 7.4 7.9
Industrial 8.7 9.5 9.9
Corporate unallocated .2 .2 .2
-----------------------------------
Total $ 31.1 $ 33.2 $ 35.3
-----------------------------------
Capital expenditures:
Aerospace/Government $ 21.3 $ 21.8 $ 13.3
Automotive 7.0 9.6 6.5
Industrial 9.9 7.2 5.2
-----------------------------------
Total $ 38.2 $ 38.6 $ 25.0
-----------------------------------
-----------------------------------
Information by geographic segment for the three years ended December 31, 1994
is as follows:
OPERATING TOTAL
(IN MILLIONS) SALES INCOME ASSETS
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
1994
Domestic operations $1,148.3 $241.5 $ 629.2
Foreign operations 208.1 28.8 202.0
Intersegment elimination (29.6) - (135.0)
--------------------------------------
Total segments 1,326.8 270.3 696.2
Corporate unallocated - (34.0) 151.3
--------------------------------------
Total $1,326.8 $236.3 $ 847.5
--------------------------------------
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) 105.6
--------------------------------------
Total $1,334.8 $211.7 $ 796.5
--------------------------------------
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) 123.9
--------------------------------------
Total $1,368.7 $243.1 $ 817.9
--------------------------------------
--------------------------------------
12. SUPPLEMENTARY EARNINGS INFORMATION
The following costs and expenses are included in the Consolidated Statement
of Earnings:
(IN THOUSANDS) 1994 1993 1992
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
Maintenance $27,224 $25,363 $27,444
------------------------------------
Taxes, other than federal
income taxes
Payroll 28,205 28,700 28,764
------------------------------------
Property 4,565 4,764 4,793
------------------------------------
State and local 7,688 4,785 5,195
------------------------------------
Rent 10,106 12,235 12,849
------------------------------------
Research and development costs 23,830 22,079 22,947
------------------------------------
------------------------------------
13. RELATED PARTY TRANSACTIONS
On November 18, 1993, Holdings became a wholly owned subsidiary of Coltec as
a result of 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") in a transaction accounted for as a
purchase. The net assets acquired consisted primarily of 25,000,000 shares of
common stock of Coltec and $26,700,000 of cash. Immediately before this
exchange, Holdings owned 35.7% or 25,000,000 shares of common stock of
Coltec. The 25,000,000 shares of 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. As a result of the exchange,
Morgan Stanley Group Inc ("Morgan Stanley Group") became a direct shareholder
of Coltec. On June 6, 1994, two investment funds affiliated with Morgan
Stanley Group made a distribution to their respective partners of the shares
of common stock of Coltec received in the Holdings Reorganization.
Immediately after the distribution, the three representatives of Morgan
Stanley Group on Coltec's Board of Directors resigned.
During 1994, Morgan Stanley & Co. Incorporated ("MS&Co."), a wholly owned
subsidiary of Morgan Stanley Group, acted as one of the brokers in the
purchase of Coltec's notes and, in 1993, received a fee of $309,000 in
connection with an industrial revenue bond refinancing.
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 public offering of Coltec's common stock, an underwriting commission
of $11,250,000 in connection with the public offering of debt securities, and
fees of $1,049,000 as one of the dealer managers for a 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, and acted as
a dealer in the placement of a portion of Coltec's commercial paper.
38
14. QUARTERLY SALES AND EARNINGS (UNAUDITED)
The following table sets forth quarterly sales, gross profit and earnings for
the three years ended December 31, 1994.
QUARTER
-------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1ST 2ND 3RD 4TH
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
1994
Net sales $ 331,850 $ 337,018 $ 317,507 $ 340,386
-------------------------------------------------
Gross profit 104,209 110,206 106,248 114,156
-------------------------------------------------
Operating income 54,679 60,691 57,831 63,129
-------------------------------------------------
Earnings before extraordinary item 20,643 24,383 23,037 25,926
Extraordinary item - (1,015) (177) (280)
-------------------------------------------------
Net earnings 20,643 23,368 22,860 25,646
-------------------------------------------------
Earnings per common share
Before extraordinary item .30 .35 .33 .37
Extraordinary item - (.02) - -
-------------------------------------------------
Net earnings .30 .33 .33 .37
-------------------------------------------------
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 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
-------------------------------------------------
-------------------------------------------------
<FN>
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 PUBLIC OFFERING OF
COMMON STOCK.
39
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 and certain environmental proceedings. With respect to asbestos product
liability and related litigation costs, as of December 31, 1994 and 1993, two
subsidiaries of Coltec were among a number of defendants (typically 15 to 40) in
approximately 76,700 and 68,500 actions, respectively, (including approximately
3,300 and 6,100 actions, respectively, in advanced stages of processing) filed
in various states by plaintiffs alleging injury or death as a result of exposure
to asbestos fibers. Through December 31, 1994, approximately 110,200 of the
approximately 186,900 total actions brought have been settled or otherwise
disposed of.
The damages claimed for personal injury or death vary from case to case and in
many cases plaintiffs seek $1,000,000 or more in compensatory damages and
$2,000,000 or more in punitive damages. Although the law in each state differs
to some extent, it appears, based on advice of counsel, that liability for
compensatory damages would be shared among all responsible defendants, thus
limiting the potential monetary impact of such judgments on any individual
defendant.
Following a decision of the Pennsylvania Supreme Court, in a case in which
neither Coltec or any of its subsidiaries were parties, that held insurance
carriers are obligated to cover asbestos-related bodily injury actions if any
injury or disease process, from first exposure through manifestation, occurred
during a covered policy period (the "continuous trigger theory of coverage"),
Coltec settled litigation with its primary and most of its first-level excess
insurance carriers, substantially on the basis of the Court's ruling. Coltec is
currently negotiating with its remaining excess carriers to determine, on behalf
of its subsidiaries, how payments will be made with respect to such insurance
coverage for asbestos claims. Coltec is currently receiving payments pursuant to
an interim agreement with certain of its excess carriers. Coltec believes that a
final agreement can be achieved without litigation, and on substantially the
same basis that it has resolved the issues with its primary and first-level
excess carriers. Settlements are generally made on a group basis with payments
made to individual claimants over periods of one to four years. During 1994 and
1993, two subsidiaries of Coltec received approximately 29,800 and 27,400 new
actions, respectively, with a comparable number of actions received in 1992.
Payments were made with respect to asbestos liability and related costs
aggregating $46,374,000 in 1994, $38,677,000 in 1993 and $39,810,000 in 1992,
substantially all of which were covered by insurance. 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. As of December 31, 1994, Coltec estimates that the
aggregate remaining cost of the disposition of the settled actions for which
payments remain to be made and actions in advanced stages of processing,
including associated legal costs, is approximately $42,254,000 and Coltec
expects that this cost will be substantially covered by insurance.
With respect to the 73,400 outstanding actions as of December 31, 1994 which 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
potential 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 generally does not have 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 mix of
the injuries alleged and the mix of the occupations of the plaintiffs have been
changing from those traditionally associated with Coltec's asbestos-related
actions. 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 plaintiff, the presence or absence of other possible causes of
a plaintiff's illness, the availability of legal defenses, such as
40
the statute of limitations or state of the art, and whether the lawsuit is an
individual one or part of a group, management is unable to estimate with
reasonable certainty the cost of disposing of outstanding actions in
preliminary procedural stages or of actions that may be filed in the future.
However, Coltec believes that its subsidiaries are in a favorable position
compared to many other defendants because, among other things, the asbestos
fibers in its asbestos-containing products were encapsulated. Considering the
foregoing, as well as the experience of Coltec's subsidiaries and other
defendants in asbestos litigation, the likely sharing of judgments among
multiple responsible defendants, and the significant amount of insurance
coverage that Coltec expects to be available 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.
Although the insurance coverage which Coltec has is substantial, it should be
noted that insurance coverage for asbestos claims is not available to cover
exposures initially occurring on and after July 1, 1984. Coltec's subsidiaries
continue to be named as defendants in new cases, some of which allege initial
exposure after July 1, 1984.
In addition to claims for personal injury, Coltec's subsidiaries were among 40
or more defendants in 34 cases involving property damage claims based upon
asbestos-containing materials found in schools, public facilities and private
commercial buildings. The subsidiaries have been dismissed without payment in 31
of these cases. One school case was settled for an amount that is not material
and two cases remain unresolved as against one subsidiary only. However, based
upon the proceedings to date in these cases, it appears that the subsidiary has
no liability in those two cases.
In the first quarter of 1994, Coltec adopted the requirements of Financial
Accounting Standards Board Interpretation No. 39, "Offsetting of Amounts Related
to Certain Contracts." In accordance with Interpretation No. 39, Coltec recorded
an accrual for its liabilities for asbestos-related matters that are deemed
probable and can be reasonably estimated (settled actions and actions in
advanced stages of processing), and separately recorded an asset equal to the
amount of such liabilities that is expected to be recovered by insurance. In
addition, Coltec has recorded a receivable for that portion of payments
previously made for asbestos product liability actions and related litigation
costs that is recoverable from its insurance carriers. Liabilities for asbestos
related matters and the receivable from insurance carriers included in the
Consolidated Balance Sheet are as follows:
DECEMBER 31,
----------------------
(IN THOUSANDS) 1994 1993
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
Accounts and notes receivable - other $68,179 $35,838
Other assets 13,119 23,697
Accrued expenses - other 34,099 -
Other liabilities 8,155 -
With respect to environmental proceedings, Coltec has been notified that it is
among the Potentially Responsible Parties ("PRPs") under the federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended ("CERCLA"), or similar state laws, for the costs of investigating and in
some cases remediating contamination by hazardous materials at several sites.
CERCLA imposes joint and several liability for the costs of investigating and
remediating properties contaminated by hazardous materials. Liability for these
costs can be imposed on present and former owners or operators of the properties
or on parties who generated the wastes that contributed to the contamination.
The process of investigating and remediating contaminated properties can be
lengthy and expensive. The process is also subject to the uncertainties
occasioned by changing legal requirements, developing technological applications
and liability allocations among PRPs. Based on the progress to date in the
investigation, cleanup and allocation of responsibility for these sites, Coltec
has estimated that its costs in connection with all except one of these sites
approximates $20,000,000 at December 31, 1994, and has accrued for this amount
in the Consolidated Balance Sheet as of December 31, 1994. Although Coltec is
pursuing insurance recovery in connection with certain of these matters, Coltec
has not recorded a receivable with respect to any potential recovery of costs in
connection with any environmental matter. While progress toward the
investigation, cleanup and responsibility allocation at the remaining site has
not been sufficient to allow Coltec at this time to determine the extent of its
potential financial responsibility at this site, Coltec does not believe its
costs in connection with such site 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, 1995, Coltec and certain of its subsidiaries
are obligated as of December 31, 1994 to pay rentals totaling $30,861,000 as
follows: $6,151,000 in 1995, $5,551,000 in 1996, $4,754,000 in 1997,
$4,179,000 in 1998, $3,680,000 in 1999, and $6,546,000 in later years.
41
REPORT OF MANAGEMENT
The management of Coltec Industries Inc is responsible for the preparation of
the financial statements and related financial information included in this
Annual Report and for their integrity and objectivity. The financial
statements have been prepared in conformity with generally accepted
accounting principles and contain estimates and judgments by management as
appropriate.
The Company maintains a system of internal accounting control designed to
provide reasonable assurance that assets are safeguarded, transactions are
executed and recorded in accordance with management's authorization and
accounting records may be relied upon for preparation of financial
statements. Management is responsible for maintenance of these systems, which
is accomplished through communication of established written codes of
conduct, policies and procedures; selection of qualified personnel; and
appropriate delegation of authority and segregation of responsibilities.
Adherence to these controls, policies and procedures is monitored and
evaluated by the Company's internal auditors.
Coltec Industries Inc's financial statements have been audited by Arthur
Andersen LLP, the Company's independent public accountants. In planning and
performing their audit of the Company's financial statements, the independent
public accountants consider the internal control structure in determining their
auditing procedures. The independent public accountants also prepare
recommendations for improving policies and procedures and such recommendations
are communicated to management and the Audit Committee of the Board of
Directors.
The Audit Committee, composed solely of outside directors, meets periodically
with management, the independent public accountants and the internal
auditors, to review matters relating to the system of internal accounting
control and the Company's financial statements. Both the independent public
accountants and internal auditors have direct access to the Audit Committee,
with or without the presence of management, to discuss the scope and results
of their audits and their comments on the adequacy of the Company's internal
accounting control system.
/s/ John W. Guffey, Jr.
John W. Guffey, Jr.
Chairman, President and Chief Executive Officer
/s/ Paul G. Schoen
Paul G. Schoen
Executive Vice President, Finance;
Treasurer, and Chief Financial Officer
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS
OF COLTEC INDUSTRIES INC:
We have audited the accompanying consolidated balance sheets of Coltec
Industries Inc (a Pennsylvania corporation) and subsidiaries as of December
31, 1994 and 1993, and the related consolidated statements of earnings,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1994. 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, 1994 and 1993, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1994, in conformity with generally
accepted accounting principles.
/s/ Arthur Andersen LLP
New York, N.Y.
January 23, 1995
42