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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