W.R. Grace & Co. Reports Operating Results (10-Q)

W.R. Grace & Co. (GRA, Financial) filed Quarterly Report for the period ended 2009-03-31.

W. R. Grace & Co. produces specialty chemicals. They primarily operate through the following two business segments: Davison Chemicals and Performance Chemicals. Davison Chemicals manufactures catalysts (fluid cracking hydroprocessing and polyolein) and silica and zeolite absorbents. Performance Chemicals produces specialty construction and building materials along with container and closure sealants. W.R. Grace & Co. has a market cap of $942.3 million; its shares were traded at around $13.06 with a P/E ratio of 8.4 and P/S ratio of 0.3.

Highlight of Business Operations:

Sales for the first quarter were $682.1 million compared with $759.2 million in the prior year quarter, a 10.2% decrease (4.0% before the effects of currency translation). The sales decrease was attributable primarily to lower volumes and unfavorable currency translation, partially offset by higher selling prices in both operating segments. Sales were down 5.3% in North America and 23.8% in Europe, and up 11.1% in Latin America and 8.0% in Asia Pacific. Net loss for the first quarter was $38.9 million, or $0.54 per diluted share, compared with net income of $17.7 million, or $0.24 per diluted share, in the prior year quarter. Results in both the 2009 and 2008 quarters were negatively affected by Chapter 11 expenses, litigation and other matters not related to core operations. Excluding Chapter 11 expenses, the loss on noncore activities, and the tax effects of such expenses and loss, the net loss would have been $8.7 million for the first quarter compared with net income of $35.2 million calculated on the same basis for the prior year quarter. Pre-tax loss from core operations was $3.4 million in the first quarter compared with income of $68.2 million in the prior year quarter. As previously reported, Grace expected a pre-tax loss from core operations in the first quarter 2009 due to the unfavorable effects of lower sales volumes, higher costs of goods sold, and the restructuring charge discussed below. Cost of goods sold in the first quarter 2009 reflects approximately $40 million of high raw materials and energy costs incurred in the fourth quarter 2008. Raw materials and energy costs in the first quarter 2009 were below their fourth quarter 2008 peak, though such costs remained above their first quarter 2008 levels. We recorded a pre-tax charge of $19.1 million in the first quarter related to cost reduction and restructuring actions in both operations and administrative functions. We expect these actions to improve our earnings and cash flow beginning in the second quarter and we expect these actions to save approximately $22 million in operating costs in the current year. We expect these actions, together with cost reduction and restructuring actions that we completed in 2008, to produce over $40 million of annualized cost savings by 2010. The restructuring programs initiated in the first quarter are expected to reduce total employment by approximately 300 employees by year-end 2009. Together with cost reduction and restructuring programs implemented in 2008, these actions will reduce total employment by approximately 500 employees by year-end 2009. We remain cautious in our outlook for customer demand in 2009, and we are continuing to focus on reducing operating costs and working capital requirements. We expect to record additional restructuring expenses in 2009 as additional cost reduction programs are implemented. Pre-tax loss from noncore activities was $39.9 million in the first quarter compared with a loss of $0.2 million in the prior year quarter. The increase in the noncore loss is primarily 49

Operating free cash flow was $77.8 million in the first quarter compared to a use of $10.8 million in the prior year quarter. The improvement was attributable primarily to reduced working capital and capital expenditures, partially offset by lower pre-tax income from core operations. Net cash provided by operating activities was $54.7 million in the first quarter compared to net cash used for operating activities of $47.7 million in the prior year quarter. Summary Description of Core Business

Note (g): Restructuring costs included in pre-tax income from core operations above have been reflected by operating segment in Note 16 as follows: Grace Davison $11.7 million, Grace Construction Products $4.7 million, and Corporate $1.7 million. An additional $1.0 million, reflected in pre-tax income (loss) from noncore activities above, is also reflected in Corporate in Note 16.

Refining TechnologiesThe increase in first quarter sales was primarily a result of higher sales volume of hydroprocessing catalysts. Some hydroprocessing catalysts are consumed over a period of years and replacement orders occur in an irregular pattern. The increase in sales volume of hydroprocessing catalysts in the first quarter of 2009 when compared to the prior year quarter is a result of significant replacement orders filled during the quarter. Based on the expected order pattern in the second quarter of 2009, we expect sales of hydroprocessing catalysts to decrease by approximately $50 million when compared to the first quarter of 2009. Higher sales volume of hydroprocessing catalysts was partially offset by lower molybdenum prices. Molybdenum is a key raw material in our hydroprocessing catalysts and we generally pass the cost of molybdenum through to our customers. Molybdenum cost in the first quarter was approximately one-third its cost in the first quarter 2008, resulting in a decrease in pass-through sales of approximately $30 million.

Read the The complete ReportGRA is in the portfolios of John Keeley of Keeley Fund Management.