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W. R. GRACE & CO. AND SUBSIDIARIES Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
ý |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the Quarterly Period Ended September 30, 2009 |
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OR |
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o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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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 ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o 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 the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class | Outstanding at October 31, 2009 | |
---|---|---|
Common Stock, $0.01 par value per share | 72,236,518 shares |
W. R. GRACE & CO. AND SUBSIDIARIES
Table of Contents
Unless the context otherwise indicates, in this Report 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. Grace®, the Grace® logo and, except as otherwise indicated, the other product names used in the text of this report are trademarks, service marks, and/or trade names of operating units of W. R. Grace & Co. or its affiliates and/or subsidiaries.
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 quarter ended September 30, 2009, 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.
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 September 30, 2009, and the related consolidated statements of operations, equity (deficit), and comprehensive income (loss) for the three-month and nine-month periods ended September 30, 2009 and 2008 and the consolidated statements of cash flows for the nine-month periods ended September 30, 2009 and 2008. 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 previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2008, and the related consolidated statements of operations, equity (deficit), comprehensive income (loss), and of cash flows for the year then ended (not presented herein), and in our report dated February 27, 2009, 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. As discussed in Note 1 to the accompanying consolidated financial statements, the Company changed its method of accounting for noncontrolling interests. The accompanying December 31, 2008 consolidated balance sheet reflects this change.
PricewaterhouseCoopers LLP
McLean, Virginia
November 6, 2009
2
W. R. Grace & Co. and Subsidiaries
Consolidated Statements of Operations (unaudited)
(In millions, except per share amounts)
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | 2009 | 2008 | ||||||||||
Net sales |
$ | 753.6 | $ | 889.4 | $ | 2,146.7 | $ | 2,548.6 | ||||||
Cost of goods sold |
491.1 | 630.8 | 1,470.6 | 1,774.0 | ||||||||||
Gross profit |
262.5 | 258.6 | 676.1 | 774.6 | ||||||||||
Selling, general and administrative expenses |
136.7 |
150.7 |
425.8 |
441.7 |
||||||||||
Restructuring expenses |
1.9 | | 26.9 | 5.2 | ||||||||||
Gain on sales of product lines |
(22.2 | ) | | (22.2 | ) | | ||||||||
Research and development expenses |
16.6 | 20.5 | 52.8 | 63.4 | ||||||||||
Defined benefit pension expense |
21.5 | 14.1 | 63.9 | 42.4 | ||||||||||
Interest expense and related financing costs |
9.7 | 13.2 | 28.5 | 42.8 | ||||||||||
Provision for environmental remediation |
0.4 | 2.9 | 1.1 | 8.8 | ||||||||||
Chapter 11 expenses, net of interest income |
18.4 | 12.0 | 36.4 | 48.4 | ||||||||||
Other (income) expense, net |
5.1 | 17.1 | 11.2 | (6.5 | ) | |||||||||
|
188.1 | 230.5 | 624.4 | 646.2 | ||||||||||
Income before income taxes |
74.4 | 28.1 | 51.7 | 128.4 | ||||||||||
Benefit from (provision for) income taxes |
(23.6 | ) | 4.3 | (17.0 | ) | (38.9 | ) | |||||||
Net income |
50.8 | 32.4 | 34.7 | 89.5 | ||||||||||
Less: Net income attributable to noncontrolling interests |
(6.4 | ) | (4.1 | ) | (9.9 | ) | (11.4 | ) | ||||||
Net income attributable to W. R. Grace & Co. shareholders |
$ | 44.4 | $ | 28.3 | $ | 24.8 | $ | 78.1 | ||||||
Earnings Per Share Attributable to W. R. Grace & Co. Shareholders |
||||||||||||||
Basic earnings per share: |
||||||||||||||
Net income |
$ | 0.61 | $ | 0.39 | $ | 0.34 | $ | 1.08 | ||||||
Weighted average number of basic shares |
72.2 | 72.2 | 72.2 | 72.0 | ||||||||||
Diluted earnings per share: |
||||||||||||||
Net income |
$ | 0.61 | $ | 0.39 | $ | 0.34 | $ | 1.07 | ||||||
Weighted average number of diluted shares |
72.9 | 72.8 | 72.3 | 72.7 |
The Notes to Consolidated Financial Statements are an integral part of these statements.
3
W. R. Grace & Co. and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)
(In millions)
|
Nine Months Ended September 30, |
|||||||
---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | ||||||
OPERATING ACTIVITIES |
||||||||
Net income |
$ | 34.7 | $ | 89.5 | ||||
Reconciliation to net cash provided by (used for) operating activities: |
||||||||
Depreciation and amortization |
84.5 | 90.8 | ||||||
Chapter 11 expenses, net of interest income |
36.4 | 48.4 | ||||||
Provision for income taxes |
17.0 | 38.9 | ||||||
Income taxes paid, net of refunds |
(8.1 | ) | (44.3 | ) | ||||
Interest accrued on pre-petition liabilities subject to compromise |
26.9 | 38.8 | ||||||
Net (gain) loss on sales of product lines and disposals of assets |
(25.2 | ) | 0.3 | |||||
Restructuring expenses |
26.9 | 5.2 | ||||||
Defined benefit pension expense |
63.9 | 42.4 | ||||||
Payments under defined benefit pension arrangements |
(42.5 | ) | (57.4 | ) | ||||
Payments under postretirement benefit plans |
(1.5 | ) | (4.7 | ) | ||||
Net income from life insurance policies |
(1.2 | ) | (2.0 | ) | ||||
Provision for uncollectible receivables |
2.9 | 0.8 | ||||||
Provision for environmental remediation |
1.1 | 8.8 | ||||||
Expenditures for environmental remediation |
(5.8 | ) | (3.3 | ) | ||||
Expenditures for retained obligations of divested businesses |
| (0.1 | ) | |||||
Changes in assets and liabilities, excluding effect of businesses acquired/divested and foreign currency translation: |
||||||||
Working capital items (trade accounts receivable, inventories and accounts payable) |
99.5 | (85.9 | ) | |||||
Other accruals and non-cash items |
(29.1 | ) | (30.0 | ) | ||||
Net cash provided by operating activities before Chapter 11 expenses and settlements |
280.4 | 136.2 | ||||||
Cash paid to resolve contingencies subject to Chapter 11 |
| (252.0 | ) | |||||
Chapter 11 expenses paid |
(34.9 | ) | (52.9 | ) | ||||
Net cash provided by (used for) operating activities |
245.5 | (168.7 | ) | |||||
INVESTING ACTIVITIES |
||||||||
Capital expenditures |
(53.6 | ) | (93.1 | ) | ||||
Proceeds from sales of investment securities |
17.7 | 61.5 | ||||||
Purchases of equity investments |
(1.5 | ) | (3.0 | ) | ||||
Proceeds from termination of life insurance policies |
68.8 | 8.1 | ||||||
Net investment in life insurance policies |
(0.6 | ) | (0.2 | ) | ||||
Proceeds from disposals of assets |
8.0 | 2.8 | ||||||
Proceeds from sales of product lines |
26.7 | | ||||||
Net cash provided by (used for) investing activities |
65.5 | (23.9 | ) | |||||
FINANCING ACTIVITIES |
||||||||
Dividends paid to noncontrolling interests in consolidated entities |
(14.3 | ) | (13.3 | ) | ||||
Proceeds from life insurance policy loans |
| 40.0 | ||||||
Net (repayments) borrowings under credit arrangements |
(4.8 | ) | 1.5 | |||||
Fees paid under debtor-in-possession credit facility |
(1.4 | ) | (1.6 | ) | ||||
Proceeds from exercise of stock options |
0.6 | 9.6 | ||||||
Net cash provided by (used for) financing activities |
(19.9 | ) | 36.2 | |||||
Effect of currency exchange rate changes on cash and cash equivalents |
14.2 | 1.1 | ||||||
Increase (decrease) in cash and cash equivalents |
305.3 | (155.3 | ) | |||||
Cash and cash equivalents, beginning of period |
460.1 | 480.5 | ||||||
Cash and cash equivalents, end of period |
$ | 765.4 | $ | 325.2 | ||||
The Notes to Consolidated Financial Statements are an integral part of these statements.
4
W. R. Grace & Co. and Subsidiaries
Consolidated Balance Sheets (unaudited)
(In millions, except par value and shares)
|
September 30, 2009 |
December 31, 2008 |
||||||
---|---|---|---|---|---|---|---|---|
ASSETS |
||||||||
Current Assets |
||||||||
Cash and cash equivalents |
$ | 765.4 | $ | 460.1 | ||||
Investment securities |
4.8 | 21.6 | ||||||
Cash value of life insurance policies, net of policy loans |
| 67.2 | ||||||
Trade accounts receivable, less allowance of $6.4 (2008$5.0) |
442.1 | 462.6 | ||||||
Inventories |
261.2 | 354.8 | ||||||
Deferred income taxes |
42.5 | 45.8 | ||||||
Other current assets |
75.3 | 86.1 | ||||||
Total Current Assets |
1,591.3 | 1,498.2 | ||||||
Properties and equipment, net of accumulated depreciation and amortization of $1,611.7 (2008$1,545.3) |
686.6 | 710.6 | ||||||
Goodwill |
120.2 | 117.1 | ||||||
Deferred income taxes |
880.4 | 851.7 | ||||||
Asbestos-related insurance |
500.0 | 500.0 | ||||||
Overfunded defined benefit pension plans |
33.9 | 48.6 | ||||||
Other assets |
124.4 | 149.3 | ||||||
Total Assets |
$ | 3,936.8 | $ | 3,875.5 | ||||
LIABILITIES AND EQUITY (DEFICIT) |
||||||||
Liabilities Not Subject to Compromise |
||||||||
Current Liabilities |
||||||||
Debt payable within one year |
$ | 6.6 | $ | 11.2 | ||||
Accounts payable |
177.6 | 207.6 | ||||||
Other current liabilities |
312.0 | 314.3 | ||||||
Total Current Liabilities |
496.2 | 533.1 | ||||||
Debt payable after one year |
0.4 | 0.6 | ||||||
Deferred income taxes |
5.8 | 7.1 | ||||||
Underfunded defined benefit pension plans |
397.6 | 392.3 | ||||||
Unfunded pay-as-you-go defined benefit pension plans |
153.7 | 136.7 | ||||||
Other liabilities |
42.2 | 46.6 | ||||||
Total Liabilities Not Subject to Compromise |
1,095.9 | 1,116.4 | ||||||
Liabilities Subject to CompromiseNote 2 |
||||||||
Pre-petition bank debt plus accrued interest |
843.7 | 823.5 | ||||||
Drawn letters of credit plus accrued interest |
30.9 | 30.0 | ||||||
Income tax contingencies |
123.9 | 121.0 | ||||||
Asbestos-related contingencies |
1,700.0 | 1,700.0 | ||||||
Environmental contingencies |
147.5 | 152.2 | ||||||
Postretirement benefits |
181.1 | 169.7 | ||||||
Other liabilities and accrued interest |
126.1 | 116.5 | ||||||
Total Liabilities Subject to Compromise |
3,153.2 | 3,112.9 | ||||||
Total Liabilities |
4,249.1 | 4,229.3 | ||||||
Commitments and Contingencies |
||||||||
Equity (Deficit) |
||||||||
Common stock issued, par value $0.01; 300,000,000 shares authorized; outstanding: 200972,220,768 (200872,157,518) |
0.8 | 0.8 | ||||||
Paid-in capital |
441.6 | 436.6 | ||||||
Accumulated deficit |
(221.8 | ) | (246.6 | ) | ||||
Treasury stock, at cost: shares: 20094,758,992; (20084,822,242) |
(56.6 | ) | (57.4 | ) | ||||
Accumulated other comprehensive income (loss) |
(544.5 | ) | (560.3 | ) | ||||
Total W. R. Grace & Co. Shareholders' Equity (Deficit) |
(380.5 | ) | (426.9 | ) | ||||
Noncontrolling interests in consolidated entities |
68.2 | 73.1 | ||||||
Total Equity (Deficit) |
(312.3 | ) | (353.8 | ) | ||||
Total Liabilities and Equity (Deficit) |
$ | 3,936.8 | $ | 3,875.5 | ||||
The Notes to Consolidated Financial Statements are an integral part of these statements.
5
W. R. Grace & Co. and Subsidiaries
Consolidated Statements of Equity (Deficit) (unaudited)
(In millions)
|
Common Stock and Paid-in Capital |
Accumulated Deficit |
Treasury Stock |
Accumulated Other Comprehensive Income (Loss) |
Noncontrolling Interests |
Total Equity (Deficit) |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance, June 30, 2009 |
$ | 440.5 | $ | (266.2 | ) | $ | (57.4 | ) | $ | (531.7 | ) | $ | 63.1 | $ | (351.7 | ) | |||
Net income |
| 44.4 | | | 6.4 | 50.8 | |||||||||||||
Stock plan activity |
1.9 | | 0.8 | | | 2.7 | |||||||||||||
Other comprehensive loss |
| | | (12.8 | ) | (0.7 | ) | (13.5 | ) | ||||||||||
Dividends paid |
| | | | (0.6 | ) | (0.6 | ) | |||||||||||
Balance, September 30, 2009 |
$ | 442.4 | $ | (221.8 | ) | $ | (56.6 | ) | $ | (544.5 | ) | $ | 68.2 | $ | (312.3 | ) | |||
Balance, December 31, 2008 |
$ | 437.4 | $ | (246.6 | ) | $ | (57.4 | ) | $ | (560.3 | ) | $ | 73.1 | $ | (353.8 | ) | |||
Net income |
| 24.8 | | | 9.9 | 34.7 | |||||||||||||
Stock plan activity |
5.0 | | 0.8 | | | 5.8 | |||||||||||||
Other comprehensive income (loss) |
| | | 15.8 | (0.5 | ) | 15.3 | ||||||||||||
Dividends paid |
| | | | (14.3 | ) | (14.3 | ) | |||||||||||
Balance, September 30, 2009 |
$ | 442.4 | $ | (221.8 | ) | $ | (56.6 | ) | $ | (544.5 | ) | $ | 68.2 | $ | (312.3 | ) | |||
The Notes to Consolidated Financial Statements are an integral part of these statements.
6
W. R. Grace & Co. and Subsidiaries
Consolidated Statements of Comprehensive Income (unaudited)
(In millions)
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | 2009 | 2008 | |||||||||
Net income |
$ | 50.8 | $ | 32.4 | $ | 34.7 | $ | 89.5 | |||||
Other comprehensive income (loss): |
|||||||||||||
Foreign currency translation adjustments |
10.9 | (1.8 | ) | 30.1 | (4.4 | ) | |||||||
Gain (loss) from hedging activities, net of income taxes |
2.8 | (7.5 | ) | 5.3 | (3.5 | ) | |||||||
Defined benefit pension and other postretirement plans, net of income taxes |
(26.7 | ) | 20.2 | (20.6 | ) | 21.1 | |||||||
Unrealized holding gain on available-for-sale securities |
0.2 | | 1.0 | | |||||||||
Total other comprehensive income (loss) attributable to W. R. Grace & Co. shareholders |
(12.8 | ) | 10.9 | 15.8 | 13.2 | ||||||||
Total other comprehensive loss attributable to noncontrolling interests |
(0.7 | ) | (0.9 | ) | (0.5 | ) | (1.6 | ) | |||||
Total other comprehensive income (loss) |
(13.5 | ) | 10.0 | 15.3 | 11.6 | ||||||||
Comprehensive income |
$ | 37.3 | $ | 42.4 | $ | 50.0 | $ | 101.1 | |||||
The Notes to Consolidated Financial Statements are an integral part of these statements.
7
Notes to Consolidated Financial Statements
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 ("Chapter 11") 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 11Related 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 2008 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 except for the impacts of adopting new accounting standards as discussed below. 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.
8
Notes to Consolidated Financial Statements (Continued)
1. Basis of Presentation and Summary of Significant Accounting and Financial Reporting Policies (Continued)
The results of operations for the nine-month interim period ended September 30, 2009 are not necessarily indicative of the results of operations for the year ending December 31, 2009.
Reclassifications Certain amounts in prior years' Consolidated Financial Statements have been reclassified to conform to the 2009 presentation. Such reclassifications have not 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 ("U.S. GAAP") 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 11), income taxes (see Note 8), and litigation (see Note 11);
-
- Pension and postretirement liabilities that depend on assumptions regarding participant life spans, future inflation,
discount rates and total returns on invested funds (see Note 9); 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 StandardsIn June 2009, the Financial Accounting Standards Board ("FASB") issued FASB Accounting Standards Codification ("ASC") No. 105 and the Hierarchy of Generally Accepted Accounting Principles, which is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Codification does not change current U.S. GAAP, but is intended to simplify user access by providing all of the authoritative literature related to a particular topic in one place, and as of the effective date, all existing accounting standard documents were superseded. Grace has included the references to the Codification, as appropriate, in this Form 10-Q.
In June 2009, the FASB issued SFAS No. 167, "Amendments to FASB Interpretation No. 46(R)." The objective of this Statement is to improve financial reporting by enterprises involved with variable interest entities. The Statement is effective as of the beginning of each reporting entity's first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Grace will adopt this standard for 2010 and does not expect it to have a material effect on the Consolidated Financial Statements.
In May 2009, the FASB issued SFAS No. 165, "Subsequent Events", which was subsequently codified as ASC 855. The objective of this Statement is to establish general standards of accounting
9
Notes to Consolidated Financial Statements (Continued)
1. Basis of Presentation and Summary of Significant Accounting and Financial Reporting Policies (Continued)
for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This Statement is effective for interim or annual financial periods ending after June 15, 2009, and accordingly, Grace has adopted this Standard. ASC 855 requires that public entities evaluate subsequent events through the date that the financial statements are issued. We have evaluated subsequent events through the time of filing these financial statements with the SEC on November 6, 2009.
In April 2009, the FASB issued FASB Staff Position ("FSP") No. FAS 107-1 and APB 28-1, "Interim Disclosures about Fair Value of Financial Instruments", which was subsequently codified as ASC 825. ASC 825 amends FASB Statement No. 107 (subsequently codified ASC 825), Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as for annual financial statements. ASC 825 also amends APB Opinion No. 28 (subsequently codified as ASC 270), Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods. ASC 825 is effective for interim reporting periods ending after June 15, 2009, and accordingly, Grace has adopted this standard.
In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, "Recognition and Presentation of Other-Than-Temporary Impairments", which was subsequently codified as ASC 320. ASC 320 changed the method for determining whether an other-than-temporary impairment exists for debt securities and the amount of an impairment charge to be recorded in earnings. ASC 320 is effective for interim and annual periods ending after June 15, 2009 and accordingly, Grace has adopted this standard. This standard has not had a material effect on the Consolidated Financial Statements.
In January 2009, the FASB Emerging Issues Task Force ("EITF") issued EITF 99-20-1, "Amendments to the Impairment Guidance of EITF Issue No. 99-20", which was subsequently codified as ASC 325. The objective of ASC 325 is to achieve more consistent determination of whether an other-than-temporary impairment has occurred, and to retain and emphasize the objective of an other-than-temporary impairment assessment and the related disclosure requirements in FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, which was subsequently codified as ASC 320, and other related guidance. This standard is effective for interim and annual reporting periods ending after December 15, 2008, and applies prospectively. Grace has adopted ASC 325 in 2009.
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations", which was subsequently codified as ASC 805. ASC 805 requires 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. In March 2009, the FASB issued FSP No. FAS 141(R)-1, "Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies", which was subsequently codified as ASC 805. This standard addresses application issues on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. This standard is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Grace has adopted this standard in 2009.
10
Notes to Consolidated Financial Statements (Continued)
1. Basis of Presentation and Summary of Significant Accounting and Financial Reporting Policies (Continued)
In December 2008, the FASB issued FSP No. FAS 132(R)-1 "Disclosures about Postretirement Benefit Plan Assets" which was subsequently codified as ASC 718. This standard amends FASB Statement No. 132 (revised 2003), Employers' Disclosures about Pensions and Other Postretirement Benefits, which was subsequently codified as ASC 230, to provide guidance on an employer's disclosures about plan assets of a defined benefit pension or other postretirement plan. ASC 718 shall be effective for fiscal years ending after December 15, 2009. Grace will adopt these disclosure requirements for its 2009 Annual Report on Form 10-K.
In April 2008, the FASB issued FSP No. FAS 142-3 "Determination of the Useful Life of Intangible Assets", which was subsequently codified as ASC 350. This standard will improve the consistency between the useful life of a recognized intangible asset under ASC 350 and the period of expected cash flows used to measure the fair value of the asset under ASC 805, and other U.S. GAAP. This standard is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Grace has adopted this standard, and it did not materially impact the Consolidated Financial Statements.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activitiesan amendment of FASB Statement No. 133", which was subsequently codified as ASC 815. This standard 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. ASC 815 is effective for fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. Grace has adopted these disclosure requirements.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements"' which was subsequently codified as ASC 810. ASC 810 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. ASC 810 is effective for fiscal years beginning on or after December 15, 2008. Grace has adopted this standard, and has modified its Consolidated Financial Statements where applicable.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements", which was subsequently codified as ASC 820. ASC 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. In February 2008, the FASB delayed the effective date of ASC 820 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 adopted ASC 820 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. In April 2009, the FASB issued FSP No. FAS 157-4 "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly", which was subsequently codified as ASC 820. This standard provides additional guidance and expands on the factors that should be considered in estimating fair value when there has been a significant decrease in market activity for a financial asset. This standard is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. Grace has adopted this standard, and it has not had a material impact on its Consolidated Financial Statements. See Note 7 for further discussion of ASC 820.
11
Notes to Consolidated Financial Statements (Continued)
2. Chapter 11Related Information
Official Parties to Grace's Chapter 11 Cases 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 the third representing other unsecured creditors, and the Official Committee of Equity Security Holders (the "Equity Committee"), have been appointed in the Chapter 11 Cases. These committees, a legal representative of future asbestos personal injury claimants (the "PI FCR") and a legal representative of future asbestos property damage claimants (the "PD 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 the representatives of future asbestos claimants, including those of their counsel and financial advisors.
As discussed below, the Debtors, the Equity Committee, the PI Committee and the PI FCR have filed a joint plan of reorganization, subsequently amended, with the Bankruptcy Court that is designed to address all pending and future asbestos-related claims and all other pre-petition claims as outlined therein. The committee representing general unsecured creditors, the PD Committee and the PD FCR are not co-proponents of this joint plan.
Plans of Reorganization On November 13, 2004, Grace filed a proposed 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 "Prior Plan") and related documents to address certain objections of creditors and other interested parties. At the time it was filed, the Prior 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 PI FCR. At the time of filing of the Prior Plan, the PD FCR had not been appointed.
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 PI FCR filed a proposed plan of reorganization (the "PI Plan") with the Bankruptcy Court.
On April 6, 2008, the Debtors reached an agreement in principle with the PI Committee, the PI FCR, and the Equity Committee designed to resolve all present and future asbestos-related personal injury claims (the "PI Settlement").
Prior to the PI Settlement, the Bankruptcy Court 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.
As contemplated by the PI Settlement, on September 19, 2008, the Debtors, supported by the Equity Committee, the PI Committee and the PI FCR, as co-proponents, filed a joint plan of reorganization with the Bankruptcy Court to reflect the terms of the PI Settlement.
On October 17, 2008, the Ontario Superior Court of Justice, in the Grace Canada, Inc. proceeding pending under the Companies' Creditors Arrangement Act, approved an agreement (the "Minutes of Settlement"), entered into by the Company, Grace Canada, Inc. and legal representatives of Canadian ZAI property damage claimants on September 2, 2008, that would settle
12
Notes to Consolidated Financial Statements (Continued)
2. Chapter 11Related Information (Continued)
all Canadian ZAI property damage claims and demands. Under the Minutes of Settlement, all Canadian ZAI property damage claims and demands would be paid through a separate Canadian ZAI property damage claims fund of CDN$6.5 million. The Minutes of Settlement are subject to the confirmation and effectiveness of the Joint Plan (as defined below). The Minutes of Settlement provide that if the Bankruptcy Court does not issue a confirmation order with respect to the Joint Plan by October 31, 2009, the Minutes of Settlement will terminate. The parties are discussing the terms of a possible extension.
On November 21, 2008, the Debtors reached an agreement in principle (the "ZAI PD Term Sheet") with the Putative Class Counsel to the U.S. ZAI claimants, the PD FCR, and the Equity Committee designed to resolve all present and future U.S. ZAI property damage claims and demands.
As contemplated by the PI Settlement and the ZAI PD Term Sheet, the Debtors, supported by the Equity Committee, the PI Committee and the PI FCR, as co-proponents, amended the joint plan of reorganization and several associated documents, including a disclosure statement, trust distribution procedures, exhibits and other supporting documents on December 18, 2008, February 3, 2009 and February 27, 2009 through filings with the Bankruptcy Court. The Debtors and co-proponents filed technical modifications to the Joint Plan and certain exhibits on September 4, 2009 and October 12, 2009. The joint plan of reorganization (as amended and modified through October 12, 2009, the "Joint Plan") is designed to address all pending and future asbestos-related claims and all other pre-petition claims as outlined therein. The Joint Plan supersedes the Prior Plan and the PI Plan. The committee representing general unsecured creditors, the PD Committee and the PD FCR are not co-proponents of the Joint Plan.
Under the Joint Plan, two asbestos trusts would be established under Section 524(g) of the Bankruptcy Code. All asbestos-related personal injury claims would be channeled for resolution to one asbestos trust (the "PI Trust") and all asbestos-related property damage claims, including U.S and Canadian ZAI property damage claims, would be channeled to a separate asbestos trust (the "PD Trust").
Any plan of reorganization, including the Joint Plan 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. On March 9, 2009, the Bankruptcy Court approved the disclosure statement associated with the Joint Plan. On March 31, 2009, Grace distributed the Joint Plan, exhibits and disclosure statement along with voting materials to all creditors entitled to vote on the Joint Plan. The Bankruptcy Court required all creditors eligible to vote on the Joint Plan to submit their votes, and all parties-in-interest who object to the Joint Plan to submit their objections, by May 20, 2009. All classes of creditors entitled to vote accepted the Joint Plan. The class of general unsecured creditors, who voted on a provisional basis pending a determination by the Bankruptcy Court as to whether the class is impaired and therefore entitled to a vote, voted to reject the Joint Plan. The objections filed generally relate to demands for interest at rates higher than provided for in the Joint Plan, assertions that the Joint Plan may impair insurers' contractual rights, assertions that the Joint Plan discriminates against Libby, Montana personal injury claimants and the classification and treatment of claims under the Joint Plan. Grace believes that the Joint Plan complies with the requirements for confirmation under the Bankruptcy Code and Grace intends to vigorously defend the Joint Plan against these and all other objections. If certain objections were resolved adversely to Grace and the other Joint Plan proponents, or if rulings by the Bankruptcy Court resolving certain
13
Notes to Consolidated Financial Statements (Continued)
2. Chapter 11Related Information (Continued)
objections favorably to the Joint Plan proponents were appealed, certain conditions to the Joint Plan, including for example, payments pursuant to the Sealed Air Settlement (as defined below) and the Fresenius Settlement (as defined below), might not be satisfied and potential lenders might not be willing to provide the new financing that Grace seeks to fund the Joint Plan. The resolution of these objections and any related appeals could have a material effect on the terms and timing of Grace's emergence from Chapter 11. Hearings to determine whether the Bankruptcy Court will approve the Joint Plan were held on June 22-23, 2009, September 8-17, 2009, and October 13-14, 2009. The parties will submit post-hearing briefs in November and December 2009. Closing arguments on confirmation of the Joint Plan are scheduled for January 4-5, 2010.
The Joint Plan assumes that Cryovac, Inc. ("Cryovac"), a wholly-owned subsidiary of Sealed Air Corporation ("Sealed Air"), will fund the PI Trust and the PD Trust with an aggregate of: (i) $512.5 million in cash (plus interest at 5.5% compounded annually from December 21, 2002); and (ii) 18 million shares (reflecting a two-for-one stock split) of common stock of Sealed Air, 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 Joint Plan also assumes that Fresenius AG ("Fresenius") will fund the PI Trust and the PD Trust with an aggregate of $115.0 million pursuant to the terms of a settlement agreement resolving asbestos-related, successor liability and fraudulent transfer claims against Fresenius, as further described below (the "Fresenius Settlement"). The Sealed Air Settlement and the Fresenius Settlement have been approved by the Bankruptcy Court, but remain subject to the fulfillment of specified conditions.
The Joint Plan is designed to address all pending and future asbestos-related claims and demands and all other pre-petition claims as outlined respectively therein. However, it is possible that the Joint Plan will not be confirmed by the Bankruptcy Court, or become effective if it is confirmed. If the Joint Plan is not confirmed by the Bankruptcy Court or the U.S. District Court for the District of Delaware or does not become effective, the Debtors would expect to resume the estimation trial, which was suspended in April 2008 due to the PI Settlement, to determine the amount of its asbestos-related liabilities. Under those circumstances, a different plan of reorganization may ultimately be confirmed and become effective. Under that effective plan of reorganization, the interests of holders of Company common stock could be substantially diluted or cancelled. The value of Company common stock following the effective date of any plan of reorganization and the extent of any recovery by non-asbestos-related creditors would depend principally on the amount of Debtors' asbestos-related liability under such effective plan of reorganization.
Joint Plan of Reorganization Under the terms of the Joint Plan, claims under the Chapter 11 Cases would be satisfied as follows:
Asbestos-Related Personal Injury Claims
All pending and future asbestos-related personal injury claims and demands ("PI Claims") would be channeled to the PI Trust for resolution. The PI Trust would use specified trust distribution procedures to satisfy allowed PI Claims.
14
Notes to Consolidated Financial Statements (Continued)
2. Chapter 11Related Information (Continued)
The PI Trust would be funded with:
-
- $250 million in cash plus interest thereon from January 1, 2009 to the effective date of the Joint Plan to
be paid by Grace;
-
- Cash in the amount of the PD Initial Payment (as described below) and the ZAI Initial Payment (as described below) to be
paid by Grace;
-
- 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 the Joint Plan;
-
- Rights to all proceeds under all of the Debtors' insurance policies that are available for payment of PI Claims;
-
- Cash in the amount of $512.5 million plus interest thereon from December 21, 2002 to the effective date of
the Joint Plan at a rate of 5.5% per annum reduced by the amount of Cryovac's contribution to the PD Initial Payment and the ZAI Initial Payment (as described below) and 18 million shares of
Sealed Air common stock to be paid by Cryovac pursuant to the Sealed Air Settlement;
-
- Cash in the amount of $115 million to be paid by Fresenius pursuant to the Fresenius Settlement reduced by the
amount of Fresenius' contribution to the PD Initial Payment and ZAI Initial Payment (as described below); 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 (measured as of the effective date of the Joint Plan) to the PI Trust in the event of default.
Asbestos-Related Property Damage Claims
All pending and future asbestos-related property damage claims and demands ("PD Claims") would be channeled to the PD Trust for resolution. The PD Trust would contribute CDN$6.5 million to a separate Canadian ZAI PD Claims fund through which Canadian ZAI PD Claims would be resolved. The PD Trust would generally resolve U.S. ZAI PD Claims that qualify for payment by paying 55% of the claimed amount, but in no event would the PD Trust pay more per claim than 55% of $7,500 (as adjusted for the increase in inflation each year after the fifth anniversary of the effective date of the Joint Plan). The PD Trust would satisfy other allowed PD Claims pursuant to specified trust distribution procedures with cash payments in the allowed settlement amount. Unresolved PD Claims and future PD claims would be litigated pursuant to procedures to be approved by the Bankruptcy Court and, to the extent such claims were determined to be allowed claims, would be paid in cash by the PD Trust in the amount determined by the Bankruptcy Court.
The PD Trust would contain two accounts, the PD account and the ZAI PD account. U.S. ZAI PD Claims would be paid from the ZAI PD account and other PD Claims would be paid from the PD account. The separate Canadian ZAI PD Claims would be paid by a separate fund established in Canada. Each account would have a separate trustee and the assets of the accounts would not be commingled. The two accounts would be funded as follows:
15
Notes to Consolidated Financial Statements (Continued)
2. Chapter 11Related Information (Continued)
The PD account would be funded with:
-
- Approximately $147 million in cash plus cash in the amount of the estimated first six months of PD Trust expenses,
to be paid by Cryovac and Fresenius (the "PD Initial Payment"), and CDN$6.5 million in cash to be paid by Grace pursuant to the Minutes of Settlement.
-
- A Grace obligation (the "PD Obligation") providing for a payment to the PD Trust every six months in the amount of the non-ZAI PD Claims allowed during the preceding six months plus interest and, except for the first six months, the amount of PD Trust expenses for the preceding six months. The aggregate amount to be paid under the PD Obligation would not be capped.
The ZAI account would be funded as follows (the "ZAI Assets"):
-
- $30 million in cash plus interest from April 1, 2009 to the effective date, to be paid by Cryovac and
Fresenius (the "ZAI Initial Payment").
-
- $30 million in cash on the third anniversary of the effective date of the Joint Plan, to be paid by Grace.
-
- A Grace obligation providing for the payment of up to 10 contingent deferred payments of $8 million per year during the 20-year period beginning on the fifth anniversary of the effective date of the Joint Plan, with each such payment due only if the ZAI Assets fall below $10 million during the preceding year.
All payments to the PD Trust that were not to be paid on the effective date of the Joint Plan would be secured by the Company's obligation to issue 50.1% of its outstanding common stock (measured as of the effective date of the Joint Plan) to the PD Trust in the event of default. Grace would have the right to conduct annual audits of the books, records and claim processing procedures of the PD Trust.
Other Claims
All allowed administrative claims would be paid in cash and all allowed priority claims would be paid in cash with interest. Secured claims would be paid in cash with interest 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% from the Filing Date, compounded annually, or if pursuant to an existing contract, interest at the non-default contract rate. The general unsecured creditors that hold pre-petition bank debt have asserted that they are entitled to post-petition interest at the default rate specified under the terms of the underlying credit agreements which, if paid, would be materially greater than that reflected above. Grace has asserted that such creditors are not entitled to interest at the default rate and has requested the Bankruptcy Court to determine the appropriate rate at which interest would be payable. Unsecured employee-related claims such as pension, retirement medical obligations and workers compensation claims, would be reinstated.
16
Notes to Consolidated Financial Statements (Continued)
2. Chapter 11Related Information (Continued)
Effect on Company Common Stock
The Joint Plan assumes that Company common stock will remain outstanding at the effective date of the Joint Plan, 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 payment obligations to the PI Trust or the PD Trust under the Company's security obligation. In order to preserve significant tax benefits 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 Joint Plan provides that under certain circumstances, the Board of Directors would have the authority to impose restrictions on the transfer of Grace stock with respect to certain 5% shareholders. These restrictions will generally not limit the ability of a person that holds less than 5% of Grace stock after emergence to either buy or sell stock on the open market. In addition, the Bankruptcy Court has approved trading restrictions on Grace common stock until the effective date of a plan of reorganization. These restrictions prohibit (without the consent of Grace) a person from acquiring more than 4.75% of the outstanding Grace common stock or, for any person already holding more than 4.75%, from increasing such person's holdings. This summary of the stock transfer restrictions does not purport to be complete and is qualified in its entirety by reference to the order of the Bankruptcy Court, which has been filed with the SEC.
Claims Filings The Bankruptcy Court established a bar date of March 31, 2003 for claims of general unsecured creditors, PD Claims (other than ZAI PD Claims) and medical monitoring claims related to asbestos. The bar date did not apply to PI Claims or claims related to ZAI PD Claims.
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 PD Claims, 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. Under the Joint Plan, these claims would be channeled to the PI Trust for resolution. 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 to retain such benefits under the Joint Plan. 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 Chapter 11 Cases, 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 analyzed the claims filed pursuant to the March 31, 2003 bar date and 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 October 30, 2009, of the approximately 4,300 non-ZAI PD Claims filed, approximately 375 claims have been resolved, approximately 3,890 claims have been expunged, reclassified by the Debtors or withdrawn by claimants, leaving approximately 35 claims to be addressed through the property damage case management order approved by the Bankruptcy Court and/or the Joint Plan or another plan of reorganization. The claims remaining to be addressed include 16 asbestos property damage claims that had been expunged by a bankruptcy court order that was reversed by an order of the District
17
Notes to Consolidated Financial Statements (Continued)
2. Chapter 11Related Information (Continued)
Court of Delaware on September 29, 2009. As of September 30, 2009, of the approximately 3,290 non-asbestos claims filed, approximately 1,900 have been expunged or withdrawn by claimants, approximately 1,170 have been resolved, and an additional approximately 220 claims are to be addressed through the claim objection process and the dispute resolution procedures approved by the Bankruptcy Court.
Additionally, by order dated June 17, 2008, the Bankruptcy Court established October 31, 2008 as the bar date for ZAI PD Claims related to property located in the U.S. As of September 30, 2009, approximately 19,260 US ZAI PD Claims have been filed. In addition, on October 21, 2008, the Bankruptcy Court entered an order establishing August 31, 2009 as the bar date for ZAI PD Claims related to property located in Canada. As of September 30, 2009, approximately 13,890 Canadian ZAI PD Claims have been filed. The Joint Plan provides for the channeling of US ZAI PD Claims and Canadian ZAI PD Claims to the Asbestos PD Trust created under the Joint Plan, and the subsequent transfer of Canadian ZAI PD Claims to a Canadian fund. No bar date has been set for personal injury claims related to ZAI. The Joint Plan provides that ZAI PI Claims would be channeled to the Asbestos PI Trust created under the Joint Plan.
Grace is continuing to analyze and review unresolved claims in relation to the Joint Plan. 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 PD Claims are considered as part of Grace's overall asbestos liability and are being accounted for in accordance with the conditions precedent under the Prior Plan, as described in Note 3.
Debt Capital All of the Debtors' pre-petition debt is in default due to the Filing. The accompanying Consolidated Balance Sheets reflect the classification of the Debtors' pre-petition debt within "liabilities subject to compromise."
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.
Accounting Impact The accompanying Consolidated Financial Statements have been prepared in accordance with FASB Accounting Standards Codification 852 ("ASC 852"), "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code. ASC 852 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 ASC 852, 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
18
Notes to Consolidated Financial Statements (Continued)
2. Chapter 11Related Information (Continued)
ultimately be allowed by the Bankruptcy Court. As of September 30, 2009, 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. ASC 852 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.
As discussed in Note 3, Grace has not adjusted its accounting for asbestos-related liabilities to reflect the Joint Plan.
Grace has not recorded the benefit of any assets that may be available to fund asbestos-related and other liabilities under the Fresenius Settlement and the Sealed Air Settlement, as such agreements are subject to conditions, which, although expected to be met, have not been satisfied and confirmed by the Bankruptcy Court and, under the Joint Plan, these assets would be transferred to the PI Trust and the PD Trust. The estimated fair value available under the Fresenius Settlement and the Sealed Air Settlement as measured at September 30, 2009, was $1,205.1 million comprised of $115.0 million in cash from Fresenius and $1,090.1 million in cash and stock from Cryovac under the Joint Plan. Payments under the Sealed Air Settlement will be made directly to the PI Trust and the PD 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. GAAP. Changes to pre-petition liabilities subsequent to the Filing Date reflect: (1) cash payments under approved court orders; (2) the terms of the Prior Plan, as discussed above and in Note 3, 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. The accounting for the asbestos-related liability component of "liabilities subject to compromise" is described in Note 3.
19
Notes to Consolidated Financial Statements (Continued)
2. Chapter 11Related Information (Continued)
Components of liabilities subject to compromise are as follows:
(In millions)
|
September 30, 2009 |
December 31, 2008 |
|||||
---|---|---|---|---|---|---|---|
Pre-petition bank debt plus accrued interest |
$ | 843.7 | $ | 823.5 | |||
Drawn letters of credit plus accrued interest |
30.9 | 30.0 | |||||
Asbestos-related contingencies |
1,700.0 | 1,700.0 | |||||
Income tax contingencies(1) |
123.9 | 121.0 | |||||
Environmental contingencies |
147.5 | 152.2 | |||||
Postretirement benefits other than pension |
77.4 | 73.2 | |||||
Unfunded special pension arrangements |
115.3 | 106.0 | |||||
Retained obligations of divested businesses |
31.1 | 29.8 | |||||
Accounts payable |
31.2 | 31.2 | |||||
Other accrued liabilities |
63.8 | 55.5 | |||||
Reclassification to current liabilities(2) |
(11.6 | ) | (9.5 | ) | |||
Total Liabilities Subject to Compromise |
$ | 3,153.2 | $ | 3,112.9 | |||
- (1)
- Amounts
are net of expected refunds of $0.8 million for each of the periods ending September 30, 2009 and December 31, 2008.
- (2)
- As of September 30, 2009 and December 31, 2008, approximately $11.6 million and $9.5 million, respectively, of certain pension and postretirement benefit obligations subject to compromise have been presented in other current liabilities in the Consolidated Balance Sheets in accordance with ASC 715.
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.
20
Notes to Consolidated Financial Statements (Continued)
2. Chapter 11Related Information (Continued)
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 September 30, 2009.
(In millions) (Unaudited)
|
Cumulative Since Filing |
|||
---|---|---|---|---|
Balance, Filing Date April 2, 2001 |
$ | 2,366.0 | ||
Cash disbursements and/or reclassifications under Bankruptcy Court orders: |
||||
Payment of environmental settlement liabilityincluding Libby (see Note 11) |
(252.0 | ) | ||
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 |
(365.8 | ) | ||
Expense/(income) items: |
||||
Interest on pre-petition liabilities |
423.7 | |||
Employee-related accruals |
87.9 | |||
Provision for asbestos-related contingencies |
744.8 | |||
Provision for environmental contingencies |
328.3 | |||
Provision for income tax contingencies |
2.4 | |||
Balance sheet reclassifications |
(37.3 | ) | ||
Balance, end of period |
$ | 3,153.2 | ||
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 nine months ended September 30, 2009 and 2008 were 3.25% and 5.43%, 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 general unsecured creditors that hold pre-petition bank credit facilities have asserted that they are entitled to post-petition interest at the default rate specified under the terms of the underlying credit agreements which, if paid, would be materially greater than that reflected above. Grace has asserted that such creditors are not entitled to interest at the default rate and has requested the Bankruptcy Court to determine the appropriate rate at which interest would be payable.
For the holders of claims who, but for the 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.
21
Notes to Consolidated Financial Statements (Continued)
2. Chapter 11Related Information (Continued)
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.
Chapter 11 Expenses
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(In millions)
|
2009 | 2008 | 2009 | 2008 | |||||||||
Legal and financial advisory fees |
$ | 18.4 | $ | 12.0 | $ | 36.5 | $ | 50.0 | |||||
Interest income |
| | (0.1 | ) | (1.6 | ) | |||||||
Chapter 11 expenses, net of interest income |
$ | 18.4 | $ | 12.0 | $ | 36.4 | $ | 48.4 | |||||
Pursuant to ASC 852, interest income earned on the Debtors' cash balances must be offset against Chapter 11 expenses.
22
Notes to Consolidated Financial Statements (Continued)
2. Chapter 11Related Information (Continued)
Condensed financial information of the Debtors
W. R. Grace & Co.Chapter 11 Filing Entities
Debtor-in-Possession Statements of Operations
|
Nine Months Ended September 30, |
||||||
---|---|---|---|---|---|---|---|
(In millions) (Unaudited)
|
2009 | 2008 | |||||
Net sales, including intercompany |
$ | 1,058.4 | $ | 1,194.8 | |||
Cost of goods sold, including intercompany, exclusive of depreciation and amortization shown separately below |
751.9 | 870.9 | |||||
Selling general and administrative expenses |
229.4 | 222.8 | |||||
Restructuring expenses |
12.1 | 2.9 | |||||
Gain on sales of product lines |
(22.2 | ) | | ||||
Research and development expenses |
26.9 | 33.3 | |||||
Depreciation and amortization |
41.5 | 43.2 | |||||
Defined benefit pension expense |
52.1 | 28.0 | |||||
Interest expense and related financing costs |
27.7 | 42.2 | |||||
Other income, net |
(48.8 | ) | (68.7 | ) | |||
Provision for environmental remediation |
1.1 | 8.8 | |||||
Chapter 11 expenses, net of interest income |
36.4 | 48.4 | |||||
|
1,108.1 | 1,231.8 | |||||
Loss before income taxes and equity in net income of non-filing entities |
(49.7 | ) | (37.0 | ) | |||
Benefit from (provision for) income taxes |
7.6 | (11.8 | ) | ||||
Loss before equity in net income of non-filing entities |
(42.1 | ) | (48.8 | ) | |||
Equity in net income of non-filing entities |
66.9 | 126.9 | |||||
Net income |
$ | 24.8 | $ | 78.1 | |||
23
Notes to Consolidated Financial Statements (Continued)
2. Chapter 11Related Information (Continued)
W. R. Grace & Co.Chapter 11 Filing Entities
Debtor-in-Possession Statements of Cash Flows
|
Nine Months Ended September 30, |
|||||||
---|---|---|---|---|---|---|---|---|
(In millions) (Unaudited)
|
2009 | 2008 | ||||||
Operating Activities |
||||||||
Net income |
$ | 24.8 | $ | 78.1 | ||||
Reconciliation to net cash provided by (used for) operating activities: |
||||||||
Chapter 11 expenses, net of interest income |
36.4 | 48.4 | ||||||
(Benefit from) provision for income taxes |
(7.6 | ) | 11.8 | |||||
Equity in net income of non-filing entities |
(66.9 | ) | (126.9 | ) | ||||
Depreciation and amortization |
41.5 | 43.2 | ||||||
Interest on pre-petition liabilities subject to compromise |
26.9 | 38.8 | ||||||
Provision for environmental remediation |
1.1 | 8.8 | ||||||
Other non-cash items, net |
(26.4 | ) | (1.7 | ) | ||||
Contributions to defined benefit pension plans |
(33.0 | ) | (47.1 | ) | ||||
Cash paid to resolve contingencies subject to Chapter 11 |
| (252.0 | ) | |||||
Chapter 11 expenses paid |
(34.9 | ) | (52.9 | ) | ||||
Restructuring expenses |
12.1 | | ||||||
Changes in other assets and liabilities, excluding the effect of businesses acquired/divested |
68.2 | (39.9 | ) | |||||
Net cash provided by (used for) operating activities |
42.2 | (291.4 | ) | |||||
Investing Activities |
||||||||
Capital expenditures |
(30.0 | ) | (52.0 | ) | ||||
Loan repayments and other |
148.5 | 208.3 | ||||||
Net cash provided by investing activities |
118.5 | 156.3 | ||||||
Net cash provided by (used for) financing activities |
(0.8 | ) | 48.0 | |||||
Net increase (decrease) in cash and cash equivalents |
159.9 | (87.1 | ) | |||||
Cash and cash equivalents, beginning of period |
218.1 | 206.8 | ||||||
Cash and cash equivalents, end of period |
$ | 378.0 | $ | 119.7 | ||||
24
Notes to Consolidated Financial Statements (Continued)
2. Chapter 11Related Information (Continued)
W. R. Grace & Co.Chapter 11 Filing Entities
Debtor-in-Possession Balance Sheets
(In millions) (Unaudited)
|
September 30, 2009 | December 31, 2008 | |||||
---|---|---|---|---|---|---|---|
ASSETS |
|||||||
Current Assets |
|||||||
Cash and cash equivalents |
$ | 378.0 | $ | 218.1 | |||
Investment securities |
4.8 | 21.6 | |||||
Cash value of life insurance policies, net of policy loans |
| 67.2 | |||||
Trade accounts receivable, net |
106.6 | 115.0 | |||||
Receivables from non-filing entities, net |
56.6 | 69.9 | |||||
Inventories |
87.3 | 122.1 | |||||
Other current assets |
50.3 | 57.4 | |||||
Total Current Assets |
683.6 | 671.3 | |||||
Properties and equipment, net |
393.4 | 417.1 | |||||
Deferred income taxes |
850.8 | 834.4 | |||||
Asbestos-related insurance |
500.0 | 500.0 | |||||
Loans receivable from non-filing entities, net |
426.3 | 399.1 | |||||
Investment in non-filing entities |
536.3 | 492.0 | |||||
Overfunded defined benefit pension plans |
0.2 | 0.2 | |||||
Other assets |
72.1 | 97.8 | |||||
Total Assets |
$ | 3,462.7 | $ | 3,411.9 | |||
LIABILITIES AND EQUITY (DEFICIT) |
|||||||
Liabilities Not Subject to Compromise |
|||||||
Current liabilities |
$ | 213.2 | $ | 239.5 | |||
Underfunded defined benefit pension plans |
385.3 | 380.6 | |||||
Other liabilities |
32.4 | 41.6 | |||||
Total Liabilities Not Subject to Compromise |
630.9 | 661.7 | |||||
Liabilities Subject to Compromise |
3,153.2 | 3,112.9 | |||||
Total Liabilities |
3,784.1 | 3,774.6 | |||||
Total W. R. Grace & Co. Shareholders' Equity (Deficit) |
(380.5 | ) | (426.9 | ) | |||
Noncontrolling interests in Chapter 11 filing entities |
59.1 | 64.2 | |||||
Total Equity (Deficit) |
(321.4 | ) | (362.7 | ) | |||
Total Liabilities and Equity (Deficit) |
$ | 3,462.7 | $ | 3,411.9 | |||
In addition to Grace's financial reporting obligations as prescribed by the 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
25
Notes to Consolidated Financial Statements (Continued)
2. Chapter 11Related Information (Continued)
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 asbestos personal injury and asbestos property damage claimants, respectively, and the PI FCR and PD FCR, representing the interests of future asbestos personal injury and property damage claimants, respectively, 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 PD 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 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 4,300 additional PD 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.) Grace objected to virtually all PD 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; the 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 October 30, 2009, following the reclassification, withdrawal or expungement of claims, approximately 430 PD Claims subject to the March 31, 2003 bar date remain outstanding. The Bankruptcy Court has approved settlement agreements covering approximately 375 of such claims for an aggregate allowed amount of $109 million.
Eight of the ZAI cases were filed as purported class action lawsuits in 2000 and 2001. In addition, 10 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
26
Notes to Consolidated Financial Statements (Continued)
3. Asbestos-Related Litigation (Continued)
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 ZAI 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 dispute Grace's position on the safety of ZAI. In October, 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. In December, 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 U.S. District Court for the District of Delaware, but that request was denied. In the event the Joint Plan is not confirmed, the ZAI claimants have reserved their right to appeal such opinion and order if and when it becomes a final order.
At the Debtors' request, in July 2008, the Bankruptcy Court established a bar date for U.S. ZAI PD Claims and approved a related notice program that required any person with a U.S. ZAI PD Claim to submit an individual proof of claim no later than October 31, 2008. Approximately 17,960 U.S. ZAI PD Claims were filed prior to the October 31, 2008 claims bar date and, as of September 30, 2009 an additional 1,300 U.S. ZAI PD Claims were filed. As described above, on October 17, 2008, the Ontario Superior Court of Justice, in the Grace Canada, Inc. proceeding pending under the Companies' Creditors Arrangement Act, approved the Minutes of Settlement that would settle all Canadian ZAI PD Claims on the terms of the Joint Plan. On October 20, 2008, the Bankruptcy Court established August 31, 2009 as the bar date for Canadian ZAI PD Claims. Approximately 13,100 Canadian ZAI PD Claims were filed prior to the bar date and, as of September 30, 2009, an additional 800 Canadian ZAI PD Claims were filed.
As described in Note 2, on November 21, 2008, the Debtors, the Putative Class Counsel to the U.S. ZAI property damage claimants, the PD FCR, and the Equity Committee reached an agreement in principle designed to resolve all present and future U.S. ZAI PD Claims. The terms of the U.S. and Canadian ZAI agreements in principle have been incorporated into the terms of the Joint Plan and related documents. As described below, Grace's recorded asbestos related liability does not include the agreements in principle to settle the ZAI liability that is part of the Joint Plan. The asbestos related liability at September 30, 2009, which is based on the Prior Plan, assumes the risk of loss from ZAI litigation is not probable. If the Joint Plan or another plan of reorganization reflecting the agreements in principle is not confirmed or does not become effective and Grace's view as to risk of loss from ZAI litigation is not sustained, Grace believes the cost to resolve the U.S. ZAI litigation may 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 PI Claims were dismissed without payment of any damages or settlement
27
Notes to Consolidated Financial Statements (Continued)
3. Asbestos-Related Litigation (Continued)
amounts (primarily on the basis that Grace products were not involved) and approximately 55,489 lawsuits involving approximately 163,698 PI Claims were disposed of (through settlements and judgments) for a total of $645.6 million. As of the Filing Date, 129,191 PI claims for personal injury were pending against Grace. Grace believes that a substantial number of additional PI Claims would have been received between the Filing Date and September 30, 2009 had such PI Claims not been stayed by the Bankruptcy Court.
The Bankruptcy Court has entered a case management order for estimating liability for pending and future PI Claims. A trial for estimating liability for PI 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 September 30, 2009 and December 31, 2008, including pre-Filing Date and post-Filing Date settlements, 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 Prior Plan. The Prior Plan contained a condition precedent that the Bankruptcy Court determine that $1,613 million (this amount, plus $87 million of prepetition settlements and judgments, "the Funding Amount") was sufficient to pay, on a net present value basis, all PI Claims and PD Claims entitled to payment and related trust administration costs and expenses. Therefore, prior to the PI Settlement, the U.S. and Canadian ZAI agreements in principle and the filing of the Joint Plan, Grace was prepared to settle its asbestos-related claims at the Funding Amount as part of a consensual plan of reorganization and recorded its asbestos-related liability on that basis. The treatment of asbestos-related liabilities is significantly different under the Joint Plan than under the Prior Plan. Grace has not adjusted its accounting for asbestos-related liabilities to reflect the Joint Plan. At this time, Grace is unable to determine a reasonable estimate of the value of certain consideration payable to the PI Trust and the PD Trust under the Joint Plan. These values will ultimately be determined on the effective date of the Joint Plan. Grace expects to adjust its accounting for the Joint Plan when the consideration can be measured and material conditions to the Joint Plan are satisfied. Grace expects that such adjustments may be material to Grace's consolidated financial position and results of operations.
If the Joint Plan is not confirmed by the Bankruptcy Court, the Debtors would expect to resume the estimation trial, which was suspended in April 2008 due to the PI Settlement, to determine the amount of its asbestos-related liabilities. Through the PI Claim estimation process and the continued adjudication of PD Claims, Grace would seek to demonstrate that most claims have no value because they fail to establish any significant property damage, health impairment or 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 PI Claims and PD Claims, then Grace believes that the Funding Amount could be lower than $1,700 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 PI FCR have asserted that Grace's asbestos-related liabilities are substantially higher than $1,700 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 PI FCR, then any plan of reorganization likely would result in the loss of all or substantially all equity value by current shareholders.
Insurance Rights Grace holds insurance policies that provide coverage for 1962 to 1985 with respect to asbestos-related lawsuits and claims. For the most part, coverage for years 1962 through
28
Notes to Consolidated Financial Statements (Continued)
3. Asbestos-Related Litigation (Continued)
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 Joint Plan, insurance policies that provide coverage for asbestos-related claims and proceeds, including interest, received after the date of the PI Settlement, would be assigned to the PI 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 $440 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 agreements in place with insurers with respect to approximately $483 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 Prior 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 also would be covered under the policies discussed above to the extent they relate to installations of ZAI occurring after July 1, 1973.
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.
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 in respect of claims for which Grace was provided coverage under the affected policies. The escrow account balance at September 30, 2009 was approximately $97.3 million, including interest earned on the account. The settlement agreement, as amended in July 2009, provides that: unless Grace confirms a plan of reorganization by December 31, 2013, at the option of the underwriter, exercisable at any time prior to April 30, 2014, the escrow amount with interest must be returned to the underwriter; funds in the escrow account will be distributed from the account to the PI Trust as set forth in the Joint Plan; 52% of the interest accrued on the settlement amount as of March 31, 2009 will be transferred to an agent of the underwriter; and the underwriter has certain indemnification rights against Grace and the PI Trust with respect to certain claims. In
29
Notes to Consolidated Financial Statements (Continued)
3. Asbestos-Related Litigation (Continued)
October 2009, in compliance with the settlement agreement, Grace transferred approximately $3.7 million of the accrued interest to an agent of the underwriter. Due to the open contingencies for the release of the amount in the escrow account, Grace has not recorded this amount or reduced its asbestos insurance receivable balance. Under the Joint Plan, the amount in the escrow account would be assigned to the PI Trust.
As of September 30, 2009, including the settlement discussed above and after subtracting previous reimbursements by insurers and allowing for discounts pursuant to certain settlement agreements, there remains approximately $923 million of excess coverage from 53 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 Claim, PD Claim or ZAI PD Claim), the relevant exposure years, the timing of payment, the solvency of insurers and the legal status of policy rights. Accordingly, Grace's estimate of insurance recovery may differ materially from actual amounts received by Grace, or, if the Joint Plan is confirmed and becomes effective, the PI Trust.
4. Life Insurance
Grace is the beneficiary of corporate-owned life insurance ("COLI") policies on certain current and former employees with net cash surrender values of $4.4 million and $71.4 million at September 30, 2009 and December 31, 2008, respectively. The following tables summarize activity in these policies for the nine months ended September 30, 2009 and 2008, and the components of net cash value at September 30, 2009 and December 31, 2008:
Life InsuranceActivity Summary
|
Nine Months Ended September 30, |
||||||
---|---|---|---|---|---|---|---|
(In millions)
|
2009 | 2008 | |||||
Earnings on policy assets |
$ | 1.4 | $ | 2.5 | |||
Interest on policy loans |
(0.2 | ) | (0.5 | ) | |||
Proceeds from policy loans |
| (40.0 | ) | ||||
Premiums |
0.3 | 0.4 | |||||
Proceeds from termination of life insurance policies |
(68.8 | ) | (8.1 | ) | |||
Net investing activity |
0.3 | (0.2 | ) | ||||
Change in net cash value |
$ | (67.0 | ) | $ | (45.9 | ) | |
Tax-free proceeds received |
$ | 0.6 | $ | 0.2 | |||
30
Notes to Consolidated Financial Statements (Continued)
4. Life Insurance (Continued)
Components of Net Cash Value
(In millions)
|
September 30, 2009 |
December 31, 2008 |
|||||
---|---|---|---|---|---|---|---|
Gross cash value |
$ | 9.7 | $ | 77.5 | |||
Principalpolicy loans |
(5.3 | ) | (5.0 | ) | |||
Accrued interestpolicy loans |
| (1.1 | ) | ||||
Total net cash value |
4.4 | 71.4 | |||||
Less: current portion |
| (67.2 | ) | ||||
Net cash valuelong-term |
$ | 4.4 | $ | 4.2 | |||
Insurance benefits in force |
$ | 19.2 | $ | 120.7 | |||
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.
In March 2009, Grace surrendered and terminated life insurance policies and received approximately $68.8 million of net cash value from the terminations. As a result of the terminations, Grace's insurance benefits in force was reduced by approximately $102.4 million from December 31, 2008.
5. Inventories
Inventories are stated at the lower of cost or market, and cost is determined using FIFO. Inventories consisted of the following at September 30, 2009 and December 31, 2008:
(In millions)
|
September 30, 2009 |
December 31, 2008 |
|||||
---|---|---|---|---|---|---|---|
Raw materials |
$ | 53.4 | $ | 63.6 | |||
In process |
45.7 | 42.1 | |||||
Finished products |
130.0 | 212.1 | |||||
Other |
32.1 | 37.0 | |||||
|
$ | 261.2 | $ | 354.8 | |||
31
Notes to Consolidated Financial Statements (Continued)
6. Debt
Components of Debt
(In millions)
|
September 30, 2009 |
December 31, 2008 |
|||||
---|---|---|---|---|---|---|---|
Debt payable within one year |
$ | 6.6 | $ | 11.2 | |||
Debt payable after one year |
|||||||
Other long-term borrowings |
$ | 0.4 | $ | 0.6 | |||
Debt Subject to Compromise |
|||||||
Bank borrowings |
$ | 500.0 | $ | 500.0 | |||
Accrued interest on bank borrowings |
343.7 | 323.5 | |||||
Drawn letters of credit |
25.6 | 25.6 | |||||
Accrued interest on drawn letters of credit |
5.3 | 4.4 | |||||
|
$ | 874.6 | $ | 853.5 | |||
Full-year weighted average interest rates on total debt |
3.4 | % | 5.2 | % | |||
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 the London Interbank Offered Rate (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 September 30, 2009, the Debtors had no revolving loans and had $67.7 million of standby letters of credit issued and outstanding under the DIP facility. The letters of credit were issued mainly for trade-related matters such as performance bonds, as well as certain insurance and environmental matters.
At September 30, 2009, the fair value of Grace's debt payable within one year not subject to compromise approximated the recorded value of $6.6 million. Fair value is determined based on expected future cash flows (discounted at market interest rates), quotes from financial institutions and other appropriate valuation methodologies. At September 30, 2009, the carrying value of Grace's bank debt subject to compromise plus interest was $874.6 million. The estimated fair value of the bank debt is lower than the carrying value; however, because such debt is subject to compromise in Grace's Chapter 11 proceeding, neither carrying values nor market values may reflect ultimate liquidation value.
7. Fair Value Measurements
Certain of Grace's assets and liabilities are reported at fair value. ASC 820 defines fair value as the value that would be received at the measurement date in the principal or "most advantageous" market. Grace uses principal market data, whenever available, to value assets and liabilities at fair
32
Notes to Consolidated Financial Statements (Continued)
7. Fair Value Measurements (Continued)
value that are required to be reported at fair value. ASC 820 prescribes three valuation techniques that shall be used to measure fair value as follows:
- 1.
- Market
Approachuses prices or other relevant information generated by market transactions involving identical or comparable assets or
liabilities.
- 2.
- Income
Approachuses valuation techniques to convert future amounts to a single present amount (discounted).
- 3.
- Cost Approachthe 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, ASC 820 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 ASC 820:
Investment Securities
Investment securities consist of direct or indirect investments in debt securities primarily in the Columbia Strategic Cash Portfolio Fund (the "Columbia Fund"). In the nine months ended September 30, 2009 and 2008, $17.7 million and $61.5 million, respectively, of Grace's account balance was distributed to Grace in cash. Grace has elected to maintain its investment in the Columbia Fund pending the orderly liquidation of the portfolio and to value its account based on the value of the underlying securities as determined by the fund principals. Grace has determined the value of the fund using a market approach, which consists of matrix pricing techniques based on widely available market data and comparables as provided by the fund principals. Grace's investment in the Columbia Fund was valued at $4.8 million and $21.6 million at September 30, 2009 and December 31, 2008, respectively.
Grace recorded an increase in fair value of its Columbia Fund account of $0.2 million and $1.0 million for the three and nine months ended September 30, 2009, respectively. The increase in fair value is recorded as an unrealized holding gain in other comprehensive income (loss).
33
Notes to Consolidated Financial Statements (Continued)
7. Fair Value Measurements (Continued)
Derivatives
From time to time, Grace enters into commodity derivatives such as fixed-rate swaps with financial institutions to mitigate the risk of volatility of natural gas prices or other commodities. Under fixed-rate swaps, Grace locks in a fixed rate with a financial institution for future purchases, purchases its commodity 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.
In 2008 and 2009, Grace used 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. Commodity fixed-rate swaps with maturities of not more than 12 months are used and designated as cash flow hedges of forecasted purchases of natural gas. Current open contracts hedge forecasted transactions until September 2010. The effective portion of the gain or loss on the commodity contracts is recorded in accumulated other comprehensive income (loss) and reclassified into income in the same period or periods that the underlying commodity purchase affects income. At September 30, 2009, the contract volume, or notional amount, of the commodity contracts was 2.6 million British thermal units (MMBtu).
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. 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 primarily affected by changes in interest rates on Euro and U.S. dollar deposits; and (3) discount rates used to present value future cash flows, which are based on the London Interbank Offered Rate (LIBOR) curve.
In November 2007, Grace purchased foreign currency forward contracts to mitigate the effect of foreign currency risk with respect to intercompany loans between its principal U.S. subsidiary and a German subsidiary. As of September 30, 2009, the total amount outstanding under the foreign currency forward contracts was €248.9 million. These derivatives are not designated as hedging instruments under ASC 815.
34
Notes to Consolidated Financial Statements (Continued)
7. Fair Value Measurements (Continued)
The following tables present the fair value hierarchy for financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2009 and December 31, 2008:
|
Fair Value Measurements at September 30, 2009 Using | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Items Measured at Fair Value on a Recurring Basis (In millions) |
Total | Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||
Assets |
|||||||||||||
Available-for-sale securities |
$ | 4.8 | $ | | $ | 4.8 | $ | | |||||
Currency derivatives |
0.2 | | 0.2 | | |||||||||
Commodity derivatives |
0.3 | | 0.3 | | |||||||||
Total Assets |
$ | 5.3 | $ | | $ | 5.3 | $ | | |||||
Liabilities |
|||||||||||||
Currency derivatives |
$ | 7.1 | $ | | $ | 7.1 | $ | | |||||
Commodity derivatives |
3.2 | | 3.2 | | |||||||||
Total Liabilities |
$ | 10.3 | $ | | $ | 10.3 | $ | | |||||
|
Fair Value Measurements at December 31, 2008 Using | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Items Measured at Fair Value on a Recurring Basis (In millions) |
Total | Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||
Assets |
|||||||||||||
Available-for-sale securities |
$ | 21.6 | $ | | $ | 21.6 | $ | | |||||
Currency derivatives |
21.0 | | 21.0 | | |||||||||
Total Assets |
$ | 42.6 | $ | | $ | 42.6 | $ | | |||||
Liabilities |
|||||||||||||
Currency derivatives |
$ | 3.7 | $ | | $ | 3.7 | $ | | |||||
Commodity derivatives |
10.8 | | 10.8 | | |||||||||
Total Liabilities |
$ | 14.5 | $ | | $ | 14.5 | $ | | |||||
35
Notes to Consolidated Financial Statements (Continued)
7. Fair Value Measurements (Continued)
The following table presents the location and fair values of derivative instruments included in the Consolidated Balance Sheet as of September 30, 2009:
|
Asset Derivatives | Liability Derivatives | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Fair Values of Derivative Instruments at September 30, 2009 (In millions) |
Balance Sheet Location |
Fair Value |
Balance Sheet Location |
Fair Value | |||||||
Derivatives designated as hedging instruments under ASC 815 |
|||||||||||
Currency contracts |
Other current assets | $ | 0.1 | Other current liabilities | $ | | |||||
Commodity contracts |
Other current assets | 0.3 | Other current liabilities | 3.2 | |||||||
Derivatives not designated as hedging instruments under ASC 815 |
|||||||||||
Currency contracts |
Other current assets | 0.1 | Other current liabilities | 3.1 | |||||||
Currency contracts |
Other assets |
| Other liabilities | 4.0 | |||||||
Total derivatives |
$ | 0.5 | $ | 10.3 | |||||||
The following tables present the location and amount of gains and losses on derivative instruments included in the Consolidated Statement of Operations or, when applicable, gains and losses initially recognized in other comprehensive income (loss) ("OCI") for the three and nine month periods ended September 30, 2009:
The Effect of Derivative Instruments on the Consolidated Statement of Operations for the Three Months Ended September 30, 2009 (In millions) |
Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion) |
Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) |
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) |
||||||
---|---|---|---|---|---|---|---|---|---|
Derivatives in ASC 815 cash flow hedging relationships: |
|||||||||
Currency contracts |
$ | 0.1 | Cost of goods sold | $ | |||||
Commodity contracts |
(0.4 | ) | Cost of goods sold | (4.9 | ) | ||||
Total derivatives |
$ | (0.3 | ) | $(4.9 | ) | ||||
|
|
Location of Gain or (Loss) Recognized in Income on Derivative |
Amount of Gain or (Loss) Recognized in Income on Derivative |
||||||
Derivatives not designated as hedging instruments under ASC 815: |
|||||||||
Currency contracts |
Other income (expense) | $ | (15.1 | ) | |||||
36
Notes to Consolidated Financial Statements (Continued)
7. Fair Value Measurements (Continued)
The Effect of Derivative Instruments on the Consolidated Statement of Operations for the Nine Months Ended September 30, 2009 (In millions) |
Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion) |
Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) |
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) |
||||||
---|---|---|---|---|---|---|---|---|---|
Derivatives in ASC 815 cash flow hedging relationships: |
|||||||||
Currency contracts |
$ | 0.1 | Cost of goods sold | $ | | ||||
Commodity contracts |
(8.5 | ) | Cost of goods sold | (16.6 | ) | ||||
Total derivatives |
$ | (8.4 | ) | $ | (16.6 | ) | |||
|
|
Location of Gain or (Loss) Recognized in Income on Derivative |
Amount of Gain or (Loss) Recognized in Income on Derivative |
||||||
Derivatives not designated as hedging instruments under ASC 815: |
|||||||||
Currency contracts |
Other income (expense) | $ | (24.7 | ) | |||||
8. Income Taxes
As of September 30, 2009, the total amount of unrecognized tax benefits was $132.8 million compared to $134.6 million as of December 31, 2008. If Grace favorably resolves the tax issues related to such uncertain tax positions and recognizes the September 30, 2009 amount in full, Grace expects that $15.8 million related to alternative minimum tax credit carryforwards, that Grace has recorded as deferred tax assets, would no longer be available. In such event, Grace's effective tax rate would be reduced by the September 30, 2009 amount net of the effect of such reduction in alternative minimum tax credit carryforwards.
Grace accrues potential interest and any associated penalties related to uncertain tax positions in "benefit from (provision for) income taxes". The total amount of interest and penalties accrued on uncertain tax positions was $80.9 million ($55.0 million net of applicable tax benefits) and $78.4 million ($53.4 million net of applicable tax benefits) as of September 30, 2009 and December 31, 2008, respectively. The total amount of interest and penalties expense for the quarter ended September 30, 2009 was $1.6 million ($1.2 million net of applicable tax benefits).
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 income tax returns
37
Notes to Consolidated Financial Statements (Continued)
8. Income Taxes (Continued)
for 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 StatesFederal(2) |
1997-2001 | 2005-2008 | ||||
United StatesState |
1994-2006 | 2007-2008 | ||||
Germany |
None | 2006-2008 | ||||
United Kingdom |
None | 2003-2008 | ||||
Singapore |
None | 2002-2008 | ||||
France |
None | 2007-2008 | ||||
Canada |
2002-2003 | 2004-2008 |
- (1)
- Includes
federal as well as state, provincial or local jurisdictions, as applicable.
- (2)
- Grace's U.S. federal income tax returns for the tax years 1997-2001 have been examined by the U.S. Internal Revenue Service ("IRS") and, except as described below, have been resolved (Grace's U.S. tax years 2002 - 2004 have been examined and closed).
Grace believes there may be material changes to Grace's aggregate recorded liabilities for uncertain tax positions within the next 12 months due to expected examinations of Grace income tax returns for tax years that remain subject to examination, the expected expiration of statutes of limitations applicable to certain issues reflected as uncertain tax positions and the matters described below:
- 1.
- Grace
received approval from the Bankruptcy Court on May 26, 2009 to enter into a settlement with the IRS with respect to a carryback of a U.S. net
operating loss arising during the 1997-2001 tax years. The U.S. Tax Court approved a Decision Document implementing the settlement on August 26, 2009. Under the settlement, Grace
would be entitled to a U.S. Federal income tax refund for the 1989 tax year of approximately $13.5 million plus interest. The settlement also confirmed that the remainder of the specified
liability losses could be carried to tax years after 1989 and Grace expects that additional refunds will result from related adjustments in such years. The potential benefits associated with this
settlement have not been recognized as of September 30, 2009 pending review and approval by the Joint Committee on Taxation of the U.S. Congress ("Joint Committee"). In October 2009, Grace was
notified that the refund associated with the carryback to the 1989 tax year will not be required to be approved by the Joint Committee. Therefore, in the quarter ending December 31, 2009 Grace
estimates that it will record a net tax benefit of $24.1 million including interest with respect to the 1989 year. The refunds relating to the years after 1989 are currently under review
by the Joint Committee. Grace estimates that upon approval it is reasonably possible that up to $5.0 million of additional tax benefits (including interest) will be recorded.
- 2.
- In court decisions involving taxpayers other than Grace, certain tax benefits similar to those claimed by a non-U.S. subsidiary of Grace were denied. However, recently, on appeal, one case was reversed in favor of the taxpayer. Due to the strength of its facts and the recent court decision in favor of the taxpayer, Grace believes that tax benefits claimed by its non-U.S. subsidiary should be sustained if challenged. However, it is reasonably possible that such benefits would not be sustained. In such case Grace estimates that the tax expense that Grace
38
Notes to Consolidated Financial Statements (Continued)
8. Income Taxes (Continued)
may record if it changed its assessment of this matter based on the final outcome of these pending legal proceedings ranges from $20 million to $51 million (including interest) and Grace would also expect to accelerate recognition of a deferred charge of $18 million.
As of September 30, 2009, Grace has prior-year tax credit carryforwards of $84.6 million consisting of $65.0 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 alternative minimum tax credit carryforwards with no expiration dates. The $18.9 million of alternative minimum tax credit carryforwards includes $15.8 million which Grace does not expect will be available if Grace is successful in resolving certain issues reflected as uncertain tax positions.
Grace anticipates generating U.S. net operating loss ("NOL") carryforwards upon emergence from Chapter 11. Because Grace did not pay a significant amount of U.S. tax in prior years and/or has already received or applied for tax refunds from available NOL carryback years, Grace expects to carryforward most of the NOLs after emergence from Chapter 11. 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, as a result of, or after emergence from, the Chapter 11 Cases. The Bankruptcy Court has entered an order that places certain limitations on trading in Grace common stock or options convertible into Grace common stock during the course of the Chapter 11 Cases. Nevertheless, Grace can provide no assurance that these limitations will prevent an ownership change or that Grace's ability to utilize NOLs will not be significantly limited as a result of the Chapter 11 Cases.
9. Pension Plans and Other Postretirement Benefits 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, 2008 measurement date for Grace's defined benefit pension plans, the projected benefit obligation ("PBO") was approximately $1,380 million as measured under U.S. GAAP. The PBO basis reflects the present value (using a 6.25% discount rate for U.S. plans and a 6.24% weighted average discount rate for non-U.S. plans as of December 31, 2008) of vested and non-vested benefits earned from employee service to date, based upon current services and estimated future pay increases for active employees.
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.
39
Notes to Consolidated Financial Statements (Continued)
9. Pension Plans and Other Postretirement Benefits Plans (Continued)
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, 2008 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 September 30, 2009, Grace decreased the discount rate for the U.S. qualified pension plans from 6.25% at June 30, 2009 to 5.50% at September 30, 2009 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 89% of the benefit obligation of the non-U.S. pension plans as of December 31, 2008. Based on review of the yield curve analyses for these plans as of September 30, 2009, Grace changed the discount rate for the United Kingdom from 6.25% at June 30, 2009 to 5.50% at September 30, 2009, and for Germany from 5.75% at June 30, 2009 to 5.25% at September 30, 2009. Grace did not change the discount rate for Canada from the 6.75% rate in effect at June 30, 2009. The funded status as of September 30, 2009 reflects a decrease in total assets of approximately $17 million and an increase in total liabilities of approximately $104 million as compared to June 30, 2009, resulting from the change in discount rates (including the postretirement plan). After tax effects, total assets increased from June 30, 2009 to September 30, 2009 by approximately $24 million, total liabilities increased by approximately $104 million and shareholders' equity decreased by approximately $80 million. The funded status as of September 30, 2009 reflects a decrease in total assets of approximately $25 million and an increase in total liabilities of approximately $105 million as compared to December 31, 2008, resulting from the change in discount rates (including the postretirement plan). After tax effects, total assets increased from December 31, 2008 to September 30, 2009 by approximately $19 million, total liabilities increased by approximately $105 million and shareholders' equity decreased by approximately $86 million.
At September 30, 2009, Grace's recorded pension liability for underfunded and unfunded plans was $674.0 million ($397.6 million included in "underfunded defined benefit pension plans", $153.7 million included in "unfunded pay-as-you-go defined benefit pension plans", $12.9 million included in "other current liabilities", and $109.8 million related to noncurrent supplemental pension benefits, included in "liabilities subject to compromise"). The recorded liability reflects 1) the shortfall between plan assets and the PBO of underfunded plans ($397.6 million); and 2) the PBO of unfunded pay-as-you-go plans ($276.4 million).
|
Three Months Ended September 30, | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | |
||||||||||||||||
|
Pension | |
Pension | |
|||||||||||||||
Components of Net Periodic Benefit Cost (Income) (In millions) |
U.S. | Non-U.S. | Other | U.S. | Non-U.S. | Other | |||||||||||||
Service cost |
$ | 4.0 | $ | 1.8 | $ | 0.1 | $ | 4.1 | $ | 2.2 | $ | | |||||||
Interest cost |
15.7 | 5.5 | 1.0 | 15.5 | 5.9 | 1.2 | |||||||||||||
Expected return on plan assets |
(11.0 | ) | (3.9 | ) | | (15.4 | ) | (4.9 | ) | | |||||||||
Amortization of prior service cost (credit) |
0.4 | | (1.0 | ) | 0.3 | 0.1 | (2.0 | ) | |||||||||||
Amortization of net deferred actuarial loss |
8.2 | 0.8 | 0.2 | 5.0 | 1.3 | 0.4 | |||||||||||||
Net periodic benefit cost (income) |
$ | 17.3 | $ | 4.2 | $ | 0.3 | $ | 9.5 | $ | 4.6 | $ | (0.4 | ) | ||||||
40
Notes to Consolidated Financial Statements (Continued)
9. Pension Plans and Other Postretirement Benefits Plans (Continued)
|
Nine Months Ended September 30, | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | |||||||||||||||||
|
Pension | |
Pension | |
|||||||||||||||
Components of Net Periodic Benefit Cost (Income) (In millions) |
U.S. | Non-U.S. | Other | U.S. | Non-U.S. | Other | |||||||||||||
Service cost |
$ | 12.2 | $ | 5.1 | $ | 0.2 | $ | 12.2 | $ | 6.6 | $ | 0.2 | |||||||
Interest cost |
47.2 | 15.4 | 3.2 | 46.6 | 18.0 | 3.6 | |||||||||||||
Expected return on plan assets |
(33.0 | ) | (11.0 | ) | | (46.4 | ) | (15.0 | ) | | |||||||||
Amortization of prior service cost (credit) |
0.9 | 0.1 | (3.0 | ) | 1.1 | 0.5 | (6.3 | ) | |||||||||||
Amortization of net deferred actuarial loss |
24.7 | 2.3 | 0.6 | 14.9 | 3.9 | 1.3 | |||||||||||||
Net periodic benefit cost (income) |
$ | 52.0 | $ | 11.9 | $ | 1.0 | $ | 28.4 | $ | 14.0 | $ | (1.2 | ) | ||||||
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. GAAP. On June 24, 2009, Grace obtained Bankruptcy Court approval to fund minimum required payments under the U.S. qualified pension plans of approximately $30 million for the period from July 2009 through January 2010. In that regard, Grace contributed approximately $8 million in July 2009, approximately $5 million in September 2009, and approximately $9 million in October 2009 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 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.
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 ASC 715 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 2009 measurement purposes, per capita costs, before retiree contributions, were assumed to initially increase at a rate of 8.0%. The rate is assumed to decrease gradually to 5% through 2014 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
41
Notes to Consolidated Financial Statements (Continued)
9. Pension Plans and Other Postretirement Benefits Plans (Continued)
(impact of less than $1 million) and would have a negligible impact on the aggregate of the service and interest cost components of net periodic benefit cost.
10. Other Balance Sheet Accounts
(In millions)
|
September 30, 2009 |
December 31, 2008 |
|||||
---|---|---|---|---|---|---|---|
Other Assets |
|||||||
Deferred charges |
$ | 30.4 | $ | 33.5 | |||
Cash value of life insurance policies, net of policy loans |
4.4 | 4.2 | |||||
Long-term receivables, less allowances of $0.0 (2008$0.0) |
0.6 | 0.9 | |||||
Patents, licenses and other intangible assets, net |
65.7 | 72.5 | |||||
Fair value of foreign currency forward contracts |
| 21.0 | |||||
Investments in unconsolidated affiliates and other |
23.3 | 17.2 | |||||
|
$ | 124.4 | $ | 149.3 | |||
Other Current Liabilities |
|||||||
Accrued compensation |
$ | 95.0 | $ | 88.1 | |||
Customer volume rebates |
27.9 | 37.7 | |||||
Accrued commissions |
10.5 | 13.0 | |||||
Accrued Chapter 11 reorganization expenses |
25.4 | 23.9 | |||||
Income tax payable |
27.5 | 15.9 | |||||
Deferred tax liability |
8.1 | 7.9 | |||||
Fair value of foreign currency forward and commodity contracts |
6.3 | 14.5 | |||||
Other accrued liabilities |
111.3 | 113.3 | |||||
|
$ | 312.0 | $ | 314.3 | |||
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.
11. 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.
42
Notes to Consolidated Financial Statements (Continued)
11. Commitments and Contingent Liabilities (Continued)
At September 30, 2009, Grace's estimated liability for environmental investigative and remediation costs totaled $147.5 million, as compared with $152.2 million at December 31, 2008. The amount is based on funding and/or remediation agreements in place, including the Multi-Site Agreement described below, and Grace's best estimate of its cost for sites not subject to a formal remediation plan. 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 nine months ended September 30, 2009 and 2008 were $5.8 million and $255.3 million, respectively.
Multi-Site Settlement
The U.S. Environmental Protection Agency ("EPA") has filed proofs of claim with respect to potential contamination at 38 sites, including vermiculite related claims and non-vermiculite related claims. In June 2008, Grace entered into a multi-site settlement agreement (the "Multi-Site Agreement") with the U.S. Government, on behalf of EPA and other federal agencies. Under the Multi-Site Agreement, Grace has agreed to pay approximately $44 million to the U.S. Government and other parties in settlement of 35 of these outstanding claims and the U.S. Government has agreed not to take action against Grace under the Comprehensive Environmental Response, Compensation, and Liability Act with respect to these sites. Grace intends to separately fund or carry out remediation at two of the remaining sites. With respect to the third remaining site, Libby, Montana, EPA's claims, excluding claims in respect of the Grace-owned Libby vermiculite mine, are resolved by the EPA Cost Recovery Agreement described below. Grace is working in cooperation with EPA to investigate the Libby vermiculite mine.
Vermiculite Related Matters
During 2008, Grace paid $250 million plus accrued interest of approximately $2 million pursuant to an agreement (the "EPA Cost Recovery Agreement"), between Grace and the U.S. Department of Justice to settle the EPA's cost recovery claims for all past and future remediation costs with respect to Grace's former Libby operations, except for those relating to the Grace-owned Libby vermiculite mine.
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, at September 30, 2009 and December 31, 2008 was $52.2 million and $48.4 million, respectively, excluding interest. The estimated obligation as of each date does not include the cost to remediate the Grace-owned Libby vermiculite mine, which is not currently estimable.
New Jersey Claims In 2005, the New Jersey Department of Environmental Protection ("NJDEP") filed a lawsuit against Grace and two former employees, which was removed at Grace's request to the U.S. District Court for the District of New Jersey (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 NJDEP 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 vermiculite expansion plant in Hamilton Township, New Jersey. In 2005, the Bankruptcy Court stayed this lawsuit. In April 2008, the Bankruptcy Court issued a ruling stating that the lawsuit filed by the NJDEP was in violation of the
43
Notes to Consolidated Financial Statements (Continued)
11. Commitments and Contingent Liabilities (Continued)
automatic stay and enjoining further pursuit of all claims in the lawsuit. In March 2009, the Delaware District Court upheld the Bankruptcy Court's ruling. In April 2009, the NJDEP appealed this ruling to the U.S. Court of Appeals for the Third Circuit, which appeal remains pending. To the extent this lawsuit proceeds against the two former Grace employees, Grace may have an indemnification obligation.
In April 2007, New Jersey filed a motion for leave to file a late proof of claim in the amount of $31 million with respect to substantially the same claims set forth in the lawsuit described in the preceding paragraph. In August 2007, the Bankruptcy Court denied this motion and the Delaware District Court affirmed this ruling on appeal in March 2008. In April 2008, New Jersey appealed this ruling to the Third Circuit, which appeal remains pending.
On October 19, 2009, the Debtors, the two former employees and the NJDEP entered into a stipulation in the amount of $1 million that, subject to approval by the Bankruptcy Court, will resolve the NJDEP's claims and terminate all of the litigation described above, including the appeals pending in the Third Circuit. A motion to approve the stipulation is pending before the Bankruptcy Court.
Non-Vermiculite Related Matters
At September 30, 2009 and December 31, 2008, Grace's estimated liability for remediation of sites not related to its former vermiculite mining and processing activities was $95.3 million and $103.8 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 Agreement. As Grace receives new information and continues its claims evaluation process, 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.
-
- 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.
44
Notes to Consolidated Financial Statements (Continued)
11. Commitments and Contingent Liabilities (Continued)
-
- Contracts entered into with customers in which Grace has agreed to indemnify such parties against damages caused by our
personnel or our products or resulting from our violation of applicable laws.
-
- 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.
Based on historical experience and the likelihood that such parties will make a claim against Grace, Grace believes that such indemnification obligations are immaterial.
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 September 30, 2009, Grace had gross financial assurances issued and outstanding of $253.7 million, comprised of $102.2 million of surety bonds issued by various insurance companies, and $151.5 million of standby letters of credit and other financial assurances issued by various banks. As discussed in Note 6, $67.7 million of these financial assurances have been issued under the DIP facility.
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. GAAP. 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 September 30, 2009.
12. Restructuring Expenses
In 2009, Grace implemented cost reduction and restructuring programs to further improve productivity. Grace accrued $19.1 million, $5.9 million, and $1.9 million of restructuring expense in the first three quarters of 2009, respectively. The restructuring programs include worldwide involuntary restructuring programs and a U.S. voluntary early retirement restructuring program. Grace expects to accrue additional restructuring expense of approximately $0.4 million in 2009 related to the previously announced involuntary programs as the final elements of these programs are completed. Grace expects substantially all costs of these programs to be paid by December 31, 2010.
45
Notes to Consolidated Financial Statements (Continued)
12. Restructuring Expenses (Continued)
The restructuring programs initiated in 2009 are expected to reduce total employment by over 450 employees by year-end 2009.
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(In millions)
|
2009 | 2008 | 2009 | 2008 | |||||||||
Restructuring Expenses: |
|||||||||||||
Severance and other employee related costs |
$ | 1.9 | $ | | $ | 26.7 | $ | 5.2 | |||||
Asset Write-offs |
| | 0.2 | | |||||||||
Total Restructuring Expenses |
$ | 1.9 | $ | | $ | 26.9 | $ | 5.2 | |||||
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(In millions)
|
2009 | 2008 | 2009 | 2008 | |||||||||
Restructuring Liability: |
|||||||||||||
Beginning Balance |
$ | 18.3 | $ | 3.8 | $ | 0.7 | $ | | |||||
Accruals |
1.9 | | 26.9 | 5.2 | |||||||||
Payments |
(5.9 | ) | (2.1 | ) | (13.3 | ) | (3.5 | ) | |||||
Foreign currency translation adjustments and other |
0.6 | | 0.6 | | |||||||||
Total Restructuring Liability |
$ | 14.9 | $ | 1.7 | $ | 14.9 | $ | 1.7 | |||||
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | 2009 | 2008 | |||||||||
Employee Reduction by Operating Segment: |
|||||||||||||
Grace Davison |
| | 183 | | |||||||||
Grace Construction Products |
4 | | 218 | 121 | |||||||||
Corporate |
21 | | 61 | 8 | |||||||||
Total |
25 | | 462 | 129 | |||||||||
13. Product Line Sales
Grace sold two of its product lines in the third quarter of 2009 resulting in a net gain of $22.2 million. The Grace Davison operating segment sold its membranes product line and the Grace Construction Products operating segment sold its firestopping and abatement product line. The membranes product line and the firestopping and abatement product line accounted for substantially less than 1% of Grace Davison's and Grace Construction Products' year to date sales, respectively.
46
Notes to Consolidated Financial Statements (Continued)
14. Other (Income) Expense, net
Components of other (income) expense, net are as follows:
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(In millions)
|
2009 | 2008 | 2009 | 2008 | |||||||||
Net income from life insurance policies |
$ | | $ | (0.2 | ) | $ | (1.2 | ) | $ | (2.0 | ) | ||
Interest income of non-Debtor subsidiaries |
(0.3 | ) | (0.7 | ) | (1.1 | ) | (3.0 | ) | |||||
Net (gain) loss on sales of investments and disposals of assets |
| 0.9 | (3.0 | ) | 0.3 | ||||||||
Translation effectsintercompany loans |
(16.8 | ) | 42.3 | (18.6 | ) | 4.5 | |||||||
Value of foreign currency forward contractsintercompany loans |
14.6 | (29.4 | ) | 23.9 | (5.7 | ) | |||||||
Other currency transaction effects |
1.0 | 3.4 | 5.4 | 4.3 | |||||||||
Interest income on joint venture cash balances |
| (0.2 | ) | | (0.4 | ) | |||||||
Other miscellaneous (income) expense |
6.6 | 1.0 | 5.8 | (4.5 | ) | ||||||||
Total other (income) expense, net |
$ | 5.1 | $ | 17.1 | $ | 11.2 | $ | (6.5 | ) | ||||
15. 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 and nine months ended September 30, 2009 and 2008:
Three Months Ended September 30, 2009 (In millions) |
Pre-Tax Amount |
Tax Benefit/ (Expense) |
After-Tax Amount |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Defined benefit pension and other postretirement plans: |
|||||||||||
Amortization of net prior service credit included in net periodic benefit cost |
$ | (0.6 | ) | $ | 0.3 | $ | (0.3 | ) | |||
Amortization of net deferred actuarial loss included in net periodic benefit cost |
9.2 | (3.2 | ) | 6.0 | |||||||
Other changes in funded status |
(48.6 | ) | 16.2 | (32.4 | ) | ||||||
Benefit plans, net |
(40.0 | ) | 13.3 | (26.7 | ) | ||||||
Foreign currency translation adjustments |
10.9 | | 10.9 | ||||||||
Gain (loss) from hedging activities |
4.6 | (1.8 | ) | 2.8 | |||||||
Unrealized holding gain on available-for-sale securities |
0.2 | | 0.2 | ||||||||
Other comprehensive income (loss) attributable to W. R. Grace & Co. shareholders |
$ | (24.3 | ) | $ | 11.5 | $ | (12.8 | ) | |||
47
Notes to Consolidated Financial Statements (Continued)
15. Comprehensive Income (Loss) (Continued)
Nine Months Ended September 30, 2009 (In millions) |
Pre-Tax Amount |
Tax Benefit/ (Expense) |
After-Tax Amount |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Defined benefit pension and other postretirement plans: |
|||||||||||
Amortization of net prior service credit included in net periodic benefit cost |
$ | (2.0 | ) | $ | 0.8 | $ | (1.2 | ) | |||
Amortization of net deferred actuarial loss included in net periodic benefit cost |
27.6 | (9.6 | ) | 18.0 | |||||||
Other changes in funded status |
(54.7 | ) | 17.3 | (37.4 | ) | ||||||
Benefit plans, net |
(29.1 | ) | 8.5 | (20.6 | ) | ||||||
Foreign currency translation adjustments |
30.1 | | 30.1 | ||||||||
Gain (loss) from hedging activities |
8.2 | (2.9 | ) | 5.3 | |||||||
Unrealized holding gain on available-for-sale securities |
1.0 | | 1.0 | ||||||||
Other comprehensive income attributable to W. R. Grace & Co. shareholders |
$ | 10.2 | $ | 5.6 | $ | 15.8 | |||||
Three Months Ended September 30, 2008 (In millions) |
Pre-Tax Amount |
Tax Benefit/ (Expense) |
After-Tax Amount |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
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 |
6.7 | (2.3 | ) | 4.4 | |||||||
Other changes in funded status |
24.4 | (7.6 | ) | 16.8 | |||||||
Benefit plans, net |
29.5 | (9.3 | ) | 20.2 | |||||||
Foreign currency translation adjustments |
(1.8 | ) | | (1.8 | ) | ||||||
Gain (loss) from hedging activities |
(11.5 | ) | 4.0 | (7.5 | ) | ||||||
Other comprehensive income (loss) attributable to W. R. Grace & Co. shareholders |
$ | 16.2 | $ | (5.3 | ) | $ | 10.9 | ||||
48
Notes to Consolidated Financial Statements (Continued)
15. Comprehensive Income (Loss) (Continued)