UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2008

 

 

 

OR

 

 

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number 1-13953

 

W. R. GRACE & CO.

 

Delaware

 

65-0773649

(State of Incorporation)

 

(I.R.S. Employer
Identification No.)

 

7500 Grace Drive
Columbia, Maryland 21044
(410) 531-4000

(Address and phone number of
principal executive offices)

 

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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

 

Yes   x

No   o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

 

Yes   o

No   x

 

72,108,918 shares of Common Stock, $0.01 par value, were outstanding at April 30, 2008.

 

 



 

W. R. GRACE & CO. AND SUBSIDIARIES

 

Table of Contents

 

 

 

Page No.

 

 

 

Part I.

Financial Information

 

 

 

 

Item 1.

Financial Statements

I-1

 

 

 

 

Report of Independent Registered Public Accounting Firm

I-2

 

 

 

 

Consolidated Statements of Operations

I-3

 

 

 

 

Consolidated Statements of Cash Flows

I-4

 

 

 

 

Consolidated Balance Sheets

I-5

 

 

 

 

Consolidated Statements of Shareholders’ Equity (Deficit)

I-6

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss)

I-6

 

 

 

 

Notes to Consolidated Financial Statements

I-7

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

I-36

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

I-54

 

 

 

Item 4.

Controls and Procedures

I-54

 

 

 

Part II.

Other Information

 

 

 

 

Item 1.

Legal Proceedings

II-1

 

 

 

Item 1A.

Risk Factors

II-1

 

 

 

Item 6.

Exhibits

II-2

 

Grace®, the Grace® logo and, except as otherwise indicated, the other trademarks in this Report are trademarks or registered trademarks of W. R. Grace & Co. — Conn. or its subsidiaries in the United States and/or other countries. OCR® is a registered trademark of Chevron Intellectual Property, LLC.  As used herein, ®  indicates that a trademark is registered in the United States and/or other countries.  Unless the context otherwise indicates, in this document the terms “Grace,” “we,” “us,” “our” or “the company” mean W. R. Grace & Co. and/or its consolidated subsidiaries and affiliates.  Unless otherwise indicated, the contents of websites mentioned in this Report are not incorporated by reference or otherwise made a part of this Report.

 



 

PART I.  FINANCIAL INFORMATION

 

Item 1.  FINANCIAL STATEMENTS

 

Review by Independent Registered Public Accounting Firm

 

With respect to the interim consolidated financial statements included in this Quarterly Report on Form 10-Q for the three months ended March 31, 2008 and 2007, PricewaterhouseCoopers LLP, the company’s independent registered public accounting firm, has applied limited procedures in accordance with professional standards for a review of such information.  Their report on the interim consolidated financial statements, which follows, states that they did not audit and they do not express an opinion on the unaudited interim financial statements.  Accordingly, the degree of reliance on their report on the unaudited interim financial statements should be restricted in light of the limited nature of the review procedures applied.  This report is not considered a “report” within the meaning of Sections 7 and 11 of the Securities Act of 1933, and, therefore, the independent accountants’ liability under Section 11 does not extend to it.

 

I-1



 

Report of Independent Registered Public Accounting Firm

 

To the Shareholders and Board of Directors of W. R. Grace & Co.:

 

We have reviewed the accompanying consolidated balance sheet of W. R. Grace & Co. and its subsidiaries as of March 31, 2008, and the related consolidated statements of operations, cash flows, shareholders’ equity (deficit) and comprehensive income (loss) for each of the three-month periods ended March 31, 2008 and March 31, 2007. These interim financial statements are the responsibility of the Company’s management.

 

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

 

Based on our review, we are not aware of any material modifications that should be made to the accompanying interim consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying interim consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Notes 1 and 2 to the interim consolidated financial statements, on April 2, 2001, the Company and substantially all of its domestic subsidiaries voluntarily filed for protection under Chapter 11 of the United States Bankruptcy Code, which raises substantial doubt about the Company’s ability to continue as a going concern in its present form.  Management’s intentions with respect to this matter are also described in Notes 1 and 2.  The accompanying interim consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2007, and the related consolidated statements of operations, cash flows, shareholders’ equity (deficit) and comprehensive income (loss) for the year then ended (not presented herein), and in our report dated February 29, 2008, we expressed an unqualified opinion on those consolidated financial statements with an explanatory paragraph relating to the Company’s ability to continue as a going concern.  In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2007, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.

 

 

/s/ PricewaterhouseCoopers LLP

McLean, Virginia

May 9, 2008

 

I-2



 

W. R. Grace & Co. and Subsidiaries

Consolidated Statements of Operations (Unaudited)

(In millions, except per share amounts)

 

 

 

Three Months
Ended
March 31,

 

 

 

2008

 

2007

 

Net sales

 

$

759.2

 

$

715.6

 

Cost of goods sold

 

527.2

 

497.7

 

Selling, general and administrative expenses

 

142.8

 

135.2

 

Research and development expenses

 

21.7

 

18.7

 

Defined benefit pension expense

 

14.3

 

12.7

 

Interest expense and related financing costs

 

15.1

 

19.4

 

Provision for environmental remediation

 

5.9

 

 

Chapter 11 expenses, net of interest income

 

18.4

 

17.8

 

Other (income) expense, net

 

(17.3

)

(8.0

)

 

 

 

728.1

 

 

693.5

 

Income before income taxes and minority interest

 

31.1

 

22.1

 

Provision for income taxes

 

(15.6

)

(14.9

)

Minority interest in consolidated entities

 

(1.9

)

(2.4

)

Net income

 

$

13.6

 

$

4.8

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

Net income

 

$

0.19

 

$

0.07

 

Weighted average number of basic shares

 

72.5

 

69.4

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

Net income

 

$

0.19

 

$

0.07

 

Weighted average number of diluted shares

 

73.2

 

70.5

 

 

The Notes to Consolidated Financial Statements are an integral part of these statements.

 

I-3



 

W. R. Grace & Co. and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

(In millions)

 

 

 

Three Months
Ended
March 31,

 

 

 

2008

 

2007

 

OPERATING ACTIVITIES

 

 

 

 

 

Net income

 

$

13.6

 

$

4.8

 

Reconciliation to net cash used for operating activities:

 

 

 

 

 

Depreciation and amortization

 

30.2

 

27.6

 

Chapter 11 expenses, net of interest income

 

18.4

 

17.8

 

Provision for income taxes

 

15.6

 

14.9

 

Income taxes paid, net of refunds

 

(15.4

)

(2.5

)

Minority interest in consolidated entities

 

1.9

 

2.4

 

Dividends paid to minority interests in consolidated entities

 

 

(11.8

)

Interest accrued on pre-petition liabilities subject to compromise

 

14.3

 

19.1

 

Net (gain) loss on sales of investments and disposals of assets

 

(1.6

)

(0.2

)

Defined benefit pension expense

 

14.3

 

12.7

 

Payments under defined benefit pension arrangements

 

(19.5

)

(32.4

)

Net payments under postretirement benefit plans

 

(1.1

)

(0.2

)

Net income from life insurance policies

 

(1.1

)

(2.0

)

Provision for uncollectible receivables

 

0.4

 

0.6

 

Provision for environmental remediation

 

5.9

 

 

Expenditures for environmental remediation

 

(1.3

)

(2.8

)

Expenditures for retained obligations of divested businesses

 

 

(0.4

)

Changes in assets and liabilities, excluding effect of foreign currency translation:

 

 

 

 

 

Working capital items (trade accounts receivable, inventories and accounts payable)

 

(20.8

)

(7.1

)

Other accruals and non-cash items

 

(87.5

)

(61.0

)

Net cash used for operating activities before Chapter 11 expenses and settlements

 

(33.7

)

(20.5

)

Cash paid to resolve contingencies subject to Chapter 11

 

 

(10.3

)

Chapter 11 expenses paid

 

(14.0

)

(18.2

)

Net cash used for operating activities

 

(47.7

)

(49.0

)

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

Capital expenditures

 

(25.9

)

(24.1

)

Proceeds from sales of investment securities

 

33.1

 

 

Purchase of equity investment

 

(3.0

)

 

Net investment in life insurance policies

 

 

0.2

 

Proceeds from disposals of assets

 

2.5

 

0.7

 

Net cash provided by (used for) investing activities

 

6.7

 

(23.2

)

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

Net (repayments) borrowings under credit arrangements

 

(1.5

)

(1.1

)

Fees paid under debtor-in-possession credit facility

 

(0.7

)

(0.7

)

Proceeds from exercise of stock options

 

8.9

 

14.2

 

Net cash provided by financing activities

 

6.7

 

12.4

 

Effect of currency exchange rate changes on cash and cash equivalents

 

14.6

 

2.8

 

Decrease in cash and cash equivalents

 

(19.7

)

(57.0

)

Cash and cash equivalents, beginning of period

 

480.5

 

536.3

 

Cash and cash equivalents, end of period

 

$

460.8

 

$

479.3

 

 

The Notes to Consolidated Financial Statements are an integral part of these statements.

 

I-4



 

W. R. Grace & Co. and Subsidiaries

Consolidated Balance Sheets

(In millions, except par value and shares)

 

 

 

March 31,
2008

 

December 31,
2007

 

 

 

(unaudited)

 

 

 

ASSETS

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

 

$

460.8

 

$

480.5

 

Investment securities

 

64.0

 

98.3

 

Cash value of life insurance policies, net of policy loans

 

78.2

 

77.1

 

Trade accounts receivable, less allowance of $5.6 (2007 - $5.2)

 

488.1

 

500.6

 

Inventories

 

371.9

 

303.5

 

Deferred income taxes

 

34.7

 

37.7

 

Other current assets

 

90.4

 

80.8

 

Total Current Assets

 

 

1,588.1

 

 

1,578.5

 

Properties and equipment, net of accumulated depreciation and amortization of $1,615.8 (2007 - $1,545.0)

 

722.9

 

706.1

 

Goodwill

 

128.1

 

122.3

 

Cash value of life insurance policies, net of policy loans

 

3.9

 

3.9

 

Deferred income taxes

 

768.1

 

767.5

 

Asbestos-related insurance

 

500.0

 

500.0

 

Overfunded defined benefit pension plans

 

75.6

 

54.1

 

Other assets

 

140.6

 

136.6

 

Total Assets

 

$

3,927.3

 

$

3,869.0

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

Liabilities Not Subject to Compromise

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Debt payable within one year

 

$

3.2

 

$

4.7

 

Accounts payable

 

203.6

 

191.3

 

Other current liabilities

 

290.5

 

325.1

 

Total Current Liabilities

 

497.3

 

521.1

 

Debt payable after one year

 

0.3

 

0.3

 

Deferred income taxes

 

34.0

 

32.7

 

Minority interest in consolidated entities

 

71.8

 

70.8

 

Underfunded defined benefit pension plans

 

192.9

 

169.1

 

Unfunded pay-as-you-go defined benefit pension plans

 

140.8

 

137.9

 

Other liabilities

 

55.8

 

46.2

 

Total Liabilities Not Subject to Compromise

 

 

992.9

 

 

978.1

 

 

 

 

 

 

 

Liabilities Subject to Compromise – Note 2

 

 

 

 

 

Pre-petition bank debt plus accrued interest

 

795.1

 

783.0

 

Drawn letters of credit plus accrued interest

 

27.1

 

26.9

 

Income tax contingencies

 

86.3

 

89.3

 

Asbestos-related contingencies

 

1,700.0

 

1,700.0

 

Environmental contingencies

 

373.2

 

368.6

 

Postretirement benefits

 

170.2

 

172.7

 

Other liabilities and accrued interest

 

139.2

 

137.0

 

Total Liabilities Subject to Compromise

 

3,291.1

 

3,277.5

 

Total Liabilities

 

 

4,284.0

 

 

4,255.6

 

Commitments and Contingencies

 

 

 

 

 

Shareholders’ Equity (Deficit)

 

 

 

 

 

Common stock issued, par value $0.01; 300,000,000 shares authorized; outstanding: 2008 – 72,090,418 (2007 – 71,627,901)

 

0.8

 

0.8

 

Paid-in capital

 

434.9

 

431.5

 

Accumulated deficit

 

(391.5

)

(405.1

)

Treasury stock, at cost: shares: 2008 – 4,889,342; (2007 – 5,351,859)

 

(58.2

)

(63.7

)

Accumulated other comprehensive income (loss)

 

(342.7

)

(350.1

)

Total Shareholders’ Equity (Deficit)

 

(356.7

)

(386.6

)

Total Liabilities and Shareholders’ Equity (Deficit)

 

$

3,927.3

 

$

3,869.0

 

 

The Notes to Consolidated Financial Statements are an integral part of these statements.

 

I-5



 

W. R. Grace & Co. and Subsidiaries

Consolidated Statements of Shareholders’ Equity (Deficit) (Unaudited)

(In millions)

 

 

 

Common
Stock
and
Paid-in Capital

 

Accumulated
Deficit

 

Treasury
Stock

 

Accumulated
Other
Comprehensive
Income
(Loss)

 

Total
Shareholders’ 
Equity
(Deficit)

 

Balance, December 31, 2007

 

$

432.3

 

$

(405.1

)

$

(63.7

)

$

(350.1

)

$

(386.6

)

Net income

 

 

13.6

 

 

 

13.6

 

Stock plan activity

 

3.4

 

 

5.5

 

 

8.9

 

Other comprehensive income (loss)

 

 

 

 

7.4

 

7.4

 

Balance, March 31, 2008

 

$

435.7

 

$

(391.5

)

$

(58.2

)

$

(342.7

)

$

(356.7

)

 

W. R. Grace & Co. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

(In millions)

 

 

 

Three Months
Ended
March 31,

 

 

 

2008

 

2007

 

Net income

 

$

13.6

 

$

4.8

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

Foreign currency translation adjustments

 

1.9

 

5.7

 

Gain (loss) from hedging activities, net of income taxes

 

2.2

 

1.1

 

Defined benefit pension and other postretirement plans, net of income taxes (see Note 12)

 

3.3

 

(0.4

)

Total other comprehensive income (loss)

 

$

7.4

 

$

6.4

 

Comprehensive income (loss)

 

$

21.0

 

$

11.2

 

 

The Notes to Consolidated Financial Statements are an integral part of these statements.

 

I-6



 

W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

 

1.              Basis of Presentation and Summary of Significant Accounting and Financial Reporting Policies

 

W. R. Grace & Co., through its subsidiaries, is engaged in specialty chemicals and specialty materials businesses on a worldwide basis through two operating segments: “Grace Davison,” which includes specialty catalysts and materials used in a wide range of energy, refining, consumer, industrial, packaging and life sciences applications; and “Grace Construction Products,” which includes specialty chemicals and materials used in commercial, infrastructure and residential construction.

 

W. R. Grace & Co. conducts substantially all of its business through a direct, wholly-owned subsidiary,
W. R. Grace & Co.-Conn. (“Grace-Conn.”). Grace-Conn. owns substantially all of the assets, properties and rights of W. R. Grace & Co. on a consolidated basis, either directly or through subsidiaries.

 

As used in these notes, the term “Company” refers to W. R. Grace & Co. The term “Grace” refers to the Company and/or one or more of its subsidiaries and, in certain cases, their respective predecessors.

 

Voluntary Bankruptcy Filing – During 2000 and the first quarter of 2001, Grace experienced several adverse developments in its asbestos-related litigation, including: a significant increase in personal injury claims, higher than expected costs to resolve personal injury and certain property damage claims, and class action lawsuits alleging damages from Zonolite Attic Insulation (“ZAI”), a former Grace attic insulation product.

 

After a thorough review of these developments, Grace’s Board of Directors concluded that a federal court-supervised bankruptcy process provided the best forum available to achieve fairness in resolving these claims and on April 2, 2001 (the “Filing Date”), Grace and 61 of its United States subsidiaries and affiliates, including Grace-Conn. (collectively, the “Debtors”), filed voluntary petitions for reorganization (the “Filing”) under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). The cases were consolidated and are being jointly administered under case number 01-01139 (the “Chapter 11 Cases”). Grace’s non-U.S. subsidiaries and certain of its U.S. subsidiaries were not included in the Filing.

 

Under Chapter 11, the Debtors have continued to operate their businesses as debtors-in-possession under court protection from creditors and claimants, while using the Chapter 11 process to develop and implement a plan for addressing the asbestos-related claims. Since the Filing, all motions necessary to conduct normal business activities have been approved by the Bankruptcy Court. (See Note 2 for Chapter 11-Related Information.)

 

Basis of Presentation – The interim Consolidated Financial Statements presented herein are unaudited and should be read in conjunction with the Consolidated Financial Statements presented in the Company’s 2007 Annual Report on Form 10-K.  Such 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 are of a normal recurring nature. Potential accounting adjustments discovered during normal reporting and accounting processes are evaluated on the basis of materiality, both individually and in the aggregate, and are recorded in the accounting period discovered, unless a restatement of a prior period is necessary. All significant intercompany accounts and transactions have been eliminated.

 

The results of operations for the three-month interim period ended March 31, 2008 are not necessarily indicative of the results of operations for the year ending December 31, 2008.

 

Reclassifications Certain amounts in prior years’ Consolidated Financial Statements have been reclassified to conform to the 2008 presentation.  In the fourth quarter of 2007, Grace completed the transfer of its packaging technologies product group to the Grace Davison segment in an effort to capture operating synergies. All 2007 segment information herein has been retrospectively restated to reflect this realignment of the packaging technologies product group.  The former Grace Performance Chemicals segment has been renamed “Grace Construction Products” as a result of the transfer.  Other than the realignment of operating segments, reclassifications have not

 

I-7



 

materially affected previously reported amounts in the Consolidated Financial Statements.

 

Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements, and the reported amounts of revenues and expenses for the periods presented. Actual amounts could differ from those estimates, and the differences could be material.  Changes in estimates are recorded in the period identified.  Grace’s accounting measurements that are most affected by management’s estimates of future events are:

 

·                  Contingent liabilities, which depend on an assessment of the probability of loss and an estimate of ultimate resolution cost, such as asbestos-related matters (see Notes 2 and 3), environmental remediation (see Note 13), income taxes (see Note 4), and litigation (see Note 13);

 

·                  Pension and postretirement liabilities that depend on assumptions regarding participant life spans, future inflation, discount rates and total returns on invested funds (see Note 14); and

 

·                  Realization values of net deferred tax assets and insurance receivables, which depend on projections of future income and cash flows and assessments of insurance coverage and insurer solvency.

 

The accuracy of management’s estimates may be materially affected by the uncertainties arising under Grace’s Chapter 11 proceeding.

 

Effect of New Accounting Standards – In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements.”  SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.  In February 2008, the FASB issued FASB Staff Position (“FSP”) 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13”, and FSP 157-2, “Effective Date of FASB Statement No. 157”.  FSP 157-1 amends SFAS No. 157 to remove certain leasing transactions from its scope.  FSP 157-2 delays the effective date of SFAS No. 157 for all non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until fiscal years beginning after November 15, 2008.  Grace has adopted SFAS No. 157 and the related FSPs in the first quarter of 2008, and the adoption for Grace’s financial assets and liabilities did not have a material impact on its Consolidated Financial Statements.  Grace does not believe the adoption of SFAS No. 157 for its non-financial assets and liabilities, effective January 1, 2009, will have a material impact on its Consolidated Financial Statements.  See Note 6 for further discussion of SFAS No. 157.

 

In March 2008, the FASB issued SFAS No. 161 “Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133.”  SFAS No. 161 expands the current disclosure framework by requiring entities to provide qualitative disclosures about the objectives and strategies for using derivatives, quantitative data about the fair value of and gains and losses on derivative contracts, and details of credit-risk-related contingent features in their hedged positions.  SFAS No. 161 is effective for fiscal years beginning after November 15, 2008.

 

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.”  SFAS No. 159 permits entities to measure many financial instruments and certain other items at fair value.  SFAS No. 159 is effective for the first quarter of 2008.  Grace has elected not to measure eligible financial assets and liabilities at fair value that are not currently required to be so measured.

 

In November 2006, the FASB Emerging Issues Task Force (“EITF”) promulgated Issue No. 06-10, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Collateral Assignment Split-Dollar Life Insurance Arrangement.”  This Issue specifies that if a company provides a benefit to an employee under a collateral assignment split-dollar life insurance arrangement that extends to postretirement periods or provides an employee with a death benefit, it would have to recognize a liability and related compensation costs.  Grace adopted EITF 06-10 in

 

I-8



 

the first quarter of 2008, and it had no impact to the Consolidated Financial Statements.

 

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations.”  SFAS No. 141(R) will require the acquirer in a business combination to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with acquisition-related costs recognized separately from the acquisition.  SFAS No. 141(R) applies prospectively to business combinations occurring on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.

 

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements.”  SFAS No. 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary.  SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008.

 

2.              Chapter 11 - Related Information

 

Official Parties to Grace’s Chapter 11 Proceedings Three creditors’ committees, two representing asbestos claimants, the Official Committee of Asbestos Personal Injury Claimants (the “PI Committee”) and the Official Committee of Asbestos Property Damage Claimants (the “PD Committee”), and a third representing other general unsecured creditors, and the Official Committee of Equity Security Holders (the “Equity Committee”), have been appointed in the Chapter 11 Cases. These committees, and a legal representative of future asbestos claimants (the “FCR”), have the right to be heard on all matters that come before the Bankruptcy Court and have important roles in the Chapter 11 Cases. The Debtors are required to bear certain costs and expenses of the committees and of the FCR, including those of their counsel and financial advisors.

 

As discussed below, the Debtors, supported by the committee representing general unsecured creditors and the Equity Committee, as co-proponents, have filed a plan of reorganization with the Bankruptcy Court.  The PI Committee and the FCR, as co-proponents, also have filed a separate plan of reorganization with the Bankruptcy Court.  Each of these plans of reorganization is designed to address all pending and future asbestos-related claims and all other pre-petition claims as outlined therein.  Subsequent to these filings, on April 6, 2008, the Debtors, the Equity Committee, the PI Committee and the FCR entered into an agreement in principle that would settle all present and future asbestos-related personal injury claims.  The committee representing general unsecured creditors and the PD Committee are not parties to this agreement in principle.  The Debtors, Equity Committee, PI Committee and FCR contemplate that a joint plan of reorganization reflecting the terms of the agreement in principle would be filed with the Bankruptcy Court and would supersede the existing plans on file.

 

Plans of Reorganization - On November 13, 2004, Grace filed a plan of reorganization, as well as several associated documents, including a disclosure statement, trust distribution procedures, exhibits and other supporting documents, with the Bankruptcy Court.  On January 13, 2005, Grace filed an amended plan of reorganization (the “Debtors Plan”) and related documents to address certain objections of creditors and other interested parties.  At the time it was filed, the Debtors Plan was supported by the committee representing general unsecured creditors and the Equity Committee, but was not supported by the PI Committee, the PD Committee or the FCR.

 

On July 26, 2007, the Bankruptcy Court terminated Grace’s exclusive rights to propose a plan of reorganization and solicit votes thereon.  As a result of the termination of these rights, any party-in-interest may propose a competing plan of reorganization.

 

On November 5, 2007, the PI Committee and the FCR filed a proposed plan of reorganization (the “PI Plan”, and with the Debtors Plan, the “Plans”) with the Bankruptcy Court.  Copies of the Plans are available from the Bankruptcy Court.  The filing did not include a disclosure statement, trust distribution procedures, exhibits or other supporting documents.

 

On April 6, 2008, the Debtors reached an agreement in principle with the PI Committee, the FCR, and the Equity Committee that would settle all present and future asbestos-related personal injury claims, as further described below (the “PI Settlement”).  The PI Settlement contemplates that the Debtors, the PI Committee, the FCR and the Equity Committee would file a new joint plan of reorganization with the Bankruptcy Court reflecting the terms and conditions of the PI Settlement.  The drafting and negotiation of the joint plan and related documentation is in progress.  The committee

 

I-9



 

representing general unsecured creditors and the PD Committee are not parties to the PI Settlement.  Neither the PI Settlement nor a joint plan of reorganization reflecting its terms has been filed with the Bankruptcy Court.

 

The Bankruptcy Court had previously entered a case management order for estimating liability for pending and future asbestos personal injury claims.  A trial for estimating liability for such claims began in January 2008 but was suspended in April 2008 as a result of the PI Settlement.

 

Any plan of reorganization, including either of the Plans, a plan reflecting the PI Settlement and any plan of reorganization that may be filed in the future by a party-in-interest, will become effective only after a vote of eligible creditors and with the approval of the Bankruptcy Court and the U.S. District Court for the District of Delaware.  Votes on a plan of reorganization may not be solicited until the Bankruptcy Court approves a related disclosure statement.

 

Each of the Plans and the PI Settlement assumes that Cryovac, Inc. (“Cryovac”), a wholly-owned subsidiary of Sealed Air Corporation (“Sealed Air”), will pay $512.5 million in cash (plus interest at 5.5% compounded annually from December 21, 2002) and will issue 18 million shares (reflecting a two-for-one stock split) of common stock of Sealed Air to an asbestos trust pursuant to the terms of a settlement agreement resolving asbestos-related, successor liability and fraudulent transfer claims against Sealed Air and Cryovac, as further described below (the “Sealed Air Settlement”).  The value of the Sealed Air Settlement changes daily with the accrual of interest and the trading value of Sealed Air common stock. The Sealed Air Settlement has been approved by the Bankruptcy Court, but remains subject to the fulfillment of specified conditions.

 

Each of the Plans and the PI Settlement contemplate that a trust would be established under Section 524(g) of the Bankruptcy Code (the “Asbestos Trust”) to which asbestos-related personal injury claims would be channeled for resolution.

 

The Debtors Plan and the PI Plan are designed to address all pending and future asbestos-related claims and all other pre-petition claims as outlined respectively, therein.  However, it is possible that neither of the Plans, nor any plan that may be filed as contemplated by the PI Settlement, will be approved by the Bankruptcy Court.  If a new joint plan of reorganization reflecting the PI Settlement is not filed with the Bankruptcy Court, the Debtors would expect to resume the estimation trial, that was suspended in April due to the PI Settlement, to determine the amount of its asbestos-related liabilities.  Therefore, until an ultimate plan of reorganization is confirmed, the interests of the holders of Company common stock remain subject to substantial dilution or cancellation, and the value of asbestos claims and non-asbestos claims could be materially different from that reflected in Grace’s balance sheet.  The value of Company common stock and the extent of any recovery by non-asbestos-related creditors will depend principally on the amount of Grace’s asbestos-related liability under a confirmed plan of reorganization.

 

Debtors Plan of Reorganization - Under the terms of the Debtors Plan, claims will be satisfied under the Chapter 11 Cases as follows:

 

Asbestos-Related Claims and Costs

 

All pending and future asbestos-related claims would be channeled to the Asbestos Trust for resolution.  The Debtors Plan contemplates that the Bankruptcy Court will conduct hearings to determine, among other things, the amount that would need to be paid into the Asbestos Trust on the effective date of the Debtors Plan to satisfy Grace’s asbestos-related liabilities and trust administration costs and expenses over time.  The Asbestos Trust would utilize specified trust distribution procedures to satisfy the following allowed asbestos-related claims and costs:

 

·                  “PI-SE Claims” — Personal Injury-Symptomatic Eligible claims — in order to qualify for this class, claims would have to meet specified exposure and medical criteria and claimants would have to prove that their health is impaired due to meaningful exposure to asbestos-containing products formerly manufactured by Grace;

 

·                  “PI-AO Claims” — Personal Injury-Asymptomatic and Other claims — this class would contain all asbestos-related personal injury claims against Grace that did not meet the specific requirements to be PI-SE Claims, but did meet certain other specified exposure and medical criteria;

 

·                  “PD Claims” — Property Damage, including ZAI, claims — in order to qualify for this class, claimants would have to prove Grace liability for loss of property value or remediation costs related to products formerly manufactured by Grace that claimants allege contained asbestos; and

 

I-10



 

·                  Trust administration costs and legal expenses.

 

The claims arising from such proceedings would be subject to this classification process.

 

Asbestos personal injury claimants, including holders of both PI-SE Claims and PI-AO Claims, would have the option either to litigate their claims against the Asbestos Trust in federal court in Delaware or, if they meet specified eligibility criteria, accept a settlement amount based on the severity of their condition.  Holders of PD Claims would be required to present allowed claims to the Asbestos Trust or litigate their claims against the Asbestos Trust in federal court in Delaware.  The Debtors Plan provides that, as a condition precedent to confirmation, the maximum estimated aggregate funding amount for all asbestos-related liabilities (PI-SE Claims, PI-AO Claims and PD Claims) and trust administration costs and expenses as determined by the Bankruptcy Court cannot exceed $1,613 million, which Grace believes would fund over $2 billion in claims, costs and expenses over time.

 

PI-SE Claims, PD Claims and related trust administration costs and expenses would be funded with (1) cash and shares of Sealed Air common stock pursuant to the Sealed Air Settlement; and (2) Company common stock.  The number of shares of Company common stock required to satisfy these claims will depend on the price of Company common stock on the effective date of the Debtors Plan, liability measures approved by the Bankruptcy Court, and the value of the Sealed Air Settlement.

 

PI-AO Claims would be funded with warrants exercisable for that number of shares of Company common stock which, when added to the shares issued directly to the Asbestos Trust on the effective date of the Debtors Plan, would represent 50.1% of Grace’s voting securities. If the common stock issuable upon exercise of the warrants is insufficient to pay all PI-AO Claims (the liability for which is uncapped under the Debtors Plan), then Grace would pay any additional liabilities in cash.

 

The amounts to fund PI-SE Claims, PD Claims and trust administration costs and expenses would be capped at the amount determined by the Bankruptcy Court.  Amounts required to fund PI-AO Claims would not be capped, so if the amount funded in respect thereof later proved to be inadequate, Grace would be responsible for contributing additional funds into the Asbestos Trust to satisfy PI-AO Claims.  Because of the number and nature of the uncertainties involved, Grace is unable to determine the extent to which, if any, the liability for PI-AO Claims may exceed the amount funded into the Asbestos Trust in respect thereof.

 

Other Claims

 

All allowed administrative or priority claims would be paid 100% in cash and all general unsecured claims, other than those covered by the Asbestos Trust, would be paid 85% in cash and 15% in Company common stock. Grace estimates that claims with a recorded value of approximately $1,390 million, including interest accrued through March 31, 2008, would be satisfied in this manner at the effective date of the Debtors Plan. Grace would finance these payments with cash on hand, cash from Fresenius Medical Care Holdings, Inc. (“Fresenius”) paid in settlement of asbestos and other Grace-related claims as described below (the “Fresenius Settlement”), new Grace debt, and Company common stock.  Grace would satisfy other non-asbestos related liabilities and claims (primarily certain environmental, tax, pension and retirement medical obligations) as they become due and payable over time using cash flow from operations, insurance proceeds from policies and settlements covering asbestos-related liabilities, and new credit facilities. Proceeds from available product liability insurance applicable to asbestos-related claims would supplement operating cash flow to service new debt and liabilities not paid on the effective date of the Debtors Plan.

 

Effect on Company Common Stock

 

The Debtors Plan provides that Company common stock will remain outstanding at the effective date of the Debtors Plan, but that the interests of existing shareholders would be subject to dilution by additional shares of common stock issued under the Debtors Plan. In addition, in order to preserve significant tax benefits from net operating loss carryforwards (“NOLs”) and certain future deductions, which are subject to elimination or limitation in the event of a change in control (as defined by the Internal Revenue Code) of Grace, the Debtors Plan places restrictions on the purchase of Company common stock. The restrictions would prohibit (without the consent of Grace), for a period of three years after the effective date of the Debtors Plan, a person or entity from acquiring more than 4.75% of the outstanding Company common stock or, for those persons already holding more than 4.75%, prohibit

 

I-11



 

them from increasing or decreasing their holdings. The Bankruptcy Court has approved the trading restrictions described above, excluding the restriction on sales, until the effective date of the Debtors Plan.

 

The PI and PD Committees and the FCR have challenged the confirmability of the Debtors Plan, arguing that the Debtors Plan impairs the rights of asbestos creditors and impermissibly denies them voting rights, and have asserted that Grace’s asbestos-related liabilities exceed the fair value of Grace’s assets.

 

PI Committee and FCR Plan of Reorganization - Under the terms of the PI Plan, all pending and future asbestos-related personal injury claims and demands (“PI Claims”) would be channeled to the Asbestos Trust for resolution.  The PI Plan contemplates that the Bankruptcy Court would determine, among other things, an estimate of the value of all PI Claims.  The PI Plan assumes that:  cash would be available from insurers; cash would be available from Fresenius pursuant to the Fresenius Settlement; and cash and shares of Sealed Air common stock would be available from Cryovac pursuant to the Sealed Air Settlement.  As a condition precedent to the PI Plan, the Bankruptcy Court must determine that the estimated value of all PI Claims, excluding to the extent applicable, post-petition interest, is not less than $4 billion.  If the amount available for distribution pursuant to the PI Plan is more than the principal amount of creditors’ claims, creditors entitled to post-petition interest would be paid such interest in the form of Company equity securities and any remaining value would be available to current Company shareholders in the form of new Company equity securities.

 

Under the terms of the PI Plan, claims would be satisfied under the Chapter 11 Cases as follows:

 

Asbestos-Related Personal Injury Claims and Costs (PI Claims)

 

All pending and future PI Claims would be channeled to the Asbestos Trust for resolution.  The PI Plan provides that claims arising from such proceedings would be subject to specified trust distribution procedures, which have not been filed with the Bankruptcy Court.

 

In order to satisfy allowed PI Claims and the related trust administration costs and expenses, on the effective date of the PI Plan, the Asbestos Trust would be funded with:  (1) cash; (2) cash and shares of Sealed Air common stock pursuant to the Sealed Air Settlement; (3) personal injury liability insurance, unless it is valued at more than $500 million, in which case it would remain with Grace; and (4) Company equity securities.  The value of Company equity securities contributed to the Asbestos Trust would depend on the enterprise value of Grace, the value of Grace’s personal injury liability insurance and the value of the Sealed Air Settlement.

 

Asbestos-Related Property Damage Claims excluding ZAI (non-ZAI PD Claims)

 

Settled asbestos-related property damage claims excluding ZAI (“non-ZAI PD Claims”) would be paid in a combination of cash and Company equity securities on the effective date of the PI Plan.  On the effective date of the PI Plan, Grace would establish a reserve consisting of cash and Company equity securities with a value equal to the estimated amount of unresolved non-ZAI PD Claims.  Unresolved non-ZAI PD Claims would remain in the mediation and litigation process and would be paid in cash and Company equity securities from the reserve.  If the reserve did not have sufficient assets to pay all unresolved non-ZAI PD Claims once the amounts were determined, Grace would be liable to pay any amounts not funded from the reserve.

 

ZAI Claims

 

ZAI claims would remain in the litigation process and would be paid by Grace, if required.

 

Certain Environmental Claims

 

Certain allowed environmental claims would be paid in cash and Company equity securities on the effective date of the PI Plan.  On the effective date of the PI Plan, Grace would establish a reserve consisting of cash and Company equity securities with a value equal to the estimated amount of unresolved environmental claims.  Unresolved environmental claims would be determined by the Bankruptcy Court and would be paid in cash and Company equity securities from the reserve.  If the reserve did not have sufficient assets to pay all unresolved environmental claims once the amounts were determined, Grace would be liable to pay any amounts not funded from the reserve.

 

Other Claims

 

All allowed administrative or priority claims would be paid in cash (either on the effective date of the PI Plan or as they become due and payable over time).  General unsecured claims, other than those covered by the Asbestos Trust, would be paid in

 

I-12



 

 

cash (either on the effective date of the PI Plan or as they become due and payable over time) and Company equity securities.  Certain environmental and general unsecured claims would be reinstated and the holders of such claims would retain all legal and other rights to which they are entitled under such claims.  Other non-asbestos-related liabilities and claims (primarily certain tax claims and employee-related claims such as pension and retirement medical obligations) would be paid in cash as they become due and payable over time.

 

Effect on Company Common Stock

 

Outstanding Company common stock would be cancelled at the effective date of the PI Plan.

 

PI Settlement - Under the terms of the PI Settlement, the Debtors, the PI Committee, the FCR, and the Equity Committee would file a joint plan of reorganization.  Under this plan, all present and future PI Claims would be channeled to the Asbestos Trust for resolution.

 

The Asbestos Trust would be funded with

 

·                  $250 million in cash;

 

·                  a warrant to acquire 10 million shares of Company common stock at an exercise price of $17.00 per share, expiring one year from the effective date of a plan of reorganization;

 

·                  all of the Debtors’ insurance policies and proceeds, including interest, received after the date of the PI Settlement, that are available for payment of PI Claims;

 

·                  cash and shares of Sealed Air common stock to be paid to the Asbestos Trust by Cryovac, Inc. pursuant to the Sealed Air Settlement;

 

·                  the proceeds of the payment received by Grace pursuant to the Fresenius Settlement; and

 

·                  deferred payments by Grace-Conn. of $110 million per year for five years beginning in 2019, and $100 million per year for 10 years beginning in 2024, that would be subordinate to any bank debt or bonds outstanding, guaranteed by the Company and secured by the Company’s obligation to issue 50.1% of its outstanding common stock to the Asbestos Trust in the event of default.

 

Under the terms of the PI Settlement, claims would be satisfied under the Chapter 11 Cases as follows:

 

Asbestos-Related Personal Injury Claims (PI Claims)

 

All pending and future PI Claims would be channeled to the Asbestos Trust for resolution.  The Asbestos Trust would pay claims from trust assets in accordance with a trust agreement and trust distribution procedures established by the PI Committee and the FCR, subject to the approval of the Bankruptcy Court.

 

Asbestos-Related Property Damage Claims, excluding ZAI (non-ZAI PD Claims)

 

Settled non-ZAI PD Claims would be paid in cash on the effective date of a plan of reorganization.  A plan of reorganization would set forth procedures for the allowance or disallowance of all non-ZAI PD Claims that are disputed as of the effective date of the plan.

 

ZAI Claims

 

The PI Settlement contemplates that the Bankruptcy Court would estimate the value of all ZAI claims prior to or in connection with the confirmation of a plan of reorganization.  ZAI claims would be paid up to the amount of the estimate in cash.

 

Other Claims

 

All allowed administrative or priority claims would be paid in cash.  Secured claims would be paid in cash or by reinstatement.  Allowed general unsecured claims would be paid in cash, including any post-petition interest as follows:  (i) for holders of pre-petition bank credit facilities, post-petition interest at the rate of 6.09% from the Filing Date through December 31, 2005 and thereafter at floating prime, in each case compounded quarterly; and (ii) for all other unsecured claims that are not subject to a settlement agreement providing otherwise, interest at 4.19%, compounded annually, or if pursuant to an existing contract, interest at the non-default contract rate.  The general unsecured creditors holding pre-petition bank credit facilities have requested post-petition interest greater than that reflected above that, if paid, could be material.  Unsecured employee-related claims such as pension, retirement medical obligations and workers compensation claims, would be reinstated.

 

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Effect on Company common stock

 

The PI Settlement assumes that Company common stock will remain outstanding at the effective date of a plan of reorganization, but that the interests of existing shareholders would be subject to dilution by additional shares of Company common stock issued under the warrant or in the event of default in respect of the deferred payments by Grace-Conn. under the Company’s security obligation.

 

Claims Filings – The Bankruptcy Court established a bar date of March 31, 2003 for claims of general unsecured creditors, asbestos-related property damage claims (other than ZAI claims) and medical monitoring claims related to asbestos. The bar date did not apply to asbestos-related personal injury claims or claims related to ZAI.

 

Approximately 14,900 proofs of claim were filed by the March 31, 2003 bar date. Of these claims, approximately 9,400 were non-asbestos related, approximately 4,300 were for asbestos-related property damage, and approximately 1,000 were for medical monitoring. The medical monitoring claims were made by individuals who allege exposure to asbestos through Grace’s products or operations. These claims, if sustained, would require Grace to fund ongoing health monitoring costs for qualified claimants.  In addition, approximately 800 proofs of claim were filed after the bar date.

 

Approximately 7,000 of the non-asbestos related claims involve claims by employees or former employees for future retirement benefits such as pension and retiree medical coverage. Grace views most of these claims as contingent and has proposed a plan of reorganization that would retain such benefits.  The remaining non-asbestos claims include claims for payment of goods and services, taxes, product warranties, principal and interest under pre-petition credit facilities, amounts due under leases and other contracts, leases and other executory contracts rejected in the Bankruptcy Court, environmental remediation, pending non-asbestos-related litigation, and non-asbestos-related personal injury.  Claims for indemnification or contribution to actual or potential codefendants in asbestos-related and other litigation were also filed.

 

The Debtors have analyzed the claims filed pursuant to the March 31, 2003 bar date and have found that many are duplicates, represent the same claim filed against more than one of the Debtors, lack any supporting documentation, or provide insufficient supporting documentation. As of March 31, 2008, of the approximately 4,035 asbestos property damage claims filed, 275 claims have been resolved, approximately 3,570 claims have been expunged or withdrawn by claimants, leaving approximately 190 claims to be addressed through the property damage case management order approved by the Bankruptcy Court.  As of March 31, 2008, of the approximately 3,265 non-asbestos claims filed, approximately 1,850 have been expunged or withdrawn by claimants, approximately 1,145 have been resolved, and an additional approximately 270 claims are to be addressed through the claim objection process and the dispute resolution procedures approved by the Bankruptcy Court.

 

Grace believes that its recorded liabilities for claims subject to the March 31, 2003 bar date represent a reasonable estimate of the ultimate allowable amount for claims that are not in dispute or have been submitted with sufficient information to both evaluate the merit and estimate the value of the claim. The asbestos-related claims are considered as part of Grace’s overall asbestos liability and are being accounted for in accordance with the conditions precedent under the Debtors Plan, as described in “Accounting Impact” below. Grace expects to adjust its recorded asbestos-related liability as necessary:  to reflect rulings made by the Bankruptcy Court; when a new joint plan of reorganization is filed to reflect the terms of the PI Settlement; and when significant uncertainties have been resolved.  Such adjustments may be material to Grace’s consolidated financial position and results of operations.

 

Litigation Proceedings in Bankruptcy Court – In September 2000, Grace was named in a purported class action lawsuit filed in California Superior Court for the County of San Francisco, alleging that the 1996 reorganization involving a predecessor of Grace and Fresenius AG and the 1998 reorganization involving a predecessor of Grace and Sealed Air were fraudulent transfers (Abner, et al., v. W.R. Grace & Co., et al.). The Bankruptcy Court authorized the PI and PD Committees to proceed with claims against Fresenius and Sealed Air and Cryovac on behalf of the Debtors’ bankruptcy estate.

 

On November 29, 2002, Sealed Air (and Cryovac) and Fresenius each announced that they had reached agreements in principle with the PI and PD Committees to settle asbestos, successor liability and fraudulent transfer claims related to such transactions (the “litigation settlement agreements”). Under the terms of the Fresenius Settlement, subject to the fulfillment of certain conditions, Fresenius would pay $115.0 million to the Debtors’ estate as directed by the Bankruptcy

 

I-14



 

Court upon confirmation of the Debtors’ plan of reorganization. In July 2003, the Fresenius Settlement was approved by the Bankruptcy Court. Under the terms of the Sealed Air Settlement, subject to the fulfillment of certain conditions, Cryovac would make a payment of $512.5 million (plus interest at 5.5% compounded annually, commencing on December 21, 2002) and nine million shares (now 18 million shares to reflect a two-for-one stock split) of Sealed Air common stock (collectively valued at $1,134.4 million as of March 31, 2008), as directed by the Bankruptcy Court upon confirmation of a plan of reorganization. In June 2005, the Sealed Air Settlement was approved by the Bankruptcy Court.

 

Accounting Impact – The accompanying Consolidated Financial Statements have been prepared in accordance with Statement of Position 90-7 (“SOP 90-7”), “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code,” promulgated by the American Institute of Certified Public Accountants. SOP 90-7 requires that financial statements of debtors-in-possession be prepared on a going concern basis, which contemplates continuity of operations, realization of assets and liquidation of liabilities in the ordinary course of business.  However, as a result of the Filing, the realization of certain of the Debtors’ assets and the liquidation of certain of the Debtors’ liabilities are subject to significant uncertainty. While operating as debtors-in-possession, the Debtors may sell or otherwise dispose of assets and liquidate or settle liabilities for amounts other than those reflected in the Consolidated Financial Statements. Further, the ultimate plan of reorganization could materially change the amounts and classifications reported in the Consolidated Financial Statements.

 

Pursuant to SOP 90-7, Grace’s pre-petition and future liabilities that are subject to compromise are required to be reported separately on the balance sheet at an estimate of the amount that will ultimately be allowed by the Bankruptcy Court. As of March 31, 2008, such pre-petition liabilities include fixed obligations (such as debt and contractual commitments), as well as estimates of costs related to contingent liabilities (such as asbestos-related litigation, environmental remediation, and other claims). Obligations of Grace subsidiaries not covered by the Filing continue to be classified on the Consolidated Balance Sheets based upon maturity dates or the expected dates of payment. SOP 90-7 also requires separate reporting of certain expenses, realized gains and losses, and provisions for losses related to the Filing as reorganization items.  Grace presents reorganization items as “Chapter 11 expenses, net of interest income,” a separate caption in its Consolidated Statements of Operations.

 

Grace has not recorded the benefit of any assets that may be available to fund asbestos-related and other liabilities under the litigation settlements with Sealed Air and Fresenius, as such agreements are subject to conditions, which, although expected to be met, have not been satisfied and confirmed by the Bankruptcy Court. The value available under these litigation settlement agreements as measured at March 31, 2008, was $1,249.4 million comprised of $115.0 million in cash from Fresenius and $1,134.4 million in cash and stock from Cryovac. Payments under the Sealed Air Settlement will be made directly to the Asbestos Trust by Cryovac.

 

Grace’s Consolidated Balance Sheets separately identify the liabilities that are “subject to compromise” as a result of the Chapter 11 proceedings. In Grace’s case, “liabilities subject to compromise” represent both pre-petition and future liabilities as determined under U.S. generally accepted accounting principles. The bases for the asbestos-related liability component of “liabilities subject to compromise” are described in Note 3.  Changes to the recorded amount of such liabilities will be based on developments in the Chapter 11 Cases and management’s assessment of the claim amounts that will ultimately be allowed by the Bankruptcy Court. Changes to pre-petition liabilities subsequent to the Filing Date reflect: 1) cash payments under approved court orders; 2) the terms of Grace’s proposed plan of reorganization, as discussed above, including the accrual of interest on pre-petition debt and other fixed obligations; 3) accruals for employee-related programs; and 4) changes in estimates related to other pre-petition contingent liabilities.

 

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Components of liabilities subject to compromise are as follows:

 

 

 

March 31,
2008

 

December 31,
2007

 

(In millions)

 

 

 

 

 

 

 

Pre-petition bank debt plus accrued interest

 

$

795.1

 

$

783.0

 

Drawn letters of credit plus accrued interest

 

27.1

 

26.9

 

Asbestos-related contingencies

 

1,700.0

 

1,700.0

 

Income taxes(1)

 

86.3

 

89.3

 

Environmental contingencies

 

373.2

 

368.6

 

Postretirement benefits other than pension

 

82.7

 

84.0

 

Unfunded special pension arrangements

 

99.8

 

100.8

 

Retained obligations of divested businesses

 

31.0

 

30.9

 

Accounts payable

 

31.7

 

31.7

 

Other accrued liabilities

 

76.5

 

74.4

 

Reclassification to current liabilities(2)

 

(12.3

)

(12.1

)

Total Liabilities Subject to Compromise

 

$

3,291.1

 

$

3,277.5

 

 


(1)              Amounts as of March 31, 2008 and December 31, 2007 are net of expected refunds of $77.7 million and $76.4 million, respectively.

 

(2)              As of March 31, 2008 and December 31, 2007, approximately $12.3 million and $12.1 million, respectively, of certain pension and postretirement benefit obligations subject to compromise have been presented in other current liabilities in the Consolidated Balance Sheet in accordance with SFAS No. 158.

 

Note that the unfunded special pension arrangements reflected above exclude non-U.S. pension plans and qualified U.S. pension plans that became underfunded subsequent to the Filing. Contributions to qualified U.S. pension plans are subject to Bankruptcy Court approval.

 

Change in Liabilities Subject to Compromise

 

The following table is a reconciliation of the changes in pre-filing date liability balances for the period from the Filing Date through March 31, 2008.

 

 

 

Cumulative
Since Filing

 

(In millions)

 

 

 

 

Balance, Filing Date April 2, 2001

 

$

2,366.0

 

Cash disbursements and/or reclassifications under Bankruptcy Court orders:

 

 

 

Freight and distribution order

 

(5.7

)

Trade accounts payable order

 

(9.1

)

Resolution of contingencies subject to Chapter 11

 

(130.0

)

Other court orders including employee wages and benefits, sales and use tax, and customer programs

 

(357.5

)

Expense/(income) items:

 

 

 

Interest on pre-petition liabilities

 

360.1

 

Employee-related accruals

 

60.7

 

Provision for asbestos-related contingencies

 

744.8

 

Provision for environmental contingencies

 

318.5

 

Provision for income tax contingencies

 

(18.7

)

Balance sheet reclassifications

 

(38.0

)

Balance, end of period

 

$

3,291.1

 

 

Additional liabilities subject to compromise may arise due to the rejection of executory contracts or unexpired leases, or as a result of the Bankruptcy Court’s allowance of contingent or disputed claims.

 

For the holders of pre-petition bank credit facilities, beginning January 1, 2006, Grace agreed to pay interest on pre-petition bank debt at the prime rate, adjusted for periodic changes, and compounded quarterly. The effective rates for the quarters ended March 31, 2008 and 2007 were 6.22% and 8.25%, respectively.  From the Filing Date through December 31, 2005, Grace accrued interest on pre-petition bank debt at a negotiated fixed annual rate of 6.09%, compounded quarterly.  The holders of pre-petition bank credit facilities have requested post-petition interest greater than that reflected in the rates specified above that, if paid, could be material.

 

For the holders of claims who, but for the Chapter 11 filing, would be entitled under a contract or otherwise to accrue or be paid interest on such claim in a non-default (or non-overdue payment) situation under applicable non-bankruptcy law, Grace accrues interest at the rate provided in the contract between the Grace entity and the claimant or such rate as may otherwise apply under applicable non-bankruptcy law.

 

For all other holders of allowed general unsecured claims, Grace accrues interest at a rate of 4.19% per annum, compounded annually, unless otherwise negotiated during the claim settlement process.

 

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Chapter 11 Expenses

 

 

 

Three Months
Ended
March 31,

 

 

 

2008

 

2007

 

(In millions)

 

 

 

 

 

 

 

Legal and financial advisory fees

 

$

18.7

 

$

20.1

 

Interest income

 

(0.3

)

(2.3

)

Chapter 11 expenses, net

 

$

18.4

 

$

17.8

 

 

Pursuant to SOP 90-7, interest income earned on the Debtors’ cash balances must be offset against Chapter 11 expenses. In the first quarter of 2008, interest income was reduced by a $1.2 million charge related to the change in fair value of investment securities held by the Debtors.

 

Condensed Financial Information of the Debtors

 

W. R. Grace & Co. – Chapter 11 Filing Entities

Debtor-in-Possession

Statements of Operations

 

 

 

Three Months
Ended
March 31,

 

 

 

2008

 

2007

 

(In millions) (unaudited)

 

 

 

 

 

 

 

Net sales, including intercompany

 

$

376.4

 

$

354.5

 

Cost of goods sold, including intercompany, exclusive of depreciation and amortization shown separately below

 

282.4

 

259.2

 

Selling, general and administrative expenses, exclusive of defined benefit pension expense shown separately below

 

71.4

 

73.0

 

Research and development expenses

 

12.1

 

11.1

 

Depreciation and amortization

 

14.6

 

13.6

 

Defined benefit pension expense

 

9.6

 

9.1

 

Interest expense and related financing costs

 

14.9

 

19.3

 

Other (income) expense, net

 

(34.0

)

(12.0

)

Provision for environmental remediation

 

5.9

 

 

Chapter 11 expenses, net of interest income

 

18.4

 

17.7

 

 

 

 

395.3

 

 

391.0

 

Loss before income taxes and equity in net income of non-filing entities

 

(18.9

)

(36.5

)

Benefit from (provision for) income taxes

 

(0.4

)

3.4

 

Loss before equity in net income of non-filing entities

 

(19.3

)

(33.1

)

Equity in net income of non-filing entities

 

32.9

 

37.9

 

Net income

 

$

13.6

 

$

4.8

 

 

W. R. Grace & Co. – Chapter 11 Filing Entities

Debtor-in-Possession

Condensed Statements of Cash Flows

 

 

 

Three Months
Ended
March 31,

 

 

 

2008

 

2007

 

(In millions) (unaudited)

 

 

 

 

 

Operating Activities

 

 

 

 

 

Net income

 

$

13.6

 

$

4.8

 

Reconciliation to net cash used for operating activities:

 

 

 

 

 

Chapter 11 expenses, net of interest income

 

18.4

 

17.7

 

(Benefit from) provision for income taxes

 

0.4

 

(3.4

)

Equity in net income of non-filing entities

 

(32.9

)

(37.9

)

Depreciation and amortization

 

14.6

 

13.6

 

Interest on pre-petition liabilities subject to compromise

 

14.3

 

19.1

 

Provision for environmental remediation

 

5.9

 

 

Other non-cash items, net

 

(2.7

)

(2.2

)

Contributions to defined benefit pension plans

 

(16.1

)

(17.5

)

Cash paid to resolve contingencies subject to Chapter 11

 

 

(10.3

)

Chapter 11 expenses paid

 

(14.0

)

(18.2

)

Changes in other assets and liabilities, excluding the effect of businesses acquired/divested

 

(76.6

)

(58.9

)

Net cash used for operating activities

 

(75.1

)

(93.2

)

Investing Activities

 

 

 

 

 

Capital expenditures

 

(16.3

)

(15.9

)

Loan repayments and other

 

56.0

 

59.2

 

Net cash provided by investing activities

 

39.7

 

43.3

 

Net cash provided by financing activities

 

8.2

 

13.5

 

Net decrease in cash and cash equivalents

 

(27.2

)

(36.4

)

Cash and cash equivalents, beginning of period

 

206.8

 

233.8

 

Cash and cash equivalents, end of period

 

$

179.6

 

$

197.4

 

 

I-17



 

W. R. Grace & Co. – Chapter 11 Filing Entities

Debtor-in-Possession

Balance Sheets

 

 

 

March 31,
2008

 

December 31,
2007

 

(In millions) (unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

 

$

179.6

 

$

206.8

 

Investment securities

 

64.0

 

98.3

 

Cash value of life insurance policies, net of policy loans

 

78.2

 

77.1

 

Trade accounts receivable, net

 

112.3

 

108.3

 

Receivables from non-filing entities, net

 

108.4

 

103.2

 

Inventories

 

96.1

 

82.6

 

Other current assets

 

51.9

 

47.1

 

Total Current Assets

 

690.5

 

723.4

 

Properties and equipment, net

 

403.2

 

403.8

 

Cash value of life insurance policies, net of policy loans

 

3.9

 

3.9

 

Deferred income taxes

 

754.5

 

745.7

 

Asbestos-related insurance

 

500.0

 

500.0

 

Loans receivable from non-filing entities, net

 

542.3

 

524.2

 

Investment in non-filing entities

 

446.1

 

395.4

 

Overfunded defined benefit pension plans

 

1.1

 

1.5

 

Other assets

 

77.7

 

77.7

 

Total Assets

 

$

3,419.3

 

$

3,375.6

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

Liabilities Not Subject to Compromise

 

 

 

 

 

Current liabilities

 

$

190.4

 

$

224.0

 

Minority interest in consolidated entities

 

63.5

 

62.1

 

Underfunded defined benefit pension plans

 

182.4

 

159.6

 

Other liabilities

 

48.6

 

39.0

 

Total Liabilities Not Subject to Compromise

 

484.9

 

484.7

 

Liabilities Subject to Compromise

 

3,291.1

 

3,277.5

 

Total Liabilities

 

3,776.0

 

3,762.2

 

Shareholders’ Equity (Deficit)

 

(356.7

)

(386.6

)

Total Liabilities and Shareholders’ Equity (Deficit)

 

$

3,419.3

 

$

3,375.6

 

 

In addition to Grace’s financial reporting obligations as prescribed by the U.S. Securities and Exchange Commission (“SEC”), the Debtors are also required, under the rules and regulations of the Bankruptcy Code, to periodically file certain statements and schedules and a monthly operating report with the Bankruptcy Court. This information is available to the public through the Bankruptcy Court. This information is prepared in a format that may not be comparable to information in Grace’s quarterly and annual financial statements as filed with the SEC. The monthly operating reports are not audited, do not purport to represent the financial position or results of operations of Grace on a consolidated basis, and should not be relied on for such purposes.

 

3.              Asbestos-Related Litigation

 

Grace is a defendant in property damage and personal injury lawsuits relating to previously-sold asbestos-containing products. As of the Filing Date, Grace was a defendant in 65,656 asbestos-related lawsuits, 17 involving claims for property damage (one of which has since been dismissed), and the remainder involving 129,191 claims for personal injury. Due to the Filing, holders of asbestos-related claims are stayed from continuing to prosecute pending litigation and from commencing new lawsuits against the Debtors. The PI and PD Committees, representing the interests of property damage and personal injury claimants, respectively, and the FCR, representing the interests of future personal injury claimants, have been appointed in the Chapter 11 Cases. Grace’s obligations with respect to present and future claims will be determined through the Chapter 11 process.

 

Property Damage Litigation The plaintiffs in asbestos property damage lawsuits generally seek to have the defendants pay for the cost of removing, containing or repairing the asbestos-containing materials in the affected buildings. Various factors can affect the merit and value of property damage claims, including legal defenses, product identification, the amount and type of product involved, the age, type, size and use of the building, the legal status of the claimant, the jurisdictional history of prior cases, the court in which the case is pending, and the difficulty of asbestos abatement, if necessary.

 

Out of 380 asbestos property damage cases (which involved thousands of buildings) filed prior to the Filing Date, 140 were dismissed without payment of any damages or settlement amounts; judgments after trial were entered in favor of Grace in nine cases (excluding cases settled following appeals of judgments in favor of Grace); judgments after trial were entered in favor of the plaintiffs in eight cases (one of which is on appeal) for a total of $86.1 million; 207 property damage cases were settled for a total of $696.8 million; and 16 cases remain

 

I-18



 

outstanding (including the one on appeal). Of the 16 remaining cases, eight relate to ZAI and eight relate to a number of former asbestos-containing products (two of which also are alleged to involve ZAI).

 

Approximately 4,035 additional property damage claims were filed prior to the March 31, 2003 claims bar date established by the Bankruptcy Court. (The bar date did not apply to ZAI claims.) Such claims were reviewed in detail by Grace, categorized into claims with sufficient information to be evaluated or claims that require additional information and, where sufficient information existed, the estimated cost of resolution was considered as part of Grace’s recorded asbestos-related liability. Approximately 200 claims did not contain sufficient information to permit an evaluation.  Grace objected to virtually all property damage claims on a number of different bases, including:  no authorization to file a claim; the claim was previously settled or adjudicated; no or insufficient documentation; failure to identify a Grace product; expiration of the applicable statute of limitations and/or statute of repose, and/or laches; and a defense that the product in place is not hazardous. As of March 31, 2008, following the reclassification, withdrawal or expungement of claims, approximately 460 property damage claims remain outstanding.  The Bankruptcy Court has approved settlement agreements covering approximately 275 property damage claims for an aggregate allowed amount of $82 million.

 

Eight of the ZAI cases were filed as purported class action lawsuits in 2000 and 2001. In addition, ten lawsuits were filed as purported class actions in 2004 and 2005 with respect to persons and homes in Canada. These cases seek damages and equitable relief, including the removal, replacement and/or disposal of all such insulation. The plaintiffs assert that this product is in millions of homes and that the cost of removal could be several thousand dollars per home. As a result of the Filing, the eight U.S. cases have been stayed.

 

Based on Grace’s investigation of the claims described in these lawsuits, and testing and analysis of this product by Grace and others, Grace believes that the product was and continues to be safe for its intended purpose and poses little or no threat to human health. The plaintiffs in the ZAI lawsuits (and the U.S. government in the Montana criminal proceeding described in Note 13) dispute Grace’s position on the safety of ZAI. On October 18, 2004, the Bankruptcy Court held a hearing on motions filed by the parties to address a number of important legal and factual issues regarding the ZAI claims.  On December 14, 2006, the Bankruptcy Court issued an opinion and order holding that, although ZAI is contaminated with asbestos and can release asbestos fibers when disturbed, there is no unreasonable risk of harm from ZAI.  The ZAI claimants sought an interlocutory appeal of the opinion and order with the District Court in Delaware but that request was denied. The ZAI claimants have indicated they still intend to appeal such opinion and order when it becomes a final order.  The Debtors have asked the Bankruptcy Court to establish a bar date for ZAI claims and approve a related notice program that would require persons with a ZAI claim to submit individual proofs of claim.  At the same time, the ZAI Claimants have asked the Bankruptcy Court for various forms of relief: (1) to take such actions as would finalize the December 14 order and permit an appeal to be taken; (2) to allow the ZAI claims to return to the state court tort system; (3) to appoint an expert to estimate the number of homes containing ZAI; and (4) to certify a class claim on behalf of Washington state residents. These motions are scheduled to be argued at a hearing on June 2, 2008.  Grace’s recorded asbestos-related liability at March 31, 2008 assumes the risk of loss from ZAI litigation is not probable.  If Grace’s view as to risk of loss is not sustained, Grace believes the cost to resolve the matter would be material.

 

Personal Injury Litigation Asbestos personal injury claimants allege adverse health effects from exposure to asbestos-containing products formerly manufactured by Grace.  Historically, Grace’s cost to resolve such claims has been influenced by numerous variables, including the nature of the disease alleged, product identification, proof of exposure to a Grace product, negotiation factors, the solvency of other former producers of asbestos containing products, cross-claims by co-defendants, the rate at which new claims are filed, the jurisdiction in which the claims are filed, and the defense and disposition costs associated with these claims.

 

Cumulatively through the Filing Date, 16,354 asbestos personal injury lawsuits involving approximately 35,720 claims were dismissed without payment of any damages or settlement amounts (primarily on the basis that Grace products were not involved) and approximately 55,489 lawsuits involving approximately 163,698 claims were disposed of (through settlements and judgments) for a total of $645.6 million.  As of the

 

I-19



 

Filing Date, 129,191 claims for personal injury were pending against Grace. Grace believes that a substantial number of additional personal injury claims would have been received between the Filing Date and March 31, 2008 had such claims not been stayed by the Bankruptcy Court.

 

The Bankruptcy Court has entered separate case management orders for estimating liability for pending and future personal injury claims and adjudicating pending property damage claims, excluding ZAI claims.  A trial for estimating liability for personal injury claims began in January 2008 but was suspended in April 2008 as a result of the PI Settlement.

 

Asbestos-Related Liability – The total recorded asbestos-related liability as of March 31, 2008 and December 31, 2007 was $1,700 million and is included in “liabilities subject to compromise” in the accompanying Consolidated Balance Sheets.  Grace adjusted its asbestos-related liability in the fourth quarter of 2004 based on the filing of the Debtors Plan as discussed in Note 2. The amount recorded at March 31, 2008 and December 31, 2007 includes the $1,613 million maximum amount reflected as a condition precedent to the Debtors Plan and $87 million related to pre-Chapter 11 contractual settlements and judgments included in general unsecured claims.

 

Pursuant to the Debtors Plan, Grace requested that the Bankruptcy Court determine the aggregate dollar amount, on a net present value basis, that must be funded on the effective date of the Debtors Plan into the Asbestos Trust (established under Section 524(g) of the Bankruptcy Code) to pay all asbestos-related personal injury and property damage claims (including ZAI) entitled to payment under the Debtors Plan and related trust administration costs and expenses on the later of the effective date of the Debtors Plan or when allowed (the “Funding Amount”). It is a condition to confirmation of the Debtors Plan that the Bankruptcy Court shall conclude that the Funding Amount is not greater than $1,613 million. This amount, which should be sufficient to fund over $2 billion in pending and future claims, was based in part on Grace’s 2004 evaluation of (1) existing but unresolved personal injury and property damage claims, (2) actuarially-based estimates of future personal injury claims, (3) the risk of loss from ZAI litigation, (4) proposed claim payments reflected in the Debtors Plan, and (5) the cost of trust administration and litigation.  Based upon these and other factors, Grace is prepared to settle its asbestos-related claims at this amount as part of a consensual plan of reorganization.  As part of the estimation and litigation process, if it continues, the amounts proposed to or adopted by the Bankruptcy Court may be materially different than this amount.

 

For personal injury claims, the Bankruptcy Court ordered that all claimants with claims pending as of the Filing Date (other than settled but unpaid claims) must complete detailed questionnaires providing information on, among other things, their medical condition, including diagnostic support, exposure to Grace and non-Grace asbestos-containing products, employment history, and pending lawsuits against other companies.  The Bankruptcy Court required questionnaires to be completed on or before July 12, 2006 and supplemental questionnaires to be completed on or before January 12, 2007.

 

The Bankruptcy Court also established procedures and deadlines for filing proofs of claims for asbestos personal injury claims pending as of the Filing Date.  Claimants asserting claims subject to enforceable written settlement agreements dated prior to the Filing Date, which have not been fully paid or satisfied, were required to file proofs of claim by October 16, 2006.  Claimants asserting claims that are not subject to such settlement agreements were required to file proofs of claim by November 15, 2006.

 

Grace has catalogued and analyzed the information furnished with the proofs of claim and questionnaires. This information and other information, including Grace’s claims and settlement history, the experience of other defendants in asbestos-related litigation, and post-petition developments in asbestos-related litigation generally, have been analyzed and reviewed by experts; and Grace, the PI Committee and the FCR have submitted expert reports that each party has relied upon to support its respective estimate of Grace’s asbestos personal injury liability.  Copies of Grace’s and the PI Committee’s expert reports and portions of the FCR’s expert report are available through the Bankruptcy Court. These expert reports (since supplemented, rebutted and made the subject of discovery) are based on data, methodologies and assumptions that may or may not be accepted by the Bankruptcy Court.

 

For property damage claims, the case management order provides that estimation will be preceded by litigation on certain common threshold issues affecting a substantial majority of claims. Such

 

I-20



 

litigation will consist of determining, among other things, (1) whether asbestos-containing products formerly manufactured by Grace are hazardous in place, and (2) compliance with the applicable statute of limitations.  Grace has asked the Bankruptcy Court to rule on Grace’s specific objections to individual claims and groups of claims.

 

Under the Debtors Plan, the Funding Amount would primarily be a function of the number of property damage and personal injury claims entitled to be paid, and the amount payable per claim. Through the estimation process, Grace would seek to demonstrate that most claims have no value because they fail to establish any material property damage, health impairment or significant occupational exposure to asbestos from Grace’s operations or products. If the Bankruptcy Court agreed with Grace’s position on the number of, and the amounts to be paid in respect of, allowed personal injury and property damage claims, then Grace believes that the Funding Amount could be less than $1,613 million. However, this outcome would be highly uncertain and would depend on a number of Bankruptcy Court rulings favorable to Grace’s position.

 

Conversely, the PI and PD Committees and the FCR have asserted that Grace’s asbestos-related liabilities are substantially higher than $1,613 million, and in fact are in excess of Grace’s business value.  If the Bankruptcy Court accepted the position of the PI and PD Committees and the FCR, then any plan of reorganization likely would result in the loss of all or substantially all equity value by current shareholders. Therefore, due to the significant uncertainties of the estimation process and asbestos litigation generally, Grace is not able to estimate a probable Funding Amount that would be accepted by the Bankruptcy Court.

 

However, as Grace is willing to proceed with confirmation of the Debtors Plan with a Funding Amount of up to $1,613 million (assuming that other conditions precedent to confirmation of the Debtors Plan are satisfied, including the availability of the payment from Cryovac directly to the Asbestos Trust under the Sealed Air Settlement described in Note 2), Grace’s recorded asbestos-related liability reflects the maximum amount allowed as a condition precedent under the Debtors Plan. This amount, plus $87 million for pre-Chapter 11 contractual settlements and judgments, brings the total recorded asbestos-related liability as of March 31, 2008 and December 31, 2007 to $1,700 million. Any differences between the Debtors Plan as filed and the plan ultimately confirmed by the Bankruptcy Court could fundamentally change the accounting measurement of Grace’s asbestos-related liability and that change could be material.

 

On April 6, 2008, the Debtors reached an agreement in principle, the PI Settlement, with the PI Committee, the FCR, and the Equity Committee that would settle all present and future asbestos-related personal injury claims.  As discussed in Note 2, the PI Settlement contemplates that the Debtors, the PI Committee, the FCR and the Equity Committee would file a new joint plan of reorganization with the Bankruptcy Court reflecting the terms and conditions of the PI Settlement.  The drafting and negotiation of the joint plan and related documentation is in progress.  The committee representing general unsecured creditors and the PD Committee are not parties to the PI Settlement.  Neither the PI Settlement nor a joint plan of reorganization reflecting its terms has been filed with the Bankruptcy Court.

 

As a result of the PI Settlement, a trial for estimating liability for asbestos personal injury claims that began in January 2008 was suspended in April 2008.

 

Grace has not adjusted its accounting for asbestos-related liabilities and other liabilities subject to compromise as at March 31, 2008 because:

 

·                  the Debtors Plan remains the only plan filed by the Debtors with the Bankruptcy Court;

 

·                  while the PI Settlement broadly provides for a settlement of significant economic issues, such issues and other issues remain subject to additional negotiation among the parties thereto and significant documentation before a new joint plan of reorganization reflecting the PI Settlement may be filed with the Bankruptcy Court; and

 

·                  the estimated liability for certain property damage and general unsecured claims could change materially prior to the time a new joint plan of reorganization is filed or confirmed.

 

If a new joint plan of reorganization reflecting the PI Settlement is not filed with the Bankruptcy Court, Debtors would expect to resume the estimation trial, that was suspended in April due to the PI Settlement, to determine the amount of its asbestos-related liabilities.  Grace expects to adjust its recorded asbestos-related liability as necessary: 

 

I-21



 

to reflect rulings made by the Bankruptcy Court; when a new joint plan of reorganization is filed to reflect the terms of the PI Settlement; and when significant uncertainties have been resolved.  Such adjustments may be material to Grace’s consolidated financial position and results of operations.

 

Insurance Rights Grace holds insurance policies that provide coverage for 1962 to 1984 with respect to asbestos-related lawsuits and claims.  For the most part, coverage for years 1962 through 1972 has been exhausted, leaving coverage for years 1973 through 1985 available for pending and future asbestos claims.  Since 1985, insurance coverage for asbestos-related liabilities has not been commercially available to Grace.  As discussed in Note 2, pursuant to the PI Settlement, insurance policies that provide coverage for asbestos personal injury claims and proceeds, including interest, received after the date of the PI Settlement, would be assigned to the Asbestos Trust.

 

For each insurance year, Grace’s coverage consists of both primary and excess coverage.  Primary coverage for an insurance year generally reimburses Grace for the portion of paid claims allocated to that year starting at the first dollar paid (after any deductible) through the coverage limit.  With one exception, coverage disputes regarding Grace’s primary insurance policies have been settled, and the settlement amounts have been paid in full. Excess insurance generally reimburses Grace for claims paid above a specified policy threshold through the coverage limit.  For each insurance year, Grace’s insurance program includes multiple layers of excess coverage.  A layer of excess coverage, which may include multiple insurers, is triggered once claim payments that can be assigned to that insurance year are paid up to the threshold of that layer.

 

Grace has entered into settlement agreements with various excess insurance carriers. These settlements involve amounts paid and to be paid to Grace. The unpaid maximum aggregate amount available under these settlement agreements is approximately $487 million.  With respect to asbestos-related personal injury claims, the settlement agreements generally require that the claims be spread over the claimant’s exposure period and that each insurer pay a pro rata portion of each claim based on the amount of coverage provided during each year of the total exposure period.

 

Presently, Grace has no settlement agreements in place with insurers with respect to approximately $430 million of excess coverage.  Such policies are at layers of coverage that have not yet been triggered, but certain layers would be triggered if the Debtors Plan were approved at the recorded asbestos-related liability of $1,700 million. In estimating its ultimate insurance recovery, Grace has assumed that its unsettled excess coverage will be available on terms that are substantially similar to the existing settlement agreements described above.  Grace believes that any allowed ZAI claims (while not probable) also would be covered under the policies discussed above to the extent they relate to installations of ZAI occurring after July 1, 1973 but before June 30, 1985.

 

In addition, Grace has approximately $253 million of excess coverage with insolvent or non-paying insurance carriers.  Non-paying carriers are those that, although technically solvent, are not currently meeting their obligations to pay claims.  Grace has filed and continues to file claims in the insolvency proceedings of these carriers.  Grace periodically receives distributions from some of these insolvent carriers and expects to receive distributions in the future.  Settlement amounts are recorded as income when received.

 

In November 2006, Grace entered into a settlement agreement with an underwriter of a portion of its excess insurance coverage. The insurer paid a settlement amount of $90 million directly to an escrow account for the benefit of the holders of claims for which Grace was provided coverage under the affected policies.  The escrow account balance at March 31, 2008 approximated $95.7 million, including interest earned on the account. Funds will be distributed from this account directly to claimants at the direction of the escrow agent pursuant to the terms of a confirmed plan of reorganization or as otherwise ordered by the Bankruptcy Court.  The settlement agreement provides that unless Grace confirms a plan of reorganization by December 31, 2008, at the option of the insurer, exercisable at any time prior to April 30, 2009, the escrow amount with interest must be returned to the insurer.  Grace will record the amount in the escrow account as an asset and reduce its asbestos insurance receivable balance if and when all contingencies for the release of such amount are satisfied.

 

As of March 31, 2008, including the settlement discussed above and after subtracting previous reimbursements by insurers and allowing for

 

I-22



 

discounts pursuant to certain settlement agreements, there remains approximately $917 million of excess coverage from 54 presently solvent insurers.  Grace estimates that eligible claims would have to exceed $4 billion to access total coverage.  Grace further estimates that, assuming the resolution value of asbestos-related claims is equal to the recorded liability of $1,700 million (which should fund claim payments in excess of $2 billion), it should be entitled to approximately $500 million of insurance recovery, including the escrow described above.  This amount was determined by estimating the aggregate and per year payout for claims over time and applying the expected insurance recovery factor to such claims. However, the ultimate amount of insurance recovered on such claims will depend on a number of factors that will only be determined at the time claims are paid including: the nature of the claim (PI, PD or ZAI), the relevant exposure years, the timing of payment, the solvency of insurers and the legal status of policy rights. Accordingly, Grace’s recorded estimate of insurance recovery may differ materially from actual amounts received.

 

4.              Income Taxes

 

The amount of unrecognized tax benefits at March 31, 2008 was $177.5 million, a decrease of $0.3 million from December 31, 2007. If this amount were recognized, it would reduce Grace’s effective tax rate, except for the amount of $15.8 million related to alternative minimum tax credit (“AMTC”) carryforwards recorded as deferred tax assets that will not be available if Grace is successful in resolving certain issues.

 

During the three months ended March 31, 2008, Grace reduced its liability for uncertain tax positions by $0.5 million due to lapses in the statute of limitations related to assessments in certain taxing jurisdictions, net of increases for interest and other tax contingencies in certain jurisdictions.

 

Grace accrues potential interest and any associated penalties related to uncertain tax positions in “benefit from (provision for) income taxes” in the Consolidated Statements of Operations. The total amount of interest and penalties (on a gross basis) accrued on uncertain tax positions as of December 31, 2007 was $54.9 million out of the total amount of unrecognized tax benefits of $177.8 million. During the three months ended March 31, 2008, Grace accrued additional net interest and penalties of $1.0 million (exclusive of reductions of accrued interest resulting from lapses of statutes of limitations).

 

Grace files U.S. federal income tax returns as well as income tax returns in various states and foreign jurisdictions. In many cases, Grace’s uncertain tax positions are related to tax years that remain subject to examination by the relevant taxing authorities. The following table summarizes these open tax years by major jurisdiction:

 

Tax Jurisdiction (1)

 

Examination in
Progress

 

Examination Not 
Yet Initiated

 

United States (2)

 

1994-2006

 

2005-2007

 

Germany

 

1998-2001

 

2002-2007

 

United Kingdom

 

None

 

2002-2007

 

Singapore

 

None

 

2002-2007

 

France

 

2004-2006

 

2007

 

Italy

 

None

 

2003-2007

 

 


(1)    Includes federal as well as state, provincial or local jurisdictions, as applicable.

 

(2)    In the U.S., the IRS has completed examining tax years 2002-2004.  Tax years 1993-1996 and 1997-2001 have been examined and partially resolved and there are still pending issues in appeals or pending legal proceedings as described below.  The Federal examination of 2005-2007 has not yet been initiated.  Certain state tax examinations remain in progress relative to the years 1994-2006.

 

Based upon the outcome of these examinations, or as a result of the expiration of statute of limitations for specific jurisdictions, it is reasonably possible that there may be a material change to Grace’s aggregate recorded liabilities for uncertain tax positions in the next twelve months.  A decrease in recorded liabilities of $7 million to $8 million may arise as a result of settlement of the R&E credit issue described below.  However, the outcomes of other ongoing tax examinations remain uncertain, and it is possible that new issues will be raised by tax authorities, which may require an increase to the balance of unrecognized benefits.  An estimate of such increases cannot reasonably be made. The status of U.S. tax examinations is as follows:

 

·                  With respect to the 1993-1996 federal income tax audit, there is one issue outstanding related to $7.0 million of research and experimentation (“R&E”) credits on which the Internal Revenue Service (“IRS”) and Grace have reached a tentative settlement, which will result in an additional refund of approximately $4.5 million.  Grace anticipates filing a motion with the Bankruptcy Court in the near future seeking approval of the settlement.  Upon receiving Bankruptcy Court approval, the settlement will be submitted by the IRS to

 

I-23



 

the Joint Committee on Taxation for final review and approval.

 

·                  With respect to the IRS examination of the 1997-2001 tax years, Grace has received revised examination reports from the IRS, which include the review of losses carried back to 1988-1989 (collectively, the “Examination Reports”) asserting, in the aggregate, approximately $32.5 million of net additional tax plus accrued interest.  The most significant issue addressed in the Examination Reports concerns the carryback of a specified liability loss from the 1998 tax period to the 1989 taxable year.  On March 22, 2007, Grace received a Notice of Deficiency with respect to the carryback of the specified liability loss and certain other issues.  On June 19, 2007, Grace filed a petition in the United States Tax Court to resolve the issues relating to the Notice of Deficiency.  On December 10, 2007, the Tax Court granted the parties’ motion to forward the case to the IRS Appeals Office for the purpose of conducting settlement negotiations.

 

·                  With respect to the years 2002-2004, the IRS completed its examination during the first quarter of 2008 and Grace has tentatively agreed to proposed adjustments that result in net tax expense of $1.5 million which has been provided for in Grace’s liability for uncertain tax positions.

 

Other Tax Matters

 

As of March 31, 2008, Grace had tax credit carryforwards of $71.1 million, consisting of $51.6 million of foreign tax credit carryforwards with expiration dates through 2017, $0.6 million of general business credit carryforwards with expiration dates through 2025 and $18.9 million of AMTC carryforwards with no expiration dates.  However, the $18.9 million of AMTC carryforwards includes $15.8 million, which will not be available if Grace is successful in resolving certain issues reflected as uncertain tax positions.

 

Grace has not yet recorded tax benefits of $14.4 million associated with stock option compensation that remained unrealized as of March 31, 2008.  When realized, the benefits will increase paid-in capital in our Consolidated Balance Sheet.

 

Grace anticipates generating U.S. net operating loss (“NOL”) carryforwards upon emergence from bankruptcy.  Because Grace did not pay a significant amount of U.S. taxes in prior years and/or has already received or applied for tax refunds from available NOL carryback years, it expects to carryforward most of its NOLs after emergence from bankruptcy. Under federal income tax law, a corporation is generally permitted to carryforward NOLs for a 20-year period for deduction against future taxable income. Grace’s ability to deduct NOL carryforwards could be significantly limited if it were to undergo an ownership change during, or as a result of, the Chapter 11 proceeding.  During the course of the bankruptcy proceeding, the Bankruptcy Court entered an order that places certain limitations on trading in Grace common stock or options convertible into Grace common stock.  Pursuant to these limitations, Grace intends to object to any purchase of Grace common stock or options that would potentially contribute to an ownership change.  However, Grace can provide no assurance that these limitations will prevent an ownership change or that its ability to utilize NOLs will not be significantly limited as a result of Grace’s reorganization.

 

5.              Other (Income) Expense, net

 

Components of other (income) expense, net are as follows:

 

 

 

Three Months
Ended
March 31,

 

Other (Income) Expense, net

 

2008

 

2007

 

(In millions)

 

 

 

 

 

 

 

COLI income, net

 

$

(1.1

)

$

(2.0

)

Interest income

 

(1.1

)

(2.1

)

Net (gain) loss on sales of investments and disposals of assets

 

(1.6

)

(0.2

)

Currency translation – intercompany loans

 

(38.6

)

(2.8

)

Value of currency contracts

 

26.5

 

2.1

 

Other currency transaction effects

 

0.9

 

0.4

 

Cash received on previously written off receivable

 

 

(0.9

)

Other miscellaneous income

 

(2.3

)

(2.5

)

Total other (income) expense, net

 

$

(17.3

)

$

(8.0

)

 

In November 2007, Grace executed an intercompany loan in the amount of €250 million between Grace’s principal U.S. operating subsidiary and a newly established German subsidiary as part of a legal restructuring.  In conjunction with the loan, Grace entered into a series of foreign currency forward contracts to attempt to minimize volatility from foreign currency movements on the loan amount.  The forward contracts are aligned with the payment schedule of the intercompany loan, which has annual principal

 

I-24



 

and interest payments in November 2009 through November 2013.  In the first quarter of 2008, the Euro continued to strengthen against the U.S. dollar, which resulted in significant foreign currency translation gains from the revaluation of the intercompany loan.  The changes in fair values of the foreign currency forward contracts partially offset the translation gains.

 

6.              Fair Value Measurements

 

SFAS No. 157 defines fair value as the value that would be received at the measurement date in the principal or “most advantageous” market.  Grace utilizes principal market data, whenever available, to value assets and liabilities at fair value that are required to be reported at fair value.  SFAS No. 157 prescribes three valuation techniques that shall be used to measure fair value as follows:

 

1.               Market approach – uses prices or other relevant information generated by market transactions involving identical or comparable assets or liabilities.

 

2.               Income approach – uses valuation techniques to convert future amounts to a single present amount (discounted).

 

3.               Cost approach – the amount that currently would be required to replace the service capacity of an asset (i.e., current replacement cost).

 

One or a combination of the approaches above can be used to calculate fair value, whichever results in the most representative fair value.

 

In addition to the three valuation techniques, SFAS No. 157 prescribes a fair value hierarchy in order to increase consistency and comparability in fair value measurements and related disclosures.  The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels:

 

Level 1 Inputs - quoted prices in active markets for identical assets or liabilities.  A quoted price in an active market provides the most reliable evidence of fair value.

 

Level 2 Inputs - inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly.

 

Level 3 Inputs - unobservable inputs for the asset or liability, which should reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability.

 

Grace has identified the following financial assets and liabilities that are subject to the fair value analysis required by SFAS No. 157:

 

Investment Securities

 

Investment securities consist of direct or indirect investments in debt securities. Prior to the fourth quarter of 2007, Grace’s investment in the Columbia Strategic Cash Fund was classified in cash and cash equivalents, as redemptions were available in cash.  In December 2007, the fund began an orderly liquidation that is expected to continue through 2009 and restricted redemptions to an in-kind distribution of securities held by the fund. In the first quarter of 2008, $33.1 million of the fund balance was distributed in cash.  Grace has elected to remain in the fund and to value the fund based on the underlying securities as determined by the fund principals.  The valuation of the fund was determined using a market approach, which consisted of matrix pricing techniques based on widely available market data and comparables.  The strategic cash investment fund was valued at $64.0 million and $98.3 million at March 31, 2008 and December 31, 2007, respectively.

 

Grace recorded a decrease in fair value of $1.2 million in the first quarter of 2008 due to continued unfavorable conditions in the credit markets.  The loss is recorded as an offset to interest income earned on the Columbia Strategic Cash Fund by the Debtors, which is netted against Chapter 11 expenses in the Consolidated Statements of Operations.  This loss was deemed to be other than temporary, and as such, was recorded in earnings.

 

Derivatives

 

From time to time, Grace enters into commodity derivatives such as forward contracts or option contracts directly with natural gas suppliers, and fixed-rate swaps with financial institutions to mitigate the risk of volatility of natural gas prices.  Under fixed-rate swaps, Grace locks in a fixed rate with a financial institution for future natural gas purchases, purchases its natural gas from a supplier at the prevailing market rate, and then settles with the bank for any difference in the rates, thereby “swapping” a variable rate for a fixed rate. 

 

I-25



 

In 2007 and 2008, Grace utilized fixed-rate swaps to mitigate the risk of natural gas price volatility.  The valuation of Grace’s fixed-rate natural gas swaps was determined using a market approach, based on natural gas futures trading prices quoted on the New York Mercantile Exchange.

 

As part of its risk management program, Grace enters into foreign currency exchange rate forward and/or option contracts to mitigate the effects of exchange rate fluctuations.  Grace also utilizes foreign currency forward exchange rate and/or option contracts from time to time to hedge the value of its net investment in certain foreign entities.  The valuation of Grace’s foreign currency exchange rate forward contracts was determined using both a market approach and an income approach.  Inputs used to value foreign currency exchange rate forward contracts consist of (1) spot rates, which are quoted by various financial institutions, (2) forward points, which are affected by changes in interest rates on Euro and $U.S. deposits, and (3) discount rates used to present value future cash flows, which are based on the London Interbank Offered Rate (LIBOR) curve.

 

The following table presents the fair value hierarchy for non-financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2008:

 

 

 

Fair Value Measurements at
March 31, 2008 Using

 

Items Measured at Fair Value on a Recurring Basis

 

Total

 

Quoted
Prices in
Active
Markets
for
Identical
Assets or
Liabilities
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant

Unobservable
Inputs
(Level 3)

 

(In millions)

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

Available-for-sale securities

 

$

64.0

 

$

 

$

64.0

 

$

 

Commodity derivatives

 

2.6

 

 

2.6

 

 

Total Assets

 

$

66.6

 

$

 

$

66.6

 

$

 

Liabilities

 

 

 

 

 

 

 

 

 

Currency derivatives

 

$

32.1

 

$

 

$

32.1

 

$

 

Total Liabilities

 

$

32.1

 

$

 

$

32.1

 

$

 

 

7.              Other Balance Sheet Accounts

 

 

 

March 31,
2008

 

December 31,
2007

 

(In millions)

 

 

 

 

 

Inventories (1)

 

 

 

 

 

Raw materials

 

$

109.5

 

$

76.3

 

In process

 

51.1

 

44.7

 

Finished products

 

239.6

 

207.1

 

General merchandise

 

42.0

 

38.2

 

Less: Adjustment of certain inventories to a LIFO basis(2)

 

(70.3

)

(62.8

)

 

 

$

371.9

 

$

303.5

 

Other Assets

 

 

 

 

 

Deferred charges

 

$

39.2

 

$

40.9

 

Long-term receivables, less allowances of $0.0 (2007 - $0.0)

 

1.3

 

1.3

 

Patents, licenses and other intangible assets, net

 

82.8

 

82.2

 

Investments in unconsolidated affiliates and other

 

17.3

 

12.2

 

 

 

$

140.6

 

$

136.6

 

Other Current Liabilities

 

 

 

 

 

Accrued compensation

 

$

72.3

 

$

97.2

 

Customer volume rebates

 

29.6

 

44.1

 

Accrued commissions

 

8.9

 

11.6

 

Accrued reorganization fees

 

31.9

 

27.5

 

Income tax payable

 

34.9

 

30.4

 

Deferred tax liability

 

9.6

 

8.8

 

Other accrued liabilities

 

103.3

 

105.5

 

 

 

$

290.5

 

$

325.1

 

Other Liabilities

 

 

 

 

 

Long-term self insurance reserve

 

$

8.0

 

$

8.0

 

Retained obligations of divested businesses

 

5.3

 

5.3

 

Long-term incentive compensation

 

7.0

 

13.8

 

Other accrued liabilities

 

35.5

 

19.1

 

 

 

$

55.8

 

$

46.2

 

 


(1)      Inventories valued at LIFO cost comprised 47.5% of total inventories at March 31, 2008  and 47.0% at December 31, 2007.

 

(2)      During the three months ended March 31, 2008, a reduction in U.S. LIFO inventory levels resulted in costs pertaining to prior periods being reflected in cost of sales for the first quarter of 2008.  This had the effect of increasing pre-tax income by $0.7 million compared with current cost.

 

Accrued compensation in the table above includes salaries and wages as well as estimated current amounts due under the annual and long-term incentive programs.

 

8.              Life Insurance

 

Grace is the beneficiary of corporate-owned life insurance (“COLI”) policies on certain current and former employees with a net cash surrender value of $82.1 million and $81.0 million at March 31, 2008 and December 31, 2007, respectively. The policies were acquired to fund various employee benefit programs and other long-term liabilities and are structured to provide cash flow (primarily tax-free) over an extended number of years.

 

I-26



 

The following tables summarize activity in these policies for the three months ended March 31, 2008 and 2007, and the components of net cash value at March 31, 2008 and December 31, 2007:

 

 

 

Three Months
Ended
March 31,

 

Life Insurance – Activity Summary

 

2008

 

2007

 

(In millions)

 

 

 

 

 

Earnings on policy assets

 

$

1.2

 

$

1.9

 

Interest on policy loans

 

(0.1

)

0.1

 

Policy loan repayments

 

 

 

Proceeds from termination of life insurance policies

 

 

 

Net investing activity

 

 

(0.2

)

Change in net cash value

 

$

1.1

 

$

1.8

 

Tax-free proceeds received

 

$

 

$

 

 

Components of Net Cash Value

 

March 31,
2008

 

December 31,
2007

 

(In millions)

 

 

 

 

 

Gross cash value

 

$

87.0

 

$

85.8

 

Principal – policy loans

 

(4.7

)

(4.7

)

Accrued interest – policy loans

 

(0.2

)

(0.1

)

Total net cash value

 

 

82.1

 

 

81.0

 

Less: current portion

 

(78.2

)

(77.1

)

Net cash value – long-term

 

$

3.9

 

$

3.9

 

Insurance benefits in force

 

$

142.1

 

$

141.1

 

 

Grace’s financial statements display income statement activity and balance sheet amounts on a net basis, reflecting the contractual interdependency of policy assets and liabilities.

 

9.              Debt

 

Components of Debt

 

March 31,
2008

 

December 31,
2007

 

(In millions)

 

 

 

 

 

Debt payable within one year

 

$

3.2

 

$

4.7

 

Debt payable after one year

 

 

 

 

 

DIP facility

 

$

 

$

 

Other long-term borrowings

 

0.3

 

0.3

 

 

 

$

0.3

 

$

0.3

 

Debt subject to compromise

 

 

 

 

 

Bank borrowings

 

$

500.0

 

$

500.0

 

Accrued interest on bank borrowings

 

295.1

 

283.0

 

Drawn letters of credit

 

23.6

 

23.6

 

Accrued interest on drawn letters of credit

 

3.5

 

3.3

 

 

 

$

822.2

 

$

809.9

 

Full-year weighted average interest rates on total debt

 

6.2

%

8.1

%

 

The Debtors have entered into a debtor-in-possession post-petition loan and security agreement, or DIP facility, with a syndicate of lenders that, as amended effective April 1, 2008, provides for up to $165 million of revolving loans and face amount of letters of credit.  The DIP facility is secured by a priority lien on substantially all assets of the Debtors with the exclusion of the capital stock of non-U.S. subsidiaries, and bears interest based on LIBOR.  The term of the DIP facility ends on the earlier of April 1, 2010 or the Debtors’ emergence from Chapter 11.  The DIP facility permits the increase of commitments of existing lenders and/or commitments by new lenders up to an aggregate maximum of $250 million.

 

As of March 31, 2008 and December 31, 2007, the Debtors had no revolving loans and $61.4 million and $56.3 million, respectively, of standby letters of credit issued and outstanding under the DIP facility.  These letters of credit and other holdback provisions reduced the aggregate unused availability for revolving loans and letters of credit, as of the April 1, 2008 effective date of the amended DIP facility, to $103.6 million.  The letters of credit were issued mainly for trade-related matters such as performance bonds, as well as certain insurance and environmental matters.

 

10.             Shareholders’ Equity (Deficit)

 

Under its Certificate of Incorporation, the Company is authorized to issue 300,000,000 shares of common stock, $0.01 par value. Of the common stock unissued at March 31, 2008, 1,375,846 shares were reserved for issuance pursuant to stock options and other stock incentives. Since the Filing Date, Grace has not granted any stock options.  During the three months ended March 31, 2008 and 2007, 462,517 and 915,813 stock options were exercised for aggregate proceeds of $8.9 million and $14.2 million, respectively.

 

The Certificate of Incorporation also authorizes 53,000,000 shares of preferred stock, $0.01 par value, none of which has been issued.  Of the total, 3,000,000 shares have been designated as Series A Junior Participating Preferred Stock and are reserved for issuance in connection with the Company’s Preferred Stock Purchase Rights (“Rights”).  A Right trades together with each outstanding share of common stock and entitles the holder to purchase one one-hundredth of a share of Series A Junior Participating Preferred Stock under certain circumstances and subject to certain conditions.  The Rights are not and will not become exercisable unless and until certain events occur, and at no time will the Rights have any voting power.  The Rights agreement expires on March 30, 2018.

 

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11.             Earnings Per Share

 

The following table shows a reconciliation of the numerators and denominators used in calculating basic and diluted earnings per share.

 

 

 

Three Months
Ended
March 31,

 

Earnings Per Share

 

2008

 

2007

 

(In millions, except per share amounts)

 

 

 

 

 

Numerators

 

 

 

 

 

Net income

 

$

13.6

 

$

4.8

 

Denominators

 

 

 

 

 

Weighted average common shares – basic calculation

 

72.5

 

69.4

 

Dilutive effect of employee stock options

 

0.7

 

1.1

 

Weighted average common shares – diluted calculation

 

73.2

 

70.5

 

Basic earnings per share

 

$

0.19

 

$

0.07

 

Diluted earnings per share

 

$

0.19

 

$

0.07

 

 

There were no anti-dilutive options outstanding for the three months ended March 31, 2008 and 2007.

 

12.             Comprehensive Income (Loss)

 

The following tables present the pre-tax, tax and after-tax components of Grace’s other comprehensive income (loss) for the three months ended March 31, 2008 and 2007:

 

Three Months Ended March 31, 2008

 

Pre-
Tax
Amount

 

Tax
Benefit/
(Expense)

 

After-
Tax
Amount

 

(In millions)

 

 

 

 

 

 

 

Defined benefit pension and other postretirement plans:

 

 

 

 

 

 

 

Amortization of net prior service credit included in net periodic benefit cost

 

$

(1.6

)

$

0.6

 

$

(1.0

)

Amortization of net deferred actuarial loss included in net periodic benefit cost

 

6.8

 

(2.4

)

4.4

 

Other changes in funded status

 

(2.4

)

2.3

 

(0.1

)

Benefit plans, net

 

2.8

 

0.5

 

3.3

 

Foreign currency translation adjustments

 

1.9

 

 

1.9

 

Gain (loss) from hedging activities

 

3.5

 

(1.3

)

2.2

 

Other comprehensive income (loss)

 

$

8.2

 

$

(0.8

)

$

7.4

 

 

Three Months Ended March 31, 2007

 

Pre-
Tax
Amount

 

Tax
Benefit/
(Expense)

 

After-
Tax
Amount

 

(In millions)

 

 

 

 

 

 

 

Defined benefit pension and other postretirement plans:

 

 

 

 

 

 

 

Amortization of net prior service credit included in net periodic benefit cost

 

$

(1.7

)

$

0.6

 

$

(1.1

)

Amortization of net deferred actuarial loss included in net periodic benefit cost

 

6.7

 

(2.2

)

4.5

 

Other changes in funded status

 

(5.5

)

1.7

 

(3.8

)

Benefit plans, net

 

(0.5

)

0.1

 

(0.4

)

Foreign currency translation adjustments

 

5.7

 

 

5.7

 

Gain (loss) from hedging activities

 

1.9

 

(0.8

)

1.1

 

Other comprehensive income (loss)

 

$

7.1

 

$

(0.7

)

$

6.4

 

 

The following table presents the components of Grace’s accumulated other comprehensive income (loss) at March 31, 2008 and December 31, 2007:

 

Components of Accumulated Other Comprehensive Income (Loss)

 

March 31,
2008

 

December 31,
2007

 

(In millions)

 

 

 

 

 

Defined benefit pension and other postretirement plans:

 

 

 

 

 

Net prior service credit (net of tax)

 

$

3.9

 

$

4.9

 

Net deferred actuarial loss (net of tax)

 

(400.4

)

(404.7

)

Benefit plans, net

 

(396.5

)

(399.8

)

Foreign currency translation

 

52.1

 

50.2

 

Hedging activities, net of tax

 

1.7

 

(0.5

)

Accumulated other comprehensive income (loss)

 

$

(342.7

)

$

(350.1

)

 

Accumulated other comprehensive income (loss) related to the defined benefit pension and other postretirement plans at March 31, 2008 and December 31, 2007, respectively, represents the accumulation of net actuarial losses of $400.4 million and $404.7 million as well as net prior service credits of $3.9 million and $4.9 million. These amounts are net of tax and are amortized as a component of net periodic benefit cost. For the three months ended March 31, 2008 and 2007, the pre-tax benefit recognized related to prior service credits was $1.6 million and $1.7 million, respectively, and the pre-tax expense recognized for amortization of accumulated actuarial losses was $6.8 million and $6.7 million, respectively.  In addition, $2.4 million and $5.5 million of pre-tax loss was recognized for changes in funded status

 

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during the three months ended March 31, 2008 and 2007, respectively.

 

Grace is a global enterprise operating in over 40 countries with local currency generally deemed to be the functional currency for accounting purposes. The foreign currency translation amount represents the adjustments necessary to translate the balance sheets valued in local currencies to the U.S. dollar as of the end of each period presented, and to translate revenues and expenses at average exchange rates for each period presented.

 

See Note 6 for a discussion of hedging activities.

 

13.             Commitments and Contingent Liabilities

 

Asbestos-Related Liability See Note 3

 

Environmental Remediation Grace is subject to loss contingencies resulting from extensive and evolving federal, state, local and foreign environmental laws and regulations relating to the generation, storage, handling, discharge and disposition of hazardous wastes and other materials. Grace accrues for anticipated costs associated with investigative and remediation efforts where an assessment has indicated that a probable liability has been incurred and the cost can be reasonably estimated. These accruals do not take into account any discounting for the time value of money.

 

Grace’s environmental liabilities are reassessed whenever circumstances become better defined or remediation efforts and their costs can be better estimated. These liabilities are evaluated based on currently available information, including the progress of remedial investigation at each site, the current status of discussions with regulatory authorities regarding the method and extent of remediation at each site, existing technology, prior experience in contaminated site remediation and the apportionment of costs among potentially responsible parties. Grace expects that the funding of environmental remediation activities will be affected by the Chapter 11 proceedings.

 

At March 31, 2008, Grace’s estimated liability for environmental investigative and remediation costs totaled $373.2 million, as compared with $368.6 million at December 31, 2007. The amount is based on funding and/or remediation agreements in place and Grace’s best estimate of its cost for sites not subject to a formal remediation plan. During the fourth quarter of 2007, Grace filed a motion with the Bankruptcy Court for approval of one of the largest of these remediation agreements, a multi-site settlement agreement that Grace has executed with the U.S. Government, on behalf of the Environmental Protection Agency (“EPA”) and other federal agencies.  This agreement addresses 38 sites for which the EPA has filed a claim against Grace.  Under this agreement, Grace would pay approximately $44 million to the U.S. Government and other parties in settlement of 35 of these outstanding claims.  In return, the U.S. Government would agree not to take action against Grace under the Comprehensive Environmental Response, Compensation, and Liability Act with respect to such sites.  Grace intends to separately fund or carry out remediation at the three remaining sites, including remediation relating to Grace’s former vermiculite mining and processing site in Libby, Montana discussed below.

 

Grace’s estimated environmental liabilities are included in “liabilities subject to compromise” in the accompanying Consolidated Balance Sheets.

 

Net cash expenditures charged against previously established reserves for the three months ended March 31, 2008 and 2007 were $1.3 million and $2.8 million, respectively.

 

Vermiculite Related Matters

 

EPA Cost Recovery Claim - As a result of a 2003 U.S. District Court ruling, Grace is required to reimburse the U.S. Government for $54.5 million (plus interest) in costs expended through December 2001, and for all appropriate future costs to complete asbestos-related remediation relating to Grace’s former vermiculite mining and processing activities in the Libby, Montana area.  These costs include cleaning and/or demolition of contaminated buildings, excavation and removal of contaminated soil, health screening of Libby residents and former mine workers, and investigation and monitoring costs.

 

Grace and the U.S. Department of Justice have agreed to settle the EPA’s cost recovery claims with respect to Libby for a payment by Grace of $250 million (including the $54.5 million referenced above), such payment to be made within 30 days of the Bankruptcy Court’s approval of the settlement agreement.  The settlement would cover all past and future remediation costs in the Libby area, except for those relating to the Grace-owned mine.  In return, the EPA would agree to take no action against Grace with respect to the Libby Asbestos

 

I-29



 

Superfund Site.  The settlement agreement is subject to approval of the Bankruptcy Court and a hearing on the matter is scheduled for June 2, 2008.

 

Grace’s total estimated liability for asbestos remediation related to its former vermiculite operations in Libby, including the cost of remediation at vermiculite processing sites outside of Libby, was $276.4 million and $270.8 million at March 31, 2008 and December 31, 2007, respectively, excluding interest.  The estimated obligation as of each date includes $250 million for the settlement of Libby remediation costs and does not include the cost to remediate the Grace-owned mine site at Libby.

 

Montana Criminal Proceeding On February 7, 2005, the United States Department of Justice announced the unsealing of a grand jury indictment against Grace and seven former senior level employees (United States of America v. W. R. Grace & Co. et al) relating to Grace’s former vermiculite mining and processing activities in Libby, Montana.  The indictment accuses the defendants of (1) conspiracy to violate environmental laws and obstruct federal agency proceedings; (2) violations of the federal Clean Air Act; and (3) obstruction of justice.

 

Grace purchased the Libby mine in 1963 and operated it until 1990; vermiculite processing activities continued until 1992. The grand jury charges that the conspiracy took place from 1976 to 2002.  According to the U.S. Department of Justice, Grace could be subject to fines in an amount equal to twice the after-tax profit earned from its Libby operations or twice the alleged loss suffered by victims, plus additional amounts for restitution to victims. The indictment alleges that such after-tax profits were $140 million. Grace has categorically denied any criminal wrongdoing and intends to vigorously defend itself at trial.

 

In July 2006, the U.S. District Court for the District of Montana dismissed a portion of the conspiracy count of a superseding indictment alleging conspiracy to knowingly endanger residents of the Libby area and others in violation of the Clean Air Act.  In August 2006, the District Court granted a motion by the defendants to exclude as evidence sample results that included minerals that do not constitute asbestos under the Clean Air Act.  The Government appealed these and other rulings to the Ninth Circuit Court of Appeals.  In September 2007, the Ninth Circuit overturned the July 2006 and August 2006 District Court rulings. In December 2007, Grace’s petition for rehearing concerning these rulings was denied.  Grace appealed the Ninth Circuit’s ruling to the Supreme Court on April 14, 2008.  A trial date has not yet been scheduled.

 

The U.S. Bankruptcy Court previously granted Grace’s request to advance legal and defense costs to the employees involved in this case, subject to a reimbursement obligation if it is later determined that the employees did not meet the standards for indemnification set forth under the appropriate state corporate law. For the three months ended March 31, 2008 and 2007, total expense for Grace and the employees was $3.0 million and $2.5 million, respectively, which amounts are included in selling, general and administrative expenses in the accompanying Consolidated Statements of Operations.  Cumulative expenses to address this matter were $94.6 million through March 31, 2008.

 

Grace is unable to assess whether the indictment, or any conviction resulting therefrom, will have a material adverse effect on the results of operations or financial condition of Grace or affect Grace’s bankruptcy proceedings. While the appeal to the Supreme Court is pending, Grace expects legal fees for this matter to be approximately $3 million per quarter.  Grace intends to expense such costs as they are incurred.

 

New Jersey Lawsuit – On June 1, 2005, the New Jersey Department of Environmental Protection (“DEP”) filed a lawsuit against Grace and two former employees in the Superior Court of New Jersey Law Division: Mercer County (N.J. Dept. of Environmental Protection v. W.R. Grace & Co. et al.) seeking civil penalties for alleged misrepresentations and false statements made in a Preliminary Assessment/Site Investigation Report and Negative Declarations submitted by Grace to the DEP in 1995 pursuant to the New Jersey Industrial Site Recovery Act. Grace submitted the report, which was prepared by an independent environmental consultant, in connection with the closing of Grace’s former plant in Hamilton Township, New Jersey. The State of New Jersey and the U.S. Department of Justice also have conducted criminal investigations related to Grace’s former operations of the Hamilton plant, but Grace is not aware of any recent activity related to such investigations.

 

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Grace purchased the Hamilton plant assets in 1963 and ceased operations in 1994. During the operating period, Grace produced spray-on fire protection products and other vermiculite-based products at this plant. The current property owners are conducting remediation activities as directed by the EPA.  The property owners and the EPA have filed proofs of claim against Grace seeking approximately $4.2 million with respect to the Hamilton plant site, which is contemplated as part of the multi-site settlement agreement described above.

 

In August 2007, the Bankruptcy Court denied the State of New Jersey’s motion for leave to file a late proof of claim in the amount of $31 million.  This ruling, which the State of New Jersey has appealed, does not affect the claims against the former employees, for which Grace would have an indemnification obligation.  On April 1, 2008, the Bankruptcy Court issued an opinion and order directing New Jersey to dismiss its lawsuit against Grace with prejudice.  New Jersey has appealed this decision.

 

Non-Vermiculite Related Matters

 

At March 31, 2008 and December 31, 2007, Grace’s estimated liability for remediation of sites not related to its former vermiculite mining and processing activities was $96.8 million and $97.8 million, respectively. This liability relates to Grace’s current and former operations, including its share of liability for off-site disposal at facilities where it has been identified as a potentially responsible party.  Grace’s estimated liability is based upon an evaluation of claims for which sufficient information was available and the liabilities settled pursuant to the multi-site settlement agreement described above. As Grace receives new information, its estimated liability may change materially.

 

Purchase Commitments – Grace engages in purchase commitments to minimize the volatility of major components of direct manufacturing costs including natural gas, certain metals, asphalt, amines and other materials.  Such commitments are for quantities that Grace fully expects to use in its normal operations.

 

Guarantees and Indemnification Obligations Grace is a party to many contracts containing guarantees and indemnification obligations. These contracts primarily consist of:

 

·                  Contracts providing for the sale of a former business unit or product line in which Grace has agreed to indemnify the buyer against liabilities arising prior to the closing of the transaction, including environmental liabilities. These liabilities are included in “liabilities subject to compromise” in the accompanying Consolidated Balance Sheets.

 

·                  Guarantees of real property lease obligations of third parties, typically arising out of (a) leases entered into by former subsidiaries of Grace, or (b) the assignment or sublease of a lease by Grace to a third party. These obligations are included in “liabilities subject to compromise” in the accompanying Consolidated Balance Sheets.

 

·                  Licenses of intellectual property by Grace to third parties in which Grace has agreed to indemnify the licensee against third party infringement claims.

 

·                  Contracts entered into with third party consultants, independent contractors, and other service providers in which Grace has agreed to indemnify such parties against certain liabilities in connection with their performance. Based on historical experience and the likelihood that such parties will make a claim against Grace, Grace believes that such indemnification obligations are immaterial.

 

·                  Product warranties with respect to certain products sold to customers in the ordinary course of business. These warranties typically provide that product will conform to specifications. Grace generally does not establish a liability for product warranty based on a percentage of sales or other formula. Grace accrues a warranty liability on a transaction-specific basis depending on the individual facts and circumstances related to each sale. Both the liability and annual expense related to product warranties are immaterial to the Consolidated Financial Statements.

 

Financial Assurances – Financial assurances have been established for a variety of purposes, including insurance and environmental matters, asbestos settlements and appeals, trade-related commitments and other matters.  At March 31 2008, Grace had gross financial assurances issued and outstanding of $283.7 million, comprised of

 

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$138.7 million of surety bonds issued by various insurance companies, and $145.0 million of standby letters of credit and other financial assurances issued by various banks. As discussed in Note 9, $61.4 million of these financial assurances have been issued under the DIP facility.

 

In connection with a 1994 divestment, Grace obtained a letter of credit in the maximum amount of $25.0 million to secure scheduled payments on bonds issued to fund the transaction.  Amounts drawn under this letter of credit aggregated $4.2 million through March 31, 2008.  The last of the bonds matures in November 2016.  Because the primary source of bond payment funds is revenue from contracts under which timing and amounts of sales are variable, it is not possible to predict future draws.

 

No amounts have been accrued in the Consolidated Financial Statements related to Grace’s financial assurances.

 

Accounting for Contingencies Although the outcome of each of the matters discussed above cannot be predicted with certainty, Grace has assessed its risk and has made accounting estimates as required under U.S. generally accepted accounting principles. As a result of the Filing, claims related to certain of the items discussed above will be addressed as part of Grace’s Chapter 11 proceedings. Accruals recorded for such contingencies have been included in “liabilities subject to compromise” in the accompanying Consolidated Balance Sheets. The amounts of these liabilities as ultimately determined through the Chapter 11 proceedings could be materially different from amounts recorded at March 31, 2008.

 

14.             Pension Plans and Other Postretirement Benefit Plans

 

Pension Plans – Grace maintains defined benefit pension plans covering employees of certain units who meet age and service requirements. Benefits are generally based on final average salary and years of service. Grace funds its U.S. qualified pension plans (“U.S. qualified pension plans”) in accordance with U.S. federal laws and regulations. Non-U.S. pension plans (“non-U.S. pension plans”) are funded under a variety of methods, as required under local laws and customs.

 

Grace also provides, through nonqualified plans, supplemental pension benefits in excess of U.S. qualified pension plan limits imposed by federal tax law. These plans cover officers and higher-level employees and serve to increase the combined pension amount to the level that they otherwise would have received under the U.S. qualified pension plans in the absence of such limits. The nonqualified plans are unfunded and Grace pays the costs of benefits as they are incurred.

 

At the December 31, 2007 measurement date for Grace’s defined benefit pension plans, the projected benefit obligation (“PBO”) was approximately $1,449 million as measured under U.S. generally accepted accounting principles.  The PBO basis reflects the present value (using a 6.25% discount rate for U.S. plans and a 5.81% weighted average discount rate for non-U.S. plans as of December 31, 2007) of vested and non-vested benefits earned from employee service to date, based upon current services and estimated future pay increases for active employees.

 

Beginning in 2007, on a quarterly basis, Grace analyzes pension assets and pension liabilities along with the resulting funded status, and updates its estimate of these measures.  Funded status is adjusted for contributions, benefit payments, actual return on assets, current discount rates and other identifiable and material actuarial changes.

 

The assumed discount rate for pension plans reflects the market rates for high quality corporate bonds currently available and is subject to change based on changes in the overall market interest rates. For the U.S. qualified pension plans, the assumed discount rate of 6.25% as of December 31, 2007 was selected by Grace, in consultation with its independent actuaries, based on a yield curve constructed from a portfolio of high quality bonds for which the timing and amount of cash outflows approximate the estimated payouts of the plan. Based on review of an updated yield curve analysis as of March 31, 2008, Grace increased the discount rate for the U.S. qualified pension plans to 6.50% based on market rates at that time. Grace also evaluated the current discount rates for the pension plans in the United Kingdom, Germany and Canada, which combined represented approximately 90% of the benefit obligation of the non-U.S. pension plans as of December 31, 2007. Based on review of the yield curve analyses for these plans as of March 31, 2008, Grace increased the discount rate for the United Kingdom from 5.75% at December 31, 2007 to 6.75% at March 

 

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31, 2008, for Germany from 5.50% at December 31, 2007 to 6.00% at March 31, 2008, and for Canada from 5.50% at December 31, 2007 to 6.00% at March 31, 2008. The aggregate adjustment to the funded status resulting from the change in discount rates as of March 31, 2008 (including the postretirement plan) was an increase to total assets of approximately $32 million, and a decrease to total liabilities of approximately $38 million.  After tax effects, total assets increased by approximately $10 million, total liabilities decreased by approximately $38 million and shareholders’ equity increased by approximately $48 million.

 

At March 31, 2008, Grace’s recorded pension liability for underfunded and unfunded plans was $441.3 million ($192.9 million included in “underfunded defined benefit pension plans”, $140.8 million included in “unfunded pay-as-you-go defined benefit pension plans”, $13.0 million included in “other current liabilities”, and $94.6 million related to noncurrent supplemental pension benefits, included in “liabilities subject to compromise”). The recorded liability reflects 1) the shortfall between dedicated assets and the PBO of underfunded plans ($192.9 million); and 2) the PBO of unfunded pay-as-you-go plans ($248.4 million).

 

Postretirement Benefits Other Than Pensions Grace provides postretirement health care and life insurance benefits for retired employees of certain U.S. business units and certain divested units.  The postretirement medical plan provides various levels of benefits to employees hired before 1991 who retire from Grace after age 55 with at least 10 years of service.  These plans are unfunded and Grace pays a portion of the costs of benefits under these plans as they are incurred. Grace applies SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” which requires that the future costs of postretirement health care and life insurance benefits be accrued over the employees’ years of service.

 

Retirees and beneficiaries covered by the postretirement medical plan are required to contribute a minimum of 40% of the calculated premium for that coverage. During 2002, per capita costs under the retiree medical plans exceeded caps on the amount Grace was required to contribute under a 1993 amendment to the plan. As a result, for 2003 and future years, retirees will bear 100% of any increase in premium costs.

 

For 2008 measurement purposes, per capita costs, before retiree contributions, were assumed to initially increase at a rate of 8.5%.  The rate is assumed to decrease gradually to 5% through 2012 and remain at that level thereafter.  A one percentage point increase or decrease in assumed health care medical cost trend rates would not materially change Grace’s postretirement benefit obligations (impact of less than $1.0 million) and would have a negligible impact on the aggregate of the service and interest cost components of net periodic benefit cost.

 

The components of net periodic benefit cost (income) for Grace’s pension and postretirement plans for the three months ended March 31, 2008 and 2007 are as follows:

 

 

 

Three Months
Ended
March 31,

 

 

 

2008

 

2007

 

 

 

Pension

 

 

 

Pension

 

 

 

Components of Net Periodic Benefit Cost (Income)

 

U.S.

 

Non-
U.S.

 

Post-
retirement

 

U.S.

 

Non-
U.S.

 

Post-
retirement

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

4.2

 

$

2.2

 

$

0.1

 

$

4.2

 

$

2.0

 

$

0.1

 

Interest cost

 

15.6

 

5.9

 

1.3

 

14.4

 

5.0

 

1.1

 

Expected return on plan assets

 

(15.5

)

(5.0

)

 

(14.8

)

(5.2

)

 

Amortization of prior service cost (credit)

 

0.4

 

0.2

 

(2.2

)

0.6

 

0.2

 

(2.5

)

Amortization of net deferred actuarial loss

 

5.0

 

1.3

 

0.5

 

4.9

 

1.4

 

0.4

 

Net periodic benefit cost (income)

 

$

9.7

 

$

4.6

 

$

(0.3

)

$

9.3

 

$

3.4

 

$

(0.9

)

 

Plan Contributions and Funding – Subject to any required approval of the Bankruptcy Court, Grace intends to satisfy its funding obligations under the U.S. qualified pension plans and to comply with all of the requirements of the Employee Retirement Income Security Act of 1974 (“ERISA”).  For ERISA purposes, funded status is calculated on a different basis than under U.S. generally accepted accounting principles.  Grace has obtained Bankruptcy Court approval to fund all minimum required payments under the U.S. qualified pension plans through April 2008.  In that regard, Grace contributed approximately $76 million in 2007, approximately $15 million in January 2008, and approximately $18 million in April 2008 to the trusts that hold assets of the U.S. qualified pension plans.  While Grace intends to continue to fund all minimum required payments under the U.S. qualified pension plans, there can be no assurance that

 

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the Bankruptcy Court will continue to approve these payments.

 

Contributions to non-U.S. pension plans are not subject to Bankruptcy Court approval and Grace intends to fund such plans based on applicable legal requirements, and actuarial and trustee recommendations.

 

Grace plans to pay benefits as they become due under virtually all pay-as-you-go plans and to maintain compliance with federal funding laws for its U.S. qualified pension plans.

 

15.             Operating Segment Information

 

Grace is a global producer of specialty chemicals and materials. It generates revenues from two operating segments: Grace Davison and Grace Construction Products.  Intersegment sales, eliminated in consolidation, are not material.

 

Grace’s reportable operating segments reflect the transfer of the packaging technologies product line to the Grace Davison operating segment, which was completed in the fourth quarter of 2007. The previous Grace Performance Chemicals operating segment has been renamed “Grace Construction Products” as a result of the transfer. Previously reported segment information contained herein has been retrospectively restated to reflect this realignment.

 

The following table presents information related to Grace’s operating segments for the three month periods ended March 31, 2008 and 2007, respectively. Only those corporate expenses directly related to the operating segments are allocated for reporting purposes. All remaining corporate items are reported separately and labeled as such.

 

 

 

Three Months
Ended
March 31,

 

Operating Segment Data

 

2008

 

2007

 

(In millions)

 

 

 

 

 

Net Sales

 

 

 

 

 

Grace Davison

 

$

497.1

 

$

467.6

 

Grace Construction Products

 

262.1

 

248.0

 

Total

 

$

759.2

 

$

715.6

 

Pre-tax Operating Income

 

 

 

 

 

Grace Davison

 

$

62.3

 

$

54.4

 

Grace Construction Products

 

24.7

 

26.8

 

Corporate costs

 

(24.8

)

(20.6

)

Total

 

$

62.2

 

$

60.6

 

 

Corporate costs include expenses of corporate headquarters functions incurred in support of core operations, such as corporate financial and legal services, human resources management, communications and regulatory affairs. Corporate costs also include certain pension and postretirement benefits, including the amortization of deferred costs that are considered a core operating expense but not allocated to operating segments.

 

The following table presents information related to the geographic areas in which Grace operated for the three months ended March 31, 2008 and 2007, respectively. Sales are attributed to geographic areas based on customer location.

 

 

 

Three Months
Ended
March 31,

 

Geographic Area Data

 

2008

 

2007

 

(In millions)

 

 

 

 

 

Net Sales

 

 

 

 

 

United States

 

$

250.3

 

$

245.8

 

Canada and Puerto Rico

 

23.3

 

20.9

 

Total North America

 

273.6

 

266.7

 

Europe Africa

 

324.0

 

295.0

 

Asia Pacific

 

112.2

 

110.6