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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1995 Commission file number 1-804
SEQUA CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 13-188-5030
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 Park Avenue, New York, New York 10166
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 986-5500
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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Class A Common Stock, no par value New York Stock Exchange
Class B Common Stock, no par value New York Stock Exchange
$5.00 Cumulative Convertible
Preferred Stock, $1.00 Par Value New York Stock Exchange
9-5/8% Senior Notes, Due
October 15, 1999 New York Stock Exchange
8-3/4% Senior Notes, Due
December 15, 2001 New York Stock Exchange
9-3/8% Senior Subordinated Notes,
Due December 15, 2003 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
The aggregate market value of registrant's voting stock (Common and Preferred)
held by nonaffiliates as of March 12, 1996 was $254,446,000
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock:
Class Outstanding at March 12, 1996
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Class A Common Stock, no par value 6,535,823
Class B Common Stock, no par value 3,330,780
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's definitive proxy statement for its annual meeting of
stockholders scheduled to be held on May 16, 1996 are incorporated herein by
reference into Part III.
SEQUA CORPORATION
FORM 10-K
* * * * * * *
PART I
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ITEM 1. BUSINESS
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(a) GENERAL DEVELOPMENT OF BUSINESS. Sequa Corporation is a
diversified industrial company that produces a broad range of
products through operating units in four industry segments:
Aerospace, Machinery and Metal Coatings, Specialty Chemicals, and
Other Products. Sequa Corporation, incorporated in 1929, is
hereinafter sometimes referred to as the "Registrant" and,
together with its consolidated subsidiaries, is hereinafter
sometimes referred to as the "Company" or "Sequa."
Divestitures
- ------------
On December 29, 1995, the Company sold substantially all of
the business and operating assets, excluding billed receivables,
of Kollsman for cash proceeds of $49.6 million. The sale
resulted in a pre-tax gain of $6.5 million.
During 1994, the Company sold three Chromalloy Gas Turbine
units primarily engaged in activities other than basic component
repair of flight engines for net cash proceeds of $57.2 million.
Losses on the sale of these units were charged to reserves
established in 1993 for Chromalloy's restructuring program.
In December 1993, the Company sold the stock of ARC
Professional Services for net cash proceeds of $58.3 million, and
the purchaser assumed $4.5 million of ARC Professional Services'
debt. The sale resulted in a pre-tax gain of $12.4 million.
Also during 1993, Northern Can Systems' two can making facilities
were sold for cash proceeds of $15.0 million.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS. Segment
information is included in Note 19 to the Consolidated Financial
Statements on page 60 of this Annual Report on Form 10-K and is
hereby incorporated by reference.
(c) NARRATIVE DESCRIPTION OF BUSINESS. The following is a
narrative description of the business segments of Sequa:
Aerospace
- ---------
The Aerospace segment includes three operating units:
Chromalloy Gas Turbine, ARC Propulsion and the Kollsman division.
Chromalloy Gas Turbine. Chromalloy, the largest of Sequa's
operating units, 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. 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 steadily 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.
ARC Propulsion. ARC Propulsion, a supplier of solid rocket
fuel propulsion systems since 1949, is a leading developer and
manufacturer of advanced rocket propulsion systems, gas
generators and auxiliary rockets, and engages in research and
development relating to new rocket propellants and advanced
materials. For the military contract market, ARC Propulsion
produces propulsion systems for tactical weapons, and for space
applications, ARC Propulsion produces small liquid fueled rocket
engines designed to provide attitude and orbit control for a
number of satellite systems worldwide.
ARC Propulsion's strategy is to pursue opportunities to
develop products for commercial markets in order to reduce its
reliance on defense-related business. ARC Propulsion supplies
solid propellant and other airbag components to the Company's
unconsolidated joint ventures (BAICO and BAG Spa) participating
in the rapidly growing market for automobile airbags. A pioneer
in the development of hybrid inflator systems, BAICO has earned
widespread market acceptance among car companies. Building on
the success of BAICO in North America, the Company and its joint
venture partner, AlliedSignal, joined with a unit of European
auto maker Fiat in a three-way venture (BAG Spa) that has
successfully introduced the hybrid inflator to the European
automobile market.
Kollsman. Kollsman, which was sold in December 1995,
consists of three units: the military systems unit, a government
contract supplier of electro-optical and electronic systems for
military weapons; the avionics products unit, a designer and
manufacturer of aircraft instruments and related test equipment;
and Kollsman Manufacturing Company, Inc. (KMC), a separate
subsidiary that produces medical diagnostic instrumentation.
Machinery and Metal Coatings Segment
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The Company's Machinery and Metal Coatings segment is
composed of Precoat Metals, Sequa Can Machinery and Materiels
Equipements Graphiques.
Precoat Metals. The largest individual unit of the segment,
Precoat Metals 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
and agricultural 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 two-piece metal cans and can lids. In addition, the
division has established a presence in the truck trailer and
manufactured products markets as a supplier of pre-painted steel.
Over the past two years, Precoat has substantially expanded its
market reach, adding a new facility in the Southeast and
acquiring two additional coating facilities, one in the Midwest
and one in the East.
Sequa Can Machinery. Sequa Can Machinery designs and
manufactures equipment for the two-piece can industry. At a
facility on the East Coast, Sequa Can Machinery manufactures
equipment to coat and decorate two-piece beverage cans. With an
installed base at its customers of over 700 machines, Sequa Can
Machinery has successfully developed a retrofit business to
upgrade older equipment to match the technical standards of newer
lines. At the same time, the division's product development team
has improved the technology of precision printing to achieve
higher speeds without compromising quality. The current
generation of equipment runs at a rate of 2,000 cans per minute,
applying an even base coat and printing crisp, clear images in up
to eight colors. At its West Coast plant, Sequa Can Machinery
produces equipment used to form the cup and body of two-piece
metal cans. The latest generation of cupping equipment supports
two high speed can lines, producing more than 4,500 shallow cups
per minute. The company's newest bodymaker operates at a rate up
to 500 cans per minute.
Materiels Equipements Graphiques (MEG). MEG supplies
equipment for the web offset printing industry, including dryers,
chill rolls, paper guides, in-feeds and related equipment for
high-speed web presses. MEG's products include a line of
advanced flying pasters, devices that spin a fresh roll, or web,
of paper, to press speed and splice it to an expiring roll
without interrupting press operation.
Specialty Chemicals Segment
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The two operations that make up the Company's Specialty
Chemicals segment, Warwick International and Sequa Chemicals,
serve distinctly different markets with performance-enhancing
additives for a broad range of end products.
Warwick International. The larger of the two businesses in
the Specialty Chemicals segment, Warwick is a leading producer
and supplier of TAED, a bleach activator for powdered laundry
detergent products. TAED is used in perborate- or oxygen-based
bleaching systems to increase the cleaning power of detergent at
low wash temperatures. These bleaching systems, as opposed to
the chlorine-based bleaches traditionally used in the US, are
used in international markets, primarily in Europe.
Sequa Chemicals. Sequa Chemicals manufactures high-quality
performance-enhancing chemicals for the paper, textile and other
industries. For the paper industry, Sequa Chemicals produces key
synthetic coating additives for coated papers including
Reactopaque, which increases the opacity of finished paper
primarily used by the newsprint industry. Sequa Chemicals
supplies the woven and knit fabric market with permanent press
resins, softeners, water repellents, soil release agents and
other chemicals to improve the look, feel and durability of
clothing and other textiles. In addition, Sequa Chemicals has
developed and patented a unique series of specialty emulsion
polymers for a broad range of commercial applications including
roofing mat, industrial filtration systems and tape release
coatings.
Other Products Segment
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In December 1993, the Company sold the ARC Professional
Services unit, the largest business unit in the group, and
disposed of two smaller operations, leaving: Casco Products,
which manufactures automotive cigarette lighters, power outlets
and electronic devices; Northern Can Systems, which manufactures
easy-open steel lids for cans; and Centor, a real estate holding
company which owns and operates, among other properties, the
Chromalloy Plaza Building in Clayton, Missouri.
Casco Products (Casco). Casco, which has been serving the
automotive products market since 1921, is a major manufacturer of
automotive cigarette lighters and the leading supplier in North
America to Chrysler, Ford, General Motors and Honda. In
addition, the unit has established a presence in the European
automotive markets.
Casco offers a growing line of automotive accessories, led
by a series of electronic devices to monitor automotive fluid
levels. These products are presently used as gauges for engine
oil and engine coolant and may also be used to monitor brake,
transmission and power steering fluids. Casco's other products
include auxiliary power outlets, electronic control modules, and
daytime running lights.
Northern Can Systems (NCS). NCS supplies the domestic and
international food processing market with easy-open lids for
cans. Fabricated from steel, full-open ends are used on cans for
pet food, fruits, vegetables, coffee and specialty foods. When
made as pour-spout lids, which incorporate a pull-tab, easy-open
ends are used on cans for beverages, including nutritional
drinks.
Principal Products
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The percentage of Sequa's consolidated sales contributed by
each class of similar products, which accounted for 10 percent or
more of such consolidated sales during the last three fiscal
years, is as follows:
Year Ended December 31,
-----------------------
1995 1994 1993
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Chromalloy Gas Turbine 39% 42% 42%
ARC Propulsion 10% 10% 9%
Precoat Metals 12% 10% 7%
Markets and Methods of Distribution
Chromalloy markets its gas turbine engine component
manufacturing and repair services primarily to commercial and
military aircraft customers and to users of industrial gas
turbines worldwide. These and other products of Chromalloy are
marketed directly and through sales representatives working on a
commission basis.
A portion of the sales of Chromalloy's operations is made
pursuant to contracts with various agencies of the United States
Government, particularly the Department of the Air Force, with
which Chromalloy has had a long-term relationship.
Sequa markets its rocket propulsion systems generally on a
subcontract basis under various defense programs of the United
States Government. Among the programs currently in production
are the Multiple Launch Rocket System (MLRS) and the MK-104
rocket motor for the Standard Missile. During 1995, ARC was
awarded a two-year contract to provide the MK-36 motor for the
Sidewinder missile. In addition, ARC Propulsion has a number of
advanced programs in various stages of development and
qualification, including the extended range MLRS and PAC-3, a new
anti-missile system (formerly known as ERINT) that is the
successor to the Patriot missile.
Kollsman, which was sold in December 1995, markets its
electronic and electro-optical systems and its avionics products
to both commercial and military customers. The electro-optical
systems, and related spares and repair work, are sold primarily
under government contracts to the US military, and to foreign
governments. KMC products are sold directly to medical equipment
suppliers.
By their terms, government contracts are subject to
termination by the government either for its convenience or for
default by the contractor. Some government contracts are secured
through competitive bidding. The largest single government
agency contract accounted for 2% of Sequa's sales in 1995, 1994
and 1993. Prime contracts and subcontracts with all government
agencies accounted for 11% of Sequa's sales in 1995 and 1994 and
22% of sales in 1993. The decline in sales to government
agencies was primarily due to the sale of the ARC Professional
Services unit in December 1993. With the sale of Kollsman in
December 1995 and ARC Propulsion's continued development of
products for commercial markets, the impact of defense spending
levels on the Company's sales and operating income has been
significantly reduced.
Sequa's Machinery and Metal Coatings Segment sells its
machinery products directly to the container and food industries,
as well as to the web printing industry. The metal coatings
business sells its coating services to regional steel and
aluminum producers, building product manufacturers, merchant can
makers and other participants in the food industry.
The Specialty Chemicals Segment sells textile chemicals and
emulsion polymers directly to manufacturers of fabric for
clothing and other products. Paper chemicals are sold directly to
paper mills and detergent chemicals are sold to detergent
manufacturers. Specialty polymers are sold directly to the
producers of roofing mats, industrial filters, and tape and label
products.
The automotive products subsidiary sells cigarette lighters
and various electronic monitoring devices directly to the
automotive industry.
Competition
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There is significant competition in the industries in which
Sequa operates, and, in several cases, it competes with larger
companies having substantially greater resources than those of
Sequa.
Sequa believes that it is currently the world's largest
manufacturer of cylindrical can decorating and can forming
equipment, one of the largest manufacturers of permanent press
textile finishing resins and the largest domestic supplier of
automotive cigarette lighters in the United States.
Sequa, through its Chromalloy operations, is a leader in the
development and use of advanced metallurgical and other processes
to manufacture, repair and coat blades, vanes and other
components of gas turbine engines used for military and
commercial jet aircraft and for industrial purposes.
Chromalloy's divisions compete for turbine engine repair business
with a number of other major companies, including the original
equipment manufacturers (OEM). Such OEMs generally have
obligations (contractual and otherwise) to approve vendors to
manufacture components for their engines and/or perform repair
services on their engines and components. Chromalloy has a
number of such approvals, including licensing agreements, which
allow it to manufacture and repair certain components of flight
engines. The loss of approval by one of the major OEMs to
manufacture or 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 the
adverse effect.
Sequa's rocket propulsion systems 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. The Company's ability to compete is enhanced by the
needs of the US Government to have alternative sources of supply
under these contracts.
Sequa's Kollsman unit, which was sold in December 1995,
competes in each of its markets with a number of other
manufacturers, some of which are larger and have greater
resources than Kollsman. This unit competes on the basis of
technical competence, quality and price.
Sequa's Precoat Metals operation is the leading independent
coil coater of steel for metal building panels. Sequa's
cylindrical can decorating and can forming equipment operations
are world leaders in their markets. MEG is a leading supplier of
auxiliary press equipment in Europe.
Sequa's automotive products manufacturer is the nation's
leading producer of cigarette lighters and holds a commanding
share of both the domestic original equipment market and the auto
aftermarket. Sequa's easy-open can lid manufacturing business
competes with a number of larger and well established entities
which have substantially greater financial and other resources.
Raw Materials
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The various segments of Sequa's business 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.
Seasonal Factors
----------------
Overall, Sequa's business is not considered seasonal to any
significant extent.
Patents and Trademarks
----------------------
The Company 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. The Company
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 its
business as a whole to be materially dependent upon any
particular patent, license, trade name, trademark or any related
group thereof. It regards its technical and managerial knowledge
and experience as more important to its business.
Backlog
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Backlog information is included in the Management's
Discussion and Analysis of Financial Condition and Results of
Operations on pages 25 and 26 of this Annual Report on Form 10-K
and is hereby incorporated by reference.
Research and Development
------------------------
Research and development costs, charged to expense as
incurred, amounted to approximately $15.2 million in 1995, $14.3
million in 1994, and $17.2 million in 1993. The level of
research and development costs reflects the Company's objective
of realizing improved returns on those projects which are
undertaken and discontinuing expenditures in areas the Company
believes will not be profitable due to the lack of sufficient
future commercial opportunities. It is not anticipated that this
approach will affect the Company's ability to be competitive.
Costs relating to customer-sponsored research and development
activities are not material.
Environmental Matters
---------------------
The Company 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 the Company or to which the Company may have sent
hazardous wastes. The Company 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
results of operations or the financial position of the Company.
These environmental matters include the following:
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 the Company 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. An agreement
in principle has been reached in the class action, while the
Borough action remains unresolved.
The Pennsylvania Department of Environmental Protection
entered into a Consent Decree with the Company 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 Environmental Protection Agency (EPA) also
placed the site on the Superfund List in 1990 and, in conjunction
therewith, entered into a Consent Agreement with the Company on
December 31, 1990. EPA estimates that the cost of the interim
remedy will be approximately $4 million. The investigation for
the final remedy is still in progress.
The State of Florida issued an Administrative Order
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 has subsequently constructed and is
operating a groundwater remediation system. The Company has
negotiated a settlement with the City of Stuart whereby it would
contribute its ratable share of the capital and operating costs
for the groundwater treatment system. The Company 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.
In September 1993, fourteen 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 the plaintiffs' alleged property damage.
Chromalloy believes it has strong defenses under New York law to
the plaintiffs' complaint. Chromalloy entered into a Consent
Order with the New York Department of Environmental Conservation
on February 14, 1994, to undertake the remedial investigation and
feasibility study relating to the alleged contamination in the
vicinity of the former Chromalloy site.
In connection with the sale of the Graphic Arts Materials
Segment, now known as Sun Chemical Corporation, to Dainippon Ink
and Chemicals, Inc. (DIC) in December 1986, the Company has
continuing contingent liability for all off-site environmental
claims which relate to activities prior to the sale. In
connection therewith, the Company provided a letter of credit in
the original amount of $25.0 million in favor of DIC as security
for said obligation for a period of ten years from date of sale.
The amount of this letter of credit is adjusted each year. It is
increased by an interest factor and decreased by the amount
actually paid by the Company for related off-site environmental
claims. In late 1993, the agreement was amended with the amount
of the letter of credit being reduced to $15.0 million, subject
to annual adjustment, and the obligation to provide said letter
was extended three years to December 1999.
In 1989, the Company and Chromalloy instituted a law suit in
the Delaware Superior Court against forty-one of the Company's
comprehensive general liability insurance carriers (the
Defendants) for idemnity of costs associated with various
environmental actions that have been brought against the Company
and Chromalloy. As of December 31, 1995, the Company has
received settlements from the Defendants totalling approximately
$33.7 million.
It is the Company'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. The potential exposure for such future
costs is estimated to range from $24 million to $52 million. At
December 31, 1995, the Company's balance sheet includes accruals
for remediation costs of $44.5 million. These accruals are at
undiscounted amounts and are primarily included in accrued
expenses and other long-term liabilities. While the possibility
of recovery of some of the costs from insurance companies exists,
the Company does not recognize these recoveries in its financial
statements until they are realized. 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, the
Company's actual cash expenditures for remediation of previously
contaminated sites were $10.6 million in 1995, $10.3 million in
1994, and $8.3 million in 1993. The Company anticipates that
remedial cash expenditures will be in the $8 million to $12
million range during each of the next several years. For the
past three years, the Company's capital expenditures for projects
to eliminate, control or dispose of pollutants have averaged
approximately $2 million per year. The Company anticipates
environmental-related capital programs to be approximately $4
million per year during 1996 and 1997. The Company's operating
expenses to eliminate, control and dispose of pollutants have
averaged approximately $11 million per year during the last three
years. The Company anticipates that environmental operating
expenses will be approximately $12 million per year during 1996
and 1997.
Employment
----------
At December 31, 1995, Sequa employed approximately 8,700
persons in its continuing operations of whom approximately 1,800
were covered by union contracts.
The approximate number of employees attributable to each
reportable business segment as of December 31, 1995 was:
Approximate
Segment Number of Employees
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Aerospace 6,200
Machinery and Metal Coatings 1,200
Specialty Chemicals 650
Other Products 550
Corporate 100
Total 8,700
The Company considers its relations with employees to be
generally satisfactory. Sequa maintains a number of employee
benefit programs, including life, hospitalization, surgical,
dental, and major medical insurance, and a number of 401(k) and
pension plans.
(d) FOREIGN OPERATIONS. Sequa's foreign operations, spread
primarily throughout Europe, include Chromalloy's operations
within the Aerospace Segment; detergent chemicals operations
included in the Specialty Chemicals Segment; the auxiliary press
equipment supplier in the Machinery and Metal Coatings Segment;
and automotive products operations in the United Kingdom and
Italy in the Other Products Segment. These operations consist
primarily of wholly-owned foreign subsidiaries. Sales, operating
income and identifiable assets attributable to foreign
operations, and export sales, are set forth in Note 19 to the
Consolidated Financial Statements on page 61 of this Annual
Report on Form 10-K and is incorporated herein by reference.
ITEM 2. PROPERTIES
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Aerospace
- ---------
Chromalloy operates approximately 50 plants in eleven states
and seven foreign countries, primarily in Europe, which have
aggregate floor space of approximately 3,300,000 square feet, of
which approximately 1,750,000 square feet is owned and
approximately 1,550,000 square feet is leased. The leases
covering the leased facilities in this business have various
expiration dates and some have renewal or purchase options.
Rocket propulsion operations lease two principal
manufacturing facilities, a 421-acre site in Gainesville,
Virginia, and a 1,014-acre manufacturing facility in Camden,
Arkansas. The Gainesville lease expires in 2012, and the Camden
lease, which has various renewal options, expires in 1998.
Adjacent to the Gainesville leased facility, the Company owns 12
acres and an 89,000 square foot office and manufacturing complex.
An additional 249,000 square feet (of which 100,000 square feet
is sublet) is leased for administrative, research and
manufacturing purposes in Alabama, California, Massachusetts and
Virginia. The liquid propulsion division leases a 96,000 square
foot facility in Niagara, New York. The Company also owns 2,430
acres of land in Orange County, Virginia, which has been
developed for use in the propellant business. An additional
37,000 square feet is owned in Virginia (of which 20,000 square
feet is sublet) and is used for administrative purposes.
Facilities in this segment are suitable and adequate for the
business and are operating at a moderate level of utilization.
Capital spending plans for the operations in this segment are
primarily designed to keep up with current technology or to meet
specific requirements for various government or commercial
contracts.
Machinery and Metal Coatings
- ----------------------------
The Sequa Can Machinery operation owns two plants in the
United States with aggregate floor space of 228,000 square feet.
In Europe, through the segment's auxiliary press equipment
supplier, MEG, the Company owns a plant with aggregate floor
space of approximately 62,000 square feet. MEG also leases three
sales offices and owns a storage facility in Europe with a total
of 22,000 square feet and leases a 2,500 square foot sales office
in Singapore. The Precoat Metals operation owns seven
manufacturing facilities in six states with a total of 1,018,000
square feet of manufacturing and office space. An additional
268,000 square feet of warehouse space is leased in Illinois,
Missouri and Texas.
The properties in this segment are suitable and adequate for
the business presently being conducted. With the exception of
the Precoat Metal's two newly acquired plants, the facilities in
this segment are functioning at a high level of utilization.
Specialty Chemicals
- -------------------
The Specialty Chemicals segment owns one plant and an office
building situated on 88 acres in Chester, South Carolina with
aggregate floor space of 164,000 square feet and a 22,000 square
foot leased warehouse in Chester. The segment owns one plant in
the United Kingdom with aggregate floor space of 203,000 square
feet on approximately 55 acres of land and leases 9,000 square
feet of office and warehouse space in five separate locations in
Europe.
Facilities in this segment are adequate and suitable for the
business being conducted. They operate at a high utilization
rate.
Other Products
- --------------
The automotive products subsidiary, Casco Products, leases a
168,000 square foot plant in Connecticut, a 1,600 square foot
sales office in Detroit, Michigan, a 30,000 square foot
manufacturing facility in Italy, and 5,500 square feet of
manufacturing, warehouse and office space in the United Kingdom.
NCS owns a manufacturing facility in Ohio with floor space of
90,000 square feet.
The Centor Company, a wholly-owned subsidiary, owns and
operates the Chromalloy Plaza Building, an 18-story office
building in Clayton, Missouri with approximately 284,000 square
feet of rentable office and commercial space. Centor also owns
and rents a manufacturing facility and a warehouse in Wisconsin
with aggregate floor space of 185,000 square feet as well as
owning nine smaller properties that are either leased to third
parties and/or held for sale.
Facilities in this segment are adequate and suitable for the
business being conducted. Casco Products' leased facilities
operate at high utilization rates, while utilization at NCS
continues to be below 50%.
Corporate
- ---------
The Company leases 58,000 square feet of corporate office
space in New York, New York and Hackensack, New Jersey.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
Information with respect to the Company's legal proceedings
is included in Note 21 to the Consolidated Financial Statements
on pages 62 through 64 of this Annual Report on Form 10-K and is
hereby incorporated by reference. Additional information on
environmental matters is covered in the Environmental Matters
section on pages 10 through 12 of this Annual Report on Form 10-K
and is hereby incorporated by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- ---------------------------------------------------
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
- ------- -------------------------------------------------
STOCKHOLDER MATTERS
- -------------------
(a) Market Information.
The following table sets forth the high and low closing 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:
Sequa Class A Sequa Class B
------------- -------------
High Low High Low
---- --- ---- ---
1995:
First Quarter....... 31 1/4 22 32 5/8 22
Second Quarter...... 31 27 35 1/8 30 3/4
Third Quarter....... 30 1/4 25 3/4 34 30 1/8
Fourth Quarter...... 31 24 1/8 39 3/4 31 1/2
1994:
First Quarter....... 39 1/2 31 7/8 39 3/4 32
Second Quarter...... 31 3/4 27 3/8 33 1/2 28 7/8
Third Quarter....... 29 7/8 26 7/8 33 3/4 31 7/8
Fourth Quarter...... 26 7/8 18 32 21 1/4
(b) Holders.
Shares of Sequa Class A common stock and Sequa Class B
common stock are listed on the New York Stock Exchange. There
were approximately 2,930 holders of record of the Sequa Class A
common stock and approximately 650 holders of record of the Sequa
Class B common stock at March 12, 1996.
(c) Dividends.
During the years ended December 31, 1995 and 1994, no
dividends were declared on Sequa Class A common shares or Class B
common shares. The Company's revolving credit agreement contains
covenants, which among other matters, restricts the Company's
ability to pay dividends on Sequa's common shares.
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, 1995. Such
information should be read in conjunction with the Company's Consolidated
Financial Statements and Notes thereto, filed herewith.
(Amounts in millions, except per share)
Year ended December 31, 1995 1994 1993 1992 1991
- ----------------------- ------ ------ ------ ------ ------
Summary of operations
Continuing operations:
Sales $1,414.1 $1,419.6 $1,697.0 $1,868.3 $1,878.8
Operating income 67.9 39.8 15.7 124.6 117.7
Income (loss) from
continuing operations 8.8 (24.7) (55.5) 17.9 15.0
Loss from discontinued
operations - - - (21.7) (21.6)
Extraordinary loss - (1.1) (8.5) - -
Cumulative effect of
accounting change - - - (7.3) -
Net income (loss) $ 8.8 $ (25.8) $ (64.0) $ (11.1) $ (6.6)
======= ======= ======= ======= =======
Earnings (loss) per share of
common stock
Continuing operations $ .57 $ (2.87) $ (6.07) $ 1.53 $ 1.24
Discontinued operations - - - (2.26) (2.26)
Extraordinary loss - (.11) (.88) - -
Cumulative effect of
accounting change - - - (.76) -
------- ------- ------- ------- -------
Net income (loss) $ .57 $ (2.98) $(6.95) $(1.49) $(1.02)
======= ======= ======= ======= =======
Cash dividends declared
Preferred $ 5.00 $ 7.50* $ 2.50 $ 5.00 $ 5.00
Class A common - - .30 .60 .60
Class B common - - .25 .50 .50
Financial position
Current assets $ 621.2 $ 604.3 $ 661.6 $ 679.2 $ 778.5
Total assets 1,622.0 1,648.2 1,803.5 1,912.5 2,108.3
Current liabilities 324.7 321.3 376.5 350.1 383.2
Long-term debt 563.2 586.6 624.1 690.0 825.5
Shareholders' equity 576.6 566.5 575.8 651.7 696.6
* Includes $2.50 of dividends in arrears for the third and fourth quarters of
1993.
/TABLE
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ------- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
- -----------------------------------
OPERATING RESULTS 1995 - 1994
SALES
Sales were roughly on a par with 1994 results, as declines in the
Aerospace segment were largely offset by increased sales in the
Machinery and Metal Coatings segment and in the domestic
chemicals and automotive products units. In 1994, reported sales
included $73.5 million of sales generated by units disposed of in
1994 and early 1995, while the 1995 figure includes $22.0 million
of sales of newly acquired units and two units sold in 1995. If
reported sales in both years are adjusted for these amounts, pro
forma sales would have increased 3% for 1995.
Sales in the Aerospace segment were 7% lower than in 1994,
with all units registering declines. Chromalloy Gas Turbine
sales declined 8% in 1995, reflecting its withdrawal from the
engine overhaul business, combined with a 12% decline at units
primarily serving OEM customers. The largest single factor in
the OEM decline was the impact on the Orangeburg, New York plant
of a major engine customer bringing in house new parts work that
previously had been done at Orangeburg. These declines were
partially offset by a 7% increase in sales of Chromalloy units
primarily serving repair customers. The recovery in repair sales
reflects higher volume tempered by lower pricing in the
commercial market, as well as unexpectedly strong demand from the
US Government for repairs on military engines. On a pro forma
basis -- eliminating from both years the sales of divested units
- -- Chromalloy posted a 3% sales increase. In early 1996, repair
sales continued to trend up when compared with the comparable
prior-year period. Nonetheless, extensive pricing pressures
continue, as well as increased activity in the repair aftermarket
by engine manufacturers. (See Note 21 to the Consolidated
Financial Statements for a discussion of the Texas lawsuit.)
ARC Propulsion experienced a small sales decline in 1995,
reflecting reductions in the overall level of military sales,
largely offset by an increase in sales of automotive airbag
components. At the Kollsman unit (which was sold on December 29,
1995), 1995 sales declined 11%, as a sharp drop in electro-optic
sales and lower levels of medical instrumentation sales were only
partially offset by improvements in the avionics product line
(which benefitted from a large commercial contract that was
substantially completed in 1995) and from increased sales of the
night targeting system for the Cobra helicopter.
Sales in the Machinery and Metal Coatings segment advanced
20% in 1995 (16% excluding the sales of the two metal coating
plants acquired in 1995), with all three units contributing to
the advance. Before giving effect to its 1995 acquisition of two
SALES (con't)
plants, the Precoat Metals unit achieved a solid sales advance.
Both its mainstay building products and newer manufactured
products groups achieved solid advances, while container product
sales declined as a large customer brought more work in house.
Can machinery sales rose 23% in 1995, primarily as a result of
increased overseas sales of can decorating equipment. While
overall sales of the can forming unit registered a small decline,
sales of bodymakers achieved a solid increase, driven by the
successful introduction in late 1994 of the latest generation
bodymaker, the B-6 model. Based on current backlog, can
machinery sales are expected to remain strong in 1996. At MEG,
sales increased 28% in 1995, driven by strong increases in dryers
and other auxiliary equipment.
Sales of the Specialty Chemicals segment increased 1% as a
small decline at the overseas unit was offset by a modest advance
at the domestic unit. Local currency sales of the overseas unit
were modestly lower, though reported dollar sales benefitted from
a favorable foreign exchange swing of 3%. A decline in detergent
chemical sales and the 1995 disposition of a manufacturing
facility that produced textile and bromine chemicals were
partially offset by improved performance at the unit's specialty
chemical distribution operations and the late 1994 addition of a
distribution operation in Portugal. The domestic unit recorded a
sales increase, as price increases offset a modest volume
decline. Sales advances were recorded in specialty polymers,
paper specialties, export and graphics markets, while textile
chemical sales declined and paper chemical sales were on a par
with 1994.
Sales of the Other Products segment increased 3%, as advances
at the automotive products unit and the can lid unit were
partially offset by a 16% decline in revenues at the Centor real
estate unit. The automotive products unit reported a 5% increase
in 1995 sales. A small decline in cigarette lighter sales to the
domestic auto makers was more than offset by increased North
American sales of power outlets and electronic devices. Sales of
lighters by Casco's European operation also improved in 1995, and
late in the year Casco acquired an automobile lighter product
line in Italy that will further strengthen its position in
Europe. Sales at Casco are expected to remain strong in the
first half of 1996, as the unit's domestic sales pattern closely
tracks the volume and mix of North American car and light truck
production. At the can lid unit, sales increased 1% in 1995, as
advances in the export market more than made up for a small
decline in domestic sales. The improvement in the export market
occurred entirely in the fourth quarter when 46% of export sales
for the year were shipped. This uptrend primarily reflects
resumption of shipments to the Mexican market, which had been
severely curtailed earlier in the year with the sudden
SALES (con't)
devaluation of the peso. Management currently expects modest
improvement in the 1996 sales level. At the Centor real estate
unit, revenues declined primarily because of a lower occupancy
rate and reduced parking revenues at its office building in
Clayton, Missouri. Revenues were also affected by Sequa's
continuing sales of excess properties.
OPERATING INCOME
Overall operating income increased 71% in 1995 to $67.9 million,
with all operating segments contributing to the improvement.
The Aerospace segment recorded operating income of $10.2
million in 1995, up $23.0 million from 1994, with all three
operations contributing to the improvement. At the Chromalloy
Gas Turbine operation, the 1995 loss was less than half that
recorded in the previous year. The improvement was primarily the
result of the following factors: the results of the 1995 annual
actuarial report significantly reduced the required level of
workers' compensation insurance reserves, resulting in an
insurance expense reversal in the fourth quarter; the level of
inventory and other reserve provisions was significantly lower
than in 1994; and the 1995 period was not affected by a charge
taken in 1994 to correct an accounting irregularity. The
favorable effect of these factors was partially offset by 1995
downsizing expenses. After eliminating the net effects of these
variances, Chromalloy's loss in 1995 was relatively unchanged
from 1994, as weakness in the first half gave way to improved
results later in 1995. The second half benefitted from a cost
reduction program and other measures implemented earlier in the
year and from an improving sales pattern. The Orangeburg, New
York plant recorded a reduced level of losses, with results for
the second half more than 30% ahead of the first half. These
improvements have continued in early 1996, and it is expected
that Chromalloy will be profitable in the first quarter, before
significant legal expenses related to litigation (discussed in
Note 21 to the Consolidated Financial Statements).
At the ARC Propulsion unit, profits increased, principally
due to a sharp decline in administrative costs and improvements
in the airbag components and liquid rocket motors product lines.
Profits on military programs declined, as the impact of lower
sales more than offset an improvement in margins. The advanced
materials product line recorded increased losses in 1995. In
1996, this unit will continue its transition to a higher
concentration of commercial airbag products, while maintaining
its military business, which continues to be affected by reduced
government spending. Operating income at the Kollsman operation
OPERATING INCOME (con't)
increased 26% in 1995, as the impact of a higher margined sales
mix, improved performance on a major program, and lower selling,
general and administrative costs more than offset the impact of
lower revenues.
Operating income in the Machinery and Metal Coatings segment
increased 13%, as solid advances at the metal coatings and can
machinery units were partially offset by increased losses at the
auxiliary press equipment unit. The Precoat Metals unit recorded
increased profits although the benefits of higher sales were
partially offset by the costs associated with the Jackson,
Mississippi plant and newly acquired plants in Portage, Indiana
and McKeesport, Pennsylvania. At the can machinery unit, the
increased profitability was primarily the result of higher sales
volume, improved factory utilization and manufacturing
improvements implemented in 1994 and 1995, partially offset by
increased warranty costs and higher general and administrative
expenses. Based on the current equipment sales backlog,
management anticipates that the profitability of this unit will
remain strong in 1996. The overseas auxiliary press equipment
operation reported a larger loss in 1995, as the benefits derived
from an improved level of sales were more than offset by sharply
higher manufacturing, warranty and selling costs. These cost
increases were largely attributable to: new product
introductions; participation in a major European trade show; and
steps taken to make fundamental changes in the way the unit
operates. Increased losses were exacerbated by a 11% drop in the
average value of the dollar against the French franc in 1995.
While management currently anticipates better performance in
1996, this unit faces increased competitive pressures in its
market and continues to incur costs to improve its operating
efficiency. Losses for the first quarter of 1996 are expected to
exceed those recorded in the first quarter of 1995.
Operating income in the Specialty Chemicals segment was up 3%
in 1995, as a small improvement at the overseas unit was
partially offset by a decline at the domestic unit. At the
overseas unit, profits measured in local currency registered an
increase, as manufacturing efficiencies more than offset the
impact of lower volume in the detergent chemical product line,
and higher sales led to improved profitability at the chemical
distribution operations. Local currency results were further
bolstered by a favorable foreign exchange rate swing. At the
domestic unit, profits for the year declined. In the second half
of 1994, the unit began to experience rapidly increasing raw
material costs, whose impact was not entirely absorbed by price
increases. Though this problem began to abate in the second half
of 1995, it still had a significant impact on the year. The unit
also experienced higher selling and administrative costs. The
effect of these factors was partially offset by the higher level
of sales and by significantly lower environmental clean-up costs.
OPERATING INCOME (con't)
Operating income in the Other Products segment increased 27%,
as improvements at the can lid and real estate units offset a
small decline at the automotive products operation. In 1995, the
benefit of increased sales at Casco was offset by certain price
reductions and increased manufacturing costs. The improvement at
Northern Can Systems was entirely due to the absence of the 1994
writedown of two lid lines, which have since been sold. This
unit continues to operate at close to a breakeven level, so that
a small change in its sales volume or mix can have a significant
impact on profitability. The improvement at Centor resulted
primarily from the favorable resolution of a multi-year real
estate tax appeal on its office building in Clayton, Missouri.
INTEREST EXPENSE
The decrease in interest expense of approximately $5.8 million
was primarily due to a decrease in average borrowings and the
termination in 1994 of interest-rate swaps, accounted for as
hedges, for which $2.8 million of interest expense was incurred
during 1994.
OTHER, NET
In 1995, Other, net included $2.1 million of dividend income on
an investment; $6.1 million of gains on the sale of assets; $2.1
million of charges for the amortization of capitalized debt
costs; $1.8 million of equity losses in unconsolidated joint
ventures; and $0.9 million of discount expense related to the
sale of accounts receivable.
In 1994, Other, net included a $2.4 million mark-to-market
loss on non-hedging interest-rate derivatives; $1.8 million of
discount expense related to the sale of accounts receivable; $2.2
million of equity losses in unconsolidated joint ventures; and
amortization of capitalized debt costs of $2.4 million.
DERIVATIVE FINANCIAL INSTRUMENTS
It is the Company's current policy that the treasurer has the
authority to enter into interest-related derivative transactions
in the amounts and for the purposes to be stipulated by the board
of directors and the management executive committee. The
treasurer must obtain approval from the committee prior to
entering into any derivative transaction.
The Company has had limited involvement with derivative
financial instruments and does not use them for trading purposes.
Various derivative financial instruments have been used in the
past to manage well-defined interest rate risk. By entering into
interest rate swaps, the Company has functionally converted
DERIVATIVE FINANCIAL INSTRUMENTS (con't)
floating-rate debt to fixed-rate debt to minimize exposure to
rising interest rates and has functionally converted fixed-rate
debt to floating-rate debt to minimize interest costs in
declining interest rate environments. The Company has also
utilized interest rate options and other complex derivative
instruments to manage economic exposures resulting from changes
in interest rates.
The Company accounts for interest rate swaps as hedges
provided that the derivative changes the nature of a designated
debt instrument on the Company's balance sheet and the underlying
debt obligation has a principal balance equal to or greater than
the notional amount of the related derivative. In accordance
with hedge accounting, any gains or losses from changes in the
value of the swaps are deferred and interest expense on the
hedged debt instrument is recorded using the interest rate as
effectively revised by the related swap. If the principal amount
of the particular debt instrument being hedged falls below the
notional amount of the related swap, the excess portion of the
derivative is marked to market and the resulting gain or loss is
included in interest expense. Gains or losses on terminated
interest rate swaps that were accounted for as hedges are
deferred and amortized to interest expense over the original
lives of the terminated swaps.
The Company's weighted average borrowing rate was 9.1% during
1995 and 9.4% during 1994 and 1993. The Company's hedging
activities related to interest-rate swaps reduced interest
expense by $3.1 million (or 53 basis points) during 1995; $0.3
million (or 5 basis points) during 1994; and $2.4 million (or 35
basis points) during 1993. As of December 31, 1995, deferred
gains on terminated interest rate swaps amounted to $3.8 million
and amortization of such deferred gains will serve to reduce
interest expense by $2.2 million, $1.5 million and $0.1 million
during 1996, 1997 and 1998, respectively.
The Company accounts for interest rate options written and
other complex interest-related derivative instruments under non-
hedge accounting. During 1994 and 1993, Other, net included
mark-to-market losses of $2.4 million and $6.6 million,
respectively, to adjust the carrying value of interest-rate
derivatives considered to be non-hedging instruments. All
interest-related derivatives were closed out as of December 31,
1994 and the Company was not a party to any interest-rate
derivatives during 1995.
The Company utilizes forward exchange contracts in several
ways. The Company's specialty chemicals operation in the United
Kingdom uses such contracts to hedge anticipated but not yet
committed sales and purchases to be denominated in currencies
DERIVATIVE FINANCIAL INSTRUMENTS (con't)
other than the pound sterling. These contracts are accounted for
under non-hedge accounting; accordingly, changes in the fair
values are recognized in operating income during the period in
which the changes occur. Gains or losses on forward foreign
exchange contracts that hedge foreign investments are not
included in income but are recorded in the cumulative translation
adjustment, a component of shareholders' equity.
ENVIRONMENTAL MATTERS
The Company's environmental department, under senior management
direction, manages all activities related to the Company's
involvement in environmental clean-up. This department
establishes the projected range of expenditures for individual
sites with respect to which the Company may be considered a
potentially responsible party under applicable federal or state
law. 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 known conditions, probable
conditions, regulatory requirements, past expenditures, and other
potentially responsible parties and their probable level of
involvement. Outside legal, technical and scientific consulting
services are used to support management's assessments of costs at
significant individual sites.
It is the Company'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. The potential exposure for such costs is
estimated to range from $24 million to $52 million. At December
31, 1995, the Company's balance sheet includes accruals for
remediation costs of $44.5 million. These accruals are at
undiscounted amounts and are primarily included in accrued
expenses and other long-term liabilities. While the possibility
of recovery of some of the costs from insurance companies exists,
the Company does not recognize these recoveries in its financial
statements until they are realized. 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, the
Company's actual cash expenditures for remediation of previously
contaminated sites were $10.6 million in 1995, $10.3 million in
1994 and $8.3 million in 1993. The Company anticipates that
remedial cash expenditures will be in the $8 million to $12
million range during each of the next several years. For the
past three years, the Company's capital expenditures for projects
to eliminate, control or dispose of pollutants have averaged
approximately $2 million per year. The Company anticipates
ENVIRONMENTAL MATTERS (con't)
environmental-related capital programs to be approximately $4
million per year during 1996 and 1997. The Company's operating
expenses to eliminate, control and dispose of pollutants have
averaged approximately $11 million per year during the last three
years. The Company anticipates that environmental operating
expenses will be approximately $12 million per year during 1996
and 1997.
AUTOMOTIVE AIRBAGS
In 1989, Atlantic Research and AlliedSignal formed a 50/50 joint
venture, called Bendix Atlantic Inflator Company (BAICO), to
develop, produce and market hybrid inflators for automotive
airbag systems. In 1993, Sequa Corporation, AlliedSignal and
Gilardini (a unit of the Fiat Group) formed an Italian company
(BAG SpA) to produce and market hybrid inflators for Fiat and
other European car companies. Each participant owns a one-third
interest in this venture.
The Company's equity loss in its unconsolidated airbag
business was $2.2 million in 1995, $2.4 million in 1994 and $7.6
million in 1993. BAICO was profitable in 1995 and management
currently anticipates that BAG SpA will turn profitable in late
1996.
In December 1994, BAICO entered into a $35 million revolving
credit agreement with a group of banks, which extended through
December 1995. Under the terms of the agreement, BAICO
borrowings are guaranteed equally by BAICO's partners. In
December 1995, the revolving credit agreement was extended
through December 1996 and the maximum amount available under the
facility was increased to $50 million. In December 1995 and
1994, BAICO borrowed $15 million and $35 million, respectively,
under the facility and remitted half the proceeds to each
partner. Sequa accounted for the $7.5 million it received in
1995 and the $17.5 million received in 1994 as financing
activities in the Consolidated Statement of Cash Flows and
reduced its investment in BAICO, which is carried as an equity
investment. At December 31, 1995 and 1994, the Company's equity
in the losses of its airbag business exceeded its investment by
$15.1 million and $9.5 million, respectively, and the negative
investment is included in Other long-term liabilities in the
Consolidated Balance Sheet.
BACKLOG
The businesses of Sequa for which backlogs are significant are
the Turbine Airfoils, Caval Tool, Turbocombustor Technology and
Castings units of Chromalloy Gas Turbine, and the ARC Propulsion
operations of the Aerospace segment; and the Can Machinery, MEG
BACKLOG (con't)
and Precoat Metals operations of the Machinery and Metal Coatings
segment. The aggregate dollar amount of backlog in these units
at December 31, 1995 was $346.4 million ($279.4 million at
December 31, 1994).
CAPITAL SPENDING
Capital expenditures amounted to $56.9 million in 1995, with
spending concentrated in the Chromalloy, metal coatings and
chemicals operations. These funds were primarily used to upgrade
existing facilities and equipment and to expand capacity. The
Company anticipates that capital spending in 1996 will be
approximately $74 million and will be concentrated in the
Chromalloy and metal coatings operations.
LIQUIDITY AND CAPITAL RESOURCES
Management anticipates that cash flow from operations, proceeds
from the divestiture of assets, the $108.5 million of credit
available under the revolving credit agreement, the $45.0 million
of available financing under the Receivables Purchase Agreement,
plus the $62.7 million of cash and cash equivalents on hand at
December 31, 1995 will be more than sufficient to fund the
Company's operations for the foreseeable future.
OTHER INFORMATION
Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of," was issued in March 1995 and
must be implemented by the first quarter of 1996. This statement
requires long-lived assets to be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. If the sum of the
expected future cash flows is less than the carrying amount of
the asset, then an impairment loss is to be recognized based on
the fair value of the asset. The Company's current accounting
policies related to long-lived assets are similar to the
requirements of SFAS No. 121; accordingly, the impact of adopting
the new standard will not have a material effect on the Company's
results of operations or financial position.
SFAS No. 123, "Accounting for Stock-Based Compensation," was
issued in October 1995 and encourages, but does not require,
companies to account for stock options based on their fair value
at the date the options are granted. The resulting compensation
cost would be shown as an expense on the income statement. The
Company does not intend to apply the new accounting method and
will continue to apply current accounting requirements which
result in no compensation cost for stock options. However,
certain additional disclosures will be required in the future
concerning the fair value of stock options granted.
OPERATING RESULTS 1994 - 1993
SALES
Sales from continuing operations declined 16% in 1994, reflecting
the disposals of the ARC Professional Services Group (PSG), three
Chromalloy Gas Turbine units and two Northern Can Systems (NCS)
can plants in late 1993 and early 1994. On a pro forma basis,
excluding the impact of these disposals, sales were down 2%, as
solid advances at the Precoat Metals division, both units of the
Specialty Chemicals segment, the auxiliary press equipment unit
and the automotive products unit were more than offset by
declines at Sequa Can Machinery and the three units in the
Aerospace segment.
Sales of the Aerospace segment were 14% lower than in 1993,
with all units registering declines. Chromalloy sales were down
15% (5% after eliminating the sales of disposed units from both
years) due to weakness in each of the three major markets served:
component repair, OEM manufacture, and domestic military. The
decline in repair revenues reflects a constricted market,
increased competitive activity from certain engine manufacturers,
extensive pricing pressure, and loss of market share following
the 1993 interruption of operations at Chromalloy's largest plant
in Orangeburg, New York. The decline in OEM sales reflects lower
commercial jet engine production in 1994, and the lower level of
military contract revenue reflects reduced domestic defense
spending, the completion of several contracts and the unit's plan
to reduce its participation in domestic defense activities. The
Orangeburg plant continued to make progress in its recovery from
the effects of the Federal government investigation and
suspension of FAA-certified repair activities during 1993.
Repair input in each of the last three quarters of 1994 increased
over the preceding quarter; turnaround time improved
dramatically; and the customer base was expanded. Partially
offsetting improvements in the repair area was the severe decline
in the manufacture of OEM parts, as a major engine customer
brought into its own facilities new parts work previously done at
Orangeburg.
ARC Propulsion sales declined 14% from 1993, largely due to
lower production levels on three major contracts: MLRS, Stinger,
and Tomahawk. These declines were partially offset by higher
sales of propellant and other components for automotive airbag
inflators and by increased sales under the Trident D-5 program.
At the Kollsman unit, 1994 sales declined 7%, as lower sales of
medical instrumentation, avionics hardware and troop simulation
trainers were partially offset by improvements in the night
targeting system (NTS) for the Cobra helicopter.
Sales of the Machinery and Metal Coatings segment advanced 3%
in 1994, as improvements at the metal coatings and auxiliary
SALES (con't)
press equipment units were largely offset by a decline at the can
machinery operation. At the metal coatings unit, strong demand
from the building products market resulted in solid advances.
Sales of the can machinery unit declined 18%, as both can forming
and can decorating equipment units experienced reduced demand in
overseas markets. Sales of the auxiliary press equipment
operation were up 7%, as increased unit sales were partially
offset by the price reductions required in a highly competitive
market.
Sales of the Specialty Chemicals segment increased 12%, with
both units achieving solid advances. The increase at the
overseas unit was primarily driven by higher volume sales of
TAED, a detergent additive, partially offset by lower average
selling prices. At the domestic unit, sales of every major
product, except paper coatings, posted solid sales gains with
particular strength in specialty polymers.
Sales of the Other Products segment declined 71% in 1994, due
entirely to dispositions. On a pro forma basis -- excluding 1993
sales of divested units -- sales advanced 8% in 1994. Sales of
the automotive products unit advanced while NCS sales from
continuing business -- the production of convenience ends for
food cans -- declined. Revenues of Centor, the real estate unit,
recorded a small year-to-year increase.
OPERATING INCOME
Overall 1994 operating income of $39.8 million compared favorably
with operating income of $15.7 million in 1993. The increase
primarily resulted from reduced losses at Chromalloy and improved
profits at the can machinery and precoat metals operations and at
both units of the Specialty Chemicals segment. The gains were
partially offset by the absence of profits from the PSG unit sold
in late 1993, as well as by losses at the auxiliary press
equipment unit and the convenience end business.
In the Aerospace segment, Chromalloy reduced its loss by
nearly half, Kollsman recorded a profit improvement, and ARC
Propulsion registered only a slight decline in profits. The
improvement at Chromalloy primarily reflected the absence of a
number of unfavorable factors that had affected 1993. The
decline at ARC Propulsion reflected the effects of lower sales
and a loss provision on a liquid propellant rocket motor program,
partially offset by reduced bid and proposal costs and an
improved sales mix. Kollsman's higher operating income was
primarily the result of improved profitability on the NTS
program, lower selling, general and administrative expenses, and
the benefits of a favorable contract settlement in the avionics
business.
OPERATING INCOME (con't)
Operating income in the Machinery and Metal Coatings segment
increased 10% in 1994, as improvements at the metal coatings and
can machinery units were partially offset by losses at the
auxiliary press equipment unit. Profits of the metal coatings
unit improved primarily as the result of increased sales and
higher capacity utilization, partially offset by start-up costs
related to a new facility in Jackson, Mississippi, and pricing
pressures in the container industry. Operating income at the
Sequa Can Machinery unit more than doubled in 1994, primarily due
to: the absence of the restructuring and bad debt charges that
had affected 1993; lower selling, general and administrative
costs; reduced warranty and equipment start-up costs; and a
favorable sales mix shift. The auxiliary press equipment unit
recorded a loss in 1994 compared to a small profit in 1993. The
loss primarily resulted from severe pricing pressures and
increased product development and marketing costs.
Operating income in the Specialty Chemicals segment advanced
21% in 1994, with both units contributing to the gain. At the
overseas unit, improved results were primarily driven by
increased sales of TAED and the resulting improvement in factory
utilization. At the domestic unit, the improvement was derived
from increased sales, partially offset by the effect of higher
raw material prices, an unfavorable sales mix shift and increased
environmental clean-up costs.
Operating income from the Other Products segment declined 68%
in 1994 primarily due to the late-1993 disposition of PSG and the
writedown of two excess NCS lid lines. At the automotive
products unit, profits increased in line with higher sales. At
NCS, the loss for 1994 was due entirely to the writedown of the
lid lines and at Centor, the real estate unit, profits declined
primarily due to increased operating costs.
RESTRUCTURING CHARGES
During 1993, the Company recorded restructuring charges totaling
$26.6 million primarily related to plans adopted to reduce
Chromalloy's investment in activities other than the repair of
components for flight engines, to sell excess machinery and to
permanently reduce the number of employees. During 1994 and
1995, Chromalloy completed its exit from the engine overhaul
business and significantly reduced its asset base serving the OEM
market.
INTEREST EXPENSE
The decrease in interest expense of approximately $7.4 million
during 1994 was due to a decrease in average borrowings primarily
attributable to the application of cash generated from the sale
of businesses and the non-recourse securitization of the
Company's discontinued leveraged lease portfolio.
OTHER, NET
In 1994, Other, net included a $2.4 million mark-to-market loss
on interest-rate derivatives; $1.8 million of discount expense
related to the sale of accounts receivable; $2.2 million of
equity losses in unconsolidated joint ventures; and amortization
of capitalized debt costs of $2.4 million. In 1993, Other, net
included a $6.6 million mark-to-market loss on interest-rate
options written; $3.1 million of discount expense related to the
sale of accounts receivable; a $3.1 million loss incurred on a
sale and leaseback transaction; $7.1 million of equity losses in
unconsolidated joint ventures; amortization of capitalized debt
costs in the amount of $4.2 million; and $2.5 million in charges
for a minority shareholder's interest in the earnings of Atlantic
Research Corporation.
GOVERNMENT INVESTIGATIONS
During the second quarter of 1993, the Company entered into
agreements with the US Attorney's Office, Southern District of
New York (SDNY), and the Federal Aviation Administration (FAA) in
connection with investigations begun in November 1992 by these
offices and other related governmental agencies of Chromalloy's
Orangeburg, New York plant and certain of its then employees.
Throughout the investigations, the Company, its Chromalloy
Gas Turbine subsidiary and the Orangeburg plant cooperated fully
with federal authorities. In addition, extensive changes were
instituted in the management and operations of the Orangeburg
plant. As a result of the Company's cooperation with the
government and its good faith efforts to comply with all
applicable FAA standards, the FAA restored the facility's FAA
repair station certificate on June 10, 1993, ending the
suspension of repair operations and resolving all FAA civil
matters related to the Orangeburg plant. Subsequently, the US
Attorney's Office, SDNY, declined to prosecute the Company in
connection with its investigation.
As a result of the investigations and the related suspension,
the Company incurred direct expenses in 1993 of $12.8 million.
Direct expenses included a remedial payment of $5.0 million to
the FAA, the deposit of an additional $2.5 million to cover the
cost of testing engine parts seized by federal authorities,
severance payments, and related legal fees and expenses.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------- -------------------------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Shareholders and
the Board of Directors of
Sequa Corporation:
We have audited the accompanying consolidated balance sheet
of Sequa Corporation (a Delaware corporation) and subsidiaries as
of December 31, 1995 and 1994, and the related consolidated
statements of income, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1995.
These financial statements are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Sequa Corporation and subsidiaries as of December 31, 1995 and
1994, and the results of their operations and their cash flows
for each of the three years in the period ended December 31,
1995, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
New York, New York
March 7, 1996
SEQUA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Amounts in thousands)
At December 31, 1995 1994
- ------------------------------ ---------- ---------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 62,667 $ 18,655
Trade receivables, net (Note 2) 255,342 252,588
Unbilled receivables, net (Note 3) 23,602 35,688
Inventories (Note 4) 242,126 266,370
Other current assets 37,476 31,030
--------- ---------
Total current assets 621,213 604,331
--------- ---------
INVESTMENTS
Net assets of discontinued operations
(Note 5) 144,891 154,395
Other investments 15,891 19,085
--------- ---------
160,782 173,480
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, NET
(Note 6) 496,588 524,150
--------- ---------
OTHER ASSETS
Excess of cost over net assets of
companies acquired 320,214 325,530
Deferred charges and other 23,181 20,757
--------- ---------
343,395 346,287
--------- ---------
TOTAL ASSETS $1,621,978 $1,648,248
========== ==========
The accompanying notes are an integral part of the financial
statements.
SEQUA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Amounts in thousands, except share data)
At December 31, 1995 1994
- ----------------------------------------- -------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt
(Note 7) $ 16,316 $ 15,231
Accounts payable 123,529 118,429
Taxes on income (Note 8) 38,422 21,128
Accrued expenses (Note 9) 146,388 166,558
---------- ----------
Total current liabilities 324,655 321,346
---------- ----------
LONG-TERM DEBT, NET OF
CURRENT MATURITIES (Note 7) 563,245 586,574
---------- ----------
DEFERRED TAXES AND OTHER LONG-TERM
LIABILITIES
Deferred taxes on income (Note 8) 3,521 9,494
Other long-term liabilities 153,962 164,343
---------- ----------
157,483 173,837
---------- ----------
SHAREHOLDERS' EQUITY (Notes 7, 12 and 13)
Preferred stock--$1 par value,
1,825,000 shares authorized; 797,000
shares of $5 cumulative convertible
stock issued at December 31, 1995
and 1994 (involuntary liquidation
value--$26,359 at December 31, 1995) 797 797
Class A common stock--no par value,
25,000,000 shares authorized; 7,188,000
shares issued at December 31, 1995 and
1994 7,188 7,188
Class B common stock--no par value,
5,000,000 shares authorized; 3,727,000
shares issued at December 31, 1995
and 1994 3,727 3,727
Capital in excess of par value 287,204 287,204
Cumulative translation adjustment 2,333 (1,899)
Retained earnings 360,290 354,676
---------- ----------
661,539 651,693
Less: cost of treasury stock 84,944 85,202
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 576,595 566,491
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $1,621,978 $1,648,248
========== ==========
SEQUA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(Amounts in thousands, except per share)
Year ended December 31, 1995 1994 1993
- -------------------------------------- -------- -------- --------
SALES $1,414,139 $1,419,550 $1,696,968
---------- ---------- ----------
COSTS AND EXPENSES
Cost of sales 1,129,955 1,164,739 1,382,509
Selling, general and administrative 216,257 215,058 272,145
Restructuring charges (Note 14) - - 26,640
---------- ---------- ----------
1,346,212 1,379,797 1,681,294
---------- ---------- ----------
OPERATING INCOME 67,927 39,753 15,674
OTHER INCOME (EXPENSE)
Interest expense (53,302) (59,114) (66,501)
Interest income 3,870 2,819 2,679
Gain on sale of Kollsman (Note 15) 6,461 - -
Gain on sale of ARC Professional
Services (Note 15) - - 12,408
Other, net (Note 16) 2,523 (11,353) (28,275)
---------- ---------- ----------
(40,448) (67,648) (79,689)
---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 27,479 (27,895) (64,015)
Income tax benefit (provision) (Note 8) (18,700) 3,200 8,557
---------- ---------- ----------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS
ON EARLY RETIREMENT OF DEBT 8,779 (24,695) (55,458)
Extraordinary loss on early retirement
of debt, net of applicable income
taxes (Note 7) - (1,083) (8,524)
---------- ---------- ----------
NET INCOME (LOSS) 8,779 (25,778) (63,982)
Preferred dividend requirements (3,165) (3,163) (3,163)
---------- ---------- ----------
NET INCOME (LOSS) APPLICABLE TO COMMON
STOCK $ 5,614 $ (28,941) $ (67,145)
========== =========== ==========
Earnings (loss) per share
Income (loss) before extraordinary item $ .57 $ (2.87) $ (6.07)
Extraordinary loss on early retirement
of debt - (.11) (.88)
Net income (loss) $ .57 $ (2.98) $ (6.95)
========== ========== ==========
The accompanying notes are an integral part of the financial statements.
SEQUA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts in thousands)
Year ended December 31, 1995 1994 1993
- -------------------------------------------- ------ ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Income (loss) before income taxes $ 27,479 $ (27,895) $(64,015)
Adjustments to reconcile income (loss) to
net cash provided by operating activities:
Depreciation and amortization 96,485 103,974 110,061
Provision for losses on receivables 4,694 4,891 7,051
Gain on sale of Kollsman (6,461) - -
Gain on sale of ARC Professional Services - - (12,408)
Equity in losses of unconsolidated
joint ventures 1,774 2,154 7,097
Other items not requiring (providing) cash (6,501) (79) 5,367
Changes in operating assets and liabilities,
net of businesses acquired and sold:
Receivables (5,272) 18,877 1,535
Inventories (11,408) (13,549) 16,158
Other current assets (5,878) 28,743 (17,895)
Accounts payable and accrued expenses (2,691) (32,671) 41,531
Other long-term liabilities (9,017) (6,952) 28,915
--------- --------- --------
Net cash provided by continuing operations
before income taxes 83,204 77,493 123,397
Net cash provided by discontinued operations
before income taxes (Note 18) 5,621 28,228 2,750
Income taxes paid, net (6,565) (10,444) (5,111)
--------- --------- --------
Net cash provided by operating activities 82,260 95,277 121,036
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (56,899) (59,241) (76,858)
Sale of property, plant and equipment 9,122 8,492 29,628
Sale of businesses, net of cash sold 57,580 57,248 76,153
Businesses purchased, net of cash acquired (42,659) - -
Purchase of minority interest in subsidiary - (16,701) -
Other investing activities (2,254) (10,139) (53)
--------- --------- --------
Net cash provided by (used for) investing
activities (35,110) (20,341) 28,870
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from debt, net of issuance costs 3,392 6,253 292,320
Payments of debt (8,979) (21,214) (165,963)
Early retirement of debt - (34,839) (222,661)
Dividends paid (3,165) (3,956) (4,305)
Repurchase of accounts receivable - (45,000) (39,000)
Proceeds from joint venture financing
arrangement 7,500 17,500 -
--------- --------- --------
Net cash used for financing activities (1,252) (81,256) (139,609)
--------- --------- --------
Effect of exchange rate changes on cash
and cash equivalents (1,886) 195 (324)
--------- --------- --------
Net increase (decrease) in cash and cash
equivalents 44,012 (6,125) 9,973
Cash and cash equivalents at beginning of year 18,655 24,780 14,807
--------- --------- --------
Cash and cash equivalents at end of year $ 62,667 $ 18,655 $ 24,780
========= ========= ========
The accompanying notes are an integral part of the financial statements.
SEQUA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Class A Class B Capital in Cumulative
(Amounts in thousands, Preferred Common Common Excess of Translation Retained Treasury
except per share data) Stock Stock Stock Par Value Adjustment Earnings Stock
- --------------------- -------- ------- ------- --------- ---------- -------- -------
BALANCE AT DECEMBER 31, 1992 $ 797 $ 7,042 $3,873 $295,806 $(10,583) $453,486 $ (98,755)
Net loss - - - - - (63,982) -
Revaluation and amortization
of restricted stock grant - - - 35 - - 140
Exchange of common stock - 12 (12) - - - -
Foreign currency translation
adjustment - - - - (6,696) - -
Sale of foreign subsidiary - - - - 508 - -
Cash dividends:
Class A - $.30 per share - - - - - (1,854) -
Class B - $.25 per share - - - - - (870) -
Preferred - $2.50 per share - - - - - (1,581) -
Preferred dividends in arrears
- $2.50 per share* - - - - - (1,582) -
------- ------- ------ -------- -------- -------- ---------
Balance at December 31, 1993 797 7,054 3,861 295,841 (16,771) 383,617 (98,615)
Net loss - - - - - (25,778) -
Issuance and amortization
of restricted stock grant - - - (1,313) - - 1,366
Treasury stock contributed
to pension plan - - - (7,324) - - 12,047
Exchange of common stock - 134 (134) - - - -
Foreign currency translation
adjustment - - - - 12,897 - -
Sale of foreign subsidiary - - - - 1,975 - -
Cash dividends:
Preferred - $5.00 per share - - - - - (3,163) -
------- ------- ------ -------- -------- -------- ---------
BALANCE AT DECEMBER 31, 1994 797 7,188 3,727 287,204 (1,899) 354,676 (85,202)
Net income - - - - - 8,779 -
Amortization of restricted
stock grant - - - - - - 258
Foreign currency translation
adjustment - - - - 4,906 - -
Sale of foreign subsidiary - - - - (674) - -
Cash dividends:
Preferred - $5.00 per share - - - - - (3,165) -
------- ------- ------ -------- -------- -------- ---------
BALANCE AT DECEMBER 31, 1995 $ 797 $ 7,188 $3,727 $287,204 $ 2,333 $360,290 $ (84,944)
======= ======= ====== ======== ======== ======== =========
* Preferred dividends in arrears at December 31, 1993 were paid during the fourth quarter of 1994.
The accompanying notes are an integral part of the financial statements.
SEQUA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements of Sequa Corporation (the
Company) include the accounts of all majority-owned subsidiaries,
including those of Sequa Receivables Corp. (SRC), a special
purpose corporation formed for the sale of eligible receivables.
Under the terms of the Receivables Purchase 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 the Company. At December
31, 1995 and 1994, SRC had no obligations outstanding to its
creditors. All material accounts and transactions between the
consolidated subsidiaries have been eliminated in consolidation.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of the Consolidated Statement of Cash Flows, the
Company considers time deposits, certificates of deposit and
marketable securities with original maturities of three months or
less to be cash equivalents. Where the right of set-off exists,
the Company has netted overdrafts with unrestricted cash and cash
equivalents.
INVENTORIES AND CONTRACT ACCOUNTING
Inventories are stated at the lower of cost or market.
Non-contract related inventories are primarily valued on a
first-in, first-out basis (FIFO). Inventoried costs relating to
long-term contracts are stated at actual or average costs,
including engineering and manufacturing labor and related
overhead incurred, reduced by amounts identified with sales. The
costs attributable to sales reflect the estimated costs of all
items to be produced under the related contract.
PROPERTY, PLANT AND EQUIPMENT
For financial reporting purposes, depreciation and amortization
are computed using the straight-line method to amortize the cost
of assets over their estimated useful lives. Accelerated
depreciation methods are used for income tax purposes.
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (con't)
PROPERTY, PLANT AND EQUIPMENT (con't)
The Company periodically reviews for impairment of properties
based on recoverability. If the estimated future cash flows
expected to result from the use of an asset and its eventual
disposition are less than the carrying amount of the asset, then
the property is written down to its fair market value.
Upon sale or retirement of properties, the related cost and
accumulated depreciation are removed from the accounts, and any
gain or loss is reflected currently. Expenditures for
maintenance and repairs of $42,534,000 in 1995, $43,438,000 in
1994 and $44,362,000 in 1993 were expensed as incurred, while
betterments and replacements were capitalized.
EXCESS OF COST OVER NET ASSETS OF COMPANIES ACQUIRED
Excess of cost over net assets of companies acquired (goodwill)
is being amortized on a straight-line basis over periods not
exceeding forty years. The Company evaluates goodwill impairment
at the end of each year based on recoverability measured by
undiscounted estimated operating profits (i.e., pre-tax earnings
before interest expense and goodwill amortization). Under this
approach, the carrying value would be reduced if it is probable
that management's best estimate of future operating profits
during the goodwill amortization period will be less than the
carrying amount of the related goodwill. The amortization
charged against earnings in 1995, 1994 and 1993 was $10,716,000,
$10,440,000 and $10,821,000, respectively. Accumulated
amortization at December 31, 1995 and 1994 was $94,718,000 and
$84,002,000, respectively.
FOREIGN CURRENCY TRANSLATION
The financial position and results of operations of the Company's
foreign subsidiaries are measured using local currency as the
functional currency. Assets and liabilities of operations
denominated in foreign currencies are translated into US dollars
at exchange rates in effect at year-end, while revenues and
expenses are translated at average exchange rates prevailing
during the year. The resulting translation gains and losses are
charged directly to cumulative translation adjustment, a
component of shareholders' equity, and are not included in net
income until realized through sale or liquidation of the
investment. Foreign exchange gains and losses incurred on
foreign currency transactions are included in net income.
DERIVATIVE FINANCIAL INSTRUMENTS
It is the Company's current policy that the treasurer has the
authority to enter into interest-related derivative transactions
in the amounts and for the purposes to be stipulated by the board
of directors and the management executive committee. The
treasurer must obtain approval from the committee prior to
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (con't)
DERIVATIVE FINANCIAL INSTRUMENTS (con't)
entering into any derivative transaction. At December 31, 1995
and 1994, the Company had no interest-related derivatives
outstanding.
The Company accounts for interest rate swaps as hedges
provided that the derivative changes the nature of a designated
debt instrument on the Company's balance sheet and the underlying
debt obligation has a principal balance equal to or greater than
the notional amount of the related derivative. In accordance
with hedge accounting, any gains or losses from changes in the
value of the swaps are deferred and interest expense on the
hedged debt instrument is recorded using the interest rate as
effectively revised by the related swap. If the principal amount
of the particular debt instrument being hedged falls below the
notional amount of the related swap, the excess portion of the
derivative is marked to market and the resulting gain or loss is
included in interest expense. Gains or losses on terminated
interest rate swaps that were accounted for as hedges are
deferred and amortized to interest expense over the original
lives of the terminated swaps.
The Company accounts for interest rate options written, other
complex interest-related derivative instruments, and forward
foreign exchange contracts that hedge anticipated transactions
under non-hedge accounting. Accordingly, the market values of
these financial instruments are recorded in the Company's balance
sheet at the reporting date and changes in fair values are
recognized in income during the period in which the changes
occur. Gains or losses on forward foreign exchange contracts
that hedge foreign investments are not included in income but are
recorded in the cumulative translation adjustment, a component of
shareholders' equity.
ENVIRONMENTAL REMEDIATION AND COMPLIANCE
It is the Company'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. Accrued environmental remediation and compliance
costs include remedial investigation and feasibility studies,
outside legal, consulting and remediation project management
fees, projected cost of remediation activities, site closure and
post-remediation monitoring costs. The potential exposure for
such costs is estimated to range from $24,000,000 to $52,000,000.
At December 31, 1995, the Company's balance sheet includes
accruals for remediation costs of $44,521,000. These accruals
are at undiscounted amounts and are primarily included in accrued
expenses and other long-term liabilities. While the possibility
of recovery of some of the costs from insurance companies exists,
the Company does not recognize these recoveries in its financial
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (con't)
ENVIRONMENTAL REMEDIATION AND COMPLIANCE (con't)
statements until they are realized. Actual costs to be incurred
at identified sites in future periods may vary from the
estimates, given inherent uncertainties in evaluating
environmental exposures.
REVENUE RECOGNITION
Generally, sales are recorded when products are shipped or
services are rendered. Long-term contracts are accounted for
under 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 profits are recognized in the period in which they are
determinable using the cumulative catch-up method. Any
anticipated losses on contracts are charged to current operations
as soon as they are determinable.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to expense as incurred
and amounted to approximately $15,176,000 in 1995, $14,317,000 in
1994 and $17,166,000 in 1993.
INCOME TAXES
Income taxes are recognized during the year in which transactions
enter into the determination of financial statement income, with
deferred taxes being provided for temporary differences between
amounts of assets and liabilities recorded for tax and financial
reporting purposes.
At December 31, 1995, the accompanying Consolidated Balance
Sheet includes a deferred tax liability of $2,153,000 for the
estimated income taxes that will be payable upon the anticipated
future repatriation of approximately $7,100,000 of foreign
undistributed earnings in the form of dividends. Provision has
not been made for US or additional foreign taxes on $189,200,000
of undistributed earnings of foreign subsidiaries as those
earnings are intended to be permanently reinvested. Such
earnings would become taxable upon the sale or liquidation of
these foreign subsidiaries or upon the remittance of dividends.
It is not practicable to estimate the amount of deferred tax
liability on foreign undistributed earnings which are intended to
be permanently reinvested.
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (con't)
EARNINGS PER SHARE
Primary earnings per share for each of the respective years have
been computed by dividing the net earnings, after deducting
dividend requirements on cumulative convertible preferred stock,
by the weighted average number of common and common equivalent
shares outstanding during the year. The weighted average number
of common and common equivalent shares for 1995, 1994 and 1993
was 9,867,000 shares, 9,722,000 shares and 9,655,000 shares,
respectively.
Fully diluted earnings per common share calculations for the
assumed conversion of the cumulative convertible preferred stock
were anti-dilutive in 1995, 1994 and 1993.
NOTE 2. TRADE RECEIVABLES, NET
Sequa Receivables Corporation, a wholly owned special purpose
subsidiary of the Company, has a Receivables Purchase Agreement
with a group of banks, under which it is able to sell up to
$45,000,000 of Company receivables without recourse through March
1997. At December 31, 1995 and 1994, all receivables sold under
the agreement were repurchased. Other, net in the Consolidated
Statement of Income includes discount expenses of $947,000 in
1995, $1,829,000 in 1994 and $3,136,000 in 1993 related to the
sale of receivables under this agreement.
Trade receivables at December 31, 1995 and 1994 have been
reduced by allowances for doubtful accounts of $12,045,000 and
$12,448,000, respectively.
NOTE 3. UNBILLED RECEIVABLES, NET
Unbilled receivables, net consist of the following:
(Amounts in thousands)
At December 31, 1995 1994
- ------------------------------------ ---- ----
Fixed-price contracts $19,746 $32,005
Cost-reimbursement contracts 3,856 3,683
$23,602 $35,688
======= =======
Unbilled receivables on fixed-price contracts arise as revenues
are recognized under the percentage-of-completion method. These
amounts are billable at specified dates, when deliveries are made
or at contract completion, which is expected to occur within one
year. All amounts included in unbilled receivables are related
to long-term contracts and are reduced by appropriate progress
billings.
NOTE 3. UNBILLED RECEIVABLES, NET (con't)
Unbilled amounts on cost-reimbursement contracts represent
recoverable costs and accrued profits not yet billed. These
amounts are billable upon receipt of contract funding, final
settlement of indirect expense rates, or contract completion.
Allowances for estimated nonrecoverable costs are primarily
to provide for losses which may be sustained on contract costs
awaiting funding and for the finalization of indirect expenses.
Unbilled amounts at December 31, 1995 and 1994 are reduced by
allowances for estimated nonrecoverable costs of $1,616,000 and
$2,723,000, respectively.
NOTE 4. INVENTORIES
The components of inventories are as follows:
(Amounts in thousands)
At December 31, 1995 1994
- ------------------------------ ---- ----
Finished goods $ 67,910 $ 70,514
Work in process 72,600 59,716
Raw materials 106,627 128,488
Long-term contract costs 9,600 14,432
Customer deposits (12,974) (3,277)
Progress payments - (1,954)
--------- --------
243,763 267,919
Adjustment to reduce
carrying value to LIFO basis (1,637) (1,549)
-------- --------
$242,126 $266,370
======== ========
NOTE 5. DISCONTINUED OPERATIONS
During 1991, the Company adopted a formal plan to divest Sequa
Capital's investment portfolio and to sell a group of businesses
which it classified as discontinued operations. Losses during
1995, 1994 and 1993 were charged to reserves established during
1992 and 1991 for this purpose.
As of December 31, 1995, approximately $345,370,000 of Sequa
Capital's investment portfolio had been sold, written down or
otherwise disposed of since the Company adopted a formal plan to
divest the portfolio. During the same period, the Company repaid
approximately $367,000,000 of Sequa Capital's debt. Debt of
discontinued operations at December 31, 1995 represents the
accreted principal amount of the $25,000,000 in proceeds received
from the non-recourse securitization of Sequa Capital's leveraged
lease portfolio in 1994. The leveraged lease cash flow stream
will service the payment of principal and interest until the loan
is paid off. To the extent that the leveraged lease cash flow
stream during the next several years is less than the amount
necessary to service the debt, the loan will increase.
Subsequent to the payment of the secured indebtedness, the
NOTE 5. DISCONTINUED OPERATIONS (con't)
remaining investment in leveraged leases will be liquidated over
time as rentals are received and residual values are realized.
Disposal activities are ongoing for other discontinued assets.
Net assets of discontinued operations approximate net
realizable value and have been classified as noncurrent. The
amounts the Company will ultimately realize from the leveraged
lease portfolio and other investments could differ materially
from management's best estimates of their realizable value. A
summary of the net assets of discontinued operations is as
follows:
(Amounts in thousands)
At December 31, 1995 1994
- -------------------------------- ---- ----
Receivables, net $ 7,788 $ 6,774
Inventories 6,765 9,788
Investment in leveraged leases and
other investments 159,987 163,857
Property, plant and equipment, net 2,807 3,515
Other assets 11,123 10,861
-------- --------
Total assets 188,470 194,795
-------- --------
Accounts payable 2,438 2,550
Accrued expenses 4,425 5,338
Debt 29,528 27,029
Other long-term liabilities 7,188 5,483
-------- --------
Total liabilities 43,579 40,400
-------- --------
Net assets of discontinued operations $144,891 $154,395
======== ========
NOTE 6. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consists of the following:
(Amounts in thousands)
At December 31, 1995 1994
- -------------------------------- ---- ----
Land and improvements $ 49,792 $ 51,418
Buildings and improvements 232,570 247,590
Machinery and equipment 714,320 731,439
Construction in progress 26,273 23,777
---------- ----------
1,022,955 1,054,224
Accumulated depreciation (526,367) (530,074)
---------- ----------
$ 496,588 $ 524,150
========== ==========
NOTE 7. INDEBTEDNESS
Long-term debt is as follows:
(Amounts in thousands)
At December 31, 1995 1994
- ---------------------------------- ---- ----
Senior unsecured notes, at 9 5/8%,
due 1999 $150,000 $150,000
Senior unsecured notes, at 8 3/4%, due 2001 125,000 125,000
Medium-term notes, at a weighted average
interest rate of 9.9%, payable in varying
amounts from 1996 through 2001 100,000 100,000
Senior subordinated notes, at 9 3/8%,
due 2003 175,000 175,000
Capital lease obligations, at weighted
average interest rates of 9.5% and
9.3%, respectively, payable in varying
amounts through 2004 21,327 24,094
Other, at weighted average interest rates of
5.3% and 5.6%, respectively, payable in
varying amounts through 2004 8,234 27,711
-------- --------
579,561 601,805
Less current maturities (16,316) (15,231)
-------- --------
Total long-term debt $563,245 $586,574
======== ========
In 1993, the Company entered into a $150,000,000 revolving
credit agreement with a group of banks that extends through March
1997. The rate of interest payable under the agreement is, at
the Company's option, a function of the prime rate or the
Eurodollar rate. The agreement requires the Company to pay a
facility fee at an annual rate of 0.5% of the maximum amount
available under the credit line. Under the terms of the credit
facility, usage of up to approximately $46,000,000 is to be
secured by the stock of certain of the Company's subsidiaries.
At December 31, 1995, there were no borrowings outstanding under
this facility; however, $41,527,000 of the available credit line
was used for the issuance of letters of credit leaving
$108,473,000 of unused credit available.
NOTE 7. INDEBTEDNESS (con't)
In December 1993, the Company sold $125,000,000 of 8 3/4%
senior unsecured notes due 2001 and $175,000,000 of 9 3/8% senior
subordinated notes due 2003, pursuant to a public offering. The
net proceeds from the offering, together with proceeds from the
sale of ARC Professional Services, were used to repay $90,000,000
of indebtedness under the Company's existing revolving credit
agreement; to repay $35,000,000 of the private placement due
1994; and to execute a partial in-substance defeasance of the
Company's senior subordinated notes due 1998. In December 1993,
the Company called $211,000,000 principal amount of the senior
subordinated notes for redemption in January and February 1994
and deposited $222,661,000 of US Government securities into an
irrevocable trust to cover the principal amount called, the call
premium of $9,847,000 and interest during the 30-day call period
of $1,814,000. The in-substance defeasance transaction resulted
in an extraordinary loss of $8,524,000, net of tax benefits of
$4,590,000.
In April 1994, the Company called the remaining $33,450,000
principal amount of the senior subordinated notes due 1998 and
deposited $34,839,000 of US Government securities into an
irrevocable trust to cover the principal amount called, the call
premium of $1,171,000 and net interest expense of $218,000 during
the 30-day call period. The in-substance defeasance transaction
resulted in an extraordinary loss of $1,083,000 in 1994, net of
tax benefits of $583,000.
The aggregate maturities of total long-term debt during the
next five years are $16,316,000 in 1996, $5,316,000 in 1997,
$27,821,000 in 1998, $151,038,000 in 1999 and $5,016,000 in 2000.
The Company's loan agreements and indentures contain
covenants which, among other matters, restrict or limit the
ability of the Company to pay dividends, incur indebtedness, make
capital expenditures, repurchase common and preferred stock, and
repurchase the 9 3/8% senior subordinated notes due 2003. The
Company must also maintain certain ratios regarding interest
coverage, leverage and net worth, among other restrictions.
NOTE 8. INCOME TAXES
The components of income (loss) before income taxes were:
(Amounts in thousands)
Year ended December 31, 1995 1994 1993
- --------------------------------- ---- ---- ----
Domestic $(12,600) $(60,667) $(93,507)
Foreign 40,079 32,772 29,492
-------- -------- --------
$ 27,479 $(27,895) $(64,015)
======== ======== ========
NOTE 8. INCOME TAXES (con't)
The income tax provision (benefit) consisted of:
(Amounts in thousands)
Year ended December 31, 1995 1994 1993
- --------------------------------- ---- ---- ----
United States Federal
Current $ 144 $ 4,668 $ 2,084
Deferred (3,251) (23,064) (19,776)
State and local 5,508 5,131 (119)
Foreign 16,299 10,065 9,254
-------- -------- --------
$ 18,700 $ (3,200) $ (8,557)
======== ======== ========
The income tax provision (benefit) is different from the amount
computed by applying the US Federal statutory income tax rate of
35% to income (loss) before income taxes. The reasons for this
difference are as follows:
(Amounts in thousands)
Year ended December 31, 1995 1994 1993
- -------------------------------- ---- ---- ----
Computed income taxes at statutory
rate $ 9,618 $ (9,763) $(22,405)
Foreign subsidiaries at different
tax rates (835) (1,303) 3,931
State and local taxes, net of
Federal income tax benefit 3,580 3,883 (1,164)
Benefit from Foreign Sales
Corporations (1,296) (670) (767)
Book basis of assets over (under)
tax basis 4,741 3,598 (2,818)
Foreign losses not benefitted 3,106 - -
Taxes on undistributed foreign
earnings - - 14,000
Effect of tax rate change - - (2,012)
Other, net (214) 1,055 2,678
------- -------- --------
$18,700 $ (3,200) $ (8,557)
======= ======== ========
The deferred tax provision represents the change in deferred
tax liabilities and assets from the beginning of the year to the
end of the year resulting from changes in the temporary
differences between the financial reporting basis and the tax
basis of the Company's assets and liabilities.
NOTE 8. INCOME TAXES (con't)
Temporary differences and carryforwards which gave rise to
deferred tax assets and liabilities are as follows:
(Amounts in thousands)
At December 31, 1995
- ------------------------- --------------------
Deferred Deferred
Tax Tax
Assets Liabilities
------ -----------
Accounts receivable allowances $ 3,215 $ -
Inventory valuation differences 11,156 3,560
Recognition of income on
long-term contracts 3,063 5,601
Depreciation 11,824 59,390
Lease and finance transactions - 119,156
Accruals not currently deductible
for tax purposes 92,256 -
Taxes on undistributed foreign earnings - 2,153
Tax net operating loss carryforward 84,732 -
Tax capital loss carryforward 1,326 -
Alternative minimum tax (AMT)
credit carryforward 24,981 -
Other tax credit carryforwards 7,817 -
All other 22,258 19,135
-------- --------
Subtotal 262,628 208,995
Valuation allowance (8,329) -
-------- --------
Total deferred taxes $254,299 $208,995
======== ========
(Amounts in thousands)
At December 31, 1994
- ------------------------- --------------------
Deferred Deferred
Tax Tax
Assets Liabilities
------ -----------
Accounts receivable allowances $ 3,196 $ -
Inventory valuation differences 17,808 5,069
Recognition of income on
long-term contracts 4,321 7,034
Depreciation 15,286 60,063
Lease and finance transactions - 105,821
Accruals not currently deductible
for tax purposes 97,008 -
Taxes on undistributed foreign earnings - 9,632
Tax net operating loss carryforward 67,297 -
Tax capital loss carryforward 2,156 -
Alternative minimum tax (AMT)
credit carryforward 26,661 -
Other tax credit carryforwards 6,881 -
All other 21,323 18,871
-------- --------
Subtotal 261,937 206,490
Valuation allowance (6,075) -
-------- --------
Total deferred taxes $255,862 $206,490
======== ========
NOTE 8. INCOME TAXES (con't)
The Company has a tax capital loss carryforward of $3,788,000
at December 31, 1995 that most likely will expire unutilized in
1998. A valuation allowance has been established to reduce the
deferred tax asset recorded for the capital loss carryforward to
zero, to reduce the tax asset recorded for certain tax credits
which may expire unutilized in 1998 through 2008 and to reduce
the tax benefit for current year losses of the Company's French
subsidiaries. The AMT credit carryforward does not expire and
can be carried forward indefinitely. The Company has a tax net
operating loss carryforward of $242,093,000 at December 31, 1995
that expires in 2006 through 2010.
Although the Company has experienced book and tax domestic
losses in the past five years, management believes that the
Company will return to profitability and will be able to utilize
its domestic net operating loss carryforwards before expiration
through future reversals of existing taxable temporary
differences and future earnings. The losses were largely
attributable to loss provisions recorded during 1991 and 1992 for
the Company's discontinued leasing unit, the government
investigation of jet engine component repairs and repair
procedures at Chromalloy's Orangeburg plant, the Chromalloy
restructuring charges and the persistent difficulties of
overcapacity and pricing pressure in the airline marketplace
which resulted in Chromalloy -- a consistent contributor to
profits in the past -- operating at a loss from 1993 through
1995. The Company has divested itself of a significant portion
of Sequa Capital's assets, has downsized and restructured the
Chromalloy operation, has resumed FAA repair operations at
Chromalloy's Orangeburg plant and has decreased interest expense
by significantly reducing debt levels.
The Company'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,
competitive pressures on sales and margins, and other factors
beyond management's control. There can be no assurance that the
Company will meet its expectations for future domestic taxable
income in the carryforward period; however, management has
considered the above factors in reaching the conclusion that it
is more likely than not that future domestic taxable income will
be sufficient to fully realize the net domestic deferred tax
assets at December 31, 1995. The amount of the deferred tax
assets considered realizable, however, could be reduced in the
near term if estimates of future domestic taxable income during
the carryforward period are reduced.
NOTE 9. ACCRUED EXPENSES
The Company's accrued expenses consisted of the following items:
(Amounts in thousands)
At December 31, 1995 1994
- ------------------------------- ---- ----
Salaries and wages $ 34,675 $ 36,769
Current portion of environmental
liabilities 9,500 9,500
Current portion of self-insurance
liabilities 6,700 8,000
Current portion of pension liabilities 3,312 2,140
Warranty 4,347 6,434
Customer rebates 6,271 3,595
Legal 7,335 6,151
Royalties 6,083 4,808
Interest 6,265 6,399
Insurance 5,586 5,255
Taxes other than income 4,581 4,410
Other 51,733 73,097
-------- --------
$146,388 $166,558
======== ========
NOTE 10. FINANCIAL INSTRUMENTS
The Company has had limited involvement with derivative financial
instruments and does not use them for trading purposes. During
1993, the Company received proceeds of $9,796,000 from the early
termination of interest rate swaps that were accounted for as
hedges and that effectively converted $75,000,000 of fixed-rate
debt into variable-rate borrowings. The resulting gains were
deferred and are being amortized to income over the remaining
original lives of the swaps terminated. In December 1994, the
Company closed out all of its outstanding interest-related
derivatives for a cash payment of $7,729,000, the approximate net
carrying value of these instruments.
The Company's weighted average borrowing rate was 9.1% during
1995 and 9.4% during 1994 and 1993. The Company's hedging
activities related to interest rate swaps reduced interest
expense by $3,105,000 in 1995 (or 53 basis points); $335,000 (or
5 basis points) during 1994; and $2,443,000 (or 35 basis points)
during 1993. Deferred gains on terminated interest rate swaps
amounted to $3,752,000 and $6,856,000 at December 31, 1995 and
1994, respectively. Amortization of such deferred gains will
serve to reduce interest expense by $2,169,000, $1,524,000 and
$59,000 during 1996, 1997 and 1998, respectively.
NOTE 10. FINANCIAL INSTRUMENTS (con't)
During 1993, certain interest rate options being accounted
for as hedges were restructured into non-hedge instruments. A
mark-to-market loss of $6,557,000 was charged to Other, net in
1993 on these options. Early in 1994, the options were further
restructured and a related derivative transaction was entered
into. In 1994, Other, net includes $2,394,000 of losses on this
derivative and the two restructured options. All interest-
related derivatives were closed out as of December 31, 1994 with
no further loss.
Forward foreign exchange contracts are used by the Company's
specialty chemicals operation in the United Kingdom to hedge
anticipated but not yet committed sales and purchases to be
denominated in currencies other than the pound sterling. The
Company also uses forward foreign exchange contracts to hedge the
portion of foreign investments expected to be repatriated in the
form of dividends.
At December 31, 1995 and 1994, the Company had forward
foreign exchange contracts outstanding with notional amounts of
$7,765,000 and $27,303,000, respectively. The fair value of
these instruments included in the Consolidated Balance Sheet was
a $50,000 liability at December 31, 1995 and a $66,000 asset at
December 31, 1994. There were no interest-rate derivatives
outstanding at December 31, 1995 and 1994.
Based upon quoted market prices of the Company's publicly
traded debt securities, the fair value of current and long-term
debt was approximately $568,500,000 at December 31, 1995 and
approximately $548,000,000 at December 31, 1994, compared with
$579,561,000 and $601,805,000 included in the Consolidated
Balance Sheet at December 31, 1995 and 1994, respectively.
At December 31, 1995, the Company was contingently liable for
outstanding letters of credit, not reflected in the accompanying
consolidated financial statements, in the aggregate amount of
$71,704,000. The Company is not currently aware of any existing
conditions which would cause risk of loss relative to outstanding
letters of credit. The Company was also contingently liable at
December 31, 1995 for $25,000,000 in guarantees of debt owed by
one of the Company's unconsolidated joint ventures. The Company
believes that its unconsolidated joint venture will be able to
perform under its payment obligations in connection with such
guaranteed indebtedness.
NOTE 11. PENSION PLANS AND POSTRETIREMENT BENEFITS
The Company sponsors various noncontributory defined benefit pension plans
covering certain hourly and most salaried employees. The defined benefit plans
provide benefits based primarily on the participant's years of service and
compensation. It has been the Company's policy to fund domestic plans to meet
the minimum funding requirements of the Employee Retirement Income Security Act
(ERISA).
The status of all the Company's significant funded domestic and foreign
defined benefit plans was as follows:
(Amounts in thousands)
At December 31, 1995 1994
- -------------------------- ---------------------- --------------------
Assets Accumulated Assets Accumulated
Exceed Benefits Exceed Benefits
Accumulated Exceed Accumulated Exceed
Benefits Assets Benefits Assets
----------- ---------- ----------- ----------
Actuarial present value of
benefit obligations:
Vested benefit obligation $ 49,590 $153,191 $ 66,047 $ 96,743
Accumulated benefit obligation 51,006 155,553 67,978 98,846
Projected benefit obligation 52,417 167,128 72,798 106,442
Plan assets at fair value 54,119 145,575 71,931 93,076
-------- ------- ------- --------
(Excess) deficiency of assets
over projected benefit
obligation (1,702) 21,553 867 13,366
Unrecognized net transition asset
(obligation) (1,190) 5,190 (1,897) 6,599
Unrecognized prior service cost (832) (2,199) (1,598) (939)
Unrecognized net gain (loss) (575) (17,277) 3,205 (11,639)
Adjustment needed to recognize
minimum liability - 1,914 - 1,183
-------- ------- ------- --------
(Prepaid pension cost) pension
liability $ (4,299) $ 9,181 $ 577 $ 8,570
======== ======= ======= ========
Included in:
Deferred charges $ (4,838) $ - $(1,106) $ -
Accrued expenses 539 2,773 1,545 595
Other long-term liabilities - 6,408 138 7,975
-------- ------- ------- --------
(Prepaid pension cost) pension
liability $ (4,299) $ 9,181 $ 577 $ 8,570
======== ====== ======= ========
The plans' assets consist primarily of listed common stock, pooled equity funds
and index funds. At December 31, 1995 and 1994, the plans' assets included
Company stock with market values of $12,480,000 and $11,927,000, respectively.
NOTE 11. PENSION PLANS AND POSTRETIREMENT BENEFITS (con't)
Assumptions used in the accounting for all the Company's
significant funded domestic and foreign defined benefit plans
were:
At December 31, 1995 1994 1993
- --------------- ---- ---- ----
Discount rate for obligations 7.5% 8.5% 7.5%
Rate of increase in compensation levels 4.5% 4.5% 4.5%
Expected long-term rate of return on
plan assets 9.0% 9.0% 9.0%
The periodic net pension cost of all the Company's significant
funded domestic and foreign defined benefit plans includes the
following components:
(Amounts in thousands)
Year ended December 31, 1995 1994 1993
- ---------------------------- ---- ---- ----
Service cost for benefits earned $ 7,096 $ 8,099 $ 7,255
Interest cost on projected benefit
obligation 14,908 13,807 12,532
Actual (return) loss on plan
assets (22,308) 2,539 (25,108)
Net amortization and deferral 6,443 (17,354) 11,623
------- ------- -------
$ 6,139 $ 7,091 $ 6,302
======= ======= =======
The net amortization and deferral component of pension cost
includes $7,453,000 of deferred asset gains in 1995, $16,868,000
of deferred asset losses in 1994, and $12,379,000 of deferred
asset gains in 1993. These unrecognized gains and losses
resulted from actual returns on plan assets differing from the
expected returns on plan assets. Such deferred gains and losses
are subject to amortization in future periods. Pension expense
includes a curtailment gain of $612,000 in 1995 and a curtailment
loss of $434,000 in 1994.
Employees not covered by the defined benefit plans discussed
above generally are covered by multiemployer plans as part of
collective bargaining agreements or small local plans. Pension
expense for these multiemployer plans and small local plans was
not significant in the aggregate.
The Company also has several nonfunded supplemental executive
retirement plans for certain key executives. These plans provide
for benefits that supplement those provided by the Company's
other retirement plans. At December 31, 1995, the projected
benefit obligation for these plans of $10,707,000 is included in
Other long-term liabilities in the accompanying Consolidated
Balance Sheet. The expense for these plans was $1,755,000 in
1995, $1,824,000 in 1994 and $1,919,000 in 1993.
Note 11. Pension Plans and Postretirement Benefits (con't)
Most of the Company's domestic non-union employees are
eligible to participate in the Company's 401(k) plans. Expenses
recorded for the Company's matching contributions under these
plans were $3,542,000 in 1995, $4,978,000 in 1994 and $7,146,000
in 1993.
Postretirement health care and other insurance benefits are
provided to certain retirees. The actuarial and recorded
liabilities for these postretirement benefits, none of which have
been funded, are as follows:
(Amounts in thousands)
At December 31, 1995 1994
- --------------------- ---- ----
Accumulated postretirement benefit
obligation:
Retirees $1,796 $ 1,963
Employees fully eligible 424 272
Other active participants 776 633
----- -----
Total 2,996 2,868
Unrecognized prior service cost (299) -
Unrecognized net gain 418 205
Unrecognized transition obligation (2,613) (2,767)
------ -------
Postretirement benefit liability $ 502 $ 306
====== =======
Net periodic postretirement benefit cost includes the following
components:
(Amounts in thousands)
Year ended December 31, 1995 1994 1993
- -------------------------- ---- ---- ----
Service cost for benefits earned $124 $138 $130
Interest cost on accumulated
postretirement benefit obligation 228 212 248
Amortization of net gain (15) (7) -
Amortization of transition
obligation 154 153 153
---- ---- ----
Net periodic postretirement benefit
cost $491 $496 $531
==== ==== ====
The accumulated postretirement benefit obligation was
determined using a discount rate of 7.5%, 8.5% and 7.5% at
December 31, 1995, 1994 and 1993, respectively, and an average
health care cost trend rate of approximately 14% progressively
decreasing to approximately 5.5% in the year 2005 and thereafter.
Increasing the assumed health care cost trend rates by one
percentage point in each year and holding all other assumptions
constant would increase the accumulated postretirement benefit
obligation as of December 31, 1995 by approximately $134,000 and
increase the aggregate of the service and interest cost
components of the net periodic postretirement benefit cost for
1995 by approximately $20,000.
NOTE 12. CAPITAL STOCK
The Company's capital stock consists of Class A and Class B
common stock, and $5.00 cumulative convertible preferred stock.
Holders of Class A common stock have one vote per share, holders
of Class B common stock have ten votes per share and preferred
stockholders have one vote per share. Holders of Class B common
stock are entitled to convert their shares into Class A common
stock at any time on a share-for-share basis. Each share of
$5.00 cumulative convertible preferred stock is convertible into
1.322 shares of Class A common stock. The preferred stock is
redeemable, at the option of the Company, at $100 per share.
At December 31, 1995, 4,460,024 shares of Sequa Class A
common stock were reserved for conversion of preferred and Class
B common stock and stock options.
The following table summarizes shares held in treasury:
At December 31, 1995 1994 1993
- -------------------- ---- ---- ----
Class A common stock 652,000 652,000 864,052
Class B common stock 396,283 396,283 396,283
Preferred stock 163,489 163,489 163,489
During 1994, 180,000 shares of Class A common stock in
treasury were contributed to the Company's defined benefit
pension plans and 32,052 shares of Class A common stock in
treasury were granted to certain key employees.
Note 13. Stock Options and Grants
The Company has incentive and nonqualified stock option plans in
effect. As of December 31, 1995, only options on Class A common
stock remained outstanding, exercisable and available for future
grant. There were no options exercised in 1995, 1994 and 1993.
Summarized data relating to stock options are as follows:
Year ended Number of Average option
Options December 31, Common Shares price per share
- ------- ------------ ------------- ---------------
Outstanding 1995 292,000 $32.18
Granted 1995 12,200 25.48
1994 15,500 32.05
1993 326,300 32.50
Cancelled or expired 1995 26,000 33.84
1994 41,300 33.06
1993 157,647 63.19
Exercisable 1995 182,867 32.62
Available for future
grant 1995 66,322 -
NOTE 13. STOCK OPTIONS AND GRANTS (con't)
During 1994, 32,052 shares of the Company's Class A common
stock held in treasury were granted to certain key employees.
Such stock is subject to restrictions which prohibit sale or
transfer by the grantee for periods of three to five years and
require forfeiture by the employee in the event of employment
termination within the restricted periods. The market value of
the shares granted was $831,000 and is being amortized to expense
over the respective periods in which the restrictions lapse. The
charge to operations was $258,000 in 1995 and $53,000 in 1994.
The unamortized value of the shares granted of $520,000 is
included in treasury stock in the accompanying Consolidated
Balance Sheet at December 31, 1995.
Note 14. Restructuring Charges
During 1993, the Company recorded restructuring charges totaling
$26,640,000 primarily related to plans adopted to reduce
Chromalloy's investment in plants engaged in activities other
than the repair of components for flight engines; to sell excess
machinery; and to permanently reduce the number of employees in
Chromalloy facilities.
NOTE 15. ACQUISITIONS AND DISPOSITIONS
On December 29, 1995, the Company sold substantially all of the
business and operating assets, excluding billed receivables, of
Kollsman for cash proceeds of $49,612,000. The sale resulted in
a pre-tax gain of $6,461,000. Kollsman had revenues of
$97,271,000, $109,167,000 and $116,806,000 in 1995, 1994 and
1993, respectively, and operating income of $12,857,000,
$10,223,000 and $8,946,000 in 1995, 1994 and 1993, respectively.
The consolidated financial statements and accompanying footnotes
reflect the operating results of Kollsman as a continuing
operation.
During 1995, Chromalloy sold an OEM unit and its 51% interest
in an engine overhaul business for cash proceeds aggregating
$5,908,000 with one of the purchasers assuming $17,236,000 of the
Company's debt. A small net loss on the sale of these two
businesses was charged against restructuring reserves established
in 1993 for this purpose. Also during 1995, an overseas
chemicals plant was sold for cash proceeds of $2,060,000. The
sale resulted in a pre-tax gain of $1,711,000 which is included
in Other, net.
In July 1995, the Company purchased two coil coating
operations from Enamel Products and Plating Co. (EP&P) for
$38,258,000. In connection with the acquisition, the Company
entered into an operating lease with a financial institution for
the rental of a metal coating line located at one of the EP&P
facilities. In December 1995, the Company acquired an automobile
lighter product line in Italy for $4,401,000. These acquisitions
have been accounted for as purchases; accordingly, operating
NOTE 15. ACQUISITIONS AND DISPOSITIONS (con't)
results are included in the Consolidated Statement of Income from
the date of purchase. Pro forma combined results of operations
giving effect to these purchases would not vary materially from
historical results.
During 1994, three Chromalloy operations, all engaged in
activities other than the repair of components for flight
engines, were sold for net cash proceeds of $57,248,000. Losses
on the sale of these businesses were charged against
restructuring reserves established in 1993 for this purpose.
On December 30, 1993, the Company sold the stock of ARC
Professional Services for net cash proceeds of $58,313,000, and
the purchaser assumed $4,524,000 of ARC Professional Services'
debt. The sale resulted in a pre-tax gain of $12,408,000. ARC
Professional Services had revenues of $162,606,000 and operating
income of $10,699,000 in 1993. In 1993, the Company also sold
Northern Can Systems' two can making plants and a small
discontinued operation for cash proceeds totalling $17,840,000.
No pre-tax gain or loss was recorded as a result of these sales.
In connection with the sale of ARC Professional Services, the
Company was contractually required to purchase the 7% minority
interest in Atlantic Research Corporation (ARC). In January
1994, the Company purchased the minority interest at a cost of
$16,701,000 which was $13,709,000 less than the book value of the
net assets acquired. The excess of the book value over the cost
of the minority interest acquired was allocated to the goodwill
of ARC and is being amortized over the remaining life of the ARC
goodwill.
NOTE 16. OTHER, NET
Other, net includes the following income (expense) items:
(Amounts in thousands)
Year ended December 31, 1995 1994 1993
- ---------------------------- ---- ---- ----
Gain on sale of investment $ 2,664 $ - $ -
Gain on sale of chemicals plant 1,711 - -
Dividend income 2,080 - -
Gain on sale of land 1,701 - -
Amortization of capitalized
debt costs (2,145) (2,389) (4,158)
Equity in losses of
unconsolidated joint ventures (1,774) (2,154) (7,097)
Discount expense related to the
sale of accounts receivable (947) (1,829) (3,136)
Mark-to-market loss on
interest-rate derivatives - (2,394) (6,557)
Loss on sale and leaseback
transaction - - (3,051)
Minority interest in earnings
of subsidiary - - (2,517)
Other (767) (2,587) (1,759)
------- -------- --------
$ 2,523 $(11,353) $(28,275)
====== ======= =======
Note 17. Operating Leases
Certain businesses of the Company utilize leased premises or
equipment under noncancelable agreements having initial or
remaining terms of more than one year. The majority of the real
property leases require the Company to pay maintenance, insurance
and real estate taxes. Rental expense totaled $17,826,000,
$17,997,000 and $24,780,000 in 1995, 1994 and 1993, respectively.
At December 31, 1995, future minimum lease payments under
noncancelable operating leases are as follows:
(Amounts in thousands)
1996 $12,357
1997 10,477
1998 6,690
1999 4,988
2000 3,600
After 2000 12,319
-------
$50,431
=======
NOTE 18. SUPPLEMENTAL CASH FLOW INFORMATION
Net cash provided by discontinued operations:
(Amounts in thousands)
Year ended December 31, 1995 1994 1993
- ------------------------------- ---- ---- ----
Changes in working capital $ 2,160 $ (6,039) $ (64)
Increase (decrease) in debt 2,499 27,029 (37,432)
Investment in leasing assets - (1,019) (1,323)
Principal repayments on
leasing assets 3,467 6,687 1,621
Sale of leasing assets 666 8,247 41,463
Other changes in net assets (3,171) (6,677) (1,515)
--------- --------- ---------
$ 5,621 $ 28,228 $ 2,750
========= ========= =========
Non-cash investment activities:
During 1994, 180,000 shares of the Company's Class A common
stock, with a market value of $4,723,000, were contributed to the
Company's defined benefit pension plans.
In 1993, the Company entered into two sale and leaseback
agreements related to various Chromalloy and Precoat Metals
equipment. Aggregate cash proceeds from the sale of $20,845,000
have been presented as an investing activity in the accompanying
Consolidated Statement of Cash Flows for the year ended December
31, 1993. The sales resulted in a loss on one transaction of
$3,051,000, which is included in 1993 in Other, net in the
Consolidated Statement of Income, and a gain on the other
transaction of $5,738,000. The Company entered into agreements
to lease back the equipment and recorded fixed assets and capital
lease obligations in the amount of $20,845,000. The $5,738,000
gain on sale has been deferred and is being amortized to income
over the life of the related leaseback agreement.
Other supplemental cash flow information:
(Amounts in thousands)
Year ended December 31, 1995 1994 1993
- --------------------------- ---- ---- ----
Interest paid $53,436 $60,746 $70,052
NOTE 19. SEGMENT INFORMATION
Sequa Corporation is a diversified industrial company that
produces a broad range of products in four industry segments:
Aerospace, Machinery and Metal Coatings, Specialty Chemicals and
Other Products.
The Aerospace segment includes three operating units:
Chromalloy Gas Turbine, ARC Propulsion and Kollsman. Chromalloy,
the largest of the Company's operating units, manufactures and
repairs gas turbine engine components, principally for domestic
and international airlines. ARC Propulsion primarily
manufactures solid rocket propulsion systems for use in tactical
military weapons sold to the US Government. Kollsman, which was
sold in December 1995, manufactures electronic and electro-
optical systems for US military and foreign government use,
avionics equipment principally sold to the general aviation
market and medical diagnostic instrumentation sold to medical
equipment suppliers.
The Machinery and Metal Coatings segment is composed of
Precoat Metals, Sequa Can Machinery and MEG. Precoat Metals
applies polymer coatings to continuous steel and aluminum coil
for the nationwide building products market and the two-piece
container market. Sequa Can Machinery produces high-speed
equipment to form and decorate two-piece metal cans for the
worldwide container industry. MEG provides auxiliary press
equipment for web offset printing for the European, North
American and Asian printing markets.
The Specialty Chemicals segment is composed of Warwick
International and Sequa Chemicals. Warwick produces TAED, a
bleach activator for powdered detergent laundry products sold
principally in European markets. Sequa Chemicals produces a
broad range of specialty chemicals primarily for national
textile, paper and building products markets.
The Other Products segment is composed of Casco Products and
Northern Can Systems. Casco manufactures cigarette lighters,
power outlets, and electronic monitoring devices primarily for
North American automobile manufacturers. Northern Can Systems
produces easy-open steel lids for the domestic and international
food processing industry.
NOTE 19. SEGMENT INFORMATION (con't)
Operations by business segment is presented below:
(Amounts in thousands)
Year ended December 31, 1995 1994 1993
- --------------------------- ---------- ---------- ----------
AEROSPACE
Sales $ 785,627 $ 847,173 $ 983,113
Operating income (loss) 10,179 (12,777) (40,892)
Identifiable assets 956,120 1,078,269 1,200,782
Capital expenditures 27,312 25,246 45,418
Depreciation and amortization 67,740 74,714 79,623
MACHINERY AND METAL COATINGS
Sales $ 312,891 $ 261,581 $ 254,680
Operating income 32,287 28,570 25,919
Identifiable assets 210,850 162,518 146,231
Capital expenditures 10,062 15,035 14,984
Depreciation and amortization 8,528 6,363 6,045
SPECIALTY CHEMICALS
Sales $ 243,030 $ 240,170 $ 214,866
Operating income 44,394 43,265 35,781
Identifiable assets 163,112 149,396 128,904
Capital expenditures 14,523 14,329 11,457
Depreciation and amortization 12,123 12,344 10,819
OTHER PRODUCTS
Sales $ 72,591 $ 70,626 $ 244,309
Operating income 7,671 6,057 18,950
Identifiable assets 74,706 71,431 78,499
Capital expenditures 4,393 4,336 4,794
Depreciation and amortization 5,592 7,893 9,779
CORPORATE
Expenses $ (26,604) $ (25,362) $ (24,084)
Identifiable assets (a) 217,190 186,634 249,105
Capital expenditures 609 295 205
Depreciation and amortization 2,502 2,660 3,795
TOTALS
Sales $1,414,139 $1,419,550 $1,696,968
Operating income 67,927 39,753 15,674
Identifiable assets 1,621,978 1,648,248 1,803,521
Capital expenditures 56,899 59,241 76,858
Depreciation and amortization 96,485 103,974 110,061
(a) Includes net assets of discontinued operations.
/TABLE
NOTE 19. SEGMENT INFORMATION (con't)
Geographic data is presented below:
(Amounts in thousands)
Year ended December 31,
1995 1994 1993
- ----------------------- ---- ---- ----
SALES
- -----
United States $1,027,390 $1,028,737 $1,307,559
Europe 386,749 390,813 389,409
---------- ---------- ----------
Total $1,414,139 $1,419,550 $1,696,968
========== ========== ==========
OPERATING INCOME
- ----------------
United States $ 57,335 $ 28,561 $ 6,160
Europe 37,196 36,554 33,598
Corporate expenses (26,604) (25,362) (24,084)
---------- ---------- ----------
Total $ 67,927 $ 39,753 $ 15,674
========== ========== ==========
At December 31, 1995 1994 1993
- ------------------- ---- ---- ----
Identifiable Assets
- -------------------
United States $1,089,438 $1,129,271 $1,237,066
Europe 315,350 332,343 317,350
Corporate and discontinued
operations 217,190 186,634 249,105
---------- ---------- ----------
Total $1,621,978 $1,648,248 $1,803,521
========== ========== ==========
Operating income includes all costs and expenses directly
related to the segment or geographic area. Identifiable assets are
those used in each segment's operation.
No single commercial customer accounted for more than 10% of
sales in any year.
Export sales were as follows:
(Amounts in thousands)
Year ended December 31, 1995 1994 1993
- --------------------------- ---- ---- ----
Europe $121,918 $120,288 $118,666
Far East 74,830 52,112 69,917
Middle East 15,737 18,137 32,377
Canada 27,241 21,962 16,758
Central and South America 31,725 23,037 30,771
Other 15,680 14,816 11,474
-------- -------- --------
$287,131 $250,352 $279,963
======== ======== ========
The largest single contract with any one US Government agency
accounted for approximately 2% of sales in 1995, 1994 and 1993. Prime
and subcontracts with all government agencies accounted for
approximately 11% of sales in 1995 and 1994 and approximately 22% of
sales in 1993.
Note 20. Government Investigations
During the second quarter of 1993, the Company entered into agreements
with the US Attorney's Office, Southern District of New York (SDNY),
and the Federal Aviation Administration (FAA) in connection with
investigations begun in November 1992 by these offices and other
related governmental agencies of Chromalloy's Orangeburg plant and
certain of its then employees. The FAA restored the facility's FAA
repair station certificate on June 10, 1993, ending the suspension of
repair operations and resolving all FAA civil matters related to the
Orangeburg plant. Subsequently, the US Attorney's Office, SDNY,
declined to prosecute the Company in connection with its
investigation.
As a result of the investigations and the related suspension,
the Company incurred direct expenses in 1993 of $12,800,000. Direct
expenses included the remedial payment of $5,000,000 to the FAA, an
additional $2,500,000 to cover the cost of testing engine parts seized
by federal authorities, severance payments, and legal fees and
expenses.
NOTE 21. CONTINGENCIES
At December 31, 1995, the Company was contingently liable for
outstanding letters of credit, not reflected in the accompanying
consolidated financial statements, in the aggregate amount of
approximately $71,704,000. The Company was also contingently liable
at December 31, 1995 for $25,000,000 in guarantees of debt owed by one
of the Company's unconsolidated joint ventures. In addition, the
Company is involved in a number of claims, lawsuits and proceedings
(environmental and otherwise) which arose in the ordinary course of
business. Other litigation is pending against the Company involving
allegations that are not routine and include, in certain cases,
compensatory and punitive damage claims. Included in this other class
of litigation is an arbitration proceeding that was formally commenced
in 1992 to resolve a dispute between the Egyptian Air Force and
Chromalloy Gas Turbine Corporation, a subsidiary of Sequa. In 1994,
the arbitral tribunal issued an award of $16,250,000 plus interest in
favor of Chromalloy Gas Turbine. At December 31, 1995, the Company's
Consolidated Balance Sheet includes net assets of approximately
$17,500,000 related to this issue. Chromalloy Gas Turbine has filed a
petition in the US District Court for the District of Columbia to
confirm and enforce the award. The government of Egypt has succeeded
in a challenge to this award in the Court of Appeal of Cairo.
Management does not believe that this will prevent the ultimate
collection of the award.
On July 11, 1995, United Technologies Corporation, through
its Pratt & Whitney division, commenced an action against Chromalloy
Gas Turbine Corporation in the United States District Court for the
District of Delaware. The complaint seeks unspecified monetary
damages (including treble and punitive damages with respect to certain
NOTE 21. CONTINGENCIES (con't)
claims) and injunctive relief based upon alleged breaches of certain
license agreements, alleged infringement of patents and misuse of
other Pratt & Whitney intellectual and intangible property. This
lawsuit is in its preliminary stage and, accordingly, management
cannot make an evaluation of the likely outcome at this time.
Management intends to vigorously defend against all claims, which it
regards as substantially lacking in merit. In this connection, on
August 30, 1995, Chromalloy Gas Turbine filed its answer denying the
significant allegations in such complaint, and included numerous
affirmative defenses and a counterclaim against United Technologies.
On August 29, 1995, Chromalloy Gas Turbine Corporation
commenced an action against United Technologies Corporation in the
District Court, 131st Judicial District, of Bexar County, Texas. This
is a suit to recover monetary damages (including treble and punitive
damages) and for injunctive relief based upon Chromalloy Gas Turbine's
claims that United Technologies has violated the Texas Free Enterprise
and Antitrust Act, and engaged in unfair competition and tortiously
interfered with Chromalloy Gas Turbine's business relations. On
October 2, 1995, United Technologies filed its answer denying the
material allegations of the petition and raising certain affirmative
defenses. On December 28, 1995, United Technologies filed
counterclaims in this action seeking monetary damages and injunctive
relief. Chromalloy intends to formally respond to these counterclaims
in the near term. Chromalloy Gas Turbine's claims focus on allegedly
illegal, exclusionary and monopolistic activities with respect to key
segments of commerce in repairs for Pratt & Whitney commercial jet
engines. While management cannot predict the outcome of this
litigation at this time, in management's opinion, a successful
outcome, including the possible award of injunctive and monetary
relief to restore competition in areas of commerce now alleged to have
been unlawfully foreclosed and restrained, could be favorable to the
Company.
Related to the above lawsuits, Chromalloy Gas Turbine's
divisions compete for turbine engine repair business with a number of
other major companies, including the original equipment manufacturers
(OEM). Such OEMs generally have obligations (contractual and
otherwise) to approve vendors to manufacture components for their
engines and/or perform repair services on their engines and
components. Chromalloy Gas Turbine has a number of such approvals,
including licensing agreements, which allow it to manufacture and
repair certain components of flight engines. The loss of approval by
one of the major OEMs to manufacture or repair components for such
OEM's engines could have an adverse effect on Chromalloy Gas Turbine,
although management believes it has certain actions available to it to
mitigate the adverse effect.
The ultimate legal and financial liability of the Company in
respect to all claims, lawsuits and proceedings referred to above
NOTE 21. CONTINGENCIES (con't)
cannot be estimated with any certainty. However, in the opinion of
management, based on its examination of such matters, its experience
to date and discussions with counsel, the ultimate outcome of these
contingencies, net of liabilities already accrued in the Company's
Consolidated Balance Sheet, is not expected to have a material adverse
effect on the Company's consolidated financial position, although the
resolution in any reporting period of one or more of these matters
could have a significant impact on the Company's results of operations
for that period.
NOTE 22. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(Amounts in thousands, except per share)
1995 Quarter ended March 31 June 30 Sept. 30 Dec. 31 Year
- ------------------ -------- ------- -------- ------- ----------
Sales $327,534 $357,263 $353,288 $376,054 $1,414,139
Cost of sales 261,511 288,716 288,328 291,400 1,129,955
Operating income 11,107 6,780 13,628 36,412 67,927
Net income (loss) $ (1,875) $ (6,087) $ 1,930 $ 14,811 $ 8,779
======== ======== ======== ======== ==========
Net income (loss) per share $ (.27) $ (.70) $ .12 $ 1.42 $ .57
======== ======== ======== ======== ==========
1994 Quarter ended March 31 June 30 Sept. 30 Dec. 31 Year
- ------------------ -------- ------- -------- ------- ----------
Sales $350,982 $360,698 $330,799 $377,071 $1,419,550
Cost of sales 280,011 292,572 266,711 325,445 1,164,739
Operating income (loss) 17,006 10,568 12,732 (553) 39,753
Loss before extraordinary item (1,458) (2,351) (8,387) (12,499) (24,695)
Extraordinary loss (1,083) - - - (1,083)
Net loss $ (2,541) $ (2,351) $ (8,387) $(12,499) $ (25,778)
======== ======== ======= ======== ==========
Per share:
Loss before extraordinary item $ (.23) $ (.33) $ (.94) $ (1.35) $ (2.87)
Extraordinary loss (.11) - - - (.11)
-------- -------- -------- -------- ----------
Net loss $ (.34) $ (.33) $ (.94) $ (1.35) $ (2.98)
======== ======== ======== ======== ==========
The following unusual items are included in the quarterly financial information:
(1) A significant portion of the increase in operating income and net income for the fourth quarter of
1995 is attributable to the reversal of workers' compensation insurance reserves, which were
actuarially determined to be in excess of requirements.
(2) The second quarter of 1994 includes a $4,300,000 charge related to an accounting irregularity.
(3) The fourth quarter of 1994 includes provisions for Chromalloy inventory and other reserves which,
when combined with Chromalloy's operating loss, were the causes of the Company's fourth-quarter
operating loss.
Quarterly earnings per share are not additive for 1994 due to the contribution of 180,000 shares of the
Company's Class A common stock to the Company's defined benefit pension plans in September 1994.
/TABLE
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
- ------- ----------------------------------------------------
None.
PART III
ITEM 10. 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 the Registrant:
Name Age Position Held
---- --- -------------
Norman E. Alexander (1) 81 Chairman of the Board, Chief
Executive Officer and Director
John J. Quicke (2) 46 President, Chief Operating
Officer and Director
Stuart Z. Krinsly (1) 78 Senior Executive Vice
President - General Counsel and
Director
Gerald S. Gutterman (1) 67 Executive Vice President -
Finance and Administration
Antonio L. Savoca (3) 72 Senior Vice President -
Atlantic Research Operations
Ira A. Schreger (4) 45 Senior Vice President - Legal -
Corporate Secretary
Martin Weinstein (5) 60 Senior Vice President -
Chromalloy Gas Turbine
Operations
(1) Has served in the same or similar capacity for more than the
past ten years.
(2) President and Chief Operating Officer - Sequa Corporation
since March 1993; Senior Executive Vice President,
Operations, - Sequa Corporation from June 1992 to March
1993; from February 1991 to June 1992, served as Vice
President, Financial Services, of the Company; from 1987 to
February 1991, served as Vice President, Financial Projects,
of the Company. Served as Vice President and Controller of
Chromalloy American Corporation (which became a subsidiary
of the Company in 1987) from 1983 to 1987, and held various
other positions in Chromalloy American Corporation from 1979
to 1983. Has been a director of the Company since March
1993 and is a member of the Executive Committee.
ITEM 10. EXECUTIVE OFFICERS OF THE REGISTRANT (con't)
- ----------------------------------------------
(3) Senior Vice President - Atlantic Research Operations since
February 1991; Vice President - Atlantic Research Operations
from April 1990 to February 1991. Also serves as President
and Chief Executive Officer of Atlantic Research Corporation
and has held those positions since October 1989. From
September 1985 to October 1989, Mr. Savoca served as a
consultant to a number of companies, including Atlantic
Research Corporation. From 1983 to September 1985, he was
Chief Executive Officer of Transpace Carriers, Inc. From
1963 to 1983, he held planning and management positions with
Thiokol Corporation, including, most recently, senior vice
president and general manager of its solid rocket motor
division.
(4) Senior Vice President - Legal since October 1994; Vice
President - Legal from 1991 to October 1994; Senior
Associate General Counsel from 1990 to 1994; Associate
General Counsel from 1988 to 1990. Has also served as
Corporate Secretary of the Company since 1988. Previously,
he was a partner at the law firm of Kronish, Lieb, Weiner &
Hellman and before that, an associate at the law firm of
Sullivan & Cromwell.
(5) Senior Vice President - Chromalloy Gas Turbine Operations
since February 1988 and Vice President since May 1987. Also
serves as Chairman and Chief Executive Officer of Chromalloy
Gas Turbine Corporation (since January 1987) and previously
was President of the CompTech Group of Chromalloy American
Corporation.
Sequa is not aware of any family relationship among any of
the above-named executive officers. Each of such officers holds
his office for a term expiring on the date of the annual
organization meeting of the Board of Directors, subject to the
provisions of Section 5 of Article IV of the Company's By-Laws
relative to removal of officers.
ITEMS 10 (IN PART) THROUGH 13
- -----------------------------
The Company intends to file with the Securities and Exchange
Commission a definitive proxy statement pursuant to Regulation
14A involving the election of directors not later than 120 days
after the end of its fiscal year ended December 31, 1995.
Accordingly, the information required by Part III (Items 10
(concerning Sequa's directors and disclosure pursuant to Item 405
of Regulation S-K), 11, 12 and 13) is incorporated herein by
reference to such definitive proxy statement in accordance with
General Instruction G(3) to Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON
- -------- --------------------------------------------------------
FORM 8-K.
- ---------
(a) 1. Financial Statements:
---------------------
The following consolidated financial statements are included
in Part II of this Annual Report on Form 10-K:
Page Numbers
in this Annual
Report on Form
10-K
------------
Report of Independent Public Accountants. 31
Consolidated Balance Sheet as of December 31,
1995 and 1994. 32 - 33
Consolidated Statement of Income for the three
years ended December 31, 1995. 34
Consolidated Statement of Cash Flows for the three
years ended December 31, 1995. 35
Consolidated Statement of Shareholders' Equity for
the three years ended December 31, 1995. 36
Notes to Consolidated Financial Statements. 37 - 65
2. Financial Statement Schedules:
------------------------------
Financial statement schedules are omitted due to the absence of
conditions under which they are required.
3. Exhibits
Exhibit No. (Referenced to Item 601(b) of Regulation S-K)
- -----------
3.1 - Restated Certificate of Incorporation of Sequa and two
Certificates of Amendment of the Restated Certificate of
Incorporation of Sequa (incorporated by reference to
Exhibit 4(a) of Sequa's Registration Statement No.
33-12420 on Form S-8 filed on March 6, 1987).
3.2 - Certificate of Amendment of Certificate of Incorporation
of Sequa, dated May 7, 1987 (incorporated by reference
to Exhibit 3(b) of Sequa's Annual Report on Form 10-K,
File No. 1-804, for the year ended December 31, 1988,
filed on March 28, 1989).
3.3 - Restated and amended (as of August 26, 1993) By-laws of
Sequa, (incorporated by reference to Exhibit 3.3 of
Sequa's Registration Statement No. 33-50843 on Form S-1,
filed on October 29, 1993).
4.1 - Indenture, dated as of December 15, 1993, by and between
Sequa and Bankers Trust Company, as Trustee, and Form of
9 3/8% Senior Subordinated Note due December 15, 2003
(incorporated by reference to Exhibits 4.7 and 4.3,
respectively, of Sequa's Registration Statement on Form
8-A, File No. 1-804, filed on January 25, 1994).
4.2 - Indenture, dated as of December 15, 1993, by and between
Sequa and IBJ Schroder Bank & Trust Company, as Trustee,
and Form of 8 3/4% Senior Note due December 15, 2001
(incorporated by reference to Exhibits 4.6 and 4.2,
respectively, of Sequa's Registration Statement on Form
8-A, File No. 1-804, filed on January 25, 1994).
4.3 - Indenture, dated as of September 1, 1989, by and between
Sequa and The First National Bank of Chicago, as
Trustee, with respect to an aggregate of $250 million of
senior debt (incorporated by reference to Exhibit 4.1 of
Sequa's Form S-3 Registration Statement No. 33-30959,
filed on September 12, 1989).
4.4 - First Supplemental Indenture, dated as of October 15,
1989, by and between Sequa and The First National Bank
of Chicago, as Trustee (incorporated by reference to
Exhibit 4.5 of Sequa's Registration Statement on Form
8-A, File No. 1-804, filed on January 25, 1994).
4.5 - Prospectus Supplement, dated October 19, 1989, for $150
million of senior unsecured 9 5/8% Notes due October 15,
1999 (incorporated by reference to Sequa's filing under
Rule 424 (b)(2) on October 20, 1989).
4.6 - Purchase Agreement, dated October 19, 1989, by and
between Sequa and certain Underwriters, and Form of
Supplemental Indenture, dated as of October 15, 1989,
both with respect to $150 million of senior unsecured
9 5/8% Notes due October 15, 1999 (incorporated by
reference to Sequa's Report on Form 8-K, File No. 1-804,
filed on October 25, 1989) and Form of 9 5/8% Note
(incorporated by reference to Exhibit 4.1 of Sequa's
Registration Statement on Form 8-A, File No. 1-804,
filed on January 25, 1994).
4.7 - Prospectus and Prospectus Supplement, both dated April
22, 1991, with respect to $100 million of medium-term
notes (incorporated by reference to Sequa's filing under
Rule 424 (b)(5) on April 23, 1991).
4.8 - Sales Agency and Distribution Agreement, executed as of
April 22, 1991, by and among Sequa and Bear, Stearns &
Co., Inc. and Merrill Lynch & Co., with respect to $100
million of medium-term notes, and Forms of Notes
thereunder (incorporated by reference to Exhibits 4.1
and 12.1 of Sequa's Report on Form 8-K, File No. 1-804,
filed on April 25, 1991).
4.9 - Instruments with respect to other long-term debt of
Sequa and its consolidated subsidiaries are omitted
pursuant to Item 601(b)(4)(iii) of Regulation S-K since
the amount of debt authorized under each such omitted
instrument does not exceed 10 percent of the total
assets of Sequa and its subsidiaries on a consolidated
basis. Sequa hereby agrees to furnish a copy of any
such instrument to the Securities and Exchange
Commission upon request.
10.1 - Amended and Restated Receivables Purchase Agreement,
dated as of June 24, 1993, among Sequa, Sequa
Receivables Corp., Chemical Bank, Barton Capital
Corporation and Westpac Banking Corporation
(incorporated by reference to Exhibit 10.1 of Sequa's
Report on Form 8-K, File No. 1-804, filed on July 12,
1993); Amendments No. 1 (dated as of September 30,
1993), No. 2 (dated as of December 1, 1993) and No. 3
(dated as of December 14, 1993) (incorporated by
reference to Exhibit 10.1 of Sequa's Report on Form
10-K, File No. 1-804, for the year ended December 31,
1993, filed on March 30, 1994); Amendments No. 4 (dated
as of July 1, 1994) and No. 5 (dated as of March 3,
1995) (incorporated by reference to Exhibit 10.1 of
Sequa's Report on Form 10-K, File No. 1-804, for the
year ended December 31, 1994, filed on March 30, 1995);
and Amendments No. 6 (dated as of May 31, 1995) and
No. 7 (dated as of August 16, 1995) (both of which are
filed herewith).
10.2 - $150 Million Amended and Restated Credit Agreement,
dated as of December 14, 1993, among Sequa Corporation,
The Bank of New York, The Bank of Nova Scotia, Chemical
Bank, Bank of America NT & SA, Chase Manhattan Bank,
N.A. and The Nippon Credit Bank, Ltd. and certain other
lenders (incorporated by reference to Exhibit 10.2 of
Sequa's Report on Form 10-K, File No. 1-804, for the
year ended December 31, 1993, filed on March 30, 1994);
Amendments No. 1 (dated as of June 13, 1994), No. 2
(dated as of December 14, 1994) and No. 3 (dated as of
March 3, 1995) (incorporated by reference to Exhibit
10.2 of Sequa's Report on Form 10-K, File No. 1-804, for
the year ended December 31, 1994, filed on March 30,
1995); and Amendment No. 4 (dated as of April 1, 1995)
(filed herewith).
10.3 - Purchase Agreement, dated November 9, 1995, by and
between Sequa Corporation and various Buyers, in
connection with the sale of by Sequa of the assets of
its Kollsman Division and its subsidiary, Kollsman
Manufacturing Company (incorporated by reference to
Exhibit 10.1 of Sequa's Report on Form 8-K, File
No. 1-804, filed on January 16, 1996).
COMPENSATORY PLANS OR ARRANGEMENTS
10.4 - 1986 Key Employees Stock Option Plan (incorporated by
reference to Annex B of Sequa's Registration Statement
No. 33-12420 on Form S-8 filed March 6, 1987).
10.5 - 1988 Key Employees Stock Option Plan (incorporated by
reference to Annex A of Sequa's Registration Statement
No. 33-30711 on Form S-8 filed August 25, 1989).
10.6 - Sequa's Supplemental Executive Retirement Plans I, II,
and III, effective as of January 1, 1990 (incorporated
by reference to Exhibit 10(c) of Sequa's Annual Report
on Form 10-K, File No. 1-804, for the year ended
December 31, 1990, filed on April 1, 1991) and
amendments thereto (incorporated by reference to Exhibit
10(c) of Sequa's Annual Report on Form 10-K, File
No. 1-804, for the year ended December 31, 1991, filed
on March 30, 1992).
10.7 - Management Incentive Bonus Program of Sequa for
Corporate Executive Officers and Corporate Staff
(Revised 1996 - Amendment No. 2) (filed herewith).
10.8 - Letter Agreements, dated May 24, 1984, by and between
Norman E. Alexander and Sequa, and Stuart Z. Krinsly and
Sequa (incorporated by reference to Exhibit 10(h) of
Sequa's Annual Report on Form 10-K, File No. 1-804, for
the year ended December 31, 1989, filed on March 30,
1990).
COMPENSATORY PLANS OR ARRANGEMENTS (con't)
10.9 - Letter Agreements, dated April 30, 1990, by and between
Norman E. Alexander and Sequa, and Stuart Z. Krinsly and
Sequa (incorporated by reference to Exhibit 10 (h) of
Sequa's Annual Report on Form 10-K, File No. 1-804, for
the year ended December 31, 1990, filed on April 1,
1991).
10.10 - Employment Agreement, dated April 1, 1993, by and
between John J. Quicke and Sequa, (incorporated by
reference to Exhibit 10(k) of Sequa's Annual Report on
Form 10-K, File No. 1-804 for the year ended December
31, 1992 filed on March 31, 1993); and Amendment
thereto, dated March 1, 1995 (incorporated by reference
to Exhibit 10.11 of Sequa's Report on Form 10-K, File
No. 1-804, for the year ended December 31, 1994, filed
on March 30, 1995).
10.11 - Employment Agreement, dated May 6, 1991, by and between
Antonio L. Savoca and Sequa, (incorporated by reference
to Exhibit 10(1) of Sequa's Annual Report on Form 10-K
for the year ended December 31, 1991, filed on March 30,
1992). Amendment thereto, dated August 18, 1992
(incorporated by reference to Exhibit 10(1) of Sequa's
Annual Report on Form 10-K, File No. 1-804 for the year
ended December 31, 1992, filed on March 31, 1993); and
Amendment thereto, dated June 10, 1993 (incorporated by
reference to Exhibit 10.12 of Sequa's Report on Form
10-K, File No. 1-804, for the year ended December 31,
1993, filed on March 30, 1994).
10.12 - Employment Agreement, dated as of October 1, 1991, by
and between Martin Weinstein and Chromalloy Gas Turbine
Corporation, (incorporated by reference to Exhibit 10(n)
of Sequa's Annual Report on Form 10-K, File No. 1-804
for the year ended December 31, 1991, filed on March 30,
1992), Amendment thereto, dated as of June 1, 1993
(incorporated by reference to Exhibit 10.14 of Sequa's
Registration Statement No. 33-50843 on Form S-1 filed on
October 29, 1993) and Amendment thereto, dated as of
February 23, 1995 (filed herewith).
10.13 - Executive Life Insurance Plan of Sequa, (incorporated by
reference to Exhibit 10(o) of Sequa's Annual Report on
Form 10-K, File No. 1-804 for the year ended December
31, 1991, filed on March 30, 1992).
10.14 - Key Employee Medical Insurance Plan of Sequa,
(incorporated by reference to Exhibit 10(p) of Sequa's
Annual Report on Form 10-K, File No. 1-804 for the year
ended December 31, 1991, filed on March 30, 1992).
COMPENSATORY PLANS OR ARRANGEMENTS (con't)
10.15 - Exec-U-Care Medical Reimbursement Insurance Trust of
Atlantic Research Corporation, (incorporated by
reference to Exhibit 10(q) of Sequa's Annual Report on
Form 10-K, File No. 1-804 for the year ended December
31, 1991, filed on March 30, 1992).
10.16 - Cafeteria Plan of Atlantic Research Corporation,
(incorporated by reference to Exhibit 10(r) of Sequa's
Annual Report on Form 10-K, File No. 1-804 for the year
ended December 31, 1991, filed on March 30, 1992).
10.17 - Supplemental Retirement Program of Atlantic Research
Corporation, (incorporated by reference to Exhibit 10(s)
of Sequa's Annual Report on Form 10-K, File No. 1-804
for the year ended December 31, 1991, filed on March 30,
1992).
10.18 - Sequa Corporation 1994 Corporate Staff Stock Award Plan
(incorporated by reference to Exhibit 10.20 of Sequa's
Report on Form 10-K, File No. 1-804, for the year ended
December 31, 1994, filed on March 30, 1995).
10.19 - Sequa Corporation Management Incentive Bonus Program for
Operating Divisions (Revised 1996) (filed herewith).
11.1 - Computation of earnings per share, filed herewith.
21.1 - List of subsidiaries of Sequa, filed herewith.
23.1 - Consent of Independent Public Accountants, filed
herewith.
27.1 - Financial Data Schedule, filed herewith
(b) Reports on Form 8-K
-------------------
No Reports on Form 8-K were filed during the last quarter of
1995.
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual
Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SEQUA CORPORATION
Date: March 28, 1996 By: /S/ GERALD S. GUTTERMAN
---------------- -------------------------
Gerald S. Gutterman
Executive Vice President,
Finance and Administration
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf
of the Registrant and in the capacities indicated on March 28, 1996.
By: /S/ NORMAN E. ALEXANDER Chairman of the Board, Chief
- -----------------------------
Norman E. Alexander Executive Officer and Director
By: President, Chief Operating Officer
- -----------------------------
John J. Quicke and Director
By: /S/ STUART Z. KRINSLY Senior Executive Vice President,
- -----------------------------
Stuart Z. Krinsly General Counsel and Director
By: /S/ GERALD S. GUTTERMAN Executive Vice President, Finance
- -----------------------------
Gerald S. Gutterman and Administration
By: /S/ WILLIAM P. KSIAZEK Vice President and Controller
- -----------------------------
William P. Ksiazek
By: /S/ALVIN DWORMAN Director
- -----------------------------
Alvin Dworman
By: /S/ A. LEON FERGENSON Director
- -----------------------------
A. Leon Fergenson
By: /S/ DAVID S. GOTTESMAN Director
- -----------------------------
David S. Gottesman
By: /S/ DONALD D. KUMMERFELD Director
- -----------------------------
Donald D. Kummerfeld
By: /S/ RICHARD S. LEFRAK Director
- -----------------------------
Richard S. LeFrak
By: /S/ FRED R. SULLIVAN Director
- -----------------------------
Fred R. Sullivan
By: Director
- -----------------------------
Gerald Tsai, Jr.
/TABLE