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18. | Garlock Sealing Technologies LLC and Garrison Litigation Management Group, Ltd. |
On the Petition Date, GST LLC, Anchor and Garrison filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code in the Bankruptcy Court. The filings were the initial step in a claims resolution process, which is ongoing. The goal of the process is an efficient and permanent resolution of all current and future asbestos claims through court approval of a plan of reorganization, which typically would establish a trust to which all asbestos claims would be channeled for resolution. GST seeks an agreement with asbestos claimants and other creditors on the terms of a plan for the establishment of such a trust and repayment of other creditors in full, or in the absence of such an agreement, an order of the Bankruptcy Court confirming such a plan.
In November 2011, GST filed a proposed plan of reorganization with the Bankruptcy Court. The proposed plan calls for a trust to be formed, to which GST and affiliates would contribute $200 million and which would be the exclusive remedy for future asbestos personal injury claimants – those whose claims arise after confirmation of the plan. The proposed plan provides that each present asbestos personal injury claim, i.e., any pending claim or one that arises between the Petition Date and plan confirmation, will be assumed by reorganized GST and resolved either by settlement (pursuant to a matrix contained in the proposed plan or as otherwise agreed), or by payment in full of any final judgment entered after trial in federal court. Based on a preliminary estimate provided by Bates White, the estimation expert retained by counsel to GST prior to the time that GST filed its proposed plan, GST estimates that the indemnity costs to resolve all present claims pursuant to the settlement matrix in the plan would cost the reorganized GST approximately $70 million. Under the proposed plan, all non-asbestos claimants would be paid the full value of their claims.
GST’s proposed plan is opposed by the Official Committee of Asbestos Personal Injury Claimants (the “Claimants’ Committee”) and Future Claimants’ Representative (the “FCR”) and is unlikely to be approved in its current form.
On April 13, 2012, the Bankruptcy Court granted a motion by GST for the Bankruptcy Court to estimate the allowed amount of present and future asbestos claims against GST for mesothelioma, a rare cancer attributed to asbestos exposure, for purposes of determining the feasibility of a potential proposed plan of reorganization. The estimation trial commenced on July 22, 2013 and concluded on August 22, 2013.
On January 10, 2014, Bankruptcy Judge George Hodges announced his estimation decision in a 65-page order. Citing with approval the methodology put forth by GST at trial, the judge determined that $125 million is the amount sufficient to satisfy GST’s liability for present and future mesothelioma claims. Judge Hodges adopted GST’s “legal liability” approach to estimation, focused on the merits of claims, and rejected asbestos claimant representatives’ approach, which focused solely on GST’s historical settlement history. The judge’s liability determination is for mesothelioma claims only. The court has not yet determined amounts for GST’s liability for other asbestos claims and for administrative costs that would be required to review and process claims and payments, which will add to the amount.
In his opinion, Judge Hodges writes, “The best evidence of Garlock’s aggregate responsibility is the projection of its legal liability that takes into consideration causation, limited exposure and the contribution of exposures to other products.”
The decision validates the positions that GST has been asserting for the more than three years it has been in this process. Following are several important findings in the opinion:
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• | Garlock’s products resulted in a relatively low exposure to asbestos to a limited population, and its legal responsibility for causing mesothelioma is relatively de minimis. |
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• | Chrysotile, the asbestos fiber type used in almost all of Garlock’s asbestos products, is far less toxic than other forms of asbestos. The court found reliable and persuasive Garlock’s expert epidemiologist, who testified that there is no statistically significant association between low dose chrysotile exposure and mesothelioma. |
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• | The population that was exposed to Garlock’s products was necessarily exposed to far greater quantities of higher potency asbestos from the products of others. |
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• | The estimates of Garlock’s aggregate liability that are based on its historic settlement values are not reliable because those values are infected with the impropriety of some law firms and inflated by the cost of defense. |
GST plans to incorporate the court’s ruling into a plan of reorganization that it will submit in place of the plan referenced above. GST has not yet determined the amount that it will propose be included in its revised plan, as it continues to hope that it can reach a consensual resolution with representatives of current and future claimants. GST has stated that it continues to be willing to engage in discussions with claimant representatives, recognizing that an agreed settlement would provide the best path to certainty and finality through section 524(g) of the Bankruptcy Code, provide for faster and more efficient completion of the case, save significant future costs, and allow for the attainment of complete finality.
We caution that, in the absence of a consensual deal, the GST asbestos claims resolution process remains uncertain and could take an undetermined time to complete.
That estimation decision does not end the case; there are many potential hurdles, including appeals, that may arise prior to plan confirmation.
Financial Results
Condensed combined financial information for GST is set forth below, presented on a historical cost basis.
GST
(Debtor-in-Possession)
Condensed Combined Statements of Operations
Years Ended December 31, 2013, 2012 and 2011
(in millions)
|
| | | | | | | | | | | |
| 2013 | | 2012 | | 2011 |
Net sales | $ | 244.8 |
| | $ | 240.1 |
| | $ | 236.1 |
|
Cost of sales | 145.3 |
| | 145.3 |
| | 144.7 |
|
Gross profit | 99.5 |
| | 94.8 |
| | 91.4 |
|
Operating expenses: | | | | | |
Selling, general and administrative | 41.7 |
| | 45.1 |
| | 45.4 |
|
Asbestos-related | 2.3 |
| | (1.6 | ) | | 2.7 |
|
Other | 0.5 |
| | 1.7 |
| | 0.8 |
|
Total operating expenses | 44.5 |
| | 45.2 |
| | 48.9 |
|
Operating income | 55.0 |
| | 49.6 |
| | 42.5 |
|
Interest income, net | 29.7 |
| | 27.9 |
| | 26.8 |
|
Income before reorganization expenses and income taxes | 84.7 |
| | 77.5 |
| | 69.3 |
|
Reorganization expenses | (44.6 | ) | | (31.4 | ) | | (17.0 | ) |
Income before income taxes | 40.1 |
| | 46.1 |
| | 52.3 |
|
Income tax expense | (18.7 | ) | | (16.3 | ) | | (19.6 | ) |
Net income | $ | 21.4 |
| | $ | 29.8 |
| | $ | 32.7 |
|
Comprehensive income | $ | 20.8 |
| | $ | 30.4 |
| | $ | 31.6 |
|
GST
(Debtor-in-Possession)
Condensed Combined Statements of Cash Flows
Years Ended December 31, 2013, 2012 and 2011
(in millions)
|
| | | | | | | | | | | |
| 2013 | | 2012 | | 2011 |
Net cash flows from operating activities | $ | 48.2 |
| | $ | 31.9 |
| | $ | 44.2 |
|
Investing activities | | | | | |
Purchases of property, plant and equipment | (8.7 | ) | | (6.9 | ) | | (3.3 | ) |
Net receipts (payments) from loans to affiliates | (12.8 | ) | | 0.5 |
| | 13.1 |
|
Net purchases of held-to-maturity securities | (25.0 | ) | | (110.0 | ) | | — |
|
Receipts from (deposits into) restricted cash accounts | 0.9 |
| | 1.4 |
| | (6.5 | ) |
Acquisitions, net of cash acquired | — |
| | — |
| | (7.5 | ) |
Other | (1.1 | ) | | — |
| | — |
|
Net cash used in investing activities | (46.7 | ) | | (115.0 | ) | | (4.2 | ) |
Effect of exchange rate changes on cash and cash equivalents | (2.3 | ) | | 0.4 |
| | (0.8 | ) |
Net increase (decrease) in cash and cash equivalents | (0.8 | ) | | (82.7 | ) | | 39.2 |
|
Cash and cash equivalents at beginning of year | 43.6 |
| | 126.3 |
| | 87.1 |
|
Cash and cash equivalents at end of year | $ | 42.8 |
| | $ | 43.6 |
| | $ | 126.3 |
|
GST
(Debtor-in-Possession)
Condensed Combined Balance Sheets
As of December 31, 2013 and 2012
(in millions)
|
| | | | | | | |
| 2013 | | 2012 |
Assets: | | | |
Current assets | $ | 314.4 |
| | $ | 168.2 |
|
U.S. Treasury securities | — |
| | 110.0 |
|
Asbestos insurance receivable | 101.1 |
| | 120.7 |
|
Deferred income taxes | 130.4 |
| | 124.8 |
|
Notes receivable from affiliate | 248.1 |
| | 237.4 |
|
Other assets | 76.2 |
| | 74.3 |
|
Total assets | $ | 870.2 |
| | $ | 835.4 |
|
Liabilities and Shareholder’s Equity: | | | |
Current liabilities | $ | 43.9 |
| | $ | 76.9 |
|
Other liabilities | 58.1 |
| | 10.8 |
|
Liabilities subject to compromise (A) | 468.4 |
| | 468.4 |
|
Total liabilities | 570.4 |
| | 556.1 |
|
Shareholder’s equity | 299.8 |
| | 279.3 |
|
Total liabilities and shareholder’s equity | $ | 870.2 |
| | $ | 835.4 |
|
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(A) | Liabilities subject to compromise include pre-petition unsecured claims which may be resolved at amounts different from those recorded in the condensed combined balance sheets. Liabilities subject to compromise consist principally of asbestos-related claims. GST has undertaken to project the number and ultimate cost of all present and future bodily injury claims expected to be asserted, based on actuarial principles, and to measure probable and estimable liabilities under generally accepted accounting principles. GST has accrued $466.8 million as of December 31, 2013. The estimate indicated for those asbestos-related claims reflects the point in a wide range of possible outcomes determined based on historical facts and circumstances prior to the Petition Date as our estimate of the cost to resolve asbestos-related personal injury cases and claims against GST as they would have been resolved in the state courts or by settlements over a ten-year period from April 1, 2010 through March 31, 2020. GST adjusts this estimate to reflect payments of previously accrued but unpaid legal fees and to reflect the results of appeals. Otherwise, GST does not expect to adjust the estimate unless developments in the Chapter 11 proceeding provide a reasonable basis for a revised estimate. GST intends to use the claims resolution process in Chapter 11 to determine the validity and ultimate amount of its aggregate liability for asbestos-related claims. Due to the uncertainties of asbestos-related litigation and the Chapter 11 process, GST’s ultimate liability could differ materially from the recorded liability. See Note 19, “Commitments and Contingencies – Asbestos.” |
