1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended September 27, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from ______________ to _______________
Commission file number: 1-7568
COLTEC INDUSTRIES INC
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 13-1846375
(State or other jurisdiction of incorporation (IRS Employer
or organization) Identification No.)
3 Coliseum Centre
2550 West Tyvola Road
Charlotte, North Carolina 28217 28217
(Address of principal executive offices) (Zip code)
(704)423-7000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes (X) No ( )
----------------------------------------
On November 5, 1998, there were outstanding 63,052,035 shares of common
stock, par value $.01 per share.
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
COLTEC INDUSTRIES INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
Three Months Ended Nine Months Ended
Sept. 27 Sept. 28 Sept. 27 Sept. 28
1998 1997 1998 1997
-------- -------- -------- --------
Net sales $ 360,398 $ 324,453 $ 1,129,593 $ 955,852
Cost of sales 249,329 221,472 821,333 650,284
--------- --------- ----------- ---------
Gross profit 111,069 102,981 308,260 305,568
Selling and administrative 54,968 53,787 180,097 162,692
--------- --------- ----------- ---------
Operating income 56,101 49,194 128,163 142,876
Gain on divestiture -- -- 56,194 --
Interest expense and other, net (12,620) (13,859) (40,930) (38,905)
--------- --------- ----------- ---------
Earnings before income taxes, minority
interest and extraordinary item 43,481 35,335 143,427 103,971
Income taxes (14,783) (12,014) (48,765) (35,350)
Minority interest in net loss of
subsidiaries (1,300) -- (2,385) --
--------- --------- ----------- ---------
Earnings before extraordinary item 27,398 23,321 92,277 68,621
Extraordinary item (net of tax) -- -- (4,326) --
--------- --------- ----------- ---------
Net earnings $ 27,398 $ 23,321 $ 87,951 $ 68,621
========= ========= =========== =========
Basic earnings per common share
Before extraordinary item $ .42 $ .36 $ 1.40 $ 1.04
Extraordinary item -- -- (.07) --
--------- --------- ----------- ---------
Net earnings $ .42 $ .36 $ 1.33 $ 1.04
========= ========= =========== =========
Basic weighted-average common
shares 65,050 65,428 65,639 65,977
========= ========= =========== =========
Diluted earnings per common share
Before extraordinary item $ .41 $ .35 $ 1.36 $ 1.03
Extraordinary item -- -- (.06) --
--------- --------- ----------- ---------
Net earnings $ .41 $ .35 $ 1.30 $ 1.03
========= ========= =========== =========
Diluted weighted-average common
and common equivalent shares 70,419 66,596 69,620 67,007
========= ========= =========== =========
See notes to consolidated financial statements.
2
3
COLTEC INDUSTRIES INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
Sept. 27 Dec. 31
1998 1997
---------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 18,032 $ 14,693
Accounts and notes receivable, net of
allowance of $3,078 in 1998 and $2,394 in 1997 180,956 120,311
Inventories
Finished goods 40,927 53,748
Work in process and finished parts 159,615 158,937
Raw materials and supplies 37,096 44,051
---------- --------
237,638 256,736
Deferred income taxes 17,218 15,195
Other current assets 14,475 20,508
---------- --------
Total current assets 468,319 427,443
Property, plant and equipment, net 298,799 287,619
Costs in excess of net assets acquired, net 216,826 157,751
Other assets 101,863 60,221
---------- --------
$1,085,807 $933,034
========== ========
See notes to consolidated financial statements.
3
4
COLTEC INDUSTRIES INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
Sept. 27 Dec. 31
1998 1997
---------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 3,220 $ 1,811
Accounts payable 93,463 93,799
Accrued expenses 226,077 138,969
Current portion of liabilities of
discontinued operations 4,999 4,999
---------- --------
Total current liabilities 327,759 239,578
Long-term debt 607,583 757,578
Deferred income taxes 88,828 79,229
Other liabilities 81,973 60,892
Liabilities of discontinued operations 146,671 154,918
Commitments and contingencies -- --
Company-obligated, mandatorily redeemable
convertible preferred securities of subsidiary
Coltec Capital Trust holding solely convertible
junior subordinated debentures of the Company 144,966 --
Shareholders' equity:
Preferred stock, $.01 par value,
2,500,000 shares authorized,
shares outstanding - none -- --
Common stock, $.01 par value,
100,000,000 shares authorized, 70,595,495 and
70,501,948 shares issued at September 27, 1998
and December 31, 1997, respectively (excluding
25,000,000 shares held by a wholly-owned
subsidiary) 705 705
Capital surplus 643,729 642,828
Retained deficit (824,535) (912,029)
Unearned compensation (3,370) (2,721)
Minimum pension liability (1,646) (1,646)
Foreign currency translation adjustments (16,755) (6,745)
---------- --------
(201,872) (279,608)
Less cost of 6,461,985 and 4,666,406 shares
of common stock in treasury at
September 27, 1998 and December 31, 1997,
respectively (110,101) (79,553)
---------- --------
(311,973) (359,161)
---------- --------
$1,085,807 $933,034
========== ========
See notes to consolidated financial statements.
4
5
COLTEC INDUSTRIES INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine Months Ended
-----------------------
Sept. 27 Sept. 28
1998 1997
--------- --------
Cash flows from operating activities:
Net earnings $ 87,951 $ 68,621
Adjustments to reconcile net earnings to cash
provided by operating activities:
Gain on divestiture (56,194) --
Extraordinary item 6,554 --
Depreciation and amortization 36,948 28,327
Deferred income taxes 8,781 10,209
Payments of liabilities of discontinued
operations (8,247) (19,196)
Foreign currency translation adjustment (10,010) (4,062)
Other operating items (12,453) (30,825)
Changes in assets and liabilities (net of effects
from acquisitions and divestiture):
Accounts and notes receivable (60,525) (10,604)
Inventories 16,141 (28,314)
Other current assets 3,268 (504)
Accounts payable (1,114) 11,934
Accrued expenses 77,404 4,748
--------- --------
Cash provided by operating activities 88,504 30,334
--------- --------
Cash flows from investing activities:
Capital expenditures (36,700) (46,004)
Proceeds from divestiture 100,000 --
Acquisition of businesses, net (93,842) (23,778)
--------- --------
Cash used in investing activities (30,542) (69,782)
--------- --------
Cash flows from financing activities:
Increase (decrease) in revolving facility, net (432,000) 25,000
Repayment of long-term debt (22,067) (8,117)
Issuance of long-term debt, net 292,151 --
Issuance of convertible preferred securities, net 144,472 --
Sale of accounts receivable -- 62,000
Purchase of treasury stock (33,308) (42,695)
Payments for unclaimed stock (3,871) --
--------- --------
Cash provided by (used in)
investing activities (54,623) 36,188
--------- --------
Increase (decrease) in cash and cash equivalents 3,339 (3,260)
Cash and cash equivalents - beginning of period 14,693 15,029
--------- --------
Cash and cash equivalents - end of period $ 18,032 $ 11,769
========= ========
Supplemental cash flow data:
Cash paid for interest $ 32,412 $ 35,025
Cash paid for income taxes 21,589 13,827
See notes to consolidated financial statements.
5
6
COLTEC INDUSTRIES INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Three Months Ended Nine Months Ended
Sept. 27 Sept. 28 Sept. 27 Sept. 28
1998 1997 1998 1997
--------- --------- ----------- ---------
Net earnings $ 27,398 $ 23,321 $ 87,951 $ 68,621
--------- --------- ----------- ---------
Other comprehensive income (loss), net of
tax:
Foreign currency translation adjustment (1,603) 978 (10,010) (4,062)
Unearned compensation (1,220) (712) (649) (1,041)
Amortization of preferred stock issuance
costs (196) -- (494) --
--------- --------- ----------- ---------
Other comprehensive income (loss),
net of tax (3,019) 266 (11,153) (5,103)
--------- --------- ----------- ---------
Comprehensive income $ 24,379 $ 23,587 $ 76,798 $ 63,518
========= ========= =========== =========
See notes to consolidated financial statements.
6
7
COLTEC INDUSTRIES INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands)
1. SUMMARY OF ACCOUNTING POLICIES
Financial Information: The unaudited consolidated financial statements
included herein reflect in the opinion of the management of Coltec
Industries Inc (the "Company") all normal recurring adjustments
necessary to present fairly the consolidated financial position and
results of operations for the periods indicated. The unaudited
consolidated financial statements have been prepared in accordance
with the instructions to Form 10-Q and do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. The Consolidated Balance
Sheet as of December 31, 1997 has been extracted from the audited
consolidated financial statements as of that date. For further
information, refer to the consolidated financial statements and
footnotes included in the Company's annual report to shareholders for
the year ended December 31, 1997.
2. ACQUISITIONS AND DIVESTITURES
On January 30, 1998, the Company acquired certain Marine and Petroleum
Mfg. Inc.'s manufacturing facilities based in Texas for approximately
$17,000. The plants acquired produce flexible graphite and
polytetrafluoroethylene (PTFE) fluid sealing products used in the
petrochemical industry. Combined annual sales for these facilities are
expected to approximate $18,000. The Company also acquired Tex-o-Lon
and Repro-Lon for approximately $25,000. These two Texas businesses
have combined annual sales of $15,000. Tex-o-Lon manufactures,
machines and distributes PTFE products, primarily for the
semiconductor industry. Repro-Lon reprocesses PTFE compounds for the
chemical and semiconductor industries. The acquisitions were accounted
for as purchases; accordingly, the purchase price, which was financed
through available cash resources, was allocated to the acquired assets
based upon their fair market values.
On February 2, 1998, the Company purchased the Sealing Division of
Groupe Carbone Lorraine for $45,600. This division, with facilities in
France and South Carolina, produces high-technology metallic gaskets
used in the nuclear, petroleum and chemical industries. Sales are
expected to approximate $38,000. This acquisition was accounted for as
a purchase and the purchase price, also financed through available
cash resources, was allocated to the acquired assets based upon their
fair market values.
In May 1998, the Company sold the capital stock of its Holley
Performance Products subsidiary to Kohlberg & Co., L.L.C., a private
merchant banking firm located in Mount Kisco, New York, for $100
million in cash. The sale resulted in a pre-tax gain of $56,194, net
of liabilities retained.
In August 1998, the Company acquired from Federal-Mogul Corporation
the 20% of Garlock Bearings that it did not previously own for
approximately $12,000. Garlock Bearings, a producer of
self-lubricating bearings, has annual sales of approximately $50,000.
3. FINANCINGS
In April 1998, the Company privately placed, with institutional
investors, $300,000 principal amount of 7 1/2% Senior Notes due 2008
("Senior Notes") and $150,000 (3,000,000 shares at liquidation value
of $50 per Convertible Preferred
7
8
Security) of 5 1/4% Trust Convertible Preferred Securities
("Convertible Preferred Securities"). The placement of the Convertible
Preferred Securities was made through the Company's wholly-owned
subsidiary, Coltec Capital Trust ("Trust"), a newly-formed Delaware
business trust. The Convertible Preferred Securities represent
undivided beneficial ownership interests in the Trust. Substantially
all the assets of the Trust are the 5 1/4% Convertible Junior
Subordinated Deferrable Interest Debentures Due April 15, 2028 which
were acquired with the proceeds from the private placement of the
Convertible Preferred Securities. The Company's obligations under the
Convertible Junior Subordinated Debentures, the Indenture pursuant to
which they were issued, the Amended and Restated Declaration of Trust
of the Trust, and the Guarantee of the Company, taken together,
constitute a full and unconditional guarantee by the Company of
amounts due on the Convertible Preferred Securities. The Convertible
Preferred Securities are convertible at the option of the holders at
any time into the common stock of the Company at an effective
conversion price of $29 5/16 per share and are redeemable at the
Company's option after April 20, 2001 at 102.63% of the liquidation
amount declining ratably to 100% after April 20, 2004.
The net proceeds of the Senior Notes and the Convertible Preferred
Securities of approximately $436,623 were used by the Company to
reduce indebtedness under its credit facility. Dividends on the
Convertible Preferred Securities were $1.3 million and $2.4 million
after tax, in the three months and nine months ended September 27,
1998, respectively.
4. EXTRAORDINARY ITEM
The Company incurred an extraordinary charge of $4,326, net of income
taxes of $2,228, in the second quarter of 1998 in connection with
early debt repayment.
5. EARNINGS PER SHARE
In 1997, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 128, Earnings per Share, effective December 15,
1997. The Company's reported earnings per common share for the three
months and nine months ended September 27, 1997 equaled diluted
earnings per share as set forth in SFAS No. 128. As a result, the
Company's reported earnings per share for the three months and nine
months ended September 27, 1997 were not restated.
Basic earnings per common share are computed by dividing net income by
the weighted-average number of shares of common stock outstanding
during the year.
8
9
Diluted earnings per common share is computed by using the treasury
stock method to determine shares related to stock options and
restricted stock.
(in thousands) Three Months Ended Nine Months Ended
Sept. 27 Sept. 28 Sept. 27 Sept. 28
1998 1997 1998 1997
-------- -------- -------- --------
Income available to common
shareholders before
extraordinary item $ 27,398 $ 23,321 $ 92,277 $ 68,621
Dividends on convertible
preferred securities, net
of tax 1,300 -- 2,385 --
--------- --------- ----------- ---------
Income available to common
shareholders before
extraordinary item plus
assumed conversions 28,698 23,321 94,662 68,621
Extraordinary item, net of
tax -- -- (4,326) --
--------- --------- ----------- ---------
Net income available to
common shareholders plus
assumed conversions $ 28,698 $ 23,321 $ 90,336 $ 68,621
========= ========= =========== =========
Basic weighted-average
common shares 65,050 65,428 65,639 65,977
Stock options and
restricted stock issued 252 1,168 854 1,030
Convertible preferred
securities 5,117 -- 3,127 --
--------- --------- ----------- ---------
Diluted weighted-average
common and common
equivalent shares 70,419 66,596 69,620 67,007
========= ========= =========== =========
6. COMMITMENTS AND CONTINGENCIES
Asbestos
The Company and certain of its subsidiaries 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 September 27, 1998 two subsidiaries of the Company were
among a number of defendants (typically 15 to 40) in approximately
102,000 actions (including approximately 17,400 actions in advanced
stages of processing) filed in various states by plaintiffs alleging
injury or death as a result of exposure to asbestos fibers. During the
first nine months of 1998, two subsidiaries of the Company received
approximately 28,700 new actions compared to approximately 31,400 new
actions received during the first nine months of 1997. Through
September 27, 1998, approximately 237,300 of the approximately 339,300
total actions brought have been settled or otherwise disposed.
The damages claimed for personal injury or death vary from case to
case, and in many cases plaintiffs seek $1,000 or more in compensatory
damages and $2,000 or more in punitive damages from an extensive list
of defendants. Although the law in each state differs to some extent,
it appears, based on advice of counsel,
9
10
that liability for compensatory damages would be shared among all
responsible defendants, thus limiting the potential monetary impact of
such judgments on any individual defendant.
Following a decision of the Pennsylvania Supreme Court, in a case in
which neither the Company nor any of its subsidiaries were parties,
that held insurance carriers are obligated to cover asbestos-related
bodily injury actions if any injury or disease process, from first
exposure through manifestation, occurred during a covered policy
period (the "continuous trigger theory of coverage"), the Company
settled litigation with its primary and most of its first-level excess
insurance carriers, substantially on the basis of the Court's ruling.
The Company has negotiated a final agreement with most of its excess
carriers that are in the layers of coverage immediately above its
first layer. The Company is currently receiving payments pursuant to
this agreement. The Company believes that, with respect to the
remaining carriers, a final agreement can be achieved without
litigation and on substantially the same basis that it has resolved
the issues with its other carriers.
Payments were made with respect to asbestos liability and related
costs aggregating $34,423 and $47,572 for the first nine months of
1998 and 1997, respectively, substantially all of which were covered
by insurance. Settlements are generally made on a group basis with
payments made to individual claimants over periods of one to four
years. Related to payments not covered by insurance, the Company
recorded charges to operations amounting to $6,000 for the first nine
months of 1998 and 1997. The average cost to the Company for
unreimbursed expenses and liability per case disposed was
approximately $.3 for the nine months ended September 27, 1998 and the
nine months ended September 28, 1997.
In accordance with the Company's internal procedures for the
processing of asbestos product liability actions and due to the
proximity to trial or settlement, certain outstanding actions have
progressed to a stage where the Company can reasonably estimate the
cost to dispose of these actions. As of September 27, 1998, the
Company estimates that the aggregate remaining cost of the disposition
of the settled actions for which payments remain to be made and
actions in advanced stages of processing, including associated legal
costs, is approximately $126,500 and the Company expects that this
cost will be substantially covered by insurance.
With respect to the 84,600 outstanding actions as of September 27,
1998, which are in preliminary procedural stages, the Company lacks
sufficient information upon which judgments can be made as to the
validity or ultimate disposition of such actions, thereby making it
difficult to estimate with reasonable certainty the potential
liability or costs to the Company. The lawsuits are disposed of over a
period of one year to more than five years, with the majority being
disposed of by the third year after filing. When asbestos actions are
received, they are typically forwarded to local counsel to ensure that
the appropriate preliminary procedural response is taken. The
complaints typically do not contain sufficient information to permit a
reasonable evaluation as to their merits at the time of receipt, and
in jurisdictions encompassing a majority of the outstanding actions,
the practice has been that little or no discovery or other action is
taken until several months prior to the date set for trial.
Accordingly, the Company generally does not have the information
necessary to analyze the actions in sufficient detail to estimate the
ultimate liability or costs to the Company, if any, until the actions
appear on a trial calendar. A determination to seek dismissal, to
attempt to settle or proceed to trial is typically not made prior to
the receipt of such information.
10
11
The Company believes that it will continue to receive some number of
asbestos lawsuits into the foreseeable future. It is also difficult,
however, to predict the number of asbestos lawsuits that the Company's
subsidiaries will receive or the timeframe in which they will be
received. The Company has noted that, with respect to recently settled
actions and actions in advanced stages of processing, the mix of the
injuries alleged and the mix of the occupations of the plaintiffs have
been changing from those traditionally associated with the Company's
asbestos-related actions. The Company is not able to determine with
reasonable certainty whether this trend will continue. Based upon the
foregoing, and due to the unique factors inherent in each of the
actions, including the nature of the disease, the occupation of the
plaintiff, the presence or absence of other possible causes of a
plaintiff's illness, the availability of legal defenses, such as the
statute of limitations or state of the art, the jurisdiction in which
a lawsuit is filed, the pendency of tort reform, and whether the
lawsuit is an individual one or part of a group, management is unable
to estimate with reasonable certainty the cost of disposing of
outstanding actions in preliminary procedural stages or of actions
that may be filed in the future. However, the Company believes that
its subsidiaries are in a favorable position compared to many other
defendants because, among other things, the asbestos fibers in its
asbestos-containing products were encapsulated. Subsidiaries of the
Company continue to distribute encapsulated asbestos-bearing product
in the United States with annual sales of less than $1,500. All sales
are accompanied by appropriate warnings. The end users of such product
are sophisticated users, who utilize the product for critical
applications where no known substitutes exist or have been approved.
Insurance coverage of a small non-operating subsidiary formerly
distributing asbestos-bearing products is nearly depleted. Considering
the foregoing, as well as the experience of the Company's subsidiaries
and other defendants in asbestos litigation, the likely sharing of
judgments among multiple responsible defendants, and the substantial
amount of insurance coverage that the Company expects to be available
from its solvent carriers, the Company believes that pending and
reasonably anticipated future actions are not likely to have a
material effect on the Company's consolidated results of operations
and financial condition. Although the insurance coverage, which the
Company has, is substantial, it should be noted that insurance
coverage for asbestos claims is not available to cover exposures
initially occurring on and after July 1, 1984. The Company's
subsidiaries continue to be named as defendants in new cases, some of
which allege initial exposure after July 1, 1984.
In addition to claims for personal injury, the Company's subsidiaries
have been involved in an insignificant number of property damage
claims based upon asbestos-containing materials found in schools,
public facilities and private commercial buildings. Based upon
proceedings to date, the overwhelming majority of these claims have
been resolved without a material adverse impact on the Company.
Likewise, the insignificant number of claims remaining to be resolved
are not expected to have a material effect on the Company's
consolidated results of operations and financial condition.
The Company has recorded an accrual for its liabilities for
asbestos-related matters that are deemed probable and can be
reasonably estimated (settled actions and actions in advanced stages
of processing), and has separately recorded an asset equal to the
amount of such liabilities that is expected to be recovered by
insurance. In addition, the Company has recorded a receivable for that
portion of payments previously made for asbestos product liability
actions and related litigation costs that is recoverable from its
insurance carriers. Liabilities for
11
12
asbestos-related matters and the receivable from insurance carriers
included in the Consolidated Balance Sheets are as follows:
Sept. 27 Dec. 31
1998 1997
-------- --------
Accounts and notes receivable $ 98,253 $ 56,039
Other assets 44,097 16,249
Accrued expenses 96,416 50,688
Other liabilities 32,834 2,682
Environmental
With respect to environmental proceedings, the Company has been
notified that it is among the Potentially Responsible Parties under
federal environmental laws, or similar state laws, relative to the
costs of investigating and in some cases remediating contamination by
hazardous materials at several sites. Such laws impose joint and
several liability for the costs of investigating and remediating
properties contaminated by hazardous materials. Liability for these
costs can be imposed on present and former owners or operators of the
properties or on parties who generated the wastes that contributed to
the contamination. The Company's policy is to accrue environmental
remediation costs when it is both probable that a liability has been
incurred and the amount can be reasonably estimated. The measurement
of liability is based on an evaluation of currently available facts
with respect to each individual situation and takes into consideration
factors such as existing technology, presently enacted laws and
regulations and prior experience in remediation of contaminated sites.
Investigations have been completed for approximately 17 sites and
continuing investigations are being done at approximately 11 sites.
Accruals are provided for all sites based on the factors discussed
above. As remediation plans are written and implemented, estimated
costs become more fact-based and less judgment-based. As assessments
and remediation progress at individual sites, these liabilities are
reviewed periodically and adjusted to reflect additional technical and
legal information. While it is often difficult to reasonably quantify
future environmental-related expenditures, the Company currently
estimates its future non-capital expenditures related to environmental
matters to range between $25,000 and $53,000. In connection with these
expenditures, the Company has accrued $37,000 at September 27, 1998
representing management's best estimate of probable non-capital
environmental expenditures.
These non-capital expenditures are estimated to be incurred over the
next 10 to 20 years. In addition, capital expenditures aggregating
$5,000 may be required during the next two years related to
environmental matters. Although the Company is pursuing insurance
recovery in connection with certain of these matters, no receivable
has been recorded with respect to any potential recovery of costs in
connection with any environmental matters.
7. OTHER MATTERS
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No 133 ("SFAS No. 133")
Accounting for Derivative Instruments and Hedging Activities. The
Statement established accounting and reporting standards requiring
that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. The
Statement requires that changes in the derivative's fair value be
recognized
12
13
currently in earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows a derivative's
gains and losses to offset related results on the hedged item in the
income statement, and requires that a company must formally document,
designate, and assess the effectiveness of transactions that receive
hedge accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15,
1999. A company may also implement the Statement as of the beginning
of any fiscal quarter after issuance. SFAS No. 133 cannot be applied
retroactively. SFAS No. 133 must be applied to derivative instruments
and certain derivative instruments embedded in hybrid contracts that
were issued, acquired, or substantively modified after December 31,
1997.
The Company has not yet quantified the impacts of adopting SFAS No.
133 on its consolidated financial statements and has not determined
the timing of or method of adoption. However the statement could
increase volatility in net income and other comprehensive income.
8. SUPPLEMENTAL GUARANTOR INFORMATION
Substantially all the Company's subsidiaries incorporated in the
United States (the "Subsidiary Guarantors") have fully and
unconditionally guaranteed, on a joint and several basis, the
Company's obligations to pay principal and interest with respect to
the Senior Notes. Each subsidiary guarantor is wholly owned and
management has determined that separate financial statements for the
subsidiary guarantors are not material to investors. The subsidiaries
of the Company that are not Subsidiary Guarantors are referred to in
this note as the "Non-Guarantor Subsidiaries".
The following supplemental consolidating condensed financial
statements present balance sheets as of September 27, 1998 and
December 31, 1997 and statements of earnings and of cash flows for the
three months and nine months ended September 27, 1998 and September
28, 1997. In the consolidating financial statements, Coltec Industries
Inc (the "Parent") accounts for its investments in wholly-owned
subsidiaries using the equity method and the Subsidiary Guarantors
account for their investments in Non-Subsidiary Guarantors using the
equity method. Interest expense related to the indebtedness under the
Company's credit agreement and its three series of senior notes is
allocated to United States subsidiaries based on net sales.
13
14
Consolidating Condensed Statement of Earnings
Three Months Ended September 27, 1998
-------------------------------------
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------- ------------ ------------
Net sales $ 119,608 $ 146,084 $ 108,035 $ (13,329) $ 360,398
Cost of sales 84,234 98,031 80,393 (13,329) 249,329
--------- --------- --------- --------- ---------
Gross Profit 35,374 48,053 27,642 111,069
Selling and administrative 14,937 30,701 9,330 -- 54,968
--------- --------- --------- --------- ---------
Operating income 20,437 17,352 18,312 56,101
Equity earnings of affiliates 21,550 12,692 -- (34,242) --
Interest expense and other, net (12,743) (5,932) 6,287 (232) (12,620)
--------- --------- --------- --------- ---------
Earnings before income taxes
and minority interest 29,244 24,112 24,599 (34,474) 43,481
Income taxes (1,846) (7,263) (5,674) (14,783)
Minority interest in net loss
of subsidiaries -- -- (1,300) -- (1,300)
--------- --------- --------- --------- ---------
Net earnings $ 27,398 $ 16,849 $ 17,625 $ (34,474) $ 27,398
========= ========= ========= ========= =========
Consolidating Condensed Statement of Earnings
Nine Months Ended September 27, 1998
------------------------------------
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------- ------------ ------------
Net sales $ 363,616 $ 477,945 $ 325,290 $ (37,258) $1,129,593
Cost of sales 293,664 323,845 241,082 (37,258) 821,333
--------- --------- --------- --------- ---------
Gross Profit 69,952 154,100 84,208 308,260
Selling and administrative 44,730 90,267 45,100 -- 180,097
--------- --------- --------- --------- ---------
Operating income 25,222 63,833 39,108 128,163
Equity earnings of affiliates 61,533 30,115 -- (91,648) --
Gain on divestiture 56,194 -- -- 56,194
Interest expense and other, net (39,999) (24,089) 24,444 (1,286) (40,930)
--------- --------- --------- --------- ---------
Earnings before income taxes,
minority interest and
extraordinary item 102,950 69,859 63,552 (92,934) 143,427
Income taxes (10,673) (20,813) (17,279) (48,765)
Minority interest in net loss
of subsidiaries -- -- (2,385) -- (2,385)
--------- --------- --------- --------- ---------
Earnings before extraordinary
item 92,277 49,046 43,888 (92,934) 92,277
Extraordinary item (net of tax) (4,326) -- -- -- (4,326)
--------- --------- --------- --------- ---------
Net earnings $ 87,951 $ 49,046 $ 43,888 $ (92,934) $ 87,951
========= ========= ========= ========= =========
14
15
Consolidating Condensed Statement of Earnings
Three Months Ended September 28 1998
-------------------------------------
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------- ------------ ------------
Net sales $ 104,673 $ 147,278 $ 83,470 $ (10,968) $ 324,453
Cost of sales 71,373 99,337 61,730 (10,968) 221,472
--------- --------- --------- --------- ---------
Gross Profit 33,300 47,941 21,740 102,981
Selling and administrative 15,898 33,769 4,120 -- 53,787
--------- --------- --------- --------- ---------
Operating income 17,402 14,172 17,620 49,194
Equity earnings of affiliates 16,134 5,729 -- (21,863) --
Interest expense and other, net (13,623) (159) (77) -- (13,859)
--------- --------- --------- --------- ---------
Earnings before income taxes 19,913 19,742 17,543 (21,863) 35,335
Income taxes 3,408 (8,636) (6,786) -- (12,014)
--------- --------- --------- --------- ---------
Net earnings $ 23,321 $ 11,106 $ 10,757 $ (21,863) $ 23,321
========= ========= ========= ========= =========
Consolidating Condensed Statement of Earnings
Nine Months Ended September 28, 1998
------------------------------------
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------- ------------ ------------
Net sales $ 312,009 $ 428,901 $ 246,566 $ (31,624) $ 955,852
Cost of sales 214,855 285,934 181,119 (31,624) 650,284
--------- --------- --------- --------- ---------
Gross Profit 97,154 142,967 65,447 305,568
Selling and administrative 50,513 95,429 16,750 -- 162,692
--------- --------- --------- --------- ---------
Operating income 46,641 47,538 48,697 142,876
Equity earnings of affiliates 56,439 13,952 -- (70,391) --
Interest expense and other, net (38,556) 32 (381) -- (38,905)
--------- --------- --------- --------- ---------
Earnings before income taxes 64,524 61,522 48,316 (70,391) 103,971
Income taxes 4,097 (20,074) (19,373) -- (35,350)
--------- --------- --------- --------- ---------
Net earnings $ 68,621 $ 41,448 $ 28,943 $ (70,391) $ 68,621
========= ========= ========= ========= =========
15
16
Consolidating Condensed Balance Sheet
September 27, 1998
------------------------------------------------------------------------------
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------- ------------ ------------
Cash and cash equivalents $ 10,470 $ 5,575 $ 1,987 $ 18,032
Accounts and notes receivable,
net -- 21,210 159,746 180,956
Inventory, net 80,669 60,583 96,386 237,638
Deferred income taxes 9,023 8,065 130 17,218
Other current assets 4,182 5,456 4,837 14,475
--------- --------- --------- ----------- ----------
Total current assets 104,344 100,889 263,086 -- 468,319
Intercompany, net (810,822) 286,108 524,714 --
Investments in affiliates 1,023,051 94,523 865 $(1,118,439) --
Property, plant and equipment 95,984 116,224 86,591 298,799
Cost in excess of net assets
acquired, net 25,033 136,154 55,639 216,826
Other assets 45,596 2,525 53,742 101,863
--------- --------- --------- ----------- ----------
Total assets $ 483,186 $ 736,423 $ 984,637 $(1,118,439) $1,085,807
========= ========= ========= =========== ==========
Total current liabilities $ 130,578 $ 52,756 $ 144,425 $ 327,759
Long-term debt 513,299 2,969 91,315 607,583
Deferred income taxes (30,499) 101,987 17,340 88,828
Other liabilities 35,110 12,143 38,687 $ (3,967) 81,973
Liabilities of discontinued
operations 146,671 -- -- -- 146,671
Company-obligated mandatorily
redeemable convertible
preferred securities of
subsidiary Coltec Capital
Trust holding solely
convertible junior
subordinated debentures of
the Company -- -- 144,966 -- 144,966
Shareholders' equity (311,973) 566,568 547,904 (1,114,472) (311,973)
--------- --------- --------- ----------- ---------
Total liabilities and
shareholders' equity $ 483,186 $ 736,423 $ 984,637 $(1,118,439) $1,085,807
========= ========= ========= =========== ==========
16
17
Consolidating Condensed Balance Sheet
December 31, 1997
------------------------------------------------------------------------------
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------- ------------ ------------
Cash and cash equivalents $ 9,912 $ 722 $ 4,059 $ 14,693
Accounts and notes receivable,
net -- 60,881 59,430 120,311
Inventory, net 99,100 71,958 85,678 256,736
Deferred income taxes 4,535 10,689 (29) 15,195
Other current assets 4,540 10,406 5,562 20,508
--------- --------- --------- ----------- --------
Total current assets 118,087 154,656 154,700 -- 427,443
Intercompany, net (741,897) 10,933 730,964 --
Investments in affiliates 1,057,890 355,399 2,688 $(1,415,977) --
Property, plant and equipment 89,488 118,405 79,726 287,619
Cost in excess of net assets
acquired, net 21,820 133,441 2,490 157,751
Other assets 40,266 3,490 16,465 60,221
--------- --------- --------- ----------- ---------
Total assets $ 585,654 $ 776,324 $ 987,033 $(1,415,977) $ 933,034
========= ========= ========= =========== =========
Total current liabilities $ 93,669 $ 49,494 $ 96,415 $ 239,578
Long-term debt 689,302 1,611 66,665 757,578
Deferred income taxes (32,780) 101,871 10,138 79,229
Other liabilities 39,706 12,844 10,544 $ (2,202) 60,892
Liabilities of discontinued
operations 154,918 -- -- 154,918
Shareholders' equity (359,161) 610,504 803,271 (1,413,775) (359,161)
--------- --------- --------- ----------- ---------
Total liabilities and
shareholders' equity $ 585,654 $ 776,324 $ 987,033 $(1,415,977) $ 933,034
========= ========= ========= =========== =========
17
18
Consolidating Condensed Statement of Cash Flows
Nine Months Ended September 27, 1998
------------------------------------------------------------------------------
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------- ------------ ------------
Cash provided by (used in)
operating activities $ 85,723 $ 4,853 $ (2,072) -- $ 88,504
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Capital expenditures (14,972) (13,568) (8,160) (36,700)
Proceeds from divestiture 100,000 -- -- 100,000
Acquisition of business (26,260) (17,000) (50,582) (93,842)
Cash from (to) Parent (89,310) 30,568 58,742 -- --
--------- --------- --------- --------- ---------
Cash used in investing
activities (30,542) -- -- -- (30,542)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Increase (decrease) in
revolving facility, net (472,000) -- 40,000 (432,000)
Repayment of long-term debt (6,462) (234) (15,371) (22,067)
Issuance of long-term debt 292,151 -- -- 292,151
Issuance of convertible
preferred securities -- -- 144,472 144,472
Payments for unclaimed stock (3,871) -- -- (3,871)
Purchase of treasury stock (33,308) -- -- (33,308)
Cash from (to) Parent 168,867 234 (169,101) -- --
--------- --------- --------- --------- ---------
Cash used in financing
activities (54,623) -- -- -- (54,623)
--------- --------- --------- --------- ---------
Cash and cash equivalents:
Increase (decrease) in cash
and cash equivalents 558 4,853 (2,072) 3,339
Cash and cash equivalents -
beginning of period 9,912 722 4,059 -- 14,693
--------- --------- --------- --------- ---------
Cash and cash equivalents -
end of period $ 10,470 $ 5,575 $ 1,987 -- $ 18,032
========= ========= ========= ========= =========
18
19
Consolidating Condensed Statement of Cash Flows
Nine Months Ended September 28, 1997
------------------------------------------------------------------------------
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------- ------------ ------------
Cash provided by (used in)
operating activities $ 27,343 $ 315 $ 2,676 -- $ 30,334
--------- --------- --------- --------- ---------
Cash flows from investing
activities:
Capital expenditures (16,650) (13,352) (16,002) (46,004)
Acquisition of business (23,778) (23,778)
Cash from (to) Parent (29,354) 13,352 16,002 -- --
--------- --------- --------- --------- ---------
Cash used in investing
activities (69,782) -- -- -- (69,782)
--------- --------- --------- --------- ---------
Cash flows from financing
activities:
Increase in revolving
facility, net 25,000 -- -- 25,000
Repayment of long-term debt (4,045) -- (4,072) (8,117)
Purchase of treasury stock (42,695) -- -- (42,695)
Sale of accounts receivable -- -- 62,000 62,000
Cash from (to) Parent 57,928 -- (57,928) -- --
--------- --------- --------- --------- ---------
Cash provided by financing
activities 36,188 -- -- -- 36,188
--------- --------- --------- --------- ---------
Cash and cash equivalents:
Increase (decrease) in cash
and cash equivalents (6,251) 315 2,676 (3,260)
Cash and cash equivalents -
beginning of period 10,248 722 4,059 -- 15,029
--------- --------- --------- --------- ---------
Cash and cash equivalents -
end of period $ 3,997 $ 1,037 $ 6,735 -- $ 11,769
========= ========= ========= ========= =========
19
20
COLTEC INDUSTRIES INC AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following table shows financial information by industry segment for the
three months and nine months ended September 27, 1998 and September 28, 1997.
Three Months Ended Nine Months Ended
Sept. 27 Sept. 28 Sept. 27 Sept. 28
1998 1997 1998 1997
-------- -------- -------- --------
(in thousands)
Sales:
Aerospace $ 180,956 $ 142,775 $ 529,682 $ 390,532
Industrial 179,689 181,923 601,010 565,940
Intersegment elimination (247) (245) (1,099) (620)
--------- --------- ----------- ---------
Total $ 360,398 $ 324,453 $ 1,129,593 $ 955,852
========= ========= =========== =========
Operating income:
Aerospace (1) 29,866 $ 22,077 $ 57,352 $ 60,974
Industrial (2) 35,887 36,619 99,646 112,054
--------- --------- ----------- ---------
Total segments 65,753 58,696 156,998 173,028
Corporate unallocated (9,652) (9,502) (28,835) (30,152)
--------- --------- ----------- ---------
Operating income $ 56,101 $ 49,194 $ 128,163 $ 142,876
========= ========= =========== =========
(1) Operating income in the Aerospace Segment for the nine months ended
September 27, 1998 included a charge of $25.0 million to recognize
program costs associated with the development of Boeing programs and
$2.0 million of expenses for Year 2000 compliance for new computer
systems. Excluding these charges, Aerospace Segment operating income was
$84.4 million for the nine months ended September 27, 1998.
(2) Operating income in the Industrial Segment for the nine months ended
September 27, 1998 included charges of $12.0 million to record
additional warranty and legal reserves and $3.0 million of expenses for
Year 2000 compliance for new and existing computer systems. Excluding
these charges, Industrial Segment operating income was $114.6 million
for the nine months ended September 27, 1998.
Results of Operations
Company Review
Net sales for the third quarter of 1998 increased 11.1% to $360.4 million from
$324.5 million for the third quarter of 1997 resulting from sales volume
increases in the Aerospace Segment. Gross profit increased to $111.1 million
for the third quarter 1998 from $103.0 million in third quarter 1997. The
increase in gross profit resulted from increased sales in the Aerospace
Segment. Selling and administrative expenses totaled $55.0 million, or 15.3% of
sales, in third quarter 1998 compared to $53.8 million, or 16.6% of sales, in
third quarter 1997.
20
21
Net sales for the nine months ended September 27, 1998 increased 18.2% to
$1,129.6 million from $955.9 million for the nine months ended September 28,
1997 as a result of continued sales increases in the Aerospace Segment. Gross
profit increased slightly to $308.3 million for the first nine months of 1998
from $305.6 million for the first nine months of 1997. Gross profit in 1998 was
affected by a charge of $25.0 million to recognize program costs associated
with the development of Boeing programs and a charge of $12.0 million to record
additional warranty and legal reserves. Excluding these charges, gross profit
was $344.3 million for the nine months ended September 27, 1998. Although
selling and administrative expenses totaled $180.1 million for year to date
1998 ($175.1 million excluding a $5.0 million expense for Year 2000 compliance
for new and existing computer systems) compared to $162.7 million for year to
date 1997, selling and administrative expenses decreased as a percentage of
sales, 15.9% for year to date 1998 (15.5% excluding Year 2000 expense) as
compared to 17.0% for year to date 1997.
In the second quarter of 1998, the Company performed a study of total revenue
and costs for certain commercial aircraft programs. This study was performed on
the Boeing 777 as the program reached its 200th shipset milestone. Based on
this study which considered recent market conditions including normal market
uncertainties related to shipping schedules beyond five years and expected
future program efficiencies and related costs, the company revised its total
estimated revenue and costs for the Boeing 777 program. In accordance with the
Company's accounting policy for commercial jet aircraft, the Company reduced
inventory by $25.0 million, which resulted in a charge of $25.0 million to
current operations in the nine months ended September 27, 1998.
Also in the second quarter of 1998, the Company recorded a $12.0 million charge
to establish additional warranty and legal reserves for claims and outstanding
cases. Based on first time production of commercial engine applications,
warranty claims escalated during the first six months of 1998. Based on the
liability for individual claims and cases being probable and estimable, the
Company recorded a liability for these cases. None of these claims or cases is
expected to be individually material to the Company's financial position or
results of operations.
In the second quarter 1998, selling and administrative expenses included
expenses of $5.0 million for Year 2000 compliance. After reviewing costs
incurred for new computer systems scheduled to start up in the second quarter
of 1998, the Company determined that approximately $5.0 million of such costs
related to items that should be expensed. These expenses primarily included
certain consulting fees, software maintenance fees and training and travel
costs.
Operating income increased to $56.1 million in third quarter 1998 from $49.2
million in the third quarter of 1997. Operating margin was 15.6% for third
quarter 1998 compared to 15.2% for the third quarter 1997.
Operating income decreased to $128.2 million for the first nine months of 1998
from $142.9 million for the first nine months of 1997 as a result of $42.0
million of charges in the second quarter of 1998. Operating margin for year to
date 1998 was 11.3% (15.1% excluding $42.0 million of charges) compared to
14.9% for year to date 1997.
In May 1998, the Company sold the capital stock of its Holley Performance
Products subsidiary to Kohlberg & Co., L.L.C., a private merchant-banking firm
located in Mount Kisco, New York, for $100 million in cash. The sale resulted
in a pre-tax gain of $56.2 million, net of liabilities retained.
21
22
Interest expense decreased slightly to $12.6 million in third quarter 1998 from
$13.9 million for third quarter 1997 and increased to $40.9 million for year to
date 1998 as compared to $38.9 million for year to date 1997.
In April 1998, the Company privately placed $300.0 million principal amount of
7 1/2% Senior Notes due 2008 and $150.0 million liquidation value of 5 1/4%
Trust Convertible Preferred Securities. Distributions on the Convertible
Preferred Securities were $1.3 million after-tax and $2.4 million after-tax in
the three months and nine months ended September 27, 1998, respectively, which
is classified as minority interest in net loss of subsidiaries in the Company's
consolidated statements of earnings.
As a result of the foregoing, earnings before extraordinary item for the three
months and nine months ended September 27, 1998 were $27.4 million and $92.3
million, respectively, as compared to $23.3 million and $68.6 million for the
three months and nine months ended September 28, 1997, respectively. The
Company incurred an extraordinary charge of $4.3 million, net of taxes, or $.06
per share in the nine months ended September 27, 1998 in connection with early
debt repayment. Net earnings were $27.4 million in second quarter 1998, or
$0.41 per share (diluted), compared to net earnings of $23.3 million, or $0.35
per share (diluted), in second quarter 1997. 1998 year to date net earnings
were $88.0 million, or $1.30 per share (diluted), as compared to $68.6 million,
or $1.03 per share (diluted) for 1997.
Segment Review - Aerospace
Sales in the third quarter of 1998 for the Aerospace Segment totaled $180.9
million increasing 26.7% from $142.8 million in the third quarter of 1997. For
the nine months ended September 27, 1998 Aerospace sales increased 35.6% to
$529.7 million from $390.5 million for the comparable 1997 period. At Menasco,
sales increased by $21.8 million for the third quarter 1998 and $73.9 million
for the nine months ended September 27, 1998 due to rising commercial aircraft
production as well as improved military sales. Menasco deliveries of main
landing gear systems for the Boeing 737 increased from 55 and 137 shipsets in
the three months and nine months ended September 28, 1997, respectively, to 59
and 202 shipsets in the three months and nine months ended September 27, 1998,
respectively. Sales increases in 1998 were also driven by higher sales volumes
of the engine components businesses. The acquisition of AMI, on June 30, 1997,
was a significant contributor to the increase in sales for 1998 year to date.
Operating income for the Aerospace Segment increased to $29.9 million in third
quarter 1998 from $22.1 million in third quarter of 1997 as a direct result of
increased Aerospace sales. Operating income for year to date 1998 was $57.4
million ($84.4 million excluding 1998 second quarter charges totaling $27.0
million ($25.0 million to recognize program costs associated with development
of Boeing programs and $2.0 million for Year 2000 compliance for new computer
systems) as compared to $61.0 million for year to date 1997. The increase,
excluding charges, was also driven by generally higher sales volumes thoughout
the Segment. Operating margins increased slightly in the third quarter 1998,
primarily due to productivity improvements.
Segment Review - Industrial
Industrial sales decreased slightly to $179.7 million in the three months ended
September 27, 1998, from $181.9 in the three months ended September 28, 1997.
Sales were unfavorably impacted by the effect of the second quarter divestiture
of Holley Performance Products which was partially offset by the Company's
first quarter acquisitions.
Operating income for the Industrial Segment was $35.9 million and $99.6 million
in the three months and nine months ended September 27, 1998, respectively,
compared to $36.6
22
23
million and $112.1 million in the three and nine months ended September 28,
1997, respectively. Operating income for the nine months ended September 27,
1998 included charges of $12.0 million to record additional warranty and legal
reserves and $3.0 million expense for Year 2000 compliance for new and existing
computer systems. Excluding these charges, Industrial Segment operating income
increased slightly to $114.6 million for the nine months ended September 27,
1998, as a result of increased sales. Operating margin excluding the second
quarter charges decreased slightly from prior periods due to lower operating
margins on the first quarter 1998 acquisitions, although such acquisitions were
accretive.
Liquidity and Capital Resources
The Company generated $88.5 million of operating cash flows for the nine months
ended September 27, 1998 compared with $30.3 million for the nine months ended
September 28, 1997. The higher operating cash flows in 1998 were primarily due
to the increase in earnings before depreciation and amortization and the
Company's initiatives to reduce working capital requirements.
The ratio of current assets to current liabilities at June 28, 1998 was 1.43,
decreasing from 1.78 at December 31, 1997. Cash and cash equivalents increased
to $18.0 million at September 27, 1998 from $14.7 million at December 31, 1997.
In the first nine months of 1998, the Company invested $36.7 million in capital
expenditures compared to $46.0 million during the same prior year period. Debt
decreased by $148.6 million at September 27, 1998 compared to December 31,
1997. In April 1998, the Company sold $150.0 million of 5 1/4% Convertible
Preferred Securities. The proceeds from the Convertible Preferred Securities,
which are effectively guaranteed by the Company, were used to reduce the
Company's indebtedness under its credit agreement.
Year 2000
As is the case with most other companies, the Company recognizes the need to
ensure that its operations will not be adversely impacted by the Year 2000 date
transition and is faced with the task of addressing related issues. With senior
management accountability and corporate staff guidance, all operating units
have completed the assessment phase with respect to both information technology
("IT") and non-IT systems and are in varying stages of plan implementation to
address the Company's Year 2000 issues. Overall, the Company has targeted Year
2000 compliance primarily by the end of 1998, with certain operating units
targeting compliance by mid-1999. The testing phase has begun at various
operating units and will be completed company-wide by late 1999. The Company is
also evaluating whether the Year 2000 transition issues resulting from
relationships with customers, suppliers and other constituents will have an
impact on the Company's results of operations, financial condition or cash
flows. The Company has recently initiated formal communication with its active
suppliers to determine the extent to which the Company is vulnerable to
suppliers and customers who fail to address their own Year 2000 issues.
The Company estimates that total IT system expenditures (including all computer
systems replaced since January 1, 1997) will approximate $30,000 which will be
funded from operating cash flows. At September 27, 1998, approximately $24,000
of the $30,000 had been incurred, $19,000 of which has been capitalized since
January 1, 1997 and $5,000 of Year 2000 costs was expensed in the nine months
ended September 27, 1998. The remaining costs of modifying its existing software
for the Year 2000 date transition should have an immaterial impact on
consolidated operating
23
24
results. The costs of the project and the date on which the Company plans to
complete Year 2000 compliance efforts are based on management's best estimates,
which were derived from assumptions of future events including the continued
availability of certain resources, third parties' Year 2000 readiness and other
factors. There can be no assurance that these assumptions will prove to be
accurate, and actual results could differ materially from those currently
anticipated.
Although the Company believes that its critical systems will be fully compliant
prior to year end 1999, the Company also believes that prudent business
practices call for the development of contingency plans. Currently, the Company
does not have Year 2000 contingency plans in place; however, the Company is
assessing areas which require contingency planning and expects to have
necessary contingency plans in place by mid-1999. Such contingency plans will
primarily address mitigating the impact of internal system and third party
failures.
Because the implementation of multiple computer systems and communication with
critical third parties is on-going, the Company's reasonably likely worst case
scenario is unknown at this time. The Company does not currently expect the
Year 2000 transition to have a material adverse effect on its results of
operation, financial position or cash flows. However, if all Year 2000 issues
are not properly identified, or assessment, remediation and testing are not
effected timely with respect to Year 2000 problems that are identified, there
can be no assurance that the Year 2000 issue will not have a material adverse
effect on the Company's results of operations, financial position or cash flows
or adversely affect the Company's relationships with suppliers, customers or
others. Additionally, there can be no assurance that the Year 2000 issues of
other entities will not have a material adverse effect on the Company's results
of operations, financial position or cash flows.
Cautionary Statement Regarding Forward-Looking Statements
This Management's Discussion and Analysis contains forward-looking statements
within the meaning of the federal securities laws. As a general matter,
forward-looking statements are those focused upon anticipated events or trends
and expectations and beliefs relating to matters that are not historical in
nature. Such forward-looking statements are subject to uncertainties and
factors relating to the Company's operations and business environment, all of
which are difficult to predict and many of which are beyond the control of the
Company, that could cause actual results of the Company to differ materially
from those matters expressed in or implied by such forward-looking statements.
For a discussion of various factors that may cause the Company's actual results
to differ materially from those matters expressed in or implied by such
forward-looking statements, see the Company's 1997 Annual Report on Form 10-K
as well as the Company's 1998 filings with the Securities and Exchange
Commission.
24
25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company and certain of its subsidiaries are defendants in various
lawsuits involving asbestos-containing products. In addition, the Company has
been notified that it is among Potentially Responsible Parties under federal
environmental laws, or similar state laws, relative to the costs of
investigating and in some cases remediating contamination by hazardous
materials at several sites. See note 6 to consolidated financial statements.
Item 5. Other Information
Any shareholder proposals intended to be presented at the 1999 Annual Meeting
of Shareholders pursuant to Rule 14a-8 must be received by the Secretary of
Coltec by November 20, 1998 to be considered for inclusion in the proxy
statement and proxy relating to such meeting.
Coltec's Bylaws require that any shareholder who intends to present a
proposal at the 1999 Annual Meeting of Shareholders and has not sought
inclusion of the proposal in the Company's proxy materials pursuant to Rule
14a-8 must (i) deliver written notice, including specified information, to
the Secretary of Coltec by not earlier than February 5, 1999 and not later
than March 7, 1999 and (ii) be a shareholder of record of Coltec on both the
date on which such notice is given and on the record date for such meeting.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
3.2 Amended and Restated Bylaws.
4.27 Sixth Amendment to Credit Agreement dated as of
September 9, 1998.
4.28 Family Protection Plan of Coltec Industries Inc.
27. Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed by the Company during
the quarter ended September 27, 1998.
25
26
S I G N A T U R E
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COLTEC INDUSTRIES INC
(Registrant)
by /s/ David D. Harrison
-----------------------------
David D. Harrison
Executive Vice President
and Chief Financial Officer
Date: November 12, 1998
26