SEQUA CORPORATION

FORM 10-K

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PART I

ITEM 1.  BUSINESS

(a)  General development of business. Sequa Corporation ("Sequa"), which was incorporated in 1929, is a diversified industrial company that produces a broad range of products through operating units in five business segments: Aerospace, Propulsion, Metal Coating, Specialty Chemicals and Other Products. Information with respect to material acquisitions and dispositions is included in Note 18 to the Consolidated Financial Statements on page 66 of this Annual Report on Form 10-K and is incorporated herein by reference.

(b)  Financial information about business segments. Segment information is included in Note 24 to the Consolidated Financial Statements on pages 73 through 77 of this Annual Report on Form 10-K and is incorporated herein by reference.

(c)  Narrative description of business. The following is a narrative description of the business segments of Sequa:

     The Aerospace segment consists solely of Sequa's largest operating unit, Chromalloy Gas Turbine (Chromalloy). Chromalloy repairs and manufactures components for jet aircraft engines. A major independent supplier in the repair market, Chromalloy provides domestic and international airlines with technologically advanced repairs and coatings for turbine airfoils and other critical engine components. In addition, the unit repairs components for land-based aero derivative and industrial turbine engines. The unit also supplies components to the manufacturers of jet engines and serves both the general aviation and military markets.

     Chromalloy has built on its metallurgical process technologies to develop procedures that permit the repair and reuse of turbine engine components. Management believes Chromalloy has played a key role in the development of the repair market for certain jet engine parts. Over the years, Chromalloy has continued to invest in research and development projects that have led to ceramic coatings, vacuum plasma coatings, advanced laser drilling and welding, and diffused precious metal/aluminide coatings. Chromalloy has introduced a series of innovative and in some cases proprietary processes that allow engines to perform at improved efficiency levels, at higher operating temperatures and under severe environmental conditions.

     Chromalloy's strategy has included the active pursuit of joint venture opportunities aimed at strengthening its ties to certain original equipment manufacturers (OEMs) and to its customers, as well as ensuring close cooperation with respect to the dissemination of technical specifications and requirements.

     The Propulsion segment consists solely of Atlantic Research Corporation (ARC), a supplier of solid rocket fuel propulsion systems. ARC is a leading developer and manufacturer of advanced rocket propulsion systems, gas generators and auxiliary rocket motors, and engages in research and development relating to new rocket propellants. For the military contract market, ARC produces propulsion systems primarily for tactical weapons. For space applications, ARC produces small liquid fuel rocket engines designed to provide attitude and orbit control for a number of satellite systems worldwide.

     ARC's expertise with propulsion systems has led to the development of other products for commercial markets. ARC pioneered the development of hybrid inflators for use in automotive airbags. ARC produces inflators for driver, passenger, side-impact and curtain model airbag modules.

Metal Coating

     The Metal Coating segment consists solely of Precoat Metals (Precoat), which is a leader in the application of protective and decorative coatings to continuous steel and aluminum coil. Precoat's principal market is the building products industry, where coated steel is used for the construction of pre-engineered building systems, and as components in the industrial, commercial, agricultural and residential sectors. Precoat also serves the container industry, where the division has established a position in the application of coatings to steel and aluminum stock used to fabricate metal cans and can lids. In addition, the division has established a presence in other product markets, including heating, ventilating and air conditioning units, truck trailer panels and office equipment.

Specialty Chemicals

     The Specialty Chemicals segment is composed solely of Warwick International, which is a leading producer and supplier of TAED, a bleach activator for laundry and dishwasher powdered and tablet detergent products. TAED is used in oxygen-based bleaching systems to increase the cleaning power of detergent at low wash temperatures. These bleaching systems are used primarily in international markets, principally in Europe. The unit is extending its TAED capabilities to biocide applications, textile bleaching and pulp and paper processing, and continues to expand a network of European chemical distributors that supply specialty products for use in plastics, inks, resins, pharmaceuticals, petrochemicals, cosmetics and ceramics.

Other Products

     This segment is composed of four ongoing businesses: MEGTEC Systems (MEGTEC), Sequa Can Machinery, Casco Products (Casco) and After Six.

     MEGTEC Systems. MEGTEC's products include air flotation dryers for paper, printing and other uses and emission control systems for industrial applications. MEGTEC equipment for the web offset printing industry includes pasters and splicers, web guides, infeeds, chill stands and related equipment for high-speed web presses.

     Sequa Can Machinery. Sequa Can Machinery designs and manufactures equipment for the two-piece can industry. Sequa Can Machinery manufactures high-speed can-forming equipment and equipment to coat and decorate two-piece beverage cans and has the largest installed base of equipment in the field. The unit's product development team has improved the technology of precision printing to achieve high speeds without compromising quality. In addition, the unit has developed products to broaden the range of metal containers to include other specialty products such as oil cans, oil filters and non-round cans.

     Casco Products. Casco, which has been serving the automotive products market since 1921, is believed to be the world's leading supplier of automotive cigarette lighters and power outlets. Casco also offers a line of automotive accessories including a series of electronic devices used for measurement and control of certain gases and for monitoring engine oil and engine coolant.

     After Six. After Six designs and markets men's formalwear and accessories under the After Six, Oscar de la Renta and Raffinati labels, all three of which are registered trademarks.

Markets and Methods of Distribution

     The Aerospace segment markets its engine component repair and manufacturing services primarily to the major airlines of the world, to the manufacturers of commercial jet engines and to the military. Chromalloy's products and services are marketed directly and through sales representatives working on a commission basis. A portion of Chromalloy's sales is made pursuant to contracts with various agencies of the United States Government, particularly the Air Force, with which Chromalloy has had a longstanding relationship. Further information with respect to Chromalloy is included in the discussion on pages 22 and 23 of this Annual Report on Form 10-K under the heading "Risk/Concentration of Business," which is incorporated herein by reference.

     The Propulsion segment markets its solid propulsion unit generally on a subcontract basis with prime contractors under various defense programs of the United States Government. Among the programs currently in production are the Standard Missile, Army Extended Range Multiple Launch Rocket System, Army Tactical Rocket System, Trident, Javelin, PAC-3 and Stinger. Air-breathing rocket systems in development include the High Speed Anti-Radiation Demonstration (HSAD) and the Super Sonic Sea-skimming Target (SSST). In addition, the liquid propulsion unit operates in the world wide commercial satellite market selling directly to the satellite manufacturers. ARC markets its automotive airbag inflators to automotive tier one customers in the US and overseas. Further information with respect to ARC's major commercial customer is included in the discussion on pages 22 and 23 of this Annual Report on Form 10-K under the heading "Risk/Concentration of Business," which is incorporated herein by reference.

     Sequa's Metal Coating segment sells its coating services to regional steel and aluminum producers and distributors, building products manufacturers, merchant can makers and manufacturers of other diverse products. Further information with respect to Precoat's major customer is included in the discussion on pages 22 and 23 of this Annual Report on Form 10-K under the heading "Risk/Concentration of Business," which is incorporated herein by reference.

     The Specialty Chemicals segment sells TAED-based chemical additives directly to major producers of household and industrial cleaning products and to paper and textile manufacturers. Specialty products for use in plastics, inks, resins, pharmaceuticals, petrochemicals, cosmetics and ceramics are sold through a network of wholly owned chemical distributors.

     Businesses in the Other Products segment serve distinct markets and have individual methods of distribution. MEGTEC Systems sells auxiliary press equipment directly to international web printing press manufacturers and to their customers, and markets emission control equipment and industrial drying systems directly to customers in the coating, converting and metal finishing industries. Sequa Can Machinery sells its can-forming and decorating equipment through agents, as well as directly to the international container manufacturing industry. Casco sells cigarette lighters, power outlets and various electronic monitoring devices directly to the automotive industry. After Six sells its formalwear to wholesalers and retailers, principally serving the rental market, primarily through independent sales representatives.

     There is significant competition in the industries in which Sequa operates, and, in several cases, the competition consists of larger companies having substantially greater resources than those of Sequa.

     Sequa believes that it is currently the world's largest supplier of automotive cigarette lighters and power outlets, and the largest supplier of men's formalwear coats and pants in the United States.

     Sequa, through its Chromalloy operations, is a leader in the development and use of advanced metallurgical and other processes to repair, manufacture and coat blades, vanes and other components of gas turbine engines used for commercial and military jet aircraft. Chromalloy's divisions compete for turbine engine repair business with a number of other companies, including the manufacturers of jet engines (OEMs). The OEMs generally have obligations (contractual and otherwise) to approve vendors to perform repair services on their engines and components. Chromalloy has a number of such approvals, including licensing agreements, which allow it to repair certain components of flight engines. The loss of approval by one of the major OEMs to repair components for such OEM's engines could have an adverse effect on Chromalloy, although management believes it has certain actions available to it to mitigate this effect.

     Sequa's rocket propulsion business competes with several other companies for defense business. In some cases, these competitors are larger than Sequa and have substantially greater resources. Government contracts in this area are generally awarded on the basis of proven engineering capability and price. Sequa's ability to compete is enhanced by the US Government's need for alternative sources of supply under these contracts. The liquid propulsion unit operates primarily in the commercial satellite market and competes on the technical capabilities of its products and on price.

     ARC is a second tier automotive supplier that supplies airbag inflators to first tier airbag module (airbag, inflator and covers) suppliers, certain of whom have their own inflator capabilities. The unit competes on product capabilities, energetics expertise, quality and price. Breed Technologies, Inc., (Breed), ARC's largest commercial customer, is supplied under the terms of long-term contracts. Further information with respect to annual sales to Breed is included in the discussion on pages 22 and 23 of this Annual Report on Form 10-K under the heading "Risk/Concentration of Business," which is incorporated herein by reference.

     Sequa's Precoat Metals operation is a leading independent domestic coater of coiled steel for metal building panels. Precoat competes in all its markets based on price, quality, customer service and technical capabilities.

     Sequa's Specialty Chemicals segment competes in each of its markets with several other manufacturers, one of which is larger and has greater resources than Sequa. This segment competes in the detergent additive market with its TAED products based on breadth of product offerings and performance characteristics, quality and price. In the European chemical distribution market, it competes primarily on the technical expertise of its sales force and the breadth of its product offerings.

     MEGTEC is a major international supplier of auxiliary press equipment, air flotation dryers and emission control equipment. This unit has several major competitors (including certain press manufacturers in the graphic arts market) in each of its main product areas. It competes on the basis of price, quality and technical capabilities. Sequa believes its cylindrical can decorating and can-forming equipment operations are world leaders in their markets. Sequa Can Machinery has one or two major competitors in each major product area, and the unit competes on the basis of price, quality, technical capabilities and equipment speed. Sequa believes its automotive products manufacturer is the world's leading producer of cigarette lighters for both the original equipment market and the auto aftermarket and competes on the basis of price, quality and customer service. Sequa believes After Six is the leader in men's formalwear and competes on the basis of design, quality and price.

     Sequa's businesses use a wide variety of raw materials and supplies. Generally, these have been available in sufficient quantities to meet requirements, although occasional shortages have occurred. Precoat Metals uses natural gas to fire the curing ovens used in the coating process as well as for emission control devices. Increases in the price paid for natural gas adversely affected operating income for this unit by approximately $2.8 million in 2001 and $3.0 million in 2000. In 2002, natural gas costs approximated 2000 levels. Natural gas prices have increased significantly in early 2003 and a continuance of prices at current levels could have an adverse impact on Precoat Metal's operating income.

Seasonal Factors

     With the exception of the After Six business, which has stronger sales in the first six months of the year, Sequa's businesses are not considered seasonal to any significant extent.

Patents and Trademarks

     Sequa owns and is licensed to manufacture and sell under a number of patents, including patents relating to its metallurgical processes. These patents and licenses were secured over a period of years and expire at various times. Sequa has also created and acquired a number of trade names and trademarks. While Sequa believes its patents, patent licenses, trade names and trademarks are valuable, it does not consider the businesses comprising its segments to be materially dependent upon any particular patent, license, trade name, or trademark. Sequa regards its technical and managerial knowledge and experience as more important to its business.

Major Customers

     No single commercial customer accounted for more than 10% of consolidated sales during the past three years. Prime and subcontracts with all US government agencies accounted for approximately 12% of sales in 2002, 11% of sales in 2001 and 12% of sales in 2000. One commercial customer accounted for approximately 25% of the Propulsion segment's 2002 sales. Further information with respect to annual sales to this customer is included in the discussion appearing on pages 22 and 23 of this Annual Report on Form 10-K under the heading "Risk/Concentration of Business," which is incorporated herein by reference. In the Metal Coating segment, one customer accounted for approximately 35% of the segment's 2002 sales. The customer is a major steel manufacturer, and information with respect to this customer is included in the discussion on pages 22 and 23 of this Annual Report on Form 10-K under the heading "Risk/Concentration of Business," which is incorporated herein by reference. In the Specialty Chemicals segment, one customer accounted for approximately 30% of the segment's 2002 sales, and the top three customers accounted for approximately 45% of the segment's 2002 sales. All of these customers are well-known international consumer products companies with whom Warwick International has been doing business for many years.

Backlog

     Backlog information is included in the Management's Discussion and Analysis of Financial Condition and Results of Operations on page 25 of this Annual Report on Form 10-K and is incorporated herein by reference.

Maintenance and Repairs

     Expenditures for maintenance and repairs of $45.9 million in 2002, $47.5 million in 2001 and $45.7 million in 2000 were expensed as incurred, while betterments and replacements were capitalized.

     Research and development costs, charged to expense as incurred, amounted to $15.9 million in 2002, $20.1 million in 2001 and $22.2 million in 2000.

Environmental Matters

     Sequa has been notified that it has been named as a potentially responsible party under Federal and State Superfund laws and/or has been named as a defendant in suits by private parties (or governmental suits including private parties as co-defendants) with respect to sites currently or previously owned or operated by Sequa or its predecessors or to which Sequa or its predecessors may have sent hazardous wastes. Sequa is not presently aware of other such lawsuits or notices contemplated or planned by any private parties or environmental enforcement agencies. The aggregate liability with respect to these matters, net of liabilities already accrued in the Consolidated Balance Sheet, will not, in the opinion of management, have a material adverse effect on the financial position of Sequa, although adjustments to estimates based on improved knowledge of site conditions and chemical interactions with humans or changes in environmental law could have a significant impact on Sequa's results of operations in a particular period. These environmental matters include the following:

     Two propellant manufacturing facilities have soil and groundwater ammonium perchlorate (AP) contamination above the limit currently proposed by the US Environmental Protection Agency for groundwater. AP is a raw material used to produce missile and rocket fuel. Sequa has implemented a series of pilot tests to determine the feasibility and applicability of utilizing an emerging technology, biodegration, to treat AP-affected soil and groundwater. In the fourth quarter of 2001, Sequa recorded an environmental charge that included $9.7 million of estimated costs to remediate soil and groundwater contamination from AP.

     A number of claims have been filed in connection with alleged groundwater contamination in the vicinity of a predecessor corporation site which operated during the 1960s and early 1970s in Dublin, Pennsylvania. In October 1987, a class action was filed by residents of Dublin against Sequa and two other defendants. The Borough of Dublin also filed suit seeking remediation of alleged contamination of the Borough's water supply and damages in an unspecified amount. A settlement was reached in the class action in which Sequa paid $1.8 million in 1997. The Borough action was settled in 1998 when Sequa agreed to transfer to the Borough the water treatment system it constructed, and $2.0 million was paid to the Borough. The Pennsylvania Department of Environmental Protection entered into a Consent Decree with Sequa in 1990 providing for the performance of a remedial investigation and feasibility study with respect to the same alleged groundwater contamination in Dublin. The US En vironmental Protection Agency placed the site on the Superfund List in 1990 and, in conjunction therewith, entered into a Consent Agreement with Sequa on December 31, 1990. The negotiation for the final remedy is still in progress.

     The State of Florida issued an Administrative Order in 1988 requiring TurboCombustor Technology, Inc. (TCT), a subsidiary of Chromalloy, to investigate and to take appropriate corrective action in connection with alleged groundwater contamination in Stuart, Florida. The contamination is alleged to have arisen from a 1985 fire which occurred at TCT's former facility in Stuart. The City of Stuart subsequently constructed and is operating a groundwater remediation system. Sequa negotiated a conditional settlement with the City of Stuart in October 1994 whereby it would contribute its pro-rata share of the capital and operating costs for the groundwater treatment system. On February 14, 2000, the Stuart City Commission approved the execution of the settlement. Sequa estimates the amount to be paid in settlement, plus additional groundwater sampling and analysis, will be approximately $2 million to be paid over a ten-year period which began in the second quarter of 2000.

     In September 1993, 14 homeowners residing in West Nyack, New York served a complaint on Chromalloy and others alleging, among other things, that contamination from a former Chromalloy site caused damage to the plaintiffs' property. All 14 homeowners agreed to dismiss the case with prejudice in November 2002. The case was subsequently dismissed by the court. Chromalloy entered into a Consent Order with the New York Department of Environmental Conservation (DEC) on February 14, 1994 to undertake the remedial investigation and feasibility study (RI/FS) relating to the alleged contamination in the vicinity of the former Chromalloy site. The dual phase extraction remedial system was started up in January 2003. It is scheduled to operate for five years.

     It is Sequa's policy to accrue environmental remediation costs for identified sites when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. In the fourth quarter of 2001, Sequa recorded a charge of $13.3 million to increase its accruals for remediation costs. The charge included $9.7 million of estimated cost to remediate soil and groundwater contamination from ammonium perchlorate (AP), a raw material used in the manufacture of solid rocket propellant. Although no federal or state environmental standards have been finalized for AP, recent studies indicating that the chemical may interfere with human thyroid function have prompted Sequa to begin cleanup actions at its solid propellant facilities. At December 31, 2002, the potential exposure for all remediation costs is estimated to range from $16 million to $28 million, and Sequa's Consolidated Balance Sheet includes accruals for remediation costs of $23.1 million. These accruals are at undiscounted amounts and are included in accrued expenses and other noncurrent liabilities. Actual costs to be incurred at identified sites in future periods may vary from the estimates, given inherent uncertainties in evaluating environmental exposures.

     With respect to all known environmental liabilities, Sequa's actual cash expenditures for remediation of previously contaminated sites were $8.0 million in 2002, $4.0 million in 2001 and $3.3 million in 2000. Sequa anticipates that remedial cash expenditures will be between $5 million and $8 million during 2003 and between $5 million and $7 million during 2004. Sequa's capital expenditures for projects to eliminate, control or dispose of pollutants were $1.3 million, $2.4 million and $2.2 million in 2002, 2001 and 2000, respectively. Sequa anticipates annual environment-related capital expenditures to be approximately $2.5 million during 2003 and $1.8 million during 2004. Sequa's operating expenses to eliminate, control and dispose of pollutants were approximately $11 million in 2002, $11 million in 2001 and $10 million in 2000. Sequa anticipates that environmental operating expenses will be approximately $12 million per year during 2003 and 2004.

Employment

     At December 31, 2002, Sequa employed approximately 10,375 people of whom approximately 3,500 were covered by union contracts.

     The approximate number of employees attributable to each reportable business segment as of December 31, 2002 and 2001 was:

Segment

     The increase in the number of employees in the Propulsion segment primarily reflects an increase in hiring at the automotive reporting unit.

     In 2002, Sequa continued its strategic restructuring program in response to difficult economic conditions prevailing in certain of its markets. The restructuring program resulted in the termination of approximately 475 employees concentrated primarily in the Aerospace segment and the MEGTEC and After Six units of the Other Products segment. Headcount reductions in the Aerospace and Other Products segments were partially offset by the acquisitions of the remaining 50% interest in the Pacific Gas Turbine joint venture and of a small Brazilian machining operation.

     Certain Metal Coating employees who were notified of their termination in 2001 continued their employment until the Chicago, Illinois facility was closed in January 2002.

     Sequa considers its relations with employees to be generally satisfactory. Sequa maintains a number of employee benefit programs, including life, medical and dental insurance, pension and 401(k) plans.

(d)  Foreign Operations. Sequa's consolidated foreign operations include Chromalloy's operations in England, France, Israel, Mexico, Netherlands and Thailand within the Aerospace Segment; ARC's liquid rocket motor business in England, an automotive airbag inflator business in Italy and automotive sales offices in Germany, Japan and Korea within the Propulsion segment; detergent chemicals operations in Wales and chemical distribution operations in France, Italy, Spain, Portugal and, Slovenia within the Specialty Chemicals segment; MEGTEC's auxiliary press equipment suppliers in China, France, Germany, Singapore, Sweden and the United Kingdom; the Sequa Can Machinery operations in Brazil, and Casco products operations in Germany, Italy, Brazil and Tunisia in the Other Products segment. Sales and long-lived assets attributable to foreign countries are set forth in Note 24 to the Consolidated Financial Statements on page 77 of this Annual Report on Form 10-K and are incorporated herein by ref erence.

ITEM 2.  PROPERTIES

Aerospace

     Chromalloy operates more than 40 plants and major warehouse facilities in 12 states and six foreign countries, which have aggregate floor space of 3,000,000 square feet, of which 1,900,000 square feet is owned and 1,100,000 square feet is leased. The leases covering facilities used in this business have various expiration dates, and some have renewal or purchase options.

     Facilities in this segment are adequate and suitable for the business being conducted and operate at a moderate level of utilization.

Propulsion

     ARC operates 10 manufacturing and research facilities in five states, one manufacturing facility in the United Kingdom and one manufacturing facility in Italy with aggregate floor space of 2,000,000 square feet. The segment owns 200,000 square feet and leases 1,800,000 square feet. The largest lease, with renewal options extending through 2014, is for a 951,000 square foot facility in Arkansas. The segment also holds a lease on a 270,000 square foot facility in Virginia that expires in 2012. Other leased production facilities are located in Tennessee, New York, California, the United Kingdom and Italy with leased sales offices located in Germany, Japan and Korea.

     Facilities in this segment are suitable and adequate for the business. Utilization at various facilities ranges from moderate to high.

     The Precoat Metals operation owns seven active manufacturing facilities in six states with a total of 1,300,000 square feet of manufacturing and office space. An additional 20,000 square feet of office space is leased in Missouri. The Chicago, Illinois plant is currently mothballed, and management is reviewing the possibility of selling the facility.

     The properties in this segment are suitable and adequate for the business presently being conducted. Facilities within this segment operate at a moderate utilization rate.

Specialty Chemicals

     Warwick International owns a 203,000 square foot plant on 55 acres in the United Kingdom and a 26,000 square foot warehouse facility in France. The segment also leases 65,000 square feet of office and warehouse space in seven separate locations in Europe.

     Facilities in this segment are adequate and suitable for the business being conducted. Facilities within this segment operate at a high utilization rate.

Other Products

     MEGTEC owns manufacturing and office facilities in Wisconsin with aggregate floor space of 314,000 square feet; a facility in France with aggregate floor space of 62,000 square feet; and a facility in Sweden with aggregate floor space of 50,000 square feet. MEGTEC also leases four manufacturing plants and four sales offices in Europe with a total of 205,000 square feet. In addition, the unit leases 14,000 square feet of manufacturing and office space in China and leases a 3,200 square foot sales office in Singapore.

     Sequa Can Machinery owns two plants in the United States with aggregate floor space of 163,000 square feet and leases manufacturing, warehouse and office space of 65,000 square feet. Sequa Can Machinery also leases 16,000 square feet of manufacturing and office space in Brazil.

     Casco leases a 168,000 square foot plant with office space in Connecticut; a 2,300 square foot sales office in Michigan; a 38,000 square foot manufacturing facility in Italy; a 30,000 square foot facility in Tunisia; and a 9,900 square foot facility in Brazil. Casco owns an 81,000 square foot plant in Germany and a 39,000 square foot plant in Kentucky. Casco is in the process of relocating its Connecticut manufacturing operation to a 45,000 square foot leased facility in Mississippi as well as to its existing facility in Kentucky.

     After Six owns warehouse and office facilities in Georgia with aggregate floor space of 158,000 square feet. This unit also leases approximately 1,250 square feet of office space in Hackensack, New Jersey.

     Facilities in this segment are adequate and suitable for the business being conducted. MEGTEC and Casco facilities operated at high utilization rates in 2002 except for Mississippi which will operate at a high utilization rate once the relocation process is complete. Sequa Can Machinery facilities currently operate at a moderate utilization rate due to increases in backlog. The After Six 40,000 square foot warehouse facility is expected to be sold, as the unit completed measures to outsource the bulk of its production in 2002.

     Sequa leases 48,000 square feet of corporate office space in New York, New York and Hackensack, New Jersey.

ITEM 3.  LEGAL PROCEEDINGS

     Information with respect to Sequa's legal proceedings is included in Note 25 to the Consolidated Financial Statements on page 77 of this Annual Report on Form 10-K and is incorporated herein by reference. Additional information on environmental matters is covered in the Environmental Matters section on pages 24 and 25 of this Annual Report on Form 10-K and is incorporated herein by reference.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     None.

ITEM 4A.  EXECUTIVE OFFICERS OF THE REGISTRANT

     The following information is furnished pursuant to General Instruction G(3) of Form 10-K and Instruction 3 to Item 401(b) of Regulation S-K with respect to the executive officers of Sequa:

     Sequa is not aware of any family relationship among any of the above-named executive officers. All of the above-named executive officers have been employed by Sequa in the same or a similar capacity for at least five years, except for Mr. Leitner, Mr. Dombek, Mr. Ellis and Ms. O'Sullivan. Mr. Leitner was elected Senior Vice President, Finance by the Board of Directors on December 16, 1999. Prior to joining Sequa, Mr. Leitner was Senior Vice President and Chief Financial Officer (1980-1986 and 1995-1999) and was President (1986-1995) of Chock Full O'Nuts Corporation (a beverage products manufacturing company). Mr. Dombek and Mr. Ellis were elected to Senior Vice President positions by the Board of Directors on February 27, 2003. Prior to his election, Mr. Dombek was a vice president of Sequa and President and General Manager of Precoat Metals, positions he has held since 1995. Prior to his election, Mr. Ellis was a vice president of Sequa since 2001 and managing director an d chief executive officer of Warwick International since 1999. Prior to 1999, Mr. Ellis was an executive vice president of Warwick International where he has held positions of increasing responsibility since 1980. Ms. O'Sullivan was elected Vice President and Controller by the Board of Directors on June 27, 2002. Prior to her election, Ms. O'Sullivan was Sequa's Director of Financial Reporting. Each of such officers holds office until his/her successor shall have been chosen and qualified by the Board of Directors at its annual meeting, subject to the provisions of Section 4 of Article IV of Sequa's By-laws relative to the resignation of officers and Section 5 of Article IV of Sequa's By-laws relative to the removal of officers.

PART II

(a)   Market Information.

     The following table sets forth the high and low sales prices of Sequa Class A common stock and Sequa Class B common stock for the calendar periods indicated on the Exchange Composite Tape, as reported by the National Quotation Bureau Incorporated:

     Shares of Sequa Class A common stock and Sequa Class B common stock are listed on the New York Stock Exchange. There were approximately 2,018 holders of record of the Sequa Class A common stock and approximately 415 holders of record of the Sequa Class B common stock at March 1, 2003.

(c)  Dividends.

     During the years ended December 31, 2002 and 2001, no cash dividends were declared on Sequa Class A common shares or Class B common shares. Sequa has no present intention to pay cash dividends on its common shares.

(d)  Securities Authorized for Issuance Under Equity Compensation Plans.

     Information relating to securities authorized for issuance under equity compensation plans is included in Note 16 to the Consolidated Financial Statements on pages 64 and 65 of this Annual Report on Form 10-K and is incorporated herein by reference.

ITEM 6.  SELECTED FINANCIAL DATA

     The following table sets forth selected financial information for, and as of the end of, each of the five years in the period ended December 31, 2002. Such information should be read in conjunction with Sequa's Consolidated Financial Statements and Notes thereto, filed herewith.

ITEM 6.   SELECTED FINANCIAL DATA (cont'd)

ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overall sales declined 4% in 2002 driven primarily by sharp declines at the large Aerospace segment and at the smaller MEGTEC Systems unit of the Other Products segment. The effect of these declines was tempered by advances in the Propulsion and Specialty Chemicals segments. A detailed review of sales for each segment follows.

     The 10% decline in sales in the Aerospace segment was due primarily to the continuing downturn in the worldwide commercial aviation industry. Engine repair sales declined 11% (13% excluding $8.1 million of sales of Pacific Gas Turbine (PGT), a former equity affiliate which became wholly-owned on September 30, 2002), as an increase in sales to the US military and the benefit of translating foreign currency sales into US dollars (approximately $4.8 million) was more than offset by the poor conditions in the worldwide commercial airline industry. The military sales advance was primarily driven by revenues from a contract to provide component repairs at Kelly Air Force base. Sales of original equipment components declined 7% as increases in sales to the industrial turbine and US military markets and a favorable impact of approximately $2.6 million from translation of foreign currency results to US dollars was more than offset by the weak commercial aviation market. Persistent po or conditions in the airline industry continue to cloud the near-term outlook for this unit. Given the outlook for this industry, a recovery to more normal sales levels is not anticipated in the near future.

     Sales of the Propulsion segment increased 6% in 2002. Sales of rocket motor propulsion systems were ahead 5% due to higher sales of liquid rocket motors for commercial space applications and the benefit of a $4.0 million technology transfer license payment. Excluding the license payment, sales of propulsion systems were on a par with 2001 as new programs offset the absence of contributions from an advanced materials product line sold in May 2002. Sales of automotive airbag inflators advanced 6%, reflecting increased volumes and the benefit of translating foreign sales into US dollars (approximately $2.3 million), which more than offset an unfavorable shift to lower priced new products.

     Sales of the Metal Coating segment declined 3% in 2002, with declines in building and manufactured products tempered by a modest advance in container products. The year over year decline primarily reflects a 13% decline in the fourth quarter, with sales in each of the three major market segments off from the prior year quarter. Sales to the building products market were down slightly in 2002 reflecting weakness in the pre-engineered sector of the commercial construction market partially offset by the impact of sales from a former equity affiliate, Midwest Metal Coatings which was consolidated in mid-2001. Modest advances in sales to the container market were driven by increased demand from the beverage industry while a small decline in sales to the manufactured products area primarily reflects weakness in transportation and lighting sectors. Management expects the building products market to remain soft in the first quarter of 2003.

     Sales of the Specialty Chemicals segment advanced 12% in 2002 (7% in local currency) due to three principal factors: stronger demand for the detergent additive TAED; sales added through the June 2001 acquisition of a specialty chemicals marketing unit; and the favorable effect of the weakening of the US dollar on the translation of local currency results (approximately $7.0 million).

Sales   (cont'd)

     Sales of the Other Products segment declined 6% in 2002, as advances at the automotive products and can machinery units were more than offset by declines at MEGTEC Systems and After Six. Sales of MEGTEC Systems declined 15% (24% excluding sales added by a September 2001 acquisition of the roll handling group). The decline reflects the continuing weak condition of the worldwide graphic arts market. Management does not anticipate improvement in this market in 2003. Sales of the can machinery unit registered a 6% advance in 2002, with increased sales of the can decorating and specialty can systems product lines more than offsetting lower sales of can forming equipment. Fourth quarter sales more than doubled compared to 2001 with all product lines contributing to the advance and the unit finished the year with a strong backlog position. As a result, management expects that sales in the upcoming quarters will compare favorably to the previous year's comparable periods. Casco Pr oducts sales increased 6% in 2002, due primarily to advances at the unit's foreign operations. Sales of the After Six formalwear unit declined 11% in 2002, reflecting a drop in demand. Sales in the fourth quarter advanced 41% compared to an unusually low prior year quarter due to a post September 11^th downturn in 2001. Backlog at this unit doubled compared to the prior year, and management anticipates sales in the first quarter of 2003 will be higher than the first quarter of 2002.

Overall operating income increased $35.3 million or 136% in 2002. On an operating basis, significant improvements at the Propulsion and Specialty Chemicals segments and at three of the four units of the Other Products segment were partially offset by sharp declines at the large Aerospace segment and the smaller MEGTEC Systems unit of the Other Products segment as well as increased expenses in the Corporate segment. Other major factors in the advance were: lower restructuring and related asset impairment charges ($4.5 million in 2002 compared with $22.4 million in 2001); the cessation of goodwill amortization as required by SFAS No. 142 ($13.1 million); and lower environmental clean up provisions ($0.2 million in 2002 compared with $13.3 million in 2001). The amounts of restructuring and related asset impairment charges recorded in 2002 and 2001 and the goodwill amortization in 2001 are summarized as follows:

A detailed review of operating results by business segment follows:

Operating Income   (cont'd)

     Operating income in the Aerospace segment declined 32% in 2002, as the impact of continuing intense pressure on the commercial airline industry in 2002 was tempered by the absence of goodwill amortization, lower restructuring and related asset impairment charges and the favorable effect of translating foreign currency results into US dollars (approximately $0.7 million). Excluding these factors, profits of the Chromalloy Gas Turbine units primarily engaged in engine component repair were unfavorably affected by the following factors: the decline in sales to the commercial aviation market; increased inventory provisions primarily related to slow moving inventory; start-up costs related to a new unit offering repairs of auxiliary power units and the absence of reserve reversals recorded in 2001. These factors were partially offset by the benefits of cost reductions and restructuring actions as well as higher sales to the US military. Results of units primarily engaged in the ma nufacture of original equipment components were also negatively affected by lower volume, an unfavorable sales mix shift and the absence of reserve reversals recorded in 2001, partially offset by a sharp reduction in operating expenses. In light of the continuing difficulties and intense pricing pressures in the commercial airline market, a return to the pre-September 11, 2001 level of operating income is not expected in 2003. Furthermore, a prolonged decline in the level of air travel will continue to have an adverse impact on Chromalloy.

     Operating income in the Propulsion segment was $7.8 million in 2002, whereas the segment recorded a loss of $21.0 million in 2001. The 2001 loss included a $10.2 million environmental cleanup provision primarily to remediate soil and groundwater contamination from ammonium perchlorate; $5.7 million of goodwill amortization and asset impairment charges of $3.2 million ($2.2 million at the domestic airbag inflator operation and $1.0 million at the propulsion operation). Excluding the impact of these three items, the segment's 2001 loss was $1.9 million, for a $9.7 million swing in year-over-year results. Both the propulsion and airbag inflator product lines contributed to the improvement. The propulsion systems profit advance was primarily driven by profits from the technology transfer license. The automotive airbag inflator product line narrowed its loss, as a result of increased sales and lower general and administrative costs tempered by lower margins.

     Operating income in the Metal Coating segment increased 51% in 2002 due primarily to the absence of restructuring and related asset impairment charges and goodwill amortization. Excluding these factors, operating income at the unit advanced 5% as the benefit of improved profitability from ongoing Six Sigma initiatives and the 2001 restructuring program combined with lower natural gas prices to offset the impact of lower sales. Natural gas prices have increased significantly in early 2003, and continuation of the current price levels will have an adverse impact on Precoat Metal's operating income in later quarters.

     The Specialty Chemicals segment posted improved results in 2002 driven by higher sales, operating efficiencies generated from Six Sigma initiatives and cost containment measures. The absence of restructuring charges and goodwill amortization and the benefit of favorable currency movements (approximately $0.8 million) boosted results further. The impacts of these factors were tempered by higher pension costs. Results of the specialty chemicals marketing units were ahead for the year primarily due to the June 2001 acquisition of a marketing unit. On an overall basis, profits of this segment for the first quarter of 2003 are expected to continue to trend higher, as a result of continuing strong demand from the international detergent market and favorable currency conditions.

Operating Income   (cont'd)

     The Other Products segment posted operating profit of $1.9 million in 2002. This segment recorded an operating loss of $19.7 million in 2001. The improvement reflects three factors: strong recovery at three of the four operating units in the segment; decreased restructuring and related asset impairment charges; and the absence of goodwill amortization. Partially offsetting these factors was a widening of the loss recorded by the MEGTEC Systems unit (a $5.8 million swing excluding the impacts of restructuring and related asset impairment charges and goodwill amortization). MEGTEC's results reflect the effect of the sharp decline in the worldwide graphic arts market, mitigated by the inclusion of profits from a business acquired in September 2001. Both years include substantial restructuring charges to curb costs in the tight market environment. A further restructuring charge estimated at $1.5 million will result from a plan to streamline its European operations which will b e completed in 2003. The can machinery unit posted a profit in the current year, representing a favorable $13.1 million swing in operating results that was driven by several key factors: improved absorption due to a higher level of production; the absence of 2001 restructuring charges; the benefits gained from the restructuring program and other cost reduction efforts; the ongoing Six Sigma program; reduced provisions for slow moving inventory; and improved results at the specialty can systems operations. The Casco automotive products unit posted a profit improvement in 2002. The primary reasons for the advance are: the absence of restructuring and related asset impairment charges and goodwill amortization in 2002; improved sales at the foreign units; and benefits gained from the 2001 restructuring program, including improved cost controls and the outsourcing of certain manufacturing processes. In order to further reduce costs, management announced plans in early 2003 to transfer production from its plan t in Bridgeport, Connecticut to other facilities. Management anticipates that the move will be completed by mid-2003 at an estimated cost of approximately $1.5 million, which includes costs for severance and relocation. After Six posted a profit in 2002 and a loss in the prior year. The improvement was driven by the benefits of operating efficiencies derived from the 2001 restructuring actions and also reflects, reduced bad debt expense and an improved sales mix.

     A 19% increase in corporate expenses for 2002, reflects the addition of an accrual for incentive compensation; an increase in pension expense; and a restructuring charge to cover the costs of an early retirement program in 2002, partially offset by lower environmental cleanup provisions in 2002.

Pension Expense

Operating income for 2002 includes $13.3 million of expense related to the periodic net pension cost of all of Sequa's significant domestic and foreign funded defined benefit plans. On an annual basis, Sequa reviews the assumptions used in accounting for these plans. In order to reflect current market conditions, at December 31, 2002, the long term expected rate of return on plan assets was changed from 9.0% to 8.3% and the discount rate used to value pension obligations was changed from 7.5% to 6.75%. As a result of these changes and the effect of a decline in the investment performance of its pension portfolios in 2002, management currently anticipates that pension expense in 2003 for these plans will double to approximately $27 million, with the largest dollar increases affecting the Aerospace, Propulsion, Specialty Chemicals and Corporate segments.

Interest expense increased $0.4 million from 2001 due to a first-quarter increase in average borrowings, as well as a higher first-quarter average interest rate. The increased rate resulted from the repayment of lower-rate revolving credit debt using a portion of the proceeds of the $200 million 8 7/8% Senior Notes issued on April 2, 2001.

Interest Income

Interest income decreased $1.7 million from 2001, primarily due to lower interest rates and the absence of earnings on a portion of the proceeds of the $200 million 8 7/8% Senior Notes issued on April 2, 2001 that had been temporarily invested.

Sequa has investments in a number of unconsolidated joint ventures, which amounted to $42.5 million and $46.4 million at December 31, 2002 and 2001, respectively. The combination of income and losses of these joint ventures was losses of $0.1 million in 2002 and $0.7 million in 2001.

     Chromalloy is a partner in joint ventures aimed at strengthening its ties to certain original equipment manufacturers and airline customers, as well as ensuring close cooperation with respect to the dissemination of technical specifications and requirements. Sequa's investment in Chromalloy's joint ventures was $40.6 million and $44.5 million at December 31, 2002 and 2001, respectively. The combination of income and losses of Chromalloy's joint ventures was income of $0.3 million in 2002 and $0.7 million in 2001. The largest of the Chromalloy joint ventures are discussed in the following paragraphs.

     In December 2002, Chromalloy signed an agreement with Siemens Westinghouse Power Corporation and Siemens Aktiengesellschaft (collectively referred to as Siemens) to establish a global cooperation consisting of joint ownership of certain operating companies. These operating companies will provide service and repairs for heavy industrial gas turbines manufactured by other companies or for gas turbines based on the mature technologies of Siemens and its affiliates. The agreement has been approved by the European Commission which reviews mergers, acquisitions and joint ventures, and it is anticipated that the agreement will be effective in the second quarter of 2003. Chromalloy has a 49% ownership interest in Turbine Airfoil Coating & Repair LLC (TACR), an existing joint venture with Siemens. TACR coats new parts and repairs components of industrial gas turbines primarily for Siemens.

     Chromalloy has a 49% ownership interest in Masaood John Brown Ltd (MJB), a partnership with Mohammed Bin Masaood & Sons, which provides repair and maintenance services for industrial gas turbines from a facility in the United Arab Emirates. At December 31, 2002, Sequa has guaranteed MJB's bank line of credit in the amount of $7.0 million.

     Chromalloy has a 52.6% ownership interest, which does not equate to a controlling interest, in a component manufacturing operation that produces new replacement parts for jet engines. While Chromalloy's partners in this joint venture are major commercial airlines, whose industry has been under significant pressures, management believes that the venture is adequately capitalized.

Equity in Loss of Unconsolidated Joint Ventures   (cont'd)

     Chromalloy has two 50/50 joint ventures with Rolls-Royce plc: Turbine Surface Technologies Ltd (TST), which will provide advanced coatings for Rolls-Royce turbine components, and Turbine Repair Technologies Ltd (TRT), which provides advanced component repair services for certain Rolls-Royce engines. TST is expected to generate sales in 2003.

     Advanced Coatings Technologies (ACT), a 50% owned joint venture with United Technologies Corporation, owns and operates an electron beam ceramic coater for the application of Pratt & Whitney coatings to jet engine parts.

     On September 30, 2002, Chromalloy acquired the remaining 50% ownership interest in Pacific Gas Turbine Center, LLC (PGT), which overhauls and tests certain jet engines. The acquired assets and liabilities of PGT and the results of operations have been consolidated with those of Sequa from the acquisition date.

In 2002, Other, net included $3.3 million of gain related to the change in the fair market value of a gas swap; $2.8 million of income related to insurance litigation settlements concerning certain product liability claims relating to the closed operations of a predecessor company; $1.3 million of gain on the sale of a former joint venture engaged in the marketing of electric propulsion subsystems for satellites; $0.9 million of gain on the fair market value of forward foreign exchange contracts that did not qualify for cash flow hedge accounting; $0.6 million of gain on the sale of stock received from the demutualization of an issuer of corporate-owned life insurance policies and pension annuities; $1.5 million of charges for the amortization of capitalized debt issuance costs; $1.4 million of expense on the cash surrender value of corporate-owned life insurance; $1.3 million of discount expense on the sale of accounts receivable; and $1.0 million of charges for letters of credit and commitment fees.

     In 2001, Other, net included $4.6 million of income related to the demutualization of an issuer of corporate-owned life insurance policies and pension annuities; $4.3 million of gain on the sale of the Caval Tool Division of the Chromalloy Gas Turbine subsidiary; $4.1 million of discount expense related to the sale of accounts receivable; $3.6 million of expense on the fair market valuation of a natural gas swap and related option; $1.8 million of charges for the amortization of capitalized debt issuance costs; $1.2 million of expense on the cash surrender value of corporate-owned life insurance; and $1.0 million of charges for letters of credit and commitment fees.

The 2002 income tax benefit of $4.1 million includes $4.1 million of tax benefit, related to an increase in domestic net operating loss carryforwards due to the resolution of issues and the related completion of an Internal Revenue Service audit, and $2.4 million of income relating to the reversal of income tax reserves no longer required, due to the completion of tax audits at two foreign units. The effect of these items is to increase basic earnings per share by $0.40 and $0.23, respectively.

In 2001, the IRS notified Sequa that a settlement agreement concerning the 1989 restructuring of two subsidiaries was approved. As a result of the settlement, $36.0 million, representing the reversal of reserves no longer required, was recorded as income through a reduction of the income tax provision. The amount is separately identified in the Consolidated Statement of Operations. The impact of the settlement was to increase basic earnings per share by $3.47 in 2001.

Effect of a Change in Accounting Principle

On January 1, 2002, Sequa adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142). The statement changed the accounting for goodwill from an amortization method to an impairment only approach.

     Sequa completed the transitional impairment review required under SFAS No. 142 and recorded a non-cash charge of $114.8 million (net of a related tax benefit on deductible goodwill of $8.0 million) as the effect of a change in accounting principle in the Consolidated Statement of Operations. The fair values of Sequa's reporting units were measured using an income approach based on a present value technique of estimated expected future cash flows. The transitional charge relates to the missile and space propulsion ($101.8 million) and automotive inflator ($3.1 million) reporting units of the Propulsion segment and the MEGTEC Systems ($9.1 million) and After Six ($0.8 million) reporting units of the Other Products segment. The effect of the change in accounting principle reduced basic earnings per share by $11.02 for the year ended December 31, 2002. Further information regarding the impact of this statement is contained in Note 8 to the Consolidated Financial Statements.

     Pursuant to SFAS No. 142, goodwill is to be reviewed for impairment on an annual basis. The review date may coincide with the anniversary of the implementation date (January 1) or another date may be selected. Sequa has selected October 1 as the date for subsequent reviews. Sequa reviewed its goodwill as of October 1, 2002 and determined that no further impairment of goodwill had occurred.

Sequa's investment in discontinued operations primarily relates to a leveraged lease portfolio that will be liquidated over the next 12 years as rentals are received and residual values are realized. The leveraged lease cash flow stream, excluding estimated residual values, services the payment of principal and interest on a non-recourse loan that securitized the lease portfolio.

Sequa's largest operation, Chromalloy Gas Turbine Corporation, with 2002 sales and operating income of $675.2 million and $45.3 million, respectively, and total assets at December 31, 2002 of $806.2 million, has experienced significant difficulties in its operating environment since the terrorist attacks of September 11, 2001, which had a severe, immediate and extended impact on the airline industry compounded by a general economic slowdown. The downturn in air travel has had a significant impact on both Chromalloy's repair, and original equipment component manufacturing operations which derived approximately 80% of their 2002 sales from the commercial aviation market. The large repair business is directly related to the number of hours jet engines are flown and the original equipment component manufacturing business is related to the number of new jet engines placed in service. The economic impact on Chromalloy has been partially offset by cost cutting measures. In light of the continuing difficulties a nd intense pricing pressures in the commercial airline market, a return to the pre-September 11, 2001 level of operating income is not expected in 2003. Furthermore, a prolonged decline in the level of air travel will continue to have an adverse impact on the operations of Chromalloy and on its joint ventures ($11.1 million investment at December 31, 2002) that serve the airline industry.

     In March 2003, Standard & Poor's Ratings Services (S&P) placed its ratings on 12 airlines on "CreditWatch with negative implications." S&P cited the looming war with Iraq and its estimation that already weak airlines will incur substantial losses and cash outflow, due to declines in air travel.

     At February 28, 2003, trade receivables due from major commercial airlines totaled approximately $43 million. The poor business conditions in the airline industry and the possibility of bankruptcy filings by other carriers who are customers of Chromalloy could adversely affect the ability of Chromalloy to realize some of these receivables.

     UAL, which filed Chapter 11 in December 2002, accounted for approximately $25 million or 4% of Chromalloy's sales in 2002 (5% of 2001 sales). The pre-petition net trade accounts receivable balance is nominal. The impact of the UAL filing on Chromalloy's operations is uncertain at this time.

     Chromalloy competes for turbine engine repair business with a number of other companies, including the OEMs. The OEMs generally have obligations (contractual and otherwise) to approve vendors to perform repair services on their engines and components. Chromalloy has a number of such approvals, including licensing agreements, which allow it to repair certain components of flight engines. The loss of a major OEM's approval to repair components for its engines could have an adverse effect on Chromalloy, although management believes it has certain actions available to it to mitigate this effect.

     Sequa is engaged in the automotive airbag inflator business through ARC. ARC's largest customer for airbag inflators is Breed and its subsidiaries which are supplied under long-term contracts. Breed and its subsidiaries accounted for $76.1 million or 25% of ARC's sales in 2002 and $95.5 million or 33% of sales in 2001.

Risk/Concentration of Business   (cont'd)

     Precoat Metals markets its coating services to steel and aluminum producers and distributors, building products manufacturers, merchant can makers and manufacturers of other diverse products. The steel manufacturers have experienced difficult economic pressures and the industry is undergoing a period of consolidation. Precoat Metals has worked to insulate its accounts receivable exposure. Furthermore, Precoat Metals primarily acts as a toll coater for its steel mill customers and therefore does not own significant stores of coil inventory to serve this market.

     On March 6, 2002, National Steel filed Chapter 11. National Steel is Precoat Metals' largest customer, accounting for approximately $82 million or 35% of 2002 sales (37% of 2001 sales). The pre-petition trade receivable balance with National Steel was nominal and Precoat Metal's operations have not been adversely impacted. AK Steel has been granted "stalking horse" rights by the Bankruptcy Court for the purchase of National Steel's assets contingent on AK Steel reaching a new labor agreement with the United Steel Workers of America. US Steel has also indicated its interest in acquiring National Steel's assets should AK Steel be unsuccessful in its negotiations.

     Sequa's investment in discontinued operations primarily relates to a leveraged lease portfolio that is subject to risks associated with the ultimate realizability of estimated residual values as well as the creditworthiness of the lessees. Several of the leases are for aircraft leased to major commercial airlines including one with UAL. In December 2002, Sequa recorded an $11.0 million after-tax charge related to its investment in the UAL lease as well as a permanent reduction in other aircraft residuals. In February 2003, American Airlines, Inc. (AA) issued a term sheet to parties involved in its leveraged lease financings as part of a process to implement a consensual restructuring of its obligations to its stakeholders. The term sheet outlines net present value savings that AA is seeking as part of its restructuring. Management does not believe that the AA term sheet is indicative of the value the leveraged lease arrangement provides to AA and, it is premature to estima te the impact on Sequa's investment in discontinued operations of a potential bankruptcy by AA. At December 31, 2002, Sequa's remaining investment in aircraft leases with major commercial airlines is $39.7 million of which $16.2 million relates to AA.

     Sequa is exposed to market risk from changes in foreign currency exchange rates and from changes in the prices of certain commodities which impact its earnings, cash flows and financial condition. Sequa manages its exposure to this market risk through its regular operating and financial activities and, when appropriate, through the use of derivative financial instruments.
Sequa has established a control environment which assigns senior executives and in certain instances operational management responsibility for risk assessment and the approval, reporting and monitoring of derivative financial instrument activities. Sequa does not buy, hold or sell derivative financial instruments for trading purposes. Sequa's primary foreign currency exposures relate to the British pound and to the Euro. To mitigate the short-term effect of changes in currency exchange rates, Sequa utilizes forward foreign exchange contracts and derivatives thereof, to manage its exposure to certain existing assets and liabilities and to hedge firm commitments and forecasted transactions denominated in currencies other than the

Derivative and Other Financial Instruments   (cont'd)

functional currency. Depending on the volatility of the market, Sequa utilizes natural gas swap agreements to convert a portion of its natural gas requirements to fixed rates. Depending on the use of a derivative and whether it has been designated and qualifies as an efficient hedge, gains and losses resulting from changes in the value of the derivative are recognized currently in earnings or reported in Accumulated Other Comprehensive Income (Loss), a separate component of shareholders' equity.

     A hypothetical 10% uniform decrease in all foreign currency exchange rates relative to the US dollar would have decreased the fair value of Sequa's financial instruments by approximately $11.9 million as of December 31, 2002 and $10.6 million as of December 31, 2001. The sensitivity analysis relates only to Sequa's exchange rate-sensitive financial instruments, which include cash and debt amounts denominated in foreign currencies and all open foreign forward exchange contracts at December 31, 2002 and 2001. The effect of this hypothetical change in exchange rates ignores the effect this movement may have on the value of net assets, other than financial instruments, denominated in foreign currencies and does not consider the effect this movement may have on anticipated foreign currency cash flows.

     At December 31, 2002 and 2001, substantially all of Sequa's debt was at fixed rates, and Sequa currently does not hold interest rate derivative contracts. Accordingly, a change in market interest rates would not materially impact Sequa's interest expense but would affect the fair value of Sequa's debt. Generally, the fair market value of fixed-rate debt increases as interest rates fall and decreases as interest rates rise. The estimated fair value of Sequa's total debt was approximately $672 million at December 31, 2002 and $660 million at December 31, 2001. A hypothetical 1% increase in interest rates would have decreased the fair value of Sequa's total debt by approximately $29.6 million at December 31, 2002 and $32.1 million at December 31, 2001. A hypothetical 1% decrease in interest rates would have increased the fair value of Sequa's total debt by approximately $31.4 million at December 31, 2002 and $34.3 million at December 31, 2001. The fair value of Sequa's total d ebt is based primarily upon quoted market prices of Sequa's publicly traded securities. The estimated changes in the fair values of Sequa's debt are based upon changes in the present value of future cash flows as derived from the hypothetical changes in market interest rates.

Sequa's environmental department, under senior management's direction, manages all activities related to Sequa's involvement in environmental cleanup. This department establishes the projected range of expenditures for individual sites with respect to which Sequa may be considered a potentially responsible party under applicable federal or state laws. These projected expenditures, which are reviewed periodically, include: remedial investigation and feasibility studies; outside legal, consulting and remediation project management fees; the projected cost of remediation activities; and site closure and post-remediation monitoring costs. The assessments take into account currently available facts, existing technology, presently enacted laws, past expenditures, and other potentially responsible parties and their probable level of involvement. Outside technical, scientific and legal consulting services are used to support management's assessments of costs at significant individual sites.

Environmental Matters   (cont'd)

     It is Sequa's policy to accrue environmental remediation costs for identified sites when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. In the fourth quarter of 2001, Sequa recorded a charge of $13.3 million to increase its accruals for remediation costs. The charge included $9.7 million of estimated cost to remediate soil and groundwater contamination from ammonium perchlorate (AP), a raw material used to produce missile and rocket fuel. Although no federal or state environmental standards have been finalized for AP, recent studies indicating that the chemical may interfere with human thyroid function have prompted Sequa to begin cleanup actions at its solid propellant facilities. At December 31, 2002, the potential exposure for all remediation costs is estimated to range from $16 million to $28 million, and Sequa's Consolidated Balance Sheet includes accruals for remediation costs of $23.1 million. These accruals are at undiscounted amounts and are included in accrued expenses and other noncurrent liabilities. Actual costs to be incurred at identified sites in future periods may vary from the estimates, given inherent uncertainties in evaluating environmental exposures.

     With respect to all known environmental liabilities, Sequa's actual cash expenditures for remediation of previously contaminated sites were $8.0 million in 2002, $4.0 million in 2001 and $3.3 million in 2000. Sequa anticipates that remedial cash expenditures will be between $5 million and $8 million during 2003 and between $5 million and $7 million during 2004. Sequa's capital expenditures for projects to eliminate, control or dispose of pollutants were $1.3 million, $2.4 million and $2.2 million in 2002, 2001 and 2000, respectively. Sequa anticipates annual environment-related capital expenditures to be approximately $2.5 million during 2003 and $1.8 million during 2004. Sequa's operating expenses to eliminate, control and dispose of pollutants were approximately $11 million in 2002, $11 million in 2001 and $10 million in 2000. Sequa anticipates that environmental operating expenses will be approximately $12 million per year during 2003 and 2004.

Backlog

The businesses of Sequa for which backlogs are significant are the Turbine Airfoils, TurboCombustor Technology and Castings units of the Aerospace segment; the solid and liquid rocket motor operations of the Propulsion segment; and the Sequa Can Machinery, MEGTEC and After Six units of the Other Products segment. The aggregate dollar amount of backlog in these units was $254.2 million at December 31, 2002 and $212.4 million at December 31, 2001. Increases in backlog at the Propulsion segment, Sequa Can Machinery and After Six were partially offset by a decline at MEGTEC. Sales of After Six are seasonal, with stronger sales in the first six months of the year; accordingly, this unit's backlog is normally higher at December 31 than at any other time of the year.

Liquidity and Capital Resources   (cont'd)

in 2002, compared with $57.8 million in 2001. The $29.3 million increased usage primarily relates to the proceeds on the sale of the Caval Tool Division of the Chromalloy Gas Turbine subsidiary in 2001. Net cash from financing activities was $8.5 million in 2002, compared with $52.0 million in 2001. The $43.6 million decrease reflects the $196.8 million net proceeds from the April 2001 debt offering and subsequent repayment in 2001 of amounts outstanding under Sequa's medium-term note issue, revolving credit and receivables purchase agreements, as well as an increase in receivables sold in 2002. Net cash provided by the effect of exchange rate changes was $10.5 million in 2002, compared with $5.2 million used in 2001. The $15.7 million increase primarily reflects the strengthening of the British pound and the Euro relative to the US dollar in 2002 from 2001 and a modest weakening of these same currencies relative to the US dollar in 2001 from 2000.

     In January 2002, Sequa cancelled its $75 million revolving credit agreement. Adverse economic conditions precluded Sequa from being in compliance with certain financial covenants of the agreement in the fourth quarter of 2001, and the facility was not used during that period. Sequa has held intermittent discussions with a group of banks regarding a new secured credit facility; however, given the sufficient level of liquidity, management has chosen not to enter into a new agreement at this time.

     In the third quarter of 2002, Fitch Ratings downgraded the senior unsecured debt of Sequa to BB- from BB+ and revised its Rating Outlook to Negative from Stable. Fitch Ratings cited Sequa's weakened financial performance over the previous 18 months, the cyclical nature of each of Sequa's businesses, particularly commercial aerospace, and the underfunded status of Sequa's defined benefit pension plans. In the second quarter of 2002, Standard & Poor's lowered its long-term corporate credit and senior unsecured debt ratings on Sequa to BB- from BB.

     In March 2003, S&P placed its ratings on 14 commercial aviation suppliers, including Sequa, on "CreditWatch with negative implications." S&P cited the looming war with Iraq as likely to have a significant impact on commercial aviation which, in turn, would put additonal pressures on companies serving that industry.

     The absence of a revolving credit agreement and the downgrade in debt ratings have impacted Sequa's ability to issue new unsecured letters of credit and surety bonds for financial guarantees. While Sequa's letters of credit generally renew on an annual, evergreen basis, it is possible that some issuers may require collateral in the future. In December 2002, Sequa deposited $8.4 million with an insurance carrier when the surety market for financial guarantees became extremely tight and Sequa was unable to renew a surety bond. The amount is being held in an interest bearing account as cash collateral against future expected claims and is refundable upon the issuance of a letter of credit.

     At December 31, 2002, Sequa was contingently liable for $31.3 million of outstanding letters
of credit and $4.6 million of surety bonds not reflected in the accompanying Consolidated Balance Sheet. In addition, Sequa has guaranteed a $7.0 million bank line of credit for its MJB joint venture. Sequa is not currently aware of any existing conditions that would cause risk of loss relative to the outstanding letters of credit, surety bonds or the guarantee.

Liquidity and Capital Resources   (cont'd)

     Sequa Receivables Corp. (SRC), a wholly owned special purpose corporation, has a Receivables Purchase Agreement extending through November 2003 under which it may sell up to $120 million of an undivided percentage ownership interest in Sequa's eligible trade receivables through a bank sponsored facility. Under the terms of the agreement, SRC's assets will be available to satisfy its obligations to its creditors, which have security interests in certain of SRC's assets, prior to any distribution to Sequa. Management has held preliminary discussions regarding a renewal of the facility and expects that an agreement will be in place, similar in terms and in an amount commensurate with underlying receivables balances, upon the expiration of the current Receivables Purchase Agreement. Alternatively, subject to liquidity requirements, a new secured bank credit facility may replace the Receivables Purchase Agreement and provide for additional funds including the issuance of letters of credit. In accordance with SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities -- a Replacement of FASB Statement No. 125," transactions under the Receivables Purchase Agreement qualify as a sale of receivables. Trade receivables included in the December 31, 2002 Consolidated Balance Sheet are net of $80.0 million of receivables sold under the agreement.

     Capital expenditures amounted to $73.6 million in 2002, with spending concentrated in the Aerospace, Propulsion and Metal Coating segments. These funds were primarily used to upgrade existing facilities and equipment and to expand airbag inflator capacity. Sequa currently anticipates that capital spending in 2003 will be approximately $85 million and will be concentrated in the Aerospace and Propulsion segments.

     In 2002, Sequa contributed $21.9 million to its domestic qualified defined benefit pension plans. Due to the present underfunded status of these plans, management anticipates that additional pension contributions will total approximately $27 million in the next 12 months and will be contributed primarily in the third quarter of 2003.

     Due to 2002 declines in the equity markets as well as lower interest rates utilized to value year-end pension liabilities, Sequa recorded a $65.1 million after-tax fourth-quarter charge through other comprehensive income, a component of shareholders' equity, to increase pension liabilities to required levels in the Consolidated Balance Sheet.

     In October 2002, Sequa purchased and cancelled $2.0 million of its 9% Senior Notes due in 2009. Management regarded the purchase to be at a satisfactory price. Although Sequa has no formal plan to purchase its outstanding notes or other securities, management may, depending on market conditions and other factors, from time to time, purchase its notes or other securities in the open market or through privately negotiated transactions.

     Management currently anticipates that cash flow from operations; the $26.0 million available at March 20, 2003 under the Receivables Purchase Agreement and the Agreement's expected fourth quarter renewal in an amount commensurate with underlying receivable balances or, alternatively, subject to liquidity requirements, a new secured bank credit facility that may replace the Receivables Purchase Agreement and provide for additional funds including the issuance of letters of credit; and the $101.7 million of cash and cash equivalents on hand at February 28, 2003 will be sufficient to fund Sequa's operations for 2003 including the $62.6 million of interest payments due on the outstanding 9% and 8 7/8% Senior Notes; $85 million of estimated capital expenditures; the $27 million of estimated pension contributions; and any future requirements of collateral on letters of credit and surety bonds which totaled $35.4 million at February 28, 2003.

Sequa believes that the application of the following accounting policies is important to its financial position and results of operations and requires significant judgments and estimates on the part of management. For a summary of all of Sequa's significant accounting policies see Note 1 to the Consolidated Financial Statements included on pages 44 through 48 of this Annual Report on Form 10-K.

Allowance for Doubtful Accounts

Certain of Sequa's operating segments provide services to industries that are or have been experiencing difficult economic pressures. The Aerospace segment performs repair and other services for the commercial airline industry and the Metal Coating segment counts major steel mills among its customers. See the Risk/Concentration of Business section of this MD&A on pages 22 and 23 of this Annual Report on Form 10-K for further discussion. Many of Sequa's customers are large, well-known companies, and the customer base is monitored through a review of account balance agings, an assessment of customer financial condition, and interactions with the customers. Reserves are established through a combination of specific identification of problem accounts and percentages of aging brackets.

The Aerospace segment (Chromalloy Gas Turbine) maintains significant inventories of parts to serve the repair market. In order to ensure that any obsolete or slow moving inventory is properly identified and valued, Chromalloy has in place a policy that mandates minimum reserve requirements based on usage. The policy provides for a consistent and systematic approach to valuing inventory, with reserves reassessed quarterly and at year-end for adequacy. Management believes that, while demand for certain repair services and manufactured parts has been volatile during the past year and can remain volatile while the industry is disrupted, the long-term outlook for the industry is positive. However, a further decline in air travel would have an adverse impact on inventory reserve requirements.

The Propulsion segment is engaged in the military contract market to produce propulsion systems primarily for tactical weapons. Long-term contracts are accounted for on the percentage-of-completion method, whereby sales are primarily recognized based upon costs incurred as a percentage of estimated total costs and gross profits are recognized under a more conservative "efforts-expended" method, primarily based upon direct labor costs incurred as a percentage of estimated total direct labor costs. Changes in estimates for sales, costs and gross profit are recognized in the period in which they are determinable using the cumulative catch-up method.

Goodwill

SFAS No. 142 requires that goodwill and other intangible assets be tested for impairment on an annual basis. Sequa recorded a $114.8 million after-tax transitional impairment charge effective with the January 1, 2002 adoption of SFAS No. 142. Sequa updated its review of goodwill on its selected annual test date of October 1, 2002 and noted no further impairment. In assessing the recoverability of goodwill, assumptions are made with respect to future business conditions and estimated expected future cash flows to determine the fair value of a reporting unit. If these

Goodwill   (cont'd)

estimates and assumptions change in the future due to such factors as a decline in general economic conditions; a long-term or permanent decline in air travel; competitive pressures on sales and margins; and other factors beyond management's controls, an impairment charge may be required. Details of remaining goodwill balances by segment are included in Note 24 to the Consolidated Financial Statements on page 75 of this Annual Report on Form 10-K and is incorporated herein by reference.

Income Taxes

Sequa has significant domestic net operating loss carryforwards, as well as deferred tax assets established through other comprehensive income in recording a minimum required pension liability. Management believes that such carryforwards and deferred tax assets will be utilized before their expiration through future reversals of existing taxable temporary differences, future earnings and available tax planning strategies. Sequa's ability to generate the expected amounts of domestic taxable income from future operations is dependent upon general economic conditions; the state of the airline industry and other major markets; competitive pressures on sales and margins; and other factors beyond management's control. There can be no assurance that Sequa will meet its expectations for future domestic taxable income in the carryforward period or that available tax strategies can be enacted. However, management has considered the above factors in reaching the conclusion that it is more l ikely than not that future domestic taxable income and available tax strategies will be sufficient to fully realize the domestic operating loss carryforwards and deferred tax assets at December 31, 2002.

Environmental
Sequa's environmental department, under senior management's direction, manages all activities related to Sequa's involvement in environmental cleanup. This department establishes the projected range of expenditures for individual sites with respect to which Sequa may be considered a potentially responsible party under applicable federal or state laws. These projected expenditures, which are reviewed periodically, include: remedial investigation and feasibility studies; outside legal, consulting and remediation project management fees; the projected cost of remediation activities; and site closure and post-remediation monitoring costs. The assessments take into account currently available facts, existing technology, presently enacted laws, past expenditures, and other potentially responsible parties and their probable level of involvement. Outside technical, scientific and legal consulting services are used to support management's assessments of costs at significant individual sites. It is Sequa's policy to accrue environmental remediation costs for identified sites when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. Actual costs to be incurred at identified sites in future periods may vary from the estimates, given inherent uncertainties in evaluating environmental exposures.

Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS No. 146), was issued in June 2002. This statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred rather than on the date of an entity's commitment to an exit plan. The initial

Other Information   (cont'd)

liability is to be measured at fair value. SFAS No. 146 is not expected to have a material impact on Sequa's consolidated financial statements. This statement is effective for exit or disposal activities initiated after December 31, 2002, and Sequa adopted this accounting standard on January 1, 2003.

     SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure," was issued in December 2002 and amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition to SFAS No. 123's fair value method of accounting for stock-based compensation. While the statement does not require companies to account for employee stock options using the fair value method, it does require disclosure in the summary of significant accounting policies of the effects of an entity's accounting policy with respect to stock-based compensation on reported net income and earnings per share in annual and interim statements. Sequa currently follows Accounting Principles Board (APB) Opinion No. 25, which measures compensation cost for stock options as the excess, if any, of the quoted market price of a company's stock at the grant date over the amount an employee must pay to acquire the stock. As Sequa's stock option plans require the option p rice to be no less than the fair market value at the date of grant, no compensation expense is recognized for stock options granted. Sequa has not issued significant numbers of stock options in the last three years and may reassess its accounting policy in the future. SFAS No. 148 is effective for fiscal years ending after December 15, 2002, and the disclosure requirements are included in Notes 1 and 16, pages 47, 48, 64 and 65, to the Consolidated Financial Statements in this Annual Report on Form 10-K which are incorporated by reference.

This document includes forward-looking statements made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended. All statements other than statements of historical fact contained in this Report and other periodic reports filed by Sequa under the Securities Exchange Act of 1934, as amended, and other written or oral statements made by Sequa or on its behalf, are forward-looking statements. When used herein, the words "anticipates," "expects," "believes," "goals," "intends," "plans," or "projects" and similar expressions are intended to identify forward-looking statements. These include, among others, statements relating to:

• Future earnings and other measurements of financial performance
• The effect of economic downturns or growth in particular markets
• Future cash flow and uses of cash
• Pension plan assumptions and future contributions
• Restructuring costs and savings
• The outcome of contingencies
• Future levels of indebtedness and capital spending
• Product developments and new business opportunities

Forward-Looking Statements   (cont'd)

It is important to note that forward-looking statements are based on a number of assumptions about future events and are subject to various risks, uncertainties and other factors that may cause our actual results to differ materially from the views, beliefs and estimates expressed or implied in such forward-looking statements. Although Sequa believes that the assumptions on which any forward-looking statements in this Report and other periodic reports filed by Sequa are reasonable, no assurance can be given that such assumptions will prove correct. All forward-looking statements in this Report are expressly qualified in their entirety by the cautionary statements in this paragraph and elsewhere in this Report.

Web Access to Securities and Exchange Commission Filings

Sequa's Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to such reports, are available free of charge or through Sequa's web site (www.sequa.com) as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission.

     Sales of the Aerospace segment declined 2% in 2001. On a pro forma basis -- to exclude the prior year's sales from operations contributed to joint ventures during 2000, and the sales of Caval Tool, which was divested on February 28, 2001 -- aerospace sales advanced 5%. Engine component repair sales advanced 5% in 2001, despite the absence of sales from units contributed to joint ventures ($14.5 million) and the unfavorable effect of translating foreign sales to US dollars (approximately $2.6 million). The advance in the repair segment reflects higher sales to the commercial airline market and the industrial gas turbine market. In the fourth quarter of 2001, sales to the repair market declined 5%, primarily due to the impact on the commercial airlines of the September 11 terrorist attacks. The impact on sales was partially offset by work already in house. Sales to the original equipment market declined 17% in 2001, a reflection of the divestiture of Caval Tool ($27.2 millio n impact), weak market conditions, and the unfavorable effect of translating foreign sales to US dollars (approximately $3.4 million).

     Sales of the Propulsion segment increased 5% in 2001, as sales of automotive airbag inflators rose 10% due to the February 1, 2001 acquisition by an ARC affiliate of certain assets and the automotive inflator business of BAG S.p.A., an Italian operation that was previously 50% owned by ARC. Domestic automotive inflator sales declined 16% because of the absence of sales to BAG S.p.A. in the last 11 months of 2001. Propulsion sales were on a par with 2000.

     Sales of the Metal Coating segment increased 6% in 2001, primarily driven by a strong advance in sales to the building products market, and the consolidation of a former equity affiliate, Midwest Metal Coatings (MMC), for the last seven months of 2001. The increase in building products primarily reflects market share gains and strong demand from the component segment of the market. Sales to the container market registered a small advance, as the benefit derived from the temporary shutdown of coating capacity at a customer's facility more than offset general weakness in the container market. Sales to the manufactured products market were on a par with the prior year. The fourth quarter was particularly strong for the Metal Coating segment, with double digit increases in sales to each of the major markets served.

     Sales of the Specialty Chemicals segment declined 1% in 2001, as a 4% increase in local currency sales was more than offset by the translation of local currency amounts to US dollars. The local currency increase was due entirely to the addition of two specialty chemicals marketing units acquired in 2001 and 2000. Sales of detergent chemicals declined 3% for the year, though a rebound in fourth-quarter demand tempered the impact of mid-year market weakness. The marketing units were unfavorably affected by the weak Euro and a softening in demand which began in the second quarter.

Sales   (cont'd)

     Sales of the Other Products segment declined 9% in 2001, with each of the major units down from the preceding year. Sales of MEGTEC Systems declined 3% (8% excluding sales from the recently acquired roll handling group), with lower sales to all major markets: graphic arts, emission controls, and industrial products. Fourth-quarter sales declined 21% (34% excluding the impact of the roll handling group) reflecting both very weak market conditions and the effect of comparison against a particularly strong fourth quarter of 2000. Backlog at year-end was down 32% from year-end 2000, primarily reflecting weakness in demand from the graphic arts market. Sales of Sequa Can Machinery declined 6% in 2001 with lower sales to the can forming and decorating equipment and spare parts markets tempered by a 7% increase in specialty can systems. Sales at automotive supplier Casco Products declined 12%, due primarily to a significant decline in sales to the North American market. Foreign un its registered a small advance, as local currency increases were tempered by the impact of the stronger dollar on translation of the results ($1.5 million). Sales of the men's apparel unit, After Six, declined 33% for the year and 53% for the fourth quarter, due to a sharp decline in demand for formalwear. Backlog at this unit was down 45% from year-end 2000.

Operating Income

Overall operating income declined $77.3 million or 75% in 2001. The major elements in the decline were: restructuring and related asset impairment charges of $22.4 million ($19.2 million higher than in 2000); a $13.3 million provision for environmental clean-up ($12.3 million higher than in 2000); and an unfavorable swing in results (exclusive of the restructuring and environmental provisions) of $20.9 million in the Propulsion segment and $27.7 million in the Other Products segment. A detailed review of operating results for each segment follows.

     Operating income in the Aerospace segment declined 3% in 2001. Results for 2001 include a restructuring charge of $4.0 million and related asset impairment charges of $0.4 million. These costs were for a 376 person (approximately 6%) reduction in Chromalloy Gas Turbine's workforce and the closing of a small facility. On a pro forma basis to exclude these charges, operating income increased 4% in 2001. The segment benefited from the absence of product development costs ($3.0 million in the first six months of 2000) at a component manufacturing unit now treated as an equity investment, and improved profitability at units engaged primarily in OEM activities. These benefits were tempered by lower profits at units primarily engaged in component repair for both the commercial airlines and industrial gas turbine aftermarkets. While declines at these repair units in the first nine months were due entirely to the absence of approximately $3.0 million of operating income from busine ss transferred to joint ventures in 2000, the fourth-quarter decline reflected the dislocations in the commercial airline market following the September 11, 2001 terrorist attacks, partially offset by cost-cutting actions and the resolution of certain contractual matters and cost estimates which allowed previously established reserves of $1.3 million to be reversed.

     The Propulsion segment reported a $21.0 million loss in 2001, compared with a $10.0 million profit in 2000. The unfavorable swing primarily reflects losses at the automotive airbag inflator operations, a fourth-quarter environmental cleanup provision of $10.2 million, $3.2 million in asset impairment charges and a decline in profits in the rocket motor propulsion unit. Losses at

Operating Income   (cont'd)

the automotive airbag inflator operations primarily reflect three major factors: the consolidation of the Italian inflator operation beginning February 1, 2001; an unfavorable shift in the mix of domestic airbag inflator sales; and a $2.2 million asset impairment charge. The $10.2 million provision for environmental cleanup was primarily related to the establishment of a $9.7 million reserve to remediate soil and groundwater contamination from ammonium perchlorate (AP), a raw material used in the production of solid rocket motor propellant. Although no federal or applicable state environmental standards have been finalized for AP, studies indicating that the chemical may interfere with human thyroid function prompted the unit to begin cleanup actions at its two affected solid propellant facilities. Excluding the environmental provision, the decline in operating profit in the rocket propulsion portion of the business is primarily related to a $1.0 million asset impairment charge, and to lower margins in the liquid propulsion market primarily caused by cost overruns on a commercial satellite program in the second half of 2001.

     Operating income in the Metal Coating segment declined 29% or $5.5 million in 2001. The decline was due entirely to $5.7 million of restructuring and related asset impairment charges to cover an early retirement program and the closing of a coating facility in Chicago, Illinois. Excluding these charges, results for 2001 were on a par with 2000, as strong operating results in the second half of the year offset the effect of a poor first quarter. On an operating basis, a 6% increase in sales (4% without the impact of MMC), the earnings added by the newly acquired MMC unit, improved productivity and income from a consulting agreement were offset by higher natural gas pricing (approximately $2.8 million) and by weakness in the secondary metal market.

     Operating income in the Specialty Chemicals segment declined 17% in 2001. Both years were affected by restructuring charges related to early retirement programs ($1.1 million in 2001 and $3.2 million in 2000). The decline was primarily due to: lower profits at the marketing units, where the benefits of higher sales were largely offset by currency-driven margin pressures and weakness in a key product market; increased pension expense; and the impact of a declining pound sterling on reported US dollar results. At the larger detergent chemicals operation, the benefits of restructuring and other ongoing cost containment initiatives were largely offset by slightly lower sales and higher raw material costs. The impact on operating income of restructuring charges, net of same-year savings, was roughly equivalent in both years.

     The Other Products segment posted a $19.7 million loss in 2001, whereas this segment had operating income of $19.2 million in 2000. Each of the four operating units recorded losses in 2001, whereas each recorded profits in 2000. Of the $38.9 million swing in operating results, $11.2 million reflects restructuring actions taken at the four units. MEGTEC had an unfavorable $7.8 million swing in operating results, which included a $3.2 million restructuring charge to reduce the work force by 5%. Without this charge the unit was at approximately breakeven in 2001, due to the impact of a sharp decline in sales in the fourth quarter and a shift to lower margined products. The Sequa Can Machinery operation registered an unfavorable swing of $12.0 million in operating results. This was primarily attributable to: restructuring and related asset impairment charges of $2.6 million for headcount reductions and the closing of a facility; the impact of lower sales and a significantly lo wer level of manufacturing activity in can forming and decorating products on absorption and gross profit; increased provisions for slow moving inventory; and lower spare parts sales. Casco, the automotive products unit, recorded an $11.7

Operating Income   (cont'd)

million unfavorable swing in operating results in 2001. This included a restructuring charge of $3.6 million and related asset impairment charges of $1.1 million to cover the impact of headcount reductions and the write-down of equipment used in processes being outsourced. The balance of the decline is attributable to a loss at the domestic operation, where sales declined sharply and pressure on costs and margins continued. Results at After Six, the men's apparel unit, were down $7.3 million, primarily due to a 33% drop in sales, manufacturing inefficiencies, and increased inventory markdowns and bad debt provisions. Restructuring and related asset impairment charges totaled $0.7 million for this unit, which resulted from the decision to manufacture a large portion of the unit's products offshore.

     Corporate expenses declined 9% in 2001, primarily a reflection of the absence of a bonus accrual, partially offset by increased environmental cleanup provisions for operations that are no longer part of Sequa ($3.1 million in 2001, $1.0 million in 2000) and higher pension costs.

Interest Expense

Interest expense increased $6.9 million from 2000 and reflects a higher level of average borrowings due to expanded working capital needs at Sequa's Chromalloy unit resulting from growth initiatives pursued in 2000 as well as other general corporate purposes. The increase also reflects a higher average interest rate resulting from the repayment of revolving credit debt using a portion of the proceeds of the $200 million 8 7/8% Senior Notes.

Equity in Loss of Unconsolidated Joint Ventures

Sequa's investments in unconsolidated joint ventures amounted to $46.4 million and $65.7 million at December 31, 2001 and 2000, respectively. The combination of income and losses of these joint ventures resulted in net equity losses of $0.7 million in 2001 and $2.0 million in 2000. The largest of these joint ventures are discussed in the following paragraphs.

     On February 1, 2001, ARC, through an affiliate, acquired certain assets and the ongoing automotive airbag inflator business of BAG S.p.A. pursuant to an overall settlement agreement with its former joint venture partner, Breed Technologies, Inc. The results of operations as they relate to the acquired assets and the ongoing inflator business of BAG S.p.A. have been fully consolidated with those of Sequa from the acquisition date. Sequa continues to have an equity investment in BAG S.p.A. reflecting underlying assets established for certain anticipated liabilities as the venture is wound down. Sequa's investment in BAG S.p.A. was $1.9 million at December 31, 2001 and $15.2 million at December 31, 2000. Sequa's equity share of the losses of the BAG S.p.A. joint venture was $1.9 million in 2001 and $2.0 million in 2000. The 2001 loss includes a $1.2 million write-down of an airbag inflator production line.

     Chromalloy has investments in a number of unconsolidated joint ventures, which amounted to $44.5 million and $41.5 million at December 31, 2001 and 2000, respectively. The combination of income and losses of these joint ventures resulted in net equity income of $0.7 million in 2001 and net equity losses of $0.2 million in 2000.

     In June 2001, Precoat Metals acquired the remaining 50% ownership interest in Midwest Metal Coatings (MMC), which coats coils of heavy gauge steel for structural components used in the building products market. The results of operations have been fully consolidated with those of Sequa from the acquisition date. Sequa's investment in MMC was $9.0 million at December 31, 2000. Sequa's equity share of net income from MMC was $0.5 million in 2001 and $0.3 million in 2000.

In 2001, Other, net included $4.6 million of income related to the demutualization of an issuer of corporate-owned life insurance policies and pension annuities; $4.3 million of gain on the sale of the Caval Tool Division of the Chromalloy Gas Turbine subsidiary; $4.1 million of discount expense related to the sale of accounts receivable; $3.6 million of expense on the fair market valuation of a natural gas swap and related option; $1.8 million of charges for the amortization of capitalized debt issuance costs; $1.2 million of expense on the cash surrender value of corporate-owned life insurance; and $1.0 million of charges for letters of credit and commitment fees.

     In 2000, Other, net included $7.5 million of discount expense related to the sale of accounts receivable; $1.6 million of expense on the cash surrender value of corporate-owned life insurance; $1.1 million of charges for the amortization of capitalized debt issuance costs; $1.0 million of charges for letters of credit and commitment fees; $1.0 million of income related to the final resolution of matters associated with the sale of a Chromalloy Gas Turbine business in the United Kingdom; $1.0 million of income related to a minority interest in the component manufacturing operation for the period during which the operation was majority owned; and a $0.9 million gain related to the sale of a partial ownership interest in this operation.

Liquidity and Capital Resources

Net cash provided by operating activities was $88.1 million in 2001, compared with $42.3 million in 2000. The primary reasons for the $45.8 million increase were a lower level of working capital requirements partly offset by lower operating income and an increase in taxes paid that primarily reflects the absence of a Federal tax refund received in 2000. Cash used for investing activities was $57.8 million in 2001, compared with $115.8 million in 2000. The $58.0 million decrease primarily relates to the proceeds on the sale of the Caval Tool division of the Chromalloy Gas Turbine subsidiary, and a lower level of capital spending in 2001. Net cash from financing activities was $52.0 million in 2001, compared with $62.4 million in 2000. The $10.4 million decrease reflects the $196.8 million net proceeds from the April 2001 debt offering and the subsequent repayment of the $66.4 million 10.1% medium-term notes due in mid-May and amounts outstanding under Sequa's revolving credit and receivables purchase agr eements.

     On April 2, 2001, Sequa completed an offering of $200 million of 8 7/8% Senior Notes due April 1, 2008 through a private placement under Rule 144A of the Securities Act of 1933, as amended (the Securities Act). Net proceeds received on April 2, 2001 from the 8 7/8% Senior Notes offering amounted to $196.8 million. The proceeds were used to repay approximately $100 million outstanding under Sequa's revolving credit agreement; to redeem $66.4 million of 10.1% medium-term notes when they matured in mid-May 2001; and for general corporate purposes including a reduction in the amount outstanding under the receivables purchase agreement. Concurrent with the completion of the 8 7/8% Senior Notes offering, Sequa's revolving credit facility was reduced to $75 million from $150 million.

     On July 12, 2001, Sequa completed its offer to exchange all outstanding 8 7/8% Senior Notes due April 1, 2008 for up to $200 million of registered Series B 8 7/8% Senior Notes due April 1, 2008. All $200 million of outstanding notes were exchanged. The terms of the new Series B 8 7/8% Senior Notes -- including principal amount, interest rate, maturity, security and ranking -- are substantially the same as the terms of the original notes, with the principal exception that the new notes are registered under the Securities Act.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     See discussion appearing on pages 23 and 24 of this Annual Report on Form 10-K under the heading "Derivative and Other Financial Instruments," and Note 13 to the Consolidated Financial Statements on pages 58 and 59 of this Annual Report on Form 10-K, which are incorporated

herein by reference.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF THE INDEPENDENT AUDITORS

To the Shareholders and Board of Directors of Sequa Corporation

We have audited the accompanying consolidated balance sheet of Sequa Corporation and subsidiaries as of December 31, 2002 and the related consolidated statements of operations, shareholders' equity, and cash flows for the year then ended. The consolidated financial statements of Sequa Corporation and Subsidiaries as of December 31, 2001 and for the two years then ended were audited by other auditors who have ceased operations. Those auditors have expressed an unqualified opinion on those financial statements in their report dated March 11, 2002. 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 audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States. 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 audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sequa Corporation and subsidiaries at December 31, 2002, and the consolidated results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States.

As described in Notes 1 and 8 to the consolidated financial statements, effective January 1, 2002 the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA   (cont'd)