<PAGE>
- - -------------------------------------------------------------------------------
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 1994
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
----- -----
93,915,245 shares of Common Stock, $1.00 par value, were outstanding at
April 29, 1994.
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<PAGE>
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-6
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition I-7 to I-12
PART II. Other Information
Item 1. Legal Proceedings II-1
Item 5. Other Information 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.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
W. R. Grace & Co. and Subsidiaries Three Months Ended
Consolidated Statement of Operations (Unaudited) March 31,
--------------------------------------------------------------- -------------------
$ millions (except per share) 1994 1993
--------------------------------------------------------------- -------- ------
<S> <C> <C>
Sales and revenues. . . . . . . . . . . . . . . . . . . . . . . $1,076.8 $986.2
Other income. . . . . . . . . . . . . . . . . . . . . . . . . . 32.5 10.7
-------- ------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,109.3 996.9
-------- ------
Cost of goods sold and operating expenses . . . . . . . . . . . 680.6 592.4
Selling, general and administrative expenses. . . . . . . . . . 265.4 239.6
Depreciation and amortization . . . . . . . . . . . . . . . . . 59.3 54.8
Interest expense and related financing costs. . . . . . . . . . 21.1 19.9
Research and development expenses . . . . . . . . . . . . . . . 34.0 36.5
-------- ------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,060.4 943.2
-------- ------
Income from continuing operations before income taxes . . . . . 48.9 53.7
Provision for income taxes. . . . . . . . . . . . . . . . . . . 10.7 22.0
-------- ------
Income from continuing operations . . . . . . . . . . . . . . . 38.2 31.7
Loss from discontinued operations . . . . . . . . . . . . . . . - (3.4)
-------- ------
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 38.2 $ 28.3
-------- ------
-------- ------
- - ---------------------------------------------------------------------------------------------
Earnings per share:
Continuing operations . . . . . . . . . . . . . . . . . . . . $ .41 $ .35
Net earnings. . . . . . . . . . . . . . . . . . . . . . . . . $ .41 $ .31
Fully diluted earnings per share:
Continuing operations . . . . . . . . . . . . . . . . . . . . $ .40 $ .34
Net earnings. . . . . . . . . . . . . . . . . . . . . . . . . $ .40 $ .30
Dividends declared per common share . . . . . . . . . . . . . . $ .35 $ .35
- - --------------------------------------------------------------------------------------------
</TABLE>
The Notes to Consolidated Financial Statements
are integral parts of these statements.
I-1
<PAGE>
<TABLE>
<CAPTION>
W. R. Grace & Co. and Subsidiaries Three Months Ended
Consolidated Statement of Cash Flows (Unaudited) March 31,
- - ---------------------------------------------------------------------------------- --------------------
$ millions 1994 1993
- - ---------------------------------------------------------------------------------- --------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Income from continuing operations before income taxes. . . . . . . . . . . . . . $ 48.9 $ 53.7
Reconciliation to cash provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . 59.3 54.8
Changes in assets and liabilities, excluding businesses
acquired/divested and foreign exchange effect:
Increase in notes and accounts receivable, net. . . . . . . . . . . . . . (59.5) (69.4)
Increase in inventories . . . . . . . . . . . . . . . . . . . . . . . . . (19.6) (83.3)
Net proceeds from settlements of/(expenditures for)
asbestos-related insurance coverage. . . . . . . . . . . . . . . . . 16.8 (71.2)
Decrease in accounts payable. . . . . . . . . . . . . . . . . . . . . . . (104.6) (81.7)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9.6) 29.4
-------- ------
Net pretax cash used for operating activities
of continuing operations. . . . . . . . . . . . . . . . . . . . . . . . . . (68.3) (167.7)
Net pretax cash provided by/(used for) operating activities
of discontinued operations. . . . . . . . . . . . . . . . . . . . . . . . . 24.4 (48.6)
-------- ------
Net pretax cash used for operating activities. . . . . . . . . . . . . . . . . . (43.9) (216.3)
Income taxes paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (16.1) (26.7)
-------- ------
Net cash used for operating activities . . . . . . . . . . . . . . . . . . . . . (60.0) (243.0)
-------- ------
INVESTING ACTIVITIES
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (70.8) (68.6)
Businesses acquired in purchase transactions, net of cash acquired . . . . . . . (23.9) (73.6)
Net proceeds from divestments. . . . . . . . . . . . . . . . . . . . . . . . . . 49.3 268.1
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.8 .9
-------- ------
Net cash (used for)/provided by investing activities . . . . . . . . . . . . . . (37.6) 126.8
-------- ------
FINANCING ACTIVITIES
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (32.9) (31.6)
Repayments of borrowings having original maturities in excess of three months. . (36.1) (56.0)
Increase in borrowings having original maturities in excess of three months. . . 28.7 351.4
Net increase/(decrease) in borrowings having original maturities
of less than three months . . . . . . . . . . . . . . . . . . . . . . . . . 163.8 (118.2)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.1 2.4
-------- ------
Net cash provided by financing activities. . . . . . . . . . . . . . . . . . . . 137.6 148.0
-------- ------
Effect of exchange rate changes on cash and cash equivalents . . . . . . . . . . . (7.2) (1.9)
-------- ------
Increase in cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . $ 32.8 $ 29.9
-------- ------
-------- ------
</TABLE>
The Notes to Consolidated Financial Statements
are integral parts of these statements.
I-2
<PAGE>
<TABLE>
<CAPTION>
W. R. Grace & Co. and Subsidiaries
Consolidated Balance Sheet (Unaudited)
- - ---------------------------------------------------------
March 31, December 31,
$ millions (except par value) 1994 1993
- - ---------------------------------------------------------- --------- ------------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . $ 80.4 $ 47.6
Notes and accounts receivable, net. . . . . . . . . . . . 716.2 657.4
Inventories . . . . . . . . . . . . . . . . . . . . . . . 462.7 441.0
Net assets of discontinued operations . . . . . . . . . . 725.6 761.3
Deferred income taxes, current. . . . . . . . . . . . . . 19.6 31.8
Other current assets. . . . . . . . . . . . . . . . . . . 46.6 36.2
-------- --------
Total Current Assets . . . . . . . . . . . . . . . . . . 2,051.1 1,975.3
Properties and equipment, net of accumulated
depreciation and amortization of $1,343.4
and $1,323.7, respectively . . . . . . . . . . . . . . 1,448.9 1,454.1
Goodwill, less accumulated amortization of $54.3
and $53.2, respectively. . . . . . . . . . . . . . . . 491.5 481.6
Asbestos-related insurance receivable. . . . . . . . . . . 893.5 962.3
Other assets . . . . . . . . . . . . . . . . . . . . . . . 1,272.1 1,235.3
-------- --------
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . $6,157.1 $6,108.6
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt . . . . . . . . . . . . . . . . . . . . . $ 709.0 $ 532.6
Accounts payable. . . . . . . . . . . . . . . . . . . . . 260.1 414.6
Income taxes. . . . . . . . . . . . . . . . . . . . . . . 132.1 126.5
Other current liabilities . . . . . . . . . . . . . . . . 626.1 621.9
Minority interests. . . . . . . . . . . . . . . . . . . . 297.0 297.0
-------- --------
Total Current Liabilities. . . . . . . . . . . . . . . . 2,024.3 1,992.6
Long-term debt . . . . . . . . . . . . . . . . . . . . . . 1,142.1 1,173.5
Other noncurrent liabilities . . . . . . . . . . . . . . . 687.9 613.8
Deferred income taxes. . . . . . . . . . . . . . . . . . . 90.2 97.4
Noncurrent liability for asbestos-related litigation . . . 688.8 713.7
-------- --------
Total Liabilities. . . . . . . . . . . . . . . . . . . . 4,633.3 4,591.0
-------- --------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stocks, $100 par value. . . . . . . . . . . . . 7.4 7.4
Common stock, $1 par value. . . . . . . . . . . . . . . . 93.9 93.5
Paid in capital . . . . . . . . . . . . . . . . . . . . . 301.6 287.8
Retained earnings . . . . . . . . . . . . . . . . . . . . 1,201.5 1,196.2
Cumulative translation adjustments. . . . . . . . . . . . (80.6) (67.3)
-------- --------
Total Shareholders' Equity . . . . . . . . . . . . . . . 1,523.8 1,517.6
-------- --------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . $6,157.1 $6,108.6
-------- --------
-------- --------
</TABLE>
The Notes to Consolidated Financial Statements
are integral parts of these statements.
I-3
<PAGE>
W. R. Grace & Co. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ millions except per share)
(a) The financial statements in this Report at and for the three-month interim
periods ended March 31, 1994 and 1993 are unaudited and should be read in
conjunction with the Consolidated Financial Statements in the Company's
1993 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 period's basis of presentation.
The results of operations for the three months ended March 31, 1994 are
not necessarily indicative of the results of operations for the fiscal
year ending December 31, 1994.
(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. At March 31, 1994, Grace was a defendant in approximately 39,100
asbestos-related lawsuits (90 involving claims for property damage and the
remainder involving approximately 60,600 claims for personal injury), as
compared to approximately 38,100 lawsuits (92 involving claims for
property damage and the remainder involving approximately 56,600 claims
for personal injury) at December 31, 1993. During the first three months
of 1994, Grace settled two additional property damage lawsuits for a total
of $2.2 and settled approximately 350 personal injury claims for $2.8; in
addition, approximately 170 personal injury claims were dismissed during
the period.
On September 1, 1993, the U.S. Court of Appeals for the Second Circuit
issued a decision regarding the availability of insurance coverage with
respect to Grace's asbestos property damage litigation and claims. In
January 1994, the Court granted Grace's petition for a re-hearing
concerning such decision; briefs have been submitted by the parties, and
it is not known whether the Court will ask for oral arguments before
rendering a decision. As a result of these rulings, Grace recorded a net
after-tax provision of $100 for the year ended December 31, 1993 to
reflect anticipated additional legal expenses and other uncertainties
related to Grace's asbestos-related lawsuits and claims.
In Grace's opinion (based upon and subject to the factors discussed in
Note 2 to Grace's Consolidated Financial Statements for the year ended
December 31, 1993), it is probable that the personal injury and property
damage lawsuits pending at March 31, 1994 can be disposed of for a total
of $788.8, (inclusive of legal fees and expenses), of which Grace has
recorded $688.8 as a noncurrent liability and $100 as a current liability.
This compares to the estimated liability (current and noncurrent) of
$813.7 at December 31, 1993, reflecting payments made by Grace in the
first quarter of 1994. In addition, Grace has recorded a receivable of
$893.5 for the insurance proceeds it expects to receive in reimbursement
for prior payments and estimated future payments to dispose of asbestos-
related litigation. The amount of this receivable has declined from
$962.3 at December 31, 1993 due to the net insurance proceeds received
during the first quarter of 1994.
I-4
<PAGE>
W. R. Grace & Co. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ millions except per share)
Grace received a total of $88.8 in the 1994 first quarter pursuant to
settlements with certain insurance carriers in reimbursement for monies
previously paid by Grace in connection with asbestos-related litigation. A
portion of that amount will be paid to plaintiffs in previously settled
asbestos-related lawsuits.
Grace continues to be involved in litigation with certain of its insurance
carriers, including an affiliated group of carriers that had agreed to a
settlement and had made a series of payments under that agreement in 1993.
The group of carriers subsequently notified Grace that it would no longer
honor the agreement (which had not been executed) due to the September 1,
1993 U. S. Court of Appeals decision discussed above. Grace believes that
the settlement agreement (which involves approximately $200 of the
asbestos-related receivable of $893.5 at March 31, 1994) is binding and has
initiated action to enforce the settlement agreement. In January 1994, the
U.S. District Court for the Eastern District of Texas held the agreement to
be enforceable. The affiliated group of carriers has appealed this ruling
to the U. S. Court of Appeals for the Fifth Circuit.
Grace's ultimate exposure in respect of its asbestos-related lawsuits and
claims will depend on the extent to which its insurance will cover damages
for which it may be held liable, amounts paid in settlement and litigation
costs. In Grace's opinion, it is probable that recoveries from its
insurance carriers will be available to satisfy the personal injury and
property damage lawsuits and claims pending at March 31, 1994.
Consequently, Grace believes that the resolution of its asbestos-related
litigation will not have a material effect on its consolidated financial
position or results of operations.
For additional information, see Note 2 to the Consolidated Financial
Statements in the Company's 1993 Annual Report on Form 10-K.
(c) The net assets of Grace's discontinued operations (excluding intercompany
assets) at March 31, 1994 were as follows:
<TABLE>
<CAPTION>
Battery
Separators Grace
Cocoa and EMS Energy Other Total
----- ---------- ------ ------ --------
<S> <C> <C> <C> <C> <C>
Current assets $300.0 $127.4 $ 11.3 $ 50.8 $ 489.5
Properties and equipment, net 169.0 155.8 130.8 32.9 488.5
Investments in and advances to
affiliated companies - 4.7 4.1 39.6 48.4
Other noncurrent assets 40.4 21.0 10.0 36.2 107.6
------ ------ ------ ------ --------
Total assets $509.4 $308.9 $156.2 $159.5 $1,134.0
------ ------ ------ ------ --------
Current liabilities $213.7 $ 44.3 $ 11.8 $ 20.3 $ 290.1
Other noncurrent liabilities 64.3 37.7 18.6 (2.3) 118.3
------ ------ ------ ------ --------
Total liabilities $278.0 $ 82.0 $ 30.4 $ 18.0 $ 408.4
------ ------ ------ ------ --------
Net assets $231.4 $226.9 $125.8 $141.5 $ 725.6
------ ------ ------ ------ --------
------ ------ ------ ------ --------
</TABLE>
I-5
<PAGE>
W. R. Grace & Co. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ millions except per share)
Minority interest consists primarily of a limited partnership interest in
Grace Cocoa Associates, L.P. (LP). The total capital of LP was $1,466.9
million and $1,473 million at December 31, 1993 and March 31, 1994,
respectively. LP's assets consist of Grace'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. Grace had $1,099.1 million and $1,110 million of borrowings from LP
at December 31, 1993 and March 31, 1994, respectively. Four Grace entities
serve as general partners of LP and own general partnership interests
totaling 79.03% in LP; the sole limited partner of LP, which initially
acquired its interest in LP in exchange for a $300 million cash capital
contribution ($297 million of which was funded by outside investors), owns
a 20.97% limited partnership interest in LP. 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 a
component of discontinued operations and the outside investors' interest
in LP is reflected as a minority interest. The intercompany notes held by
LP are eliminated in preparing the consolidated financial statements and,
therefore, have not been classified as pertaining to discontinued
operations.
(d) Inventories consist of:
<TABLE>
<CAPTION>
March 31, December 31,
1994 1993
--------- ------------
<S> <C> <C>
Raw and packaging materials $118.1 $111.4
In process 68.8 59.9
Finished products 317.4 310.3
------ ------
504.3 481.6
Less: Adjustment of certain inventories
to a last-in/first-out (LIFO) basis (41.6) (40.6)
------ ------
Total Inventories $462.7 $441.0
------ ------
------ ------
</TABLE>
(e) Earnings per share are calculated on the basis of the following average
number of common shares outstanding:
Three Months Ended March 31:
1994 - 93,750,000
1993 - 89,983,000
I-6
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
(a) Review of Operations
(1) Overview:
Sales and revenues increased 9% in the first quarter of 1994 over the first
quarter of 1993. Income from continuing operations for the 1994 quarter
increased 21%, to $38.2 million, as compared to the 1993 quarter. In the
first quarter of 1994, Grace recorded a pretax charge of $40 million,
primarily to provide for future environmental costs relating to a
previously divested business and for the estimated costs of workforce
reductions at Grace's corporate headquarters and research and development
facility. Also recorded in the first quarter of 1994 was a $27 million gain
(pre- and after-tax) from the sale of Grace's remaining interest in The
Restaurant Enterprise Group, Inc. (REG).
(2) Operating Results:
The following table compares segment results for the 1994 first quarter to
results for the comparable period of 1993:
<TABLE>
<CAPTION>
W. R. Grace & Co. and Subsidiaries Three Months Ended
Operating Results March 31,
-------------------------------------------------- -------------------
$ millions 1994 1993
-------------------------------------------------- -------- ------
<S> <C> <C>
SALES AND REVENUES
Specialty Chemicals $ 675.4 $648.1
Health Care 401.4 338.1
-------- ------
Total $1,076.8 $986.2
-------- ------
-------- ------
OPERATING INCOME BEFORE TAXES (i)
Specialty Chemicals $ 40.1 $ 41.7
Health Care 43.7 34.7
-------- ------
Total $ 83.8 $ 76.4
-------- ------
-------- ------
<FN>
(i) Segment results for the 1993 period have been reclassified to
conform to the 1994 basis of presentation. Segment results reflect the
allocation of corporate overhead and corporate research expenses.
Corporate interest, financing costs and nonallocable expenses (such as
those associated with divested businesses) are not included in the
segment results.
</TABLE>
I-7
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (continued)
SPECIALTY CHEMICALS
Sales and revenues increased 4% in the first quarter of 1994 as compared to the
first quarter of 1993, reflecting favorable volume and price/product mix
variances estimated at 4% and 2%, respectively, offset by an unfavorable
currency translation variance estimated at 2%. Volume increases occurred in the
first quarter of 1994 in packaging (due to improved sales of bags and
laminates), water treatment (reflecting in 1994 a full quarter's results of
Latin America's largest water treatment business, which was acquired during the
first quarter of 1993), fluid cracking catalysts in Europe (reflecting
improvement in market share) and construction products (reflecting the
acquisition of a concrete admixture business in the first quarter of 1994).
Operating income before taxes decreased 4% in the first quarter of 1994 compared
to the first quarter of 1993. North American results improved slightly in the
first quarter of 1994, as strong growth occurred in packaging (due mainly to the
volume increase noted above), offset by reduced profitability in fluid cracking
catalysts (due to an increase in routine customer maintenance shutdowns during
the first quarter of 1994 as compared to the first quarter of 1993). European
results improved, due mainly to the volume increase in fluid cracking catalysts
noted above, as well as improvements in product pricing and mix and in control
of expenses, partially offset by reduced profitability in packaging (due to
competitive conditions along with the impact of currency translation). In Asia
Pacific, results were flat versus the 1993 quarter, with improvements in
packaging and fluid cracking catalysts and silica products offset by reduced
profitability in container and construction products due to expenses incurred to
increase market share in the region. In Latin America, results were down,
primarily in the water treatment business, due to the effects of exchange
arising as a result of Brazil's highly inflationary economy, weaker paper
process chemical sales and costs associated with the integration of common
services, including new administrative systems, among the product lines.
HEALTH CARE
Sales and revenues for the first quarter of 1994 increased by 19% over the first
quarter of 1993, due to increases of 21% and 41%, respectively, in kidney
dialysis services and home health care operations, offset by a decrease of 5% in
medical products operations. The decrease in medical products operations was
primarily due to lower bloodline sales resulting from the import alerts issued
in the 1993 second quarter (see below for further discussion). First quarter
1994 results for dialysis services and home health care include the results of
Home Intensive Care, Inc., acquired in June 1993, as well as a number of smaller
businesses acquired during the last nine months of 1993. The number of centers
providing dialysis and related services increased 18%, from 430 at March 31,
1993 to 508 at March 31, 1994 (476 in the U. S. and Puerto Rico, 23 in Portugal,
6 in Spain, 2 in the Czech Republic and 1 in Argentina). In April 1994, Grace
acquired all the outstanding shares of Home Nutritional Services, Inc. (HNS), a
national provider of home infusion therapy services, for approximately $120
million, inclusive of expenses and assumed debt.
I-8
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (continued)
Operating income before taxes in the first quarter of 1994 increased by 26% over
the first quarter of 1993. 1994 first quarter results for all health care
businesses benefited from acquisitions made in 1993 and continued improvements
in cost controls, operating efficiencies and/or capacity utilization, partially
offset by the costs of improving and expanding quality assurance systems for
medical products manufacturing (see below for further discussion).
It is unclear at this time whether and to what extent any of the currently
proposed reforms of the U.S. health care system will affect Grace's health care
operations. However, based on its knowledge and understanding of the health care
industry in general and of other providers of kidney dialysis and infusion
therapy, as well as on publicly available information, Grace believes that its
health care operations are among the most cost-efficient in the industry.
In 1993, the U.S. Food and Drug Administration (FDA) issued import alerts with
respect to (1) hemodialysis bloodlines manufactured at the plant of National
Medical Care, Inc. (NMC), Grace's principal health care subsidiary, located in
Reynosa, Mexico and (2) hemodialyzers manufactured in NMC's Dublin, Ireland
facility. Products subject to FDA import alerts may not enter the U. S. until
the FDA approves the quality assurance systems of the facility at which such
products are manufactured. In January 1994, NMC entered into a consent decree
providing for the resumption of importation of bloodlines and hemodialyzers
following certification by NMC that the relevant facility complies with FDA
regulations and successful completion of an FDA inspection to verify such
compliance. In accordance with the consent decree, NMC certified compliance to
the FDA with respect to the Reynosa, Mexico facility in January 1994, and the
FDA lifted the bloodline import alert in March 1994 following a thorough
reinspection by the FDA and a commitment by NMC to finish certain studies by May
1994 and, in the interim, to perform additional product testing. Certification
of compliance at the Dublin, Ireland facility was submitted to the FDA in April
1994. The consent decree also requires NMC to certify and maintain compliance
with applicable FDA device manufacturing laws and regulations at all of its U.S.
manufacturing facilities. NMC has conducted a full review of its facilities and
upgraded, as necessary, all of its quality assurance systems. No fines or
penalties were imposed on NMC as a result of any of the FDA's actions relating
to the import alerts or in connection with the consent decree. Neither the
import alerts nor previously reported recalls of certain NMC products are
expected to have a material effect on Grace's results of operations or financial
position.
(3) Statement of Operations:
OTHER INCOME
Other income includes, among other things, interest income, dividends, royalties
from product licensing agreements, and equity in earnings of affiliated
companies. In the first quarter of 1994, other income also includes a $27
million gain (pre- and after-tax) from the sale of Grace's remaining interest in
REG (see "Income Taxes" below).
I-9
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (continued)
INTEREST EXPENSE AND RELATED FINANCING COSTS
Interest expense and related financing costs increased by 6% in the first
quarter of 1994 versus the first quarter of 1993, due to reductions in interest
allocated to discontinued operations and in interest capitalized, as well as an
increase in related financing costs, partially offset by decreases due to lower
debt levels and lower interest rates, the replacement of certain fixed-rate debt
with lower-cost floating-rate borrowings and the use of financial instruments.
Grace enters into interest rate hedge agreements to manage interest costs and
risks associated with changing interest rates; most of these agreements
effectively convert underlying fixed-rate debt into variable-rate debt. Exposure
to market risk on interest rate hedge agreements results from fluctuations in
floating rate indices during the periods in which the agreements are
outstanding.
See "Financial Condition: Liquidity and Capital Resources" below for information
on borrowings.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development spending decreased by 7% in the first quarter of 1994
versus the first quarter of 1993. Research and development spending is now
directed primarily toward Grace's core specialty chemicals and health care
businesses.
INCOME TAXES
The effective tax rate was 21.9% in the first quarter of 1994 versus 41.0% in
the first quarter of 1993. The decrease is primarily attributable to the fact
that the sale of Grace's remaining interest in REG resulted in a gain for
financial reporting purposes and a capital loss for tax purposes (the carrying
basis of Grace's interest was greater for tax purposes than for financial
reporting purposes). Excluding the REG gain and the provision for environmental
costs and workforce reductions, the effective tax rate was 39.9% in the first
quarter of 1994.
In the third quarter of 1993, Grace recorded the effects of the Omnibus Budget
Reconciliation Act of 1993 (OBRA), which was enacted in August 1993. Among other
things, OBRA increased the highest U.S. Federal corporate tax rate to 35%,
effective January 1, 1993. However, neither this increase in the U.S. Federal
corporate tax rate (from 34%), nor the other provisions of OBRA, had a material
effect on Grace's results of operations.
LOSS FROM DISCONTINUED OPERATIONS
In the second quarter of 1993, Grace classified as discontinued operations its
cocoa and battery separators businesses; certain engineered materials
businesses, principally its printing products, electromagnetic radiation control
and materials businesses (collectively EMS); and other non-core businesses
pending their divestment. The $3.4 million loss from discontinued operations in
the 1993 first quarter represented the 1993 operating results of these
businesses prior to their classification as discontinued operations.
I-10
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (continued)
(b) Financial Condition; Liquidity and Capital Resources
During the first quarter of 1994, the net pretax cash flow used for Grace's
continuing operating activities was $68.3 million versus $167.7 million in the
first quarter of 1993. This reduction was primarily due to the net cash inflow
of $16.8 million relating to asbestos-related insurance settlements in the
first quarter of 1994 (see below for further discussion), compared with a net
cash outflow of $71.2 million in the first quarter of 1993. After giving effect
to discontinued operations and payments of income taxes, the net cash used for
operating activities was $60 million in the first quarter of 1994 versus $243
million in the 1993 quarter.
Investing activities used $37.6 million of cash in the first quarter of 1994,
largely reflecting capital expenditures and business acquisitions and
investments, primarily the acquisition of a concrete admixture business by Grace
Construction Products. These investing activities were offset by net proceeds of
$49.3 million from divestments, primarily Grace's remaining interest in REG.
Net cash provided by financing activities in the first quarter of 1994 was
$137.6 million, primarily reflecting an increase in total debt from year-end
1993, offset by the payment of $32.9 million of dividends. Total debt was
approximately $1.85 billion at March 31, 1994, an increase of $145 million from
December 31, 1993. Grace's total debt as a percentage of total capital (debt
ratio) increased from 52.9% at December 31, 1993 to 54.8% at March 31, 1994,
primarily as a result of the increase in total debt.
Grace expects to satisfy its 1994 cash requirements from the following sources:
(1) funds generated by operations, (2) proceeds from the sales of businesses and
(3) financings. Such financings are expected to include new borrowings, the
availability and cost of which will depend upon general economic and market
conditions.
In April 1994, Grace acquired all the outstanding shares of HNS, a national
provider of home infusion therapy services, for approximately $120 million,
inclusive of expenses and assumed debt.
In April 1994, Grace announced an agreement on the principal terms of the sale
of substantially all of Grace's interest in Colowyo Coal Company (Colowyo) to an
affiliate of Kennecott Corporation (Kennecott). Completion of the transaction is
subject to the finalization of documentation and obtaining necessary consents
and approvals, and to the completion of a proposed non-recourse financing to be
secured by a portion of the revenues from certain of Colowyo's long-term coal
supply contracts. In the transaction, Grace would receive the proceeds of the
financing, estimated at $220 million, and would retain a limited partnership
interest in Colowyo entitling it to share in proceeds of certain coal contracts
and an interest in certain receivables valued at approximately $20 million.
Kennecott's affiliate would make a cash investment of approximately $13 million
(which would be paid to Grace) and become general partner of Colowyo. Colowyo
was previously classified as a discontinued operation.
I-11
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (continued)
ASBESTOS-RELATED MATTERS
As reported in Note (b) to the Consolidated Financial Statements, Grace is a
defendant in lawsuits relating to previously sold asbestos-containing products.
In the first quarter of 1994, Grace received $16.8 million under settlements
with certain of Grace's insurance carriers, net of amounts paid in the first
quarter of 1994 for the defense and disposition of asbestos-related property
damage and personal injury litigation. The balance sheet at March 31, 1994
includes a receivable due from insurance carriers, subject to litigation, of
$893.5 million. Grace has also recorded a receivable of approximately $114
million for amounts to be received in 1994 to 1999 pursuant to settlement
agreements previously entered into with certain insurance carriers.
Although Grace cannot precisely estimate the amounts to be paid in 1994 in
respect of asbestos-related lawsuits and claims, Grace expects that it will be
required to expend approximately $50 million in 1994 to defend and dispose of
such lawsuits and claims (after giving effect to payments to be received from
certain insurance carriers, as discussed above and in Note (b) to the
Consolidated Financial Statements). As indicated therein, the amounts reflected
in the Consolidated Financial Statements with respect to the probable cost of
disposing of pending asbestos lawsuits and claims and probable recoveries from
insurance carriers represent estimates; neither the outcomes of such lawsuits
and claims nor the outcomes of Grace's ongoing litigations with certain of its
insurance carriers can be predicted with certainty.
ENVIRONMENTAL MATTERS
As previously discussed above in "Review of Operations: Overview," in the first
quarter of 1994, Grace recorded a charge primarily to provide for future
environmental costs relating to a previously divested business. No other
significant developments relating to environmental liabilities occurred in the
first quarter of 1994.
For additional information relating to environmental liabilities, see Note 11 to
the Consolidated Financial Statements in the Company's 1993 Annual Report on
Form 10-K.
I-12
<PAGE>
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.
ITEM 5. OTHER INFORMATION.
(a) On March 4, 1994, Grace announced that it had entered into a
definitive agreement under which a subsidiary of Grace would acquire all of the
outstanding shares of Home Nutritional Services, Inc. ("HNS"), a national
provider of home infusion therapy services, for $7.85 per share in cash. In
accordance with the agreement, on March 10, 1994, Grace commenced a tender offer
for all of the outstanding shares of HNS. When completed on April 6, 1994, the
tender offer resulted in Grace's ownership of 97.9% of HNS's outstanding shares.
On April 11, 1994, HNS became a wholly owned subsidiary of Grace by means of a
merger in which the HNS shares not acquired in the tender offer were converted
into the right to receive $7.85 per share in cash, without interest. Grace's
total cost to acquire HNS was approximately $120 million, inclusive of expenses
and assumed debt.
(b) Grace sold its 55% equity interest in an oil spill containment
business and the assets of its remaining American Cafe restaurants in March
1994, and sold the assets of its blow-molded plastic case business in April
1994, for total proceeds of approximately $15.5 million in cash plus $3.6
million in other consideration. Such businesses were previously classified as
discontinued operations.
II - 1
<PAGE>
(c) In April 1994, Grace announced an agreement on the principal term of
the sale of substantially all of Grace's interests in Colowyo Coal Companys
("Colowyo") to an affiliate of Kennecott Corporation ("Kennecott"). Completion
of the transaction is subject to the finalization of documentation and obtaining
necessary consents and approvals, and to the completion of a proposed
non-recourse financing to be secured by a portion of the revenues from certain
of Colowyo's long-term coal supply contracts. In the transaction, Grace would
receive the proceeds of the financing, estimated at $220 million, and would
retain a limited partnership interest in Colowyo entitling it to share in
proceeds of certain coal contracts and an interest in certain receivables
valued at approximately $20 million. Kennecott's affiliate would make a cash
investment of approximately $13 million (which would be paid to Grace) and
become general partner of Colowyo. Colowyo was previously classified as a
discontinued operation.
(d) On May 10, 1994, Grace announced that it had entered into a definitive
agreement to sell substantially all of its Endura Products Division, a custom
saturator and coater of specialty papers for the tape industry, to Specialty
Paperboard, Inc. Completion of the transaction is subject to customary
conditions and regulatory approvals.
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; and
II - 2
<PAGE>
-- computation of ratio of earnings to fixed charges and combined
fixed charges and preferred stock dividends.
(b) REPORTS ON FORM 8-K. During the quarter ended March 31, 1994, the
Company filed no Reports on Form 8-K.
II - 3
<PAGE>
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 13, 1994 By /s/ Richard N. Sukenik
-------------------------------
Richard N. Sukenik
Vice President and Controller
(Principal Accounting Officer)
<PAGE>
W. R. GRACE & CO.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1994
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
<PAGE>
Exhibit 11
W. R. GRACE & CO. AND SUBSIDIARIES
WEIGHTED AVERAGE NUMBER OF SHARES AND EARNINGS USED IN PER SHARE COMPUTATIONS
(Unaudited)
The weighted average number of shares of Common Stock outstanding were as
follows (in thousands):
<TABLE>
<CAPTION>
3 Mos. Ended
-----------------
3/31/94 3/31/93
------- -------
<S> <C> <C>
Weighted average number of shares of Common
Stock outstanding. . . . . . . . . . . . . . . . . . . . . . 93,750 89,983
Conversion of convertible debt obligations . . . . . . . . . - 3,629
Additional dilutive effect of outstanding options
(as determined by the application of the treasury
stock method). . . . . . . . . . . . . . . . . . . . . . . . 981 1,716
------- -------
Weighted average number of shares of Common
Stock outstanding assuming full dilution . . . . . . . . . . 94,731 95,328
------- -------
------- -------
</TABLE>
Income used in the computation of earnings per share were as follows (in
millions, except per share):
<TABLE>
<CAPTION>
3 Mos. Ended
----------------
3/31/94 3/31/93
------- -------
<S> <C> <C>
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $38.2 $28.3
Dividends paid on preferred stocks . . . . . . . . . . . . . (.1) (.1)
------- -------
Income used in per share computation of earnings . . . . . . 38.1 28.2
Interest, net of tax, on convertible debt obligations. . . . - .5
------- -------
Income used in per share computation of
earnings assuming full dilution. . . . . . . . . . . . . . . $38.1 $28.7
------- -------
------- -------
Income per share . . . . . . . . . . . . . . . . . . . . . . $ .41 $ .31
Income per share assuming full dilution. . . . . . . . . . . $ .40 $ .30
</TABLE>
<PAGE>
Exhibit 12
W. R. GRACE & CO. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND
COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(in millions except ratios)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
Years Ended December 31, (b) March 31,
---------------------------------------------- ------------------
1993(c) 1992(d) 1991 1990 1989 1994 1993(b)
------- ------- ---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net income from continuing operations. . . . . . . . . . . . $134.4 $ 57.7 $201.7 $174.6 $145.9 $38.2 $31.7
Add (deduct):
Provision for income taxes . . . . . . . . . . . . . . . . 86.8 134.8 132.5 97.5 61.3 10.7 22.0
Income taxes of 50%-owned companies. . . . . . . . . . . . .1 2.1 1.5 1.9 1.2 - -
Minority interest in income of
majority-owned subsidiaries. . . . . . . . . . . . . . . - - - 1.2 .6 - -
Equity in unremitted earnings of
less than 50%-owned companies. . . . . . . . . . . . . . (1.3) (1.8) (2.5) (2.1) (.3) (1.1) (.4)
Interest expense, including amortization
of capitalized interest. . . . . . . . . . . . . . . . . 119.8 152.9 198.4 235.7 224.8 21.6 29.9
Amortization of debt discount and expense. . . . . . . . . 4.3 1.5 2.1 1.9 1.9 .3 .5
Estimated amount of rental expense
deemed to represent the interest factor. . . . . . . . . 21.3 26.6 21.7 21.0 19.1 8.3 7.1
------ ------ ------ ------ ------ ----- -----
Income as adjusted . . . . . . . . . . . . . . . . . . . . . $365.4 $373.8 $555.4 $531.7 $454.5 $78.0 $90.8
------ ------ ------ ------ ------ ----- -----
------ ------ ------ ------ ------ ----- -----
Combined fixed charges and preferred stock dividends:
Interest expense, including capitalized
interest . . . . . . . . . . . . . . . . . . . . . . . . . $119.9 $166.5 $213.3 $244.7 $229.3 $22.3 $30.0
Amortization of debt discount and expense. . . . . . . . . 4.3 1.5 2.1 1.9 1.9 .3 .5
Estimated amount of rental expense
deemed to represent the interest factor. . . . . . . . . . 21.3 26.6 21.7 21.0 19.1 8.3 7.1
------ ------ ------ ------ ------ ----- -----
Fixed charges. . . . . . . . . . . . . . . . . . . . . . . . 145.5 194.6 237.1 267.6 250.3 30.9 37.6
Preferred stock dividend requirements (a). . . . . . . . . . .9 .9 .9 .8 .7 .2 .2
------ ------ ------ ------ ------ ----- -----
Combined fixed charges and preferred
stock dividends . . . . . . . . . . . . . . . . . . . . . $146.4 $195.5 $238.0 $268.4 $251.0 $31.1 $37.8
------ ------ ------ ------ ------ ----- -----
------ ------ ------ ------ ------ ----- -----
Ratio of earnings to fixed charges . . . . . . . . . . . . . 2.51 1.92 2.34 1.99 1.82 2.52 2.41
------ ------ ------ ------ ------ ----- -----
------ ------ ------ ------ ------ ----- -----
Ratio of earnings to combined fixed charges
and preferred stock dividends . . . . . . . . . . . . . . 2.50 1.91 2.33 1.98 1.81 2.51 2.40
------ ------ ------ ------ ------ ----- -----
------ ------ ------ ------ ------ ----- -----
<FN>
(a) Preferred stock dividend requirements, increased to an amount representing
the pretax earnings that would be required to cover such dividend
requirements based on the effective tax rates for the periods presented.
(b) Restated to conform to the 1994 presentation.
(c) Includes a provision of $159.0 relating to asbestos-related insurance
coverage.
(d) Includes a provision of $140.0 relating to a fumed silica plant in Belgium.
</TABLE>
