- - -------------------------------------------------------------------------------
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 March 31, 1996
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
--- ---
98,224,200 shares of Common Stock, $1.00 par value, were outstanding
at May 1, 1996.
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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-14
Part II. Other Information
Item 1. Legal Proceedings II-1
Item 6. Exhibits and Reports on Form 8-K II-2
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
Consolidated Statement of Operations (Unaudited) March 31,
----------------------------------------------------------------------------------------- -----------------------------
Dollars in millions, except per share 1996 1995
----------------------------------------------------------------------------------------- ----------- -----------
Sales and revenues........................................................................ $886.0 $853.4
Other income.............................................................................. 3.8 4.3
--------- ---------
Total .................................................................................. 889.8 857.7
--------- ---------
Cost of goods sold and operating expenses................................................. 531.8 500.9
Selling, general and administrative expenses.............................................. 199.3 230.8
Depreciation and amortization............................................................. 45.5 38.2
Interest expense and related financing costs.............................................. 18.4 15.8
Research and development expenses......................................................... 28.8 30.5
Corporate expenses previously allocated to health care operations......................... - 10.1
--------- ---------
Total................................................................................... 823.8 826.3
--------- ---------
Income from continuing operations before income taxes..................................... 66.0 31.4
Provision for income taxes................................................................ 24.4 8.5
--------- ---------
Income from continuing operations......................................................... 41.6 22.9
Income from discontinued operations....................................................... 22.0 24.6
--------- ---------
Net income................................................................................ $ 63.6 $ 47.5
========== =========
Earnings per share:
Continuing Operations................................................................... $ .42 $ .24
Net income.............................................................................. $ .65 $ .50
Fully diluted earnings per share:
Continuing Operations................................................................... $ .41 $ .24
Net income.............................................................................. $ .63 $ .49
Dividends declared per common share....................................................... $ .125 $ .35
The Notes to Consolidated Financial Statements
are integral parts of these statements.
I-1
W. R. Grace & Co. and Subsidiaries Three Months Ended
Consolidated Statement of Cash Flows (Unaudited) March 31,
- - ----------------------------------------------------------------------------------------------------- --------------------------
Dollars in millions 1996 1995
- - ----------------------------------------------------------------------------------------------------- ------- ---------
OPERATING ACTIVITIES
Income from continuing operations before income taxes........................................... $ 66.0 $ 31.4
Reconciliation to cash used for operating activities:
Depreciation and amortization............................................................. 45.5 38.2
Changes in assets and liabilities, excluding effect of businesses
acquired/divested and foreign exchange:
Increase in notes and accounts receivable, net....................................... (34.4) (.1)
Decrease/(increase) in inventories................................................... 9.0 (41.6)
Proceeds from asbestos-related insurance settlements................................. 23.7 100.0
Payments made for asbestos-related litigation settlements
and defense costs................................................................. (31.2) (30.9)
Decrease in accounts payable......................................................... (11.5) (70.4)
Other................................................................................ (114.8) (95.1)
--------- ---------
Net pretax cash used for operating activities of continuing operations.......................... (47.7) (68.5)
Net pretax cash (used for)/provided by operating activities
of discontinued operations................................................................ (32.1) 65.6
--------- ---------
Net pretax cash used for operating activities................................................... (79.8) (2.9)
Income taxes paid............................................................................... (11.5) (59.6)
--------- ---------
Net cash used for operating activities.......................................................... (91.3) (62.5)
--------- ---------
INVESTING ACTIVITIES
Capital expenditures............................................................................ (112.5) (110.4)
Businesses acquired in purchase transactions, net of
cash acquired and debt assumed............................................................ - (31.3)
Increase in net assets of discontinued operations............................................... (33.8) (3.3)
Net proceeds from divestments................................................................... 10.9 7.1
Other........................................................................................... (4.4) .7
--------- ---------
Net cash used for investing activities.......................................................... (139.8) (137.2)
--------- ---------
FINANCING ACTIVITIES
Dividends paid.................................................................................. (12.4) (33.1)
Repayments of borrowings having original maturities in excess of three months................... (33.8) (10.5)
Increase in borrowings having original maturities in excess of three months..................... - 9.3
Net increase in borrowings having original maturities of less than three months................. 264.9 209.6
Stock options exercised......................................................................... 44.8 16.1
Decrease in net financing activities of discontinued operations................................. (16.2) -
Other........................................................................................... (.5) (12.0)
--------- ---------
Net cash provided by financing activities....................................................... 246.8 179.4
--------- ---------
Effect of exchange rate changes on cash and cash equivalents......................................... .2 3.2
------------ ----------
Increase/(decrease) in cash and cash equivalents..................................................... $ 15.9 $ (17.1)
============ ==========
The Notes to Consolidated Financial Statements
are integral parts of these statements.
I-2
W. R. Grace & Co. and Subsidiaries
Consolidated Balance Sheet (Unaudited)
----------------------------------------------------------------------- March 31, December 31,
Dollars in millions, except par value 1996 1995
----------------------------------------------------------------------- ----------- -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents........................................... $ 56.5 $ 40.6
Notes and accounts receivable, net.................................. 666.8 596.8
Inventories......................................................... 481.1 491.9
Net assets of discontinued operations............................... 314.4 323.7
Deferred income taxes............................................... 193.5 206.1
Other current assets................................................ 35.6 22.2
----------- -----------
Total Current Assets............................................. 1,747.9 1,681.3
Properties and equipment, net of accumulated
depreciation and amortization of $1,446.7
and $1,418.8, respectively.................................... 1,810.0 1,736.1
Goodwill, less accumulated amortization of $20.9
and $20.6, respectively........................................ 112.5 111.8
Net assets of discontinued operations - health care.................... 1,540.5 1,435.3
Asbestos-related insurance receivable.................................. 281.5 321.2
Deferred income taxes ................................................. 381.6 386.6
Other assets........................................................... 611.5 625.3
---------- ----------
TOTAL............................................................ $6,485.5 $6,297.6
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt..................................................... $ 895.2 $ 638.3
Accounts payable.................................................... 278.0 339.2
Income taxes........................................................ 102.5 103.3
Other current liabilities........................................... 816.5 836.4
Minority interest................................................... 297.0 297.0
---------- ----------
Total Current Liabilities........................................ 2,389.2 2,214.2
Long-term debt......................................................... 1,265.4 1,295.5
Other liabilities...................................................... 769.9 789.0
Deferred income taxes ................................................. 37.7 44.8
Noncurrent liability for asbestos-related litigation................... 692.4 722.3
---------- ----------
Total Liabilities................................................ 5,154.6 5,065.8
---------- ----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stocks, $100 par value.................................... 7.4 7.4
Common stock, $1 par value.......................................... 98.5 97.4
Paid in capital..................................................... 503.1 459.8
Retained earnings................................................... 760.2 709.0
Cumulative translation adjustments.................................. (35.9) (39.4)
Treasury stock, 53,000 common shares, at cost....................... (2.4) (2.4)
---------- ----------
Total Shareholders' Equity....................................... 1,330.9 1,231.8
---------- ----------
TOTAL............................................................ $6,485.5 $6,297.6
========== ==========
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 are unaudited and should be
read in conjunction with the consolidated financial statements in the
Company's 1995 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 period's consolidated
financial statements have been reclassified to conform to the current
basis of presentation.
The results of operations for the three-month interim period ended
March 31, 1996 are not necessarily indicative of the results of
operations for the fiscal year ending December 31, 1996.
(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 42,900
asbestos-related lawsuits at March 31, 1996 (44 involving claims for
property damage and the remainder involving approximately 100,200
claims for personal injury), as compared to approximately 40,800
lawsuits at December 31, 1995 (47 involving claims for property
damage and the remainder involving approximately 92,400 claims for
personal injury). During the first quarter of 1996, Grace settled one
property damage lawsuit for a total of $4.0 and two property damage
lawsuits were dismissed; in addition, approximately 200 personal
injury claims against Grace were dismissed without payment and $7.1
was recorded to reflect settlements in approximately 2,100 personal
injury claims.
Based upon and subject to the factors discussed in Note 2 to Grace's
consolidated financial statements for the year ended December 31,
1995, Grace estimates that its probable liability with respect to the
defense and disposition of asbestos property damage and personal
injury lawsuits and claims pending at March 31, 1996 and December 31,
1995, and personal injury lawsuits and claims expected to be filed
through 1998, is as follows:
March 31, December 31,
1996 1995
- - ------------------------------------------------------------------------------------------------------------------------------
Current liability for asbestos-related litigation (1).................................... $100.0 $100.0
Noncurrent liability for asbestos-related litigation..................................... 692.4 (2) 722.3
------- -------
Total asbestos-related liability......................................................... $792.4 $822.3
====== ======
- - ------------------------------------------------------------------------------------------------------------------------------
(1) Included in "Other current liabilities" in the Consolidated Balance
Sheet.
(2) The decrease from December 31, 1995 reflects payments made by
Grace for settlements and defense costs in connection with asbestos-related
lawsuits and claims during the first quarter of 1996.
I-4
W. R. Grace & Co. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions)
The following table shows Grace's total estimated insurance
recoveries in reimbursement for past and estimated future payments to
defend against and dispose of asbestos-related lawsuits and claims:
March 31, December 31,
1996 1995
- - ------------------------------------------------------------------------------------------------------------------------------
Notes receivable from insurance carriers - current, net of discounts of
$5.7 (1995 - $4.3) (1) $ 99.3 $ 62.0
Notes receivable from insurance carriers - noncurrent, net of discounts
of $4.8 (1995 - $7.3) (2) 37.5 56.4
Asbestos-related insurance receivable.................................................... 281.5 (3) 321.2
------- -------
Total amounts due from insurance carriers................................................ $418.3 $439.6
======= =======
- - ------------------------------------------------------------------------------------------------------------------------------
(1) Included in "Notes and accounts receivable, net" in the
Consolidated Balance Sheet.
(2) Included in "Other assets" in the Consolidated Balance Sheet.
(3) The decrease from December 31, 1995 reflects the receipt of net
insurance proceeds of $12.6 and the reclassification of $27.1
from "Asbestos-related insurance receivable" to "Notes receivable
from insurance carriers - current and noncurrent" as the result
of a first quarter 1996 settlement of a dispute with an insurance
carrier.
At March 31, 1996, settlements with certain insurance carriers
provided for the future receipt by Grace of $147.3, which Grace has
recorded as notes receivable (both current and noncurrent) of $136.8,
net of discounts. In the first quarter of 1996, Grace received net
proceeds of $23.7 pursuant to settlements with insurance carriers in
reimbursement for monies previously expended by Grace in connection
with asbestos-related lawsuits and claims; of this amount, $9.7 was
received pursuant to settlements entered into in 1995, which had
previously been classified as notes receivable. Pursuant to
settlements with two groups of carriers in 1995, Grace will continue
to receive payments based on future cash outflows for
asbestos-related lawsuits and claims; such payments are estimated to
represent approximately $223.3 of the asbestos-related receivable of
$281.5 at March 31, 1996.
Grace continues to seek to recover from its excess insurers the
balance of the payments it has made with respect to asbestos-related
lawsuits and claims. As part of this effort, Grace continues to be
involved in litigation with certain of its excess insurance carriers
(having previously settled with its primary and certain of its excess
carriers). However, in Grace's opinion, it is probable that
recoveries from its insurance carriers (including amounts reflected
in the receivable discussed above), along with other funds, will be
available to satisfy the personal injury and property damage lawsuits
and claims pending at March 31, 1996, as well as personal injury
lawsuits and claims expected to be filed through 1998. Consequently,
Grace believes that the resolution of its 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 1995 Annual Report on Form 10-K.
I-5
W. R. Grace & Co. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions)
(c) As previously reported, in February 1996 Grace and Fresenius AG
(Fresenius) entered into a definitive agreement to combine National
Medical Care, Inc. (NMC), Grace's principal health care subsidiary,
with Fresenius' worldwide dialysis business (FWD) to create Fresenius
Medical Care AG (FMC). The combination would follow the borrowing
and/or assumption of debt aggregating approximately $2.3 billion by
NMC, a tax-free distribution of the net cash proceeds by NMC to Grace,
and a tax-free distribution by the Company, with respect to each share
of its Common Stock, of one share of a newly formed corporation holding
all of Grace's businesses (principally its packaging and specialty
chemicals businesses) other than NMC. As a result of these
transactions, the holders of the Company's Common Stock would own 100%
of the packaging and specialty chemicals company and would be allocated
an aggregate of approximately 44.8% of FMC's ordinary shares, and
Fresenius and other shareholders would be allocated 55.2% of such
shares. The holders of the Company's Common Stock would also own
preferred stock, the value of which would be linked to the performance
of FMC. It is expected that the various transactions will be completed
by the third quarter of 1996. See Note 7 to the consolidated
financial statements in the Company's 1995 Annual Report on Form 10-K
for additional information.
Grace classified its health care business as a discontinued operation
in the second quarter of 1995. Summary results of operations for the
health care business are as follows:
Three Months Ended
March 31,
----------------------
1996 1995
---- ----
Sales and revenues $539.7 $491.8
======== ========
Income from discontinued operations - health care $ 38.2 $ 44.0
before income taxes
Provision for income taxes 16.2 19.4
-------- --------
Income from discontinued operations - health care $ 22.0 $ 24.6
======== ========
The operating results of Grace's cocoa business and other
discontinued operations have been charged against previously
established reserves and are therefore not reflected in the above
results.
The net operating income of the health care business reflects an
allocation of Grace's interest expense ($26.8 and $20.1 for the first
quarters of 1996 and 1995, respectively) based on a ratio of the net
assets of the health care business as compared to Grace's total
capital. Taxes have been allocated to the health care business as if
it were a stand-alone taxpayer; however, these allocations are not
necessarily indicative of the taxes attributable to the health care
business in the future. For the 1995 period, net operating income of
the health care business also reflects an allocation of Grace's
health care-related research expenses (Grace management initiated the
phase-out of certain of its health care research programs in the third
quarter of 1995).
I-6
W. R. Grace & Co. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions)
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
operations and cash flows of LP are included in Grace's consolidated
financial statements as components 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 current
assets) and Grace's health care business (classified as noncurrent
assets) included in the consolidated balance sheet at March 31, 1996,
are as follows:
Sub- Health
Cocoa Other Total Care Total
-------- -------- -------- --------- ---------
Current assets $327.5 $ 10.3 $337.8 $ 667.2 $1,005.0
Properties and equipment, net 187.0 21.1 208.1 412.3 620.4
Investments in and advances to
affiliated companies - 30.6 30.6 - 30.6
Other assets 61.7 10.5 72.2 1,002.0 1,074.2
-------- -------- -------- --------- ---------
Total assets $576.2 $ 72.5 $648.7 $2,081.5 $2,730.2
-------- -------- -------- --------- ---------
Current liabilities $234.6 $ 10.9 $245.5 $ 454.2 $ 699.7
Other liabilities 84.3 4.5 88.8 86.8 175.6
-------- -------- -------- ----------- ----------
Total liabilities $318.9 $ 15.4 $334.3 $ 541.0 $ 875.3
-------- -------- -------- --------- ---------
Net assets $257.3 $ 57.1 $314.4 $1,540.5 $1,854.9
======== ======== ======== ========= =========
(d) Inventories consist of:
March 31, December 31,
1996 1995
------- -------
Raw and packaging materials $137.4 $137.1
In process 89.0 78.0
Finished products 304.2 325.2
------- -------
$530.6 $540.3
Less: Adjustment of certain inventories
to a last-in/first-out (LIFO) basis (49.5) (48.4)
-------- --------
Total Inventories $481.1 $491.9
======== ========
(e) Earnings per share are calculated on the basis of the following
weighted average number of common shares outstanding:
Three Months Ended March 31:
1996 - 97,888,000
1995 - 94,137,000
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 4% in the first quarter of 1996 over the
first quarter of 1995. Net income for the first quarter of 1996 was
$63.6 million, a 34% increase as compared to the 1995 first quarter.
The first quarter of 1995 includes an after-tax charge of $12.5
million ($20.0 million pretax) for costs associated with the
termination of the employment agreement of the Company's former
President and Chief Executive Officer, pension costs resulting from
the retirement of certain directors, legal and other expenses related
to the foregoing and other corporate governance activities. Excluding
the above charge, net income for the first quarter of 1996 would have
increased 6% as compared to the 1995 first quarter.
(2) Operating Results:
The following table compares results for the specialty chemicals
segment for the 1996 first quarter to those for the first quarter of
1995:
W. R. Grace & Co. and Subsidiaries Three Months Ended
Specialty Chemicals Operating Results March 31,
------------------------------------------------------------------- ------------------------------
Percentage
Dollars in millions 1996 1995 Increase
------------------------------------------------------------------ ----------- ----------- -----------
Sales and revenues $886.0 $853.4 4%
====== ======
Operating income before taxes (i) $ 83.9 $ 68.4 23%
======= =======
(i) Reflects the allocation of general corporate overhead, general
corporate research expenses and certain other income and
expense items that can be identified with the specialty
chemicals operations; corporate interest and financing costs
and nonallocable expenses are not reflected in the specialty
chemicals results.
Specialty Chemicals
As noted above, sales and revenues increased 4% in the first quarter
of 1996 as compared to the 1995 first quarter, reflecting favorable
volume, price/product mix and currency translation variances
estimated at 2%, 1% and 1%, respectively. Catalysts and other
silica-based products, packaging and water treatment product lines
experienced improved volumes, offset by volume declines in the
construction and container product lines. Volume increases in
catalysts and other silica-based products reflected higher sales in
all regions, especially refinery catalysts in Asia Pacific (due to
market share gains), polyolefin catalysts in North America and
silica/adsorbent products in Europe, Asia Pacific and Latin America,
as a result of new product introductions. Packaging volume increases
reflected higher sales of bags in North America and Europe, and
laminates in all regions, particularly Europe; 1996
I-8
Management's Discussion and Analysis of Results of
Operations and Financial Condition (Continued)
first quarter sales of films were flat versus the first quarter of
1995. Volume increases in water treatment reflected higher paper
industry process chemicals sales in Europe caused by market share
gains, as well as higher water treatment chemicals sales in Latin
America. Construction products experienced volume decreases,
primarily due to the 1995 divestment of the composite material
business and decreases in sales of fire protection products in North
America (due to a declining market) and waterproofing products in
North America (compared to a strong 1995 first quarter that benefited
from a mild winter) and Europe (due to weak economic conditions in
the United Kingdom). These decreases were offset by higher sales of
concrete products in Asia Pacific (caused by a strong construction
market). Container volume decreases were due to decreased sales of
can sealing products in Asia Pacific and closure compounds in Europe,
partially offset by improved sales of can coating products in Latin
America (as a result of continuing market share penetration).
Operating income before taxes increased by 23% in the first quarter
of 1996 as compared to the 1995 first quarter, as cost management
programs initiated in 1995 are beginning to favorably impact
operating income within all regions and product lines. North American
results in the first quarter of 1996 increased, primarily reflecting
improved operating margins and the volume increases in packaging,
offset by the volume decreases in construction products noted above.
European results improved versus the 1995 first quarter, primarily
due to higher sales of silica/adsorbents products (attributable to
strong sales of catalyst carriers which are used by customers to
convert ethylene to ethanol) and in paper industry process chemicals,
as noted above. These favorable results were offset by lower results
in packaging, as lower margins and higher operating expenses offset
the volume increases discussed above. In Asia Pacific, 1996 first
quarter results were flat versus the first quarter of 1995, as the
volume increases in refinery catalysts noted above were offset by
unfavorable results in can sealing products (due to a shortage of
products to be canned as a result of last year's floods in Southeast
Asia). Latin American 1996 first quarter results improved versus the
first quarter of 1995, primarily due to the improved water treatment
chemical sales noted above, improved volumes in packaging and market
share gains within container's coating products.
(2) Statement of Operations:
Other Income
Other income includes interest income, dividends, royalties from
licensing agreements and equity in earnings of affiliated companies.
Interest Expense and Related Financing Costs
Excluding amounts allocated to discontinued operations (as discussed
in Note (c) to the consolidated financial statements in this Report),
interest expense and related financing costs of $18.4 million in the
first quarter of 1996 increased 16% versus the comparable period of
1995. Including amounts allocated to discontinued operations,
interest expense and related financing costs increased 26% in the
first quarter of 1996 over the comparable period of 1995, to $45.2
million, primarily due to higher debt levels.
I-9
Management's Discussion and Analysis of Results of
Operations and Financial Condition (Continued)
See "Financial Condition: Liquidity and Capital Resources" below for
information on borrowings.
Research and Development Expenses
Research and development spending decreased 6% in the first quarter
of 1996 versus the 1995 first quarter, reflecting the cost management
programs discussed above. Research and development spending continues
to be directed toward Grace's core specialty chemicals businesses.
Income Taxes
The effective tax rate was 37.0% in the first quarter of 1996 versus
31.1% in the 1995 first quarter, excluding the 1995 first quarter
charge of $20.0 million pretax ($12.5 million after-tax) for corporate
governance, as discussed above. The higher effective tax rate in the
first quarter of 1996 was primarily due to a reduction in the overall
foreign tax rate in the first quarter of 1995, as the result of a
reassessment of the valuation allowance for certain deferred tax
assets.
Income from Discontinued Operations - Health Care
The following table compares the results for the health care business
for the 1996 first quarter to results for the comparable period of
1995:
W. R. Grace & Co. and Subsidiaries Three Months Ended
Health Care Operating Results March 31,
------------------------------------------------------------------- ------------------------------
Percentage
Dollars in millions 1996 1995 Increase
------------------------------------------------------------------ ----------- ----------- ----------
Sales and revenues $539.7 $491.8 10%
====== ======
Operating income before taxes (i) $ 65.0 $ 64.1 1%
======= =======
(i) The above operating results do not include interest expense
allocated to the discontinued health care business of $26.8
million and $20.1 million for the first quarters of 1996 and
1995, respectively.
Sales and revenues for the first quarter of 1996 increased by 10%
over the comparable period of 1995. These improvements were due to
increases of 12% and 16% in kidney dialysis services and medical
products operations, respectively. The increase in kidney dialysis
services and medical products operations is largely due to the effect
of acquisitions subsequent to the first quarter of 1995, partially
offset by the decision, effective July 1, 1995, to discontinue
recognizing incremental revenue that had previously been recorded
relating to certain dual eligible end stage renal disease patients;
see the discussion below relating to the Omnibus Budget
Reconciliation Act of 1993 (OBRA 93). The number of centers providing
dialysis and related services increased 14%, from 610 at March 31,
1995 to 693 at March 31, 1996 (581 in North America, 61 in Europe, 36
in Latin America and 15 in Asia
I-10
Management's Discussion and Analysis of Results of
Operations and Financial Condition (Continued)
Pacific). The improvements in dialysis services and medical products
operations were partially offset by a 5% decrease in home health care
revenues resulting from a decrease in infusion therapy revenues due
to continued managed care pricing pressure.
Operating income before taxes in the first quarter of 1996 increased
by 1% over the 1995 first quarter. Operating income benefited from
the favorable refinancing of a note payable by Grace's health care
personnel services company, and the phase-out of certain of Grace's
health care-related research programs. Also, operating income of
medical products operations improved due to increased revenues, as
discussed above. These benefits were offset by the effects of OBRA 93
(which reduced revenues without a commensurate decrease in costs) on
kidney dialysis services results, as discussed above, and the
reduction in home health care revenues. Also negatively impacting
operating income were costs incurred in connection with the
investigation by the Office of the Inspector General of the U.S.
Department of Health and Human Services (OIG), as discussed below.
See below for a discussion concerning certain items relating to NMC's
operations and the possible material adverse effects of these items.
OIG Investigative Subpoenas
In October 1995, NMC received five investigative subpoenas from the
OIG. The results of the investigation and its impact, if any, cannot
be predicted at this time. In the event that a U.S. government agency
believes that any wrongdoing has occurred, civil and/or criminal
proceedings could be instituted, and if any such proceedings were to
be instituted and the outcome were unfavorable, NMC could be subject
to fines, penalties and damages or could become excluded from
government reimbursement programs. Any such result could have a
material adverse effect on NMC's financial position or the results of
operations of NMC and Grace. See Note 7 to the consolidated financial
statements in the Company's 1995 Annual Report on Form 10-K for
additional information.
Intradialytic Parenteral Nutrition (IDPN) Therapy
NMC administers IDPN therapy to chronic dialysis patients who suffer
from severe gastrointestinal malfunctions. Since late 1993, Medicare
claims processors have sharply reduced the number of IDPN claims
approved for payment as compared to prior periods. NMC believes that
the reduction in IDPN claims currently being paid by Medicare
represents an unauthorized policy coverage change. Accordingly, NMC
and other IDPN providers are pursuing various administrative and
legal remedies, including administrative appeals, to address this
reduction. In November 1995, NMC filed a complaint in the U.S.
District Court for the Middle District of Pennsylvania seeking a
declaratory judgment and injunctive relief to prevent the
implementation of this policy coverage change.
NMC management believes that its IDPN claims are consistent with
published Medicare coverage guidelines and ultimately will be
approved for payment. Such claims represent substantial accounts
receivable of NMC, amounting to approximately $113.0 million and
$93.0 million as of March 31, 1996 and December 31, 1995,
respectively, and currently increasing at the rate of approximately
$6.0 million per month. If NMC is unable to collect its
I-11
Management's Discussion and Analysis of Results of
Operations and Financial Condition (Continued)
IDPN receivable or if IDPN coverage is reduced or eliminated, depending
on the amount of the receivable that is not collected and/or the nature
of the coverage change, NMC's business, financial position and
results of operations could be materially adversely affected.
In May 1995 the Medicare claims processors circulated a draft
coverage policy which, if implemented in the form proposed, would
have limited or precluded continued coverage of parenteral and
enteral nutrition (PEN) therapies, including IDPN therapy. In April
1996, the Medicare claims processors issued a revised final version
of the new coverage policy, which is expected to become effective for
services billed on and after July 1, 1996. While the new policy
permits continued coverage of IDPN and other PEN therapies, and while
the potential impact of the new policy is subject to further
analysis, NMC believes that the new policy would make it
substantially more difficult to qualify patients for future coverage
by, among other things, requiring certain patients to undergo onerous
and/or invasive tests in order to qualify for coverage. The new
policy would also eliminate all reimbursement for infusion pumps used
to administer IDPN therapy. NMC, together with other interested
parties, plans to seek to effect certain changes in the new policy,
other than with respect to elimination of reimbursement for revenues
from infusion pumps, and NMC is developing changes to its patient
qualification procedures in order to comply with the policy. However,
if NMC is unable to achieve changes in the new policy, if physicians
and patients fail to accept the new qualification procedures and/or
if patients fail to qualify under such procedures, the policy could
significantly reduce the number of patients eligible for Medicare
coverage of IDPN and other PEN therapies which would have a material
adverse effect on NMC's financial position and its results of
operations.
OBRA 93
NMC's business, financial position and results of operations could
also be materially adversely affected by an adverse outcome in the
pending litigation concerning the implementation of certain
provisions of the OBRA 93 relating to the coordination of benefits
between Medicare and employer health plans in the case of certain
dialysis patients. See Note 7 to the consolidated financial
statements in the Company's 1995 Annual Report on Form 10-K for
additional information.
(b) Financial Condition; Liquidity and Capital Resources
During the first quarter of 1996, the net pretax cash used for
Grace's continuing operating activities was $47.7 million, versus
$68.5 million in the 1995 first quarter. The reduction was primarily
due to improved operating results, offset by net cash outflows of
$7.5 million in the first quarter of 1996, reflecting amounts paid
for the defense and disposition of asbestos-related litigation (net
of amounts received from settlements with certain insurance carriers
for asbestos-related litigation, as discussed below), as compared to
a net cash inflow of $69.1 million in the first quarter of 1995. After
giving effect to the net pretax cash (used for)/provided by
operating activities of discontinued operations (including an
increase in the use of operating working capital by NMC in the
first quarter of 1996) and payments of income taxes, the net cash
used for operating activities was $91.3 million in the first quarter
of 1996 versus $62.5 million in the first quarter of 1995.
I-12
Management's Discussion and Analysis of Results of
Operations and Financial Condition (Continued)
Investing activities used $139.8 million of cash in the first quarter
of 1996, largely reflecting capital expenditures of $112.5 million
(more than 70% of which relates to Grace's packaging and catalyst and
other silica-based businesses). Also, investing activities of
discontinued operations for the first quarter of 1996 used $33.8
million (compared to $3.3 million used in the 1995 first quarter),
primarily reflecting the classification of the health care business
as a discontinued operation in the 1995 second quarter. Management
anticipates that the level of capital expenditures in 1996 will
approximate that of 1995.
Net cash provided by financing activities in the first quarter of
1996 was $246.8 million, primarily reflecting an increase in total
debt from December 31, 1995 and proceeds from the exercise of
employee stock options, offset by the payment of $12.4 million of
dividends. Total debt was $2,160.6 million at March 31, 1996, an
increase of $226.8 million from December 31, 1995. Grace's total debt
as a percentage of total capital (debt ratio) increased from 61.1% at
December 31, 1995 to 61.9% at March 31, 1996, primarily due to the
increase in total debt. At March 31, 1996 and December 31, 1995, the
net assets of the discontinued health care business included $210.6
million and $226.7 million of debt, respectively.
Grace expects to receive a substantial amount of cash in 1996 from
the expected distribution from NMC (as discussed in Note (c) to the
consolidated financial statements in this Report), the previously
announced pending sale of the Grace Dearborn water treatment and
process chemicals business, the pending sale of Grace's transgenic
plant business (see discussion below), and, to a lesser extent, funds
generated by operations. Grace expects to apply the cash proceeds
generated by these transactions to the reduction of borrowings, the
repurchase of stock and investments in core businesses. The Company
initiated its previously announced share repurchase program in April
1996.
Also in April 1996, Grace announced that it had entered into a
definitive agreement to sell the transgenic plant business of its
Agracetus subsidiary to the Monsanto Company for $150.0 million in
cash.
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
quarter of 1996, Grace paid $7.5 million for the defense and
disposition of asbestos-related property damage and personal injury
litigation, net of amounts received under settlements with certain
insurance carriers. The balance sheet at March 31, 1996 includes a
receivable due from insurance carriers, a portion of which is subject
to litigation, of $281.5 million. Grace has also recorded notes
receivable of $147.3 million ($136.8 million net of discounts) for
amounts to be received in 1996 to 2001 pursuant to settlement
agreements with certain insurance carriers.
I-13
Management's Discussion and Analysis of Results of
Operations and Financial Condition (Continued)
Although the amounts to be paid in 1996 in respect of
asbestos-related lawsuits and claims cannot be precisely estimated,
Grace expects that it will be required to expend approximately $40.0
million (pretax) in 1996 to defend against 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 defending
against and disposing of asbestos-related 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 continuing 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 quarter of 1996.
For additional information relating to environmental liabilities, see
Note 12 to the consolidated financial statements in the Company's
1995 Annual Report on Form 10-K.
I-14
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) In April 1996, the Company received a formal order of
investigation issued by the Securities and Exchange Commission ("Commission")
directing an investigation into, among other things, whether the Company
violated the federal securities laws by filing periodic reports with the
Commission that contained false and misleading financial information. Pursuant
to this formal order of investigation, the Company has received a subpoena from
the Southeast Regional Office of the Commission requiring the Company to produce
documents relating to reserves (net of applicable taxes) established by the
Company and National Medical Care, Inc., the Company's principal health care
subsidiary ("NMC"), during the period from January 1, 1990 to the date of the
subpoena (the "Covered Period"). The Company believes that all financial
statements filed by the Company with the Commission during the Covered Period,
including the financial statements of NMC included in the NMC Form 10 filed with
the Commission on September 25, 1995, and the consolidated financial statements
of the Company filed in the Company's Annual Report on Form 10-K for the year
ended December 31, 1995 (all of which financial statements, other than unaudited
quarterly financial statements, were covered by unqualified opinions issued by
Price Waterhouse LLP, Grace's independent certified public accountants), have
been fairly
II-1
stated, in all material respects, in conformity with generally accepted
accounting principles. The Company is cooperating with the Commission. The
outcome of this investigation and its impact, if any, on the Company or NMC
cannot be predicted at this time.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. The following are being filed as exhibits to this Report:
-- By-laws of W. R. Grace & Co., as amended;
-- Credit Agreement, dated as of March 27, 1996, among W. R.
Grace & Co.-Conn., W. R. Grace & Co., the several banks parties
thereto and NationsBank, N.A. (South), as agent for such banks;
-- Letter Agreement dated March 29, 1996 between W. R. Grace &
Co. and Constantine L. Hampers;
-- Option Agreement, dated as of May 1, 1995, between W. R. Grace
& Co. and Albert J. Costello, as amended;
-- weighted average number of shares and earnings used in per
share computations;
-- computation of ratio of earnings to fixed charges and combined
fixed charges and preferred stock dividends; and
-- financial data schedule.
(b) Reports on Form 8-K. On February 6, 1996, the Company filed a
Report on Form 8-K relating to an agreement to combine NMC with Fresenius AG's
dialysis business. The Company filed a Report on Form 8-K on February 13, 1996,
relating to
II-2
(a) the announcement of 1995 fourth quarter and full year results and (b) the
Company's receipt of a letter indicating that NMC is a target of a federal grand
jury investigation. On March 6, 1996, the Company filed a Report on Form 8-K
relating to the resignation of Thomas L. Gossage from its Board of Directors. On
March 27, 1996, the Company filed a Report on Form 8-K relating to an agreement
to sell Grace's water treatment and process chemicals business to Betz
Laboratories, Inc. The Company filed a Report on Form 8-K on April 15, 1996,
relating to an agreement to sell the transgenic plant business of its Agracetus
subsidiary to the Monsanto Company for $150 million. The Company also filed a
Report on Form 8-K on May 6, 1996, relating to the announcement of 1996 first
quarter results.
II-3
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: May 15, 1996 By /s/ Peter D. Houchin
--------------------
Peter D. Houchin
Senior Vice President and
Chief Financial Officer
(Acting Principal Accounting Officer)
II-4
W. R. Grace & Co.
Quarterly Report on Form 10-Q
for the quarter ended March 31, 1996
EXHIBIT INDEX
Exhibit No. Description
- - ---------- -----------
3.1 By-laws of W. R. Grace & Co., as amended
4.1 Credit Agreement, dated as of March 27, 1996, among W. R.
Grace & Co.-Conn., W. R. Grace & Co., the several banks parties
thereto and NationsBank, N.A. (South), as agent for such banks
10.1 Letter Agreement dated March 29, 1996 between W. R. Grace &
Co. and Constantine L. Hampers
10.2 Option Agreement, dated as of May 1, 1995, between W. R. Grace
& Co. and Albert J. Costello, as amended
11 Weighted average number of shares and earnings used in per
share computations
12 Computation of ratio of earnings to fixed charges and combined
fixed charges and preferred stock dividends
27 Financial Data Schedule