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 September 30, 1997
Commission File Number 1-12139
W. R. GRACE & CO.
Delaware 65-0654331
(State of Incorporation) (I.R.S. Employer
Identification No.)
One Town Center Road
Boca Raton, Florida 33486-1010
(561) 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
--- ---
74,243,052 shares of Common Stock, $.01 par value, were outstanding
at November 1, 1997.
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 - 11
Item 2. Management's Discussion and Analysis of Results of I - 12 to I - 24
Operations and Financial Condition
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 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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W. R. GRACE & CO. AND SUBSIDIARIES Three Months Ended Nine Months Ended
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) September 30, September 30,
- ---------------------------------------------------------------------------------------------------------------------------------
In millions (except per share amounts) 1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
Sales and revenues................................................... $ 833.1 $ 821.3 $2,460.7 $2,603.2
Other income......................................................... 12.9 8.2 36.5 26.3
---------- ------------ ----------- -----------
TOTAL....................................................... 846.0 829.5 2,497.2 2,629.5
--------- ---------- --------- ---------
Cost of goods sold and operating expenses............................ 499.2 503.9 1,492.4 1,565.7
Selling, general and administrative expenses......................... 163.3 151.6 467.9 546.5
Depreciation and amortization........................................ 47.8 43.4 145.5 134.2
Interest expense and related financing costs......................... 19.2 18.2 58.6 54.9
Research and development expenses.................................... 23.3 22.5 66.9 75.0
Restructuring costs.................................................. -- -- 12.4 53.7
Gain on sales of businesses.......................................... -- -- (103.1) (326.4)
------------ ------------- ---------- ----------
TOTAL....................................................... 752.8 739.6 2,140.6 2,103.6
--------- ---------- --------- ---------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES........................................ 93.2 89.9 356.6 525.9
Provision for income taxes........................................... 34.5 35.5 134.1 192.9
---------- ----------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS........................... 58.7 54.4 222.5 333.0
Income from discontinued operations.................................. 12.4 2,465.5 12.4 2,584.4
---------- --------- ----------- ---------
NET INCOME.................................................. $ 71.1 $2,519.9 $ 234.9 $2,917.4
========= ======== ========= ========
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Primary earnings per share:
Continuing operations......................................... $ .77 $ .58 $ 2.92 $ 3.42
Net income.................................................... $ .93 $ 26.99 $ 3.08 $ 30.02
Fully diluted earnings per share:
Continuing operations......................................... $ .77 $ .58 $ 2.91 $ 3.40
Net income.................................................... $ .93 $ 26.83 $ 3.07 $ 29.76
Dividends declared per common share................................ $ .145 $ .125 $ .415 $ .375
Weighted average shares outstanding................................ 73.7 91.1 73.9 95.2
- ---------------------------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are integral parts of these
statements.
I - 1
W. R. GRACE & CO. AND SUBSIDIARIES NINE MONTHS ENDED
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) SEPTEMBER 30,
- ---------------------------------------------------------------------------------------------------------------------------------
In millions 1997 1996
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OPERATING ACTIVITIES
Income from continuing operations before income taxes................................... $ 356.6 $ 525.9
Reconciliation to cash provided by operating activities:
Depreciation and amortization...................................................... 145.5 134.2
Provision relating to restructuring costs.......................................... 12.4 53.7
Gain on sales of businesses........................................................ (103.1) (326.4)
Changes in assets and liabilities, excluding effect of businesses
acquired/divested and foreign currency exchange:
Increase in notes and accounts receivable, net.................................. (63.6) (158.6)
(Increase)/decrease in inventories.............................................. (13.3) 26.1
Proceeds from asbestos-related insurance settlements............................ 53.3 139.1
Payments made for asbestos-related litigation settlements,
judgments and defense costs.................................................. (88.2) (86.6)
Decrease in accounts payable.................................................... (36.9) (36.4)
Other........................................................................... (30.7) (116.3)
--------- ---------
NET PRETAX CASH PROVIDED BY OPERATING ACTIVITIES
OF CONTINUING OPERATIONS......................................................... 232.0 154.7
Net pretax cash (used for)/provided by operating activities of
discontinued operations.......................................................... (41.0) 68.6
--------- ----------
NET PRETAX CASH PROVIDED BY OPERATING ACTIVITIES................................... 191.0 223.3
Income taxes paid....................................................................... (54.5) (113.8)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES.......................................... 136.5 109.5
--------- ---------
INVESTING ACTIVITIES
Capital expenditures.................................................................... (164.4) (335.3)
Net proceeds from divestments........................................................... 684.8 2,802.9
Businesses acquired in purchase transactions, net of
cash acquired and debt assumed..................................................... (16.3) (33.8)
Net investing activities of discontinued operations..................................... (70.7) (181.2)
Other ................................................................................ 19.5 25.3
--------- ----------
NET CASH PROVIDED BY INVESTING ACTIVITIES.......................................... 452.9 2,277.9
--------- --------
FINANCING ACTIVITIES
Dividends paid.......................................................................... (30.5) (36.0)
Repayments of borrowings having original maturities in excess of
three months....................................................................... (105.7) (513.6)
Increase in borrowings having original maturities in excess of
three months....................................................................... .5 .1
Net repayments of borrowings having original maturities of
three months or less............................................................... (165.1) (512.7)
Stock options exercised................................................................. 49.1 52.0
Net financing activities of discontinued operations..................................... -- (198.8)
Purchase of treasury stock.............................................................. (335.9) (727.1)
Other ................................................................................ -- .2
--------- ------------
NET CASH USED FOR FINANCING ACTIVITIES............................................. (587.6) (1,935.9)
--------- --------
Effect of exchange rate changes on cash and cash equivalents............................ (3.9) (.5)
--------- ------------
(DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS................................... $ (2.1) $ 451.0
========= ========
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The Notes to Consolidated Financial Statements are integral parts of these
statements.
I - 2
W. R. GRACE & CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, December 31,
In millions (except share data) 1997 1996
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ASSETS
CURRENT ASSETS
Cash and cash equivalents............................................................... $ 66.2 $ 68.3
Notes and accounts receivable, net...................................................... 616.0 831.4
Inventories............................................................................. 370.0 376.1
Net assets of discontinued operations................................................... 26.8 297.4
Deferred income taxes................................................................... 116.4 183.9
Other current assets.................................................................... 26.1 17.8
--------- ---------
TOTAL CURRENT ASSETS............................................................... 1,221.5 1,774.9
Properties and equipment, net of accumulated depreciation and
amortization of $1,489.6 (December 31, 1996 - $1,436.6)............................ 1,771.5 1,871.3
Goodwill, less accumulated amortization of $14.4
(December 31, 1996 - $18.6)........................................................ 37.0 40.6
Asbestos-related insurance receivable................................................... 260.4 296.3
Deferred income taxes................................................................... 309.2 309.2
Other assets............................................................................ 600.4 653.5
--------- ---------
TOTAL ASSETS....................................................................... $4,200.0 $4,945.8
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt......................................................................... $ 41.5 $ 315.2
Accounts payable........................................................................ 218.5 274.7
Income taxes............................................................................ 113.1 123.3
Other current liabilities............................................................... 676.4 773.9
--------- ---------
TOTAL CURRENT LIABILITIES.......................................................... 1,049.5 1,487.1
Long-term debt.......................................................................... 1,062.7 1,073.0
Deferred income taxes................................................................... 43.5 43.5
Noncurrent liability for asbestos-related litigation.................................... 775.5 859.1
Other liabilities....................................................................... 788.8 850.7
--------- ---------
TOTAL LIABILITIES.................................................................. 3,720.0 4,313.4
--------- ---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock issued, par value $.01..................................................... .8 .8
Paid in capital......................................................................... 593.1 524.1
Retained earnings....................................................................... 377.0 172.6
Cumulative translation adjustments...................................................... (154.0) (64.6)
Deferred compensation trust, at market.................................................. (5.2) --
Treasury stock, at cost: 6.2 million common shares at
September 30, 1997................................................................. (331.7) (.5)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY......................................................... 480.0 632.4
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY......................................... $4,200.0 $4,945.8
========= =========
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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, except per share amounts)
1. BASIS OF PRESENTATION
The interim consolidated financial statements in this Report are unaudited and
should be read in conjunction with the consolidated financial statements in
the Company's Annual Report on Form 10-K for the year ended December 31, 1996
(1996 Form 10-K). The interim consolidated 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 were 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 and as required with respect to
discontinued operations.
The results of operations for the three- and nine-month interim periods ended
September 30, 1997 are not necessarily indicative of the results of operations
for the fiscal year ending December 31, 1997.
2. ASBESTOS AND RELATED INSURANCE LITIGATION
Grace is a defendant in property damage and personal injury 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 43,700 asbestos-related lawsuits at
September 30, 1997 (17 involving claims for property damage and the remainder
involving approximately 105,800 claims for personal injury), compared to
approximately 41,500 lawsuits at December 31, 1996 (31 involving claims for
property damage and the remainder involving approximately 91,500 claims for
personal injury).
Property Damage Litigation
Through September 30, 1997, 139 asbestos property damage cases were dismissed
without payment of any damages or settlement amounts; judgments were entered
in favor of Grace in nine cases (excluding cases settled following appeals of
judgments in favor of Grace); judgments were entered in favor of the
plaintiffs in seven cases (none of which is on appeal) for a total of $60.3;
and 195 property damage cases were settled for a total of $476.6. Property
damage case activity for the nine months ended September 30, 1997 was as
follows:
- -------------------------------------------------------------------------------
Cases outstanding, December 31, 1996............................ 31
Settlements..................................................... (9)
Dismissals...................................................... (4)
Judgment in favor of Grace...................................... (1)
----
Cases outstanding, September 30, 1997...................... 17
===
- -------------------------------------------------------------------------------
Personal Injury Litigation
Through September 30, 1997, approximately 12,600 asbestos personal injury
lawsuits involving approximately 29,100 claims were dismissed without payment
of any damages or settlement amounts (primarily on the basis that Grace
products were not involved), and approximately 34,100 lawsuits involving
approximately 71,300 claims were disposed of for a total of $212.1. Personal
injury claim activity for the nine months ended September 30, 1997 was as
follows:
I - 4
W. R. GRACE & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)
- -------------------------------------------------------------------------------
Claims outstanding, December 31, 1996.......................... 91,511
New claims..................................................... 17,852
Claims under amended complaints................................ 3,261
Settlements.................................................... (5,009)
Dismissals..................................................... (1,767)
Judgments...................................................... (5)
--------
Claims outstanding, September 30, 1997.................... 105,843
========
- -------------------------------------------------------------------------------
Asbestos-Related Liability
Based upon and subject to the factors discussed in Note 2 to the consolidated
financial statements in the 1996 Form 10-K, Grace estimates that its probable
liability with respect to the defense and disposition of asbestos property
damage and personal injury cases and claims was as follows at September 30,
1997 and December 31, 1996:
- -----------------------------------------------------------------------------------------------------------
SEPTEMBER 30, December 31,
1997(1) 1996(1)
- -----------------------------------------------------------------------------------------------------------
Current liability for asbestos-related litigation(2).................... $135.0 $135.0
Noncurrent liability for asbestos-related litigation.................... 775.5 859.1
------- -------
Total asbestos-related liability(3)................................ $910.5 $994.1
====== ======
- -----------------------------------------------------------------------------------------------------------
(1) Reflects property damage and personal injury cases and claims pending at
September 30, 1997 and December 31, 1996, respectively, as well as
personal injury claims expected to be filed through 2001.
(2) Included in "Other current liabilities" in the Consolidated Balance Sheet.
(3) Excludes one property damage case as to which liability is not yet
estimable because Grace has not yet been able to obtain sufficient
information through discovery proceedings.
Asbestos-Related Insurance Receivable
Grace previously purchased insurance policies with respect to its
asbestos-related lawsuits and claims. The following table displays the
activity in Grace's notes receivable from insurance carriers and
asbestos-related insurance receivable during the nine months ended September
30, 1997:
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NOTES RECEIVABLE
Notes receivable from insurance carriers at December 31, 1996, net of discount of $7.4(1)................. $ 48.5
Proceeds from asbestos-related insurance settlements...................................................... (17.4)
Amortization, net......................................................................................... 1.9
---------
Notes receivable from insurance carriers at September 30, 1997, net of discount of $5.5(2)........... $ 33.0
---------
INSURANCE RECEIVABLE
Asbestos-related insurance receivable at December 31, 1996(3)............................................. $ 331.3
Proceeds from asbestos-related insurance settlements...................................................... (35.9)
--------
Asbestos-related insurance receivable at September 30, 1997(3)....................................... $ 295.4
--------
Total amounts due from insurance carriers............................................................ $ 328.4
========
- ---------------------------------------------------------------------------------------------------------------------------------
(1) Classified in the December 31, 1996 Consolidated Balance Sheet as $17.2
in "Notes and accounts receivable, net" and $31.3 in "Other assets."
(2) Classified in the September 30, 1997 Consolidated Balance Sheet as $15.6
in "Notes and accounts receivable, net" and $17.4 in "Other assets."
(3) $35.0 of the asbestos-related insurance receivable is classified in
"Notes and accounts receivable, net" in the December 31, 1996 and
September 30, 1997 Consolidated Balance Sheets.
I - 5
W. R. GRACE & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)
Insurance Litigation
Grace's ultimate exposure with respect to its asbestos-related cases 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.
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 property damage and personal
injury cases and claims pending at September 30, 1997, as well as personal
injury claims expected to be filed in the foreseeable future. Consequently,
Grace believes that the resolution of its asbestos-related litigation will not
have a material adverse effect on its consolidated financial position.
For additional information, see Note 2 to the consolidated financial
statements in the 1996 Form 10-K and "Management's Discussion and Analysis of
Results of Operations and Financial Condition -- Financial Condition --
Asbestos-Related Matters" in this Report.
3. PROPOSED PACKAGING TRANSACTION
In August 1997, Grace and Sealed Air Corporation (Sealed Air) entered into a
definitive agreement to combine Grace's flexible packaging business with the
business of Sealed Air to create a new publicly owned company, which will
retain the name "Sealed Air Corporation" (New Sealed Air). The combination
would follow (a) the borrowing of approximately $1,200.0 (subject to
adjustment) by Grace, (b) the contribution of the proceeds of the borrowing by
Grace to a new company, which will retain the name "W. R. Grace & Co." and
will own and operate Grace's specialty chemicals businesses (New Grace), and
(c) the distribution by Grace of one share of New Grace common stock for each
outstanding Grace share. As a result of these transactions, the holders of
Grace common stock would own 100% of New Grace (i.e., the specialty chemicals
businesses, consisting of catalysts and silica-based products, construction
chemicals and specialty building materials, and container sealants and
coatings), as well as New Sealed Air common stock and convertible preferred
stock constituting approximately 63% of the equity of New Sealed Air. New
Grace will use the $1,200.0 contribution to repay substantially all of its
debt, and New Sealed Air will remain liable under the $1,200.0 borrowing. The
completion of these transactions is subject to various conditions (including
approval by the shareholders of Grace and Sealed Air) and is expected to occur
in the first quarter of 1998. The transactions are expected to be tax-free,
for U.S. federal income tax purposes, to Grace and its shareholders.
I - 6
W. R. GRACE & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)
4. ACQUISITIONS AND DIVESTMENTS
Acquisitions
In April 1997, Grace purchased all of the shares of capital stock of
Schurpack, Inc. (Schurpack), a manufacturer of flexible food packaging located
in St. Joseph, Missouri. Schurpack, with 1996 sales of approximately $20.0, is
a leading manufacturer of plastic laminate packaging materials for the
institutional and retail cook-in market segment. Schurpack also co-extrudes
and converts film for food and non-food applications.
In July 1996, Grace completed the acquisition of Cypress Packaging, Inc.
(Cypress), a U.S. manufacturer of flexible packaging, primarily for the retail
pre-cut produce market segment. In August 1996, Grace acquired Bayem S.A. de
C.V. (Bayem), a Mexican manufacturer of can coatings and closure sealants for
the rigid container industry.
Divestments
In May 1997, Grace completed the sale of its specialty polymers business to
National Starch and Chemical Company for $148.0, subject to adjustment. The
sales and revenues of this business for the period from January through May 1,
1997 (the date of sale) were $24.8 ($17.8 and $53.9 for the three and nine
months ended September 30, 1996, respectively); its financial position and
results of operations were not significant to Grace. The sale of this business
resulted in pretax and after-tax gains of $103.1 and $63.0 ($.85 per common
share), respectively, in continuing operations.
In June 1996, Grace sold its water treatment and process chemicals business
(Dearborn). The sales and revenues of this business for the period from
January through June 30, 1996 (the date of sale) were $201.2; its financial
position and results of operations were not significant to Grace. The sale of
this business and the biopesticides business (sold in the second quarter of
1996) resulted in pretax and after-tax gains of $326.4 and $210.1 ($2.20 per
common share), respectively, in continuing operations.
5. DISCONTINUED OPERATIONS
In February 1997, Grace sold its cocoa business to Archer-Daniels-Midland
Company (ADM) for total proceeds of $470.0 (inclusive of debt assumed by the
buyer), subject to adjustment. The pretax and after-tax effects of the
divestment were consistent with prior estimates and were charged against
previously established reserves. In October 1997, ADM paid Grace an additional
$7.9 (including $.4 of interest income) in settlement of the purchase price
adjustment. In anticipation of this settlement, in the third quarter of 1997
Grace reversed previously recorded provisions of $12.4 (net of an applicable
tax effect of $6.6), in discontinued operations.
I - 7
W. R. GRACE & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)
In the fourth quarter of 1996, Grace classified its thermal and emission
control systems business (TEC Systems) as a discontinued operation. In August
1997, Grace sold TEC Systems to Sequa Corporation for total proceeds of $18.4,
subject to adjustment. The pretax and after-tax loss on this sale was
consistent with prior estimates and was charged against previously established
reserves.
Grace classified its health care business as a discontinued operation in the
second quarter of 1995 and disposed of that business in 1996.
Results of these discontinued operations that were not charged against
previously established reserves, the reversal of previously recorded
provisions, and the gain on the May 1996 sale of Grace's transgenic plant
business, were as follows:
- ---------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
Sales and revenues.............................................. $ -- $ 545.5 $ -- $1,703.6
---------- -------- ---------- --------
(Loss)/income from operations before taxes(1)................... $ -- $ (16.2) $ -- $ 54.5
Income tax provision............................................ -- 2.0 -- 33.2
----------- ----------- ----------- -----------
Total Operating Results.................................... $ -- $ (18.2) $ -- $ 21.3
---------- ---------- ---------- ----------
Gain on separation/sale of businesses........................... 19.0 2,473.7 19.0 2,602.7
Provision for/(benefit from) income taxes on
separation/sale of businesses.............................. 6.6 (10.0) 6.6 39.6
---------- ---------- --------- -----------
Total income from discontinued operations.................. $ 12.4 $2,465.5 $ 12.4 $2,584.4
======== ======== ======= ========
- ---------------------------------------------------------------------------------------------------------------------------------
(1) Reflects interest expense allocated to the health care segment of $25.1
and $76.3 for the three and nine months ended September 30, 1996,
respectively, based on the ratio of the net assets of the health care business
compared to Grace's total capital.
For the three and nine months ended September 30, 1997, the operating results
of TEC Systems, the cocoa business and other discontinued operations have been
charged against previously established reserves and, therefore, are not
reflected in the Consolidated Statement of Operations.
I - 8
W. R. GRACE & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)
The components of the net assets of Grace's discontinued operations (excluding
intercompany assets) are as follows:
- ---------------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, December 31,
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
Current assets.......................................................................... $11.7 $360.5
Properties and equipment, net........................................................... 4.6 207.2
Investments in and advances to affiliated companies..................................... 12.1 12.1
Other assets............................................................................ 1.1 65.1
------- -------
Total assets....................................................................... $29.5 $644.9
----- ------
Current liabilities..................................................................... $ 1.7 $262.8
Other liabilities....................................................................... 1.0 84.7
------- --------
Total liabilities.................................................................. $ 2.7 $347.5
------ ------
Net assets......................................................................... $26.8 $297.4
===== ======
- ---------------------------------------------------------------------------------------------------------------------------------
For additional information, see Note 6 to the consolidated financial
statements in the 1996 Form 10-K.
6. RESTRUCTURING COSTS
As discussed in Note 4 to the consolidated financial statements in the 1996
Form 10-K, Grace began implementing a worldwide program in 1995 focused on
streamlining processes and reducing general and administrative expenses,
factory administration costs and noncore corporate research and development
expenses. As previously reported, Grace has continued to implement additional
cost reductions and efficiency improvements beyond those initiated in 1995, as
its businesses have further evaluated and reengineered their operations. As a
result of these evaluations, in the second quarters of 1997 and 1996, Grace
recorded pretax charges of $12.4 ($8.0 after-tax) and $53.7 ($32.4 after-tax),
respectively, principally related to the restructuring of its packaging
business. The 1997 charge primarily related to the restructuring of the
packaging business from a worldwide group of independent regional units into
an integrated global organization, and was primarily comprised of employee
termination benefits. The 1996 charge primarily related to the restructuring
of Grace's European packaging business and consisted of costs related to
employee termination benefits and lease termination costs.
I - 9
W. R. GRACE & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)
7. INVENTORIES
The components of Grace's inventories are as follows:
- ---------------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, December 31,
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
Raw materials......................................................................... $ 97.3 $ 100.9
In process............................................................................ 80.8 67.6
Finished products..................................................................... 169.0 179.0
General merchandise................................................................... 69.5 73.4
Less: Adjustment of certain inventories to a
last-in/first-out (LIFO) basis................................................... (46.6) (44.8)
----------- -----------
$ 370.0 $ 376.1
========= =========
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
8. OTHER ASSETS
The components of Grace's other assets are as follows:
- ---------------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, December 31,
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
Prepaid pension costs................................................................. $ 280.3 $ 275.1
Long-term receivables, less allowance of $19.9
(December 31, 1996 - $42.7)...................................................... 129.0 152.9
Deferred charges...................................................................... 109.0 102.4
Other................................................................................. 82.1 123.1
----------- ----------
$ 600.4 $ 653.5
========= =========
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
9. SHAREHOLDERS' EQUITY
During the first quarter of 1997, the Company substantially completed the
share repurchase program initiated in 1996 by acquiring 6,306,300 additional
shares of its common stock for $335.9, or an average price of $53.26 per
share. For additional information, see Note 13 to the consolidated financial
statements in the 1996 Form 10-K.
In 1997, Grace established a trust to fund certain deferred employee incentive
compensation and nonemployee director compensation and benefits. The shares
held in the trust are valued at the closing market price at the end of each
reporting period. At September 30, 1997, 71,161 shares were held in the trust.
I - 10
W. R. GRACE & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)
10. EARNINGS PER SHARE
In the first quarter of 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share," which establishes new standards for computing and presenting earnings
per share effective December 31, 1997. At December 31, 1997, all prior periods
will be restated to reflect the new basic and diluted earnings per share
amounts required by SFAS No. 128. Had the Company followed the methodology
prescribed by SFAS No. 128 for the three and nine months ended September 30,
1997, earnings per share (EPS) for those periods would have been as follows:
- ---------------------------------------------------------------------------------------------------------------------------------
Actual Pro Forma
Three Months Ended September 30, Three Months Ended September 30,
1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
Primary EPS $ .93 $26.99 Basic EPS $ .97 $27.66
====== ====== ======= ======
Fully diluted EPS $ .93 $26.83 Diluted EPS $ .93 $26.99
====== ====== ======= ======
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Actual Pro Forma
Nine Months Ended September 30, Nine Months Ended September 30,
1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
Primary EPS $3.08 $30.02 Basic EPS $ 3.18 $30.64
===== ====== ====== ======
Fully diluted EPS $3.07 $29.76 Diluted EPS $ 3.08 $30.02
===== ====== ====== ======
- ---------------------------------------------------------------------------------------------------------------------------------
11. YEAR 2000 COMPUTER SYSTEMS COMPLIANCE
Grace has made and will continue to make certain expenditures to ensure that
its software systems and applications continue to function properly in and
after 2000. These expenditures have not been and are not anticipated to be
material to Grace's financial position or results of operations.
I - 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
REVIEW OF OPERATIONS
OVERVIEW
Grace is one of the world's leading packaging and specialty chemicals
companies. Grace's principal businesses are flexible packaging and container
sealants and coatings (Grace Packaging); catalysts and silica-based products
(Grace Davison); and construction chemicals and specialty building materials
(Grace Construction Products).
Excluding divested businesses, sales and revenues increased 3.7% for the 1997
third quarter and 3.8% for the nine months ended September 30, 1997 over the
comparable periods of 1996. Including the divested businesses, sales and
revenues increased 1.4% for the third quarter of 1997 over the third quarter
of 1996 and decreased 5.5% for the nine months ended September 30, 1997
compared to the nine months ended September 30, 1996. Pretax operating income
from continuing operations was $108.0 million for the 1997 third quarter, an
increase of .7% versus the 1996 third quarter. As noted in the table below,
pretax income from continuing operations for the nine months ended September
30, 1997 and 1996 was affected by various special items. Excluding these
special items, Grace's pretax operating income was $317.8 million for the nine
months ended September 30, 1997, an increase of 6.0% over the same period in
1996. Pretax income from continuing operations was $93.2 million for the third
quarter of 1997, a 3.7% increase compared to the 1996 third quarter, and was
$356.6 million for the nine months ended September 30, 1997, a 32.2% decrease
compared to the nine months ended September 30, 1996. Pretax operating results
for the three and nine months ended September 30, 1996 have been restated to
reflect the classification of certain businesses as discontinued operations.
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PRETAX OPERATING RESULTS - CONTINUING OPERATIONS Three Months Ended Nine Months Ended
(In millions) September 30, September 30,
1997 1996 1997 1996
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Sales and revenues, excluding divested businesses.......................... $833.1 $803.5 $2,435.9 $2,347.4
Sales and revenues of divested businesses(1)............................... -- 17.8 24.8 255.8
---------- -------- ----------- ----------
Sales and revenues................................................ $833.1 $821.3 $2,460.7 $2,603.2
====== ====== ======== ========
Operating income, excluding special items and divested businesses.......... $108.0 $106.5 $ 314.0 $ 294.8
Operating income of divested businesses(1)................................. -- .8 3.8 4.9
----------- ------------ ------------ ------------
Operating income before special items............................. $108.0 $107.3 $ 317.8 $ 299.7
Special items:
Gain on sales of businesses........................................... -- -- 103.1 326.4
Restructuring costs................................................... -- -- (12.4) (53.7)
----------- ----------- ----------- -----------
Operating income from continuing operations....................... $108.0 $107.3 $ 408.5 $ 572.4
Other (expense)/income:
Interest expense and related financing costs.......................... (19.2) (18.2) (58.6) (54.9)
Other income, net..................................................... 4.4 .8 6.7 8.4
--------- ----------- ------------ ------------
Income from continuing operations................................. $ 93.2 $ 89.9 $ 356.6 $ 525.9
======= ====== ========= =========
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(1) Primarily reflects Grace's specialty polymers business, divested in May
1997, and Grace's water treatment and process chemicals business,
divested in June 1996.
I - 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
The following discussion includes projections and/or other "forward-looking"
information. Grace is subject to risks and other uncertainties that could
cause its actual results to differ materially from any such projections or
that could cause other forward-looking information to prove incorrect. For a
discussion of such risks and uncertainties, see "Introduction and Overview --
Projections and Other Forward-Looking Information" in Item 1 of the 1996 Form
10-K.
SALES AND REVENUES
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SALES AND REVENUES (excluding divested businesses) Three Months Ended September 30, % CHANGE
(In millions) 1997 1996 1997 VS. 1996
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Grace Packaging......................................... $528.2 $506.1 4.4%
Grace Davison........................................... 175.9 177.7 (1.0)
Grace Construction Products............................. 128.9 119.1 8.2
Other................................................... .1 .6 (83.3)
---------- ----------
Sales and revenues.................................. $833.1 $803.5 3.7%
====== ======
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SALES AND REVENUES (excluding divested businesses) Nine Months Ended September 30, % CHANGE
(In millions) 1997 1996 1997 VS. 1996
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Grace Packaging......................................... $1,548.8 $1,474.5 5.0%
Grace Davison........................................... 526.0 553.5 (5.0)
Grace Construction Products............................. 359.7 317.6 13.3
Other................................................... 1.4 1.8 (22.2)
------------ ------------
Sales and revenues.................................. $2,435.9 $2,347.4 3.8%
======== ========
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As noted above, sales and revenues (excluding divested businesses) increased
3.7% for the three months and 3.8% for the nine months ended September 30,
1997 over the same periods in 1996. Excluding unfavorable currency translation
variances estimated at 4.9% for the three months and 3.7% for the nine months
ended September 30, 1997, sales and revenues increased by an estimated 8.6%
and 7.5%, respectively, over the comparable 1996 periods. The following is a
discussion of the sales and revenues of Grace's product lines.
GRACE PACKAGING
Sales and revenues of $528.2 million and $1,548.8 million for the three and
nine months ended September 30, 1997, respectively, increased 4.4% and 5.0%,
respectively, over the comparable 1996 periods. The sales increases resulted
from favorable volume variances and, to a lesser degree, favorable
price/product mix variances. The increases were partially offset by the effect
of a strengthening dollar against foreign currencies, estimated at 5.1% and
4.0%, respectively. Grace Packaging sales volume in 1997 was positively
affected by the July 1996 acquisition of Cypress, a leading supplier of
plastic packaging materials for the retail pre-cut produce market segment, the
August 1996 acquisition of Bayem, a Mexican producer of can coatings and
closure sealants for the rigid container industry, and the April 1997
acquisition of Schurpack, a U.S. manufacturer of plastic laminate packaging
materials for the institutional and retail cook-in market segment. These
acquisitions accounted for approximately 33% and 34% of the overall sales
increases for the 1997 third quarter and first nine months, respectively. 1997
third quarter and year-to-date sales also increased due to the consolidation
in January 1997 of a flexible packaging joint venture accounted for under the
equity method in 1996. In addition to these acquisitions, Grace Packaging
experienced sales growth within its product groups, as described below (in all
cases excluding the effects of currency translation).
I - 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
Bag sales increased across all geographic regions for the three and nine
months ended September 30, 1997 over the comparable prior-year periods.
Volumes increased in North America as a result of sales of fresh red meat
(FRM) bags to new customers and the continued penetration of TBG(TM) boneguard
packaging products into the fresh beef segment. Third quarter 1997 FRM bag
sales also were favorably impacted within the boneless beef segment by market
share gains resulting from patent litigation among Grace's competitors
(however, Grace cannot predict whether or to what extent these market share
gains are permanent). In addition to the volume increases noted above, 1997
third quarter and year-to-date sales increased as a result of price increases
in North America that went into effect during the latter part of the second
quarter. The year-to-date increases were moderately offset by softness in the
North American pork market, reflecting reduced slaughter rates stemming from
1996 livestock reductions caused by higher prices for corn and other feeds; in
the third quarter of 1997, slaughter rates improved as corn prices stabilized
and livestock numbers returned to more normal levels. European bag sales for
the three and nine months ended September 30, 1997 increased over the
comparable periods of 1996, as FRM sales (primarily in the U.K. and France)
recovered due to the abatement of consumer fears associated with publicity
surrounding bovine spongiform encephalopathy - commonly referred to as "mad cow
disease." Strong sales in the cheese and processed meat segments in
northeastern Europe (primarily Poland and Russia) continued through the 1997
third quarter. The increase in cheese sales was primarily due to a milk
shortage that negatively impacted 1996 sales. Additionally, substantial growth
in Russian domestic sales, due to an improving economy, drove large exports of
cheese from Poland to the Russian market. The processed meat increase was
primarily due to the continued modernization of food distribution
infrastructures in northeastern Europe. Volumes in Latin America increased due
to the growing acceptance of boxed beef packaging (primarily in Brazil), and
cheese sales increased as a mild winter allowed more milk production.
Additionally, pork bag sales to Mexican producers for export to Asia Pacific
increased in the 1997 third quarter as a result of an outbreak of foot and
mouth disease in Taiwanese and other Asia Pacific pork herds. Bag sales
volumes in Asia Pacific increased as a result of continued strong demand in
the Australian beef and lamb markets. These increases were partially offset by
volume decreases in Japan due to a decline in beef consumption, price
decreases in Japan as a result of competition, and a decrease in chilled pork
bag sales in Taiwan due to the outbreak of foot and mouth disease, as
discussed above.
Laminate sales increased 15.3% for the three months and 10.8% for the nine
months ended September 30, 1997 compared to the 1996 periods, primarily due to
increases in North America and Latin America. In North America, volumes
improved as a result of increased customer acceptance of flexible packaging
for liquid products, as well as the Schurpack acquisition discussed above.
Additionally, the 1997 third quarter benefited from increased sales to an
existing customer. Further, vacuum skin packaging (VSP) sales grew over the
third quarter of 1996, primarily due to an increased number of VSP machines
being placed in service and an increase in VSP marketing efforts. Sales growth
in Latin America resulted from increased demand for cook-in and food service
packaging for processed and prepared foods.
I - 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
Film sales for the three and nine months ended September 30, 1997 increased in
all regions as compared to the 1996 periods. In North America, film sales
increased as a result of the introduction of thinner gauge, high-performance
films for industrial and consumer goods applications, as well as a price
increase that took effect during the second quarter of 1997. In Latin America,
film sales increased, primarily due to strong volumes resulting from a
strengthening of distribution channels. In Europe, film sales increased during
the nine-month period due to the continued success of central packaging
programs for FRM, poultry and fish (primarily in Italy and the U.K.),
partially offset by a decline in bakery market sales due to pricing
competition.
Container sealants and coatings sales increased 2.0% for the three months and
3.4% for the nine months ended September 30, 1997 compared to the same periods
in 1996. In Latin America, volumes increased as a result of improved market
penetration of can coating products, primarily due to the Bayem acquisition
discussed above. In Asia Pacific, third quarter volumes increased as a result
of higher volumes in can sealants in the Philippines (due to increased market
demand for canned fish and meat) and higher volumes in China (due to market
share gains, as a customer began using Grace coatings). However, Asia Pacific
volumes for the nine months ended September 30, 1997 were unfavorable to the
comparable 1996 period, primarily due to the depletion of customers' excess
inventory in China, weather conditions that adversely impacted beverage
consumption, a decline in market demand due to the depressed Japanese economy
and the increased penetration of alternative forms of packaging, such as
plastic and glass. The overall 1997 third quarter and year-to-date increases
for container sealants and coatings sales were limited by unfavorable volume
variances in Europe, primarily due to an unseasonably cool spring and summer,
which resulted in decreased beverage consumption. Additionally, two European
customers reverted to manufacturing their own closure sealants during 1997.
These decreases were partially offset by increased shipments of new products
using oxygen scavenging technology; the oxygen scavenging sealants market for
bottled beer continues to gain momentum, although sales are still at a
moderate level.
GRACE DAVISON
Sales and revenues of catalysts and silica-based products declined 1.0% for
the three months and 5.0% for the nine months ended September 30, 1997,
compared to the same periods in 1996. Excluding unfavorable currency
translation variances estimated at 6.5% for the three months and 4.6% for the
nine months ended September 30, 1997, sales and revenues increased 5.5% and
decreased .4%, respectively, versus the 1996 periods. Volume variances
favorably impacted sales and revenues by an estimated 12.7% for the three
months and 7.1% for the nine months ended September 30, 1997, offset by
unfavorable price/mix variances estimated at 7.2% for the three months and
7.5% for the nine months. A discussion of product group results follows (in
all cases excluding the effect of currency translation).
I - 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
Fluid cracking catalyst (FCC) sales increased 2.2% for the three months ended
September 30, 1997 compared to the same period in 1996, and increased 10.2%
over the second quarter of 1997, due to increases in volumes in both North
America and Europe, partially offset by the pricing pressures discussed below.
Volumes in North America rose due to record refinery utilization, while
increased volumes in Europe were due to the addition of two new customers in
September. Volumes in Asia Pacific were below the comparable 1996 periods, but
are expected to increase in the final quarter of 1997 due to the addition of a
new customer late in the third quarter.
FCC sales decreased 8.0% for the nine months ended September 30, 1997 compared
to the same period in 1996. The factors contributing to the decrease were
price reductions in all geographic areas and volume reductions in Europe and
Asia Pacific. Competitive pricing pressures, which began in the third quarter
of 1996, appear to have begun to lessen in 1997 in North America and Europe,
but continue in Asia Pacific. Volume reductions were primarily caused by a
large number of refinery turnarounds in the first quarter of 1997, a large
order to the Middle East in the second quarter of 1996, the refining of
increased amounts of "sweet" crude oil (which requires less fluid cracking
catalysts) in the first six months of 1997, and the loss of two customers in
Asia Pacific. These decreases were partially offset by volume increases in
North America compared to the same period in 1996, primarily due to the record
refinery utilization rates discussed above.
Silica/adsorbent sales increased 9.4% for the three months and 6.9% for the
nine months ended September 30, 1997 compared to the same periods in 1996 due
to volume increases in all geographic regions. North America experienced
volume increases in adsorbents as a result of large orders placed by two
customers; Europe experienced increased sales of coatings and gels for paint
and plastics; and Asia Pacific was favorably impacted by sales generated by
Grace's new silica plant in Kuantan, Malaysia (reflecting the plant's status
as an approved supplier for an increasing number of Grace's customers).
Increased volumes were partially offset by unfavorable price/mix variances in
North America, Europe and Asia Pacific.
I - 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
Polyolefin catalyst sales increased 4.0% for the three months and 10.5% for
the nine months ended September 30, 1997 compared to the same periods of 1996.
The increase in the three months was due to favorable price/mix variances; the
increase in the nine months was due to favorable price/mix and volume
variances. The volume increase was primarily due to the addition of two new
customers in the second quarter and the start-up of another customer's new
petrochemical refinery in Asia Pacific in September; the start-up of this
refinery is expected to have a positive impact on sales and revenues during
the remainder of 1997 as compared to the same period in 1996. The strength of
the plastics industry continues to benefit the polyolefin catalyst business.
GRACE CONSTRUCTION PRODUCTS
Grace Construction Products continued to perform exceptionally well, achieving
record sales for the 1997 third quarter of $128.9 million, an 8.2% increase
over the prior-year third quarter. Sales for the first nine months of 1997
reached $359.7 million, a 13.3% increase over the prior-year period. For the
third quarter and first nine months of 1997, each region and global product
line grew in sales, driven by volume increases. Higher volumes of construction
chemicals accounted for approximately half of the increase, with increased
volumes of specialty building materials contributing significantly to the
remainder of the growth. New value-added products, primarily water-reducing
and anti-corrosion concrete admixtures and waterproofing products, showed
strong sales growth mainly as a result of increasing market acceptance.
Sales in North America increased by 9.8% for the three months and 16.2% for
the nine months ended September 30, 1997 over the 1996 periods, contributing
approximately 75% of the overall sales increase in the 1997 third quarter and
first nine months. A mild winter in the northeastern U.S., which allowed
greater than normal construction activity, drove the increase in the first
four months of the year, while market penetration of new value-added products
(discussed above), the overall strength of the U.S. economy, and market share
gains contributed to the sales increase throughout the nine-month period.
Sales in Asia Pacific increased by 6.7% in the 1997 third quarter and 8.0% in
the nine months over the 1996 periods, despite unfavorable currency
translation variances in the third quarter estimated at 5.4%. In the 1997
third quarter, sales increases slowed due to currency devaluations and
economic sluggishness in certain developing countries in Southeast Asia.
However, strong sales in other Asia Pacific countries produced a sales
increase over the prior-year third quarter, and strong sales growth in all of
Asia Pacific earlier in the year contributed to the year-to-date increase. In
the 1997 third quarter, Europe also experienced unfavorable currency
translation variances, estimated at 3%, but sales still increased by 3.8% in
the 1997 third quarter and 6.3% in the nine months over the comparable 1996
periods. Volume increases in specialty building materials drove sales in
Europe after construction activity rebounded from weather-related delays at
the beginning of the year.
I - 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
OPERATING RESULTS
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OPERATING INCOME (In millions) Three Months Ended September 30, % CHANGE
(excluding special items and divested businesses) 1997 1996 1997 VS. 1996
- ---------------------------------------------------------------------------------------------------------------------------------
Grace Packaging................................................. $ 75.0 $ 70.3 6.7%
Grace Davison................................................... 19.6 22.8 (14.0)
Grace Construction Products..................................... 14.4 13.4 7.5
Other........................................................... (1.0) -- N.D.
------ ------
Operating income............................................ $108.0 $106.5 1.4%
====== ======
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OPERATING INCOME (In millions) Nine Months Ended September 30, % CHANGE
(excluding special items and divested businesses) 1997 1996 1997 VS. 1996
- ---------------------------------------------------------------------------------------------------------------------------------
Grace Packaging................................................. $220.8 $194.4 13.6%
Grace Davison................................................... 58.6 75.1 (22.0)
Grace Construction Products..................................... 33.5 21.7 54.4
Other........................................................... 1.1 3.6 (69.4)
------ ------
Operating income............................................ $314.0 $294.8 6.5%
====== ======
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Cost management programs initially implemented in 1995 continued to favorably
impact pretax operating income across all geographic regions and product
lines. Grace has implemented, and expects to further implement, additional
cost reductions and efficiency improvements, as it further evaluates and
reengineers its manufacturing processes and operations. Significantly
offsetting the favorable impact of the cost management programs was a 1997
third quarter accrual relating to Grace's long-term incentive compensation
program (LTIP). Grace's stock price as of the close of each quarter is one of
the primary factors used in calculating the LTIP accrual. Since Grace's stock
appreciated by 34% during the third quarter (which management believes is an
indication of favorable market receptivity to the proposed transaction with
Sealed Air described in Note 3 to the interim consolidated financial
statements in this Report), a significant additional charge was required. The
following is a discussion of the operating results of Grace's product lines,
which include the adverse effects of the additional LTIP charge.
GRACE PACKAGING
Grace Packaging pretax operating income increased 6.7% for the three months
and 13.6% for the nine months ended September 30, 1997 compared to the three
and nine months ended September 30, 1996, principally reflecting improved
operating results in North America. The favorable variances were primarily due
to the volume and price increases discussed above, favorable manufacturing
rates, and a shift toward sales of higher margin products. 1997 year-to-date
operating income was adversely affected by increased prices for resins,
although resin prices declined in the 1997 third quarter as compared to the
first half of the year. It is expected that resin prices will further
stabilize through the end of 1997.
Grace's ongoing cost containment efforts have contributed favorably to pretax
operating income for the three and nine months ended September 30, 1997.
However, these improvements have been partially offset by increased expenses
(primarily depreciation and amortization expenses) associated with the new
packaging plant in Kuantan, Malaysia that began operations in the fourth
quarter of 1996 and an increase in research and development expenses as a
result of the continued emphasis on new product development.
I - 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
GRACE DAVISON
Grace Davison pretax operating income decreased 14.0% for the three months and
22.0% for the nine months ended September 30, 1997 compared to the same
periods in 1996. A weak FCC market was the primary cause for these decreases;
however, there appeared to be some recovery in the FCC market, with larger
volumes being sold in North America and Europe as compared to September 1996,
as discussed above. Price/mix variances in North America and Europe also had
an unfavorable effect upon operating income. Further, there were unusual items
contributing to the decrease in operating income in the first nine months of
1997 versus 1996. In particular, the large number of refinery turnarounds
decreased sales, and harsh winter weather at Grace Davison's Lake Charles,
Louisiana facility increased repair and maintenance costs. These charges were
offset by manufacturing efficiencies and ongoing cost reduction efforts.
Despite the decline in operating income for the first nine months of 1997,
results for the 1997 third quarter improved over results for the 1997 second
quarter, and Grace Davison expects this trend to continue. Grace Davison has
maintained its global market position, and continues to implement new
manufacturing process technologies and introduce new products to improve
margins.
GRACE CONSTRUCTION PRODUCTS
Grace Construction Products pretax operating income increased 7.5% for the
three months and 54.4% for the nine months ended September 30, 1997 over the
1996 comparable periods. The favorable results were primarily due to the
record sales levels achieved in 1997, discussed above. Enhancements to
manufacturing processes, production rate and material cost improvements, and
additional cost containment efforts also contributed to earnings growth.
I - 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
OTHER ITEMS
INTEREST EXPENSE AND RELATED FINANCING COSTS
Interest expense and related financing costs for continuing operations of
$19.2 million for the three months and $58.6 million for the nine months ended
September 30, 1997 increased 5.5% and 6.7%, respectively, compared to the 1996
periods. Including amounts allocated to discontinued operations, interest
expense and related financing costs decreased 55.6% for the three months and
55.3% for the nine months ended September 30, 1997, versus the 1996 periods.
The decrease was primarily due to lower average debt levels (as a result of
debt repayments made with the proceeds from the September 1996 separation of
Grace's principal health care business and other divestments).
See "Financial Condition: Liquidity and Capital Resources" below for further
information on borrowings.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development (R&D) spending of $23.3 million increased 3.6% for
the three months ended September 30, 1997 versus the 1996 quarter. The
increase was primarily due to Grace's continued emphasis on R&D activities,
with the goal of introducing new value-added products and services and
enhanced manufacturing processes, especially in Grace Packaging. R&D spending
decreased 10.8% for the nine months ended September 30, 1997 compared to the
nine months ended September 30, 1996. The year-to-date decrease reflects the
continued positive impact of cost management initiatives implemented during
1996 and 1995, primarily the elimination of Grace's corporate research
organization, the transfer of core R&D activities to product lines and the
termination of R&D activities not related to Grace's packaging and specialty
chemicals businesses. As a result of these initiatives, Grace has been able to
increase R&D spending for its principal businesses while reducing total R&D
expenses. The decrease is also attributable to the elimination of R&D spending
related to Grace's water treatment and process chemicals business and its
specialty polymers business, which were divested in June 1996 and May 1997,
respectively.
I - 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
RESTRUCTURING COSTS
As discussed in Note 4 to the consolidated financial statements in the 1996
Form 10-K, Grace began implementing a worldwide program in 1995 focused on
streamlining processes and reducing general and administrative expenses,
factory administration costs and noncore corporate research and development
expenses. As previously reported, Grace has continued to implement additional
cost reductions and efficiency improvements beyond those initiated in 1995, as
its businesses have further evaluated and reengineered their operations. As a
result of these evaluations, in the first nine months of 1997 and 1996, Grace
recorded pretax charges of $12.4 million ($8.0 million after-tax) and $53.7
million ($32.4 million after-tax), respectively, principally related to the
restructuring of its packaging business. The 1997 charge primarily related to
the restructuring of the packaging business from a worldwide group of
independent regional units into an integrated global organization and was
primarily comprised of employee termination benefits. The 1996 charge
primarily related to the restructuring of Grace's European packaging
operations and consisted of costs related to employee termination benefits and
lease termination costs. Management expects to finalize a plan and take an
additional charge in the fourth quarter of 1997 in connection with the Sealed
Air transaction (see Note 3 to the interim consolidated financial statements
in this Report) and related corporate restructuring activities.
INCOME TAXES
Grace's effective tax rates were 37.0% for the three months and 37.6% for the
nine months ended September 30, 1997, compared to 39.5% and 36.7%, for the
respective 1996 periods. Excluding special items, the effective tax rates were
37.0% for the three and nine months ended September 30, 1997 and 39.5% and
38.6%, respectively, for the three and nine months ended September 30, 1996.
The lower effective tax rates for 1997 were due to lower state and foreign
income taxes.
DISCONTINUED OPERATIONS
In February 1997, Grace sold its cocoa business to ADM for total proceeds of
$470.0 million (inclusive of debt assumed by the buyer), subject to
adjustment. The pretax and after-tax effects of the divestment were consistent
with prior estimates and were charged against previously established reserves.
In October 1997, ADM paid Grace an additional $7.9 million (including $.4
million of interest income) in settlement of the purchase price adjustment. In
anticipation of this settlement, in the third quarter of 1997, Grace reversed
previously recorded provisions of $12.4 million (net of an applicable tax
effect of $6.6 million), in discontinued operations.
I - 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
During 1996, Grace completed the separation of National Medical Care, Inc.
(NMC) and sold its separations science business (Amicon). These health care
businesses had been classified as discontinued operations in 1995. Income from
discontinued operations of $2,465.5 million for the three months and $2,584.4
million for the nine months ended September 30, 1996, included net losses of
$19.3 million ($17.3 million pretax) and net income of $24.1 million ($59.8
million pretax), respectively, from health care operations. Income from
discontinued operations also included a gain on the separation of NMC of
$2,483.7 million for the three and nine months ended September 30, 1996.
In 1996, Grace classified TEC Systems as a discontinued operation. Income for
the nine months ended September 30, 1996 from discontinued operations included
a loss of $3.9 million ($6.4 million pretax) from TEC Systems. In September
1997, Grace sold TEC Systems to Sequa Corporation. The loss on the sale and
the 1997 operating losses have been charged against previously established
reserves.
In May 1996, Grace completed the sale of its transgenic plant business for
$150.0 million in cash, resulting in a pretax gain of $129.0 million ($79.4
million after-tax), in discontinued operations.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Grace's continuing operating activities provided net pretax cash of $232.0
million for the nine months ended September 30, 1997, as compared to $154.7
million for the nine months ended September 30, 1996. The increase in cash
provided by operating activities of continuing operations was primarily due to
improved earnings and working capital management, partially offset by higher
payments made for the defense and disposition of asbestos-related litigation,
net of amounts received from settlements with certain insurance carriers in
connection with such litigation. Net pretax cash provided by operating
activities of discontinued operations for the nine months ended September 30,
1997 decreased by $109.6 million compared to the nine months ended September
30, 1996, primarily due to the disposition of Grace's health care and cocoa
businesses. After giving effect to the payment of income taxes, the net cash
provided by operating activities was $136.5 million and $109.5 million for the
nine months ended September 30, 1997 and 1996, respectively.
Investing activities provided $452.9 million of cash for the nine months ended
September 30, 1997, largely reflecting net cash proceeds of $469.2 million
from divestments (primarily the sale of Grace's specialty polymers, TEC and
cocoa businesses) and the receipt of $215.6 million in January 1997 on the
1996 divestments of Dearborn and Amicon. Grace made capital expenditures of
$164.4 million during the nine months ended September 30, 1997, primarily
related to the Grace Packaging and Grace Davison businesses. Total Grace
capital expenditures for 1997 are not expected to exceed $300.0 million.
I - 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
Net cash used for financing activities for the nine months ended September 30,
1997 was $587.6 million, primarily reflecting reductions in debt, the
repurchase of stock as discussed below, and the payment of dividends,
partially offset by proceeds from the exercise of employee stock options.
Total debt was $1,104.2 million at September 30, 1997, a decrease of $284.0
million from December 31, 1996.
During the first quarter of 1997, the Company substantially completed the
share repurchase program initiated in 1996 by acquiring 6,306,300 additional
shares of its common stock for $335.9 million, or an average price of $53.26
per share.
Grace is targeting a ratio of debt to earnings before interest, taxes,
depreciation and amortization (EBITDA) of 1.6 to 2.0. The debt/EBITDA ratio
was 1.7 at September 30, 1997.
At September 30, 1997, Grace had committed borrowing facilities totaling $1.0
billion, consisting of $650.0 million under a 364-day facility expiring in May
1998 (extendible for successive 364-day periods at the discretion of Grace and
the lenders) and $350.0 million under a long-term facility expiring in May
2002. As of September 30, 1997, $620.6 million was available under these
facilities.
Grace believes that cash flow generated from future operations and committed
borrowing facilities will be sufficient to meet its cash requirements for the
foreseeable future. See Note 3 to the interim consolidated financial
statements in this Report regarding cash proceeds to be received in connection
with the proposed transaction with Sealed Air.
ASBESTOS-RELATED MATTERS
In the nine months ended September 30, 1997, Grace paid $34.9 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. Although the total amount to be paid in 1997 with respect
to asbestos-related claims (after giving effect to payments to be received
from insurance carriers) cannot be precisely estimated, Grace expects that it
will be required to expend approximately $75-$100 million (pretax) in 1997 to
defend against and dispose of such claims (after giving effect to anticipated
insurance recoveries). The amounts with respect to the probable cost of
defending against and disposing of asbestos-related claims and probable
recoveries from insurance carriers represent estimates and are on an
undiscounted basis; the outcomes of such claims cannot be predicted with
certainty.
In May 1997, the Texas legislature adopted legislation that had the effect of
making it more difficult for out-of-state residents to file claims in Texas
state courts. Although the rate of filing of asbestos claims in Texas during
the 1997 third quarter was lower than that of the first half of 1997, the
effect of this legislation on Grace's ultimate exposure with respect to its
asbestos-related cases and claims cannot be predicted with certainty.
See Note 2 to the interim consolidated financial statements in this Report for
further information concerning asbestos-related lawsuits and claims.
I - 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
ENVIRONMENTAL MATTERS
There were no significant developments relating to environmental liabilities
in the nine months ended September 30, 1997. For additional information
relating to environmental liabilities, see Note 11 to the consolidated
financial statements in the 1996 Form 10-K.
I - 24
II-1
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
(a) Note 2 to the interim consolidated financial statements in Part I
of this Report is incorporated herein by reference.
(b) On September 30, 1997, the Company consented to the entry of an
order in settlement of the Securities and Exchange Commission's investigation
described in the 1996 10-K in the first paragraph under the heading "Legal
Proceedings -- Securities and Exchange Commission Investigations." Under the
order, the Company (without admitting or denying the matters set forth
therein) agreed to cease and desist from further violations of Sections 13(a)
and 14(a) of the Securities Exchange Act of 1934, as amended, and the rules
thereunder. No penalties or fines were assessed under the order, and the
Company has been advised that the investigation was closed.
(c) Reference is made to the section entitled "Shareholder Actions
Relating to NMC" in Item 3 ("Legal Proceedings") of the 1996 10-K for
information concerning lawsuits entitled Murphy, et al. v. W. R. Grace & Co.,
et al. and Bennett v. Bolduc, et al. The defendants in the Murphy and Bennett
actions have agreed in principle to settle those lawsuits. The settlements will
provide for the establishment of a fund of approximately $32 million (less
plaintiffs' attorney's fees) to compensate a class of shareholders consisting
of purchasers of Grace New York stock during the Class Period (as such terms
are defined in the 1996 10-K). As part of the settlements, the insurance
carrier for the directors and officers will cause $10 million to be paid to
Grace on behalf of the
II-1
individual defendants named in the Murphy and Bennett actions. The settlements
are contingent upon the execution of definitive agreements and court approval.
The net payment to be made by Grace in connection with these settlements will
be charged against previously established reserves.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. The following are being filed as exhibits to this Report:
-- 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
-- financial data schedule
II-2
(b) Reports on Form 8-K. The Company filed the following Reports on
Form 8-K during the third quarter and to date during the fourth quarter of
1997:
Date of Filing Disclosure(s)
- -------------- -------------
August 5, 1997 Announcement of 1997 second quarter results
August 18, 1997 Announcement of the proposed combination of Grace's
packaging business with Sealed Air Corporation
August 21, 1997 Amendment to August 18, 1997 Form 8-K filing
October 17, 1997 Announcement concerning the condition of Albert J.
Costello, the Company's Chairman, President and
Chief Executive Officer
November 4, 1997 Announcement of 1997 third 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: November 14, 1997 By /s/ Kathleen A. Browne
----------------------
Kathleen A. Browne
Vice President and Controller
(Principal Accounting Officer)
II-4
W. R. GRACE & CO.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
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
EXHIBIT 11
W. R. GRACE & CO. AND SUBSIDIARIES
WEIGHTED AVERAGE NUMBER OF SHARES AND EARNINGS USED
IN PER SHARE COMPUTATIONS
For the three and nine months ended September 30, 1997 and 1996
(Dollars in millions, except per share; shares in thousands)
3 Mos. Ended 9 Mos. Ended
9/30/97 9/30/96 9/30/97 9/30/96
--------------------- --------------------
EARNINGS PER SHARE:
Weighted average shares outstanding.................. 73,662 91,092 73,885 95,188
======= ======== ======== ========
Net income........................................... $ 71.1 $2,519.9 $ 234.9 $2,917.4
Dividends paid on preferred stocks................... - (.1) - (.4)
-------- --------- -------- --------
Income used in per share computation of earnings..... $ 71.1 $ 2,519.8 $ 234.9 $2,917.0
======== ========= ======== ========
Net income per share................................. $ .97 $ 27.66 $ 3.18 $ 30.64
PRIMARY:
Weighted average shares outstanding.................. 73,662 91,092 73,885 95,188
Dilutive effect (as determined by the application
of the treasury stock method)................... 2,377 2,262 2,295 1,978
-------- --------- -------- --------
Weighted average number of shares 76,039 93,354 76,180 97,166
======= ======== ======== ========
outstanding - primary...........................
Net income........................................... $ 71.1 $2,519.9 $ 234.9 $2,917.4
Dividends paid on preferred stocks................... - (.1) - (.4)
-------- --------- -------- ---------
Income used in per share computation of earnings
and in per share computation of earnings
assuming dilutive effect........................ $ 71.1 $ 2,519.8 $ 234.9 $ 2,917.0
======== ========= ======== =========
Net income per share - primary....................... $ .93 $ 26.99 $ 3.08 $ 30.02
FULLY DILUTED:
Weighted average shares outstanding.................. 73,662 91,092 73,885 95,188
Dilutive effect (as determined by the application
of the treasury stock method)................... 2,686 2,826 2,687 2,826
--------- --------- -------- --------
Weighted average number of shares
outstanding - fully diluted..................... 76,348 93,918 76,572 98,014
======== ========= ======== ========
Net income........................................... $ 71.1 $2,519.9 $ 234.9 $2,917.4
Dividends paid on preferred stocks................... - (.1) - (.4)
---------- --------- -------- --------
Income used in per share computation of earnings
and in per share computation of earnings
assuming dilutive effect........................ $ 71.1 $2,519.8 $ 234.9 $2,917.0
======== ======== ======= ========
Net income per share - fully diluted................. $ .93 $ 26.83 $ 3.07 $ 29.76
EXHIBIT 12
W. R. GRACE & CO. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND
COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (a)
(in millions, except ratios)
(Unaudited)
Nine Months Ended
Years Ended December 31,(c) September 30,
------------------------------------------------------ ----------------------
1996 (d) 1995 (e) 1994 (f) 1993 (g) 1992 (h) 1997 (i) 1996 (c)(j)
--------- --------- --------- --------- --------- --------- -----------
Net income/(loss) from continuing operations....... $213.8 $(179.6) $ (35.1) $ 28.1 $ 7.7 $222.5 $333.0
Add/(deduct):
Provision for/(benefit from) income taxes...... 134.8 (104.5) (42.6) 16.4 84.1 134.1 192.9
Income taxes of 50%-owned companies............ -- -- -- .1 2.1 -- --
Equity in unremitted losses/(earnings)
of less than 50%-owned companies............. (.4) .8 (.6) (.5) (2.0) (.7) (.4)
Interest expense and related financing costs,
including amortization of capitalized interest 160.8 179.8 138.5 122.7 162.7 65.0 139.1
Estimated amount of rental expense
deemed to represent the interest factor...... 8.4 8.5 10.1 11.3 14.0 3.9 8.3
------ -------- ------- ------ ------ ------ -------
Income/(loss) as adjusted.......................... $517.4 $ (95.0) $ 70.3 $178.1 $268.6 $424.8 $ 672.9
====== ======== ======= ====== ====== ====== =======
Combined fixed charges and preferred stock dividends:
Interest expense and related financing costs,
including capitalized interest............... $177.1 $195.5 $143.2 $122.8 $176.3 $ 72.9 $ 154.2
Estimated amount of rental expense
deemed to represent the interest factor...... 8.4 8.5 10.1 11.3 14.0 3.9 8.3
--------- ------- ------- -------- -------- -------- --------
Fixed charges...................................... 185.5 204.0 153.3 134.1 190.3 76.8 162.5
Preferred stock dividend requirements(b)........... .6 .5 .5 .8 .8 -- .6
---------- ------- ------- -------- -------- --------- ---------
Combined fixed charges and preferred
stock dividends................................. $186.1 $ 204.5 $153.8 $134.9 $191.1 $ 76.8 $ 163.1
====== ======= ====== ====== ====== ====== ========
Ratio of earnings to fixed charges.............. 2.79 (k) (k) 1.33 1.41 5.53 4.14
======= ======= ====== ======= ======= ======= =========
Ratio of earnings to combined fixed charges
and preferred stock dividends................... 2.78 (k) (k) 1.32 1.41 5.53 4.13
======= ======= ====== ======= ======= ======= =========
(a) Grace's preferred stocks were retired in 1996; for additional
information, see Note 1 to the consolidated financial statements in
the 1996 Form 10-K.
(b) For each period with an income tax provision, the preferred stock
dividend requirements have been increased to an amount representing
the pretax earnings required to cover such requirements using
Grace's effective tax rate.
(c) Certain amounts have been restated to conform to the 1997
presentation.
(d) Includes a pretax gain on sales of businesses of $326.4, offset by
pretax provisions of $229.1 for asbestos-related liabilities and
insurance coverage and $107.5 for restructuring costs and asset
impairments.
(e) Includes pretax provisions of $275.0 for asbestos-related
liabilities and insurance coverage; $209.5 related to restructuring
costs, asset impairments and other activities; $77.0 for
environmental liabilities at former manufacturing sites; and $30.0
for corporate governance activities.
(f) Includes a pretax provision of $316.0 relating to asbestos-related
liabilities and insurance coverage.
(g) Includes a pretax provision of $159.0 relating to asbestos-related
liabilities and insurance coverage.
(h) Includes a pretax provision of $140.0 relating to a fumed silica
plant in Belgium.
(i) Includes a pretax gain of $103.1 on the sale of Grace's specialty
polymers business and a pretax provision of $12.4 relating to
restructuring costs.
(j) Includes a pretax gain of $326.4 on the sale of businesses,
principally the water treatment and process chemicals business, and
a pretax provision of $53.7 relating to restructuring costs.
(k) As a result of the losses incurred for the years ended December 31,
1995 and 1994, Grace was unable to fully cover the indicated fixed
charges.
5
9-MOS
DEC-31-1997
JAN-01-1997
SEP-30-1997
66,200
0
616,000
0
370,000
1,221,500
3,261,100
1,489,600
4,200,000
1,049,500
0
0
0
800
479,200
4,200,000
2,460,700
2,497,200
1,492,400
1,492,400
0
0
58,600
356,600
134,100
222,500
12,400
0
0
234,900
3.08
3.07
Amount shown is net of allowances.
Included within current assets and total assets are
net assets of discontinued operations of $26,800.
Includes a pretax gain of $103,100 ($63,000 after-tax)
on the sale of Grace's specialty polymers business and
a pretax provision of $12,400 ($8,000 after-tax) relating
to restructuring costs.
Represents a $19,000 ($12,400 after-tax) reversal of
previously recorded provisions for Grace's cocoa business.
