SELECTED FINANCIAL DATA
Coltec Industries Inc 1995 Annual Report
The following table sets forth selected financial data of Coltec for the five
years ended December 31, 1995. 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,
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) 1995 1994 1993 1992 1991
STATEMENT OF EARNINGS DATA:
Sales $1,401.9 $1,326.8 $1,334.8 $1,368.7 $1,373.0
Operating income(a) 197.7 236.3 211.7 243.1 229.0
Earnings before interest, income taxes
and extraordinary item 197.7 236.3 211.7 243.1 230.4
Interest and debt expense, net 89.9 89.5 110.2 135.8 199.9
Provision for income taxes 36.6 52.8 36.3 42.6 28.3
Earnings before extraordinary item(a) 71.2 94.0 65.2 64.7 2.2
Extraordinary item(b) (.3) (1.5) (17.8) (106.9) .6
Net earnings (loss) 70.9 92.5 47.4 (42.2) 2.8
Earnings (loss) per common share:
Before extraordinary item 1.02 1.35 .94 1.11 .09
Extraordinary item -- (.02) (.26) (1.83) .02
Net earnings (loss) 1.02 1.33 .68 (.72) .11
Ratio of earnings to fixed charges(c) 2.2 2.6 1.9 1.8 1.2
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital 208.9 189.6 163.1 95.3 168.8
Total assets 894.5 847.5 796.5 817.9 823.2
Long-term debt (including current portion) 945.8 970.1 1,033.6 1,122.1 1,622.9
Shareholders' equity (453.8) (525.6) (625.5) (666.6) (1,194.5)
OTHER OPERATING DATA:
Operating margin(a) 14.1% 17.8% 15.9% 17.8% 16.7%
Cash provided by operating activities 91.0 98.2 105.2 119.9 149.2
Capital expenditures 42.5 38.2 38.6 25.0 26.2
Depreciation of property, plant and equipment 32.5 31.1 33.2 35.3 36.9
Order backlog (at end of period) 727.7 668.8 669.7 709.1 808.8
Number of employees (at end of period) 9,600 9,800 10,000 10,700 11,400
(A) OPERATING INCOME FOR 1995 INCLUDED A SPECIAL CHARGE OF $27.0 MILLION
PRIMARILY TO COVER THE COSTS OF CLOSING THE WALBAR COMPRESSOR BLADE
FACILITY IN CANADA. IT IS ANTICIPATED THAT THIS FACILITY WILL BE CLOSED BY
THE END OF 1996. THE CHARGE ALSO COVERED SELECTED REDUCTIONS IN WORK FORCE
THROUGHOUT THE COMPANY. IF THE SPECIAL CHARGE WAS EXCLUDED, OPERATING
INCOME, EARNINGS BEFORE EXTRAORDINARY ITEM AND THE OPERATING MARGIN WOULD
HAVE BEEN $224.7 MILLION, $88.7 MILLION AND 16.0%, RESPECTIVELY, IN 1995.
OPERATING INCOME FOR 1993 INCLUDED A SPECIAL CHARGE OF $25.2 MILLION TO
COVER THE COST OF CONSOLIDATION AND REARRANGEMENT OF CERTAIN MANUFACTURING
FACILITIES AND RELATED REDUCTIONS IN WORK FORCE, PRIMARILY IN THE
AEROSPACE/GOVERNMENT SEGMENT, AS WELL AS AT CENTRAL MOLONEY TRANSFORMER
DIVISION. IF THE SPECIAL CHARGE WAS EXCLUDED, OPERATING INCOME, EARNINGS
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) COLTEC RECOGNIZED EXTRAORDINARY CHARGES IN EACH OF THE FIVE YEARS ENDED
DECEMBER 31, 1995, IN CONNECTION WITH DEBT REFINANCINGS AND EARLY
RETIREMENT OF DEBT AND, IN 1992 IN CONNECTION WITH A RECAPITALIZATION.
(C) 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 BEFORE EXTRAORDINARY ITEM. FIXED
CHARGES CONSIST OF INTEREST EXPENSE, CAPITALIZED INTEREST AND THAT PORTION
OF RENTAL EXPENSE DEEMED TO BE REPRESENTATIVE OF THE INTEREST FACTOR.
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FINANCIAL REVIEW
COLTEC INDUSTRIES INC 1995 ANNUAL-REPORT
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995, COMPARED WITH YEAR ENDED DECEMBER 31, 1994
Earnings before extraordinary item for 1995 were $71.2 million, equal to $1.02
per common share, or $88.7 million and $1.27 per common share, excluding the
$27.0 million special charge. This compared with earnings before extraordinary
item of $94.0 million, or $1.35 per common share, in 1994. Sales were $1,401.9
million compared with $1,326.8 million in 1994. Operating income for 1995 was
$197.7 million and the operating margin was 14.1%. However, excluding the
special charge, operating income was $224.7 million and the operating margin was
16.0%. This compared with operating income of $236.3 million and an operating
margin of 17.8% in 1994. The 1995 earnings decline was due to weakness in the
Automotive segment which more than offset the improved performances in the
Aerospace/Government and Industrial segments and the lower effective tax rate in
1995.
The Aerospace/Government segment reported a 29% decline in operating income in
1995 on a 15% sales increase and an operating margin of 9.9% compared with 16.0%
in 1994. Excluding the special charge, operating income improved 6% and the
segment's operating margin was 14.7%. For 1995, operating income was $48.1
million, $71.5 million excluding the special charge, on sales of $486.5 million.
This compared with operating income of $67.7 million on sales of $422.1 million
in 1994. The segment benefited from increasing strength in the aerospace
industry, as divisions serving this market reported increases of 9% in operating
income, 12% in sales and 52% in order input. However, the segment's operating
margin was impacted by continued start-up costs on the Alco engine product line
and lower aftermarket sales to standby nuclear generator facilities at Fairbanks
Morse Engine. The Automotive segment saw its sales and operating income slip 4%
and 19%, respectively, from a very strong 1994, but still achieved a 19.0%
operating margin. The 1994 margin of 22.4% was the second highest in the
segment's history. Operating income for the Automotive segment was $92.8 million
in 1995 on sales of $487.8 million compared with $114.2 million of operating
income in 1994 on sales of $508.7 million. Operating results for the segment
were affected by the adverse industry pricing environment and a decline in sales
of vehicles that use Coltec components. The Industrial segment reported strong
sales and operating income increases in 1995, with improvement coming from most
of its businesses. The segment achieved a record 22.5% operating margin,
compared with 22.2% in 1994, a 9% improvement in operating income and an 8%
increase in sales. Segment operating income was $96.5 million and sales were
$428.9 million, compared with operating income of $88.4 million and sales of
$397.7 million in 1994. The higher operating results in the Industrial segment
were driven by a strong domestic industrial economy and new product
introductions. Sales and earnings gains were reported by Quincy Compressor,
Garlock Bearings, Garlock Mechanical Packing, France Compressor Products,
Garlock Valves & Industrial Plastics, Plastomer Products, Ortman Fluid Power,
Haber Tool and Sterling Die.
Following is a discussion of the results of operations for the year ended
December 31, 1995, compared with the year ended December 31, 1994.
SALES. For 1995, sales totaled $1,401.9 million or 6% higher than the $1,326.8
million in 1994. In the Aerospace/Government segment, sales increased to $486.5
million from $422.1 million in 1994 reflecting the strengthening conditions in
the aerospace industry as well as higher engine shipments at Fairbanks Morse
Engine. At Menasco, sales were higher on increased shipments of landing gear
systems for the Boeing 777, Fokker 70 and 100, and McDonnell Douglas MD-80
aircraft; and flight controls for the Fokker 100 and Canadair RJ aircraft. In
1995, Menasco delivered 20 shipsets of landing gear systems for the Boeing 777
compared with 13 in 1994 and 3 in 1993. In addition, Menasco began deliveries in
1995 of landing gear for the McDonnell Douglas F-15 fighter. This business was
acquired in June 1995 from AlliedSignal Inc ('AlliedSignal'). Fairbanks Morse
Engine reported higher shipments of engines for the U.S. Navy Landing Ship Dock
and Sealift programs and began deliveries in 1995 of Alco engines, a business
acquired in 1994. Sales were higher at Delavan Gas Turbine Products on increased
demand for fuel nozzles and overhaul services to regional airlines. At Walbar,
sales were up on increased shipments of turbine blades and vanes for commercial
aircraft engines, and components and assemblies for the locomotive turbocharger
market. The sales improvement at Chandler Evans Control Systems was due to
higher selling prices and to increased shipments of fuel pumps for the Taiwanese
Fighter program and spare units to the foreign military market.
Automotive segment sales declined to $487.8 million from $508.7 million in 1994,
reflecting the adverse industry pricing environment and a decline in sales of
vehicles that use Coltec components. At Holley Automotive, sales were down due
to pricing concessions; lower demand for throttle bodies, transmission solenoids
and manifold assemblies; and the continuing phaseout of the mechanical emission-
control air pump. The division's sales decline was offset in part by higher
sales of oil pumps and electric emission-control air pumps. Sales were lower for
Stemco Truck Products' wheel lubrication systems to the truck and trailer
aftermarket; and for Farnam
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Sealing Systems' gaskets to original equipment manufacturers and the automotive
aftermarket. Holley Performance Products reported higher sales in 1995 on
increased consumer demand and market penetration for high-performance and
remanufactured carburetors. Sales were up at Performance Friction Products on
increased shipments of synchronizer kits to the truck aftermarket.
For 1995, sales for the Industrial segment were $428.9 million compared with
$397.7 million in 1994. The higher sales reflected the strength of the
industrial sector of the U.S. economy, new product introductions and improved
market conditions in Europe. Quincy Compressor reported record sales in 1995 on
strong demand for rotary screw air compressors and on the increased level of
compressor parts and accessories business. At Garlock Mechanical Packing, sales
were higher on improved pricing and increased demand in the U.S. market for
KLOZURE oil seals, cut gaskets and GYLON gasketing products. Also contributing
to the division's sales improvement was higher international sales. In December
1995, Garlock Mechanical Packing acquired certain assets of Furon Company's
('Furon') metallic gasket business. This business manufactures gaskets for high-
temperature applications, primarily as replacement components in the chemical
processing industry. Garlock Bearings reported record sales in 1995 on the
continued development of new applications for its DU bearings and on strong
demand for both DU and DX bearings from the automotive and truck markets. Sales
were higher at Haber Tool due mainly to increased demand from the automotive
market and at Plastomer Products on increased shipments of PTFE insulating tape
to the aerospace market. The higher sales at France Compressor Products and
Garlock Valves & Industrial Plastics reflected improved conditions in both the
U.S. and European economies.
COST OF SALES. Cost of sales increased 10% in 1995 and, as a percent of sales,
increased to 69.9% from 67.2% in 1994. This increase reflected the higher sales
volume in the Aerospace/Government and Industrial segments, and higher than
expected start-up costs on the Alco engine product line at Fairbanks Morse
Engine. Also contributing to the increase were higher material cost and
depreciation expense, increased spending to develop new products and competitive
pressures limiting price increases. These adverse cost factors were offset in
part by manufacturing efficiencies and other savings achieved as part of
Coltec's cost-reduction efforts.
SELLING AND ADMINISTRATIVE EXPENSE. Selling and administrative expense,
including other income and expense, was level in 1995 compared with 1994, but as
a percent of sales, selling and administrative expense declined to 14.1% from
15.0% in 1994. Coltec's continued emphasis on controlling costs kept these
expenses comparable to prior year levels.
SPECIAL CHARGE. In the third quarter of 1995, Coltec recorded a special charge
of $27.0 million, primarily to cover the costs of closing the Walbar compressor
blade facility in Canada. It is anticipated that this facility will be closed by
the end of 1996. The charge also covered selected reductions in work force
throughout Coltec covering approximately 520 employees, all of whom have been
terminated or notified of their termination at December 31, 1995. The special
charge includes $9.1 million for the cancellation of contractual obligations
resulting from the decision to close the Walbar facility, $7.8 million for asset
writedowns, $5.1 million for severance and employee-related costs and $5.0
million for other costs necessary to implement the shutdown of the Walbar
facility and other actions. Charges of $8.9 million were recorded against this
reserve in 1995.
INTEREST AND DEBT EXPENSE. The $.4 million increase in interest and debt expense
in 1995 was due to higher interest rates offset in part by repayment of long-
term debt.
PROVISION FOR INCOME TAXES. The effective income tax rate for 1995 was 34%
compared with 36% in 1994. The lower effective tax rate for 1995 was due to the
adjustment of reserves and the utilization of tax credits.
EXTRAORDINARY ITEM. In 1995, Coltec incurred extraordinary charges of $.3
million in connection with the early retirement of debt.
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 in 1993; and earnings per share before extraordinary item were
$1.35 per common share compared with 94 cents per common share in 1993.
Excluding a special charge of $25.2 million, earnings before extraordinary item
in 1993 were $80.5 million, 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 $25.2 million special 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.
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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% in
1993. Excluding the special 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 special 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 and production
inefficiencies at Walbar. 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 special 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 special 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. The Industrial segment
reported a 16% improvement in operating income and a 22.2% operating margin in
1994, compared with 17.4% in 1993. Sales for the Industrial segment declined 9%,
in 1994; however, excluding the special 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 special charge and Central
Moloney Transformer, operating income and sales were $80.7 million and $372.5
million, respectively, in 1993.
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 in
1993. The sales decline reflected the continued general weakness in the
aerospace industry and lower military sales. 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. Sales
were lower at Fairbanks Morse Engine due to a gap in shipments for U.S. Navy
programs. Sales were down at Chandler Evans Control Systems 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 reported lower sales in 1994 on continued
reductions in defense spending.
Sales for the Automotive segment increased 14% to $508.7 million, reflecting a
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. Also
contributing to the division's sales increase were higher shipments of oil pumps
and both mechanical and electric emission-control air pumps. The higher sales of
electric emission-control air pumps reflected the acquisition late in 1993 of
General Motors' air pump manufacturing operation and Holley 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 Products 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 in 1993. 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 increased sales of compressors on improved market
conditions, increased market penetration and higher selling
22
prices. 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, price increases and the
introduction of new products. 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 benefited from improved 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
Plastomer Products 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. 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 from the consolidation and
rearrangement 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 Holley 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 new credit
agreement entered into in January 1994, and to repayments of long-term debt.
PROVISION FOR INCOME TAXES. The effective income tax rate for 1994 was 36.0%
compared with 35.75% for 1993.
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.
INDUSTRY SEGMENT INFORMATION
Following are the major products in each industry segment: Aerospace/Government:
Menasco landing gear and flight control actuation systems; Fairbanks Morse large
diesel and dual-fuel engines; Walbar blades, vanes and discs for jet and other
gas turbine engines; Chandler Evans fuel pumps and control systems; Delavan gas
turbine products; Lewis Engineering cockpit instrumentation and sensors.
Automotive: Holley Automotive fuel injection components and solenoids, air and
oil pumps; Holley Performance carburetors and fuel injection components; Stemco
truck products; Farnam gaskets and seals; Performance Friction gears,
synchronizers and clutch plates.
Industrial: Garlock seals, gaskets, packings, bearings, valves and tape; Quincy
air compressors; Delavan spray nozzles; France compressor products; Haber and
Sterling dies; Ortman Fluid Power cylinders.
23
The following table shows financial information by industry segment for the five
years ended December 31, 1995.
YEAR ENDED DECEMBER 31,
(DOLLARS IN MILLIONS) 1995 1994 1993 1992 1991
Sales:
Aerospace/Government $ 486.5 $ 422.1 $ 453.3 $ 523.7 $ 562.8
Automotive 487.8 508.7 445.7 402.6 372.6
Industrial(a) 428.9 397.7 436.7 443.8 439.3
Intersegment elimination(b) (1.3) (1.7) (.9) (1.4) (1.7)
Total $ 1,401.9 $ 1,326.8 $ 1,334.8 $ 1,368.7 $ 1,373.0
Operating income(c):
Aerospace/Government $ 48.1 $ 67.7 $ 67.8 $ 102.1 $ 109.6
Automotive 92.8 114.2 102.4 85.1 59.3
Industrial(a) 96.5 88.4 75.9 84.4 80.2
Total segments 237.4 270.3 246.1 271.6 249.1
Corporate unallocated(d) (39.7) (34.0) (34.4) (28.5) (20.1)
Operating income $ 197.7 $ 236.3 $ 211.7 $ 243.1 $ 229.0
Operating margin(c):
Aerospace/Government 9.9% 16.0% 15.0% 19.5% 19.5%
Automotive 19.0 22.4 23.0 21.1 15.9
Industrial(a) 22.5 22.2 17.4 19.0 18.3
Total 14.1% 17.8% 15.9% 17.8% 16.7%
Return on total assets(c)(e):
Aerospace/Government 10.8% 16.8% 17.6% 26.3% 26.7%
Automotive 71.1 88.2 82.2 71.8 48.1
Industrial(a) 52.6 53.8 42.1 45.2 42.2
Total 22.1% 27.9% 26.6% 29.7% 27.8%
Backlog(f):
Aerospace/Government $ 611.7 $ 547.3 $ 524.5 $ 576.9 $ 697.2
Automotive 76.4 84.2 77.6 64.8 47.0
Industrial(a) 39.6 37.3 67.6 67.4 64.6
Total $ 727.7 $ 668.8 $ 669.7 $ 709.1 $ 808.8
(a) EXCLUDING THE CENTRAL MOLONEY TRANSFORMER DIVISION, WHICH WAS SOLD IN
JANUARY 1994, AND THE 1993 SPECIAL CHARGE, INDUSTRIAL SEGMENT SALES, OPERATING
INCOME, OPERATING MARGIN, RETURN ON TOTAL ASSETS AND BACKLOG WOULD HAVE BEEN AS
FOLLOWS FOR THE FOUR YEARS ENDED DECEMBER 31, 1994:
(DOLLARS IN MILLIONS) 1994 1993 1992 1991
SALES $392.9 $372.5 $365.3 $349.7
OPERATING INCOME 88.3 80.7 81.9 75.9
OPERATING MARGIN 22.4% 21.7% 22.4% 21.7%
RETURN ON TOTAL ASSETS 53.7% 50.2% 49.9% 46.0%
BACKLOG 37.3 33.5 31.7 30.7
(b) REFLECTS ELIMINATION OF INTERCOMPANY SALES BETWEEN DIVISIONS IN DIFFERENT
SEGMENTS.
(c) OPERATING INCOME FOR 1995 INCLUDED A SPECIAL CHARGE OF $27.0 MILLION AS
FOLLOWS: $23.4 MILLION IN THE AEROSPACE/GOVERNMENT SEGMENT AND $3.6 MILLION IN
CORPORATE UNALLOCATED. EXCLUDING THE SPECIAL CHARGE, OPERATING INCOME, THE
OPERATING MARGIN AND RETURN ON TOTAL ASSETS FOR 1995 WOULD HAVE BEEN $71.5
MILLION, 14.7% AND 16.0% FOR AEROSPACE/GOVERNMENT.
OPERATING INCOME FOR 1993 INCLUDED A SPECIAL CHARGE OF $25.2 MILLION AS FOLLOWS:
$17.7 MILLION IN AEROSPACE/GOVERNMENT, $3.8 MILLION IN AUTOMOTIVE AND $3.7
MILLION IN INDUSTRIAL. EXCLUDING THE SPECIAL CHARGE, OPERATING INCOME, THE
OPERATING MARGIN AND RETURN ON TOTAL ASSETS FOR 1993 WOULD HAVE BEEN $85.5
MILLION, 18.9% AND 22.1% FOR AEROSPACE/GOVERNMENT, $106.2 MILLION, 23.8% AND
85.2% FOR AUTOMOTIVE AND $79.6 MILLION, 18.2% AND 44.2% 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 $727.7 MILLION BACKLOG AT DECEMBER 31, 1995, $268.3 MILLION WAS
SCHEDULED TO BE SHIPPED AFTER 1996.
24
LIQUIDITY AND FINANCIAL POSITION
Coltec ended 1995 with total debt of $945.8 million compared with $970.1 million
in 1994. The negative balance in shareholders' equity of $453.8 million compares
with a negative balance of $525.6 million at year-end 1994. Cash and cash
equivalents were $4.0 million at December 31, 1995, and $4.2 million in 1994.
Working capital of $208.9 million was higher by $19.3 million; and the current
ratio was 1.87 compared with 1.79 at year-end 1994.
Cash from operations amounted to $91.0 million in 1995 compared with $98.2
million in 1994 and $105.2 million in 1993. The lower cash generated from
operations in 1995 was due to increased working capital requirements. Accrued
expenses declined due to a lower interest and tax accruals, and to payments
covering the special charge. Offsetting in part the decline in cash from
operations were an increase in deferred income taxes and the net receipt of
$15.5 million from insurance carriers for asbestos-related matters. This
compared with the receipt of $10.8 million in 1994 and $3.1 million in 1993. The
1994 decrease in cash from operations compared with 1993 was attributable to
higher levels of receivables and inventories. The $91.0 million of cash
generated in 1995 was used to acquire AlliedSignal's aircraft landing gear
business for $14.0 million and certain assets of Furon's metallic gasket
business for $7.8 million, invest $42.5 million in capital expenditures and
reduce indebtedness by $24.5 million. Included in receivables at December 31,
1995 and 1994 were $53.7 million and $68.2 million, respectively, of receivables
due from insurance carriers for asbestos product liability claims and related
litigation costs. Excluding these amounts, receivables increased 6% to $138.3
million and receivables days outstanding were 38 days at December 31, 1995,
compared with 36 days at year-end 1994. Inventories increased 16% to $229.4
million, and inventory turnover was 4.02 times in 1995 compared with 4.61 times
in 1994. The increase in inventories was due to the build up of inventory for
the Boeing 777 and 737-600/700/800 programs at Menasco and the U.S. Navy Sealift
program and Alco engine business at Fairbanks Morse Engine, and the acquisitions
of the AlliedSignal aircraft landing gear and Furon metallic gasket businesses.
At December 31, 1995, total debt was $945.8 million compared with $970.1 million
at year-end 1994. In 1994, Coltec entered into a credit agreement with a
syndicate of banks which expires June 30, 1999. In November 1995, the total
commitment under the credit agreement was increased $50 million to $465.0
million. The additional commitment was used to redeem $46.4 million principal
amount of the 11 1/4% debentures, in January 1996, at a redemption price of
105.625% plus accrued interest. The purpose of the redemption was to substitute
the debentures for bank debt, at a lower interest rate. Excluding the $50.0
million of additional commitment, at December 31, 1995, $261.0 million of
borrowings were outstanding and $45.8 million of letters of credit had been
issued under the credit agreement, leaving $108.2 million of borrowings
available for working capital and general corporate purposes. The credit
agreement provides up to $100.0 million for the issuance of letters of credit
and reductions in the total commitment of $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 credit agreement will be adequate
to meet Coltec's operating needs, planned capital expenditures and debt service
requirements through 1998. In 1999 and 2000, $628.0 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 1995, shareholders' equity increased by $71.8 million to a negative
balance of $453.8 million at the end of 1995. This increase reflects $70.9
million of net earnings, $1.6 million of amortization of unearned compensation
related to restricted shares, $.4 million of proceeds and tax benefits from the
exercise of stock options and the expiration of restrictions on restricted
stock, offset by a $1.1 million reduction in foreign currency translation
adjustments.
The $29.5 million in liabilities of discontinued operations at December 31,
1995, 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 1995, 1994 and 1993 were $2.5
million, $3.2 million and $4.4 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.
25
CAPITAL EXPENDITURES
Capital expenditures were $42.5 million in 1995 compared with $38.2 million in
1994 and $38.6 million in 1993, 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 1995 included production equipment to manufacture a new engine oil pump
at Holley Automotive, equipment to increase production capacity at Garlock
Bearings and production equipment for new landing gear programs at Menasco. At
December 31, 1995, Coltec had $39.6 million of planned capital expenditures that
included production equipment to support new programs at Menasco and Holley
Automotive.
ENVIRONMENTAL
Coltec and its subsidiaries are subject to numerous federal, state and local
environmental laws. For example, the Clean Air Act Amendments regulate emissions
at certain of Coltec's facilities. In connection with the Clean Air Act
Amendments, Coltec will be required to make capital expenditures for equipment
to control emissions of hazardous air pollutants. In addition, certain of
Coltec's facilities will be required to obtain air emission control permits.
Coltec has made a determination of the impact on its operations of the Clean Air
Act Amendments. Based upon this determination, Coltec believes that it will not
be at a competitive disadvantage in complying with the Clean Air Act Amendments
and that any costs to comply with the Clean Air Act Amendments will not have a
material effect on Coltec's results of operations and financial condition.
Coltec and its subsidiaries also incur costs on a recurring basis for the
treatment, storage and disposal of hazardous materials generated at Coltec's
facilities in order to comply with the federal Resource Conservation and
Recovery Act of 1976 ("RCRA"), and its analogous state statutes. Coltec does not
believe that such costs have, nor will they 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 13 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, 1995 ranged from
$6.5 million to $9.0 million, and Coltec expects such expenditures to
approximate $12.5 million in 1996 and $10.0 million in 1997. Over the three
years ended December 31, 1995, annual expenditures for recurring environmental
matters approximated $2.5 million, annual capital expenditures ranged from $1.0
million to $2.5 million, and annual expenditures for remediation and other
nonrecurring environmental matters ranged from $3.0 million to $4.0 million.
Expenditures for recurring environmental matters are expected to approximate
$3.0 million in each of 1996 and 1997, capital expenditures are expected to
approximate $3.5 million in 1996 and $2.0 million in 1997, and expenditures for
remediation and other nonrecurring environmental matters are expected to
approximate $6.0 million in 1996 and $5.0 million in 1997. Capital expenditure
requirements for 1996 and 1997 include estimates of annual expenditures pursuant
to the Clean Air Act Amendments of $2.5 million and $2.0 million, respectively.
The estimate of annual environmental expenditures for 1996 and 1997 is based
upon the expected timing of expenditures pursuant to currently identified
environmental matters. Because environmental laws and the related
interpretations 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.
26
ASBESTOS LITIGATION
Coltec and certain of its subsidiaries are defendants in various lawsuits
involving asbestos-containing products. See Note 13 of the Notes to Financial
Statements for information on asbestos litigation.
OTHER FINANCIAL INFORMATION
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 1995 and 1994, and no dividends are expected to be
paid in 1996.
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 1995 and
1994 were as follows:
1995 1994
High Low High Low
First quarter 173/8 153/8 217/8 183/4
Second quarter 183/4 163/4 201/2 181/4
Third quarter 181/8 115/8 197/8 181/8
Fourth quarter 121/4 101/8 19 16
At December 31, 1995, there were 493 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, NY 10022-3597.
27
CONSOLIDATED BALANCE SHEET
COLTEC INDUSTRIES INC AND SUBSIDIARIES
DECEMBER 31,
(IN THOUSANDS) 1995 1994
ASSETS
Current assets
Cash and cash equivalents (Notes 1 and 6) $ 3,971 $ 4,188
Accounts and notes receivable (Notes 6
and 13)
Trade 138,327 129,790
Other 57,858 72,483
196,185 202,273
Less allowance for doubtful accounts 4,174 4,124
192,011 198,149
Inventories (Note 1)
Finished goods 55,533 46,316
Work in process and finished parts 146,916 126,097
Raw materials and supplies 26,987 25,790
229,436 198,203
Deferred income taxes (Note 4) 13,902 15,222
Other current assets 10,174 13,936
Total current assets 449,494 429,698
Property, plant and equipment, at cost
(Note 1)
Land and improvements 17,562 17,973
Buildings and equipment 134,320 133,940
Machinery and equipment 481,538 474,053
Leasehold improvements 10,028 8,071
Construction in progress 22,837 18,870
666,285 652,907
Less accumulated depreciation and
amortization 435,812 429,793
230,473 223,114
Costs in excess of net assets acquired, net of
amortization (Note 1) 140,811 131,024
Other assets (Notes 6 and 13) 73,724 63,614
$ 894,502 $ 847,450
28
DECEMBER 31,
(IN THOUSANDS, EXCEPT SHARE DATA) 1995 1994
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long-term
debt (Notes 5 and 6) $ 226 $ 886
Accounts payable 72,735 76,648
Accrued expenses (Note 13)
Salaries, wages and employee benefits 47,348 47,746
Taxes 25,008 33,157
Interest 14,918 18,616
Other 77,343 60,009
164,617 159,528
Current portion of liabilities of
discontinued operations 3,000 3,000
Total current liabilities 240,578 240,062
Long-term debt (Notes 5 and 6) 945,606 969,261
Deferred income taxes (Note 4) 14,878 10,533
Other liabilities (Note 13) 120,670 124,159
Liabilities of discontinued operations 26,532 29,036
Commitments and contingencies (Note 13)
Shareholders' equity (Notes 1 and 7)
Preferred stock
$.01 par value, 2,500,000 shares
authorized, shares outstanding -- none -- --
Common stock
$.01 par value, 100,000,000 shares
authorized, 70,077,350 and 70,016,384 shares
issued at December 31, 1995 and 1994,
respectively (excluding 25,000,000 shares
held by a wholly owned subsidiary) 701 700
Capital in excess of par value 639,419 638,407
Retained earnings (deficit) (1,088,042) (1,158,948)
Unearned compensation -- restricted
stock awards (2,408) (3,480)
Foreign currency translation adjustments (1,816) (681)
(452,146) (524,002)
Less cost of 100,346 and 98,862 shares of
common stock in treasury at December 31, 1995
and 1994, respectively (1,616) (1,599)
(453,762) (525,601)
$ 894,502 $ 847,450
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THIS
STATEMENT.
29
CONSOLIDATED STATEMENT OF EARNINGS
COLTEC INDUSTRIES INC AND SUBSIDIARIES
YEAR ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1995 1994 1993
Net sales $ 1,401,884 $ 1,326,761 $ 1,334,829
Costs and expenses
Cost of sales 979,229 891,942 905,464
Selling and administrative 197,951 198,489 192,437
Special charges (Note 2) 27,000 -- 25,219
Total costs and expenses 1,204,180 1,090,431 1,123,120
Operating income 197,704 236,330 211,709
Interest and debt expense, net 89,886 89,472 110,190
Earnings before income taxes and
extraordinary item 107,818 146,858 101,519
Provision for income taxes (Note 4) 36,658 52,869 36,293
Earnings before extraordinary item 71,160 93,989 65,226
Extraordinary item (Note 3) (254) (1,472) (17,792)
Net earnings $ 70,906 $ 92,517 $ 47,434
Earnings (loss) per common share
(Note 1)
Before extraordinary item $ 1.02 $ 1.35 $ .94
Extraordinary item -- (.02) (.26)
Net earnings $ 1.02 $ 1.33 $ .68
Weighted average number of common
and common equivalent shares 69,839 69,815 69,591
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THIS
STATEMENT.
30
CONSOLIDATED STATEMENT OF CASH FLOWS
COLTEC INDUSTRIES INC AND SUBSIDIARIES
YEAR ENDED DECEMBER 31,
(IN THOUSANDS) 1995 1994 1993
Cash flows from operating activities
Net earnings $ 70,906 $ 92,517 $ 47,434
Adjustments to reconcile net earnings
to cash provided by operating
activities
Extraordinary item 254 1,472 17,792
Special charges 27,000 -- 25,219
Depreciation and amortization 42,086 42,131 49,092
Deferred income taxes 4,345 (19,274) (10,766)
Receivable from insurance carriers 15,452 10,843 3,056
Payment of liabilities of
discontinued operations (2,504) (3,174) (4,444)
Other operating items (8,565) 3,644 (11,809)
148,974 128,159 115,574
Changes in assets and liabilities
Accounts and notes receivable (6,632) (11,808) (2,007)
Inventories (32,373) (33,511) (2,871)
Deferred income taxes 1,320 1,814 3,501
Other current assets 3,762 (1,961) (877)
Accounts payable (4,283) 14,362 4,067
Accrued expenses (19,760) 1,163 (12,169)
Changes in assets and liabilities (57,966) (29,941) (10,356)
Cash provided by operating
activities 91,008 98,218 105,218
Cash flows from investing activities
Capital expenditures (42,496) (38,191) (38,587)
Acquisition of businesses (21,750) (4,048) --
Cash received in Holdings
reorganization -- -- 26,749
Other -- net (2,512) 864 1,948
Cash used in investing activities (66,758) (41,375) (9,890)
Cash flows from financing activities
Issuance of long-term debt 44,662 335,042 46,069
Payment of long-term debt (69,129) (393,446) (138,179)
Distribution to Holdings pursuant to
preferred stock redemption and tax
sharing procedure -- -- (4,624)
Cash used in financing activities (24,467) (58,404) (96,734)
Cash and cash equivalents
Decrease (217) (1,561) (1,406)
At beginning of period 4,188 5,749 7,155
At end of period $ 3,971 $ 4,188 $ 5,749
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THIS
STATEMENT.
31
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
COLTEC INDUSTRIES INC AND SUBSIDIARIES
THREE YEARS ENDED DECEMBER 31, 1995
UNEARNED FOREIGN
CAPITAL IN RETAINED COMPENSATION- MINIMUM CURRENCY
COMMON STOCK EXCESS OF EARNINGS RESTRICTED PENSION TRANSLATION TREASURY STOCK
(IN THOUSANDS, EXCEPT SHARES AMOUNT PAR VALUE (DEFICIT) STOCK AWARDS LIABILITY ADJUSTMENTS SHARES AMOUNT TOTAL
SHARE DATA)
Balance,
January 1, 1993 69,853,464 $ 699 $ 634,088 $ (1,298,899) $ (7,221) $ -- $ 4,689 -- $ -- $ (666,644)
Net earnings 47,434 47,434
Issuance of
restricted stock,
net 89,877 1,389 1,669 (14,309) (229) 2,829
Exercise of stock
options (4) 5,000 79 75
Tax benefit from
stock option
and incentive plan 133 133
Stock exchange in
the Holdings
reorganization 1,240 (170,000) (2,740) (1,500)
Minimum pension
liability (4,205) (4,205)
Foreign currency
translation
adjustments (3,612) (3,612)
Balance, December
31, 1993 69,943,341 699 636,846 (1,251,465) (5,552) (4,205) 1,077 (179,309) (2,890) (625,490)
Net earnings 92,517 92,517
Issuance of
restricted
stock, net 73,043 1 1,370 2,072 (17,553) (293) 3,150
Exercise of
stock options (114) 98,000 1,584 1,470
Tax benefit
from stock option
and incentive plan 305 305
Minimum pension
liability 4,205 4,205
Foreign currency
translation
adjustments (1,758) (1,758)
Balance, December
31, 1994 70,016,384 700 638,407 (1,158,948) (3,480) -- (681) (98,862) (1,599) (525,601)
Net earnings 70,906 70,906
Issuance of
restricted
stock, net 60,966 1 1,006 1,072 (26,484) (422) 1,657
Exercise of
stock options (30) 25,000 405 375
Tax benefit from
stock option
and incentive plan 36 36
Foreign currency
translation
adjustments (1,135) (1,135)
BALANCE,
DECEMBER 31,
1995 70,077,350 $ 701 $ 639,419 $ (1,088,042) $ (2,408) $ -- $ (1,816) (100,346) $ (1,616) $ (453,762)
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THIS
STATEMENT.
32
NOTES TO FINANCIAL STATEMENTS
COLTEC INDUSTRIES INC AND SUBSIDIARIES
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.
ACCOUNTING ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.
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) 1995 1994 1993
Interest paid $ 92,292 $ 92,304 $ 105,713
Income taxes --
Paid 45,799 42,308 31,873
Refunded 4,114 2,262 3,913
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 1995, 1994 and 1993, 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, 1995, and 1994, $36,750,000 and $34,411,000, 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, 1995, and 1994, 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 50% of the domestic inventory at
December 31, 1995 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,
1995, and 1994 was approximately $20,400,000 and $18,800,000, 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.
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, 1995, and 1994, accumulated amortization related to all
completed acquisitions, was $62,275,000 and $57,186,000, respectively.
33
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 (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 $26,749,000 of
cash.
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. 114, "Accounting by Creditors for Impairment of a Loan," and AICPA
Statement of Position 94-6, "Disclosure of Certain Significant Risks and
Uncertainties," effective January 1, 1995. The adoption of these statements 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. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
and No. 123, "Accounting for Stock-Based Compensation," will have a material
effect on Coltec's results of operations and financial condition.
2. SPECIAL CHARGES
In the third quarter of 1995, Coltec recorded a special charge of $27,000,000,
primarily to cover the costs of closing the Walbar compressor blade facility in
Canada. It is anticipated that this facility will be closed by the end of 1996.
The charge also covered selected reductions in work force throughout the Company
covering approximately 520 employees, all of whom have been terminated or
notified of their termination at December 31, 1995. The special charge includes
costs to cover the cancellation of contractual obligations resulting from the
decision to close the Walbar facility, asset writedowns, severance and employee-
related costs and other costs necessary to implement the shutdown of the Walbar
facility and other actions. The components of the charge and its status at
December 31, 1995 are as follows:
ORIGINAL 1995 BALANCE
(IN THOUSANDS) RESERVE ACTIVITY DECEMBER 31, 1995
Cancellation of contractual
obligations $ 9,065 $ (65) $ 9,000
Asset writedowns 7,845 (4,549) 3,296
Severance 5,084 (1,778) 3,306
Other 5,006 (2,553) 2,453
Total $ 27,000 $ (8,945) $ 18,055
In the second quarter of 1993, Coltec recorded a special charge of $25,219,000
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 this program were completed in 1994 and the
liability was fully utilized as of December 31, 1994.
3. EXTRAORDINARY ITEM
Coltec incurred extraordinary charges of $254,000, net of a $136,000 tax
benefit; $1,472,000, net of a $792,000 tax benefit; and $17,792,000, net of a
$9,581,000 tax benefit; in 1995, 1994 and 1993, respectively, in connection with
the early retirement of debt, and in 1993 in connection with debt refinancings.
4. 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, 1995 and 1994 were as follows:
(IN THOUSANDS) 1995 1994
DEFERRED DEFERRED DEFERRED DEFERRED
TAX TAX TAX TAX
ASSETS LIABILITIES ASSETS LIABILITIES
Excess tax over
book depreciation $ -- $ (29,932) $ -- $ (30,076)
Recognition of income
on contracts reported
on different methods
for tax and financial
reporting -- (29,299) -- (29,003)
Employee benefit plans 22,011 -- 26,184 --
Accrued expenses
and liabilities 12,527 -- 13,062 --
Foreign tax credit
carryforwards 7,300 -- 6,000 --
Other 23,717 -- 24,522 --
65,555 (59,231) 69,768 (59,079)
Less -- Valuation
allowance (7,300) -- (6,000) --
Total deferred taxes $ 58,255 $ (59,231) $ 63,768 $ (59,079)
34
The valuation allowance is attributable to foreign tax credit carryforwards,
which expire in the years 1997 through 2000.
Domestic and foreign components of earnings before income taxes and
extraordinary item were as follows:
(IN THOUSANDS) 1995 1994 1993
Domestic $ 81,108 $ 126,254 $ 71,126
Foreign 26,710 20,604 30,393
Total $ 107,818 $ 146,858 $ 101,519
Provisions for income taxes were as
follows:
(IN THOUSANDS) 1995 1994 1993
Current --
Domestic $ 23,355 $ 56,812 $ 36,254
Foreign 7,638 11,253 9,568
30,993 68,065 45,822
Deferred --
Domestic 4,241 (12,503) (11,553)
Foreign 1,424 (2,693) 2,024
5,665 (15,196) (9,529)
Total $ 36,658 $ 52,869 $ 36,293
Reconciliation of tax at the U.S. statutory income tax rate of 35% to the
provision for income taxes was as follows:
(IN THOUSANDS) 1995 1994 1993
Tax at U.S. statutory rate $ 37,736 $ 51,400 $ 35,532
Tax cost (benefit)-
Repatriation of non-U.S. earnings 2,692 2,713 3,201
Non-U.S. rate differential (287) 1,349 954
Utilization of tax credits (1,500) -- --
Adjustment of reserves (6,197) (5,789) (6,692)
Other (not individually significant) 4,214 3,196 3,298
Provision for income taxes $ 36,658 $ 52,869 $ 36,293
Effective tax rate 34.0% 36.0% 35.75%
5. LONG-TERM DEBT
(IN THOUSANDS) 1995 1994
Credit Agreement -- 7.2%* $ 261,000 $ 291,000
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 67,782
10 1/4% senior subordinated
notes due 2002 218,080 231,465
Other due 1996-2010 48,970 29,900
945,832 970,147
Less -- Amounts due within one year 226 886
$ 945,606 $ 969,261
* Indicates average interest rate for 1995.
a) The reducing revolving credit facility (the "Credit Agreement"), entered into
with a syndicate of banks, expires June 30, 1999. At December 31, 1995,
$261,000,000 of borrowings were outstanding and $45,761,000 of letters of credit
had been issued under the Credit Agreement. In November 1995, the total
commitment under the Credit Agreement was increased by $50,000,000 to
$465,000,000. The additional commitment was used to redeem $46,407,000 principal
amount of the 11 1/4% debentures in January 1996 at a redemption price of
105.625% plus accrued interest. The Credit Agreement provides up to $100,000,000
for the issuance of letters of credit and the facility will be reduced by
$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 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 2.5 to 1 for
any period of four consecutive quarters. 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, 1995, 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 $31,920,000 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.
35
e) Coltec has purchased in the open market and redeemed $82,218,000 of its 11
1/4% debentures and in January 1996 redeemed an additional $46,407,000. The
remaining 11 1/4% debentures are redeemable at the option of Coltec at 105.625%
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,
1995 are as follows:
(IN THOUSANDS)
1996 $ 226
1997 2,524
1998 539
1999 427,601
2000 200,353
6. 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.
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, 1995
and 1994 is as follows:
(IN THOUSANDS) 1995 1994
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
Assets:
Cash and cash
equivalents $ 3,971 $ 3,971 $ 4,188 $ 4,188
Accounts and notes
receivable, other 57,858 57,858 72,483 72,483
Long-term
receivables and
investments -
Practical to
estimate
fair value 33,497 42,336 36,008 39,364
Not practical
to estimate
fair value 8,711 -- 8,711 --
Liabilities:
Long-term debt 945,832 965,065 970,147 962,647
Forward exchange
contracts -- 11,147 -- 21,026
It was not practicable to estimate 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.
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, 1995, and 1994 Coltec had
$277,278,000 and $306,230,000, respectively, of forward exchange contracts,
denominated in Canadian dollars, which had a fair value of $266,131,000 and
$285,204,000, 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 $30,816,000, and for letters of credit of $45,761,000. 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.
36
7. 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 is as follows:
OPTION
NUMBER PRICE RANGE
OF SHARES PER SHARE
Outstanding January 1, 1993 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
Granted 2,960,000 10.75-18.08
Exercised (25,000) 15.00
Canceled (64,000) 15.00-18.25
Outstanding December 31, 1995 5,188,000 10.75-21.25
Exercisable December 31:
1993 398,000 15.00-18.25
1994 772,000 15.00-18.75
1995 1,188,000 15.00-21.25
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.
Information on restricted stock is as follows:
NUMBER OF SHARES
1995 1994 1993
Outstanding January 1 517,486 554,260 578,464
Granted 60,966 73,043 89,877
Restrictions expired (203,867) (92,264) (99,772)
Forfeited (26,484) (17,553) (14,309)
Outstanding December 31 348,101 517,486 554,260
Shares available for grant at December 31, 1995 and 1994 under the stock option
plans were 1,349,650 and 4,306,616, respectively.
8. 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 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").
37
As of December 31, 1995 and 1994, the status of Coltec's pension plans was as
follows:
1995 1994*
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 $ 252,612 $ 125,481 $ 214,401 $ 101,658
Nonvested employees 6,527 5,259 5,489 4,564
Accumulated benefit obligation 259,139 130,740 219,890 106,222
Additional amounts related to
projected salary increases 28,294 4,436 22,397 2,343
Total projected benefit obligation 287,433 135,176 242,287 108,565
Assets available for benefits:
Funded assets 365,704 91,894 305,780 78,207
Accrued (prepaid) pension expense,
per books (21,256) 40,389 (8,129) 30,127
Total assets 344,448 132,283 297,651 108,334
Assets in excess of (less than)
projected benefit obligation $ 57,015 $ (2,893) $ 55,364 $ (231)
Consisting of:
Unamortized net asset existing
at date of adoption of
FAS No. 87 $ 1,747 $ 12,274 $ 11,260 $ 5,019
Unrecognized net gain (loss) 57,992 (4,220) 46,356 5,070
Unrecognized prior service cost (2,724) (10,947) (2,252) (10,320)
$ 57,015 $ (2,893) $ 55,364 $ (231)
*RESTATED TO REFLECT FUNDING CLASSIFICATION AS OF DECEMBER 31, 1995.
38
For U.S. plans, discount rates of 7.5% and 9.0% were used as of December 31,
1995 and 1994, 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 $2,044,000 at December 31,
1995, which is included in other liabilities in the Consolidated Balance Sheet.
This liability represents the excess of the accumulated benefit obligation over
plan assets and has been offset by an intangible asset, included in other assets
in the Consolidated Balance Sheet, for previously unrecognized prior service
cost. 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:
1995 1994 1993
Discount rate for benefit obligations 9.0% 7.5% 8.0%
Expected long-term rate of
return on assets 9.0% 8.5% 8.5%
Rate of increase in
compensation levels 5.0% 5.0% 5.0%
For non-U.S. plans, which were not material, similar economic assumptions were
used.
The components of net periodic pension cost were as follows:
(IN THOUSANDS) 1995 1994 1993
Service cost -- benefits earned $ 7,618 $ 9,763 $ 9,423
Interest cost on projected
benefit obligation 30,317 27,793 28,496
Actual return on assets (91,611) 7,353 (7,770)
Amortization and deferral, net 52,953 (47,687) (30,968)
Net periodic pension cost (credit) $ (723) $ (2,778) $ (819)
For discontinued operations, Coltec's total projected benefit obligation at
December 31, 1995, and 1994 was $224,934,000 and $215,121,000, respectively, and
is fully funded. Interest accrued for 1995, 1994 and 1993 on the projected
benefit obligation was $19,609,000, $18,684,000, and $20,450,000, respectively,
and was fully offset by return on assets resulting in no net periodic cost.
9. 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.
Coltec's accumulated postretirement benefit obligation, none of which is funded,
and the postretirement benefit cost liability were as follows:
(IN THOUSANDS) 1995 1994 1993
Actuarial present value of projected
accumulated postretirement
benefit obligation:
Retirees $ 17,449 $ 16,224 $ 17,511
Fully eligible active participants 4,228 3,568 4,613
Other active participants 5,415 3,126 3,441
Total 27,092 22,918 25,565
Unamortized transition obligation (18,076) (19,736) (22,727)
Unrecognized net loss (4,827) (1,279) (1,482)
Unrecognized prior service cost (1,033) -- --
Postretirement benefit cost liability $ 3,156 $ 1,903 $ 1,356
The components of postretirement benefit
cost were as follows:
(IN THOUSANDS) 1995 1994 1993
Service cost -- benefits earned $ 198 $ 179 $ 249
Interest cost on accumulated
postretirement benefit obligation 1,927 1,810 1,838
Amortization of transition obligation 1,373 1,101 1,196
Amortization and deferral, net (63) (127) --
Curtailment loss -- 427 --
Postretirement benefit cost $ 3,435 $ 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.
39
Discount rates of 7.5% and 9.0% were used in determining the accumulated
postretirement benefit obligation at December 31, 1995 and 1994, respectively.
The health care cost trend rates used in determining the accumulated
postretirement benefit obligation at December 31, 1995 were 9.8% in 1996
gradually declining to 5.0% in 2005. The effect of a 1% increase in the health
care cost trend rates in each year would be to increase the total service and
interest cost components of the postretirement benefit cost for 1995 by
approximately $207,000 and to increase the accumulated postretirement benefit
obligation at December 31, 1995, by approximately $1,900,000.
10. SEGMENT INFORMATION
Coltec's financial results are reported in three industry segments:
Aerospace/Government, Automotive, and Industrial.
Customers of the Aerospace/Government segment are principally aircraft and
aircraft engine manufacturers. The principal customers of the Automotive segment
are the domestic original equipment manufacturers and the automotive
aftermarket. Information on the major products within each industry segment and
on sales and operating income by industry segment for the years 1995, 1994 and
1993 included on pages 23 and 24 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 is as follows:
(IN MILLIONS) 1995 1994 1993
Total assets:
Aerospace/Government $ 446.2 $ 402.3 $ 386.2
Automotive 130.6 129.5 124.6
Industrial 183.4 164.4 180.1
Corporate unallocated 134.3 151.3 105.6
Total $ 894.5 $ 847.5 $ 796.5
Depreciation of property,
plant and equipment:
Aerospace/Government $ 15.8 $ 14.7 $ 16.1
Automotive 7.9 7.5 7.4
Industrial 8.6 8.7 9.5
Corporate unallocated .2 .2 .2
Total $ 32.5 $ 31.1 $ 33.2
Capital expenditures:
Aerospace/Government $ 18.3 $ 21.3 $ 21.8
Automotive 10.1 7.0 9.6
Industrial 9.9 9.9 7.2
Corporate unallocated 4.2 -- --
Total $ 42.5 $ 38.2 $ 38.6
Information by geographic segment is
as follows:
OPERATING TOTAL
(IN MILLIONS) SALES INCOME ASSETS
1995
Domestic operations $ 1,189.4 $ 227.1 $ 673.9
Foreign operations 245.6 10.3 205.4
Intersegment elimination (33.1) -- (119.1)
Total segments 1,401.9 237.4 760.2
Corporate unallocated -- (39.7) 134.3
Total $ 1,401.9 $ 197.7 $ 894.5
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
11. SUPPLEMENTARY EARNINGS INFORMATION
The following costs and expenses are included in the Consolidated Statement of
Earnings:
(IN THOUSANDS) 1995 1994 1993
Maintenance $ 27,566 $ 27,224 $ 25,363
Taxes, other than federal
income taxes
Payroll 28,660 28,205 28,700
Property 4,685 4,565 4,764
State and local 6,816 7,688 4,785
Rent 9,589 10,106 12,235
Research and development costs 25,619 23,830 22,079
40
12. QUARTERLY SALES AND EARNINGS (UNAUDITED)
The following table sets forth quarterly sales, gross profit and earnings for
the three years ended December 31, 1995.
QUARTER
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1ST 2ND 3RD 4TH
1995
Net sales $ 356,344 $ 361,547 $ 332,134 $ 351,859
Gross profit 109,855 112,162 101,029 99,609
Operating income 58,133 60,351 25,094 54,126
Earnings before extraordinary item 23,486 24,069 1,804 21,801
Extraordinary item (82) -- -- (172)
Net earnings 23,404 24,069 1,804 21,629
Earnings per common share
Before extraordinary item .34 .34 .03 .31
Extraordinary item -- -- -- --
Net earnings .34 .34 .03 .31
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
REFERENCE IS MADE TO NOTE 2 FOR SPECIAL CHARGES, NOTE 3 FOR EXTRAORDINARY ITEM
AND NOTE 1 FOR EARNINGS PER SHARE.
41
13.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, 1995, and 1994, two
subsidiaries of Coltec were among a number of defendants (typically 15 to 40) in
approximately 105,300 and 76,700 actions, respectively, (including approximately
4,900 and 3,300 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, 1995, approximately 131,200 of the
approximately 236,500 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 has
negotiated a final agreement with most of its excess carriers that are in the
layers of coverage immediately above its first layer. Coltec is currently
receiving payments pursuant to this agreement. Coltec believes that, with
respect to the remaining carriers, a final agreement can be achieved without
litigation and on substantially the same basis that it has resolved the issues
with its other carriers. Settlements are generally made on a group basis with
payments made to individual claimants over periods of one to four years. During
1995, 1994 and 1993, two subsidiaries of Coltec received approximately 44,000,
29,800 and 27,400 new actions, respectively. Payments were made with respect to
asbestos liability and related costs aggregating $56,739,000 in 1995,
$46,374,000 in 1994, and $38,677,000 in 1993, 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, 1995, 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 $59,241,000, and Coltec expects that this cost will be
substantially covered by insurance.
With respect to the 100,400 outstanding actions as of December 31, 1995, 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
42
absence of other possible causes of a plaintiff's illness, the availability of
legal defenses, such as the statute of limitations or state of the art, and
whether the lawsuit is an individual one or part of a group, management is
unable to estimate with reasonable certainty the cost of disposing of
outstanding actions in preliminary procedural stages or of actions that may be
filed in the future. However, 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 have been
involved in an insignificant number of property damage claims based upon
asbestos-containing materials found in schools, public facilities and private
commercial buildings. Based upon proceedings to date, the overwhelming majority
of these claims have been resolved without a material adverse impact on Coltec.
Likewise, the insignificant number of claims remaining to be resolved are not
expected to have a material effect on Coltec's results of operations and
financial condition.
Coltec has recorded an accrual for its liabilities for asbestos-related matters
that are deemed probable and can be reasonably estimated (settled actions and
actions in advanced stages of processing), and has separately recorded an asset
equal to the amount of such liabilities that is expected to be recovered by
insurance. In addition, 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) 1995 1994
Accounts and notes receivable -- other $ 53,677 $ 68,179
Other assets 16,243 13,119
Accrued expenses -- other 47,791 34,099
Other liabilities 11,450 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 these sites approximate
$20,000,000 at December 31, 1995, and has accrued for this amount in the
Consolidated Balance Sheet as of December 31, 1995. 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.
Under operating lease commitments, expiring on various dates after December 31,
1996, Coltec and certain of its subsidiaries are obligated as of December 31,
1995, to pay rentals totaling $26,779,000 as follows: $6,097,000 in 1996,
$5,392,000 in 1997, $4,536,000 in 1998, $3,657,000 in 1999, $2,752,000 in 2000,
and $4,345,000 in later years.
43
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,
1995 and 1994, and the related consolidated statements of earnings,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1995. 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, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
New York, N.Y.
January 22, 1996
Directors
top row, left to right
Paul G. Schoen
Executive Vice President, Finance; Treasurer, and
Chief Financial Officer
Coltec Industries Inc
J. Bradford Mooney, Jr.
Oceanography Consultant
(Retired) Rear Admiral, U.S. Navy
Professor Joel Moses
Provost
Massachusetts Institute of Technology
Joseph R. Coppola
Chairman, President and
Chief Executive Officer
Giddings & Lewis, Inc.
bottom row, left to right
John W. Guffey, Jr.
Chairman, President and
Chief Executive Officer
Coltec Industries Inc
David I. Margolis
(Retired) Former Chairman and
Chief Executive Officer
Coltec Industries Inc
Richard A. Stuckey
Economic Consultant
(Retired) Chief Economist of
E.I. du Pont de Nemours & Co.
Officers
John W. Guffey, Jr.
Chairman, President and
Chief Executive Officer
Laurence H. Polsky
Executive Vice President,
Administration
Paul G. Schoen
Executive Vice President,
Finance; Treasurer, and
Chief Financial Officer
John M. Cybulski
Senior Vice President,
Aerospace
Richard L. Dashnaw
Senior Vice President,
Group Operations
Robert J. Tubbs
Senior Vice President,
General Counsel and
Secretary
Transfer Agent and Registrar
Chemical Mellon Shareholder
Services, L.L.C.
Auditors
Arthur Andersen LLP
Executive Offices
430 Park Avenue
New York, NY 10022-3597
(212) 940-0400
Affirmative Action
In striving to develop and maintain an effective work force, the company
provides employment, training and advancement opportunities without regard to
race, color, religion, sex, age, national origin or disability. The company's
affirmative action program covers the employment of minorities, women,
disabled persons, Vietnam veterans or special disabled veterans.
Domestic Operations
Aerospace/Government
Chandler Evans Control Systems
Charter Oak Boulevard
P.O. Box 330651
West Hartford, CT 06133-0651
860/236-0651
Delavan Gas Turbine Products
P.O. Box 65100
811 Fourth Street
West Des Moines, IA 50265-0100
515/274-1561
Fairbanks Morse Engine
701 White Avenue
Beloit, WI 53511
608/364-4411
Lewis Engineering
238 Water Street
Naugatuck, CT 06770-0231
203/597-6900
Menasco Aerosystems
4000 South Highway 157
Euless, TX 76040-7012
817/283-4471
Walbar Inc
Peabody Industrial Center
Fifth Street
Peabody, MA 01960-3369
508/532-2350
Automotive
Farnam Sealing Systems
650 Stephenson Highway
Troy, MI 48083
810/588-0044
Holley Automotive
11955 East Nine Mile Road
Warren, MI 48089-2003
810/497-4000
Holley Performance Products
1801 Russellville Road
P.O. Box 10360
Bowling Green, KY 42102-7360
502/782-2900
Performance Friction Products
Rt. 3, Box 168
Highway 349
P.O. Box 8326
Longview, TX 75607
903/643-7991
Stemco Truck Products
300 East Industrial Boulevard
P.O. Box 1989
Longview, TX 75606-1989
903/758-9981
Industrial
Delavan Commercial Products
20 Delavan Drive
Lexington, TN 38351
901/968-8152
FMD Electronics
6402 Rockton Road
Roscoe, IL 61073
815/389-3660
France Compressor Products
104 Pheasant Run
Newtown, PA 18940
215/968-5959
Garlock Bearings
700 Mid Atlantic Parkway
Thorofare, NJ 08086
609/848-3200
Garlock Mechanical Packing
1666 Division Street
Palmyra, NY 14522
315/597-4811
Plastomer Products
23 Friends Lane
Newtown, PA 18940
215/968-5011
Garlock Valves & Industrial Plastics
602 North 10th Street
P.O. Box 648
Camden, NJ 08101-0648
609/964-0370
Haber Tool
12850 Inkster Road
Detroit, MI 48239
313/255-1750
Ortman Fluid Power
19 143rd Street
Hammond, IN 46327
219/931-1710
Quincy Compressor
3501 Wismann Lane
P.O. Box C2
Quincy, IL 62301-1257
217/222-7700
Sterling Die
13811 Enterprise Avenue
Cleveland, OH 44135-5196
216/267-1300
International Facilities of Domestic OperationsColtec Aerospace Canada Ltd
Menasco Aerospace
1400 South Service Road West
Oakville, Ontario, Canada
L6L 5Y7
905/827-7777
Coltec Aerospace Canada Ltd
Menasco Aviation Services
5415 North Service Road
Burlington, Ontario, Canada
L7L 5H7
905/319-3006
Coltec Aerospace Canada Ltd
Walbar Canada
1865 Sharlyn Road
Mississauga, Ontario, Canada
L4X 1R2
905/602-1810
Delavan Ltd
Gorsey Lane
Widnes
Cheshire WA8 ORJ
England
44-151-424-6821
Garlock of Canada Ltd
France Compressor Products
P.O. Box 636
124 Shaver Street
Brantford, Ontario
Canada
N3T 5P9
519/753-8671
Garlock of Canada Ltd
Mechanical Packing
2860 Plymouth Drive
Oakville, Ontario
Canada
L6H 5S8
905/829-3200
Garlock of Canada Ltd
Mechanical Packing
4100 Rue Garlock
Sherbrooke, Quebec
Canada
J1L 1W5
819/563-8080
Garlock of Canada Ltd
Stemco Truck Products
400 Trader's Boulevard East
Mississauga, Ontario
Canada
L4Z 1W7
905/890-1900
Garlock GmbH
France Compressor Products
Hans Boecklerstrasse 32
6080 Gross Gerau
64502 Neuss
Germany
49-6152-93160
Garlock GmbH
Mechanical Packing
Postfach 21 04 64
41430 Neuss
Germany
49-2131-3490
Garlock GmbH
Valves & Industrial Plastics
Gescheftsbereich Armaturen
Postfach 10 05 49
41405 Neuss
Germany
49-2131-31080
Garlock (Great Britain) Limited
France Compressor Products
Imperial Court - Unit 1
Magellan Close
Andover
Hants SP 10 5NT
England
44-1264-357421
Garlock (Great Britain) Limited
Mechanical Packing
Unit 5
Pipers Court, Berkshire Drive
Thatcham, Newbury
Berkshire RG13 4ER
England
44-1635-871778
Garlock (Great Britain) Limited
Stemco Truck Products
Hambridge Road
Newbury
Berkshire RG14 5TG
England
44-1635-38668
Louis Mulas Sucs., S.A. de C.V.
Mechanical Packing
Apartado Postal 15-111
Poniente 116, No. 571
Colonia Industrial Vallejo
Delegacion Azcapotzalco
02300 Mexico, D.F.
525/567-5600
Garlock de Mexico, S.A. de C.V.
Mechanical Packing Division
Apartado Postal 15-103
Poniente 116, No.571
Colonia Industrial Vallejo
Delegacion Azcapotzalco
02300 Mexico, D.F.
525/567-7011
Garlock Pty. Ltd
Mechanical Packing
10 Willis Street
P.O. Box 54
Arncliffe, N.S.W. 2205
Australia
61-2-597-4422
Holley Automotive
Group Limited
Unit 2230
Kettering Parkway
Kettering Venture Park
North Hamptonshire NN156XP
United Kingdom
44- 1536-534500
Holley Automotive Systems GmbH
Scheffelstrasse 73
Falkenweg 1
41468 Neuss
Germany
49-2131-3490
Liard S.A.
France Compressor Products
Route Nationale 49
BP 69-F-59570 Bavay Cedex
France
33-2763-1664
Liard S.A.
Stemco Truck Products
Z1 La Petite Montagne
SUD
1 Allee du Dauphine
91018 Evry Cedex
France
33-1-6086-9717