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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 1995
Commission File Number 1-3720
W. R. GRACE & CO.
New York 13-3461988
------------------------ -------------------
(State of Incorporation) (I.R.S. Employer
Identification No.)
One Town Center Road
Boca Raton, Florida 33486-1010
(407) 362-2000
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 and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
--------- --------
96,542,514 shares of Common Stock, $1.00 par value, were outstanding at July 31,
1995.
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W. R. GRACE & CO. AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
--------
PART I. Financial Information
Item 1. Financial Statements
Consolidated Statement of Operations I-1
Consolidated Statement of Cash Flows I-2
Consolidated Balance Sheet I-3
Notes to Consolidated Financial Statements I-4 to I-7
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition I-8 to I-12
PART II. Other Information
Item 1. Legal Proceedings II-1
Item 4. Submission of Matters to a Vote of Security
Holders II-2
Item 6. Exhibits and Reports on Form 8-K II-4
As used in this Report, the term "Company" refers to W. R. Grace & Co., and the
term "Grace" refers to the Company and/or one or more of its subsidiaries.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
W. R. Grace & Co. and Subsidiaries Three Months Ended Six Months Ended
Consolidated Statement of Operations (Unaudited) June 30, June 30,
------------------------------------------------------------ --------------------- -----------------------
$ millions (except per share) 1995 1994 1995 1994
------------------------------------------------------------ ------- -------- -------- --------
Sales and revenues . . . . . . . . . . . . . . . . . . . . . $932.3 $ 782.9 $1,785.7 $1,458.3
Other income . . . . . . . . . . . . . . . . . . . . . . . . 4.5 3.1 8.8 34.2
------ -------- -------- --------
Total . . . . . . . . . . . . . . . . . . . . . . . . . 936.8 786.0 1,794.5 1,492.5
------ -------- -------- --------
Cost of goods sold and operating expenses. . . . . . . . . . 550.7 464.5 1,051.6 902.3
Selling, general and administrative expenses . . . . . . . . 219.7 180.5 450.5 358.9
Depreciation and amortization. . . . . . . . . . . . . . . . 40.2 38.4 78.4 75.6
Interest expense and related financing costs . . . . . . . . 18.7 11.3 34.5 21.9
Research and development expenses. . . . . . . . . . . . . . 31.1 27.0 61.6 54.1
Provision relating to asbestos-related
insurance coverage. . . . . . . . . . . . . . . . . - 316.0 - 316.0
------ -------- -------- --------
Total . . . . . . . . . . . . . . . . . . . . . . . . . 860.4 1,037.7 1,676.6 1,728.8
------ -------- -------- --------
Income/(loss) from continuing operations before
income taxes. . . . . . . . . . . . . . . . . . . . 76.4 (251.7) 117.9 (236.3)
Provision for /(benefit from) income taxes . . . . . . . . . 28.3 (90.3) 43.6 (93.0)
------ -------- -------- --------
Income/(loss) from continuing operations . . . . . . . . . . 48.1 (161.4) 74.3 (143.3)
Income from discontinued operations. . . . . . . . . . . . . 30.6 27.1 51.9 47.2
------ -------- -------- --------
Net income/(loss). . . . . . . . . . . . . . . . . . . . . . $ 78.7 $ (134.3) $ 126.2 $ (96.1)
------ -------- -------- --------
------ -------- -------- --------
--------------------------------------------------------------------------------------------------------------------------
Earnings/(loss) per share:
Continuing operations. . . . . . . . . . . . . . . . . . . $ .51 $ (1.72) $ .78 $ (1.53)
Net income/(loss). . . . . . . . . . . . . . . . . . . . . $ .83 $ (1.43) $ 1.33 $ (1.03)
Fully diluted earnings per share:
Continuing operations. . . . . . . . . . . . . . . . . . . $ .49 $ - (1) $ .76 $ - (1)
Net income/(loss). . . . . . . . . . . . . . . . . . . . . $ .80 $ - (1) $ 1.30 $ - (1)
Dividends declared per common share. . . . . . . . . . . . $ .35 $ .35 $ .70 $ .70
--------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Not presented as the effect is anti-dilutive.
The Notes to Consolidated Financial Statements
are an integral part of this statement.
I-1
W. R. Grace & Co. and Subsidiaries Six Months Ended
Consolidated Statement of Cash Flows (Unaudited) June 30,
---------------------------------------------------------------------------------------------- ----------------------
$ millions 1995 1994
---------------------------------------------------------------------------------------------- ------ --------
OPERATING ACTIVITIES
Income/(loss) from continuing operations before income taxes. . . . . . . . . . . . . . . . $117.9 $(236.3)
Reconciliation to cash (used for)/provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78.4 75.6
Provision relating to asbestos-related insurance coverage . . . . . . . . . . . . . . . - 316.0
Changes in assets and liabilities, excluding effect of businesses
acquired/divested and foreign exchange:
Increase in notes and accounts receivable, net. . . . . . . . . . . . . . . . . . . (60.0) (109.2)
Increase in inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (82.3) (19.1)
Proceeds from asbestos-related insurance settlements. . . . . . . . . . . . . . . . 156.4 121.6
Payments made for asbestos-related litigation settlements,
judgments and defense costs. . . . . . . . . . . . . . . . . . . . . . . . . . . (60.2) (111.9)
Decrease in accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . (51.4) (126.5)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (37.2) 27.4
------ -------
Net pretax cash provided by/(used for) operating activities
of continuing operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61.6 (62.4)
Net pretax cash provided by operating activities of discontinued operations . . . . . . . . 6.1 138.4
------ -------
Net pretax cash provided by operating activities. . . . . . . . . . . . . . . . . . . . . . 67.7 76.0
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (91.0) (47.1)
------ -------
Net cash (used for)/provided by operating activities. . . . . . . . . . . . . . . . . . . . (23.3) 28.9
------ -------
INVESTING ACTIVITIES
Capital expenditures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (232.6) (171.3)
Businesses acquired in purchase transactions, net of
cash acquired and assumed debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (31.1) (170.6)
Increase in net investments in discontinued operations. . . . . . . . . . . . . . . . . . . (46.3) (14.2)
Net proceeds from divestments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1 118.8
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5 14.1
------ -------
Net cash used for investing activities. . . . . . . . . . . . . . . . . . . . . . . . . . . (300.4) (223.2)
------ -------
FINANCING ACTIVITIES
Dividends paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (66.3) (65.9)
Repayments of borrowings having original maturities in excess of three months . . . . . . . (51.2) (70.2)
Increase in borrowings having original maturities in excess of three months . . . . . . . . 85.3 101.7
Net increase in borrowings having original maturities of less than three months . . . . . . 251.0 256.3
Stock options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84.3 15.6
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9.8) (0.1)
------ -------
Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . 293.3 237.4
------ -------
Effect of exchange rate changes on cash and cash equivalents . . . . . . . . . . . . . . . . . 3.5 -
------ -------
(Decrease)/increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . $(26.9) $ 43.1
------ -------
------ -------
The Notes to Consolidated Financial Statements
are integral parts of these statements.
I-2
W. R. Grace & Co. and Subsidiaries
Consolidated Balance Sheet (Unaudited)
---------------------------------------------------------------------------------------------
June 30, December 31,
$ millions (except par value) 1995 1994
---------------------------------------------------------------------------------------------- -------- ----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 51.4 $ 78.3
Notes and accounts receivable, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 603.4 975.7
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 521.6 514.2
Net assets of discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . 340.0 335.6
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200.8 295.4
Other current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28.4 29.7
-------- --------
Total Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,745.6 2,228.9
Properties and equipment, net of accumulated
depreciation and amortization of $1,418.2
and $1,498.2, respectively. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,554.5 1,730.1
Goodwill, less accumulated amortization of $20.2
and $71.8, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118.4 672.5
Net assets of discontinued operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,400.5 -
Asbestos-related insurance receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 472.1 512.6
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 789.2 1,086.5
-------- --------
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,080.3 $6,230.6
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 446.8 $ 430.9
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 285.5 433.7
Income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174.9 197.0
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 575.0 872.9
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 297.0 297.0
-------- --------
Total Current Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,779.2 2,231.5
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,280.9 1,098.8
Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 676.9 690.9
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103.7 92.5
Noncurrent liability for asbestos-related litigation . . . . . . . . . . . . . . . . . . . . . 569.4 612.4
-------- --------
Total Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,410.1 4,726.1
-------- --------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stocks, $100 par value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4 7.4
Common stock, $1 par value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96.0 94.1
Paid in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 382.4 308.8
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,207.4 1,147.5
Cumulative translation adjustments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (20.2) (53.3)
Treasury stock, 62,453 common shares, at cost . . . . . . . . . . . . . . . . . . . . . . . (2.8) -
-------- --------
Total Shareholders' Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,670.2 1,504.5
-------- --------
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,080.3 $6,230.6
-------- --------
-------- --------
The Notes to Consolidated Financial Statements
are integral parts of these statements.
I-3
W. R. Grace & Co. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions)
(a) The financial statements in this Report at June 30, 1995 and 1994 and for
the three- and six-month interim periods then ended are unaudited and
should be read in conjunction with the consolidated financial statements in
the Company's 1994 Annual Report on Form 10-K. Such interim financial
statements reflect all adjustments that, in the opinion of management, are
necessary for a fair presentation of the results of the interim periods
presented; all such adjustments are of a normal recurring nature. Certain
amounts in the prior periods' consolidated financial statements have been
reclassified to conform to the current periods' basis of presentation. The
results of operations for the three- and six-month interim periods ended
June 30, 1995 are not necessarily indicative of the results of operations
for the fiscal year ending December 31, 1995.
In the second quarter of 1995, the Company announced that its Board of
Directors had approved a plan to spin off National Medical Care, Inc.
(NMC), Grace's wholly owned health care subsidiary. The spin-off would be
effected by means of a dividend to holders of the Company's common stock
which will only be formally declared upon satisfaction of various
conditions, including final Board approval, negotiation of definitive
agreements, receipt of opinions as to the tax-free nature of the spin-off
and other matters, and the effectiveness of a registration statement with
respect to NMC's common stock. It is currently anticipated that the spin-
off will take place in the fourth quarter of 1995.
As a result of the Board's approval of the plan to spin off NMC, Grace has
classified its health care segment as a discontinued operation. The
consolidated statement of operations reflects discontinued operations
separately from continuing operations for all periods presented. The
statement of cash flows reflects certain pretax operating activities of
discontinued operations separately from continuing operations for all
periods presented, and the investing and financing activities of
discontinued operations are reflected separately from continuing operations
beginning with the period in which each business was classified as a
discontinued operation. The consolidated balance sheet reflects the net
assets of discontinued operations separately from continuing operations
beginning with the period in which each business was classified as a
discontinued operation. See Note (c) below for additional information.
(b) As previously reported, Grace is a defendant in lawsuits relating to
previously sold asbestos-containing products and anticipates that it will
be named as a defendant in additional asbestos-related lawsuits in the
future. Grace was a defendant in approximately 41,300 asbestos-related
lawsuits at June 30, 1995 (65 involving claims for property damage and the
remainder involving approximately 77,400 claims for personal injury), as
compared to approximately 38,700 lawsuits at December 31, 1994 (65
involving claims for property damage and the remainder involving
approximately 67,900 claims for personal injury). During the first half of
1995, one property damage lawsuit was settled for a total of $0.3; three
new property damage lawsuits were filed; and two property damage lawsuits
were dismissed. In addition, a new trial was ordered in a property damage
case that had been on appeal. During the first half of 1995, approximately
900 personal injury claims against Grace were dismissed without payment and
$12.5 was recorded to reflect settlements and judgments in approximately
4,600 personal injury claims.
I-4
W. R. Grace & Co. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions)
Based upon and subject to the factors discussed in Note 2 to Grace's
consolidated financial statements for the year ended December 31, 1994,
Grace has attempted to estimate its future costs to dispose of the personal
injury and property damage lawsuits pending at June 30, 1995 and has
determined that it is probable that such lawsuits can be disposed of for a
total of $669.4, inclusive of legal fees and expenses, of which Grace has
recorded $569.4 as a noncurrent liability and $100.0 as a current
liability. This compares to the estimated liability (current and
noncurrent) of $712.4 at December 31, 1994, the decrease being attributable
to payments made by Grace for asbestos-related litigation, judgments,
settlements and defense costs in the first half of 1995. In addition, Grace
has recorded a receivable of $472.1 for the insurance proceeds it expects
to receive in reimbursement for prior payments and estimated future
payments to dispose of pending asbestos-related litigation. The amount of
this receivable has declined from December 31, 1994 due to the net
insurance proceeds received during the first half of 1995.
In the first half of 1995, Grace received a total of $156.4 pursuant to
settlements with certain insurance carriers in reimbursement for amounts
previously paid and to be paid by Grace in connection with asbestos-related
litigation; of this amount, $110.0 was received pursuant to settlements
entered into in 1993 and 1994, which had been classified as notes
receivable in the financial statements.
Grace continues to be involved in litigation with certain of its insurance
carriers, including an affiliated group of carriers that had agreed to a
settlement and had made a series of payments under that agreement in 1993.
The group of carriers subsequently notified Grace that it would no longer
honor the agreement (which had not been executed) due to a September 1993
decision by the U.S. Court of Appeals for the Second Circuit that had the
effect of reducing the amount of insurance coverage available to Grace with
respect to asbestos property damage litigation and claims. Grace initiated
action to enforce the settlement agreement (which involves approximately
$226.0 of the asbestos-related receivable of $472.1 at June 30, 1995) in
connection with the settlement of a property damage case pending in the
U.S. District Court for the Eastern District of Texas. The District Court
held the agreement to be enforceable, and this ruling has been affirmed by
the U.S. Court of Appeals for the Fifth Circuit (which has also denied a
request by the group of carriers for a rehearing). Grace anticipates that
the group of carriers will seek a review of this ruling by the U.S. Supreme
Court. Based on this ruling, the group of carriers paid Grace $13.9 in the
second quarter of 1995, representing the carriers' portion of the
settlement in the underlying property damage case. Grace has demanded that
the group of carriers pay the amounts due under the settlement agreement
with respect to property damage cases in other jurisdictions and will
initiate legal action if payment is not received in a reasonable time.
Grace's ultimate exposure in respect of its asbestos-related lawsuits and
claims will depend on the extent to which its insurance will cover damages
for which it may be held liable, amounts paid in settlement and litigation
costs. As previously reported, the May 1994 decision of the U.S. Court of
Appeals for the Second Circuit limited the amount of insurance coverage
available with respect to property damage lawsuits and claims. Because
Grace's insurance covers both property damage and personal injury lawsuits
and claims, the May
I-5
W. R. Grace & Co. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions)
1994 decision has had the concomitant effect of reducing the insurance
coverage available with respect to Grace's personal injury lawsuits and
claims. However, in Grace's opinion, it is probable that recoveries from
its insurance carriers, along with other funds, will be available to
satisfy the property damage and personal injury lawsuits and claims
pending at June 30, 1995. Consequently, Grace believes that the resolution
of its pending asbestos-related litigation will not have a material
adverse effect on its consolidated results of operations or financial
position.
For additional information, see Note 2 to the consolidated financial
statements in the Company's 1994 Annual Report on Form 10-K.
(c) As discussed in Note (a) above, Grace has classified its health care
segment as a discontinued operation.
Summary results of operations for the health care segment are as follows:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- -----------------------
1995 1994 1995 1994
------ ------ -------- ------
Sales and revenues $523.5 $454.0 $1,015.3 $855.4
------ ------ -------- ------
------ ------ -------- ------
Income from discontinued operations
before income taxes $ 48.5 $ 45.0 $ 82.4 $ 78.6
Provision for income taxes 17.9 17.9 30.5 31.4
------ ------ -------- ------
Income from discontinued operations $ 30.6 $ 27.1 $ 51.9 $ 47.2
------ ------ -------- ------
------ ------ -------- ------
The net operating results of the health care segment reflects the
allocation of corporate overhead and corporate research expenses and an
allocation of interest expense based on a ratio of the net assets of the
health care segment as compared to Grace's total debt and equity capital.
Interest expense allocated to the discontinued health care segment was
$21.6 and $13.3 for the second quarters of 1995 and 1994, respectively, and
$41.7 and $23.8 for the six months ended June 30, 1995 and 1994,
respectively. Taxes have been allocated to the health care segment based on
Grace's consolidated effective tax rate. These allocations are not
necessarily indicative of the results of the health care segment as it will
be reported in the future on a stand-alone basis. NMC's management is
currently determining the changes that may be required to its current
organization, including corporate overhead activities, whether NMC will
continue certain Grace research projects, and other considerations relating
to NMC's status as a stand-alone company following completion of the spin-
off.
Minority interest consists of a limited partnership interest in Grace Cocoa
Associates, L.P. (LP). LP's assets consist of Grace Cocoa's worldwide cocoa
and chocolate business, long-term notes and demand loans due from various
Grace entities and guaranteed by the Company and its principal operating
subsidiary, and cash. LP is a separate and distinct legal entity from each
of the Grace entities and has separate assets, liabilities, business
functions and operations. For financial reporting purposes, the assets,
liabilities, results of
I-6
W. R. Grace & Co. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions)
operations and cash flows of LP are included in Grace's consolidated
financial statements as a component of discontinued operations, and the
outside investors' interest in LP is reflected as a minority interest. The
intercompany notes held by LP are eliminated in preparing the consolidated
financial statements and, therefore, have not been classified as pertaining
to discontinued operations.
The net assets, excluding intercompany assets, of Grace's cocoa business
and other discontinued operations (classified as a current asset) and
Grace's health care segment (classified as a noncurrent asset) included in
the consolidated balance sheet at June 30, 1995, are as follows:
Sub- Health
Cocoa Other Total Care Total
------ ------- ------ -------- --------
Current assets $376.2 $ 17.5 $393.7 $ 583.2 $ 976.9
Properties and equipment, net 190.8 32.4 223.2 358.1 581.3
Investments in and advances to
affiliated companies - 43.0 43.0 28.8 71.8
Other assets 52.2 20.3 72.5 902.5 975.0
------ ------- ------ -------- --------
Total assets $619.2 $ 113.2 $732.4 1,872.6 $2,605.0
------ ------- ------ -------- --------
Current liabilities $276.2 $ 10.8 $287.0 $ 307.7 $ 594.7
Other liabilities 95.6 9.8 105.4 164.4 269.8
------ ------- ------ -------- --------
Total liabilities $371.8 $ 20.6 $392.4 $ 472.1 $ 864.5
------ ------- ------ -------- --------
Net assets $247.4 $ 92.6 $340.0 $1,400.5 $1,740.5
------ ------- ------ -------- --------
------ ------- ------ -------- --------
(d) Inventories consist of:
June 30, December 31,
1995 1994 (i)
-------- ------------
Raw and packaging materials $149.6 $129.8
In process 93.1 75.3
Finished products 323.2 352.2
------ ------
565.9 557.3
Less: Adjustment of certain inventories
to a last-in/first-out (LIFO) basis (44.3) (43.1)
------ ------
Total Inventories $521.6 $514.2
------ ------
------ ------
<FN>
(i) Inventories at December 31, 1994 include $92.4 relating to the
health care segment.
(e) Earnings per share are calculated on the basis of the following weighted
average number of common shares outstanding:
Three Months Ended June 30:
1995 - 95,116,000
1994 - 93,933,000
Six Months Ended June 30:
1995 - 94,629,000
1994 - 93,842,000
I-7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(a) Review of Operations
(1) Overview:
Sales and revenues increased 19% and 22% in the second quarter and first
half of 1995, respectively, over the comparable 1994 periods. Income from
continuing operations for the second quarter and first half of 1995
amounted to $48.1 million and $74.3 million, respectively, increases of 25%
and 31% as compared to the respective 1994 periods, excluding a non-cash
charge of $200.0 million after taxes ($316.0 million pretax) recorded in
the 1994 second quarter to reflect a reduction in insurance coverage for
asbestos lawsuits and claims. Including this provision, Grace reported
losses from continuing operations for the second quarter and first half of
1994 of $161.4 million and $143.3 million, respectively.
As discussed in Notes (a) and (c) to the consolidated financial statements
in this Report, Grace classified its health care segment as a discontinued
operation in the 1995 second quarter.
(2) Operating Results - Specialty Chemicals:
The following table compares results for the specialty chemicals segment
for the 1995 second quarter and first half to results for the comparable
periods of 1994:
W. R. Grace & Co. and Subsidiaries Three Months Ended Six Months Ended
Specialty Chemicals Operating Results June 30, June 30,
---------------------------------------- --------------------- -----------------------
$ millions 1995 1994 1995 1994
---------------------------------------- ------ ------ -------- --------
Sales and Revenues $932.3 $782.9 $1,785.7 $1,458.3
------ ------ -------- --------
------ ------ -------- --------
Operating Income Before Taxes (i) $ 96.9 $ 78.5 $ 175.4 $ 118.3
------ ------ -------- --------
------ ------ -------- --------
<FN>
(i) Specialty chemicals segment results reflect the allocation of
corporate overhead and corporate research expenses; corporate interest
and financing costs and nonallocable expenses are not reflected in the
specialty chemicals segment results. These allocations are not
necessarily indicative of the results of the specialty chemicals
segment as it will be reported in the future on a stand-alone basis.
As noted above, sales and revenues increased 19% and 22% in the second
quarter and first half of 1995, respectively, as compared to the 1994
periods, reflecting favorable volume, price/product mix and currency
translation variances estimated at 7%, 7% and 5%, respectively, for the
second quarter of 1995, and 12%, 5% and 5%, respectively, for the first
half of 1995.
In the second quarter of 1995, all product lines other than construction
products experienced volume increases as compared to the 1994 second
quarter. Packaging volume increases
I-8
Management's Discussion and Analysis of Results of
Operations and Financial Condition (Continued)
were due to higher sales of bags, films and laminates in all regions. The
volume increases in catalyst and other silica-based products were due to
higher sales in all products and regions, especially in North America due
to improved sales of hydroprocessing catalysts, and in Europe due to the
improving economy. Container volume increases were due to increased sales
of can sealing products in Asia Pacific, closure compounds in Europe and
coating products in Latin America. The volume increases in water treatment
were due to higher sales volumes in water treatment chemicals in Latin
America due to market share gains and in the water treatment chemicals and
paper industry process chemicals businesses in Europe. The volume decreases
in construction products were primarily due to a decrease in waterproofing
materials in North America due to a slowdown in the roofing market after a
strong 1995 first quarter, partially offset by improved cement products
volumes in North America.
Operating income before taxes increased 23% in the second quarter of 1995
compared to the second quarter of 1994. North American results improved
slightly, reflecting strong growth in packaging and catalyst and other
silica-based products (due to the volume increases noted above), offset by
the decline in construction, as noted above. European results improved
significantly versus the 1994 second quarter, primarily in packaging, due
to the improved economy and the volume increases noted above. In Asia
Pacific, favorable results were achieved versus the 1994 second quarter,
primarily in container and packaging (due to the volume increases noted
above). Latin American 1995 second quarter results improved slightly versus
the second quarter of 1994, primarily due to increased profitability in
packaging (due to the volume increases noted above), offset by a decline in
water treatment due to higher operating expenses.
For the first half of 1995, operating income increased 48% over the
comparable period of 1994, primarily due to the significant growth in
packaging and catalyst and other silica-based products, as discussed above.
(3) Statement of Operations:
OTHER INCOME
Other income includes interest income, dividends, royalties from licensing
agreements, and equity in earnings of affiliated companies. Other income
for the first half of 1994 also included a $27.0 million gain (pre- and
after-tax) from the January 1994 sale of Grace's remaining interest in The
Restaurant Enterprises Group, Inc. (REG).
INTEREST EXPENSE AND RELATED FINANCING COSTS
Interest expense and related financing costs of $18.7 million and $34.5
million in the second quarter and first half of 1995, respectively,
increased by 65% and 58%, respectively, versus the comparable 1994 periods,
primarily due to higher average short-term interest rates. As discussed in
Note (c) to the consolidated financial statements in this Report, interest
expense and related financing costs were allocated to the discontinued
health care segment. Including these amounts, interest expense and related
financing costs increased
I-9
Management's Discussion and Analysis of Results of
Operations and Financial Condition (Continued)
64% and 67% in the second quarter and first half of 1995, respectively,
over the comparable 1994 periods, to $40.3 million and $76.2 million,
respectively.
See "Financial Condition: Liquidity and Capital Resources" below for
information on borrowings.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development spending increased by 15% and 14% in the second
quarter and first half of 1995, respectively, versus the 1994 periods.
INCOME TAXES
The effective tax rate was 37.0% for both the second quarter and first half
of 1995, as compared with 35.9% and 39.4%, respectively, for the second
quarter and first half of 1994. Excluding the provision for asbestos-
related litigation and claims discussed above, the effective tax rate was
40.0% for the second quarter of 1994. The effective tax rate for the first
half of 1994 was 39.9%, excluding the asbestos-related provision, the gain
on the REG transaction and a $26.0 million provision ($40.0 million pretax)
for environmental costs and workforce reductions recorded in the first
quarter of 1994.
INCOME FROM DISCONTINUED OPERATIONS - HEALTH CARE SEGMENT
The following table compares the results for the health care segment
for the 1995 second quarter and first half to results for the
comparable periods of 1994:
W. R. Grace & Co. and Subsidiaries Three Months Ended Six Months Ended
Health Care Operating Results June 30, June 30,
---------------------------------------- --------------------- -----------------------
$ millions 1995 1994 1995 1994
---------------------------------------- ------ ------ -------- --------
Sales and Revenues $523.5 $454.0 $1,015.3 $855.4
------ ------ -------- ------
------ ------ -------- ------
Operating Income Before Taxes (i) $ 70.1 $ 58.3 $ 124.1 $102.4
------ ------ -------- ------
------ ------ -------- ------
<FN>
(i) Health care segment results reflect the allocation of corporate
overhead and corporate research expenses; corporate interest and
financing costs are not reflected in the health care segment results.
These allocations are not necessarily indicative of the results of the
health care segment as it will be reported in the future on a stand-
alone basis. NMC's management is currently determining the changes
that may be required to its current organization, including corporate
overhead activities, whether NMC will continue certain Grace research
projects, and other considerations relating to NMC's status as a
stand-alone company following completion of the spin-off.
Sales and revenues for the second quarter and first half of 1995 increased
by 15% and 19%, respectively, over the comparable periods of 1994. These
improvements were due to
I-10
Management's Discussion and Analysis of Results of
Operations and Financial Condition (Continued)
increases of 21% and 23%, respectively, in kidney dialysis services; 11%
and 8%, respectively, in medical products operations; and an 8% increase in
home health care for the first half of 1995. The positive results for the
second quarter of 1995 were partially offset by a 2% decrease in home
health care resulting from a decrease in infusion therapy. 1995 second
quarter and first half results for kidney dialysis services reflect
acquisitions subsequent to the second quarter of 1994. 1995 first half
results for home health care operations include six months of results of
Home Nutritional Services, Inc., a national provider of home infusion
therapy services acquired in April 1994. The number of centers providing
dialysis and related services increased 16%, from 537 at June 30, 1994 to
623 at June 30, 1995 (549 in North America, 45 in Europe, 20 in Latin
America and 9 in Asia Pacific).
Operating income before taxes in the second quarter and first half of 1995
increased by 20% and 21%, respectively, over the 1994 periods. 1995 second
quarter and first half results for all health care businesses benefited
from acquisitions subsequent to the second quarter of 1994, continued
expansion inside and outside the U.S., and continued improvements in cost
controls, operating efficiencies and/or capacity utilization.
(b) Financial Condition; Liquidity and Capital Resources
During the first half of 1995, the net pretax cash provided by Grace's
continuing operating activities was $61.6 million, versus $62.4 million
used in the 1994 first half. The increase was primarily due to net cash
inflows of $96.2 million in the first half of 1995 as compared to $9.7
million in the first half of 1994, resulting from settlements with certain
insurance carriers, net of amounts paid for the defense and disposition of
asbestos-related property damage and personal injury litigation (see
discussion below), along with improved operating results. After giving
effect to the pretax cash provided by operating activities of discontinued
operations (which includes an increase in the use of working capital by NMC
in the first half of 1995) and payments of income taxes, the net cash used
for operating activities was $23.3 million in the first half of 1995 versus
$28.9 million provided in the 1994 first half.
Investing activities used $300.4 million of cash in the first half of 1995,
largely reflecting capital expenditures of $232.6 million, and the
acquisitions of various kidney dialysis centers and medical products
facilities for a total of $31.1 million in the first quarter of 1995.
Also, investing activities of discontinued operations for the first half of
1995 used $46.3 million, primarily reflecting the discontinued operation
classification of the health care segment's capital expenditures and
acquisitions for the second quarter of 1995.
Net cash provided by financing activities in the first half of 1995 was
$293.3 million, primarily reflecting an increase in total debt from
December 31, 1994 and the exercise of stock options, offset by the payment
of $66.3 million of dividends. Total debt was $1,727.7 million at June 30,
1995, an increase of $198.0 million from December 31, 1994. Grace's total
debt as a percentage of total capital (debt ratio) increased from 50.4% at
December 31, 1994 to 50.8% at June 30, 1995, primarily as the result of the
increase in total debt (Grace's total debt and debt ratio were $2,018.8
million and 59.4%, respectively, at June 30, 1994). At June 30, 1995, the
net assets of the discontinued health care segment included $100.3 million
of debt.
I-11
Management's Discussion and Analysis of Results of
Operations and Financial Condition (Continued)
Grace expects to satisfy its 1995 cash requirements primarily from funds
generated by the spin-off of NMC and, to a lesser extent, from operations
and divestment proceeds. Grace expects to apply a substantial portion of
the cash proceeds generated by the spin-off of NMC to the repayment of
borrowings.
ASBESTOS-RELATED MATTERS
As reported in Note (b) to the consolidated financial statements in this
Report, Grace is a defendant in lawsuits relating to previously sold
asbestos-containing products and is involved in related litigation with
certain of its insurance carriers. In the first half of 1995, Grace
received $96.2 million under settlements with certain insurance carriers,
net of amounts paid for the defense and disposition of asbestos-related
property damage and personal injury litigation. The balance sheet at June
30, 1995 includes a receivable due from insurance carriers, subject to
litigation, of $472.1 million. Grace has also recorded a receivable of
approximately $77.0 million for amounts to be received in 1995 to 1999
pursuant to settlement agreements previously entered into with certain
insurance carriers.
Although Grace cannot precisely estimate the amounts to be paid in 1995 in
respect of asbestos-related lawsuits and claims, Grace expects that it will
be required to expend approximately $30.0 million (pretax) in 1995 to
defend and dispose of such lawsuits and claims (after giving effect to
payments to be received from certain insurance carriers, as discussed above
and in Note (b) to the consolidated financial statements in this Report).
As indicated therein, the amounts reflected in the consolidated financial
statements with respect to the probable cost of disposing of pending
asbestos lawsuits and claims and probable recoveries from insurance
carriers represent estimates; neither the outcomes of such lawsuits and
claims nor the outcomes of Grace's ongoing litigations with certain of its
insurance carriers can be predicted with certainty.
ENVIRONMENTAL MATTERS
There were no significant developments relating to environmental
liabilities in the first half of 1995.
For additional information relating to environmental liabilities, see
Note 11 to the consolidated financial statements in the Company's 1994
Annual Report on Form 10-K.
I-12
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
(a) Note (b) to the Consolidated Financial Statements in Part I of this
Report is incorporated herein by reference.
(b) Reference is made to the section entitled "Environmental and Other
Proceedings" in Item 3 of the Company's 1994 Annual Report on Form 10-K for
information concerning a lawsuit instituted by Hatco Corporation ("Hatco")
against Grace. In July 1995, the United States Court of Appeals for the Third
Circuit reversed the previous decision of the United States District Court for
the District of New Jersey and remanded the lawsuit to the District Court for
further proceedings. Specifically, the Court of Appeals (a) reversed the
District Court's ruling that Grace is responsible for a substantial portion of
Hatco's cleanup costs and (b) ruled that the applicable provision of the
agreement of sale between Grace and Hatco is in the form of a release of Grace
by Hatco, placing the burden of proof on Hatco, rather than Grace, to establish
that Hatco had not released Grace from the asserted liabilities.
(c) The Company has been notified that the Securities and Exchange
Commission has issued a formal order of investigation with respect to the
Company's prior disclosures regarding benefits and retirement arrangements
provided to the Company's former Chairman, J. Peter Grace, Jr., and certain
matters relating to Mr. Grace's son, J. Peter Grace, III. A description of the
matters that are believed to be the subject of the
II-1
investigation was included in the Company's 1995 Proxy Statement. The Company
is cooperating fully with the investigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
The Company's 1995 Annual Meeting of Shareholders ("Annual Meeting") was
held on May 10, 1995. At the Annual Meeting, the Company's shareholders (a)
elected four Class III Directors for a term expiring in 1998; (b) ratified the
selection of Price Waterhouse LLP as independent accountants of the Company
and its consolidated subsidiaries for 1995; (c) approved the Company's
Long-Term Incentive Program; (d) approved the Company's Annual Incentive
Compensation Program; (e) defeated a shareholder proposal regarding a Mexican
operation; (f) defeated a shareholder proposal concerning diversity of
membership on the Company's Board of Directors; and (g) defeated a shareholder
proposal regarding nonemployee directors' retirement benefits.
II-2
The following sets forth the results of voting at the Annual Meeting:
VOTES
--------------------------------------------------------------
MATTER FOR AGAINST* ABSTENTIONS BROKER NON-VOTES
------ --- -------- ----------- ----------------
ELECTION OF DIRECTORS*
H. A. Eckmann 71,387,511 17,151,391 -0- -0-
J. W. Frick 71,440,341 17,098,560 -0- -0-
T. A. Holmes 71,644,357 16,894,545 -0- -0-
P. S. Lynch 72,280,634 16,258,268 -0- -0-
Selection of
Independent
Accountants 86,948,019 1,101,346 489,537 -0-
Approval of
Long-Term
Incentive Program 82,690,990 4,847,251 1,000,661 -0-
Approval of
Annual Incentive
Compensation
Program 82,810,320 4,813,402 915,180 -0-
Shareholder
Proposals:
Mexican Operation 3,913,813 73,244,260 6,434,508 4,946,321
Board Diversity 17,669,392 62,089,184 3,834,005 4,946,321
Director Retirement
Benefits 17,980,948 63,093,715 2,531,623 4,932,616
<FN>
---------------------------
* With respect to the election of directors, the form of proxy permitted
shareholders to check boxes indicating votes either "for" or "withheld";
votes relating to directors designated above as "against" are votes cast as
"withheld".
II-3
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS. The following are being filed as exhibits to this Report:
-- Employment Agreement, dated as of May 1, 1995, between the
Company and Albert J. Costello;
-- weighted average number of shares and earnings used in per share
computations; and
-- financial data schedule.
(b) REPORTS ON FORM 8-K. The Company filed two Reports on Form 8-K on May
1, 1995, one relating to the election of a new President and Chief Executive
Officer and the other relating to the announcement of first quarter 1995
results, a court decision concerning the enforceability of a settlement
agreement with an affiliated group of insurance carriers, and certain
investigations involving the Company's principal health care subsidiary,
National Medical Care, Inc. ("NMC"). The Company filed a Report on Form 8-K on
May 8, 1995 regarding a proposal to purchase NMC. The Company also filed a
Report on Form 8-K on June 15, 1995 relating to the Company's announcement of a
plan to spin off NMC. The Company filed a Report on Form 8-K on August 2, 1995
relating to the announcement of second quarter 1995 results.
II-4
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
W. R. GRACE & CO.
------------------------------
(Registrant)
Date: August 14, 1995 By /s/ Richard N. Sukenik
----------------------------
Richard N. Sukenik
Vice President and Controller
(Principal Accounting Officer)
II-5
W. R. GRACE & CO.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1995
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
10.1 Employment Agreement, dated as of May 1, 1995, between the
Company and Albert J. Costello
11 Weighted average number of shares and earnings used in per share
computations
27 Financial Data Schedule