ITEM 1. BUSINESS -----------------
(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 ------------
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. The Company generated cash proceeds of $197.2 million in 1992 and $2.8 million in 1993 from the sale of discontinued assets other than Sequa Capital's investment portfolio. As of December 31, 1994, approximately $341.5 million 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. Net losses incurred upon the disposition of discontinued assets were charged to reserves established for this purpose during 1991 and 1992.
In December 1993, the Company sold the stock of ARC Professional Services for gross cash proceeds of $59.9 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 gross cash proceeds of $15.0 million.
During 1994, the Company sold three 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 Gas Turbine's restructuring program.
(b) Financial information about industry segments. Segment information is included in Note 19 to the Consolidated Financial Statements on page 62 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: Gas Turbine, ARC Propulsion and the Kollsman division.
Gas Turbine. The largest operating unit of the Company, Gas Turbine, 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. The unit serves all major jet engine models used by the global commercial airline market. The Company believes that the leadership position of its Gas Turbine operations is largely attributable to the effectiveness of its continuing development efforts on new and improved metallurgical coating, manufacturing and repair processes, and its responsiveness to customer service requirements.
Gas Turbine has built on its metallurgical process technologies to develop procedures that permit the repair and reuse of turbine engine components. Management believes Gas Turbine has played a key role in the development of the repair market for certain jet engine parts. Over the years, the Company 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. Gas Turbine works in close cooperation with the manufacturers of jet engines in connection with the design of new engines, the upgrading of old designs and the development of repair processes and procedures. Gas Turbine 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. While maintaining its traditional position as a supplier of solid propellant rocket motors to the
military, ARC Propulsion has initiated several commercial market ventures, including Bendix Atlantic Inflator Company (BAICO), a fifty-fifty unconsolidated joint venture with AlliedSignal Inc. to produce airbag inflator systems. Current production includes units for Chrysler, Mitsubishi, Hyundai, Suzuki and Isuzu, with future production directed to fill firm orders from additional auto makers, including General Motors and Mazda.
Kollsman. Kollsman 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 ------------------------------------ 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 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 is establishing a presence in the truck trailer and appliance markets as a supplier of pre-painted steel for use in trailer panels and as an exterior wrap on air conditioners and for office furniture. Precoat expanded its existing market share in building products and further penetrated the container industry and other growing markets.
Sequa Can Machinery. Rutherford and Standun design and manufacture equipment for the two-piece can industry.
Rutherford is the world's leading manufacturer of equipment to coat and decorate two-piece beverage cans. With an installed base of approximately 700 machines, Rutherford 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.
The Standun line of can forming equipment includes cupping presses, which punch the cup of a can from a coil of metal, and bodymakers, which form the shallow cup into the shape of a two- piece beer, soft drink or food can. The equipment operates within close tolerances at speeds 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 --------------------------- 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 used by the textile and graphic arts industries. 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. The Company also produces specialty emulsion polymers incorporated into non-woven fabrics for a variety of end uses, including medical drape, fiberfill and filters. 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. In addition, Sequa Chemicals has developed and patented a unique series of specialty polymers currently marketed to the building products industry for use in roofing mat, ceiling tiles, wall board and carpet tiles.
Other Products Segment ---------------------- 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 sensing 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.
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 daylight running lamps.
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 ------------------
The percentage of Sequa's consolidated sales and revenues contributed by each class of similar products and services, which accounted for 10 percent or more of such consolidated sales and revenues during the last three fiscal years, is as follows:
Markets and Methods of Distribution -----------------------------------
Sequa 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 Gas Turbine are marketed directly and through sales representatives working on a commission basis.
A portion of the sales of Gas Turbine's operations is made pursuant to contracts with various agencies of the United States Government, particularly the Department of the Air Force, with which Gas Turbine has had a long-term relationship.
Sequa 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.
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. 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.
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 and revenues in 1994, 1993 and 1992. Prime contracts and subcontracts with all government agencies accounted for 11%, 22% and 23% of Sequa's sales and revenues in 1994, 1993 and 1992, respectively. The decline in sales and revenues to government agencies during 1994 was primarily due to the sale of the ARC Professional Services unit in December 1993. The anticipated impact of defense spending levels on the Company's 1995 sales and revenues and operating income is set forth in the Management's Discussion and Analysis of financial condition and results of operations on pages 19 and 21 of this Annual Report on Form 10-K and is hereby incorporated by reference.
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 -----------
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 equipment, one of the largest manufacturers of permanent-press textile finishing resins, a leading supplier of aircraft barometric altitude reporting instruments for military and commercial air transport aircraft, and the largest domestic supplier of automotive cigarette lighters in the United States.
Sequa, through its gas turbine 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. Gas Turbine's divisions operate in highly competitive environments and compete for repair service business with a number of other major companies, including the major turbine engine manufacturers who often specify to their customers that vendors such as Gas Turbine must be approved by such manufacturers to manufacture components for their engines and/or perform repair services on their engines and components. Gas Turbine has a number of such approvals, including licensing agreements which allow it to manufacture and repair certain components of the new generation of flight engines now coming into widespread use. The loss of approval by one of the major jet engine manufacturers to manufacture or repair components for such producer's engines could have an adverse effect on Gas Turbine. In such event, however, Gas Turbine would seek to replace any approvals lost by obtaining approvals with respect to the same components directly from the Federal Aviation Administration (FAA) or, alternatively, the customer.
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 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, a leader in coating coils of steel for metal building panels, is also the most fully integrated supplier of coated metal coil stock in the United States. Sequa's cylindrical can printing and can forming equipment operations are world leaders in their markets. MEG is Europe's leading supplier of auxiliary press equipment.
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 -------------
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 -------
Backlog information is included in the Management's Discussion and Analysis of financial condition and results of operation on page 27 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 $14.3 million in 1994, $17.2 million in 1993, and $17.6 million in 1992.
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. Reductions during 1994 primarily occurred at the units serving the domestic defense markets. 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 tort 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. The Company expects that a trial date will be scheduled in 1995.
The Pennsylvania Department of Environmental Regulation 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 less than $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 Gas Turbine Corporation, 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 Gas Turbine and others alleging, among other things, that contamination from a former Gas Turbine site caused the plaintiffs' alleged property damage. Gas Turbine believes it has strong defenses under New York law to the plaintiffs' complaint. Gas Turbine 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 Gas Turbine 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.
On April 3, 1989, the Company and Gas Turbine instituted a law suit in the Delaware Superior Court against forty-one of the Company's comprehensive general liability insurance carriers (the Defendants). The Company and Gas Turbine seek to enforce their rights under insurance policies sold to them by the Defendants in connection with various environmental actions that have been brought against the Company and Gas Turbine and are seeking indemnity and defense costs with respect to all Superfund actions and third-party environmental litigation.
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 $29 million to $55 million. At December 31, 1994, the Company's Balance Sheet includes accruals for remediation costs of $50.5 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 $10.3 million in 1994, $8.3 million in 1993 and $7.3 million in 1992. The Company anticipates that remedial cash expenditures will be in the $8 million to $12 million range during each of the following 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 $6 million in 1995 and $4 million in 1996. The Company's operating expenses to eliminate, control and dispose of pollutants have averaged approximately $10 million per year during the last three years. The Company anticipates that environmental operating expenses will be approximately $12 million per year during 1995 and 1996.
Employment ----------
At December 31, 1994, Sequa employed approximately 9,200 persons in its continuing operations of whom approximately 2,000 were covered by union contracts.
The approximate number of employees attributable to each reportable business segment as of December 31, 1994 was:
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 Gas Turbine operations within its Aerospace Segment; detergent chemicals operations included in the Specialty Chemicals Segment; the auxiliary press equipment supplier in the Machinery and Metal Coatings Segment; and an automotive products operation in the United Kingdom in the Other Products Segment. These operations consist primarily of wholly-owned foreign subsidiaries. Sales and revenues, operating earnings and identifiable assets attributable to foreign operations, and export sales, are set forth in Note 19 to the Consolidated Financial Statements on page 63 of this Annual Report on Form 10-K and is incorporated herein by reference.
ITEM 2.
ITEM 2. PROPERTIES -------------------
Aerospace ---------
The Chromalloy Gas Turbine Corporation operates over 50 plants in thirteen states and six foreign countries, primarily in Europe, which have aggregate floor space of approximately 3,700,000 square feet, of which approximately 1,900,000 square feet is owned and approximately 1,800,000 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 199,000 square feet (of which 101,000 square feet is sublet) is leased for administrative, research and manufacturing purposes in Alabama, California, Massachusetts and Virginia. The liquid propulsion division leases a 101,000 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 38,000 square feet is owned in Virginia (of which 20,000 square feet is sublet) and is used for administrative purposes.
The Kollsman operation owns two plants in New Hampshire with aggregate floor space of 405,000 square feet and leases another facility in New Hampshire with aggregate floor space of 91,000 square feet where various production, administrative, warehousing and technical services are performed. This business also owns one 23,000 square foot manufacturing facility in Wichita, Kansas and leases 5 domestic offices aggregating approximately 2,000 square feet.
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 can forming and decorating operations own 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 five manufacturing facilities in Missouri, Illinois, and Mississippi, with a total of 653,000 square feet of manufacturing and office space. An additional 209,000 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. Precoat Metals facilities are functioning at a high level of utilization and the can forming and decorating operations are functioning at a moderate level of utilization.
Specialty Chemicals -------------------
The Specialty Chemicals segment owns one plant situated on 86 acres in Chester, South Carolina with aggregate floor space of 160,000 square feet in addition to a 22,000 square foot leased warehouse also in Chester. The segment owns two plants in the United Kingdom with aggregate floor space of 223,000 square feet on approximately 43 acres of land and leases 10,000 square feet of office and warehouse space in six separate locations in Europe.
Facilities in this segment are adequate and suitable for the business being conducted. They operate at a high utilization rate. Capital spending plans call for capacity increases and for installation of equipment required to meet or exceed environmental regulations.
Other Products --------------
The automotive products subsidiary, Casco Products, leases a 168,000 square foot plant in Connecticut and leases a 1,600 square foot sales office in Detroit, Michigan. Casco Products also owns a 213,000 square foot plant in Connecticut which is no longer being used and remains idle. In addition, Casco Ltd. leases 8,700 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 10 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.
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 64 and 65 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ------- ---------------------------------------------------
None.
PART II
ITEM 5.
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:
(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 3,170 holders of record of the Sequa Class A common stock (plus 350 holders of unexchanged shares) and approximately 730 holders of record of the Sequa Class B common stock (plus 100 holders of unexchanged shares) at March 15, 1995.
(c) Dividends.
During the year ended December 31, 1994, no dividends were declared on Sequa Class A common shares or Class B common shares.
During the year ended December 31, 1993, Sequa declared two quarterly dividends of $.15 per share, or $.30 per share for the year, on Sequa Class A common shares and two quarterly dividends of $.125 per share, or $.25 per share for the year on Sequa Class B common shares.
Information with respect to debt covenants which restrict or limit the ability of the Company to pay dividends is set forth in the Management's Discussion and Analysis of financial condition and results of operations on page 27 and 28 of this Annual Report on Form 10-K and is hereby incorporated by reference.
SEQUA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION 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. All material accounts and transactions between the consolidated subsidiaries have been eliminated in consolidation.
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. The cost of approximately 34% of inventories in 1994 and 1993 was determined by the last-in, first-out (LIFO) method of inventory valuation. The remaining non-contract related inventories are valued principally 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.
Upon sale or retirement of properties, the related cost and accumulated depreciation is removed from the accounts, and any gain or loss is reflected currently. Expenditures for maintenance and repairs of $43,438,000 in 1994, $44,362,000 in 1993 and $46,393,000 in 1992 were expensed as incurred, while betterments and replacements were capitalized.
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (con't)
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 1994, 1993 and 1992 was $10,440,000, $10,821,000 and $10,807,000, respectively. Accumulated amortization at December 31, 1994 and 1993 was $84,002,000 and $73,562,000, 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.
POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS OTHER THAN PENSIONS Statement of Financial Accounting Standards (SFAS) No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," was implemented by the Company in the first quarter of 1993. This statement requires the expected costs of providing postretirement benefits to be accrued during the years an employee provides services rather than the Company's past practice of recognizing these costs on the pay-as-you-go (cash) basis. At January 1, 1993, the Company's date of adoption, the actuarial present value of the accumulated benefit obligation for postretirement health care and other insurance benefits provided to certain retirees was $3,074,000. The Company is recognizing this transition obligation using the delayed recognition basis by amortizing the obligation on a straight-line basis over twenty years. The implementation of SFAS No. 106 in 1993 did not have a material impact on the Company's results of operations and had no effect on the Company's cash outlays for these retiree benefits.
SFAS No. 112, "Employers' Accounting for Postemployment Benefits," was issued in November 1992 and was implemented in the first quarter of 1994. This statement requires benefits to former employees after employment, but before retirement, to be accrued
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (con't)
when it is probable that a liability has been incurred and the amount can be reasonably estimated. The impact of adopting SFAS No. 112 did not have a material effect on the Company's results of operations or financial position.
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 and the treasurer is responsible for monthly reporting of market values of derivative activities to the committee. The Company had no interest-related derivatives outstanding at December 31, 1994.
The Company accounts for interest rate swaps as hedges provided that the derivative changes the nature of a designated debt instrument is 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.
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (con't)
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 $29,000,000 to $55,000,000. At December 31, 1994, the Company's Balance Sheet includes accruals for remediation costs of $50,537,000. 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 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 and revenues are recorded when products are shipped or services are rendered. Long-term contracts are accounted for under the percentage-of-completion method whereby sales and revenues 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 and revenues, 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 $14,317,000 in 1994, $17,166,000 in 1993 and $17,557,000 in 1992.
INCOME TAXES The Company adopted the provisions of SFAS No. 109, "Accounting for Income Taxes," as of January 1, 1992, and the cumulative effect of this change is reported separately in the 1992 Consolidated Statement of Income. The $7,337,000 charge recorded as of the beginning of 1992 for the cumulative effect on prior years of the change in the method of accounting for income taxes primarily represents the impact of adjusting deferred taxes recorded for assets and liabilities acquired in purchase business combinations.
In connection with the Company's periodic reevaluation of foreign earnings estimated to be indefinitely reinvested, deferred income taxes of $14,000,000 were provided in 1993 for the repatriation of foreign undistributed earnings in the form of
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (con't)
dividends. Provision has not been made for US or additional foreign taxes on $163,120,000 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.
EARNINGS PER SHARE Primary earnings per share for each of the respective years has 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 1994, 1993 and 1992 was 9,722,000 shares, 9,655,000 shares and 9,620,000 shares, respectively.
Fully diluted earnings per common share calculations for the assumed conversion of the cumulative convertible preferred stock were anti-dilutive in 1994, 1993 and 1992.
NOTE 2. TRADE RECEIVABLES, NET
Sequa Receivables Corporation (SRC), 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, 1993, receivables as shown in the Consolidated Balance Sheet were net of $45,000,000 of receivable interests sold under the agreement. At December 31, 1994 all such receivables had been repurchased by the Company. Other, net, in the Consolidated Statement of Income includes discount expenses of $1,829,000 in 1994, $3,136,000 in 1993 and $3,912,000 in 1992 related to the sale of receivables under this agreement.
Trade receivables at December 31, 1994 and 1993 have been reduced by allowances for doubtful accounts of $12,448,000 and $10,892,000, respectively.
NOTE 3. UNBILLED RECEIVABLES, NET
Unbilled receivables, net consist of the following:
NOTE 3. UNBILLED RECEIVABLES, NET (con't)
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.
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, 1994 and 1993 are reduced by allowances for estimated nonrecoverable costs of $2,723,000 and $13,165,000, respectively.
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. The Company recorded a $25,000,000 pre-tax charge ($15,500,000 after-tax) in 1991 and a $35,000,000 pre-tax charge ($21,700,000 after-tax) in 1992 to provide for losses from the operation and disposal of discontinued operations. Losses during 1994 and 1993 were charged to reserves established during 1992 and 1991 for this purpose.
The Company generated cash proceeds of $197,233,000 in 1992 and $2,832,000 in 1993 from the sale of discontinued assets. As of December 31, 1994, approximately $341,500,000 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, 1994 represents the
NOTE 5. DISCONTINUED OPERATIONS (con't)
remaining 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. Subsequent to the payment of the secured indebtedness, the 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. A summary of the net assets of discontinued operations is as follows:
In December 1993, the Company entered into a $150,000,000 revolving credit agreement with a group of banks that extends through March 1997. The rate of interest payable under the agreement is, at the Company's option, a function of the prime rate or the Eurodollar rate. The agreement requires the Company to pay a facility fee at an annual rate of 0.5% of the maximum amount available under the credit line. Under the credit facility, borrowings of up to approximately $50,000,000 will be secured by the stock of certain of the Company's subsidiaries. At December 31, 1994, there were no borrowings outstanding under this facility; however, $57,726,000 of the available credit line was used for the issuance of letters of credit leaving $92,274,000 of unused credit available.
NOTE 7. INDEBTEDNESS (con't)
In December 1993, the Company sold $125,000,000 of 8 3/4% senior unsecured notes due 2001 and $175,000,000 of 9 3/8% senior subordinated notes due 2003, pursuant to a public offering. The net proceeds from the offering, together with proceeds from the sale of ARC Professional Services, were used to repay $90,000,000 of indebtedness under the Company's existing revolving credit agreement; to repay $35,000,000 of the private placement due 1994; and to execute a partial in-substance defeasance of the Company's senior subordinated notes due 1998. In December 1993, the Company called $211,000,000 principal amount of the senior subordinated notes for redemption in January and February 1994 and deposited $222,661,000 of US government securities into an irrevocable trust to cover the principal amount called, the call premium of $9,847,000 and interest during the 30-day call period of $1,814,000. For financial reporting purposes, the debt was considered extinguished. Accordingly, the government securities, the principal amount of senior subordinated notes due 1998 and related unamortized debt issuance costs were removed from the Consolidated Balance Sheet at December 31, 1993. The in- substance defeasance transaction resulted in an extraordinary loss of $8,524,000, net of tax benefits of $4,590,000.
In April 1994, the Company called the remaining $33,450,000 principal amount of the senior subordinated notes due 1998 and deposited $34,839,000 of US government securities into an irrevocable trust to cover the principal amount called, the call premium of $1,171,000 and net interest expense of $218,000 during the 30-day call period. The in-substance defeasance transaction resulted in an extraordinary loss of $1,083,000 in 1994, net of tax benefits of $583,000.
The aggregate maturities of total long-term debt during the next five years are $15,231,000 in 1995, $25,724,000 in 1996, $2,199,000 in 1997, $28,061,000 in 1998 and $151,285,000 in 1999.
The Company's loan agreements and indentures contain covenants which, among other matters, restrict or limit the ability of the Company to pay dividends, incur indebtedness, make capital expenditures, repurchase common and preferred stock, and repurchase the 9 3/8% senior subordinated notes due 2003. The Company must also maintain certain ratios regarding interest coverage, leverage and net worth, among other restrictions.
NOTE 7. INDEBTEDNESS (con't)
The debt covenant that precluded the declaration of dividends in the third and fourth quarters of 1993 was eliminated in 1994 when the Company completed the redemption of its 10 1/2% senior subordinated notes. Pursuant to the terms of the Company's senior notes due 2001 and the senior subordinated notes due 2003, the Company's earnings before interest, taxes, depreciation and amortization must be sufficient to maintain a consolidated interest coverage ratio of 2 to 1 to permit the Company to pay dividends and engage in other restricted activities. At September 30, 1994, the Company met the minimum consolidated interest coverage ratio and, during the fourth quarter of 1994, the Company declared and paid all preferred stock dividends in arrears. The minimum consolidated interest coverage ratio was also met at December 31, 1994.
The income tax provision (benefit) on income (loss) from continuing operations consisted of the following:
NOTE 8. INCOME TAXES (con't)
The income tax provision (benefit) on income (loss) is different from the amount computed by applying the US Federal statutory income tax rate of 35% in 1994 and 1993 and 34% in 1992 to income (loss) from continuing operations before income taxes. The reasons for this difference are as follows:
As discussed in Note 1, Summary of Significant Accounting Policies, the Company adopted SFAS No. 109 as of January 1, 1992 and the cumulative effect of this change is reported separately in the 1992 Consolidated Statement of Income.
The deferred tax provision represents the change in deferred tax liabilities and assets from the beginning of the year to the end of the year resulting from changes in the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities.
NOTE 8. INCOME TAXES (con't)
Temporary differences and carryforwards which gave rise to deferred tax assets and liabilities are as follows:
NOTE 8. INCOME TAXES (con't)
The Company has a tax capital loss carryforward of $6,159,000 at December 31, 1994 that most likely will expire unutilized in 1995 and 1998. A valuation allowance has been established to reduce the deferred tax asset recorded for the capital loss carryforward to zero and to reduce the tax asset recorded for certain tax credits which may expire unutilized in 1998 through 2008. The AMT credit carryforward does not expire and can be carried forward indefinitely. The Company has a tax net operating loss carryforward of $192,276,000 at December 31, 1994 that expires in 2006 through 2009.
Although the Company has experienced book and tax domestic losses in the past four years, management believes that the Company will return to profitability and will be able to utilize its domestic net operating loss carryforwards before expiration through future reversals of existing taxable temporary differences and future earnings. The losses were largely attributable to loss provisions recorded during 1991 and 1992 for the Company's discontinued leasing unit, the government investigation of jet engine component repairs and repair procedures at Gas Turbine's Orangeburg plant, the Gas Turbine restructuring charges and the persistent difficulties of overcapacity and pricing pressure in the airline marketplace which resulted in Gas Turbine -- a consistent contributor to profits in the past -- operating at a loss during 1993 and 1994. The Company has divested itself of a significant portion of Sequa Capital's assets, is downsizing and restructuring the Gas Turbine operation, has resumed FAA repair operations at Gas Turbine's Orangeburg plant and has decreased interest expense by significantly reducing debt levels.
The Company's ability to generate the expected amounts of domestic taxable income from future operations is dependent upon general economic conditions, the state of the airline industry, competitive pressures on revenues and margins, and other factors beyond management's control. There can be no assurance that the Company will meet its expectations for future domestic taxable income in the carryforward period; however, management has considered the above factors in reaching the conclusion that it is more likely than not that future domestic taxable income will be sufficient to fully realize the net domestic deferred tax assets at December 31, 1994.
NOTE 10. FINANCIAL INSTRUMENTS
The Company has had limited involvement with derivative financial instruments and does not use them for trading purposes. During 1993, the Company received proceeds of $9,796,000 from the early termination of interest rate swaps that were accounted for as hedges and that effectively converted $75,000,000 of fixed-rate debt into variable-rate borrowings. The resulting gains were deferred and are being amortized to income over the remaining original lives of the swaps terminated. In December 1994, the Company closed out all of its outstanding interest-related derivatives for a cash payment of $7,729,000, the approximate net carrying value of these instruments.
The Company's weighted average borrowing rate was 9.4% during 1994 and 1993 and 9.2% during 1992. The Company's hedging activities related to interest rate swaps reduced interest expense by $335,000 (or 5 basis points) during 1994; $2,443,000 (or 35 basis points) during 1993; and $2,143,000 (or 27 basis points) during 1992. Deferred gains on terminated interest rate swaps amounted to $6,856,000 and $9,960,000 at December 31, 1994 and 1993, respectively. Amortization of such deferred gains will serve to reduce interest expense by $3,104,000, $2,169,000 and $1,524,000 during 1995, 1996 and 1997, respectively.
NOTE 10. FINANCIAL INSTRUMENTS (con't)
During 1993, certain interest rate options being accounted for as hedges were restructured into non-hedge instruments. A mark-to-market loss of $6,557,000 was charged to Other, net in 1993 on these options. Early in 1994, the options were further restructured and a related derivative transaction was entered into. In 1994, Other, net includes $2,394,000 of losses on this derivative and the two restructured options. All interest- related derivatives were closed out as of December 31, 1994 with no further loss.
Forward exchange contracts are utilized by the Company's specialty chemicals operation in the United Kingdom to hedge anticipated but not yet committed sales and purchases to be denominated in currencies other than the pound sterling. These contracts, the terms of which are shorter than one year, primarily involve the purchase of Swedish kroner and the sale of German marks at a specified range of exchange rates with the pound sterling. Accordingly, these contracts limit, but do not eliminate, the effects of exchange rate movements on sales of products to foreign customers and purchases from foreign suppliers.
The following table indicates the notional amounts of the Company's outstanding derivative financial instruments:
The fair value of the Company's debt is primarily based upon quoted market prices of the Company's publicly traded debt securities. Fair values assigned to derivative financial instruments represent the amounts the Company could settle with the counterparties to terminate the financial instruments outstanding.
At December 31, 1994, the Company was contingently liable for outstanding letters of credit, not reflected in the accompanying consolidated financial statements, in the aggregate amount of $88,059,000. The Company is not currently aware of any existing conditions which would cause risk of loss relative to outstanding letters of credit. The Company was also contingently liable at December 31, 1994 for $17,500,000 in guarantees of debt owed by one of the Company's unconsolidated joint ventures. The Company believes that its unconsolidated joint venture will be able to perform under its payment obligations in connection with such guaranteed indebtedness.
The periodic net pension cost of all the Company's significant funded domestic and foreign defined benefit plans includes the following components:
The net amortization and deferral component of pension cost includes $16,868,000 of deferred asset losses in 1994, $12,379,000 of deferred asset gains in 1993, and $3,615,000 of deferred asset losses in 1992. These unrecognized gains and losses resulted from actual returns on plan assets differing from the expected returns on plan assets. Such deferred gains and losses are subject to amortization in future periods. Pension expense includes a curtailment loss of $434,000 in 1994 and a curtailment gain of $568,000 in 1992.
Employees not covered by the defined benefit plans discussed above generally are covered by multiemployer plans as part of collective bargaining agreements or small local plans. Pension expense for these multiemployer plans and small local plans was not significant in the aggregate.
The Company also has several nonfunded supplemental executive retirement plans for certain key executives. These plans provide for benefits that supplement those provided by the Company's other retirement plans. At December 31, 1994, the projected benefit obligation for these plans of $10,252,000 is included in Other long-term liabilities in the accompanying Consolidated Balance
NOTE 11. PENSION PLANS AND POSTRETIREMENT BENEFITS (con't)
Sheet. The expense for these plans was $1,824,000 in 1994, $1,919,000 in 1993, and $2,221,000 in 1992.
Most of the Company's domestic non-union employees are eligible to participate in the Company's 401(k) plans. Expenses recorded for the Company's matching contributions under these plans were $4,978,000 in 1994, $7,146,000 in 1993, and $8,602,000 in 1992.
SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," was implemented by the Company in the first quarter of 1993. This statement requires the expected costs of providing postretirement benefits to be accrued during the years an employee provides services rather than the Company's past practice of recognizing these costs on the pay-as-you-go (cash) basis. At January 1, 1993, the Company's date of adoption, the actuarial present value of the accumulated benefit obligation for postretirement health care and other insurance benefits provided to certain retirees was $3,074,000. The Company is recognizing this transition obligation using the delayed recognition basis by amortizing the obligation on a straight-line basis over 20 years.
The actuarial and recorded liabilities for these post- retirement benefits, none of which have been funded, are as follows:
NOTE 11. PENSION PLANS AND POSTRETIREMENT BENEFITS (con't)
Net periodic postretirement benefit cost includes the following components:
The accumulated postretirement benefit obligation was determined using a discount rate of 8.5% and 7.5% at December 31, 1994 and 1993, respectively, and an average health care cost trend rate of approximately 14% progressively decreasing to approximately 6% in the year 2008 and thereafter.
Increasing the assumed health care cost trend rates by one percentage point in each year and holding all other assumptions constant would increase the accumulated postretirement benefit obligation as of December 31, 1994 by approximately $172,000 and increase the aggregate of the service and interest cost components of the net periodic postretirement benefit cost for 1994 by approximately $25,000.
NOTE 12. CAPITAL STOCK
The Company's capital stock consists of Class A and Class B common stock, and $5.00 cumulative convertible preferred stock. Holders of Class A common stock have one vote per share, holders of Class B common stock have ten votes per share and preferred stockholders have one vote per share. Holders of Class B common stock are entitled to convert their shares into Class A common stock at any time on a share-for-share basis. Each share of $5.00 cumulative convertible preferred stock is convertible into 1.322 shares of Class A common stock. The preferred stock is redeemable, at the option of the Company, at $100 per share.
At December 31, 1994, 4,473,822 shares of Sequa Class A common stock were reserved for conversion of preferred and Class B common stock and stock options.
During 1994, 180,000 shares of Class A common stock in treasury were contributed to the Company's defined benefit pension plans and 32,052 shares of Class A common stock in treasury were granted to certain key employees.
NOTE 13. STOCK OPTIONS AND GRANTS
The Company has incentive and nonqualified stock option plans in effect. As of December 31, 1994, only options on Class A common stock remained outstanding and exercisable. At December 31, 1994, 52,522 shares of Class A common stock were available for future grant. There were no options exercised in 1994, 1993 and 1992. Summarized data relating to stock options are as follows:
During 1994, 32,052 shares of the Company's Class A common stock held in treasury were granted to certain key employees. Such stock is subject to restrictions which prohibit sale or transfer by the grantee for periods of three to five years and require forfeiture by the employee in the event of employment termination within the restricted periods. The market value of the shares granted was $831,000 and is being amortized to expense over the respective periods in which the restrictions lapse. The charge to operations was $53,000 in 1994, and the unamortized value of the shares granted of $778,000 is included in treasury stock in the accompanying Consolidated Balance Sheet at December 31, 1994.
NOTE 14. RESTRUCTURING CHARGE
During 1993, the Company recorded restructuring charges totaling $26,640,000 primarily related to plans adopted to reduce Gas Turbine's investment in plants engaged in activities other than the repair of components for flight engines; to sell excess machinery; and to permanently reduce the number of employees in Gas Turbine facilities. Included in the restructuring charges are: severance costs, $7,500,000; writedown of equipment to be sold, $4,100,000; writedown of inventory to net realizable value, $3,200,000; relocation of equipment, $1,800,000; writedown of other assets, $1,500,000; operating losses through date of sale, $6,500,000; other costs, $2,040,000.
In 1994, three operations were sold for net cash proceeds of $57,248,000, two operations were closed and approximately $4,300,000 in cash was generated from the sale of excess property, plant and equipment. In early 1995, Gas Turbine's 51% interest in an engine overhaul business was sold for $5,162,000 in cash with the purchaser assuming $17,236,000 of the Company's debt. Two units and certain excess assets remain to be disposed of. At December 31, 1994, $6,325,000 of restructure reserves remained, and completion of the restructuring program will generate positive cash flow in 1995.
Note 15. Sale of ARC Professional Services
On December 30, 1993, the Company sold the stock of ARC Professional Services for gross cash proceeds of $59,926,000, and the purchaser assumed $4,524,000 of ARC Professional Services' debt. The sale resulted in a pre-tax gain of $12,408,000. ARC Professional Services had revenues of $162,606,000 and $157,979,000 in 1993 and 1992, respectively, and operating income of $10,699,000 and $9,278,000 in 1993 and 1992, respectively. The consolidated financial statements and accompanying footnotes reflect the operating results of ARC Professional Services as continuing operations.
In connection with the sale of ARC Professional Services, the Company was contractually required to purchase the 7% minority interest in Atlantic Research Corporation (ARC). In January 1994, the Company purchased the minority interest at a cost of $16,701,000 which was $13,709,000 less than the book value of the net assets acquired. The excess of the book value over the cost of the minority interest acquired was allocated to the goodwill of ARC and is being amortized over the remaining life of the ARC goodwill.
NOTE 16. OTHER, NET
In 1994, Other, net included a $2,394,000 loss on interest rate options written; $1,829,000 of discount expense related to the sale of accounts receivable; a $2,433,000 equity loss in the Company's unconsolidated airbag business; and amortization of capitalized debt costs of $2,389,000.
In 1993, Other, net included a $6,557,000 mark-to-market loss on interest rate options written; $3,136,000 of discount expense related to the sale of accounts receivable; a $3,051,000 loss incurred on a sale and leaseback transaction; a $7,551,000 equity loss in the Company's unconsolidated airbag business; amortization of capitalized debt costs in the amount of $4,158,000; and $2,517,000 in charges for a minority shareholder's interest in the earnings of ARC.
In 1992, Other, net included $3,912,000 of discount expense related to the sale of accounts receivable; a $4,709,000 equity loss in the Company's unconsolidated airbag business; amortization of capitalized debt costs in the amount of $3,074,000; and $1,704,000 in charges for a minority shareholder's interest in the earnings of ARC.
NOTE 17. OPERATING LEASES
Certain businesses of the Company utilize leased premises or equipment under noncancelable agreements having initial or remaining terms of more than one year. The majority of the real property leases require the Company to pay maintenance, insurance and real estate taxes. Rental expense totaled $17,997,000, $24,780,000 and $25,708,000 in 1994, 1993 and 1992, respectively.
At December 31, 1994, future minimum lease payments under noncancelable operating leases are as follows:
NOTE 18. SUPPLEMENTAL CASH FLOW INFORMATION
Net cash provided by (used for) discontinued operations:
Non-cash investment activities:
During 1994, 180,000 shares of the Company's Class A common stock, with a market value of $4,723,000, were contributed to the Company's defined benefit pension plans.
In 1993, the Company entered into two sale and leaseback agreements related to various Chromalloy Gas Turbine and Precoat Metals equipment. Aggregate cash proceeds from the sale of $20,845,000 have been presented as an investing activity in the accompanying Consolidated Statement of Cash Flows for the year ended December 31, 1993. The sales resulted in a loss on one transaction of $3,051,000, which is included in 1993 in Other, net in the Consolidated Statement of Income, and a gain on the other transaction of $5,738,000. The Company entered into agreements to lease back the equipment and recorded fixed assets and capital lease obligations in the amount of $20,845,000. The $5,738,000 gain on sale has been deferred and is being amortized to income over the life of the related leaseback agreement.
During 1992, 120,000 shares of the Company's Class A common stock, with a market value of $4,560,000, were contributed to the Company's defined benefit pension plans.
Other supplemental cash flow information:
NOTE 19. SEGMENT INFORMATION
Operations by business segment is presented below:
Operating income includes all costs and expenses directly related to the segment or geographic area. Identifiable assets are those used in each segment's operation.
No single commercial customer accounted for more than 10% of sales and revenues in any year.
Export sales were as follows:
The largest single contract with any one US Government agency accounted for 2% of sales in 1994, 1993 and 1992. Prime and subcontracts with all government agencies accounted for 11%, 22% and 23% of sales and revenues in 1994, 1993 and 1992, respectively.
NOTE 20. GOVERNMENT INVESTIGATIONS
During the second quarter of 1993, the Company entered into agreements with the US Attorney's Office, Southern District of New York (SDNY), and the Federal Aviation Administration (FAA) in connection with investigations begun in November 1992 by these offices and other related governmental agencies of the Company's Orangeburg facility and certain of its then employees.
Throughout the investigations, the Company and the Orangeburg facility cooperated fully with federal authorities. In addition, the Company instituted extensive changes in the management and operations of the facility. 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 facility. Subsequently, the US Attorney's Office, SDNY, declined to prosecute the Company in connection with its investigation.
As a result of the investigations and the related suspension, the Company incurred direct expenses in 1993 of $12,800,000. Direct expenses included the remedial payment of $5,000,000 to the FAA, an additional $2,500,000 to cover the cost of testing engine parts seized by federal authorities, severance payments, and legal fees and expenses.
NOTE 21. CONTINGENCIES
At December 31, 1994, the Company was contingently liable for outstanding letters of credit, not reflected in the accompanying consolidated financial statements, in the aggregate amount of approximately $88,059,000. The Company was also contingently liable at December 31, 1994 for $17,500,000 in guarantees of debt owed by one of the Company's unconsolidated joint ventures. In addition, the Company is involved in a number of claims, lawsuits and proceedings (environmental and otherwise) which arose in the ordinary course of business. Other litigation is pending against the Company involving allegations that are not routine and include, in certain cases, compensatory and punitive damage claims. Included in this other class of litigation is an arbitration proceeding that was formally commenced in 1992 to resolve a dispute between the Egyptian Air Force and Chromalloy Gas Turbine. On August 24, 1994, the arbitral tribunal issued an award of $16,250,000 plus interest in favor of Chromalloy Gas Turbine. At December 31, 1994, the Company's Consolidated Balance Sheet includes net assets of approximately $17,500,000 related to this issue. Chromalloy has filed a petition in the US District Court for the District of Columbia to confirm and enforce the award and the Egyptian Air Force has filed a challenge to this award in the Court of Appeal of Cairo.
NOTE 21. CONTINGENCIES (con't)
The ultimate legal and financial liability of the Company in respect to all claims, lawsuits and proceedings referred to above cannot be estimated with any certainty. However, in the opinion of management, based on its examination of such matters, its experience to date and discussions with counsel, the ultimate outcome of these contingencies, net of liabilities already accrued in the Company's Consolidated Balance Sheet, is not expected to have a material adverse effect on the Company's consolidated financial position, although the resolution in any reporting period of one or more of these matters could have a significant impact on the Company's results of operations for that period.
ITEMS 10 (IN PART) THROUGH 13
The Company intends to file with the Securities and Exchange Commission a definitive proxy statement pursuant to Regulation 14A involving the election of directors not later than 120 days after the end of its fiscal year ended December 31, 1994. Accordingly, the information required by Part III (Items 10 (concerning Sequa's directors and disclosure pursuant to Item 405 of Regulation S-K), 11, 12 and 13) is incorporated herein by reference to such definitive proxy statement in accordance with General Instruction G(3) to Form 10-K.
SIGNATURES ----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.
SEQUA CORPORATION
Date: March 30, 1995 By: /S/ GERALD S. GUTTERMAN ---------------- ------------------------- Gerald S. Gutterman Executive Vice President, Finance and Administration
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 30, 1995.
By: /S/ NORMAN E. ALEXANDER Chairman of the Board, Chief Norman E. Alexander Executive Officer and Director
By: /S/ JOHN J. QUICKE President, Chief Operating Officer John J. Quicke and Director
By: /S/ STUART Z. KRINSLY Senior Executive Vice President, Stuart Z. Krinsly General Counsel and Director
By: /S/ GERALD S. GUTTERMAN Executive Vice President, Finance Gerald S. Gutterman and Administration
By: /S/ WILLIAM P. KSIAZEK Vice President and Controller William P. Ksiazek
By: /S/A DWORMAN Director Alvin Dworman
By: /S/ A. LEON FERGENSON Director A. Leon Fergenson
By: /S/ DAVID S. GOTTESMAN Director David S. Gottesman
By: /S/ DONALD D. KUMMERFELD Director Donald D. Kummerfeld
By: Director Richard S. LeFrak
By: /S/ FRED R. SULLIVAN Director Fred R. Sullivan
By: /S/ GERALD TSAI Director Gerald Tsai, Jr.