UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ý☑ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20182020
or
o☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 1-13953
W. R. GRACE & CO.
(Exact name of registrant as specified in its charter)
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| Delaware | | 65-0773649 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
7500 Grace Drive, Columbia, Maryland 21044-4098
(Address of principal executive offices) (Zip Code)
(410) 531-4000
(Registrant’s telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Exchange Act: |
| Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Common Stock, $.01$0.01 par value per share | | GRA | | New York Stock Exchange Inc. |
Preferred Stock Purchase Rights | | | | |
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Securities registered pursuant to Section 12(g) of the Exchange Act: |
| None |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý☑ No o☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o☐ No ý☑
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 every Interactive Data File required to be submitted 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 such files). Yes ý☑ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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| Large accelerated filer | ☑ | | Accelerated filer | ☐ |
| Non-accelerated filer | ☐ | | Smaller reporting company | ☐ |
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Large accelerated filer ý
| | Accelerated filer o
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Non-accelerated filer o
| | Smaller reporting company o
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| | Emerging growth companyo | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report Yes ☑ No ☐
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☑
The aggregate market value of W. R. Grace & Co. voting and non-voting common equity held by non-affiliates as of June 30, 20182020 (the last business day of the registrant’s most recently completed second fiscal quarter) based on the closing sale price of $73.31 as reported on the New York Stock Exchange was $4,383,984,405.
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ý No o$2,844,898,340.
At January 31, 2019, 66,739,5572021, 66,191,426 shares of W. R. Grace & Co. Common Stock, $.01$0.01 par value per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to our stockholdersshareholders in connection with the registrant’s
2021 Annual Meeting of Shareholders, to be held on May 8, 2019, are incorporated by reference into Part III.
TABLE OF CONTENTS
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| PART I | | |
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| PART II | | |
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| PART III | | |
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| PART IV | | |
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Notes on references that we use in this Report. Unless the context indicates otherwise, in this Report the terms “Grace,” the “Company,” “we,” “us,” or “our” mean (i) W. R. Grace & Co. itself, or (ii) W. R. Grace & Co. and/or one or more of its consolidated subsidiaries and affiliates and, the term the “Company” means W. R. Grace & Co.in certain cases, their respective predecessors. Unless otherwise indicated, the contents of websites mentioned in this reportthat we mention are not incorporated by reference or otherwise made a part of this Report.
We refer to the Financial Accounting Standards Board as the “FASB.” The FASB issues, among other things, Accounting Standards Codifications (which we refer to as “ASC”) and Accounting Standards Updates (which we refer to as “ASU”). We refer to the U.S. Internal Revenue Service as the “IRS.”
Trademarks and other intellectual property that we discuss in this Report. GRACE®, the GRACE® logo and, except(and any other use of the term “Grace” as otherwise indicated,a tradename) as well as the other trademarks, service marks, or trade names used in the text of this Report are trademarks, service marks, or trade names, registered in the United States and/or other countries, of Grace or its operating units, except as otherwise indicated. UNIPOL® and UNIPOL UNIPPAC® are trademarks of W. R.The Dow Chemical Company or an affiliated company of Dow. Grace & Co. and/or its subsidiariesaffiliates are licensed to use the UNIPOL® and UNIPOL UNIPPAC® trademarks in the area of polypropylene. ART® and ADVANCED REFINING TECHNOLOGIES® are trademarks, registered in the United States and/or affiliates.other countries, of Advanced Refining Technologies LLC. RESPONSIBLE CARE® is a trademark, and RESPONSIBLE CARE MANAGEMENT SYSTEM® are trademarks, registered in the United States and/or other countries, of the American Chemistry Council. UNIPOL® is†Sustainalytics, a trademarkleading independent provider of The Dow Chemical Company or an affiliated company of Dow. W. R. Grace & Co.–Conn. and/or its affiliates are licensed to useESG and corporate governance ratings, research and analysis, has provided the UNIPOL® trademarkESG Risk Rating as set forth in the areaESG Risk Rating Summary Report issued December 31, 2020.
FORWARD-LOOKING STATEMENTS
This Report contains, and our other public communications may contain, forward-looking statements, that is, information related to future, not past, events. Such statements generally include the words “believes,” “plans,” “intends,” “targets,” “will,” “expects,” “suggests,” “anticipates,” “outlook,” “continues,” or similar expressions. Forward-looking statements include, without limitation, statements regarding future: financial positions; results of polypropylene. FINANCIAL ACCOUNTING STANDARDS BOARD®operations; cash flows; financing plans; business strategy; operating plans; capital and FASB ACCOUNTING STANDARDS CODIFICATION®other expenditures; impact of COVID-19 on our business; competitive positions; growth opportunities for existing products; benefits from new technology; benefits from cost reduction initiatives; succession planning; and markets for securities. For these statements, we claim the protections of the safe harbor for forward-looking statements contained in Section 27A of the Securities Act and Section 21E of the Exchange Act. We are trademarks, registeredsubject to risks and uncertainties that could cause actual results or events to differ materially from our projections or that could cause other forward-looking statements to prove incorrect. Factors that could cause actual results or events to differ materially from those contained in the United Statesforward-looking statements include, without limitation: risks related to foreign operations, especially in areas of active conflicts and in emerging regions; the costs and availability of raw materials, energy and transportation; the effectiveness of our research and development and growth investments; acquisitions and divestitures of assets and businesses; developments affecting our outstanding indebtedness; developments affecting our pension obligations; legacy matters (including product, environmental, and other countries,legacy liabilities) relating to past activities of Financial Accounting Foundation. IRS® is a trademark, registeredGrace; our legal and environmental proceedings; environmental compliance costs (including existing and potential laws and regulations pertaining to climate change); the inability to establish or maintain certain business relationships; the inability to hire or retain key personnel; natural disasters such as storms and floods; fires and force majeure events; the economics of our customers’ industries, including the petroleum refining, petrochemicals, and plastics industries, and shifting consumer preferences; public health and safety concerns, including pandemics and quarantines; changes in tax laws and regulations; international trade disputes, tariffs, and sanctions; the United States and/or other countries,potential effects of Internal Revenue Service, Departmentcyberattacks; and those additional factors set forth under Item 1A. “Risk Factors” and elsewhere in this Annual Report on Form 10-K. Our reported results should not be considered as an indication of our future performance. Readers are cautioned not to place undue reliance on our projections and forward-looking statements, which speak only as of the Treasury.dates those projections and statements are made. We undertake no obligation to release publicly any revisions to our projections and forward-looking statements, or to update them to reflect events or circumstances occurring after the dates those projections and statements are made.
The Financial Accounting Standards Board is referred to in this Report as the “FASB.” The FASB issues, among other things, Accounting Standards Codifications (which are referred to herein as “ASC”) and Accounting Standards Updates (which are referred to herein as “ASU”). The U.S. Internal Revenue Service is referred to in this Report as the “IRS.”
PART I
Item 1. BUSINESS
BUSINESS OVERVIEW
W. R. Grace & Co., through its subsidiaries, is engaged in the production and sale of specialty chemicals and specialty materials on a global basis through two reportable business segments: Grace Catalysts Technologies (“Catalysts Technologies”), which includes catalysts and related products and technologies used in petrochemical, refining, petrochemical and other chemical manufacturing applications; and Grace Materials Technologies (“Materials Technologies”), which includes specialty materials, including silica-based and silica-alumina-based materials, used in consumer/pharma,pharma/consumer, coatings, and chemical process and coatings applications.
Historical Perspective
Grace is the successor to a company that began in 1854 and originally became a public company in 1953. We entered the specialty chemicals and specialty materials industries in 1954, the year in which we acquired the Davison Chemical Company. W. R. Grace & Co. is a Delaware corporation.
W. R. Grace & Co. conducts all of its business through a single wholly owned subsidiary, W. R. Grace & Co.–Conn. (“Grace–Conn.”), a Connecticut corporation formed in 1899. Grace–Conn. owns all of the assets, properties and rights of W. R. Grace & Co. on a consolidated basis, either directly or through subsidiaries.
Recent Developments
Acquisitions
We discuss our approach to Mergers and Acquisitions below, under “Profitable Growth Strategy.” In line with that strategy, in recent years we have completed the following transactions:
We completed the acquisition of the business and assets of Rive Technology, Inc. (“Rive”) on June 17, 2019, for $22.8 million, with an additional $2.0 million holdback payment remitted in the three months ended September 30, 2020. The business is included in the Refining Technologies operating segment of our Catalysts Technologies reportable segment. The acquisition included Rive’s MOLECULAR HIGHWAY® zeolite technology for catalytic processes, which allows us to offer a broader spectrum of products for converting crude oil to petrochemical feedstocks.
On April 3, 2018, using cash on hand and borrowings under our credit agreement, we acquired the assets of the polyolefin catalysts business of Albemarle Corporation. We acquired the businessCorporation for $418.0 million, net of cash acquired and including customary post-closing adjustments. The acquisition included production plants in Baton Rouge, Louisiana, and Yeosu, South Korea; research and development and pilot plant capabilities; and an extensive portfolio of intellectual property. The business is included in the Specialty Catalysts operating segment of the Graceour Catalysts Technologies reportable segment. The acquisition iswas complementary to our existing specialty catalystsSpecialty Catalysts business and strengthenshas strengthened our commercial relationships, catalysts technology portfolio, and manufacturing network.
On January 27,June 30, 2016, we completed the acquisition of the assets of the BASF Polyolefin Catalysts business for a purchase price of $250.6 million. The acquisition included technologies, patents, trademarks, and production plants in Pasadena, Texas, and Tarragona, Spain. The acquisition added the following technologies to our catalysts portfolio: (1) LYNX® high-activity polyethylene (“PE”) catalyst technologies used commercially in slurry processes for the production of high-density PE resins such as bimodal film and pipe; and (2) LYNX® polypropylene (“PP”) catalyst technologies used commercially in all major PP process technologies including slurry, bulk loop, stirred gas, fluid gas, and stirred bulk. The acquisition also provided us with significant additional flexibility and capacity for our global polyolefin catalysts manufacturing network. These products became part of the Specialty Catalysts operating segment of our Catalysts Technologies reportable segment.
We completed the acquisition of the assets of the Polypropylene Licensing and Catalysts business of The Dow Chemical Company on December 2, 2013, for a cash purchase price of $510.4 million (which included post-closing adjustments). The acquisition included UNIPOL® Polypropylene Process Technology as well as CONSISTA® and SHAC® catalysts. The technology and products complemented our polyolefin catalyst
businesses as part of the Specialty Catalysts operating segment of our Catalysts Technologies reportable segment. The acquisition also included our production plant in Norco, Louisiana.
Other Notable Developments
In 2016, Grace entered intocompleted a separation agreementtransaction with respect to GCP Applied Technologies Inc., then a wholly-owned subsidiary of Grace (“GCP”), pursuant to which Grace agreed to transfer its Graceincluded Grace’s former Construction Products operating segment and the packaging technologies business of its Grace Materials Technologies operating segment to GCP (the “Separation”). Grace and GCP completed theThe Separation on February 3, 2016 (the “Distribution Date”),was effected by means of a pro rata distribution to the Company’s stockholders of all of the outstanding shares of GCP common stock (the “Distribution”), with one share of GCP common stock distributed for each share of Company common stock held as of the close of business on January 27, 2016.stock. As a result of the Distribution,transaction, GCP became an independent public company. GCP’s historical financial results through the Distribution Date are reflected in Grace’s Consolidated Financial Statements as discontinued operations.
On February 3, 2014, Grace concluded a voluntary reorganization under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware, when the joint plan of reorganization (the “Joint Plan”) filed by Grace and certain other parties became effective.
Global Scope
We operate our business on a global scale with approximately 72%73% of our 20182020 consolidated sales outside the United States. We operate and/or sell to customers in over 7060 countries and in over 30 currencies. We manage our operating segments on a global basis, to serve global markets. Currency fluctuations affect our reported results of operations, cash flows, and financial position.
Profitable Growth Strategy
We create value for customers and investors by profitably growing our specialty chemicals and specialty materials businesses and achieving high levels of efficiency and cash flow. To meet these objectives, we:
•Invest to accelerate growth and extend our competitive advantages;
•Invest in great people to strengthen our high-performance culture;
•Execute the Grace Value Model to drive operating excellence; and
•Acquire to build our technology and manufacturing capabilities for our customers.
Our businesses are well-positioned to grow through our customer-driven innovation, commercial and operating excellence and thoughtful, disciplined merger and acquisition approach. Our businesses are interconnected through shared materials science and our highly-integratedhighly integrated global manufacturing and supply chain operations.
Our organic growth drivers include: global demand for plastics and petrochemical feedstocks; global demand for cleaner fuels and heavy oil upgrading; rising living standards and growing middle class incomes; stricter environmental standards; and increased focus on health and wellness.
The Grace Value Model (“GVM”)
In 2018, we introduced investors to theThe Grace Value Model is our framework for creating and delivering value to customers, investors and employees. At the company level, we create value through our focused portfolio, strong strategic position, and disciplined capital allocation. At the business level, we create value through customer-driven innovation, commercial excellence, and operating excellence. Linking and enabling all of these elements are great talent, high-performance culture, and integrated business management processes. Our ability to rigorously execute the Grace Value Model is a principal source of our competitive advantage in the global marketplace and our financial performance. The Grace Value Model is illustrated as follows:
Human Capital Management
Our great talent and high-performance culture are the most important sources of our competitive advantage and long-term ability to deliver value to customers and investors. We have invested heavily in our global talent and talent management system, which includes aligned goal setting, ongoing feedback and coaching, effective performance reviews, and a continuous cycle of professional development. We have also invested significantly in talent development and effectiveness, including over $6 million and 50,000 hours of commercial excellence investment and training for our commercial teams since 2016. In 2019 and 2020, we refreshed more than 10% of our global workforce, including upgrading talent where needed and adding key leadership roles throughout the organization. Our voluntary workforce turnover rate was 5.4% in 2020.
Our high-performance culture is based on our commitment to performance and our five Grace Leadership Behaviors: Deliver Results; Think Critically; Be Authentic; Communicate; and Engage and Include. We expect our colleagues to model these behaviors and our values in their daily business conduct and include behavior as a core element of our performance reviews.
We aspire to continually strengthen our talent and high-performance culture by welcoming and valuing the unique backgrounds, cultures, ethnicities, genders, experiences, perspectives, and contributions of our employees around the globe. We have a well-developed Diversity and Inclusion strategy and a multi-year action plan to improve the diversity of our global team and ensure every employee feels included and valued.
Our diversity and inclusion strategy starts at the top: on the Grace Board of Directors, 29% of our independent directors are women, and on the Grace Leadership Team, 50% of our executives are women or people of color, including three of four business unit leaders. Increasing the diversity of our global team, including greater representation of women and under-represented minorities, is a focus. Through diversity and inclusion, we strengthen our people and our business.
The COVID-19 pandemic had a significant impact on our human capital management strategies and priorities in 2020. Aligned with our strong safety culture, we developed clear and effective worksite safety protocols, updated policies to add flexibility, and provided personal protective equipment to protect our essential employees working onsite in our manufacturing plants, research laboratories, and quality control laboratories. In addition, we paid for COVID-19 testing globally and covered treatment in the U.S. Approximately 45% of our workforce worked from home for most of 2020, following a seamless transition to remote work in March, including implementation of new communication and collaboration technology. We reduced operating costs during the year,
but were careful to protect our growth investments, maintain our focus on technology leadership, and continue our commercial excellence and operating excellence initiatives. We made no layoffs or salary reductions and continued employee development and hiring of critical talent. We experienced very high levels of engagement and productivity throughout the year.
As of December 31, 2020, we employed approximately 4,000 employees with 2,200 employed in the United States and 1,000 employed in Germany.
Approximately 2,300 employees are salaried, and 1,700 employees are hourly. Approximately 700 of our manufacturing employees at 5 manufacturing sites in the United States are represented by unions. We have operated without a labor work stoppage for more than 20 years. Outside the United States, we have works councils and unions serving approximately 1,400 employees, the majority of whom are located at our European sites.
Our Approach to Mergers & Acquisitions (“M&A”)
Our approach to M&A prioritizes strategic fit synergies and financial returns. We seek investments that improve our technology, research and development and/or commercial capabilities; enhance and/or leverage our manufacturing capabilities; and include attractive growth and profitability opportunities. Our recent acquisitions have been very synergistic, with strong growth and returns driven by significant cost and capital synergies. We establish minimum return requirements for every investment,acquisitions, based on specific risk-adjusted hurdle rates, and expect all acquisitions to be accretive to earnings per share (“EPS”).
Our Reportable Business Segments
GRACE CATALYSTS TECHNOLOGIES
Catalysts Technologies uses our significant catalysts knowledge and applications expertise to design and manufacture products to create significant value for our customers. Our customers include major oil refinersplastics and chemicals manufacturers as well as plastics and chemicals manufacturers.oil refiners. We believe that our technological expertise and broad technology platform provide a competitive advantage, allowing us to quickly design products that help our customers create value in their operations and their end markets.
The following table sets forth Catalysts Technologies sales of similar products as a percentage of Grace total revenue.
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| Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
| (In millions) | Sales | | % of Grace Revenue | | Sales | | % of Grace Revenue | | Sales | | % of Grace Revenue |
| Polyolefin and chemical catalysts | $ | 621.6 | | | 35.9 | % | | $ | 705.3 | | | 36.0 | % | | $ | 661.5 | | | 34.2 | % |
| Refining catalysts | 649.8 | | | 37.6 | % | | 791.4 | | | 40.4 | % | | 802.0 | | | 41.5 | % |
| Total | $ | 1,271.4 | | | 73.5 | % | | $ | 1,496.7 | | | 76.4 | % | | $ | 1,463.5 | | | 75.7 | % |
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| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| (In millions) | Sales | | % of Grace Revenue | | Sales | | % of Grace Revenue | | Sales | | % of Grace Revenue |
| Refining catalysts | $ | 802.0 |
| | 41.5 | % | | $ | 758.1 |
| | 44.2 | % | | $ | 724.9 |
| | 45.3 | % |
| Polyolefin and chemical catalysts | 661.5 |
| | 34.2 | % | | 518.4 |
| | 30.2 | % | | 438.8 |
| | 27.5 | % |
| Total | $ | 1,463.5 |
| | 75.7 | % | | $ | 1,276.5 |
| | 74.4 | % | | $ | 1,163.7 |
| | 72.8 | % |
A description of our Catalysts Technologies products and services and their applications follows:
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| Products and Services | | Overview/Use | | Key Brands |
Refining TechnologiesPolyolefin and Chemical Catalysts (also referred to as Specialty Catalysts) | | | | |
| Polyethylene Catalysts/Polypropylene Catalysts/Catalyst Supports | | Used in the production of polyethylene (PE) and polypropylene (PP) thermoplastic resins, which can be customized to enhance the performance of a wide range of industrial and consumer end-use applications including high pressure pipe, geomembranes, food packaging, automotive parts, medical devices, and textiles; non-phthalate catalysts allow customers to produce phthalate-free PP products and cleaner, clearer PP products; includes catalysts that allow for the lightweighting of automobiles by replacing steel parts with PP while meeting demanding performance standards of automakers | | PE Brands - MAGNAPORE® • SYLOPOL® • LYNX®
PP Brands - CONSISTA® • SHAC® • LYNX® • POLYTRAK® • HYAMPP® |
| Gas-Phase Polypropylene Process Technology Licensing | | Provides licensees with a cost-effective, flexible, and reliable capability to manufacture polypropylene products having a wide spectrum of performance attributes, enabling customers to manufacture products for a broad array of end-use applications | | UNIPOL® Polypropylene Process Technology • UNIPOL UNIPPAC® Process Control Software |
| Chemical Catalysts | | Include hydrogenation and dehydrogenation catalyst products used in a variety of petrochemical chain conversions and fine chemical production | | RANEY® • DAVICAT® |
| Refining Technologies | | | | |
| FCC Catalysts | | Crack the hydrocarbon chains in distilled crude oil to produce transportation fuels, such as gasoline and diesel fuels, and feeds for production of petrochemicals | | MIDAS® • IMPACT® • NEKTOR™ • GENESIS® • ACHIEVE®• FUSION® •VIP‑R™•RIVE TECHNOLOGY® • MOLECULAR HIGHWAY® |
| FCC Additives | | Used to reduce sulfur in gasoline, maximize propylene production from refinery FCC units, and reduce emissions of sulfur oxides, nitrogen oxides, and carbon monoxide from refinery FCC units | | D-PRISM® • GSR® • SURCA® • OLEFINSMAX®ZAVANTI™ • OLEFINSULTRA® • DESOX® • DENOX® • XNOXCP® • CPOXYBURN®P |
Methanol-to-Olefins (MTO) Catalysts | | Used to convert methanol, often derived from coal, into petrochemical feeds such as ethylene and propylene | | GCQ™ |
| Hydroprocessing Catalysts (HPC) | | Marketed through the ART joint venture with Chevron (discussed below), these catalysts are used in process reactors to upgrade heavy oils into lighter, more useful products, enabling less expensive feedstock usage in the petroleum refining process, and to produce products that meet more stringent environmental regulationsregulations; our catalysts and solutions allow our customers to improve their profitability in the production of cleaner petroleum-based fuels to meet regulatory and fuel quality standards | | ICR® • GRHOP® • SmART Catalyst System® • APART® |
Polyolefin and Chemical Catalysts (also referred to as Specialty Catalysts) | | | | |
Polyethylene Catalysts/Polypropylene Catalysts/ • LS™Catalyst Supports | | Used in the production of polyethylene (PE) and polypropylene (PP) thermoplastic resins, which can be customized to enhance the performance of a wide range of industrial and consumer end-use applications including high pressure pipe, geomembranes, food packaging, automotive parts, medical devices, and textiles | | PE - MAGNAPORE®Platform • SYLOPOLHSLS®Catalyst Platform • LYNX®
PP - CONSISTA®HCRC™Catalyst Platform • SHAC®DCS™Catalyst Platform • LYNX®ECAD™Catalyst Platform • POLYTRAKGR® • HYAMPPENRICH®
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Gas-Phase Polypropylene Process Technology Licensing | | Provides licensees with a proven, cost-effective, flexible, and reliable capability to manufacture polypropylene products having a wide spectrum of performance attributes enabling customers to manufacture products for a broad array of end-use applications | | UNIPOL® PP Process Technology • UNIPOL UNIPPAC® Process Control Software
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Chemical Catalysts | | Used in a variety of petrochemical chain conversions and fine chemical production | | RANEY® • DAVICAT®
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Polyolefin and Chemical Catalysts (also referred to as Specialty Catalysts)
Grace Specialty Catalysts provides process technology for polypropylene and a broad range of high-performance catalysts and supports for specialized processes in the chemical value chain, from plastics to petrochemicals.
We are the only fully integrated supplier of polyolefin catalyst solutions across all process and catalyst technologies. Our strong strategic position is particularly evident in our worldwide polyolefin catalysts and process technology licensing business. After investing $1.2 billion in accretive, synergistic acquisitions over the past seven years, including five new plants on three continents, we offer customers the broadest and most technically advanced portfolio of polyolefin catalysts technologies that enable the production of high performance and differentiated resins. Polyolefin catalysts are used to produce plastics including HDPE (high density polyethylene), LLDPE (linear low density polyethylene) and PP (polypropylene). Applications include packaging, consumer/housewares, food packaging, construction, and automotive segments providing recyclable, lightweight, durable and versatile materials.
The business comprises four major segments, including UNIPOL® PP Process Licensing, PP Catalysts, PE Catalysts, and Chemical Catalysts.
The UNIPOL® PP Process Licensing provides plant design and operational technology to polymer producers. We are the largest independent technology licensor, offering the advantages of a gas-phase process with low capital cost, mechanical simplicity, energy efficiency, and the demonstrated capability to produce differentiated resins. The UNIPOL® Polypropylene Process Technology provides polypropylene producers with the capability to innovate and succeed faster, as their business evolves to meet more sophisticated market needs. UNIPOL® PP licensees also have access to our tailored services, experienced technical team, and our Advanced Process Control software to improve their overall plant lifetime performance.
GraceOur PP Catalysts Technologies—serve multiple process technologies, including UNIPOL® PP, with optimized sizes, shapes, and composition tailored for each process requirement. We also offer unique external donor technologies that are combined with our catalysts, providing customers with resin product differentiation and production operability advantages.
Our PE Catalysts portfolio, with supporting R&D and technical service, offers existing producers the best choice of resin properties, operability and economics utilizing the three main types of Metallocene, Chromium, and Ziegler catalysts. Products include catalyst components and finished catalysts across all three systems and are offered as merchant products or custom developments.
Chemical Catalysts has two product lines: RANEY® and DAVICAT®. RANEY® catalyst products are used in a broad range of niche hydrogenation applications such as butanediol, sorbitol, and amines. DAVICAT® catalysts and catalyst carriers extend Grace-wide material science expertise in silicas, aluminas, and zeolites into a number of petrochemicals and fine chemicals applications.
Refining CatalystsTechnologies
FCC Catalysts and Additives
We are a global leader in developing and manufacturing fluid catalytic cracking, or FCC, catalysts and additives that are designed to enable petroleum refiners to increase profits by improving product yields, value and quality. Our FCC products also enable refiners to reduce emissions from their FCC units and reduce sulfur content in the transportation fuels they produce. Oil refining is a highly specialized discipline, and FCC catalysts must be tailored to meet local variations in crude oil feedstocks and a refinery’s desired product mix. We work regularly with our customers to identify the most appropriate catalyst and additive formulations for their changing needs.
FCC units are designed to produce a broad spectrum of refined product yields, including gasoline, middle distillates, and liquefied petroleum gas, or LPG. Traditionally, many FCC operators have focused on maximizing yields of transportation fuels. However, as demand for petrochemicals increases, a growing segment of refiners have transitioned their FCC operations with the primary objective of maximizing yields of petrochemical feedstocks, such as propylene. We maintain multiple industry leading technologies, including ZAVANTI™ and VIP-R™, that allow our customers to capture unique value from petrochemical feedstock driven operations.
Many countries and regions, including the U.S., European Union, Japan, Russia, India and China have imposed regulatory limitations on the sulfur content of gasoline and diesel fuel. We have developed a portfolio of products designed to assist refiners in meeting their gasoline sulfur-reduction targets, including our D-PRISM® and GSR® additives and our SURCA® catalyst family.
Also, many U.S. petroleum refiners have entered into consent decrees with the U.S. Environmental Protection Agency (the “EPA”) under which the refiners have agreed to reduce emissions of nitrogen oxides and sulfur oxides. The European Union has also imposed requirements on refineries with respect to nitrogen oxides and sulfur oxides emissions. Our additives are designed to assist refineries in meeting their obligations to reduce these pollutants. Our Super DESOX® additive reduces sulfur oxides emissions from commercial FCC units. Our DENOX® additives are designed to achieve reductions in nitrogen oxides emissions comparable to those obtained from capital intensive alternatives available to a refinery, while our non-platinum-based combustion promoters XNOX® andpromoter CP® P areis designed to enable refiners to control carbon monoxide emissions without increasing nitrogen oxides. Our newly developed OXYBURN® additives are used in the reduction of oxygenates which are often a problem when co-processing renewable feedstocks in FCC units.
Hydroprocessing Catalysts
We market most of our hydroprocessing catalysts through our Advanced Refining Technologies LLC (“ART”) joint venture with Chevron Products Company (“Chevron”). We hold a 50% economic interest in ART, which is not consolidated in our financial statements so ART’s sales are excluded from our sales. We established ART to combine our technology with that of Chevron and to develop, market, and sell hydroprocessing catalysts to customers in the petroleum refining industry worldwide.
We are a leading supplier of hydroprocessing catalysts designed for processing high resid content feedstocks. We offer products for fixed-bed resid hydrotreating, on-stream catalyst replacement, and ebullating-bed resid hydrocracking processes.
We also offer a full line of catalysts, customized for individual refiners, used in distillate hydrotreating to produce ultra-low sulfur content gasoline and diesel fuel, including our SmART CATALYST SYSTEM® and APART® catalyst systems.Catalyst Systems. As discussed above, regulatory limitations on the sulfur content of gasoline and diesel fuel are becoming more common. These products are designed to help refiners to reduce the sulfur content of their products.
Our ENRICH® catalysts, which are marketed by Grace rather than ART, enable the coprocessing of bio-based feedstocks at refineries.
We have rights to sell hydrocracking and lubes hydroprocessing catalysts to licensees of Chevron Lummus Global (“CLG”) and other petroleum refiners for unit refills. These rights allow us to streamline hydroprocessing catalyst supply and improve technical service for refining customers by establishing ART as their single point of contact for all their hydroprocessing catalyst needs.
Polyolefin Catalysts, Catalyst Supports and Polypropylene Process Technology
We are a leading provider of catalyst systems and catalyst supports to the polyolefins industry for a variety of polyethylene and polypropylene process technologies.
We use a combination of proprietary catalyst and support technology and technology licensed from third parties to provide unique catalyst-based solutions to our customers and to provide a broad technology portfolio for enhancing collaboration opportunities with technology leaders.
Also, we are a leading licensor of gas-phase polypropylene process technology to polypropylene manufacturers. Our UNIPOL® polypropylene technology is designed to have fewer moving parts and require less equipment than other competing technologies, which reduces operating costs. This technology provides our
licensees with a flexible and reliable capability to manufacture products for a broad array of end-use applications. The polypropylene process licensing industry is technology-intensive, and licensors must adapt the technology and the related licenses to meet individual customer needs.
Manufacturing, Marketing and Raw Materials
Our Catalysts Technologies products are manufactured by a network of globally coordinated plants. Our integrated planningsupply chain organization is responsible for the effective utilization of our manufacturing capabilities. For a discussion of our principal manufacturing plants for Catalysts Technologies, see Item 2, “Properties,” below.
We use a global organization of direct sales professionals to market our polyolefin catalysts, polypropylene process technology, and chemical catalysts, that seeks to maintain close working relationships with our customers. Our global direct sales force is complemented by a network of distributors and agents in Asia Pacific and, to a lesser extent, the Americas and Middle East. These relationships enable us to cooperate with major polymer and chemical producers to develop catalyst technologies that complement their process or application developments. We have geographically distributed our sales and technical service professionals to make them responsive to the needs of our geographically diverse customers. We typically operate under long-term contracts with our customers.
We use a global organization of technical professionals, including a direct sales force, with extensive experience in refining processes, catalyst development, and catalyst applications to market our refining catalysts and additives. These professionals work to tailor our technology to the needs of each specific customer. We generally negotiate prices for our refining catalysts because our formulations are specific to the needs of each customer and each customer receives individual attention and technical service. We sell a significant portion of our hydroprocessing catalysts through multiple-year supply agreements with our geographically diverse customer base.
We use a global direct sales force for our polyolefin catalysts, supports and technologies and chemical catalysts that seeks to maintain close working relationships with our customers. These relationships enable us to cooperate with major polymer and chemical producers to develop catalyst technologies that complement their process or application developments. We have geographically distributed our sales and technical service professionals to make them responsive to the needs of our geographically diverse customers. We typically operate under long-term contracts with our customers.
The principal raw materials for Catalysts Technologies products include molybdenum oxide, zeolite,specialty inorganics, caustic soda, alumina and derivatives, sodium silicate, nickel, rare earths, solvents, and tungsten salt.titanium tetrachloride. Multiple suppliers are generally available for each of these materials; however, some of our raw materials may be provided by single sources of supply. We seek to mitigate the risk of using single source suppliers by identifying and qualifying alternative suppliers or, for unique materials, by using alternative formulations from other suppliers or by passing price increases on to customers.suppliers. In some instances, we produce our own raw materials and intermediates.
Prices for many of our raw materials, including metals, and energy can be volatile. In response to increases in raw materialmaterials and energy costs, we generally take actions to mitigate the effects of higher costs including increasing prices, developing alternative formulations for our products, increasing productivity, and hedging purchases of certain raw materials.materials, and increasing prices.
As in many chemical businesses, we consume significant quantities of natural gas in the production of Catalysts Technologies products. World events and other economic factors cause volatility in the price of natural gas. Increases or decreases in the cost of natural gas and raw materials can have a significant impact on our operating margins. We have implemented a risk management program under which we hedge natural gas in a way that is designed to provide protection againstmitigate the effects of price volatility.
Seasonality
Seasonality does not have a significant overall effect on our Catalysts Technologies reportable segment. However, under traditional patterns, sales of FCC catalysts have tended to be lower in the first calendar quarter due to maintenance outages taken prior to the shift in production by refineries from home heating oil for the winter season to gasoline production for the summer season. FCC catalysts and ebullating-bed hydroprocessing catalysts are consumed at a relatively steady rate and are replaced regularly. Fixed-bed hydroprocessing catalysts are consumed over a period of years and are replaced in bulk in an irregular pattern. Since our customers periodically shut down their refining processes to replace fixed-bed hydroprocessing catalysts in bulk, our hydroprocessing catalyst sales to any customer can vary substantially over the course of a year and between years based on that customer’s catalyst replacement schedule.
Backlog of Orders; Working Capital
While at any given time there may be some backlog of orders, this backlog is not material in respect to our total annual sales for Catalysts Technologies, nor are the changes, from time to time, significant. There have not been any significant out-of-the-ordinary practices related toOur working capital items for Catalysts Technologies.
inventory, accounts receivable, accounts payable, and deferred revenue. We closely manage these working capital accounts. We value inventory balances under the first-in, first-out (“FIFO”) method. Inventories have turned regularly, but balances typically increase during the first half of the year before declining as a result of increased sales in the second half. Accounts receivable and accounts payable are also affected by this business cycle, typically requiring us to have greater working capital needs during the second and third quarters.
Competition
Competition in the polyolefin catalyst, catalyst supports, and polypropylene process licensing industry is technology-intensive. Our competition in this industry includes Univation, LyondellBasell, PQ, and Lummus Novolen Technology. Most competitors sell their products and/or license their technology worldwide.
Competition in FCC catalysts and additives and hydroprocessing catalysts is based on value delivered to refiners, which is based on differentiated technology, catalyst performance, technical and customer service, and price. Our principal global FCC catalyst competitors are Albemarle, BASF, and SINOPEC. Our principal global competitors in FCC additives are Johnson Matthey, Albemarle, and BASF. We also have multiple regionalOur principal global competitors for FCCin hydroprocessing catalysts and additives.
Competition in the hydroprocessing catalyst industry is based on value delivered to refiners, which is based on differentiated technology, catalyst performance, technical and customer service, and price. Criterion,are Shell Catalysts (formerly Criterion), Albemarle, Haldor Topsoe, UOP, and Axens are our principal global competitors in hydroprocessing catalysts.Axens. We also have multiple regional competitors.
Competition in the polyolefin catalyst, catalyst supports, and polypropylene process licensing industry is technology-intensive. Our competition in this industry includes Univation, LyondellBasell, PQ, and Lummus Novolen Technology. Most competitors sell their products and/or license their technology worldwide.
GRACE MATERIALS TECHNOLOGIES
Materials Technologies uses our significant specialty silica, zeolite and fine chemical knowledge and applications expertise to design and manufacture products to create significant value for our customers. Our customers include pharmaceutical companies, consumer products manufacturers, coatings manufacturers, consumer product manufacturers, plasticsemission control system manufacturers, petrochemical and natural gas processors, and pharmaceutical companies.plastics manufacturers. We believe that our technological expertise and broad technology platform provide a competitive advantage, allowing us to tailor our products to specific customer requirements and help them create value in their operations and end markets.
The following table sets forth Materials Technologies sales of similar products as a percentage of Grace total revenue.
|
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| (In millions) | Sales | | % of Grace Revenue | | Sales | | % of Grace Revenue | | Sales | | % of Grace Revenue |
| Coatings | $ | 155.4 |
| | 8.1 | % | | $ | 142.2 |
| | 8.3 | % | | $ | 136.5 |
| | 8.5 | % |
| Consumer/Pharma | 132.6 |
| | 6.9 | % | | 123.3 |
| | 7.2 | % | | 121.9 |
| | 7.6 | % |
| Chemical process | 157.3 |
| | 8.1 | % | | 153.5 |
| | 8.9 | % | | 142.6 |
| | 8.9 | % |
| Other | 23.3 |
| | 1.2 | % | | 21.0 |
| | 1.2 | % | | 33.9 |
| | 2.2 | % |
| Total | $ | 468.6 |
| | 24.3 | % | | $ | 440.0 |
| | 25.6 | % | | $ | 434.9 |
| | 27.2 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
| (In millions) | Sales | | % of Grace Revenue | | Sales | | % of Grace Revenue | | Sales | | % of Grace Revenue |
| Pharma/Consumer | $ | 162.5 | | | 9.4 | % | | $ | 144.6 | | | 7.4 | % | | $ | 132.6 | | | 6.9 | % |
| Coatings | 137.5 | | | 8.0 | % | | 139.8 | | | 7.1 | % | | 155.4 | | | 8.1 | % |
| Chemical process | 140.6 | | | 8.1 | % | | 156.1 | | | 8.0 | % | | 157.3 | | | 8.1 | % |
| Other | 17.8 | | | 1.0 | % | | 20.9 | | | 1.1 | % | | 23.3 | | | 1.2 | % |
| Total | $ | 458.4 | | | 26.5 | % | | $ | 461.4 | | | 23.6 | % | | $ | 468.6 | | | 24.3 | % |
A description of our Materials Technologies products and services and their applications follows:
|
| | | | | | | | | | | | | |
| Products and Services | | Overview/Use | | Key Brands |
Consumer/PharmaPharma/Consumer | | SpecializedSpecialty materials used as additives, intermediates, and intermediatespurification aids for pharmaceuticals, nutraceuticals, toothpaste, beer, toothpaste, food, and cosmetic segments, including: | | |
| | Pharmaceutical and nutraceutical excipients, carrier for oily APIs, and drug delivery | | SYLOID® • LUDOX® • SYLOID® XDP • SILSOL® |
| | Fine chemicals, including regulatory starting materials and intermediates, especially peptide building blocks, specialty amino acids, chiral boronic acids, and esters | | |
| | Toothpaste abrasives and thickening agents | | SYLODENT® • SYLOBLANC® • SIDENT® |
| | Free-flow agents,agents; anticaking agents,agents; heating agents, tabletting aids,agents;
tableting aids; cosmetic additives and carriers for flavor, carriers
fragrance, or other active ingredients; and desiccants for food and pharma packaging | | PERKASIL® • SYLOID® • SYLOSIV® • ZEOFLO® • ZEOFOAM™ |
| | Edible oil and biofuel refining agents, stabilizers and clarification aids for beer, juices and other beverages | | TRISYL® • DARACLAR® |
| | Pharmaceutical excipients and drug deliveryChromatography purification products | | SYLOIDDAVISIL® FP • SYLOIDVYDAC® XDP • SILSOL®VYKING™
|
| Coatings | | Fine chemical intermediates and regulatory starting materials | | |
| | Chromatography purification media | | DAVISIL® • VYDAC®
|
Chemical Process | | Functional materials for use in plastics, rubber, tire, metal casting, and adsorbent products for petrochemical and natural gas applications, including: | | |
| | Reinforcing agents for rubber and tires | | PERKASIL®
|
| | Inorganic binders and surface smoothening aids for precision investment casting and refractory applications | | LUDOX®
|
| | Static adsorbents for dual pane windows and refrigerant applications, moisture scavengers, and package desiccants | | PHONOSORB® • SYLOSIV® • CRYOSIV® • PROTEKSORB®
|
| | Chemical metal polishing aids and formulations for chemical mechanical planarization/electronics applications | | POLIEDGE®
|
| | Antiblocking additives for plastic films to prevent adhesion of layers in manufacturing | | SYLOBLOC®
|
| | Process adsorbents used in petrochemical and natural gas processes for such applications as ethylene-cracked-gas-drying, natural gas drying and sulfur removal | | SYLOBEAD®
|
Coatings | | Functional additives for wood, coil, general industrial, and architectural coatings that provide surface effects and corrosion protection for metal substrates, including: | | |
| | Matting agents, anticorrosion pigments, TiO2 extenders and moisture scavengers for paints and lacquers | | SYLOID® • SHIELDEX® • SYLOSIV® • SYLOWHITE™ |
| | Additives for matte, semi-glossy and glossy ink receptive coatings on high performance ink jet papers, photo paper, and commercial wide-format print media | | SYLOJET® • DURAFILL® • LUDOX® |
| | Paper retention aids, functional fillers, paper frictionizers | | DURAFILL® • LUDOX® |
| | Defoamers actives | | ZEOFLO® • ZEOFOAM™ |
| Chemical Process | | Functional materials for use in plastics, rubber, tire, and metal casting, and adsorbent products for petrochemical, natural gas, and more specialized applications, including: | | |
| | Reinforcing agents for rubber and tires | | PERKASIL® |
| | Inorganic binders for precision investment casting and refractory applications and surface modification aids for metal and ceramic substrates | | LUDOX® |
| | Static adsorbents for dual pane windows and refrigerant applications, moisture scavengers, and package desiccants | | PHONOSORB® • SYLOSIV® • CRYOSIV® • PROTEKSORB® |
| | Chemical metal polishing aids and formulations for chemical mechanical planarization/electronics applications | | POLIEDGE® • LUDOX® |
| | Antiblocking additives for plastic films to prevent adhesion of layers in manufacturing | | SYLOBLOC® |
| | Process adsorbents used in petrochemical and natural gas processes for such applications as ethylene-cracked-gas-drying, natural gas drying and sulfur removal | | SYLOBEAD® |
Silica-based Products
We globally manufacture functional additives and process aids, such as silica gel, colloidal silica, zeolitic adsorbents, precipitated silica and silica-aluminas, for a wide variety of applications and end-use industries. We also custom manufacture fine chemical intermediates and regulatory starting materials used primarily in the pharmaceutical and nutritional supplements industries.
Our materials are integrated into our customers’ manufacturing processes and when combined with our technical support, can increase the efficiency and performance of their operations and their products. By working closely with our customers, we seek to help them respond quickly to changing consumer demands.
In addition, we focus on developing and manufacturing products that differentiate our customers’ products and help them meet evolving regulatory and environmental requirements. For example, our SYLOID®coatings additives are designed to be used in more sustainable water-based and VOC-compliant coatings.coatings, and our SHIELDEX® silicas allow our customers to reformulate their anti-corrosive coating products to eliminate heavy metals. Our pharmaceutical excipients help improve bioavailability, extend shelf-life, and/or make drug manufacturing more efficient. Our dental silicas are
engineered to provide high cleaning with gentle abrasivity. Our DARACLAR® and TRISYL® silicas allow our customers to reduce their environmental footprint: our beer stabilization silicas offer greater productivity to breweries while allowing them to use water more efficiently, and our edible oil and biofuel refining aids enable the processing of waste materials in refineries, reducing feedstock losses and solid waste and water usage.sent to landfills. Our custom manufacturing of advanced intermediates supports pharmaceutical drug development processes, enabling commercialization of life-saving therapies. Our LUDOX® colloidal silicas enable our customers to produce automotive catalytic converters for automakers to meet emissions control regulations.
In 2020 we deepened our collaboration with customers to align some of our Materials Technologies product capabilities to support customers in addressing the global COVID-19 pandemic. Our silica-based technology provides separation capabilities found in the PCR (polymerase chain reaction) test kits. Similarly, our silica-based materials are used in purifying lipids that are required to hold together mRNA used in two of the leading approved COVID-19 vaccines.
Manufacturing, Marketing and Raw Materials
Our Materials Technologiesproducts are manufactured by a network of globally integrated plants that are positioned to service our customers. Our integrated planningsupply chain organization is responsible for the effective utilization of our manufacturing capabilities. Our global footprint allows us to partner effectively with both multinational and regional companies requiring multiple manufacturing facilities complemented by regional technical expertise in local languages. For a discussion of our principal manufacturing plants for Materials Technologies, see Item 2, “Properties,” below.
We use country-based direct sales forces and further support our customers with application-specific technical customer service teams to market our Materials Technologies products. Our sales force seeks to develop long-term relationships with our customers and focuses on consultative sales, technical support, and key account growth programs. To ensure full geographic coverage, our direct sales organization is further supplemented by a network of distributors.
The principal raw materials for Materials Technologiesproducts include sodium silicate, zeolite, sand, soda ash, sulfuric acid, and caustic soda. Multiple suppliers are generally available for each of these materials; however, some of our raw materials may be provided by single sources of supply. We seek to mitigate the risk of using single source suppliers by identifying and qualifying alternative suppliers or, for unique materials, by using alternative formulations from other suppliers. In some instances, we produce our own raw materials and intermediates.
Prices for some of our raw materials and energy can be volatile. In response to increases in input costs, we generally take actions intended to mitigate the effects of higher costs including increasing prices, developing alternative formulations for our products, increasing productivity, and increasing productivity.prices.
As in many chemical businesses, we consume significant quantities of natural gas in the production of Materials Technologies products. World events and other economic factors can cause volatility in the price of natural gas. Increases or decreases in the cost of natural gas and raw materials can have a significant impact on
our operating margins. We have implemented a risk management program under which we hedge natural gas in a way that is intendeddesigned to provide protection againstmitigate the effects of price volatility.
Seasonality
Seasonality does not have a significant overall effect on our Materials Technologiesreportable segment; however, sales of our adsorbents for dual frame windows are affected by seasonal and weather-related factors and the level of construction activity, and sales of our stabilizers and clarification aids for beer, juices and other beverages are affected by the level of consumption of beverages. These impacts are mitigated by the global scope of our business.
Backlog of Orders; Working Capital
While at any given time there may be some backlog of orders, this backlog is not material in respect to our total annual sales for Materials Technologies, nor are the changes, from time to time, significant. There have not been any significant out-of-the-ordinary practices relating toOur working capital items for Materials Technologies.consists of inventory, accounts receivable and accounts payable. We closely manage these working capital accounts. We value inventory balances under the FIFO method. Inventories have turned regularly.
Competition
There are many manufacturers of engineered materials that market their products on a global basis including Evonik, PQ, and UOP.Nalco. Competition is generally based on product performance, technical service, quality and reliability, price, and other differentiated product features to address the needs of customers, end-users, and brand owners. Our products compete on the basis of distinct technology, product quality, and customer support. Competition for these products is highly fragmented, with a large number of companies that sell their products on a global or regional basis.
INTELLECTUAL PROPERTY; RESEARCH ACTIVITIES
Competition in the specialty chemicals and specialty materials industry is often based on technological superiority and innovation. Our ability to maintain our margins and effectively compete with other suppliers depends on our ability to introduce new products based on innovative technology, as well as our ability to obtain patent or other intellectual property protection. Our research and development programs emphasize development of new products and processes, improvement of existing products and processes, and application of existing products and processes to new industries and uses. We conduct most of our research activity in North America and Europe.
We file patents in order to protect our investments in innovation arising from research and product development in all our businesses, and as a result, numerous patents and patent applications protect our products, formulations, manufacturing processes, equipment, and improvements. For example, we selectively file and obtain patents in our Refining Technologies business, as well as in our chemical catalysts product line in our Specialty Catalysts business, for strategic new products or for significant business opportunities. We routinely file and obtain patents in a number of countries around the world that are significant to our polyolefin catalysts product line in our Specialty Catalysts business.
In our Materials Technologies business, we focus our research on the development and use of materials-based specialty materials products and expertiseformulations for diverse applications. We file patents and use trade secret protectiontrademarks in various countries to protect our unique products, processes and expertise in strategic segmentsareas of theour business, and to cover key product innovations in adjacent market segments. We file and obtain patents and trademarks in various countries to strengthen and protect our product offerings globally.
We file patents in order to protect our investments in innovation, research, and product development. Numerous patents and patent applications protect our products, formulations, manufacturing processes, equipment, and improvements. We also benefit from the use of trade secret information, including know-how and other proprietary information relating to many of our products and processing technologies. Theretechnologies in all of our businesses, including, but not limited to, our business in licensing UNIPOL® Polypropylene Process Technology.
While we seek legal protection for our innovations, there can be no assurance, however, that our patents, patent applications and precautions to protect trade secrets and know-how will provide sufficient protection for our intellectual property. In addition, other companies may independently develop technology that could replicate, and thus diminish the advantage provided by, our trade secrets. Other companies may also develop alternative technology or design-arounds that could circumvent our patents or may acquire patent rights applicable to our business which might interpose a limitation on expansion of our business in the future.
ENVIRONMENT, HEALTH, SAFETY, AND SAFETYSECURITY (or “EHSS”) MATTERS AND GOVERNMENTAL REGULATIONS
We are subject, along with other manufacturers of specialty chemicals, to stringent regulations under numerous regional, national, provincial, state and local environment, health and safetyEHSS laws and regulations relating to the manufacture, storage, handling, transportation, disposal and stewardship of chemicals and other materials. In addition to those laws and regulations, as we operate and/or sell to customers in over 60 countries, we must comply with important government regulations around the globe with respect to wide-ranging matters, including business and operating
licenses, reporting requirements, registrations of intellectual property rights, human capital management, mine safety, and customs and taxes, among others. Cumulatively, the expenses of compliance with government regulations have a material effect on our earnings; however, as other manufacturers of specialty chemicals face similar regulations (provided they operate under similar regulatory frameworks), we do not see our compliance as creating a material competitive disadvantage to date, and our conscientious adherence to safety and other regulations has positive effects on our overall position as a global company. Nevertheless, changes in, or additions to, governmental regulations may lead to additional expenditures and negative effects on our operations.
Environmental laws require that certain responsible parties, as defined in the relevant statute, fund remediation actions regardless of legality of original disposal or ownership of a disposal site. We are involved in various response actions to address the presence of chemical substances as required by applicable laws.
We have expended substantial funds to comply with environmental laws and regulations and expect to continue to do so in the future. The following table sets forth our expenditures in the past three years, and our estimated expenditures in 20192021 and 2020,2022, for (i) the operation and maintenance of manufacturing facilities and the disposal of wastes; (ii) capital expenditures for environmental control facilities; and (iii) site remediation:
|
| | | | | | | | | | | |
(In millions) | Operation of Facilities and Waste Disposal | | Capital Expenditures | | Site Remediation |
| 2016 | $ | 62 |
| | $ | 10 |
| | $ | 18 |
|
| 2017 | 51 |
| | 7 |
| | 20 |
|
| 2018 | 56 |
| | 8 |
| | 18 |
|
| 2019(1)(2) | 59 |
| | 23 |
| | 20 |
|
| 2020(1)(2) | 61 |
| | 13 |
| | 7 |
|
| |
(1) | Amounts are based on environmental response matters for which sufficient information is available to estimate costs. We do not have sufficient information to estimate all of Grace’s possible future environmental response costs. As we receive new information, our estimate of such costs may change materially. |
| |
(2) | Amounts do not include estimated expenditures related to the replacement of the dam spillway on the Libby, Montana, mine site. |
| | | | | | | | | | | | | | | | | |
| (In millions) | Operation of
Facilities and
Waste Disposal | | Capital
Expenditures | | Site
Remediation |
| 2018 | $ | 56 | | | $ | 8 | | | $ | 18 | |
| 2019 | 54 | | | 7 | | | 14 | |
| 2020 | 56 | | | 13 | | | 8 | |
| 2021(1) | 56 | | | 13 | | | 18 | |
| 2022(1) | 58 | | | 23 | | | 10 | |
___________________________________________________________________________________________________________________
The table above does not include estimated expenditures related to the replacement of the dam spillway on the Libby, Montana, mine site. We are legally obligated to operate the dam and construct a new spillway in accordance with the conditions of the latest permit issued by the Montana Department of Natural Resources and Conservation. We have estimated the total cost of the project to be $95.0 million, with the timing of disbursements subject to a number of variables. Construction will begin in 2021 and is expected to take three to four years. Additional information about this matter and our environmental remediation activities is provided in this Report in Item 8 “Financial Statements and Supplementary Data” in the Financial Supplement under Note 10, “Commitments and Contingent Liabilities,” to the Consolidated Financial Statements, which information is incorporated herein by reference.
Environment, Health and SafetyEHSS Programs
We continuously seek to improve our environment,environmental, health, safety, and safetysecurity performance. To the extent applicable, we extend the basic elements of the American Chemistry Council’s RESPONSIBLE CARE® program to all our locations worldwide. Our Environment, Health, Safety, and Security Policy and RESPONSIBLE CARE MANAGEMENT SYSTEM® guide the company, our operating segments, and our facilities worldwide embracing specific performance objectives in systematically managing the key areas of management systems, product stewardship, employeeenvironmental, health, and safety, community awareness and emergency response, distribution, process safety, product safety, security, and pollution prevention.sustainability aspects of our operations.
Sustainability
Overview
We succeed when we deliver value to our customers, and that success is increasingly based on how we help them meet their sustainability goals. Many of our products and technical services improve the efficiency of our customers’ products and processes, reduce energy or water use, cut harmful emissions, conserve material inputs, and/or reduce waste. ManySeveral of our technologies enable our customers to make products that meet the toughest environmental standards or to reformulate products to address rising consumer and regulatory expectations for sustainability, human health, and safety. As a leading manufacturer of process catalysts, including hydroprocessing catalysts that reduce sulfur emissions, we have become an active participant in the circular economy, with an increasing business in arranging forassisting our customers with the recycling or
reprocessing of spent catalysts. As part of our commitment to RESPONSIBLE CARE®, we systematically track safety and environmental performance through a comprehensive, global EHSS management system covering the environmental, health, safety (including process safety and product safety) and security aspects of our operations, and track progress through pertinent metrics.
In 2019, we began reporting to the Carbon Disclosure Project (“CDP”). This year, we made our CDP Climate and CDP Water disclosures public for the first time. We also published sustainability disclosures aligned with the Sustainability Accounting Standards Board (“SASB”) standard for the chemical industry. In addition, we strengthened the governance of our sustainability and environmental, social, and governance (“ESG”) related activities by naming a Chief Sustainability Officer (“CSO”) reporting directly to the CEO, and established a Sustainability Leadership Council composed of the CSO and leadership from Grace businesses and integrated supply chain. We also established targets to reduce scope 1 and scope 2 greenhouse gas (“GHG”) emissions by 22% from a baseline of 2019 by 2029, as well as 10-year reduction targets for water consumption and waste generation.
Product Portfolio
As part of a strategic review of our product portfolio, in 2019 we identified the products that directly contribute to our customers’ sustainability objectives, including:
•Products designed for use-phase efficiency — defined by the SASB as products that “through their use—can be shown to improve energy efficiency, eliminate or lower GHG emissions, reduce raw materials consumption, increase product longevity, and/or reduce water consumption,” either through:
◦Improved products — by increasing the efficiency of a product during its use phase, or
◦Improved processes — by increasing the efficiency of the manufacturing processes used to make products;
•Meeting the strictest environmental standards — products that directly enable customers to meet environmental regulatory/legal requirements applicable to their products or manufacturing processes; and
•Cleaner, safer products to meet consumer demands — products that enable customers to reformulate their products to avoid or reduce to de minimis levels substances of concern to their customers.
This year, we reviewed the requested disclosures from SASB and CDP as well as other ESG ratings organizations and expanded our product categories to include products that make a significant contribution to the move toward a more circular economy through:
•Enabling material recycling and bio-feeds – products that are tailored to enable customers to replace petroleum inputs with bio-based and recycled materials, and FCC catalyst sales (not counted above) where we take back spent FCC catalyst for recycling, or otherwise enable the reuse or recycling of spent catalysts.
Together, the products in our portfolio, including those of our ART joint venture, that address these sustainability endpoints accounted for approximately $1.1 billion, or 49% of our total revenue in 2020. Looking to the future, we estimate that 62% of our R&D projects are linked to at least one of these customer sustainability objectives. We expect to see further opportunities as we continue to develop technologies for advanced plastics recycling and renewable fuels.
ESG Rankings
For 2020, we again earned a Gold Rating from EcoVadis, this year placing us in the 95th percentile of all companies ranked by EcoVadis on their sustainability performance. EcoVadis is a leading third-party entity that evaluates suppliers on a complex scale of sustainability and ESG factors. CDP increased our 2020 Climate Disclosure score to a B-, above the average achieved by our chemical industry peers and above the North American average. Also in 2020, the ESG Risk Rating† from Sustainalytics placed us in the top quintile of both chemical and specialty companies. †Source Sustainalytics.
Further Information
Shareholders and other interested persons can visit our website for additional sustainability information at www.grace.com/sustainability/en-us. That further information is not incorporated herein by reference and is not a part of this Annual Report on Form 10-K.
Security
We have implemented the RESPONSIBLE CARE® Security Code through a company-wide security program focused on the security of our people, processes, and systems. We have reviewed existing security (including cybersecurity) vulnerability and taken actions to enhance security systems where deemed necessary. In addition, we are complying with the Department of Homeland Security’s Chemical Facility Anti-Terrorism Standards, including identifying facilities subject to the standards, conducting security vulnerability assessments and developing and executing site security plans, as necessary.
EMPLOYEE RELATIONS
As of December 31, 2018, we employed approximately 3,900 persons, of whom approximately 2,100 were employed in the United States and approximately 1,000 were employed in Germany. Of our total employees, approximately 2,400 were salaried and 1,500 were hourly.
Approximately 700 of our manufacturing employees at 5 manufacturing sites in the United States are represented by unions. We have operated without a labor work stoppage for more than 20 years. We have works councils representing the majority of our European sites serving approximately 1,100 employees.
OTHER INFORMATION, WEBSITE, AND AVAILABILITY OF REPORTS AND OTHER DOCUMENTS
W. R. Grace & Co. is a Delaware corporation. Our principal executive offices are located atat: W. R. Grace & Co., 7500 Grace Drive, Columbia, Maryland 21044. We maintain an Interneta website at www.grace.com. Our telephone number at our principal executive offices is +1 410.531.4000.
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available, free of charge, on our website as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the Securities and Exchange Commission, or SEC. These reports may be accessed through our website’s investor information page.page at http://investor.grace.com/. These reports as well as our proxy and information statements may also be accessed through the SEC’s website at www.sec.gov.
In addition, the charters for the Audit, Compensation, Nominating and Governance, and Corporate Responsibility Committees of our Board of Directors, our corporate governance principles and code of ethics are available, free of charge, on our website at www.grace.com/en-us/corporate-leadership/pages/governance.aspx. Printed copies of the charters, governance principles and code of ethics may be obtained free of charge by contacting Grace Shareholder Services at +1 410.531.4167.
The information on our website is not, and shall not be deemed to be, a part of this report or incorporated into any other filings we make with the SEC.
Our Principal Executive Officer (and Actingand Principal Financial Officer) hasOfficer have submitted certifications to the SEC pursuant to the Sarbanes Oxley Act of 2002 as exhibits to this Report.
Important information can be found throughout this Form 10-K and shareholders and potential investors are encouraged in particular to review Item 1A, “Risk Factors.”
EXECUTIVE OFFICERS
See “Executive Officers of the Registrant”“Information about our Executive Officers” following Part I, Item 4 of this Report for information about our Executive Officers.
Item 1A. RISK FACTORS
This Report, including the Financial Supplement, contains, and our other public communications may contain, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact, including statements regarding: expected financial positions; results of operations; cash flows; financing plans; business strategy; operating plans; capital and other expenditures; environmental expenditures; competitive positions; growth opportunities for existing products; benefits from new technology and cost reduction initiatives, plans and objectives; and markets for securities, are forward looking. Such statements generally include the words “believes,” “plans,” “intends,” “targets,” “will,” “expects,” “suggests,” “anticipates,” “outlook,” “continues” or similar expressions. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in Section 27A of the Securities Act and Section 21E of the Exchange Act. We are subject to risks and uncertainties that could cause our actual results to differ materially from our projections or that could cause other forward-looking statements to prove incorrect. Factors that could cause actual events to differ materially from those contained in the forward-looking statements include those factors set forth below and elsewhere in this Annual Report on Form 10-K. Our reported results should not be considered as an indication of our future performance. Readers are cautioned not to place undue reliance on our projections and forward-looking statements, which speak only as of the date those projections and statements are made. We undertake no obligation to publicly release any revisions to the projections and forward-looking statements contained in this document, or to update them to reflect events or circumstances occurring after the date of this document. In addition to general economic, business and market conditions, we are subject to other risks and uncertainties, including, without limitation, the following:risks set forth below. For reference, we have divided the various significant risks to our business, financial condition, and results of operations into the following three categories: (i) key business risks; (ii) risks related to legacy matters; and (iii) risks related to financial matters, as set forth below.
Key Business Risks Related
The global COVID-19 pandemic has had a significant negative effect on certain industries into which we supply products and services, and on our financial results. The pandemic is expected to continue to negatively impact our operations and businesses until successfully controlled.
The COVID-19 pandemic caused an economic slowdown that led to a global recession. If resulting recessionary trends again turn negative or exacerbate, or if there is a resurgence of COVID-19, including variants thereof, such events could have a negative effect on our business, financial condition, and future results. Resulting recessions may impact our share price, as well as our ability to access the Businesscapital markets and sources of liquidity on reasonable terms, or at all.
The COVID-19 pandemic has led to significantly lower transportation fuel demand and a reduction in refining activity, which has negatively affected demand for our refining catalysts. Manufacturing activity reduced as a result of the pandemic. Demand for certain manufactured products, including polyolefin resins and products made with our specialty silicas, declined and negatively affected demand for our polyolefin catalysts and specialty silicas.The pandemic continues to present us with significant uncertainty.
The COVID-19 pandemic has also heightened risks associated with our internal operations. An outbreak among our employee population could have a material adverse effect on our overall business and financial condition. Additionally, a large number of our employees are working remotely as a result of restrictions imposed to control the spread of the virus. This could result in increased cybersecurity risk, which could have a material adverse effect on our overall business and financial condition.
The global scope of our operations subjects us to the risks of doing business in foreign countries, and with other parties located in foreign jurisdictions, which could adversely affect our business, financial condition and results of operations.
We operate our business on a global scale with approximately 72%73% of our 20182020 consolidated sales outside the United States. We operate and/or sell to customers in over 7060 countries and in over 30 currencies. We currently have many production facilities, research and development facilities, and administrative and sales offices located outside North America, including facilities and offices located in EMEA (Europe Middle East Africa), Asia Pacific and Latin America. We expect non-U.S. sales to continue to represent a substantial majority of our revenue. Accordingly, our business is subject to risks related to the differing legal, political, social and regulatory requirements and economic conditions of many jurisdictions. Risks inherent in non-U.S. operations include the following:
•commercial agreements may be more difficult to enforce and receivables more difficult to collect;
•intellectual property rights may be more difficult to enforce;
•increased shipping costs, disruptions in shipping or reduced availability of freight transportation;
we may have •difficulty transferring our profits or capital from foreign operations to other countries where such funds could be more profitably deployed;
we may experience •unexpected adverse changes in export duties, quotas and tariffs, and difficulties in obtaining export licenses;
•differing regulatory responses to the COVID-19 pandemic in the jurisdictions in which we operate;
some foreign countries have adopted, and others may impose, •additional withholding and other taxes or adopt other restrictions on foreign trade or investment, including import, currency exchange and capital controls, charges and limitations;
•foreign governments may nationalize private enterprises;
our business and profitability in a particular country could be affected by •political or economic repercussions on a domestic, country-specific or global level from terrorist activities and the response to such activities;
we may be affected by •unexpected adverse changes in foreign laws or regulatory requirements;
we may have to pay •the impact of the United Kingdom’s exit from the European Union on January 31, 2020, and the provisional application of the EU-UK Trade and Cooperation Agreement on January 1, 2021;
•increased cash taxes in the event of a change in tax laws, regulations or interpretations in one or more foreign jurisdictions, andcould adversely affect our business, financial condition, or results of operations, or liquidity could be adversely affected;liquidity; and
we are exposed to •geopolitical risk, where unexpected changes in global, regional, or local political or social conditions could adversely affect our foreign operations.
Our success as a global business will depend, in part, upon our ability to succeed in differing legal, regulatory, economic, social and political conditions by developing, implementing and maintaining policies and strategies that are effective in each location where we do business.
In addition to the risks and uncertainties that we discussed above, recent world events have increased the risks posed by international trade disputes, tariffs, and sanctions. We procure a wide spectrum of commodities globally to support our production. For materials sourced from nations that could be impacted by trade disputes, tariffs or sanctions, we could potentially face increased costs, supply disruptions and/or costs associated with securing alternative materials. Additionally, such disputes, tariffs, and sanctions could potentially lead to a reduction in our sales of products, technology, and services. We view geopolitical risk along with other potential supply chain and sales risks, and work actively to diversify and mitigate these potential impacts; however, such events could adversely affect our business, financial condition and results of operations.
As we operate worldwide in a competitive environment, global economic and financial market conditions may adversely affect our business, financial condition and results of operations.
We compete by selling value-added products, technologies and services. Increased levels and numbers of competitors, globally or regionally, could negatively impact our results of operations. Economic conditions around the world can have a direct impact on our revenues. A global or regional economic downturn or market uncertainty could reduce the demand for our products, technologies and services, which could negatively impact our results of operations. Since many of our customers are refiners, our fluid catalytic cracking (FCC) and hydroprocessing catalyst (HPC) businesses are highly dependent on the economics of the petroleum refining industry. Demand for our FCC and HPC products is affected by refinery throughput, the type and quality of refinery feedstocks, and the demand for transportation fuels and other refinery products, such as propylene. Also, disruptions in the financial markets could have an adverse effect on our ability to finance our operations and growth plans, and could negatively impact our suppliers and customers in similar manners.
We are exposed to currency exchange rate changes that impact our profitability.
We are exposed to currency exchange rate risk through our U.S. and non-U.S. operations. Changes in currency exchange rates may materially affect our operating results. For example, changes in currency exchange rates may affect the relative prices at which we and our competitors sell products in the same region and the cost of materials used in our operations. A substantial portion of our net sales and assets are denominated in currencies other than the U.S. dollar, particularly the euro. When the U.S. dollar strengthens against other currencies, at a constant level of business, our reported sales, earnings, assets and liabilities are reduced because the non-U.S. currencies translate into fewer U.S. dollars.
We incur a currency transaction risk whenever one of our operating subsidiaries enters into either a purchase or a sales transaction using a currency different from the operating subsidiary’s functional currency. Given the volatility of exchange rates, we may not be able to manage our currency transaction risks effectively, or volatility in currency exchange rates may expose our financial condition or results of operations to a significant additional risk.
Prices for certain raw materials and energy are volatile and can have a significant effect on our manufacturing and supply chain strategies as we seek to maximize our profitability. If we are unable to successfully adjust our strategies in response to volatile raw materials and energy prices, such volatility could have a negative effect on our earnings in future periods.
We use metals, natural gas, petroleum-based materials, and other materials in the manufacture of our products. We consume substantial amounts of energy in our manufacturing processes. Prices for these materials and energy are volatile and can have a significant effect on our pricing, sales, manufacturing and supply chain strategies as we seek to maximize our profitability. Our ability to successfully adjust strategies successfully in response to volatile raw material and energy prices is a significant factor in maintaining or improving our profitability. If we are unable to successfully adjust our strategies in response to volatile prices, such volatility could have a negative effect on our sales and earnings in future periods.
A substantial portion of our raw materials are commodities whose prices fluctuate as market supply and demand fundamentals change.
We attempt to manage exposure to price volatility of major commodities through:
•long-term supply contracts;
•contracts with customers that permit adjustments for changes in prices of commodity-based materials and energy;
•forward buying programs that layer in our expected requirements systematically over time; and
•limited use of financial instruments.
Although we regularly assess our exposure to raw material price volatility, we cannot always predict the prospects of volatility and we cannot always cover the risk in a cost effective manner.
We have a policy of maintaining, when available, multiple sources of supply for raw materials. However, certainCertain of our raw materials may be provided by single sources of supply. We may not be able to obtain sufficient raw materials due to unforeseen developments that would cause an interruption in supply. Even if we have multiple sources of supply for raw materials, these sources may not make up for the loss of a major supplier.
If we are not able to continue our technological innovation and successful introduction of new products, our customers may turn to other suppliers to meet their requirements.
The specialty chemicals and specialty materials industries and the end-use markets into which we sell our products experience ongoing technological change and product improvements. A key element of our business strategy is to invest in research and development activities with the goal of introducing new high-performance, technically differentiatedtechnically-differentiated products. We may not be successful in developing new technology and products that effectively compete with products introduced by our competitors, and our customers may not accept, or may have lower demand for, our new products. If we fail to keep pace with evolving technological innovations or fail to improve our products in response to our customers’ needs, then our business, financial condition and results of operations could be adversely affected as a result of reduced sales of our products.
We spend large amounts of money for environmental compliance in connection with our current and former operations.
As a manufacturer of specialty chemicals and specialty materials, we are subject to stringent regulations under numerous U.S. federal, state, local and foreign environmental, health and safety laws and regulations relating to the generation, storage, handling, discharge, disposition and stewardship of chemicals and other materials. We have expended substantial funds to comply with such laws and regulations and have established a policy to minimize our emissions to the environment. Nevertheless, legislative, regulatory and economic uncertainties (including existing and potential laws and regulations pertaining to climate change) make it difficult for us to project future spending for these purposes, and if there is an acceleration in new regulatory requirements, we may be required to expend substantial additional funds to remain in compliance.
We are subject to environmental clean-up costs, fines, penalties and damage claims that have been and continue to be costly.
In the U.S., we are subject to lawsuits and regulatory actions, in connection with current and former operations (including some divested businesses and off-site disposal facilities), that seek clean-up or other remedies. We are also subject to similar risks outside of the U.S.
We operated a vermiculite mine in Libby, Montana, until 1990. Some of the vermiculite ore that was mined at the Libby mine contained naturally occurring asbestos. We are cooperating with the U.S. Environmental Protection Agency (or the “EPA”) and other federal, state and local governmental agencies in a remedial investigation and feasibility study (or the “RI/FS”) of the Libby mine and the surrounding area, known as Operable Unit 3 (or “OU3”), to determine the location, scope and extent of required remediation. The RI/FS will determine the specific areas within OU3 requiring remediation and will identify possible remedial action alternatives. Possible remedial actions within OU3 are wide-ranging, from institutional controls such as land use restrictions, to more active measures involving soil removal, containment projects, or other protective measures. As part of the RI/FS process, we contracted an engineering and consulting firm to develop a range of possible remedial
alternatives and associated cost estimates for OU3. Based on this work, we recorded a pre-tax charge of $70.0 million in the 2018 third quarter for the estimated costs of remediation of OU3.
The estimated costs of remediation are preliminary and consist of several components, each of which may vary significantly as the remedial alternatives are further developed and analyzed by the regulatory bodies providing oversight. It is reasonably possible that the ultimate costs of remediation could range between $30 million and $170 million. The ultimate remedy will be determined by the EPA after the RI/FS is finalized. Such remedy will be set forth in a Record of Decision (or “ROD”) that is expected to be issued by the EPA during or after 2020. Costs associated with the more active remedial alternatives would be expected to be incurred over a decade or more. We will reevaluate our estimated liability as remedial alternatives evolve based on further work by the engineering and consulting firm and discussions with the EPA as the RI/FS process moves toward a ROD. Depending on the remedial alternatives that the EPA selects in the ROD, the total cost of remediating OU3 may exceed our current estimate by material amounts.
The EPA is also investigating or remediating formerly owned or operated sites that processed Libby vermiculite into finished products. We are cooperating with the EPA on these investigation and remediation activities, and have recorded a liability to the extent that our review has indicated that a probable liability has been incurred and the cost is estimable.
We have recorded liabilities for all environmental matters for which a loss is considered to be probable and sufficient information is available to reasonably estimate the loss. We also face legacy environmental liability for response costs at sites not related to our former vermiculite mining and processing activities. This liability relates to our former businesses or operations, including our share of liability at off-site disposal facilities. Our estimated liability is based upon regulatory requirements and environmental conditions at each site. As we receive new information, our estimated liability may increase materially.
We may be required to make one or more contingent deferred payments to the asbestos property damage trust, or PD Trust, in respect of property damage claims related to our former Zonolite attic insulation (“ZAI”) product installed in the U.S. (“ZAI PD Claims”); we may also be obligated to make additional payments to the PD trust in respect of “Other PD Claims” (those being asbestos property damage claims other than ZAI PD Claims); and our obligations to make payments to the PD Trust in respect of Other PD Claims is not capped.
Under the Joint Plan of reorganization that concluded Grace’s status as a debtor under Chapter 11, as discussed above, the PD Trust has been established and funded under Section 524(g) of the Bankruptcy Code. The order of the Bankruptcy Court confirming the Joint Plan contains a channeling injunction, which provides that all pending and future asbestos-related property damage claims and demands (or “PD Claims”) can only be brought against the PD Trust. The PD Trust contains two accounts. One of these accounts is the “ZAI PD Account,” which is funded in respect of claims related to our former Zonolite Attic Insulation product, or “ZAI.” The other account, the “PD Account,” is funded solely in respect of PD Claims excluding those PD Claims related to ZAI (which we refer to as “Other PD Claims”). Grace emerged from bankruptcy on February 3, 2014 (the “Effective Date”).
We have satisfied all of our financial obligations to the PI Trust. We have contingent financial obligations remaining to the PD Trust. With respect to ZAI PD Claims, the PD Trust was funded with $34.4 million on the Effective Date and $30.0 million on February 3, 2017. We are also obligated to make up to 10 contingent deferred payments of $8 million per year to the PD Trust in respect of ZAI PD Claims during the 20-year period which began on February 3, 2019, with each such payment due only if the assets of the PD Trust in respect of ZAI PD Claims fall below $10 million during the preceding year. As of December 31, 2018, we have evaluated the activity in the PD Trust with respect to ZAI PD Claims and other trust expenses. Through December 31, 2018, the PD Trust has paid approximately $15 million in ZAI PD Claims, approximately $6 million in operating and education expenses, and approximately $15 million in one-time attorneys’ fees. The trust balance was approximately $30 million as of December 31, 2018. We expect ZAI PD Claims payments to decline over time, but we have limited information to estimate the amount and timing of future claims payments. It is reasonably possible that we will make one or more contingent deferred payments. We estimate the present value of reasonably possible future payments to range between $0 million and $20 million. We have not accrued for any contingent deferred payments as we do not believe that payment is probable. We will continue to evaluate new information as it becomes available and will revise our estimate of the amount and timing of future claims payments and any contingent deferred payments at that time. We are not obligated to make additional payments to the PD Trust in
respect of ZAI PD Claims beyond the payments described above. We have satisfied all of our financial obligations with respect to Canadian ZAI PD Claims.
Unresolved and future Other PD Claims are to be litigated pursuant to procedures approved by the Bankruptcy Court and, to the extent such Other PD Claims are determined to be allowed claims, are to be paid in cash by the PD Trust. We are obligated to make a payment to the PD Account every six months in the amount of any Other PD Claims allowed during the preceding six months plus interest (if any) and the amount of PD Account expenses for the preceding six months (the “PD Obligation”). The aggregate amount we are required to pay under the PD Obligation is not capped so we may have to make additional payments to the PD Account in respect of the PD Obligation.
Our indebtedness may materially affect our business, including our ability to fulfill our obligations, react to changes in our business and incur additional debt to fund future needs.
We have a substantial amount of debt. As of December 31, 2018, we had $1,040.9 million of unsecured indebtedness outstanding and $942.4 million of secured indebtedness outstanding. Our indebtedness may have material effects on our business, including to:
require us to dedicate a substantial portion of our cash flow to debt payments, thereby reducing funds available for working capital, capital expenditures, acquisitions, research and development, distributions to shareholders (which fall within the discretion of our Board of Directors taking into account financial, liquidity and other considerations), share repurchase programs and other purposes;
restrict us from making strategic acquisitions or taking advantage of favorable business opportunities;
limit our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate;
increase our vulnerability to adverse economic, credit and industry conditions, including recessions;
make it more difficult for us to satisfy our debt service and other obligations;
place us at a competitive disadvantage compared to our competitors that have relatively less debt; and
limit our ability to borrow additional funds, or to dispose of assets to raise funds, if needed, for working capital, capital expenditures, acquisitions, research and development and other purposes.
If we incur additional debt, the risks related to our indebtedness may intensify.
Restrictions imposed by agreements governing our indebtedness may limit our ability to operate our business, finance our future operations or capital needs, or engage in other business activities. If we fail to comply with certain restrictions under these agreements, our debt could be accelerated and we may not have sufficient cash to pay our accelerated debt.
The agreements governing our indebtedness contain various covenants that limit, among other things, our ability, and the ability of certain of our subsidiaries, to:
incur certain liens;
enter into sale and leaseback transactions; and
consolidate, merge or sell all or substantially all of our assets or the assets of our guarantors.
As a result of these covenants, we will be limited in the manner in which we can conduct our business, and may be unable to engage in favorable business activities or finance future operations or capital needs. Accordingly, these restrictions may limit our flexibility to operate our business. A failure to comply with the restrictions contained in these agreements, including maintaining the financial ratios required by our credit facilities, could lead to an event of default which could result in an acceleration of our indebtedness. We cannot assure you that our future operating results will be sufficient to enable us to comply with the covenants contained in the agreements governing our indebtedness or to remedy any such default. In addition, in the event of an acceleration, we may not have or be able to obtain sufficient funds to make any accelerated payments.
Our indebtedness exposes us to interest expense increases if interest rates increase.
As of December 31, 2018, approximately $297.2 million of our borrowings were at variable interest rates and expose us to interest rate risk, excluding $598.5 million hedged by cross-currency swaps effective in November 2018, and $100.0 million hedged by interest rate swaps effective in April 2018. If interest rates increase, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed would
remain the same, and our net income would decrease. An increase of 100 basis points in the interest rates payable on our variable rate indebtedness would increase our annual estimated debt-service requirements by $3.0 million, assuming our consolidated variable interest rate indebtedness outstanding as of December 31, 2018, remains the same.
We have unfunded and underfunded pension plan liabilities. We will require future operating cash flow to fund these liabilities. We have no assurance that we will generate sufficient cash to satisfy these obligations.
We maintain U.S. and non-U.S. defined benefit pension plans covering current and former employees who meet or met age and service requirements. Our net pension liability and cost is materially affected by the discount rate used to measure pension obligations, the longevity and actuarial profile of our workforce, the level of plan assets available to fund those obligations and the actual and expected long-term rate of return on plan assets. Significant changes in investment performance or a change in the portfolio mix of invested assets can result in corresponding increases and decreases in the valuation of plan assets or in a change in the expected rate of return on plan assets. Assets available to fund the pension benefit obligation of the U.S. advance-funded pension plans at December 31, 2018, were approximately $833 million, or approximately $65 million less than the measured pension benefit obligation on a U.S. GAAP basis. In addition, any changes in the discount rate could result in a significant increase or decrease in the valuation of pension obligations, affecting the reported funded status of our pension plans as well as the net periodic pension cost in the following years. Similarly, changes in the expected return on plan assets can result in significant changes in the net periodic pension cost in the following years.
Our ability to use net operating losses and tax credits to reduce future tax payments may be limited if there is a change in ownership of Grace or if Grace does not generate sufficient U.S. taxable income or foreign source income. Our ability to use these attributes is also subject to time limitations. Changes in tax laws and regulations may reduce their value and availability.
Our ability to use future tax deductions and tax credits, including net operating losses (“NOLs”), is dependent on our ability to generate sufficient future taxable income in the U.S. and sufficient foreign source income. Under U.S. federal income tax law, a corporation is generally permitted to carry forward NOLs for a 20-year period (indefinitely in the case of NOLs occurring in taxable years after December 31, 2017) for deduction against future taxable income. Federal tax credits may be carried forward for 10 years. Also, our ability to use NOLs and tax credits and their value may be adversely affected by changes in tax laws and regulations.
In addition, our ability to utilize federal and state NOLs and U.S. federal tax credits may be limited by Section 382 of the Internal Revenue Code resulting from future changes in the ownership of outstanding Company common stock.
We intend to pursue acquisitions, joint ventures and other transactions that complement or expand our businesses. We may not be able to complete proposed transactions and even if completed, the transactions may involve a number of risks that may materially and adversely affect our business, financial condition and results of operations.
We intend to continue to pursue opportunities to buy other businesses or technologies that could complement, enhance or expand our current businesses or product lines or that might otherwise offer us growth opportunities. We may have difficulty identifying appropriate opportunities or, if we do identify opportunities, we may not be successful in completing transactions for a number of reasons. Any transactions that we are able to identify and complete may involve a number of risks, including:
the diversion of management’s attention from our existing businesses to integrate the operations and personnel of the acquired or combined business or joint venture;
possible adverse effects on our operating results during the integration process;
failure of the acquired business to achieve expected operational objectives;
possible assumption of unexpected liabilities;
inability to obtain indemnification from other parties to transactions; and
our possible inability to achieve the intended objectives of the transaction.
In addition, we may not be able to successfully or profitably integrate, operate, maintain and manage any newly acquired operations or their employees. We may not be able to maintain uniform standards, controls, procedures and policies, which may lead to operational inefficiencies.
We work with dangerous materials that can injure our employees, damage our facilities, disrupt our operations, and contaminate the environment.
Some of our operations involve the handling of hazardous materials that may pose the risk of fire, explosion, or the release of hazardous substances. Such events could result from natural disasters, operational failures or terrorist attacks, and might cause injury or loss of life to our employees and others, environmental contamination, and property damage. These events might cause a temporary shutdown of an affected plant, or portion thereof, and we could be subject to penalties or claims as a result of any of these events. A disruption of our operations caused by these or other events could have a material adverse effect on our results of operations.
Some of our employees are unionized, represented by works councils or employed subject to local laws that are less favorable to employers than the laws in the United States.
As of December 31, 2018, we had approximately 3,900 global employees. Approximately 700 of our approximately 2,100 U.S. employees are unionized at 5 manufacturing sites. In addition, a large number of our employees are employed in countries in which employment laws provide greater bargaining or other rights to employees than the laws in the United States. Such employment rights require us to work collaboratively with the legal representatives of the employees to effect any changes to labor arrangements. For example, most of our employees in Europe are represented by works councils that have co-determination rights on any changes in conditions of employment, including certain salaries and benefits and staff changes, and may impede efforts to restructure our workforce. A strike, work stoppage or slowdown by our employees or significant dispute with our employees, whether or not related to these negotiations, could result in a significant disruption of our operations or higher ongoing labor costs.
We may be subject to claims of infringement of the intellectual property rights of others, which could hurt our business.
From time to time, we face infringement claims from our competitors or others alleging that our processes or products infringe on their proprietary technologies. Any claims that our products or processes infringe the intellectual property rights of others, regardless of the merit or resolution of the claims, could cause us to incur significant costs in responding to, defending and resolving the claims, and may divert the efforts and attention of our management and technical personnel from our business. If we are found to be infringing on the proprietary technology of others, we may be liable for damages, and we may be required to change our processes, redesign our products, pay others to use the technology, or stop using the technology or producing the infringing product. Even if we ultimately prevail, the existence of the lawsuit could prompt our customers to switch to products that are not the subject of infringement suits.
Some of our employees are unionized, represented by works councils or employed subject to local laws that are less favorable to employers than the laws in the United States.
As of December 31, 2020, we had approximately 4,000 global employees. Approximately 700 of our approximately 2,200 U.S. employees are unionized at 5 manufacturing sites, and approximately 1,400 of our employees outside the U.S. are represented by works councils and unions. In addition, a large number of our employees are employed in countries in which employment laws provide greater bargaining or other rights to employees than the laws in the United States. Such employment rights require us to work collaboratively with the legal representatives of the employees to effect any changes to labor arrangements. For example, most of our employees in Europe are represented by works councils that have co-determination rights on any changes in conditions of employment, including certain salaries and benefits and staff changes, and may impede efforts to restructure our workforce. A strike, work stoppage or slowdown by our employees or significant dispute with our employees, whether or not related to these negotiations, could result in a significant disruption of our operations or higher ongoing labor costs.
We intend to pursue acquisitions, joint ventures and other transactions that complement or expand our businesses. We may not be able to complete proposed transactions and even if completed, the transactions may involve a number of risks that may materially and adversely affect our business, financial condition and results of operations.
We intend to continue to pursue opportunities to buy other businesses or technologies that could complement, enhance or expand our current businesses or product lines or that might otherwise offer us growth opportunities. We may have difficulty identifying appropriate opportunities or, if we do identify opportunities, we may not be successful in completing transactions for a number of reasons. Any transactions that we are able to identify and complete may involve a number of risks, including:
•the diversion of management’s attention from our existing businesses to integrate the operations and personnel of the acquired or combined business or joint venture;
•possible adverse effects on our operating results during the integration process;
•failure of the acquired business to achieve expected financial, operational, and other objectives;
•possible assumption of unexpected liabilities; and
•inability to obtain indemnification from other parties to transactions.
In addition, we may not be able to successfully or profitably integrate, operate, maintain and manage any newly acquired operations or their employees. We may not be able to maintain uniform standards, controls, procedures and policies, which may lead to operational inefficiencies.
We spend large amounts of money for environmental compliance in connection with our current and former operations.
As a manufacturer of specialty chemicals and specialty materials, we are subject to stringent regulations under numerous U.S. federal, state, local and foreign environmental, health and safety laws and regulations relating to the generation, storage, handling, discharge, disposition and stewardship of chemicals and other materials. We have expended substantial funds to comply with such laws and regulations and have established a policy to minimize our emissions to the environment. Legislative, regulatory and economic uncertainties (including existing and potential laws and regulations pertaining to climate change) make it difficult for us to project future spending for these purposes, and if there is an acceleration in new regulatory requirements, we may be required to expend substantial additional funds to remain in compliance, which may be material.
Evolving energy consumption patterns; investor sentiment regarding fossil fuels and related matters; and risks related to climate change, may negatively affect our business, financial condition, and results of operations, and our stock price.
We are engaged in the production and sale of specialty chemicals and specialty materials used in petrochemical, refining, and other chemical manufacturing applications. These industries are facing challenges from ESG concerns of investors; the economic impacts of climate change developments; and regulation of GHGs, such as carbon dioxide, methane, and nitrous oxide, among others. In addition, the increasing availability of electric vehicles offers an alternative that could lead to reduced demand for liquid transportation fuels. Resulting reductions in refining and related activities could have a negative effect on our revenues and business.
Recently, there have been intensifying efforts directed at various members of the investment community to promote the divestment of shares of energy companies, as well as to pressure lenders and other financial services companies to limit or curtail activities with energy companies. As we provide products and services to energy companies, should these efforts be successful or expanded, there may be a negative impact on our revenues and business, and our stock price.
Potential effects of climate change include increased frequency, severity, and impact of weather-related events. Multiple Grace facilities globally are located in areas that may be at risk from hurricanes and other weather-related events that could cause production interruptions. Key suppliers and associated distribution routes for raw materials and finished goods are similarly at risk of interruptions from severe weather events. Multiple customers are likewise located in areas that could be impacted by extreme weather events. These circumstances present business continuity and related risks.
We work with dangerous materials that can injure our employees, damage our facilities, disrupt our operations, and contaminate the environment.
Some of our operations involve the handling of hazardous materials that may pose the risk of fire, explosion, or the release of hazardous substances. Such events could result from natural disasters, operational failures or terrorist attacks, and might cause injury or loss of life to our employees and others, environmental contamination, and property damage. These events might cause a temporary shutdown of an affected plant, or portion thereof, and we could be subject to penalties or claims as a result of any of these events. A disruption of our operations caused by these or other events could have a material adverse effect on our results of operations.
We are subject to business continuity risks that may adversely affect our business, financial condition and results of operations.
We are subject to significant risks from both natural disasters and accidents such as fires, storms, and floods,floods; public health concerns, including pandemics and otherquarantines; and disruptive events, such as war, insurrection, and terrorist actions.actions; and other force majeure events. These types of occurrences can negatively affect our manufacturing, supply chain, logistics, transportation, information technology, and communications functions. Similarly, they can strike major suppliers and customers, thus restricting or delaying our supply of raw materials or energy as well as reducing or deferring demand for our products and services. In the event of a major disruption, we may not be able to replace this business in a timely manner or at similar margins. Also, we have centralized certain administrative functions, primarily in North America, Europe and Asia, to improve efficiency and reduce costs. To the extent that these central locations are disrupted or disabled, key business processes, such as invoicing, payments and general management operations, could be interrupted.
AsWe insure against many of these risks by carrying property, general, liability, and other coverages with highly rated global insurers. Given the current insurance market as well as our recent claims experience, we operate worldwidemay experience increased costs to purchase insurance coverage going forward. Our ability to obtain certain coverage, including contingent time element business interruption insurance, for losses related to our suppliers or customers may be limited or more costly in a competitive environment, global economic and financial market conditions maythe future.
A failure of our information technology (“IT”) infrastructure could adversely affectimpact our business financial condition and results of operations.
We compete by selling value-added products, technologiesincreasingly rely upon the capacity, reliability and services. Increased levels and numbers of competitors, globally or regionally, could negatively impact our results of operations. Economic conditions around the world can have a direct impact on our revenues. A global or regional economic downturn or market uncertainty could reduce the demand for our products, technologies and services, which could negatively impact our results
of operations. Since manysecurity of our customersIT infrastructure and our ability to expand and continually update this infrastructure in response to the changing needs of our business. Additionally, a large number of our employees are refiners, our fluid catalytic cracking (FCC) catalyst business is highly dependent onworking remotely as a result of restrictions imposed to control the economicsspread of the petroleum refining industry. Demand for our FCC products is affected by refinery throughput,COVID-19 virus. If we experience a problem with the type and qualityfunctioning of refinery feedstocks, andan important IT system, the demand for transportation fuels and other refinery products, such as propylene. Also,resulting disruptions in the financial markets could have an adverse effect on our ability tobusiness. Our IT systems affect virtually every aspect of our business, including supply chain, manufacturing, logistics, finance and communications. We and certain of our third-party vendors receive and store personal information in connection with our human resources operations and growth plans, andother aspects of our business. Any IT system failure, natural disaster, accident, or intentional breach could negatively impactresult in disruptions to our suppliers and customers in similar manners.operations.
Our ability to operate our businesses and our financial condition could be significantly undermined by cybersecurity breaches.
Despite our implementation of security measures, our information technology (“IT”)Our IT systems are subject to cyberattack and other similar disruptions. Breaches by hackers, the introduction of computer viruses, ransomware, and other cybersecurity incidents affecting our IT systems could result in disruptions to our operations. Also, such incidents could include theft of our trade secrets and other intellectual property, as well as confidential customer, employee and business information, which could be used by unauthorized parties and publicly disclosed. This could negatively affect our relationships with customers and our ability to compete effectively, and could ultimately harm our reputation, business, financial condition and results of operations. In addition, we may be required to incur significant costs to protect against damage caused by cybersecurity breaches in the future.
We rely upon the capacity, reliability and security of our IT infrastructure and our ability to expand and continually update this infrastructure in response to the changing needs of our business. If we experience a problem with the functioning of an important IT system, the resulting disruptions could have an adverse effect on our business. Our IT systems affect virtually every aspect of our business, including supply chain, manufacturing, logistics, finance and communications. We and certain of our third-party vendors receive and store personal information in connection with our human resources operations and other aspects of our business. Any IT system failure, natural disaster, accident, or intentional breach could result in disruptions to our operations.TOC—Financial StatementsRisks Related to the SeparationLegacy Matters
We are subject to liabilities for Legacy Matters, which include (i) product, (ii) environmental, and (iii) other liabilities, relating to past activities of Grace.
In addition to the legacy product and legacy environmental liabilities discussed below in these Risk Factors, we are subject to other liabilities relating to past activities of Grace. Beginning in 1971, as part of implementing a wet milling process at the Libby, Montana, vermiculite mine, we constructed a dam at the mine property that now prevents vermiculite ore tailings from moving into nearby creeks and rivers. Ongoing operation of the dam is regulated by the Montana Department of Natural Resources and Conservation (“DNRC”). In April 2019, the DNRC renewed the permit necessary for operation of the dam. We are legally obligated to operate the dam and construct a new spillway in accordance with the latest permit conditions.
Construction of the new dam spillway at the former mine site is a key element of our overall remediation strategy. The project includes both an upper spillway and a lower spillway that are being managed as two separate projects with different engineering design and construction timelines. In 2019, we contracted a third-party engineering and consulting firm to develop an initial range of cost estimates for the total project. Based on this work, we recorded a liability of $68.0 million in 2019 for the estimated costs of the project. These costs were preliminary and subject to change as new information becomes available, including defining the final scope of the projects through the contract bidding process. During the three months ended September 30, 2020, we completed a review of contractor bids for the replacement of the upper spillway and increased our cost estimate for this portion of the project by $27.0 million, bringing the estimate for the total project to $95.0 million. Regarding the lower spillway, final engineering will be completed and submitted to the state of Montana for design approval in 2021, after which we will seek contract bids for this portion of the project. We believe it is reasonably possible that the ultimate costs of the two spillway projects could range between $80 million and $120 million. As we receive new information, our estimated liability may change materially. Construction will begin in 2021 and is expected to take three to four years.
We are subject to environmental clean-up costs, fines, penalties and damage claims that have been and continue to be costly.
In the U.S., we are subject to lawsuits and regulatory actions, in connection with current and former operations (including some divested businesses and off-site disposal facilities), that seek clean-up or other remedies. We are also subject to similar risks outside of the Separation, GCPU.S.
We purchased a vermiculite mine in Libby, Montana, in 1963 and operated it until 1990. Vermiculite concentrate from the Libby mine was used in the manufacture of attic insulation and other products. Some of the vermiculite ore contained naturally occurring asbestos. We are engaged with the U.S. Environmental Protection Agency (or the “EPA”) and other federal, state and local governmental agencies in a remedial investigation and feasibility study (or the “RI/FS”) of the Libby mine and the surrounding area, known as Operable Unit 3 (or “OU3”). The RI/FS will indemnifystudy the areas within OU3 requiring remediation and will identify possible remedial action alternatives. Possible remedial actions within OU3 are wide-ranging, from institutional controls such as land use restrictions, to more active measures involving soil removal, containment projects, or other protective measures. As part of the RI/FS process, we contracted an engineering and consulting firm to develop a range of possible remedial alternatives and associated cost estimates for OU3. Based on this work, we recorded a pre-tax charge of $70.0 million during the three months ended September 30, 2018, for the estimated costs of remediation of OU3. We believe that this amount should provide for a protective remedy meeting the statutory requirements of the Comprehensive Environmental Response, Compensation, and Liability Act.
The estimated costs of remediation are preliminary and consist of several components, each of which may vary significantly as the remedial alternatives are further developed. It is reasonably possible that the ultimate costs of remediation could range between $30 million and $170 million. We are working closely with the EPA, and the ultimate remedy will be determined by the EPA after the RI/FS is finalized. Such remedy will be set forth in a Record of Decision (or “ROD”) that is currently expected to be issued by the EPA no earlier than 2024. Costs associated with the more active remedial alternatives would be expected to be incurred over a decade or more. We will reevaluate our estimated liability as remedial alternatives evolve based on further work by the engineering and consulting firm and discussions with the EPA as the RI/FS process moves toward a ROD. Technical memoranda expected prior to the issuance of the ROD may provide insight into the likely remedial alternatives ultimately selected, allowing us to update our cost of remediation estimate. Depending on the remedial alternatives that the EPA selects in the ROD, the total cost of remediating OU3 may exceed our current estimate
by material amounts. The amounts set forth above do not include possible liability for natural resources damage. Based on ecological studies conducted by the EPA, we do not believe that natural resources damage has occurred. However, if a party were to be successful in asserting a natural resources damage claim, liability related to such obligation could be material.
We have cooperated with the EPA in investigating and remediating a number of formerly owned or operated sites that processed Libby vermiculite into finished products. We have recorded a liability for remaining expected response costs, including costs for EPA oversight and potential future site remediation, where a review has indicated that liability is probable and the cost is estimable. The EPA may commence additional investigations in the future at other sites that processed Libby vermiculite. Liability for unaccrued additional investigation and remediation costs is probable but not yet estimable, and could be material.
We have recorded liabilities for all environmental matters for which a loss is considered to be probable and sufficient information is available to reasonably estimate the loss. We also face legacy environmental liability for response costs at sites not related to our former vermiculite mining and processing activities. This liability relates to our former businesses or operations, including our share of liability at off-site disposal facilities. Our estimated liability is based upon regulatory requirements and environmental conditions at each site. As we receive new information, our estimated liability may increase materially.
We may be required to make one or more contingent deferred payments to the trust for asbestos property damage claims, which we refer to as the “PD Trust,” in respect of claims related to our former Zonolite attic insulation (“ZAI”) product (“ZAI PD Claims”); we may also be obligated to make additional payments to the PD Trust in respect of “Other PD Claims” (those being asbestos property damage claims other than ZAI PD Claims); and our obligations to make payments to the PD Trust in respect of Other PD Claims is not capped.
Grace emerged from bankruptcy effective February 3, 2014 (the “Effective Date”). Under the Joint Plan, the PD Trust was established and funded under Section 524(g) of the Bankruptcy Code. The order of the Bankruptcy Court confirming the Joint Plan contains a channeling injunction, which provides that all pending and future asbestos-related property damage claims and demands (or “PD Claims”) can only be brought against the PD Trust. The PD Trust contains two accounts. One of these accounts is the “ZAI PD Account,” which is funded in respect of claims related to ZAI. The other account is the “PD Account,” which is funded solely in respect of Other PD Claims.
Under the Joint Plan, all pending and future asbestos-related personal injury claims are channeled for resolution to a personal injury trust (the “PI Trust”). We have satisfied all of our financial obligations to the PI Trust. We have contingent financial obligations remaining to the PD Trust. With respect to ZAI PD Claims, the PD Trust was funded with $49.4 million (net of $15 million of attorneys’ fees) to pay claims and expenses. We are also obligated to make up to 10 contingent deferred payments of $8 million per year to the PD Trust during the 20-year period beginning on February 3, 2019, with each such payment due only if the assets of the PD Trust fall below $10 million during the preceding year. As of December 31, 2020, the PD Trust has paid out approximately $38 million in ZAI PD Claims and expenses, leaving a balance of approximately $18 million, including the benefit of realized investment gains.
Due to the limited claims history, the unique nature of this product, and the uncertainty of future claims patterns, an actuarial analysis was completed to estimate the range of possible future payments. The analysis was conducted by a third-party actuarial firm directed by us and using historical claims data provided by the ZAI trustee. Certain key assumptions employed in the analysis were (1) projections of the future number of filed claims, assuming a percentage increase in claims during earlier years and annual decreases in later years; (2) application of historical percentages of claims closed with indemnity payment compared to total closed claims, applied on a regional basis; and (3) application of the average claim payout, which reflects the average indemnity cost per claim closing with payment. As a result of the analysis and taking into account the relative uncertainty of future claims activity, we determined that contingent funding obligations beyond 2025 are not reasonably estimable. We estimate that the reasonable range of payments over the period of 2021 to 2025 is expected to be between $16 million and $24 million and project that the first payment could be due as early as 2022. In the 2019 fourth quarter, we recorded a $24.0 million liability related to probable future obligations to fund the PD Trust for ZAI PD Claims. Our maximum financial obligation over the next 18 years is $80 million, and no single year’s payment can exceed $8 million.
With respect to Other PD Claims, claims unresolved as of the Effective Date are to be litigated in the bankruptcy court and any future claims are to be litigated in a federal district court, in each case pursuant to procedures approved by the bankruptcy court. To the extent any such Other PD Claims are determined to be allowed claims, they are to be paid in cash by the PD Trust. We are obligated to make a payment to the PD Trust every six months in the amount of any Other PD Claims allowed during the preceding six months plus interest (if applicable) and the amount of PD Trust expenses for the preceding six months (the “PD Obligation”). We have not paid any Other PD Claims since emergence. Annual expenses have been approximately $0.2 million per year. The aggregate amount to be paid under the PD Obligation is not capped, and we may be obligated to make additional payments to the PD Trust in respect of the PD Obligation. We have accrued for those unresolved Other PD Claims that we believe are probable and estimable. We have not accrued for other unresolved or unasserted Other PD Claims as we do not believe that payment is probable.
All payments to the PD Trust required after the Effective Date are secured by the Company’s obligation to issue 77,372,257 shares of Company common stock to the PD Trust in the event of default, subject to customary anti-dilution provisions.
Risks Related to Financial Matters
Our indebtedness may materially affect our business, including our ability to fulfill our obligations, react to changes in our business and incur additional debt to fund future needs.
We have a substantial amount of debt. As of December 31, 2020, we had $1,063.6 million of unsecured indebtedness outstanding and $926.8 million of secured indebtedness outstanding. Our indebtedness may have material effects on our business, including to:
•require us to dedicate a substantial portion of our cash flow to principal and interest payments, thereby reducing funds available for working capital, capital expenditures, acquisitions, research and development, distributions to shareholders (which fall within the discretion of our Board of Directors taking into account financial, liquidity and other considerations), share repurchase programs and other purposes;
•restrict us from making strategic acquisitions or taking advantage of favorable business opportunities;
•limit our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate;
•increase our vulnerability to adverse economic, credit and industry conditions, including recessions;
•make it more difficult for us to satisfy our other obligations;
•place us at a competitive disadvantage compared to our competitors that have relatively less debt; and
•limit our ability to borrow additional funds, or to dispose of assets to raise funds, if needed, for working capital, capital expenditures, acquisitions, research and development and other purposes.
If we incur additional debt, the risks related to our indebtedness may intensify.
Restrictions imposed by agreements governing our indebtedness may limit our ability to operate our business, finance our future operations or capital needs, or engage in other business activities. If we fail to comply with certain restrictions under these agreements, our debt could be accelerated, and we may not have sufficient cash to pay our accelerated debt.
The agreements governing our indebtedness contain various covenants that limit, among other things, our ability, and the ability of certain of our subsidiaries, to:
•incur certain liens;
•enter into sale and leaseback transactions; and
•consolidate, merge or sell all or substantially all of our assets or the assets of our guarantors.
As a result of these covenants, we will indemnify GCP for certain liabilities. Therebe limited in the manner in which we can conduct our business, and may be no assuranceunable to engage in favorable business activities or finance future operations or capital needs. Accordingly, these restrictions may limit our flexibility to operate our business. A failure to comply with the restrictions contained in these agreements, including maintaining the financial ratios required by our credit facilities, could lead to an event of default which could result in an acceleration of our indebtedness. We cannot guarantee that the indemnities from GCPour future operating results will be sufficient to insureenable us againstto comply with the full amount of such liabilities, or that GCP’s ability to satisfy its indemnification obligation will not be impairedcovenants contained in the future.agreements governing our indebtedness or to remedy any such default. In addition, in the event of an
acceleration, we may not have or be able to obtain sufficient funds to make any accelerated payments. Additionally, in the Separationevent of a change in control, we will be required to offer to purchase our senior unsecured notes at a price equal to 101% of the aggregate principal amount outstanding plus accrued and Distribution Agreementunpaid interest.
Our indebtedness exposes us to interest expense increases if interest rates increase.
As of December 31, 2020, approximately $268.9 million of our borrowings were at variable interest rates and other agreements we entered intoexpose us to interest rate risk, excluding $586.5 million hedged by cross-currency swaps effective in November 2018, and $100.0 million hedged by interest rate swaps effective in April 2018. If interest rates increase, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed would remain the same, and our net income would decrease. An increase of 100 basis points in the interest rates payable on our variable rate indebtedness would increase our annual estimated debt-service requirements by $2.7 million, assuming our consolidated variable interest rate indebtedness outstanding as of December 31, 2020, remains the same.
The uncertainty regarding the potential phase-out of LIBOR may negatively impact our operating results.
We currently have term loan borrowings, a revolving credit facility and financial derivatives that rely on the London Interbank Offered Rate (“LIBOR”) as a benchmark rate. All of these financial instruments use a three-month U.S. dollar LIBOR for their benchmark rate. The Intercontinental Exchange (“ICE”) Benchmark Administration (“IBA”) announced that it intends to cease publication of three-month U.S. dollar LIBOR on June 30, 2023. No consensus exists as to what rate or rates will become accepted alternatives to LIBOR at this time, although the U.S. Federal Reserve, in connection with the Separation, GCP agreedAlternative Reference Rates Committee (“ARRC”), a steering committee composed of large U.S. financial institutions, has identified the Secured Overnight Financing Rate (“SOFR”) as the rate that represents the best practice for replacement of the U.S. dollar LIBOR. SOFR is a more generic measure than LIBOR and considers the cost of borrowing cash overnight, collateralized by U.S. Treasury securities.
Given the inherent differences between LIBOR and SOFR, or any other alternative benchmark rate that may be established, there are uncertainties regarding a transition from LIBOR. These uncertainties include, but are not limited to, indemnify us forthe need to amend all contracts with LIBOR as the referenced rate and the impact on our cost of variable rate debt, including the use of certain liabilities,financial derivatives. Based on guidance issued by the IBA and other regulatory bodies, we agreeddo not expect to indemnify GCP for certainissue any contracts that reference U.S. dollar LIBOR after 2021. We will need to consider new contracts issued before the end of 2021 to determine if they should reference an alternative benchmark rate and/or include suggested fallback language, as published by the ARRC. The consequences of these developments with respect to LIBOR cannot be entirely predicted and span multiple future periods; however, they could result in a change in the cost of our variable rate debt or derivative financial instruments, which may be detrimental to our financial position or operating results.
We have unfunded and underfunded pension plan liabilities. However, third parties might seekWe will require future operating cash flow to hold us responsible for liabilities that GCP agreed to assume or retain underfund these agreements, and there can beliabilities. We have no assurance that GCPwe will be ablegenerate sufficient cash to fully satisfy its indemnificationthese obligations.
We maintain U.S. and non-U.S. defined benefit pension plans covering current and former employees who meet or met age and service requirements. Our net pension liability and cost is materially affected by the discount rate used to measure pension obligations, under these agreements.
A court could deem the Distributionlongevity and actuarial profile of our workforce, the level of plan assets available to fund those obligations and the actual and expected long-term rate of return on plan assets. Significant changes in investment performance or a change in the Separationportfolio mix of invested assets can result in corresponding increases and decreases in the valuation of plan assets or in a change in the expected rate of return on plan assets. Assets available to be a fraudulent conveyance and voidfund the transaction or impose substantial liabilities upon us.
If the transaction is challenged by a third party, notwithstanding the fact that we received an opinion from a nationally recognized financial firm that we were solvent and had adequate surplus to make the Distribution, a court could deem the distribution of GCP common stock or certain internal restructuring transactions undertaken by us in connection with the Separation to be a fraudulent conveyance or transfer. Fraudulent conveyances or transfers are defined to include transfers made or obligations incurred with the actual intent to hinder, delay or defraud current or future creditors or transfers made or obligations incurred for less than reasonably equivalent value when the debtor was insolvent, or that rendered the debtor insolvent, inadequately capitalized or unable to pay its debts as they become due. In such circumstances, a court could void the transactions or impose substantial liabilities upon us, which could adversely affect our financial condition and our results of operations. Among other things, the court could require our stockholders to return to us some or allpension benefit obligation of the sharesU.S. advance-funded pension plans at December 31, 2020, were approximately $1,001 million, or approximately 90% of GCP common stock issuedthe measured pension projected benefit obligation on a U.S. GAAP basis. In addition, any changes in the Distributiondiscount rate, as well as actual returns on plan assets, could result in a significant increase or require us to fund liabilities of other companies involveddecrease in the Separation forvaluation of pension obligations, affecting the benefitreported funded status of creditors. Whether a transaction is a fraudulent conveyance or transfer will vary depending uponour pension plans as well as the laws ofnet periodic pension cost in the applicable jurisdiction.following years. Similarly, changes in the expected return on plan assets can result in significant changes in the net periodic pension cost in the following years.
Our ability to use tax credits and / or net operating losses to reduce future tax payments may be limited if there is a change in ownership of Grace or if Grace does not generate sufficient taxable income or foreign source income for U.S. tax purposes. Our ability to use these attributes is also subject to time limitations. Changes in tax laws and regulations may reduce their value and availability.
Our ability to utilize tax attributes including tax credits, future tax deductions, and net operating losses (“NOLs”), is dependent on our ability to generate sufficient taxable income and foreign source income for U.S. tax purposes. Under U.S. income tax law, federal tax credits may be carried forward for 10 years, and research and development tax credits may be carried forward for 20 years. State NOL carryforwards are generally available for deduction against future taxable income for up to 20 years, subject to state-specific regulations. Also, our ability to realize the benefits of these tax credits and/or NOLs and their value may be adversely affected by changes in tax laws and regulations. In addition, our ability to utilize U.S. federal tax credits as well as U.S. federal and state NOLs may be limited in the event of future changes in the ownership of outstanding Company common stock.
Our business and stock price could be negatively impacted as a result of actions by activist shareholders or others.
We value constructive input from investors and regularly engage in dialogue with our shareholders regarding strategy and performance. Our Board of Directors and management team are committed to acting in the best interests of all of our shareholders. Activist shareholders may from time to time engage in proxy solicitations, advance shareholder proposals, or otherwise attempt to effect changes or acquire control of Grace. Recently, we received a revised proposal from a shareholder to acquire Grace. Our Board of Directors responded that we are willing to discuss a sale of Grace in the context of our ongoing review of strategic alternatives and that any transaction would need to be at a price level that reflects the full value of Grace for its shareholders.
Actions of activist shareholders could affect our business because responding to such actions can be costly and time-consuming and disruptive to our operations, and may divert the attention of our Board of Directors, management and employees. Moreover, such actions may create perceived uncertainties among current and potential customers, suppliers, employees and other constituencies as to our future direction, which could result in lost sales and the loss of business opportunities and make it more difficult to attract and retain qualified directors, personnel, and business partners. In addition, actual or perceived actions of activist shareholders may cause significant fluctuations in our stock price that do not necessarily reflect the underlying fundamentals and value of our business.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
Item 2. PROPERTIES
We operate manufacturing plants and other facilities (including offices, warehouses, labs and other service facilities) throughout the world. Some of these plants and facilities are shared by our reportable segments. We consider our major operating properties generally to be in good operating condition and suitable for their current use. We believe that the productive capacity of our plants and other facilities, supplemented by tolling arrangements, is
generally adequate for current operations. The table below summarizes our principal manufacturing plants by reportable segment and region as of December 31, 2018:2020:
| | | | Number of Facilities(1) | | Number of Facilities(1) |
| | North America | | Europe Middle East Africa (EMEA) | | Asia Pacific | | Latin America | | Total | | North America | | Europe Middle East Africa (EMEA) | | Asia Pacific | | Latin America | | Total |
| Catalysts Technologies | 10 |
| | 3 |
| | 2 |
| | — |
| | 15 |
| Catalysts Technologies | 10 | | | 3 | | | 1 | | | — | | | 14 | |
| Owned | 8 |
| | 1 |
| | 2 |
| | — |
| | 11 |
| Owned | 8 | | | 1 | | | 1 | | | — | | | 10 | |
| Leased | 2 |
| | 2 |
| | — |
| | — |
| | 4 |
| Leased | 2 | | | 2 | | | — | | | — | | | 4 | |
| Materials Technologies | 4 |
| | 2 |
| | 1 |
| | 1 |
| | 8 |
| Materials Technologies | 4 | | | 2 | | | 1 | | | 1 | | | 8 | |
| Owned | 2 |
| | 1 |
| | 1 |
| | — |
| | 4 |
| Owned | 3 | | | 1 | | | 1 | | | 1 | | | 6 | |
| Leased | 2 |
| | 1 |
| | — |
| | 1 |
| | 4 |
| Leased | 1 | | | 1 | | | — | | | — | | | 2 | |
| |
(1) | Shared facilities are counted in both reportable segments. The total number of facilities included in the above table, without regard to sharing between reportable segments, is 20, of which we own 12 and lease 8. |
(1)Shared facilities are counted in both reportable segments. The total number of facilities included in the above table, without regard to sharing between reportable segments, is 19, of which we own 13 and lease 6.
Generally, we own the machinery and equipment at our principal manufacturing plants. We also own the land on which most of our largest manufacturing plants are situated; however, certain manufacturing plants are located on leased land, normally long-term. We own our Corporate Headquarters in Columbia, Maryland. We also lease and operate a shared services facility in Manila, Philippines.
The table below sets forth our principal manufacturing plants by reportable segment.
|
| | | | | | | |
| Catalysts Technologies | | Materials Technologies |
| Aiken, South Carolina | | Dueren, Germany* |
| Baton Rouge, Louisiana* | | East Chicago, Indiana* |
| Chattanooga, Tennessee | | Hesperia, California*California |
| Chicago, Illinois | | Kuantan, Malaysia |
| Lake Charles, Louisiana | | Sorocaba, Brazil*Brazil |
| Norco, Louisiana* | | |
Pasadena, Texas | | |
Qingdao, China | | |
Stenungsund, Sweden* | | Shared |
Tarragona, Spain* | | Albany, Oregon |
Valleyfield, Quebec, Canada | | Curtis Bay, Maryland |
Yeosu, South Korea | | Worms, Germany |
| |
*Pasadena, Texas | Denotes leased site. | |
| Stenungsund, Sweden* | | Shared |
| Tarragona, Spain* | | Albany, Oregon |
| Valleyfield, Quebec, Canada | | Curtis Bay, Maryland |
| Yeosu, South Korea | | Worms, Germany |
*Denotes leased site.
Our three largest manufacturing sites are: Worms, in Germany; and Curtis Bay, Maryland, and Lake Charles, Louisiana, in the United States. The unanticipated loss of any of our manufacturing, headquarters, or shared services facilities could have a material adverse effect upon our business, financial condition or results of operations.
For information on our net properties and equipment by region and country, see disclosure set forth in Item 8 (Financial Statements and Supplementary Data) in the Financial Supplement under Note 18 (Segment Information) to our Consolidated Financial Statements, which disclosure is incorporated herein by reference.
Security agreements previously in effect with respect to certain of our United States facilities were terminated in connection with the 2018 Credit Agreement. For a description of our credit agreement see Item 8 (Financial
Statements and Supplementary Data) in the Financial Supplement under Note 5 (Debt) to the Consolidated Financial Statements.
Item 3. LEGAL PROCEEDINGS
CHAPTER 11 PROCEEDINGS AND ASBESTOS CLAIMS
Disclosures provided in this Report in Item 1 (Business) and Item 8 (Financial Statements and Supplementary Data) in the Financial Supplement under Note 10 (Commitments and Contingent Liabilities, under the caption “Legacy Liabilities”) to the Consolidated Financial Statements, are incorporated herein by reference.
ENVIRONMENTAL INVESTIGATIONS AND CLAIMS
Disclosures provided in this Report in Item 1 (Business) under the caption “Environment, Health, Safety, and SafetySecurity Matters” and Item 8 (Financial Statements and Supplementary Data) in the Financial Supplement under Note 10 (Commitments and Contingent Liabilities, under the caption “Legacy Environmental Liabilities”) to the Consolidated Financial Statements, are incorporated herein by reference.
Item 4. MINE SAFETY DISCLOSURES
Information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K (17 CFR 229.104) is included in Exhibit 95 to this Report.
INFORMATION ABOUT OUR EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction G(3) of Form 10-K, the following list of executive officers of Grace as of February 15, 2019,2021, is included as an unnumbered Item in Part I of this report in lieu of being included in the Grace Proxy Statement relating to the 2021 Annual Meeting of Stockholders to be held on May 8, 2019.Shareholders. Our executive officers are elected annually.
|
| | | | | | | | | | | | | |
| Name and Age | | Office | | First Elected |
Hudson La Force (54)(56) | | President and Chief Executive Officer
Director
| | November 8, 2018
November 2, 2017
|
| William C. Dockman (61) | | Senior Vice President and Chief Financial Officer | | May 8, 2019 |
Elizabeth C. Brown (55)(57) | | Senior Vice President and Chief Human Resources Officer | | January 21, 2015 |
Keith N. Cole (60)(62) | | Senior Vice President, Government RelationsPublic Affairs and Environmental,Environment, Health, Safety, and SafetyChief Sustainability Officer | | February 10, 2014 |
Mark A. Shelnitz (60)Cherée H. Johnson (45) | | Senior Vice President, General Counsel and Secretary | | April 27, 2005January 11, 2021 |
Messrs.Mr. La Force, Cole,Ms. Brown, and ShelnitzMr. Cole have been actively engaged in Grace’s business as executive officers for the past five years. Mr. La Force is Grace’s Principal Executive Officer and Acting Principal Financial Officer.
Ms. BrownMr. Dockman joined Grace in 2015.1999. From 20102012 until she he became an executive officer, Mr. Dockman was Grace’s Vice President—Finance, Controller and Chief Accounting Officer. Mr. Dockman is Grace’s Principal Financial Officer and its Principal Accounting Officer.
Ms. Johnson joined Grace in 2021. From 2015 until Ms. Brown held leadership positions in human resources for Tyco International Limited (now Johnson Controls, Inc.).became an executive officer of Grace, she was Deputy General Counsel and Assistant Corporate Secretary with McCormick & Company, Incorporated.
PART II
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Except as provided below, the disclosure required by this Item appears in this Report in: Item 6 (Selected Financial Data); under the heading “Selected Financial Data” opposite the caption “Other Statistics—Common shareholders of record” in the Financial Supplement;; Item 8 (Financial Statements and Supplementary Information) in the Financial Supplement in Note 14 (Shareholders’ Equity) and Note 2221 (Quarterly Financial Information (Unaudited)) opposite the caption “Dividends declared per share” to the Consolidated Financial Statements; and Item 12 (Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters), and such disclosure is incorporated herein by reference.
COMPANY COMMON STOCK
The principal market for Company common stock is the New York Stock Exchange, under the symbol GRA.
DIVIDENDS ON COMPANY COMMON STOCK
On February 7, 2019,8, 2021, we announced that theour Board of Directors had approved an increase to the annual cash dividend rate, from $0.96$1.20 to $1.08$1.32 per share of Company common stock. Grace expectsWe expect to continue growing our dividend as part of our disciplined capital allocation strategy.
Although our credit agreement and indentures (as described in Item 8 (Financial Statements and Supplementary Data) in the Financial Supplement under Note 5 (Debt) to the Consolidated Financial Statements and filed as an exhibit to this Report) contain certain restrictions on the payment of dividends on, and redemptions of, equity interests and other restricted payments, we believe that such restrictions do not currently materially limit our ability to pay dividends. Any determination to pay cash dividends in the future may be affected by business and market conditions, our views on potential future capital requirements, the restrictions noted above and those that may be imposed by applicable law, covenants contained in any agreements we may enter into in the future and changes in federal income tax law.
SHARE REPURCHASES
On February 5, 2015,8, 2017, we announced that theour Board of Directors had authorized a share repurchase program of up to $500 million, which we completed on July 10, 2017.$250 million. On February 8, 2017,28, 2020, we announced that theour Board of Directors authorized an additionalhad increased its share repurchase program of upauthorization to $250 million.million, including approximately $83 million remaining under the previously announced program. Repurchases under the programs may be made through one or more open market transactions at prevailing market prices; unsolicited or solicited privately negotiated transactions; accelerated share repurchase programs; or through any combination of the foregoing, or in such other manner as determined by management. The timing of the repurchases and the actual amount repurchased will depend on a variety of factors, including the market price of Grace’sthe Company’s shares, strategic priorities for the strategic deployment of capital, and general market and economic conditions. We temporarily suspended our share repurchase program in early March 2020 in light of the COVID-19 pandemic. We expect to resume our share repurchase program in 2021.
The following table presents information regardingDuring the status ofthree months ended December 31, 2020, there were no repurchases of Company common stock by or on behalf of Grace or any “affiliated purchaser” of Grace.purchaser,” as reflected in the following table:
Issuer Purchases of Equity Securities | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Total number of shares purchased
(#) | | Average price paid per share
($/share) | | Total number of shares purchased as part of publicly announced plans or programs
(#) | | Approximate dollar value of shares that may yet be purchased under the plans or programs
($ in millions) |
| 10/1/2020 - 10/31/2020 | | — | | | — | | | — | | | 235.0 | |
| 11/1/2020 - 11/30/2020 | | — | | | — | | | — | | | 235.0 | |
| 12/1/2020 - 12/31/2020 | | — | | | — | | | — | | | 235.0 | |
| Total | | — | | | — | | | — | | | |
|
| | | | | | | | | | | | |
| | | Total number of shares purchased (#) | | Average price paid per share ($/share) | | Total number of shares purchased as part of publicly announced plans or programs (#) | | Approximate dollar value of shares that may yet be purchased under the plans or programs ($ in millions) |
| 10/1/2018 - 10/31/2018 | | 108,836 |
| | 66.23 |
| | 108,836 |
| | 151.5 |
|
| 11/1/2018 - 11/30/2018 | | 196,607 |
| | 64.17 |
| | 196,607 |
| | 138.9 |
|
| 12/1/2018 - 12/31/2018 | | — |
| | — |
| | — |
| | 138.9 |
|
| Total | | 305,443 |
| | 64.90 |
| | 305,443 |
| | 138.9 |
|
STOCK PERFORMANCE GRAPH
The following information in Item 5 is not deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) or to the liabilities of Section 18 of the Exchange Act, and will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent Grace specifically incorporates it by reference into such a filing.
The line graph and table below compare the cumulative total shareholder return on Company common stock with the cumulative total return of companies on the Standard & Poor’s (“S&P”) 500 Stock Index, the S&P Composite 1500 Specialty Chemicals Index and S&P 1500 Diversified Chemicals Index. This graph and table assume the investment of $100 in Company common stock on December 31, 2013.2015. Cash dividends paid in 2016 through 20182020 are assumed reinvested for the graph and table below.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2015 | | 2016 | | 2017 | | 2018 | | 2019 | | 2020 |
| W. R. Grace & Co.(1) | $ | 100 | | | $ | 85 | | | $ | 89 | | | $ | 84 | | | $ | 92 | | | $ | 74 | |
| S&P 500 Index | 100 | | | 112 | | | 136 | | | 130 | | | 171 | | | 203 | |
| S&P 1500 Specialty Chemicals | 100 | | | 112 | | | 140 | | | 132 | | | 156 | | | 181 | |
| S&P 1500 Diversified Chemicals | 100 | | | 115 | | | 150 | | | 114 | | | 101 | | | 136 | |
(1)W. R. Grace & Co. stock value at December 31, 2015, reflects the adjusted post-Separation market value.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2013 | | 2014 | | 2015 | | 2016 | | 2017 | | 2018 |
| W. R. Grace & Co.(1) | $ | 100 |
| | $ | 96 |
| | $ | 101 |
| | $ | 86 |
| | $ | 90 |
| | $ | 85 |
|
| S&P 500 Index | 100 |
| | 114 |
| | 115 |
| | 129 |
| | 157 |
| | 150 |
|
| S&P 1500 Specialty Chemicals | 100 |
| | 118 |
| | 116 |
| | 130 |
| | 162 |
| | 152 |
|
| S&P 1500 Diversified Chemicals | 100 |
| | 107 |
| | 109 |
| | 126 |
| | 163 |
| | 124 |
|
| |
(1) | W. R. Grace & Co. stock value at December 31, 2013, reflects the adjusted post-Separation market value. |
Item 6. SELECTED FINANCIAL DATA
The disclosure required by this Item appears | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions, except per share amounts and shareholders) | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| Statement of Operations | | | | | | | | | |
| Net sales | $ | 1,729.8 | | | $ | 1,958.1 | | | $ | 1,932.1 | | | $ | 1,716.5 | | | $ | 1,598.6 | |
| Income (loss) from continuing operations(1)(2) | (1.7) | | | 126.7 | | | 166.8 | | | 10.4 | | | 107.0 | |
| Financial Position | | | | | | | | | |
| Total assets | 3,765.5 | | | 3,932.6 | | | 3,565.3 | | | 2,907.0 | | | 2,911.8 | |
| Debt payable after one year | 1,975.1 | | | 1,957.3 | | | 1,961.0 | | | 1,523.8 | | | 1,507.6 | |
| Shareholders’ equity | 234.5 | | | 402.2 | | | 337.0 | | | 263.3 | | | 372.4 | |
| Data Per Common Share | | | | | | | | | |
| Income (loss) from continuing operations—basic | $ | (0.03) | | | $ | 1.89 | | | $ | 2.49 | | | $ | 0.16 | | | $ | 1.53 | |
| Income (loss) from continuing operations—diluted | (0.03) | | | 1.89 | | | 2.49 | | | 0.16 | | | 1.52 | |
| Dividends declared | 1.20 | | | 1.08 | | | 0.96 | | | 0.84 | | | 0.51 | |
| Other Statistics | | | | | | | | | |
| Common shareholders of record | 3,423 | | | 3,749 | | | 4,369 | | | 4,646 | | | 4,895 | |
(1)Adjustments related to our legacy liabilities and pension mark-to-market accounting are included in and affect the period-to-period comparability of “income (loss) from continuing operations” and the related data per common share. See Note 18 to the Consolidated Financial Supplement underStatements for a detail of these items.
(2)For 2017, “Income (loss) from continuing operations” includes a charge of $143.0 million related to the heading “Selected Financial Data” which disclosure is incorporated herein by reference.estimated impacts of the U.S. Tax Cuts and Jobs Act of 2017.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The disclosure requiredSee “Analysis of Operations” for a discussion of our non-GAAP performance measures. Our references to “advanced economies” and “emerging regions” refer to classifications established by the International Monetary Fund.
Results of Operations
2020 Performance Summary
Following is a summary of our financial performance for the year ended December 31, 2020, compared with the prior year.
•Net sales decreased 11.7% to $1,729.8 million.
•Net loss attributable to Grace shareholders was $1.8 million.
•Adjusted EBIT1 decreased 34.0% to $312.2 million.
•Diluted loss per share was $0.03 per diluted share.
•Adjusted EPS1 decreased 39.7% to $2.64 per diluted share.
1 Non-GAAP performance measures further discussed below.
Summary Description of Business
We are engaged in specialty chemicals and specialty materials businesses on a worldwide basis through our two reportable segments, Grace Catalysts Technologies and Grace Materials Technologies. See Item 1 (Business—Business Overview) of this Item appearsReport for a summary description of our business.
Analysis of Operations
We have set forth in the Financial Supplement undertable below our key operating statistics with percentage changes for the heading “Management’syears ended December 31, 2020, 2019, and 2018. Please refer to this Analysis of Operations when reviewing this Management’s Discussion and Analysis of Financial Condition and Results of Operations”Operations. In the table we present financial information in accordance with U.S. GAAP, as well as the non-GAAP financial information described below. We believe that the non-GAAP financial information provides useful supplemental information about the performance of our businesses, improves period-to-period comparability, and provides clarity on the information our management uses to evaluate the performance of our businesses. In the table, we have provided reconciliations of these non-GAAP financial measures to the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP. The non-GAAP financial measures should not be considered as a substitute for financial measures calculated in accordance with U.S. GAAP, and the financial results calculated in accordance with U.S. GAAP and reconciliations from those results should be evaluated carefully.
We define Adjusted EBIT (a non-GAAP financial measure) to be net income attributable to W. R. Grace & Co. shareholders adjusted for interest income and expense; income taxes; costs related to legacy matters; restructuring and repositioning expenses and asset impairments; pension costs other than service and interest costs, expected returns on plan assets, and amortization of prior service costs/credits; gains and losses on sales and exits of businesses, product lines, and certain other investments; third-party acquisition-related costs and the amortization of acquired inventory fair value adjustment; gains and losses on modification or extinguishment of debt; the effects of these items on equity in earnings of unconsolidated affiliate; and certain other items that are not representative of underlying trends.
We define Adjusted EBITDA (a non-GAAP financial measure) to be Adjusted EBIT adjusted for depreciation and amortization, and depreciation and amortization included in equity in earnings of unconsolidated affiliate (collectively, Adjusted Depreciation and Amortization).
We define Adjusted EBIT Return on Invested Capital (a non-GAAP financial measure) to be Adjusted EBIT (on a trailing four quarters basis) divided by Adjusted Invested Capital, which is defined as equity adjusted for
debt; underfunded and unfunded defined benefit pension plans; liabilities related to legacy matters; cash, cash equivalents, and restricted cash; net income tax assets; and certain other assets and liabilities.
We define Adjusted Gross Margin (a non-GAAP financial measure) to be gross margin adjusted for pension-related costs included in cost of goods sold, the amortization of acquired inventory fair value adjustment, and write-offs of inventory related to exits of businesses and product lines and significant manufacturing process changes.
We define Adjusted Earnings Per Share (EPS) (a non-GAAP financial measure) to be diluted EPS adjusted for costs related to legacy matters; restructuring and repositioning expenses and asset impairments; pension costs other than service and interest costs, expected returns on plan assets, and amortization of prior service costs/credits; gains and losses on sales and exits of businesses, product lines and certain other investments; third-party acquisition-related costs and the amortization of acquired inventory fair value adjustment; gains and losses on modification or extinguishment of debt; certain other items that are not representative of underlying trends; certain discrete tax items; and income tax expense related to historical tax attributes.
We define the change in net sales on a constant currency basis (a non-GAAP financial measure) to be the period-over-period change in net sales calculated using the foreign currency exchange rates that were in effect during the previous comparable period.
“Legacy matters” include legacy (i) product, (ii) environmental, and (iii) other liabilities, relating to past activities of Grace.
In the 2020 first quarter, the definition of Adjusted EBIT was modified to adjust for the effects of interest and taxes on equity in earnings of unconsolidated affiliate. The definition of Adjusted EBITDA was modified to adjust for the effects of depreciation and amortization on equity in earnings of unconsolidated affiliate. We made these changes to provide clarity about the impacts of these items on our equity in earnings of unconsolidated affiliate and to improve consistency in our application of non-GAAP financial measures. Previously reported amounts were revised to conform to the current presentation.
We use Adjusted EBIT as a performance measure in significant business decisions and in determining certain incentive compensation. We use Adjusted EBIT as a performance measure because it provides improved period-to-period comparability for decision making and compensation purposes, and because it better measures the ongoing earnings results of our strategic and operating decisions by excluding the earnings effects of our legacy matters; restructuring and repositioning activities; certain acquisition-related items; and certain other items that are not representative of underlying trends.
We use Adjusted EBITDA, Adjusted EBIT Return on Invested Capital, Adjusted Gross Margin, and Adjusted EPS as performance measures and may use these measures in determining certain incentive compensation. We use Adjusted EBIT Return on Invested Capital in making operating and investment decisions and in balancing the growth and profitability of our operations.
We use the change in net sales on a constant currency basis as a performance measure to compare current period financial performance to historical financial performance by excluding the impact of foreign currency exchange rate fluctuations that are not representative of underlying business trends and are largely outside of our control.
Adjusted EBIT, Adjusted EBITDA, Adjusted EBIT Return on Invested Capital, Adjusted Gross Margin, Adjusted EPS, and the change in net sales on a constant currency basis are non-GAAP financial measures; do not purport to represent income measures as defined under U.S. GAAP; and should not be used as alternatives to such measures as an indicator of our performance. These measures are provided to investors and others to improve the period-to-period comparability and peer-to-peer comparability of our financial results, and to ensure that investors understand the information we use to evaluate the performance of our businesses. They distinguish the operating results of Grace’s current business base from the costs of Grace’s legacy matters; restructuring and repositioning activities; and certain other items. These measures may have material limitations due to the exclusion or inclusion of amounts that are included or excluded, respectively, in the most directly comparable measures calculated and presented in accordance with U.S. GAAP, and thus investors and others should review carefully our financial results calculated in accordance with U.S. GAAP.
Adjusted EBIT has material limitations as an operating performance measure because it excludes costs related to legacy matters, and may exclude income and expenses from restructuring, repositioning, and other activities, which historically have been material components of our net income. Adjusted EBITDA also has material limitations as an operating performance measure because it excludes the impact of depreciation and amortization expense. Our business is substantially dependent on the successful deployment of capital, and depreciation and amortization expense is a necessary element of our costs. We compensate for the limitations of these measurements by using these indicators together with net income as measured under U.S. GAAP to present a complete analysis of our results of operations. Adjusted EBIT and Adjusted EBITDA should be evaluated together with net income and net income attributable to Grace shareholders, measured under U.S. GAAP, for a complete understanding of our results of operations.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Analysis of Operations
(In millions, except per share amounts) | Year Ended December 31, |
| 2020 | | 2019 | | % Change | | 2018 | | % Change |
| Net sales: | | | | | | | | | |
| Catalysts Technologies | $ | 1,271.4 | | | $ | 1,496.7 | | | (15.1) | % | | $ | 1,463.5 | | | 2.3 | % |
| Materials Technologies | 458.4 | | | 461.4 | | | (0.7) | % | | 468.6 | | | (1.5) | % |
| Total Grace net sales | $ | 1,729.8 | | | $ | 1,958.1 | | | (11.7) | % | | $ | 1,932.1 | | | 1.3 | % |
| Net sales by region: | | | | | | | | | |
| North America | $ | 508.4 | | | $ | 597.8 | | | (15.0) | % | | $ | 581.7 | | | 2.8 | % |
| Europe Middle East Africa | 721.0 | | | 791.6 | | | (8.9) | % | | 752.2 | | | 5.2 | % |
| Asia Pacific | 413.5 | | | 475.4 | | | (13.0) | % | | 481.5 | | | (1.3) | % |
| Latin America | 86.9 | | | 93.3 | | | (6.9) | % | | 116.7 | | | (20.1) | % |
| Total net sales by region | $ | 1,729.8 | | | $ | 1,958.1 | | | (11.7) | % | | $ | 1,932.1 | | | 1.3 | % |
| Performance measures: | | | | | | | | | |
| Adjusted EBIT(A): | | | | | | | | | |
| Catalysts Technologies segment operating income | $ | 309.6 | | | $ | 466.4 | | | (33.6) | % | | $ | 440.9 | | | 5.8 | % |
| Materials Technologies segment operating income | 85.0 | | | 97.8 | | | (13.1) | % | | 105.6 | | | (7.4) | % |
| Corporate costs | (68.0) | | | (72.7) | | | 6.5 | % | | (73.5) | | | 1.1 | % |
| | | | | | | | | |
| Certain pension costs(B)(C) | (14.4) | | | (18.4) | | | 21.7 | % | | (15.9) | | | (15.7) | % |
| Adjusted EBIT | 312.2 | | | 473.1 | | | (34.0) | % | | 457.1 | | | 3.5 | % |
| Pension MTM adjustment and other related costs, net(B)(C) | (94.6) | | | (85.9) | | | | | 15.2 | | | |
| Loss on early extinguishment of debt | (39.4) | | | — | | | | | (4.8) | | | |
| Costs related to legacy matters | (39.4) | | | (103.5) | | | | | (82.3) | | | |
| Restructuring and repositioning expenses attributable to W. R. Grace & Co. shareholders | (36.9) | | | (13.7) | | | | | (46.4) | | | |
| Inventory write-offs and disposal costs(D) | (20.7) | | | (3.6) | | | | | — | | | |
| Third-party acquisition-related costs | (5.2) | | | (3.6) | | | | | (7.3) | | | |
| Taxes and interest included in equity in earnings of unconsolidated affiliate | (0.7) | | | 0.1 | | | | | (0.4) | | | |
| Benefit plan adjustment | — | | | (5.0) | | | | | — | | | |
| Amortization of acquired inventory fair value adjustment | — | | | — | | | | | (6.9) | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Interest expense, net | (74.9) | | | (74.8) | | | (0.1) | % | | (78.5) | | | 4.7 | % |
| (Provision for) benefit from income taxes | (2.2) | | | (56.8) | | | 96.1 | % | | (78.1) | | | 27.3 | % |
| Net income (loss) attributable to W. R. Grace & Co. shareholders | $ | (1.8) | | | $ | 126.3 | | | (101.4) | % | | $ | 167.6 | | | (24.6) | % |
| Diluted EPS | $ | (0.03) | | | $ | 1.89 | | | (101.6) | % | | $ | 2.49 | | | (24.1) | % |
| Adjusted EPS | $ | 2.64 | | | $ | 4.38 | | | (39.7) | % | | $ | 4.14 | | | 5.8 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Analysis of Operations
(In millions) | Year Ended December 31, |
| 2020 | | 2019 | | % Change | | 2018 | | % Change |
| Adjusted performance measures: | | | | | | | | | |
| Gross Margin: | | | | | | | | | |
| Catalysts Technologies | 39.2 | % | | 42.8 | % | | (3.6) pts | | 41.7 | % | | 1.1 pts |
| Materials Technologies | 33.6 | % | | 36.5 | % | | (2.9) pts | | 37.8 | % | | (1.3) pts |
| Adjusted Gross Margin | 37.7 | % | | 41.4 | % | | (3.7) pts | | 40.7 | % | | 0.7 pts |
| Inventory write-offs(D) | (1.2) | % | | (0.2) | % | | (1.0) pts | | — | % | | (0.2) pts |
| Pension in cost of goods sold | (0.9) | % | | (0.7) | % | | (0.2) pts | | (0.7) | % | | — pts |
| Amortization of acquired inventory fair value adjustment | — | % | | — | % | | — pts | | (0.3) | % | | 0.3 pts |
| Total Grace | 35.6 | % | | 40.5 | % | | (4.9) pts | | 39.7 | % | | 0.8 pts |
| Adjusted EBIT: | | | | | | | | | |
| Catalysts Technologies | $ | 309.6 | | | $ | 466.4 | | | (33.6) | % | | $ | 440.9 | | | 5.8 | % |
| Materials Technologies | 85.0 | | | 97.8 | | | (13.1) | % | | 105.6 | | | (7.4) | % |
| Corporate, pension, and other | (82.4) | | | (91.1) | | | 9.5 | % | | (89.4) | | | (1.9) | % |
| Total Grace | $ | 312.2 | | | $ | 473.1 | | | (34.0) | % | | $ | 457.1 | | | 3.5 | % |
| Depreciation and amortization: | | | | | | | | | |
| Catalysts Technologies depreciation and amortization | $ | 85.3 | | | $ | 81.9 | | | 4.2 | % | | $ | 81.7 | | | 0.2 | % |
| Depreciation and amortization included in equity in earnings of unconsolidated affiliate | 3.3 | | | 0.5 | | | NM | | 0.5 | | | — | % |
| Catalysts Technologies | 88.6 | | | 82.4 | | | 7.5 | % | | 82.2 | | | 0.2 | % |
| Materials Technologies | 15.0 | | | 14.2 | | | 5.6 | % | | 15.5 | | | (8.4) | % |
| Corporate | 4.7 | | | 4.2 | | | 11.9 | % | | 3.6 | | | 16.7 | % |
| Adjusted Depreciation and Amortization | 108.3 | | | 100.8 | | | 7.4 | % | | 101.3 | | | (0.5) | % |
| Depreciation and amortization included in equity in earnings of unconsolidated affiliate | (3.3) | | | (0.5) | | | NM | | (0.5) | | | — | % |
| Total Grace | $ | 105.0 | | | $ | 100.3 | | | 4.7 | % | | $ | 100.8 | | | (0.5) | % |
| Adjusted EBITDA: | | | | | | | | | |
| Catalysts Technologies | $ | 398.2 | | | $ | 548.8 | | | (27.4) | % | | $ | 523.1 | | | 4.9 | % |
| Materials Technologies | 100.0 | | | 112.0 | | | (10.7) | % | | 121.1 | | | (7.5) | % |
| Corporate, pension, and other | (77.7) | | | (86.9) | | | 10.6 | % | | (85.8) | | | (1.3) | % |
| Total Grace | $ | 420.5 | | | $ | 573.9 | | | (26.7) | % | | $ | 558.4 | | | 2.8 | % |
| Adjusted EBIT margin: | | | | | | | | | |
| Catalysts Technologies | 24.4 | % | | 31.2 | % | | (6.8) pts | | 30.1 | % | | 1.1 pts |
| Materials Technologies | 18.5 | % | | 21.2 | % | | (2.7) pts | | 22.5 | % | | (1.3) pts |
| Total Grace | 18.0 | % | | 24.2 | % | | (6.2) pts | | 23.7 | % | | 0.5 pts |
| Net income margin | (0.1) | % | | 6.5 | % | | (6.6) pts | | 8.7 | % | | (2.2) pts |
| Adjusted EBITDA margin: | | | | | | | | | |
| Catalysts Technologies | 31.3 | % | | 36.7 | % | | (5.4) pts | | 35.7 | % | | 1.0 pts |
| Materials Technologies | 21.8 | % | | 24.3 | % | | (2.5) pts | | 25.8 | % | | (1.5) pts |
| Total Grace | 24.3 | % | | 29.3 | % | | (5.0) pts | | 28.9 | % | | 0.4 pts |
| | | | | | | | | | | | | | | | | |
Analysis of Operations
(In millions) | Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
| Calculation of Adjusted EBIT Return On Invested Capital (trailing four quarters): | | | | | |
| Net Income | $ | (1.8) | | | $ | 126.3 | | | $ | 167.6 | |
| Adjusted EBIT | 312.2 | | | 473.1 | | | 457.1 | |
| Reconciliation to Adjusted Invested Capital: | | | | | |
| Total equity | 234.5 | | | 402.2 | | | 337.0 | |
| Debt | 1,990.4 | | | 1,980.4 | | | 1,983.3 | |
| Underfunded and unfunded defined benefit pension plans | 649.0 | | | 519.8 | | | 433.1 | |
| Liabilities related to legacy matters | 224.1 | | | 206.7 | | | 126.9 | |
| Cash, cash equivalents, and restricted cash | (306.2) | | | (282.9) | | | (201.0) | |
| Net income tax assets | (555.3) | | | (501.6) | | | (517.3) | |
| Other items | 13.7 | | | 19.7 | | | 21.6 | |
| Adjusted Invested Capital | $ | 2,250.2 | | | $ | 2,344.3 | | | $ | 2,183.6 | |
| | | | | |
| GAAP Return on Equity | (0.8) | % | | 31.4 | % | | 49.7 | % |
| Adjusted EBIT ROIC | 13.9 | % | | 20.2 | % | | 20.9 | % |
Amounts may not add due to rounding.
NM—Not Meaningful
(A)Grace’s segment operating income includes only Grace’s share of income of consolidated and unconsolidated joint ventures.
(B)Certain pension costs include only ongoing costs recognized quarterly, which include service and interest costs, expected returns on plan assets, and amortization of prior service costs/credits. Catalysts Technologies and Materials Technologies segment operating income and corporate costs do not include any amounts for pension expense. Other pension-related costs including annual mark-to-market (MTM) adjustments and actuarial gains and losses are excluded from Adjusted EBIT. These amounts are not used by management to evaluate the performance of Grace’s businesses and significantly affect the peer-to-peer and period-to-period comparability of our financial results. Mark-to-market adjustments and actuarial gains and losses relate primarily to changes in financial market values and actuarial assumptions and are not directly related to the operation of Grace’s businesses.
(C)“Defined benefit pension expense” as measured under U.S. GAAP includes actuarial gains and losses and actual returns on assets. Adjusted EBIT includes expected returns on assets but excludes both actuarial gains and losses and actual returns on assets. The table below presents expected and actual returns on plan assets for U.S. and non-U.S. plans for the years ended December 31, 2020, 2019, and 2018.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2018 |
| (In millions) | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| Actual return on plan assets | $ | 115.7 | | | $ | 2.3 | | | $ | 154.6 | | | $ | 4.1 | | | $ | (41.9) | | | $ | (1.7) | |
| Actual return on plan assets | 13.00 | % | | 9.02 | % | | 18.90 | % | | 20.00 | % | | (3.51) | % | | (8.01) | % |
| Expected return on plan assets | $ | 48.3 | | | $ | 1.0 | | | $ | 48.2 | | | $ | 0.9 | | | $ | 57.2 | | | $ | 1.0 | |
| Expected return on plan assets | 5.25 | % | | 4.17 | % | | 5.75 | % | | 4.43 | % | | 5.25 | % | | 4.69 | % |
(D)Inventory write-off in 2020 related to the changes in hydroprocessing catalysts manufacturing operations. Inventory write-off in 2019 related to the idling of Grace’s methanol-to-olefins manufacturing facility.
Grace Overview
Following is an overview of our financial performance for the years ended December 31, 2020, 2019, and 2018.
Impact of COVID-19 Pandemic and Recession
The COVID-19 pandemic has led to significantly lower transportation fuel demand and a reduction in refining activity, which has negatively affected demand for our refining catalysts. Demand for manufactured products, including polyolefin resins and products made with our specialty silicas, has also declined and negatively affected demand for our polyolefin catalysts and specialty silicas.
While COVID-19 had a significant negative impact on our financial results for 2020, we are well positioned to meet the operational and financial challenges caused by the pandemic until the economy recovers. Our first priority is the health and safety of our employees. We have fully implemented our pandemic response plan, including significant new safety protocols throughout our operations. We are also focused on business continuity to ensure we continue delivering value to all of our customers. Our workforce remains safe and healthy, and we have experienced no business continuity issues in our global operations or supply chain. Approximately 45% of our global workforce shifted to working remotely beginning in March 2020.
We took decisive actions to mitigate the economic effects of the pandemic to ensure we generated strong cash flow in 2020, including lowering capital spending, improving working capital to generate cash flow, reducing operating costs, and aligning production volumes to match near-term demand.
Understanding near-term demand in our operating segments is critically important to effectively managing our operations, working capital, and costs. We are triangulating customer information, economic and industry data, inventory levels, and our own experience to plan our operations. For 2021:
•Specialty catalysts demand is expected to continue to improve through the year on strong consumer demand and continued strength of our UNIPOL® Polypropylene Process Technology licensing business;
•Materials Technologies demand is expected to grow year over year on continued strength of pharma/consumer and coatings, as well as further recovery in chemical process demand; and
•FCC catalysts demand is expected to improve sequentially throughout the year and approach pre-pandemic levels by the end of the year. Transportation fuel demand and refinery utilization still remain below normal levels for the industry, and the effects of the pandemic are expected to continue to be a headwind until demand more fully recovers.
The above does not assume a double dip recession or a resurgence in the pandemic. See Item 1A. (Risk Factors) in Part I of this Report for more information on the risks we face related to the COVID-19 pandemic. With respect to the above information regarding our expectations for 2021 and other statements regarding future events, see “Forward-Looking Statements,” above.
Impact of Hurricane Laura
During the third quarter, Hurricane Laura caused severe and widespread damage to Lake Charles, Louisiana, and surrounding communities, including catastrophic damage to the regional power grid. To ensure continuity of supply for our customers, our Lake Charles refining catalysts manufacturing facility established a temporary on-site 20MW power generation capability. During the power outage, customer demand was met from inventory in Lake Charles and by shifting FCC and hydroprocessing catalysts production to other manufacturing facilities, which increased our operating costs. This created no significant impact to our customers. While this is an insured event, the total costs do not exceed our deductible.
Event-related costs were approximately $19 million. The costs, included in Catalysts Technologies segment operating income, were primarily related to on-site power generation, incremental operations and logistics costs to supply customers during the outage, temporary housing and employee assistance, and property damage and clean-up.
Discrete Items Impacting 2019
Four discrete items (the “Discrete Items”) impacted 2019 full-year results:
•Refining Technologies: an FCC catalysts customer’s bankruptcy following a fire resulting in the closure of its refinery;
•Specialty Catalysts: a customer-specific inventory correction in the second half of 2019;
•Specialty Catalysts: customer-specific temporary reductions in operating rates and catalyst usage due to reduced feedstock supply following an attack in the Middle East; and
•MaterialsTechnologies: an equipment failure in one of our silicas manufacturing lines (operations fully restored by mid-July).
These Discrete Items reduced 2019 full-year net sales by approximately $36 million. These Discrete Items also reduced pretax income and Adjusted EBIT by approximately $36 million. The earnings effect included lost margin on lower sales, the costs of adjusting our manufacturing operations in response to lower demand, costs incurred to serve customers and minimize any impact to their operations, and costs related to the FCC catalysts customer bankruptcy. These effects were partially mitigated by an approximately $12 million benefit from cost-reduction activities in response to these events and $8 million of business interruption proceeds from the FCC catalyst customer event, resulting in a net reduction to 2019 pretax income of approximately $16 million. We received insurance recoveries of an additional $16.3 million in the first half of 2020 under our business interruption insurance policy. This claim has been fully resolved.
Net Sales and Gross Margin
Sales for 2020 decreased 11.7% overall and on constant currency compared with the prior year. The decrease was driven by lower sales volumes resulting primarily from the COVID-19 pandemic, partially offset by improved pricing in both segments. Lower sales volumes in Catalysts Technologies were primarily due to lower demand for global transportation fuels and refinery operating rates driven by the COVID-19 pandemic and recession and a generally weaker manufacturing environment during the 2020 first quarter. In Materials Technologies, growth in pharma/consumer end markets was offset by weakness in chemical process end markets.
Gross margin decreased 490 basis points to 35.6% from 40.5% for the prior year. Adjusted Gross Margin decreased 370 basis points to 37.7% from 41.4% for the prior year. The decreases were primarily driven by under-absorbed fixed costs resulting from lower production volumes and inventory reductions, partially offset by improved product mix and cost mitigation actions. Strong sequential improvement in the second half of the year was primarily driven by higher production rates.
Sales for 2019 increased 1.3% overall compared with the prior year, up 3.0% on constant currency. The increase was driven by improved pricing in both segments and all regions. Higher sales volumes in Catalysts Technologies were driven by Specialty Catalyst growth in EMEA and Asia Pacific and the 2018 second quarter
polyolefin catalysts acquisition, partially offset by the Discrete Items. Sales volume in Materials Technologies were up driven by growth in the Americas, partially offset by a decline in Asia Pacific and EMEA.
Gross margin increased 80 basis points to 40.5% from 39.7% for the prior year. Adjusted Gross Margin increased 70 basis points to 41.4% from 40.7% for the prior year. Improved pricing, higher sales volumes, favorable mix, and lower depreciation were partially offset by higher manufacturing costs, including a 20 basis point impact related to higher raw materials and energy costs.
The following tables identify the year-over-year increase or decrease in sales attributable to changes in sales volume and/or mix, product price, and the impact of currency translation.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| 2020 as a Percentage Increase (Decrease) from 2019 |
| Net Sales Variance Analysis | Volume | | Price | | Currency
Translation | | | | Total |
| Catalysts Technologies | (15.5) | % | | 0.3 | % | | 0.1 | % | | | | (15.1) | % |
| Materials Technologies | (0.6) | % | | 0.3 | % | | (0.4) | % | | | | (0.7) | % |
| Net sales | (12.0) | % | | 0.3 | % | | — | % | | | | (11.7) | % |
| By Region: | | | | | | | | | |
| North America | (15.1) | % | | 0.1 | % | | — | % | | | | (15.0) | % |
| Europe Middle East Africa | (10.7) | % | | 1.3 | % | | 0.5 | % | | | | (8.9) | % |
| Asia Pacific | (12.4) | % | | (0.6) | % | | — | % | | | | (13.0) | % |
| Latin America | (1.6) | % | | (1.1) | % | | (4.2) | % | | | | (6.9) | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| 2019 as a Percentage Increase (Decrease) from 2018 |
| Net Sales Variance Analysis | Volume | | Price | | Currency
Translation | | Total |
| Catalysts Technologies | 0.9 | % | | 2.5 | % | | (1.1) | % | | 2.3 | % |
| Materials Technologies | 0.3 | % | | 1.9 | % | | (3.7) | % | | (1.5) | % |
| Net sales | 0.6 | % | | 2.4 | % | | (1.7) | % | | 1.3 | % |
| By Region: | | | | | | | |
| North America | 0.2 | % | | 2.6 | % | | — | % | | 2.8 | % |
| Europe Middle East Africa | 6.0 | % | | 3.0 | % | | (3.8) | % | | 5.2 | % |
| Asia Pacific | (1.8) | % | | 0.7 | % | | (0.2) | % | | (1.3) | % |
| Latin America | (20.7) | % | | 4.4 | % | | (3.8) | % | | (20.1) | % |
Grace Net Income
Net income (loss) attributable to Grace was $(1.8) million for 2020 compared with $126.3 million for the prior year. The decrease was primarily due to lower gross profit including the write-off of obsolete inventory, a loss on early extinguishment of debt, and a write-off of previously capitalized plant engineering and site costs, partially offset by a lower provision for income taxes including the benefit from income tax attributes and lower operating
expenses in 2020. The prior year included higher costs related to legacy matters, including higher charges related to the Libby, Montana, dam spillway replacement project (see below) and a charge related to probable future payments with respect to our former ZAI product.
During the 2020 third quarter, we completed a review of contractor bids for the replacement of the upper portion of the dam spillway at the former Libby, Montana, mine site and increased our cost estimate for the total project by $27.0 million, to $95.0 million. The prior-year period included charges of $45.0 million related to these projects. The 2019 fourth quarter included additional charges of $23.0 million related to these projects. See Note 10 to the Consolidated Financial Statements for further discussion.
During the 2020 second quarter, we implemented changes to our Refining Technologies manufacturing operations and global footprint to drive capital and operating efficiencies as well as support global growth.
Hydroprocessing Catalysts Manufacturing Operations: In connection with our ongoing operating excellence initiatives, we have accelerated the implementation of the Grace Manufacturing System at our three hydroprocessing catalyst manufacturing sites, including optimization of plant processes and key organizational changes. Over time, these changes are expected to benefit operating margins in our ART joint venture. Any margin benefits will be recognized through our equity earnings in the joint venture.
As a result of these changes, we recorded a pre-tax charge of $19.7 million in the 2020 second quarter, which is reflected in cost of goods sold, related to a write-off of inventory now deemed obsolete based on the process changes. The cash costs to dispose of this inventory are approximately $1 million.
Middle East FCC Catalysts Plant: In agreement with our local joint venture partner, we have discontinued the previously announced project to build a full-scale FCC catalysts plant in the Middle East. The decision reflects the rapid advance of FCC catalysts technology and the value of maintaining flexibility in our global manufacturing operations to ensure we can supply the dynamic needs of our customers in a cost- and capital-efficient way. We will continue to invest in our existing manufacturing network to support new technology development and provide the flexibility required to produce advanced catalyst and additive platforms.
In the 2020 second quarter, we recorded a pre-tax charge of $19.7 million to write off engineering and site costs. The expected cash costs to implement this change are approximately $1 million.
Net income attributable to Grace was $126.3 million for 2019 compared with $167.6 million for the prior year. The decrease was primarily due to a loss recorded for the annual pension mark-to-market adjustment and higher costs related to legacy matters, including charges of $68.0 million for the estimated costs of construction of a new dam spillway at our former vermiculite mine site and $24.0 million related to probable future payments with respect to our former ZAI product (see Note 10 to the Consolidated Financial Statements), partially offset by lower restructuring and repositioning expenses, higher operating income from our Catalysts Technologies segment, and a lower provision for income taxes.
Adjusted EBIT
Adjusted EBIT was $312.2 million for 2020, a decrease of 34.0% compared with the prior year primarily due to lower sales and gross profit, an approximately $19 million impact from hurricane-related costs and lower income from our ART joint venture, partially offset by lower operating expenses.
Adjusted EBIT was $473.1 million for 2019, an increase of 3.5% compared with the prior year primarily due to higher sales and gross profit including the 2019 first quarter benefit of the polyolefin catalysts acquisition, partially offset by the net impact of the Discrete Items, lower income from our ART joint venture, and unfavorable currency transaction effects.
Adjusted EPS
The following table reconciles our Diluted EPS (GAAP) to our Adjusted EPS (non-GAAP):
| | | | | | | | | | | | | | | | | | | | | | | |
| 2020 |
| (In millions, except per share amounts) | Pre-Tax | | Tax Effect | | After-Tax | | Per Share |
| Diluted Earnings Per Share | | | | | | | $ | (0.03) | |
| Pension MTM adjustment and other related costs, net | $ | 94.6 | | | $ | 22.6 | | | $ | 72.0 | | | 1.09 | |
| Loss on early extinguishment of debt | 39.4 | | | 9.5 | | | 29.9 | | | 0.45 | |
| Costs related to legacy matters | 39.4 | | | 9.5 | | | 29.9 | | | 0.45 | |
| Restructuring and repositioning expenses | 36.9 | | | 8.7 | | | 28.2 | | | 0.43 | |
| | | | | | | |
| Inventory write-offs and disposal costs | 20.7 | | | 5.0 | | | 15.7 | | | 0.24 | |
| Third-party acquisition-related costs | 5.2 | | | 1.3 | | | 3.9 | | | 0.06 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Discrete tax items | | | 3.1 | | | (3.1) | | | (0.05) | |
| Adjusted EPS | | | | | | | $ | 2.64 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| 2019 |
| (In millions, except per share amounts) | Pre-Tax | | Tax Effect | | After-Tax | | Per Share |
| Diluted Earnings Per Share | | | | | | | $ | 1.89 | |
| Costs related to legacy matters | $ | 103.5 | | | $ | 25.2 | | | $ | 78.3 | | | 1.17 | |
| Pension MTM adjustment and other related costs, net | 85.9 | | | 24.0 | | | 61.9 | | | 0.93 | |
| Restructuring and repositioning expenses | 13.7 | | | 3.0 | | | 10.7 | | | 0.16 | |
| | | | | | | |
| Benefit plan adjustment | 5.0 | | | 1.1 | | | 3.9 | | | 0.06 | |
| Inventory write-offs and disposal costs | 3.6 | | | — | | | 3.6 | | | 0.05 | |
| Third-party acquisition-related costs | 3.6 | | | 0.9 | | | 2.7 | | | 0.04 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Income tax expense related to historical tax attributes(1) | | | (8.6) | | | 8.6 | | | 0.13 | |
| | | | | | | |
| Discrete tax items | | | 3.6 | | | (3.6) | | | (0.05) | |
| Adjusted EPS | | | | | | | $ | 4.38 | |
(1)Our historical tax attribute carryforwards (net operating losses and tax credits) unfavorably affected our tax expense with respect to certain provisions of the Tax Cuts and Jobs Act (“TCJA”). To normalize the effective tax rate, an adjustment was made to eliminate the tax expense impact associated with the historical tax attributes.
| | | | | | | | | | | | | | | | | | | | | | | |
| 2018 |
| (In millions, except per share amounts) | Pre-Tax | | Tax Effect | | After-Tax | | Per Share |
| Diluted Earnings Per Share | | | | | | | $ | 2.49 | |
| Costs related to legacy matters | $ | 82.3 | | | $ | 17.7 | | | $ | 64.6 | | | 0.96 | |
| Restructuring and repositioning expenses | 46.4 | | | 10.0 | | | 36.4 | | | 0.54 | |
| Pension MTM adjustment and certain pension related costs | (15.2) | | | (3.4) | | | (11.8) | | | (0.18) | |
| Third-party acquisition-related costs | 7.3 | | | 1.6 | | | 5.7 | | | 0.08 | |
| Amortization of acquired inventory fair value adjustment | 6.9 | | | 1.5 | | | 5.4 | | | 0.08 | |
| Loss on early extinguishment of debt | 4.8 | | | 1.0 | | | $ | 3.8 | | | 0.06 | |
| Income tax expense related to historical tax attributes(1) | | | (25.6) | | | 25.6 | | | 0.38 | |
| Provisional charge related to the U.S. Tax Cuts and Jobs Act of 2017 | | | 17.1 | | | (17.1) | | | (0.25) | |
| Discrete tax items | | | 1.4 | | | (1.4) | | | (0.02) | |
| Adjusted EPS | | | | | | | $ | 4.14 | |
___________________________________________________________________________________________________________________(1)Our historical tax attribute carryforwards (net operating losses and tax credits) unfavorably affected our tax expense with respect to certain provisions of the TCJA. To normalize the effective tax rate, an adjustment was made to eliminate the tax expense impact associated with the historical tax attributes.
Return on Equity and Adjusted EBIT Return On Invested Capital
Return on equity for 2020 was (0.8)% on a trailing four quarters basis, compared with 31.4% and 49.7% for 2019 and 2018, respectively, on the same basis. The declines were due to lower net income in 2020 and 2019.
Adjusted EBIT Return on Invested Capital for 2020 was 13.9% on a trailing four quarters basis, compared with 20.2% and 20.9% for 2019 and 2018, respectively, on the same basis. The decline from 2019 to 2020 is due to lower Adjusted EBIT. The decline from 2019 to 2018 is primarily due to increased growth capital investments that had not yet been placed into service. These assets were placed in service beginning in mid-2020 and will support volume growth over the next few years. We expect Adjusted EBIT Return on Invested Capital to improve as we recover from the pandemic.
We manage our businesses with the objective of maximizing sales, earnings and cash flow over time. Doing so requires that we successfully balance our growth, profitability and working capital and other investments to support sustainable, long-term financial performance. We use Adjusted EBIT Return On Invested Capital as a performance measure in evaluating operating results, in making operating and investment decisions, and in balancing the growth and profitability of our businesses.
Segment Overview—Grace Catalysts Technologies
Following is an overview of the financial performance of Catalysts Technologies for the years ended December 31, 2020, 2019, and 2018.
Net Sales—Grace Catalysts Technologies
Sales were down 15.1% in 2020, or down 15.2% on constant currency, compared with the prior year. The decrease on a constant currency basis was due to lower sales volumes, partially offset by improved pricing. Specialty Catalysts sales decreased 11.9%, primarily due to lower market demand and customer catalyst inventory corrections in response to the COVID-19 pandemic as well as order timing in our chemical catalysts business. In 2020 we signed seven new UNIPOL® polypropylene process technology licenses totaling approximately 2,800 kilotons of annual resin capacity, which will continue to drive long-term catalysts and donor sales. Refining Technologies sales decreased 17.9% due to the effects of the pandemic on global transportation fuels demand and refinery operating rates.
Gross profit was $497.9 million for 2020, a decrease of 22.4% compared with the prior year. Gross margin was 39.2% compared with 42.8% for the prior year, primarily driven by under-absorbed fixed costs resulting from lower production volumes and inventory reductions, partially offset by a 110 basis point benefit from lower raw materials and energy costs, improved pricing, and cost reduction actions to align manufacturing costs with demand levels.
Sales were up 2.3% in 2019, or up 3.4% on constant currency, compared with the prior year. The increase on a constant currency basis was due to improved pricing in all regions and higher sales volumes, partially offset by lower sales volumes from the Discrete Items. The improved pricing in both Refining Technologies and Specialty Catalysts was driven by our focused value-selling efforts. For the trailing 12 months ending December 31, 2019, FCC pricing was up over 200 basis points. Higher sales volumes in Catalysts Technologies were driven by Specialty Catalysts growth in EMEA and Asia Pacific and the 2018 second quarter polyolefin catalysts acquisition, partially offset by lower sales volumes from the Discrete Items. In 2019, we signed six new UNIPOL® Polypropylene Process Technology licenses totaling approximately 2,500 kilotons of annual resin capacity, which
will continue to drive long-term catalysts and donor sales. Unfavorable currency translation affected both product groups as the U.S. dollar strengthened, primarily against the euro, compared with the prior-year period.
Gross profit was $641.3 million for 2019, an increase of 5.1% compared with the prior year. Gross margin was 42.8% compared with 41.7% for the prior year. The increases were primarily due to improved pricing, favorable mix, higher sales volumes, and lower depreciation, partially offset by higher manufacturing costs including a 10 basis point impact related to higher raw materials and energy costs and the Discrete Items.
Segment Operating Income (SOI) and Margin—Grace Catalysts Technologies
Segment operating income was $309.6 million for 2020, a decrease of 33.6% compared with the prior year, primarily due to lower sales and gross profit, hurricane-related costs of approximately $19 million, and lower income from our ART joint venture. The ART joint venture contributed $13.5 million to operating income, a decrease of $14.3 million from the prior-year period. Segment operating margin for 2020 decreased to 24.4%, a decline of 680 basis points compared with the prior year.
Segment operating income was $466.4 million for 2019, an increase of 5.8% compared with the prior year, primarily due to higher sales and gross profit, and business interruption insurance recoveries, partially offset by lower income from our ART joint venture, higher operating expenses including from the polyolefin catalysts acquisition, unfavorable effects of currency exchange rates, and higher amortization. The ART joint venture contributed $27.8 million to operating income, a decrease of $4.0 million from the prior-year period primarily due to an increase in expenses charged to the joint venture by the partners. Segment operating margin for 2019 increased to 31.2%, an improvement of 110 basis points compared with the prior year.
In July 2019, a North American FCC catalysts customer filed for bankruptcy protection after announcing that it would not resume operations following a fire in its refinery. We received insurance recoveries of $16.3 million in the first half of 2020 under our business interruption insurance policy. Including the $8.0 million received in the 2019 fourth quarter, we received $24.3 million of insurance recoveries related to this event, reflecting approximately eight quarters of the impact of the incident on earnings. This claim has been fully resolved.
Segment Overview—Grace Materials Technologies
Following is an overview of the financial performance of Materials Technologies for the years ended December 31, 2020, 2019, and 2018.
Net Sales—Grace Materials Technologies
Sales were down 0.7% in 2020, or down 0.3% on constant currency, compared with the prior year. The decrease on a constant currency basis was due to lower sales volumes, partially offset by improved pricing. Strength in pharma/consumer end markets was offset by weakness across chemical process end-markets. Coatings sales decreased slightly for the year, with demand rebounding in the second half of the year after pandemic-related weakness in the first half.
Gross profit was $154.0 million for 2020, a decrease of 8.7% compared with the prior year. Gross margin was 33.6% compared with 36.5% for the prior year. The decrease in gross margin was primarily driven by under-absorbed fixed costs resulting from lower production volumes and inventory reductions, partially offset by favorable mix, a 90 basis point benefit from lower raw materials and energy costs, and cost reduction actions to align manufacturing costs with demand levels.
Sales were down 1.5% in 2019, or up 2.2% on constant currency, compared with the prior year. The increase on a constant currency basis was due to improved pricing and higher sales volumes, partially offset by lower sales volumes from one of the Discrete Items. Pricing improved across all regions, driven by EMEA and the Americas. The increase in sales volumes was primarily driven by higher pharma/consumer sales in all regions, partially offset by lower coatings sales in Asia, EMEA, and North America. The pricing improvement and increased sales volumes were more than offset by unfavorable currency translation as the U.S. dollar strengthened, primarily against the euro, compared with the prior-year period. Our Materials Technologies business segment is particularly sensitive to changes in the euro.
Gross profit was $168.6 million for 2019, a decrease of 4.7% compared with the prior year. Gross margin was 36.5% compared with 37.8% for the prior year. The decrease in gross margin was primarily due to higher manufacturing costs including costs directly related to one of the Discrete Items and 50 basis points related to higher raw materials and energy costs, partially offset by improved pricing and lower depreciation expense.
Segment Operating Income (SOI) and Margin—Grace Materials Technologies
Segment operating income was $85.0 million for 2020, a decrease of 13.1% compared with the prior year, primarily due to lower gross profit, partially offset by lower operating expenses. Segment operating margin for 2020 decreased to 18.5%, a decline of 270 basis points compared with the prior year.
Segment operating income was $97.8 million for 2019, a decrease of 7.4% compared with the prior year, primarily due to lower gross profit and higher operating expenses, including the effects of one of the Discrete Items. Segment operating margin for 2019 decreased to 21.2%, a decline of 130 basis points compared with the prior year.
Corporate Costs
Corporate costs include functional and other costs such as professional fees, incentive compensation, and insurance premiums. Corporate costs for 2020 decreased 6.5% compared with the prior year, primarily due to lower functional and incentive compensation expenses.
Corporate costs for 2019 decreased 1.1% compared with the prior year, primarily due to lower incentive compensation expenses, partially offset by higher employee-related costs.
Restructuring and Repositioning Expenses
Restructuring expenses for the years ended December 31, 2020, 2019, and 2018, were $1.9 million, $2.6 million, and $14.0 million, respectively. Expenses incurred in 2020 primarily related to changes in estimated contractual costs in connection with a 2018 plant exit. Expenses incurred in 2019 primarily related to severance costs pertaining to the idling of our methanol-to-olefins manufacturing facility and were substantially paid in 2019. Restructuring expenses incurred in 2018 primarily related to the closure of two smaller manufacturing plants, the activities from which have been moved to larger, more cost-effective plants as part of our strategy to capture synergies from our recent catalysts acquisitions. Substantially all costs related to the restructuring programs are
expected to be paid by June 30, 2023, but could be paid earlier subject to negotiations around certain plant exit costs.
Repositioning expenses for the years ended December 31, 2020, 2019, and 2018, were $35.0 million, $11.1 million, and $32.4 million, respectively. Expenses incurred in 2020 included a $19.7 million charge to write off engineering and site costs as a result of the decision not to build a full-scale catalysts plant in the Middle East (see “Grace Overview” above). Repositioning expenses in 2020 also included $7.2 million in costs related to our review of strategic alternatives.
In 2020, 2019, and 2018, we incurred expenses related to a multi-year program to transform manufacturing and business processes to extend our competitive advantages and improve our cost position. Expenses in 2018 also included $11.7 million of severance and stock compensation costs related to employee separations, and write-offs of $8.5 million of previously capitalized plant engineering costs as a result of terminating an expansion project no longer necessary due to the polyolefin catalysts acquisition (see Note 20 to the Consolidated Financial Statements). Excluding asset write-offs and stock compensation costs, substantially all of these costs have been or are expected to be settled in cash.
The following table presents the major components of restructuring and repositioning expenses for the years ended December 31, 2020, 2019, and 2018.
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| (In millions) | 2020 | | 2019 | | 2018 |
| Write-off of engineering costs | $ | 19.7 | | | $ | — | | | $ | 8.5 | |
| Costs related to review of strategic alternatives | 7.2 | | | — | | | — | |
| Third-party costs of manufacturing and business transformation programs | 5.4 | | | 7.4 | | | 13.7 | |
| Employee severance and accelerated stock compensation | 4.4 | | | 5.8 | | | 12.3 | |
| Costs related to plant closures | 1.8 | | | — | | | 13.4 | |
| Other | (1.6) | | | 0.5 | | | (1.5) | |
| Total restructuring and repositioning expenses | $ | 36.9 | | | $ | 13.7 | | | $ | 46.4 | |
Defined Benefit Pension Expense
Defined benefit pension expense includes costs under U.S. and non-U.S. defined benefit pension plans that provide benefits to business segment and corporate employees, as well as retirees and former employees of divested businesses where we retained these obligations.
Under mark-to-market accounting, our pension costs consist of two elements: (1) “certain pension costs”—ongoing costs recognized quarterly, which include service and interest costs, expected returns on plan assets, and amortization of prior service costs/credits; and (2) “pension mark-to-market adjustment and other related costs, net”—mark-to-market gains and losses recognized annually in the fourth quarter, or at an interim period should a significant event occur, resulting from changes in actuarial assumptions, such as discount rates and the difference between actual and expected returns on plan assets.
Certain pension costs were $14.4 million, $18.4 million and $15.9 million for 2020, 2019 and 2018, respectively. The decrease from 2019 to 2020 was primarily due to lower interest cost partially offset by higher service cost due to a decrease in discount rates. The increase from 2018 to 2019 was primarily due to a decrease in expected return on assets, partially offset by a decrease in service cost and interest cost due to an increase in discount rates.
Pension mark-to-market adjustment and other related costs, net were $94.6 million, $85.9 million and $(15.2) million for 2020, 2019 and 2018, respectively. These costs are reported in “other (income) expense, net” in our Consolidated Financial Statements. The 2020 mark-to-market pension expense of $94.6 million was primarily due to the decrease in discount rates used to value the projected benefit obligations of our plans from year-end 2019 to year-end 2020, partially offset by higher than expected return on assets. The 2019 mark-to-market pension expense of $85.9 million was primarily due to the decrease in discount rates used to value the projected benefit obligations of our plans from year-end 2018 to year-end 2019, partially offset by higher than expected return on assets. The 2018 mark-to-market pension income of $15.2 million was primarily due to the increase in discount
rates used to value the projected benefit obligations of our plans from year-end 2017 to year-end 2018, partially offset by lower than expected return on assets.
Interest and Financing Expenses
Net interest and financing expenses were $74.9 million for 2020, flat compared with 2019 as the effect of a lower interest rate on our term loan was offset by higher interest from the higher outstanding balances of senior notes and lower capitalized interest. Interest and financing expenses were $74.8 million for 2019, a 4.7% decrease compared with 2018, primarily due to higher capitalized interest in 2019 related primarily to the growth capital investments.
Income Taxes
Income tax expense (benefit) for 2020, 2019 and 2018 was $2.2 million, $56.8 million and $78.1 million, respectively, on income before income taxes of $0.5 million, $183.5 million and $244.9 million in 2020, 2019 and 2018, respectively.
The provision for income taxes in 2020 was lower than in 2019 primarily due to lower pre-tax income in 2020 compared with 2019 and the benefit recorded in 2020 from the Global Intangible Low-Taxed Income (“GILTI”) high-tax exclusion (“HTE”) election for tax years 2018 through 2020. The benefit was partially offset by a valuation allowance recorded against the U.S. federal tax credits.
The provision for income taxes in 2019 was lower than in 2018 primarily due to lower taxable income in foreign jurisdictions where the statutory tax rates are higher than the statutory rates of the U.S., and a deduction against the GILTI inclusion under Internal Revenue Code (“IRC”) Section 250 that was not available in 2018 due to U.S. federal net operating loss (“NOL”) carryforwards.
See Note 7 to the Consolidated Financial Statements for additional information regarding income taxes.
Financial Condition, Liquidity, and Capital Resources
Following is an analysis of our financial condition, liquidity and capital resources at December 31, 2020.
Our principal uses of cash are generally capital investments and acquisitions; working capital investments; compensation paid to employees, including contributions to our defined benefit pension plans and defined contribution plans; the repayment of debt and interest payments thereon; and the return of cash to shareholders through the payment of dividends and the repurchase of shares.
On February 8, 2017, we announced that the Board of Directors had authorized a share repurchase program of up to $250 million. On February 28, 2020, we announced that our Board of Directors had increased its share repurchase authorization to $250 million, including approximately $83 million remaining under the previously announced program. During 2020 we repurchased 673,807 shares of Company common stock for $40.4 million before temporarily suspending our share repurchase program in early March in light of the COVID-19 pandemic. We expect to resume our share repurchase program in 2021 while continuing to prioritize reinvestment and reducing our temporarily higher net leverage. As of December 31, 2020, $235.0 million remained under the current authorization.
We paid cash dividends of $80.1 million during 2020. On February 4, 2020, we announced that our Board of Directors had approved an increase in the annual dividend rate, from $1.08 to $1.20 per share of Company common stock, effective with the dividend paid on March 17, 2020. On February 8, 2021, we announced that our Board of Directors had approved a further increase to $1.32 per share of Company common stock, effective with the dividend to be paid on March 23, 2021.
Although the duration and severity of the impact from the COVID-19 pandemic on our operations and liquidity depends on future developments that are difficult to accurately predict at this time, we believe that the cash we expect to generate during 2021 and thereafter, together with other available liquidity and capital resources, are sufficient to finance our operations, growth strategy, expected share repurchase program and expected dividend payments, and to meet our debt, pension, and legacy and other obligations.
On June 26, 2020, we issued $750 million aggregate principal amount of 4.875% Notes due in 2027. On July 13, 2020, we used the net proceeds, together with cash on hand, to redeem the $700.0 million Senior Notes due 2021. See Note 5 to the Consolidated Financial Statements for additional information.
Cash Resources and Available Credit Facilities
At December 31, 2020, we had available liquidity of $736.5 million, consisting of $304.5 million in cash and cash equivalents ($142.7 million in the U.S.), $391.8 million available under our revolving credit facility, and $40.2 million of available liquidity under various non-U.S. credit facilities. The $400 million revolving credit facility includes a $100 million sublimit for letters of credit.
Our non-U.S. credit facilities are extended to various subsidiaries that use them primarily to issue bank guarantees supporting trade activity and to provide working capital during occasional cash shortfalls. We generally renew these credit facilities as they expire.
The following table summarizes our non-U.S. credit facilities as of December 31, 2020:
| | | | | | | | | | | | | | | | | |
(In millions) | Maximum
Borrowing
Amount | | Available
Liquidity | | Expiration Date |
| China | $ | 12.1 | | | $ | 12.1 | | | April 3, 2023 |
| Singapore | 18.0 | | | 8.2 | | | April 3, 2023 |
| Malaysia | 7.0 | | | 5.3 | | | April 3, 2023 |
| Other countries | 15.3 | | | 14.6 | | | various, as well as open-ended |
| Total | $ | 52.4 | | | $ | 40.2 | | | |
Analysis of Cash Flows
The following table summarizes our cash flows for the years ended December 31, 2020, 2019, and 2018:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| (In millions) | 2020 | | 2019 | | 2018 |
| Net cash provided by (used for) operating activities from continuing operations | $ | 349.6 | | | $ | 392.1 | | | $ | 342.0 | |
| Net cash provided by (used for) investing activities from continuing operations | (175.8) | | | (210.1) | | | (618.5) | |
| Net cash provided by (used for) financing activities from continuing operations | (157.9) | | | (99.4) | | | 316.5 | |
| Effect of currency exchange rate changes on cash and cash equivalents | 7.4 | | | (0.7) | | | (2.5) | |
| | | | | |
| | | | | |
| Net increase (decrease) in cash and cash equivalents | 23.3 | | | 81.9 | | | 37.5 | |
| | | | | |
| Cash and cash equivalents, beginning of period | 282.9 | | | 201.0 | | | 163.5 | |
| Cash and cash equivalents, end of period | $ | 306.2 | | | $ | 282.9 | | | $ | 201.0 | |
Net cash provided by operating activities in 2020 was $349.6 million compared with $392.1 million in the prior year. The year-over-year change in cash flow is primarily due to lower net income partially offset by improved net working capital performance and $20.0 million in dividends received from our ART joint venture.
Net cash provided by operating activities in 2019 was $392.1 million compared with $342.0 million in the prior year. The year-over-year change in cash flow is primarily due to higher gross profit in 2019 and the $50.0 million accelerated contribution to the U.S. defined benefit pension plans in 2018, partially offset by lower advance payments from customers compared with 2018.
Net cash used for investing activities in 2020 was $175.8 million compared with $210.1 million in 2019 and $618.5 million in 2018. Net cash used for investing activities primarily includes the net cash paid for capital expenditures and businesses acquired. Capital expenditures were lower in 2020 as we reduced our capital spending in response to lower demand caused by the COVID-19 pandemic. In 2019, we acquired the business and assets of Rive Technology, Inc. for $22.8 million, with an additional $2.0 million holdback paid in the 2020 third quarter. In 2018, we completed the purchase of the polyolefin catalysts business of Albemarle Corporation for $418.0 million. Our capital expenditures include investments in new capacity, improved productivity, information technology, and maintenance of our manufacturing and office facilities. We expect to invest
approximately $150 million to $160 million in capital expenditures in 2021 and have entered into commitments related to a portion of those expenditures. We expect to fund our capital expenditures from net cash provided by operating activities.
Net cash used for financing activities in 2020 was $157.9 million compared with $99.4 million in 2019. The increased use of cash in 2020 was primarily due to higher repayments of debt, cash paid for repurchases of common stock, and payments of dividends to shareholders in 2020 compared with 2019, together with higher proceeds from the exercise of stock options in 2019.
Net cash used for financing activities in 2019 was $99.4 million compared with cash provided of $316.5 million in 2018. In 2019, higher payments of dividends to shareholders were offset by higher proceeds from the exercise of stock options, while in 2018 we entered into the 2018 Credit Agreement and used a portion of the borrowings to repay in full the borrowings outstanding under our 2014 credit agreement.
Debt and Other Contractual Obligations
Total debt outstanding at December 31, 2020, was $1,990.4 million. Set forth below are our contractual obligations as of December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Payments Due by Period |
| (In millions) | Total | | 1 Year or Less | | 2-3
Years | | 4-5
Years | | More Than 5 Years |
| Debt | $ | 1,990.4 | | | $ | 15.3 | | | $ | 27.9 | | | $ | 1,199.6 | | | $ | 747.6 | |
| Expected interest payments on debt(1) | 402.3 | | | 78.8 | | | 155.4 | | | 114.6 | | | 53.5 | |
| Operating lease obligations | 46.6 | | | 11.8 | | | 13.9 | | | 5.6 | | | 15.3 | |
| Operating commitments(2) | 127.6 | | | 111.5 | | | 14.2 | | | 1.9 | | | — | |
| | | | | | | | | |
| Pension funding requirements per ERISA(3) | 7.4 | | | 0.5 | | | 1.1 | | | 5.8 | | | — | |
| Funding requirements for non-U.S. retirement plans(4) | 52.7 | | | 10.2 | | | 20.6 | | | 21.9 | | | — | |
| Total Contractual Obligations | $ | 2,627.0 | | | $ | 228.1 | | | $ | 233.1 | | | $ | 1,349.4 | | | $ | 816.4 | |
(1)Amounts are based on current interest rates as of December 31, 2020, for principal debt outstanding as of December 31, 2020. Actual interest payments may vary based on any interest rate swaps in effect.
(2)Amounts do not include open purchase commitments, which are routine in nature and normally settle within 90 days, or obligations to employees under annual or long-term incentive programs.
(3)Based on the U.S. qualified pension plans’ status as of December 31, 2020, minimum funding requirements under ERISA have been estimated for the next five years. Amounts in subsequent years or additional payments have not yet been determined.
(4)Based on the non-U.S. retirement plans’ status as of December 31, 2020, funding requirements have been estimated for the next five years. Amounts in subsequent years have not yet been determined.
The table above does not include liabilities related to legacy matters discussed in Note 10 to the Consolidated Financial Statements, which are recorded in the Consolidated Balance Sheets. Certain of these liabilities are expected to require cash disbursements over the course of the next five years, but the amount per period depends on a number of variables, as disclosed, while other estimated balances relate to matters for which the settlement period is unknown.
See Note 10 to the Consolidated Financial Statements for a discussion of Financial Assurances.
Employee Benefit Plans
See Note 8 to the Consolidated Financial Statements for further discussion of Pension Plans and Other Retirement Plans.
Defined Contribution Retirement Plans
We sponsor a defined contribution retirement plan for our employees in the United States. This plan is qualified under section 401(k) of the U.S. tax code. Currently, we contribute an amount equal to 100% of employee contributions, up to 6% of an individual employee’s salary or wages. Our costs related to this benefit
plan were $14.3 million, $13.9 million and $12.6 million for the years ended December 31, 2020, 2019 and 2018, respectively.
U.S. salaried employees and certain U.S. hourly employees hired on or after January 1, 2017, participate in an enhanced defined contribution plan instead of a defined benefit pension plan. We contribute 4% of an individual employee’s salary or wages to this plan. Our cost related to this enhanced defined contribution plan was $3.5 million, $2.9 million, and $1.7 million for the years ended December 31, 2020, 2019, and 2018, respectively. We expect these amounts to increase in the future as more employees participate in this plan.
The following table presents cash payments related to our defined contribution plans.
| | | | | | | | | | | | | | | | | |
| (In millions) | 2020 | | 2019 | | 2018 |
| U.S. defined contribution plan | $ | 14.3 | | | $ | 13.9 | | | $ | 12.6 | |
| U.S. enhanced defined contribution plan | 3.5 | | | 2.9 | | | 1.7 | |
| Total cash payments | $ | 17.8 | | | $ | 16.8 | | | $ | 14.3 | |
Defined Benefit Pension Plans
We sponsor defined benefit pension plans for our employees in the U.S., Canada, Germany, and a number of other countries, and fund government-sponsored programs in other countries where we operate. Certain of our defined benefit pension plans are advance-funded and others are pay-as-you-go. The assets of the advance-funded plans are held in trusts. Our most significant advance-funded plans cover current and former salaried employees in the U.S. and employees covered by collective bargaining agreements at certain of our U.S. facilities. Our U.S. advance-funded plans are qualified under the U.S. tax code.
In the 2021 first quarter, Grace announced to employees that the U.S. salaried plan would be frozen effective January 1, 2025. As a result, we expect to record mark-to-market income and a curtailment gain totaling approximately $40 million in the 2021 first quarter.
The following table presents the funded status of our fully-funded, underfunded, and unfunded pension plans:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fully-Funded
Pension Plans(1) | | Underfunded
Pension Plans(1) | | Unfunded
Pension Plans(2) |
| (In millions) | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 |
| Projected benefit obligation | $ | 36.5 | | | $ | 35.6 | | | $ | 1,109.8 | | | $ | 1,022.8 | | | $ | 536.4 | | | $ | 448.5 | |
| Fair value of plan assets | 47.9 | | | 44.1 | | | 981.5 | | | 936.7 | | | — | | | — | |
| Funded status (PBO basis) | $ | 11.4 | | | $ | 8.5 | | | $ | (128.3) | | | $ | (86.1) | | | $ | (536.4) | | | $ | (448.5) | |
| | | | | | | | | | | |
(1)Plans intended to be advance-funded.
(2)Plans intended to be pay-as-you-go.
We have both fully-funded and underfunded pension plans. Our fully-funded plans have assets in excess of projected benefit obligation (“PBO”) of $11.4 million at December 31, 2020. Underfunded plans include a group of advance-funded plans that are underfunded on a PBO basis by a total of $128.3 million as of December 31, 2020. Additionally, we have several plans that are funded on a pay-as-you-go basis, and therefore, the entire PBO for these plans of $536.4 million at December 31, 2020, is unfunded. The net funded status of all of these plans was $653.3 million as of December 31, 2020, and is presented in the Consolidated Balance Sheets as follows: $11.4 million in “other assets,” $15.7 million in “other current liabilities,” $520.7 million in “unfunded defined benefit pension plans,” and $128.3 million in “underfunded defined benefit pension plans.”
At the December 31, 2020, measurement date for the U.S. advance-funded plans, the PBO was $1,112.8 million as measured under U.S. GAAP. The PBO is measured as the present value (using a 2.41% weighted average discount rate as of December 31, 2020) of vested and non-vested benefits earned from employee service to date, based upon current services and estimated future pay increases for active employees. Of the participants in the U.S. advance-funded plans, approximately 79% are retired or former employees or employees of our former businesses, which shortens the duration of the PBO. Assets available to fund the PBO for the U.S. advance-funded plans at December 31, 2020, were $1,000.7 million, or $112.1 million less than the measured obligation.
The following table presents the components of cash contributions for the advance-funded and pay-as-you-go plans:
| | | | | | | | | | | | | | | | | |
| (In millions) | 2020 | | 2019 | | 2018 |
| U.S. advance-funded plans | $ | 0.5 | | | $ | 0.1 | | | $ | 50.0 | |
| U.S. pay-as-you-go plans | 7.9 | | | 6.6 | | | 6.9 | |
| Non-U.S. advance-funded plans | 1.3 | | | 1.5 | | | 1.9 | |
| Non-U.S. pay-as-you-go plans | 7.5 | | | 7.6 | | | 7.7 | |
| Total Cash Contributions | $ | 17.2 | | | $ | 15.8 | | | $ | 66.5 | |
We intend to fund non-U.S. pension plans based upon applicable legal requirements and actuarial and trustee recommendations. We contributed $8.8 million related to these plans in 2020.
Other Contingencies
See Note 10 to the Consolidated Financial Statements for a discussion of our other contingent matters.
Inflation
We recognize that inflationary pressures may have an adverse effect on us through higher asset replacement costs and higher raw materials and other operating costs. We try to minimize these impacts by developing alternative formulations, increasing productivity, hedging purchases of certain raw materials, and increasing prices.
Critical Accounting Estimates
The preparation of financial statements in conformity with U.S. GAAP requires that we make estimates and assumptions affecting the assets and liabilities reported at the date of the Consolidated Financial Statements, and the revenues and expenses reported for the periods presented. We believe that our accounting estimates are appropriate and the related balances are reasonable; however, actual amounts could differ from the original estimates, requiring adjustments in future periods. Changes in estimates are recorded in the period in which the change is identified. Our accounting policies are described in Note 1 to the Consolidated Financial Statements. Critical accounting estimates are described in this section.
An accounting estimate is considered critical if the estimate requires management to make assumptions and judgments about matters that were highly uncertain at the time the estimate was made, if different estimates reasonably could have been used, or if changes in the estimate are reasonably likely to occur from period to period that could have a material impact on our financial condition or results of operations. As part of our quarterly disclosure controls and procedures, management has discussed the development, selection and disclosure of the critical accounting estimates with the Audit Committee of the Board of Directors.
Contingent Liabilities
We have recorded a liability for the resolution of contingencies related to asbestos property damage, environmental remediation, and litigation. We record a liability if we have determined that a loss is probable and we are able to reasonably estimate the amount of the loss or have another reasonable basis for recording a liability. We have determined that each of the contingencies identified below involves an accounting judgment that is material to our Consolidated Financial Statements.
Legacy Product Liabilities
We emerged from an asbestos-related Chapter 11 bankruptcy on February 3, 2014, as discussed in Note 10 to the Consolidated Financial Statements. Under the plan of reorganization, all pending and future asbestos-related claims are channeled for resolution to either the PI Trust or the PD Trust. The trusts are the sole recourse for holders of asbestos-related claims. The channeling injunctions issued by the bankruptcy court prohibit holders of asbestos-related claims from asserting such claims directly against us.
We have satisfied all of our financial obligations to the PI Trust. We have contingent financial obligations remaining to the PD Trust. With respect to ZAI PD Claims, the PD Trust was funded with $49.4 million (net of $15 million of attorneys’ fees) to pay claims and expenses. We are also obligated to make up to 10 contingent
deferred payments of $8 million per year to the PD Trust during the 20-year period beginning on the fifth anniversary of the Effective Date, with each such payment due only if the assets of the PD Trust in respect of ZAI PD Claims fall below $10 million during the preceding year. For additional discussion of this contingent liability, see Note 10 to the Consolidated Financial Statements, under the heading “Legacy Product Liabilities,” which disclosure is incorporated herein by reference.
Environmental Remediation
We are obligated under applicable law to remediate certain properties related to our business or former businesses. At some sites we outsource all or a portion of the remediation to third parties, and at others we perform the required remediation ourselves. Our environmental remediation obligation has a significant impact on our Consolidated Financial Statements. See disclosure in this Report in Item 1 (Business—Environment, Health, Safety, and Security Matters) and in Note 10 to the Consolidated Financial Statements for a discussion of our environmental remediation liabilities.
At sites where third parties conduct remediation, we estimate our obligations from information available to us from these third parties and other consultants, including actual costs incurred, expected future costs and time to completion. At sites where we conduct remediation, we work with regulatory authorities to define compliance requirements and then estimate the cost required to meet those requirements with information available to us. We base our estimates on our historical knowledge and engineering assessments specific to conditions at each site, and we update our estimates as necessary.
Our estimates can fluctuate significantly due to the extended duration of some remediation projects. The accuracy of our estimates is dependent on the validity of assumptions regarding regulatory approaches and such matters as labor rates, indirect costs and capital costs, which are each difficult to forecast over extended periods. Future changes in estimates, if required, may lead to material adjustments to our Consolidated Financial Statements, and the ultimate resolution of these obligations could have a material impact on our liquidity and capital resources.
For additional discussion of our liabilities related to environmental matters, see Note 10 to the Consolidated Financial Statements, under the heading “Legacy Environmental Liabilities—Vermiculite-Related Matters,” which disclosure is incorporated herein by reference.
Other Legacy Liabilities
Beginning in 1971, as part of implementing a wet milling process at the Libby, Montana, vermiculite mine, we constructed a dam at the mine property that now prevents vermiculite ore tailings from moving into nearby creeks and rivers. Ongoing operation of the dam is regulated by the Montana Department of Natural Resources and Conservation (“DNRC”). In April 2019, the DNRC renewed the permit necessary for operation of the dam. We are legally obligated to operate the dam and construct a new spillway in accordance with the latest permit conditions. We have recorded a liability for the construction of the new spillway based on a current assessment of the project requirements. For additional discussion related to this liability, see Note 10 to the Consolidated Financial Statements, under the heading “Other Legacy Liabilities,” which disclosure is incorporated herein by reference.
Litigation
We are subject to legal proceedings and claims arising out of the normal course of business. To estimate the cost to resolve our legal obligations, we review the facts of each matter to determine the merits of the case and the corresponding probability of a loss. If we determine that a loss is probable, we determine if there is sufficient information to make a reasonable estimate of the loss amount. Our estimates regarding the outcome of our legal proceedings and claims involve substantial uncertainties that could cause our actual losses to differ materially from our estimates. In estimating the likely outcome of a legal proceeding, we consider the nature of the specific claim (or unasserted claim), our experience with similar claims, the jurisdiction in which the proceeding is filed, court rulings, the status of any settlement negotiations, the likelihood of resolution through settlement or alternative dispute resolution, the proceeding’s current status and other relevant information and events. We adjust our recorded liability for litigation contingencies as necessary to reflect our current evaluation of these and other factors.
Goodwill and Intangible Assets
We account for business combinations under the acquisition method of accounting, which requires us to allocate the purchase price to the tangible and identifiable intangible assets and liabilities acquired based on their estimated fair values at the acquisition date in accordance with ASC 805 “Business Combinations.” The excess of the purchase price over the fair values of these identifiable assets and liabilities is recorded to goodwill. The assessment of fair value requires management to make significant estimates, including future expected revenues, earnings, and cash flows; expected useful lives; and attrition and discount rates. The allocation of the purchase price may be adjusted during the measurement period, which may not exceed one year after the acquisition date.
We review our finite-lived tangible and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. We have no indefinite-lived intangible assets. There were no impairment charges recorded in any of the periods presented.
We review our goodwill for impairment on an annual basis at October 31 and whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable. We have identified our operating segments as reporting units for goodwill impairment testing. Our Catalysts Technologies reportable segment has two reporting units for goodwill impairment testing, which are our Refining Technologies and Specialty Catalysts operating segments. Our Materials Technologies operating segment represents a single reporting unit for goodwill impairment testing.
We performed a qualitative analysis as of October 31, 2020, and concluded that the estimated fair value of all of our reporting units substantially exceeded their carrying values.
Pension Expenses and Liabilities
We sponsor defined benefit pension plans for our employees in the United States and a number of other countries, including Canada and Germany, and fund government-sponsored programs in other countries where we operate. See Note 8 to the Consolidated Financial Statements for a detailed discussion of our pension plans.
In order to estimate our pension expenses and liabilities we evaluate the range of possible assumptions to be used in the calculation of pension expenses and liabilities. We select the assumptions that we believe to be most indicative of factors such as participant demographics, past experiences and market indices, and provide the assumptions to independent actuaries. These assumptions are updated annually and primarily include factors such as discount rates, expected return on plan assets, mortality rates, retirement rates, and rate of compensation increase. The independent actuaries review our assumptions for reasonableness, and use the assumptions to calculate our estimated liability and future pension expense. We review the actuarial reports for reasonableness and adjust our expenses, assets and liabilities to reflect the amounts calculated in the actuarial reports.
Our method of accounting for actuarial gains and losses relating to our global defined benefit pension plans is referred to as “mark-to-market accounting.” Under mark-to-market accounting, our pension costs consist of two elements: (1) ongoing costs recognized quarterly, which include service and interest costs, expected returns on plan assets, and amortization of prior service costs/credits; and (2) mark-to-market gains and losses recognized annually in the fourth quarter resulting from changes in actuarial assumptions, such as discount rates and the difference between actual and expected returns on plan assets. Should a significant event occur, our pension obligation and plan assets are remeasured at an interim period, and the gains or losses on remeasurement are recognized in that period.
The two key assumptions used in determining our ongoing quarterly pension expense (excluding the effects of the annual mark-to-market adjustment) are the discount rate and expected return on plan assets. Our most significant pension assets and pension liabilities relate to U.S. pension plans.
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 overall market interest rates. For the U.S. pension plans, the assumed weighted average discount rate was selected in consultation with our 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.
We selected the expected return on plan assets for the U.S. qualified pension plans for 2020 in consultation with our independent actuaries, using an expected return model. The model determines the weighted average
return for an investment portfolio based on the target asset allocation and expected future returns for each asset class, which were developed using a building block approach based on observable inflation, available interest rate information, current market characteristics, and historical results.
The following table reflects the sensitivity of 2021 pre-tax expense (excluding the effects of the annual mark-to-market adjustment) and our year-end PBO to a change in the discount rate and expected rate of return on plan assets assumptions for the U.S. pension plans:
| | | | | | | | | | | |
Change in Assumption
(In millions) | Effect on 2021 Pre-Tax Pension Expense | | Effect on December 31, 2020 PBO |
| 25 basis point decrease in discount rate | $ | (1) | | | $ | 39 | |
| 25 basis point increase in discount rate | 1 | | | (37) | |
| 25 basis point decrease in expected return on plan assets | 2 | | | — | |
| 25 basis point increase in expected return on plan assets | (2) | | | — | |
Income Taxes
Our effective tax rate is primarily determined based on our pre-tax income and the statutory income tax rates in the jurisdictions in which we operate. The effective tax rate also reflects the tax impacts of items treated differently for tax purposes than for financial reporting purposes. Some of these differences are permanent, such as expenses that are not deductible in our tax returns, and some differences are temporary, reversing over time, such as depreciation expense. These temporary differences create deferred income tax assets and liabilities. Deferred income tax assets are also recorded for NOL and federal tax credit carryforwards.
Deferred income tax assets and liabilities are recognized by applying enacted tax rates to temporary differences that exist as of the balance sheet date. We reduce the carrying amounts of deferred tax assets by a valuation allowance if, based on the available evidence, it is more likely than not that such assets will not be realized. The need to establish valuation allowances for deferred tax assets is assessed quarterly. In assessing the requirement for, and amount of, a valuation allowance in accordance with the more likely than not standard, we give appropriate consideration to all positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability and foreign source income (“FSI”), the duration of statutory carryforward periods, and our experience with operating loss and tax credit carryforward expirations. A history of cumulative losses is a significant piece of negative evidence used in our assessment. If a history of cumulative losses is incurred for a tax jurisdiction, forecasts of future profitability are not used as positive evidence related to the realization of the deferred tax assets in the assessment.
Our net deferred income tax assets (see Note 7 to the Consolidated Financial Statements) as of December 31, 2020, include U.S. deferred income tax assets representing tax credit and NOL carryforwards of $309.2 million and $10.2 million, respectively, and state and foreign NOL carryforwards of $45.4 million and $9.6 million. We have established valuation allowances in the amount of $38.7 million, consisting primarily of $11.5 million for U.S. tax credit carryforwards as well as state NOL carryforwards of $13.9 million and foreign deferred tax assets of $13.2 million (primarily related to foreign operating loss carryforwards).
The U.S. tax credit carryforwards arose primarily as a result of the payment of intercompany dividends from our foreign affiliates, from the mandatory repatriation under the TCJA, and from research and development credits. The state NOLs arose primarily as a result of the amounts paid as a result of our bankruptcy proceedings.
In order to fully utilize our U.S. federal tax credits before they expire from 2021 to 2040, we will need to generate income of approximately $1.6 billion. We will need to generate approximately $3.1 billion for state income tax purposes during the respective realization periods (ranging from 2021 to 2036) in order to fully realize the state NOLs.
Inherent in determining our effective tax rate are judgments regarding business plans and expectations about future operations. These judgments include the amount and geographic mix of future taxable income, the amount of FSI, limitations on the usage of NOLs and foreign tax credit carryforwards, the impact of ongoing or potential tax audits, and other future tax consequences.
Our ability to utilize deferred tax assets may be impacted by certain future events, such as changes in tax legislation or insufficient future taxable income or FSI prior to expiration of certain deferred tax assets.
We recognize the tax benefits of an uncertain tax position if those benefits are more likely than not to be sustained based on existing tax law. Additionally, we establish a reserve for tax positions that are more likely than not to be sustained based on existing tax law, if the ultimate benefit to be sustained upon examination by the relevant taxing authorities is uncertain. Unrecognized tax benefits are subsequently recognized at the time the more likely than not recognition threshold is met, the tax matter is effectively settled or the statute of limitations for the relevant taxing authority to examine and challenge the tax position has expired, whichever is earlier.
Recent Accounting Pronouncements
See Note 1 to the Consolidated Financial Statements for a discussion of recent accounting pronouncements and their effect on us.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our global operations, raw materials and energy requirements, and debt obligations expose us to various market risks. We use derivative financial instruments to mitigate certain of these risks. The following is a discussion of our primary market risk exposures, how those exposures are managed, and certain quantitative data pertaining to our market risk-sensitive instruments.
Currency Exchange Rate Risk
We operate and/or sell to customers in over 7060 countries and in over 30 currencies; therefore, our results of operations are exposed to changes in currency exchange rates. We seek to minimize exposure to these changes by matching revenue streams with expenditures in the same currencies, but it is not always possible to do so. Further, where revenue streams exceed expenditures in a given currency, we seek opportunities to invoice our customers in U.S. dollars or peg the revenue stream to the U.S. dollar at the time of the sale. From time to time, we use financial instruments such as currency forward contracts, swaps, options, or combinations of themthereof to reduce the risk of certain specific transactions. However, we do not have a policy of hedging all exposures, because management does not believe that such a level of hedging would be cost-effective. Significant uses of derivatives to mitigate the effects of changes in currency exchange rates are as follows.
In May 2016, Grace entered into a fixed-to-fixed cross-currency swap maturing in October 2021 to hedge its net investment in non-U.S. subsidiaries. On every April 1 and October 1, Grace will swap interest payments. Grace will pay euro fixed at the annual rate of 3.426% on €170.0 million and receive U.S. dollars fixed at the annual rate of 5.125% on $190.3 million. The agreement requires an exchange of the notional amounts at maturity. The following tables provide information about the cross-currency swap at December 31, 2018, specifically,table presents the aggregate future cash flows for each ofthe cross-currency swaps for the next three yearsyear as of December 31, 2020.
| | | | | | | | | | | | | | | |
| (In millions) | 2021 | | | | | | | | | | |
| Payable—interest and principal in euro | € | 174.4 | | | | | | | | | | | |
| Receivable—interest and principal in U.S. dollars | $ | 197.6 | | | | | | | | | | | |
The following table presents the fair value. The fair value represents the value of the derivative contract,cross-currency swaps and is included in “other current assets” and “other liabilities”their location in the Consolidated Balance Sheets.
|
| | | | | | | | | | | |
| (In millions) | 2019 | | 2020 | | 2021 |
| Payable—interest and principal in euro | € | 5.8 |
| | € | 5.8 |
| | € | 174.4 |
|
| Receivable—interest and principal in U.S. dollars | $ | 9.8 |
| | $ | 9.8 |
| | $ | 197.6 |
|
|
| | | |
| (In millions) | December 31,
2018 |
| Current asset | $ | 2.9 |
|
| Noncurrent liability | (12.9 | ) |
| Net fair value | $ | (10.0 | ) |
| | | | | |
| (In millions) | December 31,
2020 |
| Other current liabilities | $ | (16.9) | |
| |
| |
In April 2018, in connection with the Credit Agreement (see Note 5), Grace entered into new cross-currency swaps beginning on April 3, 2018, and maturing on March 31, 2023, to synthetically convert $600.0 million of U.S. dollar-denominated floating rate debt into €490.1 million of euro-denominated debt fixed at 2.0231%. These cross-currency swaps were de-designated and terminated on November 5, 2018, and replaced with new, at-market cross-currency swaps beginning on November 5, 2018, and maturing on March 31, 2023, to synthetically convert $600.0 million of U.S. dollar-denominated floating rate debt into €525.9 million of euro-denominated debt fixed at 1.785%. The agreements require partial exchanges of the notional amounts each quarter and the remaining amounts at maturity. The following tables provide information about the cross-currency swaps at December 31, 2018, specifically,table presents the aggregate future cash flows of the cross-currency swaps for each of the next fivethree years andas of December 31, 2020.
| | | | | | | | | | | | | | | | | | | | | |
| (In millions) | 2021 | | 2022 | | 2023 | | | | |
| Payable—interest and principal in euro | € | 14.5 | | | € | 14.4 | | | € | 505.9 | | | | | |
| Receivable—interest and principal in U.S. dollars | $ | 17.9 | | | $ | 17.7 | | | $ | 577.4 | | | | | |
The following table presents the fair value. The fair value represents the valuevalues of the derivative contracts and is included in “other current assets” and “other liabilities”their location in the Consolidated Balance Sheets.
|
| | | | | | | | | | | | | | | | | | | |
| (In millions) | 2019 | | 2020 | �� | 2021 | | 2022 | | 2023 |
| Payable—interest and principal in euro | € | 14.7 |
| | € | 14.6 |
| | € | 14.5 |
| | € | 14.4 |
| | € | 505.9 |
|
| Receivable—interest and principal in U.S. dollars | $ | 33.5 |
| | $ | 33.3 |
| | $ | 33.0 |
| | $ | 32.6 |
| | $ | 581.1 |
|
|
| | | |
| (In millions) | December 31,
2018 |
| Current asset | $ | 15.4 |
|
| Noncurrent liability | (19.0 | ) |
| Net fair value | $ | (3.6 | ) |
| | | | | |
| (In millions) | December 31,
2020 |
| Other current liabilities | $ | (0.2) | |
| Other liabilities | (50.8) | |
| Net fair value | $ | (51.0) | |
There were no significant currency forward exchange agreements outstanding at December 31, 2018.2020.
Interest Rate Risk
As of December 31, 2018,2020, approximately $297.2$268.9 million of our borrowings were at variable interest rates and expose us to interest rate risk, excluding $598.5$586.5 million hedged by cross-currency swaps effective in November 2018, and $100.0 million hedged by interest rate swaps effective in April 2018. As a result, we have been and will continue to be subject to the variations onfluctuations in interest rates in respect of our floating-rate debt. A 100 basis point increase in the interest rates payable on our variable rate debt outstanding as of December 31, 2018,2020, would increase our annual interest expense by $3.0$2.7 million.
In connection with the Credit Agreement (see Note 5), Grace entered into new interest rate swaps beginning on April 3, 2018, and maturing on March 31, 2023, fixing the LIBOR component of the interest on $100.0 million of term debt at 2.775%. While we have and may continue to enter into agreements intending to limit our exposure to higher interest rates, any such agreements may not offer complete protection from this risk.
See Item 8 (Financial Statements and Supplementary Data) in the Financial Supplement under Note 6 (Fair Value Measurements and Risk) to the Consolidated Financial Statements for additional disclosure around market risk, which disclosure is incorporated herein by reference.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The disclosure required by this Item appears in the Financial Supplement which disclosure is incorporated herein by reference.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 9A. CONTROLS AND PROCEDURES
Except as provided below, the disclosure required by this Item appears in the Financial Supplement under the headings “Management’s Report on Internal Control Over Financial Reporting” and “Report of Independent Registered Public Accounting Firm,” which disclosure is incorporated herein by reference.
There was no change in Grace’s internal control over financial reporting during the quarter ended December 31, 2018, that has materially affected, or is reasonably likely to materially affect, Grace’s internal control over financial reporting.
Item 9B. OTHER INFORMATION
None.
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Incorporated by reference to the sections entitled “Proposal One: Election of Directors,” “—Nominees for Election as Directors,” “—Continuing Directors,” and “—Corporate Governance;” “Questions and Answers About the Annual Meeting and the Voting Process—Question 29: Where can I find Grace corporate governance materials?;” and “Other Information—Section 16(a) Beneficial Ownership Reporting Compliance” of a definitive proxy statement that Grace will file with the SEC no later than 120 days after December 31, 2018 (the “2019 Proxy Statement”). Required information on executive officers of Grace appears at Part I after Item 4 of this report.
Item 11. EXECUTIVE COMPENSATION
Incorporated by reference to the sections entitled “Proposal One: Election of Directors—Corporate Governance,” and “—Director Compensation,” and “Executive Compensation” of the 2019 Proxy Statement.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Incorporated by reference to the sections entitled “Other Information—Stock Ownership of Certain Beneficial Owners and Management” and “—Equity Compensation Plan Information” of the 2019 Proxy Statement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Incorporated by reference to the sections entitled “Proposal One: Election of Directors—Corporate Governance” and “Other Information—Related Party Transactions” of the 2019 Proxy Statement.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Incorporated by reference to the sections entitled “Proposal Two: Ratification of the Appointment of Independent Registered Public Accounting Firm—Principal Accountant Fees and Services” and “—Audit Committee Pre-Approval Policies and Procedures” of the 2019 Proxy Statement.
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Financial Statements and Schedules. The required information is set forth in the Financial Supplement under the heading “Table of Contents” which is incorporated herein by reference.
Exhibits. The exhibits to this Report are listed below. Other than exhibits that are filed herewith, all exhibits listed below are incorporated by reference.
In reviewing the agreements included as exhibits to this and other Reports filed by Grace with the Securities and Exchange Commission, please remember they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about Grace or other parties to the agreements. The agreements generally contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement. These representations and warranties:
are not statements of fact, but rather are used to allocate risk to one of the parties if the statements prove to be inaccurate;
may have been qualified by disclosures that were made to the other parties in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;
may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and
were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and do not reflect more recent developments.
Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. Additional information about Grace may be found elsewhere in this report and Grace’s other public filings, which are available without charge through the Securities and Exchange Commission’s website at http://www.sec.gov.
|
| | | | | |
Exhibit No. | | Exhibit | | Location |
2.1 |
| | | | Exhibit 2.01 to Form 8-K (filed 2/07/14) SEC File No.: 001-13953 |
2.2 |
| | | | Exhibit 2.02 to Form 8-K (filed 2/07/14) SEC File No.: 001-13953 |
2.3 |
| | | | Exhibit 2.1 to Form 8-K (filed 1/28/16) SEC File No.: 001-13953 |
2.4 |
| | | | Exhibit 2.4 to Form 10-K (filed 2/22/18) SEC File No.: 001-13953 |
3.1 |
| | | | Exhibit 3.01 to Form 8-K (filed 2/07/14) SEC File No.: 001-13953 |
3.2 |
| | | | Exhibit 3.01 to Form 8-K (filed 1/23/15) SEC File No.: 001-13953 |
4.1 |
| | | | Exhibit 4.10 to Form 10-K (filed 3/02/07) SEC File No.: 001-13953 |
| | | | |
|
| | | | | |
Exhibit No. | | Exhibit | | Location |
4.2 |
| | | | Exhibit 4.01 to Form 8-K (filed 2/07/14) SEC File No.: 001-13953 |
4.3 |
| | First Amendment and Consent to Credit Agreement and First Amendment to Security Agreement, dated as of November 25, 2015, by and among W. R. Grace & Co., W. R. Grace & Co.–Conn., Grace GmbH & Co. KG, Alltech Associates, Inc., each lender from time to time party thereto, and Goldman Sachs Bank USA, as Administrative Agent and lender. | | Exhibit 10.1 to Form 8-K (filed 11/25/15) SEC File No.: 001-13953 |
4.4 |
| | | | Exhibit 4.04 to Form 8-K (filed 2/07/14) SEC File No.: 001-13953 |
4.5 |
| | | | Exhibit 4.05 to Form 8-K (filed 2/07/14) SEC File No.: 001-13953 |
4.6 |
| | | | Exhibit 4.06 to Form 8-K (filed 2/07/14) SEC File No.: 001-13953 |
4.7 |
| | | | Exhibit 4.07 to Form 8-K (filed 2/07/14) SEC File No.: 001-13953 |
4.8 |
| | | | Exhibit 4.08 to Form 8-K (filed 2/07/14) SEC File No.: 001-13953 |
4.9 |
| | | | Exhibit 4.1 to Form 8-K (filed 9/19/14) SEC File No.: 001-13953 |
4.10 |
| | | | Exhibit 4.2 to Form 8-K (filed 9/19/14) SEC File No.: 001-13953 |
4.11 |
| | | | Exhibit 4.3 (included as Exhibit A-1 to Exhibit 4.2) to Form 8-K (filed 9/19/14) SEC File No.: 001-13953 |
4.12 |
| | | | Exhibit 4.4 (included as Exhibit A-2 to Exhibit 4.2) to Form 8-K (filed 9/19/14) SEC File No.: 001-13953 |
4.13 |
| | | | Exhibit 4.1 to Form 8-K (filed 4/03/18) SEC File No.: 001-13953
|
4.14 |
| | | | Exhibit 4.2 to Form 10-Q (filed 5/09/18) SEC File No.: 001-13953 |
10.1 |
| | | | Exhibit 10.02 to Form 8-K (filed 2/07/14) SEC File No.: 001-13953 |
10.2 |
| | | | Exhibit 10.03 to Form 8-K (filed 2/07/14) SEC File No.: 001-13953* |
10.3 |
| | | | Exhibit 10.2 to Form 8-K (filed 2/09/16) SEC File No.: 001-13953* |
10.4 |
| | | | Exhibit 10.1 to Form 8-K (filed 2/09/16) SEC File No.: 001-13953* |
| | | | |
|
| | | | | |
Exhibit No. | | Exhibit | | Location |
10.5 |
| | | | Exhibit 10.3 to Form 8-K (filed 2/09/16) SEC File No.: 001-13953* |
10.6 |
| | | | Exhibit 10.7 to Form 10-K (filed 3/28/02) SEC File No.: 001-13953* |
10.7 |
| | | | Exhibit 10.8 to Form 10-K (filed 3/28/02) SEC File No.: 001-13953* |
10.8 |
| | | | Exhibit 10.17 to Form 10-K (filed 3/13/03) SEC File No.: 001-13953* |
10.9 |
| | | | Exhibit 10.2 to Form 8-K (filed 2/04/16) SEC File No.: 001-13953* |
10.10 |
| | | | Exhibit 10.1 to Form 8-K (filed 5/12/15) SEC File No.: 001-13953* |
10.11 |
| | | | Exhibit 10.1 to Form 8-K (filed 1/28/16) SEC File No.: 001-13953 |
10.12 |
| | | | Exhibit 10.1 to Form 8-K (filed 3/07/08) SEC File No.: 001-13953* |
10.13 |
| | | | Exhibit 10.20 to Form 10-K (filed 2/25/15) SEC File No.: 001-13953* |
10.14 |
| | | | Exhibit 10.1 to Form 10-Q (filed 5/07/15) SEC File No.: 001-13953* |
10.15 |
| | | | Exhibit 10.1 to Form 10-Q (filed 5/09/18) SEC File No.: 001-13953* |
10.16 |
| | | | Exhibit 10.2 to Form 10-Q (filed 5/09/18) SEC File No.: 001-13953* |
10.17 |
| | | | Exhibit 10.1 to Form 8-K (filed 5/14/18) SEC File No.: 001-13953* |
10.18 |
| | | | Exhibit 10.2 to Form 10-Q (filed 8/08/18) SEC File No.: 001-13953* |
10.19 |
| | | | Exhibit 10.3 to Form 10-Q (filed 8/08/18) SEC File No.: 001-13953* |
10.20 |
| | | | Exhibit 10.4 to Form 10-Q (filed 8/08/18) SEC File No.: 001-13953* |
10.21 |
| | | | Exhibit 10.5 to Form 10-Q (filed 8/08/18) SEC File No.: 001-13953* |
10.22 |
| | | | Exhibit 99.1 to Form 8-K (filed 2/20/19) SEC File No.: 001-13953* |
21 |
| | | | Filed herewith |
23 |
| | | | Filed herewith |
24 |
| | | | Filed herewith |
31(i).1 |
| | | | Filed herewith |
31(i).2 |
| | | | Filed herewith |
32 |
| | | | Filed herewith |
95 |
| | | | Filed herewith |
101.INS |
| | XBRL Instance Document | | Filed herewith |
101.SCH |
| | XBRL Taxonomy Extension Schema | | Filed herewith |
|
| | | | | |
Exhibit No. | | Exhibit | | Location |
101.CAL |
| | XBRL Taxonomy Extension Calculation Linkbase | | Filed herewith |
101.DEF |
| | XBRL Taxonomy Extension Definition Linkbase | | Filed herewith |
101.LAB |
| | XBRL Taxonomy Extension Label Linkbase | | Filed herewith |
101.PRE |
| | XBRL Taxonomy Extension Presentation Linkbase | | Filed herewith |
| |
* | Management contracts and compensatory plans, contracts or arrangements required to be filed as exhibits to this Report. |
Item 16. FORM 10-K SUMMARY
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| | |
| W. R. GRACE & CO. |
| By: | /s/ HUDSON LA FORCE |
| | Hudson La Force
President and Chief Executive Officer (Principal Executive Officer and Acting Principal Financial Officer)
|
| By: | /s/ WILLIAM C. DOCKMAN |
| | William C. Dockman
Vice President and Controller (Principal Accounting Officer)
|
Dated: February 28, 2019
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on February 28, 2019.
|
| | | | |
Signature | | | | Title |
R. F. Cummings, Jr.* | | } | | |
A. E. Festa* | | } | | |
D. H. Gulyas* | | } | | |
J. Fasone Holder* | | } | | Directors |
J. N. Quinn* | | } | | |
C. J. Steffen* | | } | | |
M. E. Tomkins* | | } | | |
S. Yanai* | | } | | |
|
| | |
/s/ HUDSON LA FORCE | | President and Chief Executive Officer and Director
(Principal Executive Officer and Acting Principal Financial Officer)
|
(Hudson La Force) | |
/s/ WILLIAM C. DOCKMAN | | Vice President and Controller
(Principal Accounting Officer)
|
(William C. Dockman) | |
| |
* | By signing his name hereto, Mark A. Shelnitz is signing this document on behalf of each of the persons indicated above pursuant to powers of attorney duly executed by such persons and filed with the Securities and Exchange Commission. |
|
| | |
| By: | /s/ MARK A. SHELNITZ |
| | Mark A. Shelnitz
(Attorney-in-Fact)
|
FINANCIAL SUPPLEMENT
W. R. GRACE & CO.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2018
TABLE OF CONTENTS
The Financial Statement Schedule should be read in conjunction with the Consolidated Financial Statements and Notes thereto. Financial Statement Schedules not included have been omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or Notes thereto. Financial statements of less than majority-owned persons and other persons accounted for by the equity method have been omitted as provided in Rule 3-09 of the United States Securities and Exchange Commission’s (the “SEC”) Regulation S-X. Financial Statement Schedules not included have been omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or Notes thereto.
Management’s Report on Internal Control Over Financial Reporting
Responsibility For Financial Information—I amWe are responsible for the preparation, accuracy, integrity and objectivity of the Consolidated Financial Statements and the other financial information included in this report. Such information has been prepared in conformity with accounting principles generally accepted in the United States of America and accordingly, includes certain amounts that represent management’s best estimates and judgments. Actual amounts could differ from those estimates.
Responsibility For Internal Controls—IWe and Grace’sour management are also responsible for establishing and maintaining adequate internal controls over financial reporting. These internal controls consist of policies and procedures that are designed to assess and monitor the effectiveness of the control environment including risk identification, governance structure, delegations of authority, information flow, communications and control activities. A chartered Disclosure Committee oversees Grace’s public financial reporting process and key managers are required to confirm their compliance with Grace’s policies and internal controls quarterly. While no system of internal controls can ensure elimination of all errors and irregularities, Grace’s internal controls, which are reviewed and modified in response to changing conditions, have been designed to provide reasonable assurance that assets are safeguarded, policies and procedures are followed, transactions are properly executed and reported, and appropriate disclosures are made. The concept of reasonable assurance is based on the recognition that there are limitations in all systems of internal control and that the costs of such systems should be balanced with their benefits. The Audit Committee of the Board of Directors, which is composed solely of independent directors, meets regularly with Grace’s senior financial management, internal auditors and independent registered public accounting firm to review audit plans and results, as well as the actions taken by management in discharging its responsibilities for accounting, financial reporting and internal controls. The Audit Committee is responsible for the selection and compensation of the independent registered public accounting firm. Grace’s financial management, internal auditors and independent registered public accounting firm have direct and confidential access to the Audit Committee at all times.
Report On Internal Control Over Financial Reporting—IWe and Grace’sour management have evaluated Grace’s internal control over financial reporting as of December 31, 2018.2020. This evaluation was based on criteria for effective internal control over financial reporting set forth in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, Iwe and Grace’sour management have concluded that Grace’s internal control over financial reporting is effective as of December 31, 2018.2020. Grace’s independent registered public accounting firm that audited our financial statements included in Item 158 has also audited the effectiveness of Grace’s internal control over financial reporting as of December 31, 2018,2020, as stated in their report, which appears on the following page.
Report On Disclosure Controls And Procedures—As of December 31, 2018, I2020, we and Grace’sour management carried out an evaluation of the effectiveness of the design and operation of Grace’s disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, Iwe concluded that Grace’s disclosure controls and procedures are effective in ensuring that information required to be disclosed in Grace’s periodic filings and submissions under the Exchange Act is accumulated and communicated to meus and Grace’sour management to allow timely decisions regarding required disclosures, and such information is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
|
| | | | | | | |
| /s/ HUDSON LA FORCE | | /s/ WILLIAM C. DOCKMAN |
Hudson La Force President and Chief Executive Officer (Principal Executive Officer) | | William C. Dockman
Senior Vice President and Chief Financial Officer
(Principal Financial Officer and Acting Principal FinancialAccounting Officer) |
Date: February 28, 201925, 2021 | | |
Report of Independent Registered Public Accounting Firm
To theShareholders and Board of Directors and Shareholders of W. R. Grace & Co.:
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of W. R. Grace & Co. and its subsidiaries (the “Company”) as of December 31, 20182020 and 2017,2019, and the related consolidated statements of operations, of comprehensive income (loss), of equity and of cash flows for each of the three years in the period ended December 31, 2018,2020, including the related notes and financial statement schedule of valuation and qualifying accounts and reserveslisted in the accompanying index for each of the three years in the period ended December 31, 2018 appearing under Item 152020 (collectively referred to as the “consolidated financial statements”).We also have audited the Company's internal control over financial reporting as of December 31, 2018,2020, based on criteria established in Internal Control - Integrated Framework(2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20182020 and 2017, 2019, and the results of itsoperations and itscash flows for each of the three years in the period ended December 31, 20182020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018,2020, based on criteria established in Internal Control - Integrated Framework(2013)issued by the COSO.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Environmental Liability for the Libby Mine and Surrounding Area
As described in Note 10 to the consolidated financial statements, the Company is engaged with the U.S. Environmental Protection Agency (the “EPA”) and other federal, state and local governmental agencies in a remedial investigation and feasibility study (“RI/FS”) of the Libby mine and the surrounding area, known as Operable Unit 3 (“OU3”). The RI/FS will study the areas within OU3 requiring remediation and will identify possible remedial action alternatives. Possible remedial actions within OU3 are wide-ranging, from institutional controls such as land use restrictions, to more active measures involving soil removal, containment projects, or other protective measures. As part of the RI/FS process, management contracted an engineering and consulting firm to develop a range of possible remedial alternatives and associated cost estimates for OU3. The estimated costs of remediation are preliminary and consist of several components, each of which may vary significantly as the remedial alternatives are further developed. It is reasonably possible that the ultimate costs of remediation could range between $30 million and $170 million. The ultimate remedy will be determined by the EPA after the RI/FS is finalized. Such remedy will be set forth in a Record of Decision (“ROD”) that is currently expected to be issued by the EPA no earlier than 2024. Depending on the remedial alternatives that the EPA selects in the ROD, the total cost of remediating OU3 may exceed management’s current estimate by material amounts. The Company’s estimated liability for response costs that are currently estimable for OU3 and vermiculite processing sites outside of Libby at December 31, 2020 totaled $71.2 million.
The principal considerations for our determination that performing procedures relating to the environmental liability for the Libby mine and surrounding area is a critical audit matter are (i) the significant judgment by management when developing the environmental liability for the Libby mine and the surrounding area, which in turn led to a high degree of auditor judgment and subjectivity in performing procedures and evaluating audit evidence related to management’s estimated remedial alternatives and the related estimated costs of such remedial alternatives, and (ii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s estimates of the environmental liability for the Libby mine and surrounding area, including controls over the on-going monitoring of information that may impact the remedial alternatives and the associated costs. These procedures also included, among others, assessing the completeness, accuracy and relevance of the information used by management, and evaluating the remedial alternatives selected by management and the associated costs. Professionals with specialized skill and knowledge were used to assist in assessing the information used by management, and evaluating the remedial alternatives selected by management and the associatedcosts.
/s/ PricewaterhouseCoopers LLP
Baltimore, Maryland
February 28, 201925, 2021
We have served as the Company’s auditor since 1906.
Consent of Independent Registered Public Accounting Firm
We hereby consent to the incorporation by reference in the Registration Statements on Form S‑8S-8 (Nos. 333-224767, 333-194171, 333-173785)333-194171) of W. R. Grace & Co. of our report dated February 28, 201925, 2021 relating to the financial statements and financial statement schedule and the effectiveness of internal control over financial reporting, which appears in this Form 10‑K.10-K.
/s/ PricewaterhouseCoopers LLP
Baltimore, Maryland
February 28, 201925, 2021
W. R. Grace & Co. and Subsidiaries
Consolidated Statements of Operations
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| (In millions, except per share amounts) | 2020 | | 2019 | | 2018 |
| Net sales | $ | 1,729.8 | | | $ | 1,958.1 | | | $ | 1,932.1 | |
| Cost of goods sold | 1,113.3 | | | 1,164.4 | | | 1,165.4 | |
| Gross profit | 616.5 | | | 793.7 | | | 766.7 | |
| Selling, general and administrative expenses | 282.9 | | | 299.0 | | | 300.4 | |
| Research and development expenses | 65.9 | | | 64.5 | | | 62.7 | |
| Costs related to legacy matters | 39.4 | | | 103.5 | | | 82.3 | |
| Restructuring and repositioning expenses | 36.9 | | | 13.7 | | | 46.4 | |
| Equity in earnings of unconsolidated affiliate | (13.5) | | | (27.8) | | | (31.8) | |
| Loss on early extinguishment of debt | 39.4 | | | 0 | | | 4.8 | |
| Interest expense and related financing costs | 76.0 | | | 76.7 | | | 80.2 | |
| Other (income) expense, net | 89.0 | | | 80.6 | | | (23.2) | |
| Total costs and expenses | 616.0 | | | 610.2 | | | 521.8 | |
| Income (loss) before income taxes | 0.5 | | | 183.5 | | | 244.9 | |
| (Provision for) benefit from income taxes | (2.2) | | | (56.8) | | | (78.1) | |
| | | | | |
| | | | | |
| Net income (loss) | (1.7) | | | 126.7 | | | 166.8 | |
| Less: Net (income) loss attributable to noncontrolling interests | (0.1) | | | (0.4) | | | 0.8 | |
| Net income (loss) attributable to W. R. Grace & Co. shareholders | $ | (1.8) | | | $ | 126.3 | | | $ | 167.6 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Earnings Per Share Attributable to W. R. Grace & Co. Shareholders | | | | | |
| Basic earnings per share: | | | | | |
| | | | | |
| | | | | |
| Net income (loss) | $ | (0.03) | | | $ | 1.89 | | | $ | 2.49 | |
| Weighted average number of basic shares | 66.3 | | | 66.8 | | | 67.2 | |
| Diluted earnings per share: | | | | | |
| | | | | |
| | | | | |
| Net income (loss) | $ | (0.03) | | | $ | 1.89 | | | $ | 2.49 | |
| Weighted average number of diluted shares | 66.3 | | | 66.9 | | | 67.3 | |
| Dividends per common share | $ | 1.20 | | | $ | 1.08 | | | $ | 0.96 | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| (In millions, except per share amounts) | 2018 | | 2017 | | 2016 |
| Net sales | $ | 1,932.1 |
| | $ | 1,716.5 |
| | $ | 1,598.6 |
|
| Cost of goods sold | 1,165.4 |
| | 1,040.4 |
| | 928.8 |
|
| Gross profit | 766.7 |
| | 676.1 |
| | 669.8 |
|
| Selling, general and administrative expenses | 307.0 |
| | 274.0 |
| | 271.8 |
|
| Research and development expenses | 62.7 |
| | 56.3 |
| | 51.6 |
|
| Provision for environmental remediation | 73.8 |
| | 24.4 |
| | 28.7 |
|
| Restructuring and repositioning expenses | 46.4 |
| | 26.7 |
| | 38.6 |
|
| Equity in earnings of unconsolidated affiliate | (31.8 | ) | | (25.9 | ) | | (29.8 | ) |
| Interest expense and related financing costs | 80.2 |
| | 79.5 |
| | 81.5 |
|
| Other (income) expense, net | (16.5 | ) | | 30.2 |
| | 61.4 |
|
| Total costs and expenses | 521.8 |
| | 465.2 |
| | 503.8 |
|
| Income (loss) from continuing operations before income taxes | 244.9 |
| | 210.9 |
| | 166.0 |
|
| (Provision for) benefit from income taxes | (78.1 | ) | | (200.5 | ) | | (59.0 | ) |
| Income (loss) from continuing operations | 166.8 |
| | 10.4 |
| | 107.0 |
|
| Income (loss) from discontinued operations, net of income taxes | — |
| | — |
| | (12.9 | ) |
| Net income (loss) | 166.8 |
| | 10.4 |
| | 94.1 |
|
| Less: Net (income) loss attributable to noncontrolling interests | 0.8 |
| | 0.8 |
| | — |
|
| Net income (loss) attributable to W. R. Grace & Co. shareholders | $ | 167.6 |
| | $ | 11.2 |
| | $ | 94.1 |
|
| Amounts Attributable to W. R. Grace & Co. Shareholders: | | | | | |
| Income (loss) from continuing operations attributable to W. R. Grace & Co. shareholders | $ | 167.6 |
| | $ | 11.2 |
| | $ | 107.0 |
|
| Income (loss) from discontinued operations, net of income taxes | — |
| | — |
| | (12.9 | ) |
| Net income (loss) attributable to W. R. Grace & Co. shareholders | $ | 167.6 |
| | $ | 11.2 |
| | $ | 94.1 |
|
| Earnings Per Share Attributable to W. R. Grace & Co. Shareholders | | | | | |
| Basic earnings per share: | | | | | |
| Income (loss) from continuing operations | $ | 2.49 |
| | $ | 0.16 |
|
| $ | 1.53 |
|
| Income (loss) from discontinued operations, net of income taxes | — |
| | — |
| | (0.19 | ) |
| Net income (loss) | $ | 2.49 |
| | $ | 0.16 |
|
| $ | 1.34 |
|
| Weighted average number of basic shares | 67.2 |
| | 68.1 |
| | 70.1 |
|
| Diluted earnings per share: | | | | | |
| Income (loss) from continuing operations | $ | 2.49 |
| | $ | 0.16 |
|
| $ | 1.52 |
|
| Income (loss) from discontinued operations, net of income taxes | — |
| | — |
| | (0.19 | ) |
| Net income (loss) | $ | 2.49 |
| | $ | 0.16 |
|
| $ | 1.33 |
|
| Weighted average number of diluted shares | 67.3 |
| | 68.2 |
| | 70.5 |
|
| Dividends per common share | $ | 0.96 |
| | $ | 0.84 |
| | $ | 0.51 |
|
The Notes to Consolidated Financial Statements are an integral part of these statements.
F-763
W. R. Grace & Co. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| (In millions) | 2020 | | 2019 | | 2018 |
| Net income (loss) | $ | (1.7) | | | $ | 126.7 | | | $ | 166.8 | |
| Other comprehensive income (loss), net of income taxes: | | | | | |
| Defined benefit pension and other postretirement plans | (0.4) | | | (0.7) | | | (0.9) | |
| Currency translation adjustments | (49.9) | | | 16.5 | | | 32.4 | |
| Gain (loss) from hedging activities | 0.8 | | | (4.9) | | | (5.7) | |
| | | | | |
| Total other comprehensive income (loss), net of income taxes | (49.5) | | | 10.9 | | | 25.8 | |
| Comprehensive income (loss) | (51.2) | | | 137.6 | | | 192.6 | |
| Less: comprehensive (income) loss attributable to noncontrolling interests | (0.1) | | | (0.4) | | | 0.8 | |
| Comprehensive income (loss) attributable to W. R. Grace & Co. shareholders | $ | (51.3) | | | $ | 137.2 | | | $ | 193.4 | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| (In millions) | 2018 | | 2017 | | 2016 |
| Net income (loss) | $ | 166.8 |
| | $ | 10.4 |
| | $ | 94.1 |
|
| Other comprehensive income (loss), net of income taxes: | | | | | |
| Defined benefit pension and other postretirement plans | (0.9 | ) | | (1.3 | ) | | (0.6 | ) |
| Currency translation adjustments | 32.4 |
| | (26.0 | ) | | (1.8 | ) |
| Gain (loss) from hedging activities | (5.7 | ) | | 0.8 |
| | 0.3 |
|
| Total other comprehensive income (loss) attributable to noncontrolling interests | — |
| | — |
| | 2.6 |
|
| Total other comprehensive income (loss), net of income taxes | 25.8 |
| | (26.5 | ) | | 0.5 |
|
| Comprehensive income (loss) | 192.6 |
| | (16.1 | ) | | 94.6 |
|
| Less: comprehensive (income) loss attributable to noncontrolling interests | 0.8 |
| | 0.8 |
| | (2.6 | ) |
| Comprehensive income (loss) attributable to W. R. Grace & Co. shareholders | $ | 193.4 |
| | $ | (15.3 | ) | | $ | 92.0 |
|
The Notes to Consolidated Financial Statements are an integral part of these statements.
F-864
W. R. Grace & Co. and Subsidiaries
Consolidated Statements of Cash Flows
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| (In millions) | 2020 | | 2019 | | 2018 |
| OPERATING ACTIVITIES | | | | | |
| Net income (loss) | $ | (1.7) | | | $ | 126.7 | | | $ | 166.8 | |
| | | | | |
| | | | | |
| Reconciliation to net cash provided by (used for) operating activities: | | | | | |
| Depreciation and amortization | 105.0 | | | 100.3 | | | 100.8 | |
| Equity in earnings of unconsolidated affiliate | (13.5) | | | (27.8) | | | (31.8) | |
| Dividends received from unconsolidated affiliate | 20.0 | | | 0 | | | 0 | |
| Costs related to legacy product, environmental, and other claims | 39.4 | | | 103.5 | | | 82.3 | |
| Cash paid for legacy product, environmental, and other claims | (21.0) | | | (19.3) | | | (22.9) | |
| Provision for (benefit from) income taxes | 2.2 | | | 56.8 | | | 78.1 | |
| Cash paid for income taxes | (56.0) | | | (52.8) | | | (54.0) | |
| Income tax refunds received | 9.6 | | | 10.5 | | | 0.7 | |
| Defined benefit pension expense (income) | 109.0 | | | 104.3 | | | 0.7 | |
| Cash paid under defined benefit pension arrangements | (17.2) | | | (15.8) | | | (66.5) | |
| Stock compensation expense | 10.7 | | | 14.6 | | | 18.6 | |
| Loss on early extinguishment of debt | 39.4 | | | 0 | | | 4.8 | |
| Loss on disposal of assets | 23.2 | | | 4.2 | | | 13.2 | |
| Changes in assets and liabilities, excluding effect of currency translation and acquisitions: | | | | | |
| Trade accounts receivable | 59.7 | | | (18.7) | | | 2.5 | |
| Inventories | 62.0 | | | (30.1) | | | (26.1) | |
| Accounts payable | (9.3) | | | 28.0 | | | 24.2 | |
| Deferred revenue | (7.4) | | | (5.3) | | | 35.6 | |
| All other items, net | (4.5) | | | 13.0 | | | 15.0 | |
| Net cash provided by (used for) operating activities | 349.6 | | | 392.1 | | | 342.0 | |
| INVESTING ACTIVITIES | | | | | |
| Capital expenditures | (155.5) | | | (194.1) | | | (216.3) | |
| Business acquired, net of cash acquired | (2.0) | | | (22.8) | | | (418.0) | |
| | | | | |
| Other investing activities | (18.3) | | | 6.8 | | | 15.8 | |
| Net cash provided by (used for) investing activities | (175.8) | | | (210.1) | | | (618.5) | |
| FINANCING ACTIVITIES | | | | | |
| Borrowings under credit arrangements | 15.9 | | | 13.0 | | | 1,024.0 | |
| Repayments under credit arrangements | (49.9) | | | (24.2) | | | (587.8) | |
| Proceeds from issuance of notes | 750.0 | | | 0 | | | 0 | |
| Repayment of notes | (700.0) | | | 0 | | | 0 | |
| Cash paid related to early extinguishment of debt | (37.9) | | | 0 | | | 0 | |
| Cash paid for debt financing costs | (7.9) | | | 0 | | | (11.8) | |
| Cash paid for repurchases of common stock | (40.4) | | | (29.8) | | | (80.0) | |
| Proceeds from exercise of stock options | 0 | | | 19.1 | | | 6.7 | |
| Dividends paid to shareholders | (80.1) | | | (72.6) | | | (64.6) | |
| | | | | |
| Cash received from hedge settlement | 0 | | | 0 | | | 33.1 | |
| Other financing activities | (7.6) | | | (4.9) | | | (3.1) | |
| Net cash provided by (used for) financing activities | (157.9) | | | (99.4) | | | 316.5 | |
| Effect of currency exchange rate changes on cash and cash equivalents | 7.4 | | | (0.7) | | | (2.5) | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Net increase (decrease) in cash, cash equivalents, and restricted cash | 23.3 | | | 81.9 | | | 37.5 | |
| | | | | |
| Cash, cash equivalents, and restricted cash, beginning of period | 282.9 | | | 201.0 | | | 163.5 | |
| Cash, cash equivalents, and restricted cash, end of period | $ | 306.2 | | | $ | 282.9 | | | $ | 201.0 | |
| | | | | |
| Supplemental disclosure of cash flow information | | | | | |
| Cash paid for interest, net of amounts capitalized | $ | 74.2 | | | $ | 67.7 | | | $ | 75.2 | |
| Capital expenditures included in accounts payable | 51.9 | | | 49.8 | | | 31.0 | |
| Expenditures for other investing activities included in accounts payable | 0.4 | | | 16.2 | | | 16.9 | |
| Net share settled stock option exercises | 0 | | | 9.7 | | | 8.2 | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| (In millions) | 2018 | | 2017 | | 2016 |
| OPERATING ACTIVITIES | | | | | |
| Net income (loss) | $ | 166.8 |
| | $ | 10.4 |
| | $ | 94.1 |
|
| Less: loss (income) from discontinued operations | — |
| | — |
| | 12.9 |
|
| Income (loss) from continuing operations | 166.8 |
| | 10.4 |
|
| 107.0 |
|
| Reconciliation to net cash provided by (used for) operating activities from continuing operations: | | | | | |
| Depreciation and amortization | 100.8 |
| | 111.5 |
| | 100.3 |
|
| Equity in earnings of unconsolidated affiliate | (31.8 | ) | | (25.9 | ) | | (29.8 | ) |
| Dividends received from unconsolidated affiliate | — |
| | 19.0 |
| | 31.0 |
|
| Costs related to legacy product, environmental, and other claims | 84.6 |
| | 30.8 |
| | 35.4 |
|
| Cash paid for legacy product, environmental, and other claims | (22.9 | ) | | (54.5 | ) | | (24.6 | ) |
| Provision for (benefit from) income taxes | 78.1 |
| | 200.5 |
| | 59.0 |
|
| Cash paid for income taxes | (54.0 | ) | | (61.8 | ) | | (96.6 | ) |
| Income tax refunds received | 0.7 |
| | 34.2 |
| | 11.4 |
|
| Interest expense and related financing costs | 80.2 |
| | 79.5 |
| | 81.5 |
|
| Cash paid for interest | (78.4 | ) | | (70.2 | ) | | (75.7 | ) |
| Loss on early extinguishment of debt | 4.8 |
| | — |
| | 11.1 |
|
| Defined benefit pension expense (income) | 0.7 |
| | 64.1 |
| | 72.6 |
|
| Cash paid under defined benefit pension arrangements | (66.5 | ) | | (17.8 | ) | | (15.9 | ) |
| Accounts receivable reserve—Venezuela | — |
| | 10.0 |
| | — |
|
| Stock compensation expense | 18.6 |
| | 11.0 |
| | 11.6 |
|
| Changes in assets and liabilities, excluding effect of currency translation and acquisitions: | | | | | |
| Trade accounts receivable | 2.5 |
| | (4.9 | ) | | (15.7 | ) |
| Inventories | (26.1 | ) | | 4.4 |
| | (0.6 | ) |
| Accounts payable | 24.2 |
| | (2.5 | ) | | 32.0 |
|
| Deferred revenue | 35.6 |
| | 4.7 |
| | (6.9 | ) |
| All other items, net | 24.1 |
| | (23.3 | ) | | (19.6 | ) |
| Net cash provided by (used for) operating activities from continuing operations | 342.0 |
| | 319.2 |
| | 267.5 |
|
| INVESTING ACTIVITIES | | | | | |
| Capital expenditures | (216.3 | ) | | (125.2 | ) | | (116.9 | ) |
| Business acquired, net of cash acquired | (418.0 | ) | | (3.5 | ) | | (246.5 | ) |
| Proceeds from sale of assets | 2.4 |
| | 0.6 |
| | 13.7 |
|
| Other investing activities | 13.4 |
| | (1.1 | ) | | 5.3 |
|
| Net cash provided by (used for) investing activities from continuing operations | (618.5 | ) | | (129.2 | ) | | (344.4 | ) |
| FINANCING ACTIVITIES | | | | | |
| Borrowings under credit arrangements | 1,024.0 |
| | 114.4 |
| | 39.4 |
|
| Repayments under credit arrangements | (587.8 | ) | | (143.9 | ) | | (633.0 | ) |
| Cash paid for debt financing costs | (11.8 | ) | | — |
| | — |
|
| Cash paid for repurchases of common stock | (80.0 | ) | | (65.0 | ) | | (195.1 | ) |
| Proceeds from exercise of stock options | 6.7 |
| | 16.4 |
| | 17.0 |
|
| Dividends paid to shareholders | (64.6 | ) | | (57.3 | ) | | (36.0 | ) |
| Distribution from GCP | — |
| | — |
| | 750.0 |
|
| Cash received from hedge settlement | 33.1 |
| | — |
| | — |
|
| Other financing activities | (3.1 | ) | | 0.6 |
| | (2.5 | ) |
| Net cash provided by (used for) financing activities from continuing operations | 316.5 |
| | (134.8 | ) | | (60.2 | ) |
| Effect of currency exchange rate changes on cash and cash equivalents | (2.5 | ) | | 7.7 |
| | (3.0 | ) |
| Increase (decrease) in cash and cash equivalents from continuing operations | 37.5 |
| | 62.9 |
| | (140.1 | ) |
| Increase (decrease) in cash and cash equivalents from discontinued operations | — |
| | — |
| | 44.8 |
|
| Net increase (decrease) in cash and cash equivalents | 37.5 |
| | 62.9 |
|
| (95.3 | ) |
| Less: cash and cash equivalents of discontinued operations | — |
| | — |
| | (143.4 | ) |
| Cash, cash equivalents, and restricted cash, beginning of period | 163.5 |
| | 100.6 |
| | 339.3 |
|
| Cash, cash equivalents, and restricted cash, end of period | $ | 201.0 |
| | $ | 163.5 |
|
| $ | 100.6 |
|
| | | | | | |
| Supplemental disclosure of cash flow information | | | | | |
| Capital expenditures included in accounts payable | $ | 31.0 |
| | $ | 41.4 |
| | $ | 23.8 |
|
| Expenditures for other investing activities included in accounts payable | 16.9 |
| | 2.7 |
| | 1.1 |
|
| Net share settled stock option exercises | 8.2 |
| | 1.2 |
| | 10.5 |
|
The Notes to Consolidated Financial Statements are an integral part of these statements.
F-965
W. R. Grace & Co. and Subsidiaries
Consolidated Balance Sheets
| | | | | | | | | | | |
| December 31, |
| (In millions, except par value and shares) | 2020 | | 2019 |
| ASSETS | | | |
| Current Assets | | | |
| Cash and cash equivalents | $ | 304.5 | | | $ | 282.5 | |
| Restricted cash and cash equivalents | 1.7 | | | 0.4 | |
| Trade accounts receivable, less allowance of $2.2 (2019—$13.3) | 264.1 | | | 307.0 | |
| Inventories | 253.8 | | | 309.9 | |
| Other current assets | 51.2 | | | 235.1 | |
| | | |
| Total Current Assets | 875.3 | | | 1,134.9 | |
| Properties and equipment, net of accumulated depreciation and amortization of $1,550.1 (2019—$1,497.0) | 1,208.8 | | | 1,143.8 | |
| Goodwill | 562.7 | | | 556.9 | |
| Technology and other intangible assets, net | 320.8 | | | 342.8 | |
| Deferred income taxes | 567.1 | | | 517.6 | |
| | | |
| Investment in unconsolidated affiliate | 175.5 | | | 181.9 | |
| Other assets | 55.3 | | | 54.7 | |
| | | |
| Total Assets | $ | 3,765.5 | | | $ | 3,932.6 | |
| LIABILITIES AND EQUITY | | | |
| Current Liabilities | | | |
| Debt payable within one year | $ | 15.3 | | | $ | 23.1 | |
| Accounts payable | 262.1 | | | 302.3 | |
| Other current liabilities | 281.9 | | | 419.7 | |
| | | |
| Total Current Liabilities | 559.3 | | | 745.1 | |
| Debt payable after one year | 1,975.1 | | | 1,957.3 | |
| Unfunded defined benefit pension plans | 520.7 | | | 434.6 | |
| Underfunded defined benefit pension plans | 128.3 | | | 85.2 | |
| Other liabilities | 347.6 | | | 308.2 | |
| | | |
| Total Liabilities | 3,531.0 | | | 3,530.4 | |
| Commitments and Contingencies—Note 10 | 0 | | 0 |
| Equity | | | |
| Common stock issued, par value $0.01; 300,000,000 shares authorized; outstanding: 66,190,410 (2019—66,735,913) | 0.7 | | | 0.7 | |
| Paid-in capital | 473.2 | | | 477.9 | |
| Retained earnings | 648.8 | | | 730.5 | |
| Treasury stock, at cost: shares: 11,266,223 (2019—10,720,720) | (920.6) | | | (892.2) | |
| Accumulated other comprehensive income (loss) | 29.3 | | | 78.8 | |
| Total W. R. Grace & Co. Shareholders’ Equity | 231.4 | | | 395.7 | |
| Noncontrolling interests | 3.1 | | | 6.5 | |
| Total Equity | 234.5 | | | 402.2 | |
| Total Liabilities and Equity | $ | 3,765.5 | | | $ | 3,932.6 | |
|
| | | | | | | |
| | December 31, |
| (In millions, except par value and shares) | 2018 |
| 2017 |
| ASSETS | | | |
| Current Assets | | | |
| Cash and cash equivalents | $ | 200.5 |
| | $ | 152.8 |
|
| Restricted cash and cash equivalents | 0.5 |
| | 10.7 |
|
| Trade accounts receivable, less allowance of $11.6 (2017—$11.7) | 288.5 |
| | 285.2 |
|
| Inventories | 281.1 |
| | 230.9 |
|
| Other current assets | 86.7 |
| | 49.0 |
|
| Total Current Assets | 857.3 |
|
| 728.6 |
|
| Properties and equipment, net of accumulated depreciation and amortization of $1,482.8 (2017—$1,463.4) | 1,011.7 |
| | 799.1 |
|
| Goodwill | 540.4 |
| | 402.4 |
|
| Technology and other intangible assets, net | 356.5 |
| | 255.4 |
|
| Deferred income taxes | 529.4 |
| | 556.5 |
|
| Investment in unconsolidated affiliate | 156.1 |
| | 125.9 |
|
| Other assets | 113.9 |
| | 39.1 |
|
| Total Assets | $ | 3,565.3 |
| | $ | 2,907.0 |
|
| LIABILITIES AND EQUITY | | | |
| Current Liabilities | | | |
| Debt payable within one year | $ | 22.3 |
|
| $ | 20.1 |
|
| Accounts payable | 248.6 |
| | 210.3 |
|
| Other current liabilities | 243.5 |
| | 217.8 |
|
| Total Current Liabilities | 514.4 |
| | 448.2 |
|
| Debt payable after one year | 1,961.0 |
|
| 1,523.8 |
|
| Unfunded defined benefit pension plans | 366.0 |
| | 391.9 |
|
| Underfunded defined benefit pension plans | 67.1 |
| | 110.5 |
|
| Other liabilities | 319.8 |
| | 169.3 |
|
| Total Liabilities | 3,228.3 |
| | 2,643.7 |
|
| Commitments and Contingencies—Note 10 |
| |
|
| Equity | | | |
| Common stock issued, par value $0.01; 300,000,000 shares authorized; outstanding: 66,792,968 (2017—67,780,410) | 0.7 |
| | 0.7 |
|
| Paid-in capital | 481.1 |
| | 474.8 |
|
| Retained earnings | 676.7 |
| | 573.1 |
|
| Treasury stock, at cost: shares: 10,663,659 (2017—9,676,217) | (895.5 | ) | | (832.1 | ) |
| Accumulated other comprehensive income (loss) | 67.9 |
| | 39.9 |
|
| Total W. R. Grace & Co. Shareholders’ Equity | 330.9 |
| | 256.4 |
|
| Noncontrolling interests | 6.1 |
| | 6.9 |
|
| Total Equity | 337.0 |
| | 263.3 |
|
| Total Liabilities and Equity | $ | 3,565.3 |
| | $ | 2,907.0 |
|
The Notes to Consolidated Financial Statements are an integral part of these statements.
F-1066
W. R. Grace & Co. and Subsidiaries
Consolidated Statements of Equity
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | Common
Stock and
Paid-in
Capital | | Retained
Earnings | | Treasury
Stock | | Accumulated
Other
Comprehensive
(Loss) Income | | Noncontrolling
Interests | | Total
Equity |
| Balance, December 31, 2017 | $ | 475.5 | | | $ | 573.1 | | | $ | (832.1) | | | $ | 39.9 | | | $ | 6.9 | | | $ | 263.3 | |
| Net income (loss) | — | | | 167.6 | | | — | | | — | | | (0.8) | | | 166.8 | |
| Repurchase of common stock | — | | | — | | | (80.0) | | | — | | | — | | | (80.0) | |
| Stock-based compensation | 18.6 | | | — | | | — | | | — | | | — | | | 18.6 | |
| Exercise of stock options | (4.2) | | | — | | | 10.6 | | | — | | | — | | | 6.4 | |
| | | | | | | | | | | |
| Payments in consideration of employee tax obligations related to stock-based compensation | (2.9) | | | — | | | — | | | — | | | — | | | (2.9) | |
| Shares issued | (5.2) | | | — | | | 6.0 | | | — | | | — | | | 0.8 | |
| Dividends declared | — | | | (64.3) | | | — | | | — | | | — | | | (64.3) | |
| | | | | | | | | | | |
| Other comprehensive income (loss) | — | | | — | | | — | | | 25.8 | | | 0 | | | 25.8 | |
| Effect of adopting ASC 606 | — | | | 2.5 | | | — | | | — | | | — | | | 2.5 | |
| Effect of adopting ASU 2018-02 | — | | | (2.2) | | | — | | | 2.2 | | | — | | | 0 | |
| Balance, December 31, 2018 | 481.8 | | | 676.7 | | | (895.5) | | | 67.9 | | | 6.1 | | | 337.0 | |
| Net income (loss) | — | | | 126.3 | | | — | | | — | | | 0.4 | | | 126.7 | |
| Repurchase of common stock | — | | | — | | | (29.8) | | | — | | | — | | | (29.8) | |
| Stock-based compensation | 14.6 | | | — | | | — | | | — | | | — | | | 14.6 | |
| Exercise of stock options | (5.0) | | | — | | | 24.1 | | | — | | | — | | | 19.1 | |
| | | | | | | | | | | |
| Payments in consideration of employee tax obligations related to stock-based compensation | (4.9) | | | — | | | — | | | — | | | — | | | (4.9) | |
| Shares issued | (7.9) | | | — | | | 9.0 | | | — | | | — | | | 1.1 | |
| Dividends declared | — | | | (72.5) | | | — | | | — | | | — | | | (72.5) | |
| | | | | | | | | | | |
| Other comprehensive income (loss) | — | | | — | | | — | | | 10.9 | | | 0 | | | 10.9 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Balance, December 31, 2019 | 478.6 | | | 730.5 | | | (892.2) | | | 78.8 | | | 6.5 | | | 402.2 | |
| Net income (loss) | — | | | (1.8) | | | — | | | — | | | 0.1 | | | (1.7) | |
| Repurchase of common stock | — | | | — | | | (40.4) | | | — | | | — | | | (40.4) | |
| Stock-based compensation | 10.5 | | | — | | | — | | | — | | | — | | | 10.5 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Payments in consideration of employee tax obligations related to stock-based compensation | (4.0) | | | — | | | — | | | — | | | — | | | (4.0) | |
| Shares issued | (11.2) | | | — | | | 12.0 | | | — | | | — | | | 0.8 | |
| Dividends declared | — | | | (79.9) | | | — | | | — | | | — | | | (79.9) | |
| Distribution to joint venture partner | — | | | — | | | — | | | — | | | (3.5) | | | (3.5) | |
| Other comprehensive income (loss) | — | | | — | | | — | | | (49.5) | | | 0 | | | (49.5) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Balance, December 31, 2020 | $ | 473.9 | | | $ | 648.8 | | | $ | (920.6) | | | $ | 29.3 | | | $ | 3.1 | | | $ | 234.5 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | Common Stock and Paid-in Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive (Loss) Income | | Noncontrolling Interests | | Total Equity |
| Balance, December 31, 2015 | $ | 496.7 |
| | $ | 436.3 |
| | $ | (658.4 | ) | | $ | (66.8 | ) | | $ | 4.7 |
| | $ | 212.5 |
|
| Net income (loss) | — |
| | 94.1 |
| | — |
| | — |
| | — |
| | 94.1 |
|
| Repurchase of common stock | — |
| | — |
| | (195.1 | ) | | — |
| | — |
| | (195.1 | ) |
| Stock-based compensation | 11.6 |
| | — |
| | — |
| | — |
| | — |
| | 11.6 |
|
| Exercise of stock options | (21.1 | ) | | — |
| | 48.6 |
| | — |
| | — |
| | 27.5 |
|
| Tax benefit related to stock plans | — |
| | 70.4 |
| | — |
| | — |
| | — |
| | 70.4 |
|
| Shares issued | 0.8 |
| | — |
| | — |
| | — |
| | — |
| | 0.8 |
|
| Dividends declared | — |
| | (36.0 | ) | | — |
| | — |
| | — |
| | (36.0 | ) |
| Distribution of GCP | — |
| | 54.5 |
| | — |
| | 135.3 |
| | (3.7 | ) | | 186.1 |
|
| Other comprehensive income (loss) | — |
| | — |
| | — |
| | (2.1 | ) | | 2.6 |
| | 0.5 |
|
| Balance, December 31, 2016 | 488.0 |
| | 619.3 |
| | (804.9 | ) | | 66.4 |
| | 3.6 |
| | 372.4 |
|
| Net income (loss) | — |
| | 11.2 |
| | — |
| | — |
| | (0.8 | ) | | 10.4 |
|
| Repurchase of common stock | — |
| | — |
| | (65.0 | ) | | — |
| | — |
| | (65.0 | ) |
| Stock-based compensation | 11.0 |
| | — |
| | — |
| | — |
| | — |
| | 11.0 |
|
| Exercise of stock options | (18.9 | ) | | — |
| | 35.0 |
| | — |
| | — |
| | 16.1 |
|
| Payments in consideration of employee tax obligations related to stock-based compensation | (2.5 | ) | | — |
| | — |
| | — |
| | — |
| | (2.5 | ) |
| Shares issued | (2.1 | ) | | — |
| | 2.8 |
| | — |
| | — |
| | 0.7 |
|
| Dividends declared | — |
| | (57.4 | ) | | — |
| | — |
| | — |
| | (57.4 | ) |
| Contribution from joint venture partner | — |
| | — |
| | — |
| | — |
| | 4.1 |
| | 4.1 |
|
| Other comprehensive income (loss) | — |
| | — |
| | — |
| | (26.5 | ) | | — |
| | (26.5 | ) |
| Balance, December 31, 2017 | 475.5 |
| | 573.1 |
| | (832.1 | ) | | 39.9 |
| | 6.9 |
| | 263.3 |
|
| Net income (loss) | — |
| | 167.6 |
| | — |
| | — |
| | (0.8 | ) | | 166.8 |
|
| Repurchase of common stock | — |
| | — |
| | (80.0 | ) | | — |
| | — |
| | (80.0 | ) |
| Stock-based compensation | 18.6 |
| | — |
| | — |
| | — |
| | — |
| | 18.6 |
|
| Exercise of stock options | (4.2 | ) | | — |
| | 10.6 |
| | — |
| | — |
| | 6.4 |
|
| Payments in consideration of employee tax obligations related to stock-based compensation | (2.9 | ) | | — |
| | — |
| | — |
| | — |
| | (2.9 | ) |
| Shares issued | (5.2 | ) | | — |
| | 6.0 |
| | — |
| | — |
| | 0.8 |
|
| Dividends declared | — |
| | (64.3 | ) | | — |
| | — |
| | — |
| | (64.3 | ) |
| Other comprehensive income (loss) | — |
| | — |
| | — |
| | 25.8 |
| | — |
| | 25.8 |
|
| Effect of adopting ASC 606 | — |
| | 2.5 |
| | — |
| | — |
| | — |
| | 2.5 |
|
| Effect of adopting ASU 2018-02 | — |
| | (2.2 | ) | | — |
| | 2.2 |
| | — |
| | — |
|
| Balance, December 31, 2018 | $ | 481.8 |
| | $ | 676.7 |
| | $ | (895.5 | ) | | $ | 67.9 |
| | $ | 6.1 |
| | $ | 337.0 |
|
The Notes to Consolidated Financial Statements are an integral part of these statements.
F-1167
W. R. Grace & Co. and Subsidiaries
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 the production and sale of specialty chemicals and specialty materials businesses on a global basis through two2 reportable segments: Grace Catalysts Technologies, which includes catalysts and related products and technologies used in petrochemical, refining, petrochemical and other chemical manufacturing applications; and Grace Materials Technologies, which includes specialty materials, including silica-based and silica-alumina-based materials, used in consumer/pharma,pharma/consumer, coatings, and chemical process and coatings applications.
W. R. Grace & Co. conducts all of its business through a single wholly owned subsidiary, W. R. Grace & Co.–Conn. (“Grace–Conn.”). Grace–Conn. owns 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.
Separation Transaction On January 27, 2016, Grace entered into a separation agreement with GCP Applied Technologies Inc., then a wholly-owned subsidiary of Grace (“GCP”), pursuant to which Grace agreed to transfer its Grace Construction Products operating segment and the packaging technologies business of its Grace Materials Technologies operating segment to GCP (the “Separation”). Grace and GCP completed the Separation on February 3, 2016 (the “Distribution Date”), by means of a pro rata distribution to the Company’s shareholders of all of the outstanding shares of GCP common stock (the “Distribution”), with one share of GCP common stock distributed for each share of Company common stock held as of the close of business on January 27, 2016. As a result of the Distribution, GCP became an independent public company. GCP’s historical financial results through the Distribution Date are reflected in Grace’s Consolidated Financial Statements as discontinued operations.
Principles of Consolidation The Consolidated Financial Statements include the accounts of Grace and entities as to which Grace maintains a controlling financial interest. Intercompany transactions and balances are eliminated in consolidation. Investments in affiliated companies in which Grace can significantly influence operating and financial policies, but does not have a controlling financial interest, are accounted for under the equity method.
Grace conducts certaina portion of its business through joint ventures with unaffiliated third parties. For joint ventures in which Grace has a controlling financial interest, Grace consolidates the results of such joint ventures in the Consolidated Financial Statements. Grace recognizes a liability for cumulative amounts due to the third parties based on the financial results of the joint ventures, and deducts the amount of income attributable to noncontrolling interests in the measurement of its consolidated net income.
Reportable Segments Grace reports financial results of each of its reportable segments that engage in business activities that generate revenues and expenses and whose operating results are regularly reviewed by Grace’s Chief Executive Officer.
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 amounts 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:
Realization•The effective tax rate and realization values of net deferred tax assets, which depend on projections of future taxable income (see Note 7);
•Pension and postretirement liabilities, which depend on assumptions regarding participant life spans, future inflation, discount rates and total returns on invested funds (see Note 8);
•Carrying values of goodwill and other intangible assets, which depend on assumptions of future earnings and cash flows (see Note 4 and Note 20); and
Notes to Consolidated Financial Statements (Continued)
1. Basis of Presentation and Summary of Significant Accounting and Financial Reporting Policies (Continued)
•Contingent liabilities, which depend on an assessment of the probability of loss and an estimate of ultimate obligation, such as litigation and arbitration; and product, environmental, remediationand other legacy liabilities (see Note 10).
Revenue Recognition Grace generates revenues predominantly from sales of manufactured products to customers and in part from licensing of technology. Under ASC 606, revenue from customer arrangements is recognized when control is transferred to the customer.
Notes to Consolidated Financial Statements (Continued)
1. Basis of Presentation and Summary of Significant Accounting and Financial Reporting Policies (Continued)
Product Sales
In its implementation of ASC 606, Grace assessed its customer arrangements at the operating segment level, and based on the similarity of arrangements, Grace elected to use the portfolio method practical expedient. Based on the promises made to customers in product sales arrangements, Grace determined that it has a performance obligation to manufacture and deliver products to its customers. Grace makes certain other promises in its customer arrangements that are immaterial in the context of the contracts. Revenue is recognized at amounts based on agreed-upon prices in sales contracts and/or purchase orders. Grace offers various incentives to its product sales customers that result in variable consideration, including but not limited to volume discounts, which reward bulk purchases by lowering the price for future purchases, and volume rebates, which encourage customers to purchase volume levels that would reduce their current prices. These incentives are immaterial in the context of the contracts.
For product sales, control is transferred at the point in time at which risk of loss and title have transferred to the customer, which is determined based on shipping terms.terms and contract terms, respectively. Terms of delivery and terms of payment are generally included in customer contracts of sale, order confirmation documents, and invoices. Payment is generally due within 30 to 60 days of invoicing. Grace defers revenue recognition until no other significant Grace performance obligations remain. Grace’s customer arrangements do not contain significant acceptance provisions.
Taxes that Grace collects that are assessed by a governmental authority, and that are both imposed on and concurrent with any of its revenue-producing activities, are excluded from revenue. Grace considers shipping and handling activities that it performs as activities to fulfill the sales of its products. Amounts billed for shipping and handling are included in net“net sales,” while costs incurred for shipping and handling are included in cost“cost of sales, in accordance with the practical expedient provided by ASC 606.goods sold.”
Technology Licensing
For Grace’s technology licensing business, Grace determined that the customer arrangements typically contain multiple deliverables to enable licensees to realize the full benefit of the technology. These deliverables include licensing the technology itself; developing engineering design packages; and providing training, consulting, and technical services. Under these arrangements, the license grant is not a distinct performance obligation, as the licensee only can benefit from the license in conjunction with other integral services such as development of the engineering design package, training, consulting, or technical services provided over the contract period. Therefore, Grace accounts for the license grant and integral services as a single performance obligation. Certain deliverables and services not included in the core bundled deliverables are accounted for as separate performance obligations.
The transaction price is specified in the technology licensing agreements and is substantially fixed. Some services are priced on a per-diem basis, but these are not material in the context of the contracts. Grace invoices its technology licensing customers as certain project milestones are achieved. Payment terms are similar to those of Grace’s product sales.
Revenue for each performance obligation is recognized when control is transferred to the customer, which is generallytypically over a period of time. As a result, Grace generally recognizes revenue for each performance obligation ratably over the period of the contract, which is up to 7eight years, depending on the scope of the licensee’s project. Based on the timing of payments, Grace records deferred revenue related to these agreements. See Note 17.
Notes to Consolidated Financial Statements (Continued)
1. Basis of Presentation and Summary of Significant Accounting and Financial Reporting Policies (Continued)
Cash Equivalents Cash equivalents consist of liquid instruments and investments with maturities of three months or less when purchased. The recorded amounts approximate fair value.
Inventories Inventories are stated at the lower of cost or net realizable value. The method used to determine cost is first-in/first-out, or “FIFO.” Market values for raw materials are based on current cost and, for other inventory classifications, net realizable value. Inventories are evaluated regularly for salability, and slow moving and/or obsolete items are adjusted to expected salable value. Inventory values include direct and certain indirect costs of materials and production. Abnormal costs of production are expensed as incurred.
Notes to Consolidated Financial Statements (Continued)
1. Basis of Presentation and Summary of Significant Accounting and Financial Reporting Policies (Continued)
Long Lived Assets Properties and equipment are stated at cost. Depreciation of properties and equipment is generally computed using the straight-line method over the estimated useful life of the asset. Estimated useful lives range from 20 to 30 years for buildings, 3 to 7 years for information technology equipment, 5 to 25 years for operating machinery and equipment, and 5 to 10 years for furniture and fixtures. Interest is capitalized in connection with major project expenditures. Fully depreciated assets are retained in properties and equipment and related accumulated depreciation accounts until they are removed from service. In the case of disposals, assets and related accumulated depreciation are removed from the accounts and the net amount, less any proceeds from disposal, is charged or credited to earnings. Obligations for costs associated with asset retirements, such as requirements to restore a site to its original condition, are accrued at net present value and amortized along with the related asset.
During the 2018 first quarter, Grace, with the assistance of an outside accounting firm, completed a study to evaluate the useful lives of its operating machinery and equipment, including a review of historical asset retirement data as well as review and analysis of relevant industry practices. As a result of this study, effective January 1, 2018, Grace revised the accounting useful lives of certain machinery and equipment, which was determined to be a change in accounting estimate and is being applied prospectively. As a result of this change in accounting estimate, Grace’s depreciation expense with respect to such machinery and equipment was reduced by $23.5 million, resulting in an increase to net income of $18.0 million or $0.27 per diluted share for the year ended December 31, 2018. Estimated useful lives for operating machinery and equipment previously ranged from 3 to 10 years.
Intangible assets with finite lives consist of technology, customer lists, trademarks, and other intangibles and are amortized over their estimated useful lives, ranging from 1 to 30 years.
Grace reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. There were no0 impairment charges recorded in any of the periods presented.
Leases Grace leases certain real estate, office space, vehicles, railcars, and plant and office equipment, substantially all of which are accounted for as operating leases. Finance lease costs and sublease income are not material. Many of Grace’s leases contain renewal options, which are exercisable at Grace’s discretion and may be included in lease terms when they are reasonably certain to be exercised. Grace’s lease agreements do not contain material restrictive covenants or material residual value guarantees. Grace has elected not to recognize in the Consolidated Balance Sheets short-term leases, which are those with an initial term of 12 months or less. Grace has also elected not to separate lease and non-lease components. These elections apply to all asset classes. Where available, Grace uses the interest rate implicit in the lease to calculate the estimated present value of lease payment obligations. Where such a rate is not available, Grace uses an incremental borrowing rate based on credit-adjusted and term-specific discount rates, using a third-party yield curve.
Goodwill Goodwill arises from business combinations, and it is reviewed for impairment on an annual basis at October 31 and whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable. Recoverability is assessed at the reporting unit level most directly associated with the business combination that generated the goodwill. For the purpose of measuring impairment, Grace has identified its operating segments as reporting units. Grace has evaluated its goodwill annually with no0 impairment charge required in any of the periods presented.
Financial Instruments Grace uses commodity forward, swap and/or option contracts; currency forward, swap, and/or option contracts; and interest rate swap contracts to manage exposure to fluctuations in commodity prices, currency exchange rates, and interest rates. Grace does not hold or issue derivative financial instruments for trading purposes. Derivative instruments are recorded at fair value in the Consolidated Balance Sheets as either assets or liabilities. For derivative instruments designated as fair value hedges, changes in the fair values of the derivative instruments closely offset changes in the fair values of the hedged items in “other (income) expense, net” in the Consolidated Statements of Operations. For derivative instruments designated as cash flow hedges, the gain or loss on the hedge is reported in “accumulated other comprehensive income (loss)” in the Consolidated Balance Sheets until it is cleared to earnings during the same period in which the hedged item affects earnings. Forward points are excluded from the assessment of effectiveness and are amortized to income on a systematic basis. For derivative instruments designated as net investment hedges, the gains and losses on the hedge, adjusted for the impact of excluded components, are recorded net of tax to “currency translation adjustments” within “accumulated other comprehensive income (loss)” to offset the change in the carrying value of the net investment being hedged. Changes in the fair value of the hedging instrument related to time value, which are excluded from the assessment of hedge effectiveness, are recorded directly to interest expense on a systematic basis. The changes in the fair values of derivative instruments that are not designated as hedges are
Notes to Consolidated Financial Statements (Continued)
1. Basis of Presentation and Summary of Significant Accounting and Financial Reporting Policies (Continued)
recorded in current period earnings. Cash flows from derivative instruments are reported in the same category as the cash flows from the items being hedged.
Notes to Consolidated Financial Statements (Continued)
1. Basis of Presentation and Summary of Significant Accounting and Financial Reporting Policies (Continued)
Income Taxes Deferred tax assets and liabilities are recognized with respect to the expected future tax consequences of events that have been recorded in the Consolidated Financial Statements. Grace reduces the carrying amounts of deferred tax assets by a valuation allowance if, based on the available evidence, it is more likely than not that such assets will not be realized. The need to establish valuation allowances for deferred tax assets is assessed quarterly.
In assessing the requirement for, and amount of, a valuation allowance in accordance with the more likely than not standard, Grace gives appropriate consideration to all positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among other matters, the nature, frequency, and severity of current and cumulative losses,losses; forecasts of future profitability,profitability; domestic and foreign source income,income; the duration of statutory carryforward periods,periods; and Grace’s experience with operating loss and tax credit carryforward expirations.
Tax benefits from an uncertain tax position are recognized only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities based on the technical merits of the position. Tax benefits recognized in the Consolidated Financial Statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. Grace evaluates such likelihood based on relevant facts and tax law. Grace adjusts its recorded liability for income tax matters due to changes in circumstances or new uncertainties, such as amendments to existing tax law. Grace’s ultimate tax liability depends upon many factors, including negotiations with taxing authorities in the jurisdictions in which it operates, outcomes of tax litigation, and resolution of disputes arising from federal, state, and foreign tax audits. Due to the varying tax laws in each jurisdiction management, with the assistance of local tax advisors as necessary, assesses individual matters in each jurisdiction on a case-by-case basis. Grace researches and evaluates its income tax positions, including why it believes they are compliant with income tax regulations, and these positions are documented as appropriate.
The TCJA (see “U.S.U.S. Tax Reform,” below)Cuts and Jobs Act of 2017 (“TCJA”) subjects a U.S. entity to tax on global intangible low-taxed income (“GILTI”) earned by certain foreign subsidiaries. An entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. Because Grace was evaluating the provision of GILTI as of December 31, 2017, it recorded no GILTI-related deferred amounts in 2017. After further consideration in the current year, Grace has elected to account for GILTI as a period expense in the year the tax is incurred. Grace has also adopted the tax law ordering approach for evaluating the impact of GILTI on the assessment of the realizability of US deferred tax assets.
Pension Benefits Grace’s method of accounting for actuarial gains and losses relating to its global defined benefit pension plans is referred to as “mark-to-market accounting.” Under mark-to-market accounting, Grace’s pension costs consist of two elements: 1)(1) ongoing costs recognized quarterly, which include service and interest costs, expected returns on plan assets, and amortization of prior service costs/credits; and 2)(2) mark-to-market gains and losses recognized annually in the fourth quarter resulting from changes in actuarial assumptions, such as discount rates and the difference between actual and expected returns on plan assets. Should a significant event occur, Grace’s pension obligation and plan assets are remeasured at an interim period, and the gains or losses on remeasurement are recognized in that period.
Stock-Based Compensation The Company recognizes expenses related to stock-based compensation payment transactions in which it receives employee services in exchange for (a) equity instruments of the Company or (b) liabilities that are based on the fair value of the Company’s equity instruments or that may be settled by the issuance of equity instruments. Stock-based compensation cost for restricted stock units (“RSUs”) and share settled performance basedperformance-based units (“PBUs”) are measured based on the high/low average of the Company’s common stock on the date of grant. Cash settled performance based unitsCash-settled RSUs are remeasured at the end of each reporting period based on the closing fair market value of the Company’s common stock. Stock-based
Notes to Consolidated Financial Statements (Continued)
1. Basis of Presentation and Summary of Significant Accounting and Financial Reporting Policies (Continued)
compensation cost for stock options is estimated at the grant date based on each option’s fair value as calculated by the Black-Scholes option pricing model. The Company recognizes stock-based compensation cost as expense ratably on a straight-line basis over the requisite service period.
Notes to Consolidated Financial Statements (Continued)
1. Basis of Presentation and Summary of Significant Accounting and Financial Reporting Policies (Continued)
Currency Translation Assets and liabilities of foreign subsidiaries (other than those located in countries with highly inflationary economies) are translated into U.S. dollars at current exchange rates, while revenues, costs and expenses are translated at average exchange rates during each reporting period. The resulting translation adjustments are included in “accumulated other comprehensive income (loss)” in the Consolidated Balance Sheets. The financial statements of any subsidiaries located in countries with highly inflationary economies are remeasured as if the functional currency were the U.S. dollar; the remeasurement creates translation adjustments that are reflected in net income in the Consolidated Statements of Operations.
Reclassifications Certain amounts in prior years’ Consolidated Financial Statements have been reclassified to conform to the current year presentation. Such reclassifications have not materially affected previously reported amounts in the Consolidated Financial Statements.
Recently Issued Accounting Standards In February 2016,December 2019, the FASB issued ASU 2016-02 “Leases2019-12 “Income Taxes (Topic 842).740): Simplifying the Accounting for Income Taxes.” This update clarifies and amends existing guidance, including removing certain exceptions to the general principles in Topic 740 and improves consistent application of and simplifies U.S. GAAP for other areas of Topic 740. Grace will adopt this update on January 1, 2021, when it becomes effective.
Recently Adopted Accounting Standards In March 2020, the FASB issued ASU 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” This update is intended to increase transparencyease the potential burden in accounting for and comparability among organizationsrecognizing the effects of reference rate reform. It provides optional practical expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by recognizing lease assetsreference rate reform, if certain criteria are met. This update became effective on March 12, 2020, and lease liabilities onis available for use through December 31, 2022. Grace expects to utilize the balance sheet and disclosing key information about leasing arrangements. The core principlepractical expedients provided by this update in accounting for contract modifications and/or hedging transactions during the effective period. Grace expects the update to significantly reduce the effects of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term, including optional payments where they are reasonably certain to occur. Currently, as a lessee, Grace is a party to a number of leases which, under existing guidance, are classified as operating leases and not recorded on the balance sheet but expensed as incurred. Under the new standard, many of these leases will be recordedreference rate reform on the Consolidated Balance Sheets. In July 2018, the FASB issued ASU 2018-11 “Leases (Topic 842): Targeted Improvements,” which provides an additional transition method that allows entities to initially apply the new standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Grace will adopt these standards in the 2019 first quarter under the modified retrospective approach permitted by ASU 2018-11. Grace is finalizing its implementation of the new standard and expects to recognize material lease assets and lease liabilities on its Consolidated Balance Sheet upon adoption of Topic 842, but does not expect the standard to have a material impact on the Consolidated Statement of Operations.
In January 2018, the FASB issued ASU 2018-01 “Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842.” This update provides an optional transition practical expedient that allows an entity to elect not to evaluate under Topic 842 existing or expired land easements not previously accounted for as leases. All land easements entered into or modified after the adoption of Topic 842 must be evaluated under Topic 842. Grace, which typically does not account for easements under current lease accounting, will use the transition practical expedient when adopting Topic 842 in the 2019 first quarter.Financial Statements.
In August 2018, the FASB issued ASU 2018-14 “Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20).” This update adds, removes, and clarifiesrevises disclosure requirements related to defined benefit pension and other postretirement plans. Grace is required to adopt the amendments inadopted this update on January 1, 2021. Grace is currently evaluating the timing of adoption and does not expect the update to have a material effect on the Consolidated Financial Statements.
In October 2018, the FASB issued ASU 2018-16 “Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes.” This update permits use of the OIS rate based on SOFR as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815. Grace currently carries debt and derivatives that rely on the London Interbank Offered Rate (“LIBOR”) as a benchmark rate. LIBOR is expected to be phased out as a benchmark rate by the end of 2021. Grace expects its debt and financial instruments to continue to use LIBOR until the rate is no longer available. To the extent LIBOR ceases to exist, Grace may need to renegotiate any
Notes to Consolidated Financial Statements (Continued)
1. Basis of Presentation and Summary of Significant Accounting and Financial Reporting Policies (Continued)
credit agreements and/or derivative contracts that utilize LIBOR as a factor in determining the interest rate. Currently, there is not a firm timeframe for this change. This update currently has no foreseeable impact on Grace’s Consolidated Financial Statements; however, it may have an effect in the future.
Recently Adopted Accounting Standards
Revenue Recognition
In May 2014, the FASB issued ASU 2014-09 “Revenue from Contracts with Customers (Topic 606)” (“ASC 606”). This update was intended to remove inconsistencies and weaknesses in revenue requirements; provide a more robust framework for addressing revenue issues; improve comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets; provide more useful information to users of financial statements through improved disclosure requirements; and simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer. Grace adopted ASC 606 with a date of initial application of January 1, 2018. Grace applied the standard to all customer contracts. As a result, Grace has changed its accounting policy for revenue recognition as detailed below.
Grace applied ASC 606 using the modified retrospective method, that is, by recognizing the cumulative effect of initially applying ASC 606 as an adjustment to “retained earnings” at the date of initial application. Results for periods beginning after December 31, 2017, are presented under ASC 606, while the comparative information has not been adjusted and continues to be reported in accordance with Grace’s historical accounting under ASC 605 “Revenue Recognition” (“ASC 605”).
Impact of Adoption
Except for the changes below, Grace has consistently applied its accounting policy for revenue recognition to all periods presented in the Consolidated Financial Statements.
Grace recorded a net increase to “retained earnings” of $2.5 million as of January 1, 2018, which represents the cumulative impact of adopting ASC 606, with a $3.2 million reduction to “other liabilities” and a $0.7 million reduction to “deferred income taxes.” The cumulative adjustment results from a change in accounting for contingent revenue related to technology licensing arrangements. Under ASC 605, certain revenue was not realized until a contractual contingency was resolved. Upon adoption of ASC 606, Grace estimates all forms of variable consideration, including contingent amounts, at the inception of the arrangement and recognizes it over the period of performance.
The tables below present the effect of the adoption of ASC 606 on Grace’s Consolidated Statements of Operations and Consolidated Balance Sheets.
Consolidated Statements of Operations
|
| | | | | | | | | | | |
| | Year Ended December 31, 2018 |
| (In millions) | Under ASC 605 | | As Reported (ASC 606) | | Effect of Change |
| Net sales | $ | 1,930.3 |
| | $ | 1,932.1 |
| | $ | 1.8 |
|
| Gross profit | 764.9 |
| | 766.7 |
| | 1.8 |
|
| Income (loss) before income taxes | 243.1 |
| | 244.9 |
| | 1.8 |
|
| Provision for income taxes | (77.7 | ) | | (78.1 | ) | | (0.4 | ) |
| Net income (loss) | 165.4 |
| | 166.8 |
| | 1.4 |
|
| Net income (loss) attributable to W. R. Grace & Co. Shareholders | 166.2 |
| | 167.6 |
| | 1.4 |
|
Notes to Consolidated Financial Statements (Continued)
1. Basis of Presentation and Summary of Significant Accounting and Financial Reporting Policies (Continued)
Consolidated Balance Sheets
|
| | | | | | | | | | | |
| | December 31, 2018 |
| (In millions) | Under ASC 605 | | As Reported (ASC 606) | | Effect of Change |
| Deferred income taxes | $ | 530.5 |
| | $ | 529.4 |
| | $ | (1.1 | ) |
| Other liabilities | 324.8 |
| | 319.8 |
| | (5.0 | ) |
| Retained earnings | 672.8 |
| | 676.7 |
| | 3.9 |
|
ASU 2016-18 “Statement of Cash Flows (Topic 230): Restricted Cash”
In November 2016, the FASB issued ASU 2016-18 “Statement of Cash Flows (Topic 230): Restricted Cash,” which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. Grace adopted the update in the 20182020 first quarter. The table below presents the effect of the adoption of ASU 2016-18 on previously reported amounts.
|
| | | | | | | | | | | |
| | Year Ended December 31, 2017 |
| (In millions) | Previously Reported | | Revised | | Effect of Change |
| Other investing activities | $ | (1.8 | ) | | $ | (1.1 | ) | | $ | 0.7 |
|
| Net cash provided by (used for) investing activities | (129.9 | ) | | (129.2 | ) | | 0.7 |
|
| Cash, cash equivalents, and restricted cash, beginning of period | 90.6 |
| | 100.6 |
| | 10.0 |
|
| Cash, cash equivalents, and restricted cash, end of period | 152.8 |
| | 163.5 |
| | 10.7 |
|
|
| | | | | | | | | | | |
| | Year Ended December 31, 2016 |
| (In millions) | Previously Reported | | Revised | | Effect of Change |
| Other investing activities | $ | 4.7 |
| | $ | 5.3 |
| | $ | 0.6 |
|
| Net cash provided by (used for) investing activities | (345.0 | ) | | (344.4 | ) | | 0.6 |
|
| Cash, cash equivalents, and restricted cash, beginning of period | 329.9 |
| | 339.3 |
| | 9.4 |
|
| Cash, cash equivalents, and restricted cash, end of period | 90.6 |
| | 100.6 |
| | 10.0 |
|
ASU 2017-07 “Compensation—Retirement Benefits (Topic 715)”
In March 2017, the FASB issued ASU 2017-07 “Compensation—Retirement Benefits (Topic 715).” This update requires that the service cost component of net benefit cost be presented with other compensation costs arising from services rendered. The remaining net benefit cost is either presented as a line item in the statement of operations outside of a subtotal for income from operations, if presented, or disclosed separately. In addition, only the service cost component of net benefit cost can be capitalized. Grace adopted the update in the 2018 first quarter.
The changes in classification of net benefit costs within the Consolidated Statements of Operations have been retrospectively applied to all periods presented. The change in costs capitalizable into inventory was applied prospectively in accordance with the update. The tables below present the effect of the adoption of ASU 2017-07 on previously reported amounts.
Notes to Consolidated Financial Statements (Continued)
1. Basis of Presentation and Summary of Significant Accounting and Financial Reporting Policies (Continued)
Consolidated Statements of Operations
|
| | | | | | | | | | | |
| | Year Ended December 31, 2017 |
| (In millions) | Previously Reported | | Revised | | Effect of Change |
| Cost of goods sold | $ | 1,053.2 |
| | $ | 1,040.4 |
| | $ | (12.8 | ) |
| Gross profit | 663.3 |
| | 676.1 |
| | 12.8 |
|
| Selling, general and administrative expenses | 302.6 |
| | 274.0 |
| | (28.6 | ) |
| Research and development expenses | 53.5 |
| | 56.3 |
| | 2.8 |
|
| Other (income) expense | (8.4 | ) | | 30.2 |
| | 38.6 |
|
|
| | | | | | | | | | | |
| | Year Ended December 31, 2016 |
| (In millions) | Previously Reported | | Revised | | Effect of Change |
| Cost of goods sold | $ | 942.7 |
| | $ | 928.8 |
| | $ | (13.9 | ) |
| Gross profit | 655.9 |
| | 669.8 |
| | 13.9 |
|
| Selling, general and administrative expenses | 308.8 |
| | 271.8 |
| | (37.0 | ) |
| Research and development expenses | 48.8 |
| | 51.6 |
| | 2.8 |
|
| Other (income) expense | 13.3 |
| | 61.4 |
| | 48.1 |
|
Other Recently Adopted Accounting Standards
In January 2017, the FASB issued ASU 2017-01 “Business Combinations (Topic 805),” which provides a screen to determine when an integrated set of assets and activities is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. If the screen is not met, the amendments in this update (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output, and (2) remove the evaluation of whether a market participant could replace missing elements. The amendments in this update also narrow the definition of the term “output” so that the term is consistent with how outputs are described in ASC 606. Grace adopted the update in the 2018 first quarter and applied the new definition of a business to the acquisition closed during the 2018 second quarter.
In January 2017, the FASB issued ASU 2017-04 “Intangibles—Goodwill and Other (Topic 350).” This update modifies the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination (“Step 2”). Because these amendments eliminate Step 2 from the goodwill impairment test, they should reduce the cost and complexity of evaluating goodwill for impairment. Grace adopted the update in the 2018 fourth quarter, and it did not have a material effect on the Consolidated Financial Statements.
In May 2017,June 2016, the FASB issued ASU 2017-09 “Compensation—Stock Compensation2016-13 “Financial Instruments—Credit Losses (Topic 718).326) Measurement of Credit Losses on Financial Instruments.” This update clarifiesrequires companies to implement an impairment model based on expected credit losses, rather than probable incurred losses. Grace adopted this update in the existing definition of2020 first quarter, and it did not have a material effect on the term “modification,” which is currently defined as “a change in any of the terms or conditions of a share-based payment award.” The update requires entities to account for modifications of share-based payment awards unless the (1) fair value, (2) vesting conditions, and (3) classification as an equity instrument or a liability instrument of the modified award are the same as the originalConsolidated Financial Statements.
Notes to Consolidated Financial Statements (Continued)
1. Basis of Presentation and Summary of Significant Accounting and Financial Reporting Policies (Continued)
award before modification. Grace adopted the update in the 2018 first quarter, and it did not have an effect on the Consolidated Financial Statements.
In February 2018, the FASB issued ASU 2018-02 “Income Statement—Reporting Comprehensive Income (Topic 220).” This update addresses the revaluation of deferred tax assets and liabilities due to the Tax Cuts and Jobs Act of 2017 impacting income from continuing operations, even if the initial income tax effects were recognized in other comprehensive income. The update allows entities to reclassify the tax effects that were originally in other comprehensive income from accumulated other comprehensive income to retained earnings. The update requires entities to disclose whether the election was made and a description of the income tax effects. The update can be: (a) applied to the period of adoption, or (b) applied retrospectively to each period in which the Tax Cuts and Jobs Act of 2017 is in effect. Grace adopted the update in the 2018 fourth quarter and reclassified $2.2 million from “accumulated other comprehensive income (loss)” to “retained earnings” as of December 31, 2018.
U.S. Tax Reform On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “TCJA”) was signed into law, making significant changes to the Internal Revenue Code. Changes include a federal corporate tax rate decrease from 35% to 21% for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of foreign earnings. On December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the TCJA.
In 2017 and the first nine months of 2018, Grace recorded provisional amounts for certain enactment-date effects of the TCJA by applying the guidance in SAB 118 because it had not yet completed its enactment-date accounting for these effects. During the fourth quarter of 2018, Grace completed its accounting for all of the enactment-date income tax effects of the TCJA. As further discussed below, during 2018, Grace recognized a benefit of $17.1 million from adjustments to the provisional amounts recorded at December 31, 2017, and included these adjustments as a component of income tax expense from continuing operations.
The provisional amount related to the remeasurement of certain deferred tax assets and liabilities, based on the rates at which they are expected to reverse in the future, was a charge of $120.1 million at December 31, 2017. Upon further analysis of certain aspects of the TCJA and refinement of its calculations during the year ended December 31, 2018, Grace reduced the provisional amount by $4.9 million.
The provisional amounts related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings and the state and foreign taxes on the unremitted earnings were $37.4 million and $4.9 million, respectively, at December 31, 2017. Upon further analyses of the TCJA and notices and regulations issued and proposed by the U.S. Department of the Treasury and the Internal Revenue Service, Grace finalized its calculation of the transition tax liability during 2018. Grace decreased the December 31, 2017, provisional amount by $9.5 million for the deemed repatriation of foreign earnings and by $2.7 million for the state and foreign taxes on unremitted earnings. These amounts are included as a component of income tax expense from continuing operations.
Additionally, in 2017, Grace provisionally released valuation allowances on a portion of its state net operating losses and federal tax credits of $2.0 million and $17.4 million. Grace made no adjustments to these provisional amounts in 2018.
See Note 7 for more information related to income taxes and U.S. tax reform.
Notes to Consolidated Financial Statements (Continued)
2. Inventories
Inventories are stated at the lower of cost or net realizable value, and cost is determined using FIFO. Inventories consisted of the following at December 31, 20182020 and 2017:2019:
| | | | | | | | | | | |
| December 31, |
| (In millions) | 2020 | | 2019 |
| Raw materials | $ | 57.0 | | | $ | 64.2 | |
| In process | 38.2 | | | 55.7 | |
| Finished products | 126.6 | | | 154.4 | |
| Other | 32.0 | | | 35.6 | |
| $ | 253.8 | | | $ | 309.9 | |
|
| | | | | | | |
| | December 31, |
| (In millions) | 2018 | | 2017 |
| Raw materials | $ | 56.3 |
| | $ | 48.8 |
|
| In process | 49.1 |
| | 33.0 |
|
| Finished products | 144.5 |
| | 124.7 |
|
| Other | 31.2 |
| | 24.4 |
|
| | $ | 281.1 |
| | $ | 230.9 |
|
3. Properties and Equipment, and Leases
| | | | December 31, | | December 31, |
| (In millions) | 2018 | | 2017 | (In millions) | 2020 | | 2019 |
| Land | $ | 28.4 |
| | $ | 14.2 |
| Land | $ | 26.5 | | | $ | 29.5 | |
| Buildings | 425.0 |
| | 404.5 |
| Buildings | 476.6 | | | 438.9 | |
| Information technology and equipment | 142.9 |
| | 136.6 |
| Information technology and equipment | 124.1 | | | 131.3 | |
| Machinery, equipment and other | 1,668.9 |
| | 1,571.8 |
| Machinery, equipment and other | 1,956.0 | | | 1,754.5 | |
| Projects under construction | 229.3 |
| | 135.4 |
| Projects under construction | 175.7 | | | 286.6 | |
| Properties and equipment, gross | 2,494.5 |
| | 2,262.5 |
| Properties and equipment, gross | 2,758.9 | | | 2,640.8 | |
| Accumulated depreciation and amortization | (1,482.8 | ) | | (1,463.4 | ) | Accumulated depreciation and amortization | (1,550.1) | | | (1,497.0) | |
| Properties and equipment, net | $ | 1,011.7 |
| | $ | 799.1 |
| Properties and equipment, net | $ | 1,208.8 | | | $ | 1,143.8 | |
Capitalized interest costs amounted to $7.0 million, $7.5 million, and $3.2 million $1.5 million,in 2020, 2019, and $1.3 million in 2018, 2017, and 2016, respectively. Depreciation and finance lease amortization expense relating to properties and equipment was $82.9 million, $78.4 million, and $80.9 million $96.1 million,in 2020, 2019, and $85.7 million in 2018, 2017,respectively.
The following table presents Grace’s lease right-of-use assets, net of accumulated amortization, and 2016, respectively. operating lease liabilities as of December 31, 2020 and 2019.
| | | | | | | | | | | | | | | | | |
| December 31, | | |
| (in millions) | 2020 | | 2019 | | Balance Sheet Location |
| Operating lease right of use asset | $ | 35.1 | | | $ | 34.9 | | | Other assets |
| Operating lease liability—current | 10.1 | | | 9.3 | | | Other current liabilities |
| Operating lease liability—noncurrent | 25.8 | | | 26.2 | | | Other liabilities |
Notes to Consolidated Financial Statements (Continued)
3. Properties and Equipment, and Leases (Continued)
The following table presents Grace’s costs and cash flow information related to operating leases for the year ended December 31, 2020.
| | | | | | | | | | | | | |
| Year Ended December 31, |
| (In millions) | 2020 | | 2019 | | |
| Operating lease cost | $ | 13.3 | | | $ | 12.1 | | | |
| Short-term and variable lease cost | 21.1 | | | 17.9 | | | |
| Total lease cost | $ | 34.4 | | | $ | 30.0 | | | |
| | | | | |
| Cash payments related to operating leases | $ | 13.2 | | | $ | 12.0 | | | |
| Right-of-use assets obtained in exchange for new operating lease liabilities | 10.8 | | | 17.0 | | | |
Grace’s expense for operating leases was $13.5 million $11.3 million,in 2018.
The following table presents the weighted average discount rate and $10.0 million in 2018, 2017, and 2016, respectively.weighted average remaining lease term related to Grace’s operating leases.
At | | | | | |
| December 31,
2020 |
| Weighted average discount rate | 6.2 | % |
| Weighted average remaining lease term | 7.7 |
The following maturity analysis presents minimum expected operating lease payments at December 31, 2018, minimum future non-cancelable payments for operating leases are:2020.
| | | | | |
| | (In millions) |
| 2021 | $ | 11.8 | |
| 2022 | 8.7 | |
| 2023 | 5.2 | |
| 2024 | 3.4 | |
| 2025 | 2.2 | |
| Thereafter | 15.3 | |
| Total undiscounted lease payments | 46.6 | |
| Less: imputed interest | 10.7 | |
| Present value of lease liabilities | $ | 35.9 | |
|
| | | |
| | (In millions) |
| 2019 | $ | 8.3 |
|
| 2020 | 6.2 |
|
| 2021 | 3.4 |
|
| 2022 | 1.9 |
|
| 2023 | 1.3 |
|
| Thereafter | 11.4 |
|
| | $ | 32.5 |
|
Notes to Consolidated Financial Statements (Continued)
4. Goodwill and Other Intangible Assets
The carrying amount of goodwill attributable to each reportable segment and the changes in those balances during the years ended December 31, 20182020 and 2017,2019, are as follows:
| | (In millions) | | (In millions) | Catalysts Technologies | | Materials Technologies | | Total Grace |
| Balance, December 31, 2018 | | Balance, December 31, 2018 | $ | 496.3 | | | $ | 44.1 | | | $ | 540.4 | |
| Goodwill acquired during the year | | Goodwill acquired during the year | 17.8 | | | 0 | | | 17.8 | |
| Foreign currency translation | | Foreign currency translation | (1.0) | | | (0.3) | | | (1.3) | |
| | | (In millions) | Catalysts Technologies | | Materials Technologies | | Total Grace | |
| Balance, December 31, 2016 | $ | 353.5 |
| | $ | 40.7 |
| | $ | 394.2 |
| |
| Goodwill acquired during the year | — |
| | 2.4 |
| | 2.4 |
| |
| Balance, December 31, 2019 | | Balance, December 31, 2019 | 513.1 | | | 43.8 | | | 556.9 | |
| | Foreign currency translation | 4.2 |
| | 1.6 |
| | 5.8 |
| Foreign currency translation | 4.4 | | | 1.4 | | | 5.8 | |
| Balance, December 31, 2017 | 357.7 |
| | 44.7 |
| | 402.4 |
| |
| Goodwill acquired during the year | 140.6 |
| | — |
| | 140.6 |
| |
| Foreign currency translation | (2.0 | ) | | (0.6 | ) | | (2.6 | ) | |
| Balance, December 31, 2018 | $ | 496.3 |
| | $ | 44.1 |
| | $ | 540.4 |
| |
| | Balance, December 31, 2020 | | Balance, December 31, 2020 | $ | 517.5 | | | $ | 45.2 | | | $ | 562.7 | |
Grace’s net book value of other intangible assets at December 31, 20182020 and 2017,2019, was $356.5$320.8 million and $255.4$342.8 million, respectively, detailed as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 | | December 31, 2019 |
| (In millions) | Gross Carrying
Amount | | Accumulated
Amortization | | Gross Carrying
Amount | | Accumulated
Amortization |
| Technology | $ | 231.6 | | | $ | 74.1 | | | $ | 232.5 | | | $ | 63.6 | |
| Customer lists | 159.7 | | | 30.5 | | | 161.2 | | | 23.9 | |
| Trademarks | 31.8 | | | 7.0 | | | 31.7 | | | 5.5 | |
| Other | 15.7 | | | 6.4 | | | 16.1 | | | 5.7 | |
| Total | $ | 438.8 | | | $ | 118.0 | | | $ | 441.5 | | | $ | 98.7 | |
|
| | | | | | | | | | | | | | | |
| | 12/31/2018 | | 12/31/2017 |
| (In millions) | Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying
Amount | | Accumulated
Amortization |
| Technology | $ | 226.2 |
| | $ | 52.4 |
| | $ | 214.7 |
| | $ | 41.5 |
|
| Customer lists | 161.2 |
| | 15.7 |
| | 55.8 |
| | 8.8 |
|
| Trademarks | 29.8 |
| | 4.0 |
| | 25.5 |
| | 2.6 |
|
| Other | 16.1 |
| | 4.7 |
| | 16.0 |
| | 3.7 |
|
| Total | $ | 433.3 |
| | $ | 76.8 |
| | $ | 312.0 |
| | $ | 56.6 |
|
Amortization expense related to intangible assets was $19.9$22.1 million,, $15.4 $21.9 million,, and $13.9$19.9 million in 2018, 2017,2020, 2019, and 2016,2018, respectively.
At December 31, 2018,2020, estimated future annual amortization expense for intangible assets is:
| | | | | |
| (In millions) |
| 2021 | $ | 21.8 | |
| 2022 | 21.7 | |
| 2023 | 21.7 | |
| 2024 | 21.7 | |
| 2025 | 21.7 | |
| Thereafter | 212.2 | |
| $ | 320.8 | |
|
| | | |
| | (In millions) |
| 2019 | $ | 21.6 |
|
| 2020 | 21.6 |
|
| 2021 | 21.3 |
|
| 2022 | 21.2 |
|
| 2023 | 21.1 |
|
| Thereafter | 249.7 |
|
| | $ | 356.5 |
|
Notes to Consolidated Financial Statements (Continued)
5. Debt
Components of Debt
| | | | December 31, | | December 31, |
| (In millions) | 2018 | | 2017 | (In millions) | 2020 | | 2019 |
| 2018 U.S. dollar term loan, net of unamortized debt issuance costs of $8.7 | $ | 938.9 |
| | $ | — |
| |
| 5.125% senior notes due 2021, net of unamortized debt issuance costs of $4.2 at December 31, 2018 (2017—$5.8) | 695.8 |
| | 694.2 |
| |
| 5.625% senior notes due 2024, net of unamortized debt issuance costs of $3.0 at December 31, 2018 (2017—$3.5) | 297.0 |
| | 296.5 |
| |
| 2018 U.S. dollar term loan, net of unamortized debt issuance costs of $6.0 at December 31, 2020 (2019—$7.2) | | 2018 U.S. dollar term loan, net of unamortized debt issuance costs of $6.0 at December 31, 2020 (2019—$7.2) | $ | 922.6 | | | $ | 930.9 | |
| 4.875% senior notes due 2027, net of unamortized debt issuance costs of $10.1 at December 31, 2020 | | 4.875% senior notes due 2027, net of unamortized debt issuance costs of $10.1 at December 31, 2020 | 739.9 | | | 0 | |
| 5.625% senior notes due 2024, net of unamortized debt issuance costs of $1.9 at December 31, 2020 (2019—$2.4) | | 5.625% senior notes due 2024, net of unamortized debt issuance costs of $1.9 at December 31, 2020 (2019—$2.4) | 298.1 | | | 297.6 | |
| 5.125% senior notes due 2021, net of unamortized debt issuance costs (2019—$2.7) | | 5.125% senior notes due 2021, net of unamortized debt issuance costs (2019—$2.7) | 0 | | | 697.3 | |
| Debt payable to unconsolidated affiliate | 48.1 |
| | 42.4 |
| Debt payable to unconsolidated affiliate | 25.6 | | | 47.4 | |
| 2014 U.S. dollar term loan, net of unamortized debt issuance costs and discounts (2017—$4.3) | — |
| | 404.1 |
| |
| 2014 Euro term loan, net of unamortized debt issuance costs and discounts (2017—$1.0) | — |
| | 94.0 |
| |
| Other borrowings(1) | 3.5 |
| | 12.7 |
| Other borrowings(1) | 4.2 | | | 7.2 | |
| Total debt | 1,983.3 |
| | 1,543.9 |
| Total debt | 1,990.4 | | | $ | 1,980.4 | |
| Less debt payable within one year | 22.3 |
| | 20.1 |
| Less debt payable within one year | 15.3 | | | $ | 23.1 | |
| Debt payable after one year | $ | 1,961.0 |
| | $ | 1,523.8 |
| Debt payable after one year | $ | 1,975.1 | | | $ | 1,957.3 | |
| Weighted average interest rates on total debt | 3.9 | % | | 4.7 | % | Weighted average interest rates on total debt | 3.5 | % | | 3.8 | % |
| |
(1) | Represents borrowings under various lines of credit and other borrowings, primarily by non-U.S. subsidiaries. |
(1)Represents borrowings under various lines of credit and other borrowings, primarily by non-U.S. subsidiaries.
See Note 6 for a discussion of the fair value of Grace’s debt.
The principal maturities of debt outstanding at December 31, 2018,2020, were as follows:
| | | | | |
| (In millions) |
| 2021 | $ | 15.3 | |
| 2022 | 14.2 | |
| 2023 | 13.7 | |
| 2024 | 311.4 | |
| 2025 | 888.2 | |
| Thereafter | 747.6 | |
| Total debt | $ | 1,990.4 | |
Senior Notes due 2027
On June 26, 2020, Grace–Conn. (the “Issuer”) and certain of the Company’s existing domestic subsidiaries (together with the Company, the “Guarantors”), completed the sale of $750 million aggregate principal amount of 4.875% Notes due 2027 (the “Senior Notes due 2027”) for net proceeds of $741.6 million. The Senior Notes due 2027 were priced at 100% of par and were offered and sold pursuant to exemptions from registration under the Securities Act of 1933, as amended (the "Securities Act"). The Senior Notes due 2027 were issued pursuant to an indenture, dated as of September 16, 2014 (the “Base Indenture”), as supplemented by that certain third supplemental indenture, dated as of June 26, 2020 (the “Third Supplemental Indenture”), by and among the Issuer, the Guarantors and the trustee thereunder (the “Trustee”). The Base Indenture, together with the Third Supplemental Indenture, are referred to below as the “Indenture.”
On July 13, 2020, Grace used the net proceeds, together with cash on hand, to redeem the $700.0 million Senior Notes due 2021 for $748.0 million, including $10.1 million of interest accrued through the date of redemption and a $37.9 million make-whole premium. During the three months ended September 30, 2020, Grace recognized a charge related to the debt refinancing of $39.4 million, including the make-whole premium.
|
| | | |
| | (In millions) |
| 2019 | $ | 22.3 |
|
| 2020 | 18.7 |
|
| 2021 | 713.0 |
|
| 2022 | 16.3 |
|
| 2023 | 15.3 |
|
| Thereafter | 1,197.7 |
|
| Total debt | $ | 1,983.3 |
|
Notes to Consolidated Financial Statements (Continued)
5. Debt (Continued)
Interest is payable on the Senior Notes due 2027 on each June 15 and December 15, commencing December 15, 2020.
Grace may redeem all or a portion of the Senior Notes due 2027 at any time prior to June 15, 2023, at a price equal to 100% of the principal amount of the Senior Notes due 2027 redeemed plus accrued and unpaid interest, if any, to but excluding the redemption date plus a make-whole premium. At any time on or after June 15, 2023, Grace may redeem the Senior Notes due 2027, in whole or in part, at the redemption prices set forth in the Third Supplemental Indenture, in each case plus accrued and unpaid interest, if any, to but excluding the redemption date. The Senior Notes due 2027 will mature on June 15, 2027.
If a change of control of the Company occurs while the Senior Notes due 2027 are rated below investment grade, or is followed by a below investment grade rating, subject to certain exceptions, each holder shall have the right to require that the Issuer repurchase all or a portion of such holder’s Senior Notes due 2027 at a purchase price of 101% of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, on the Senior Notes due 2027 repurchased, to but excluding, the date of repurchase.
The Senior Notes due 2027 and guarantees are senior unsecured obligations of the Issuer and the Guarantors, respectively, and will rank equally with all of the existing and future unsubordinated obligations of the Issuer and the Guarantors, respectively. The Senior Notes due 2027 and the guarantees are effectively subordinated to any secured indebtedness to the extent of the value of the assets securing such indebtedness and structurally subordinated to the debt and other liabilities of the Company’s non-guarantor subsidiaries.
The Senior Notes due 2027 were issued subject to covenants that limit the ability of the Company, the Issuer, and certain of the Company’s subsidiaries to: (i) incur liens on assets; (ii) enter into sale and leaseback transactions larger than the greater of $100 million or 2.5% of total assets; and (iii) merge or consolidate with another company; subject to certain exceptions and qualifications. Grace is in compliance with those covenants.
The Senior Notes due 2027 were issued subject to customary events of default, which include (subject in certain cases to customary grace and cure periods), among others, nonpayment of principal or interest; breach of other agreements in the Indenture; failure to pay certain other indebtedness; failure to discharge a final judgment for payment of the greater of (i) $100 million and (ii) 2.5% of Total Assets (as defined in the Indenture) or more (excluding any amounts covered by insurance or indemnities) rendered against the Issuer or any of its significant subsidiaries; and certain events of bankruptcy or insolvency. Generally, if any event of default occurs, the Trustee or the holders of at least 30% in aggregate principal amount of the then outstanding series of Senior Notes due 2027 may declare all the Senior Notes due 2027 of such series to be due and payable immediately.
The foregoing is a summary of the Senior Notes due 2027 and the related indentures, does not purport to be complete, and is qualified in its entirety by reference to the full texts thereof. Grace has filed the full text of such documents with the SEC, which are readily available on the internet at www.sec.gov.
Credit Agreement
On April 3, 2018, Grace entered into a Credit Agreement (the “Credit Agreement”), which provides for new senior secured credit facilities, consisting of:
| |
(a) | a $950 million term loan due in 2025, with interest at LIBOR +175 basis points, and |
| |
(b) | a $400 million revolving credit facility due in 2023, with interest at LIBOR +175 basis points. |
(a)a $950 million term loan due in 2025, with interest at LIBOR +175 basis points, and
(b)a $400 million revolving credit facility due in 2023, with interest at LIBOR +175 basis points.
The term loan will amortizeamortizes in equal quarterly installments in aggregate annual amounts of $9.5 million, with the first payment due on December 31, 2018.million.
The Credit Agreement contains customary affirmative covenants, including, but not limited to: (i) maintenance of existence, and compliance with laws; (ii) delivery of consolidated financial statements and other information; (iii) payment of taxes; (iv) delivery of notices of defaults and certain other material events; and (v) maintenance of adequate insurance. The Credit Agreement also contains customary negative covenants, including but not limited to restrictions on: (i) dividends on, and redemptions of, equity interests and other
Notes to Consolidated Financial Statements (Continued)
5. Debt (Continued)
restricted payments; (ii) liens; (iii) loans and investments; (iv) the sale, transfer or disposition of assets and businesses; (v) transactions with affiliates; and (vi) a maximum first lien leverage ratio.
Notes to Consolidated Financial Statements (Continued)
5. Debt (Continued)
Events of default under the Credit Agreement include, but are not limited to: (i) failure to pay principal, interest, fees or other amounts under the Credit Agreement when due, taking into account any applicable grace period; (ii) any representation or warranty proving to have been incorrect in any material respect when made; (iii) failure to perform or observe covenants or other terms of the Credit Agreement subject to certain grace periods; (iv) a cross-default and cross-acceleration with certain other material debt; (v) bankruptcy events; (vi) certain defaults under ERISA; and (vii) the invalidity or impairment of security interests.
To secure its obligations under the Credit Agreement, Grace and certain of its U.S. subsidiaries have granted security interests in substantially all equity and debt interests in Grace–Conn. or any other Grace subsidiary owned by them and in substantially all their non-real estate assets and property.
Grace used a portion of the proceeds to repay in full the borrowings outstanding under its 2014 credit agreement, which was terminated, as well as to make a voluntary $50.0 million accelerated contribution to its U.S. qualified pension plans. In connection with the repayment of debt, Grace recorded a $4.8 million loss on early extinguishment of debt, which is included in “other (income) expense” in the Consolidated Statement of Operations.
Grace had no0 outstanding draws on its revolving credit facility as of December 31, 2018;2020; however, the available credit under thatthe facility was reduced to $367.6$391.8 million by outstanding letters of credit.
During the 2016 first quarter, in connection with the Separation, GCP distributed $750 million to Grace. Grace used $600 million of those funds to repay $526.9 million of its U.S. dollar term loan, including the $250 million borrowed under a delayed draw facility,Senior Notes due 2021 and €67.3 million of its euro term loan. As a result, Grace recorded a loss on early extinguishment of $11.1 million. See Note 21 for information related to the Separation.
Senior Notes2024
On September 16, 2014, Grace–Conn. (the “Issuer”) issued $1,000.0 million of senior unsecured notes (the “Notes”) in two tranches:
| |
(a) | $700 million in aggregate principal amount of Notes due 2021 at a coupon rate of 5.125%, and |
| |
(b) | $300 million in aggregate principal amount of Notes due 2024 at a coupon rate of 5.625%. |
(a)$700 million in aggregate principal amount of Notes due 2021 at a coupon rate of 5.125%, and
(b)$300 million in aggregate principal amount of Notes due 2024 at a coupon rate of 5.625%.
The Notes were priced at 100% of par and were offered and sold pursuant to exemptions from registration under the Securities Act of 1933, as amended, (the “Securities Act”). The net proceeds received from issuance were $985.5 million, a portion of which was used to terminate Grace’s obligations under the deferred payment agreement with the PI Trust (as defined in Note 10) for $632.0 million and to repay amounts outstanding under Grace’s revolving credit facility. The remaining proceeds from the Notes were used to partially fund the settlement of the warrant issued to the PI Trust and for other general corporate purposes. Interest is payable on the Notes on each April 1 and October 1.
Grace may redeem some or all of the Notes at any time at a price equal to the greater of (i) 100% of the principal amount of the Notes redeemed plus accrued and unpaid interest and (ii) the sum, as determined by an independent investment banker, of the present values of the remaining scheduled payments of principal and interest (exclusive of interest accrued to the date of redemption) discounted to the redemption date on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the treasury rate plus 50 basis points, in each case, plus accrued and unpaid interest. In the event of a change in control, Grace will be required to offer to purchase the Notes at a price equal to 101% of the aggregate principal amount outstanding plus accrued and unpaid interest. On July 13, 2020, Grace redeemed the $700.0 million Senior Notes due 2021.
The Notes are jointly and severally guaranteed on a full and unconditional senior unsecured basis by the Company and Alltech Associates, Inc., a wholly-owned subsidiary of the Issuer (the “Guarantors”). The Notes and guarantees are senior obligations of the Issuer and the Guarantors, respectively, and will rank equally with all of the existing and future unsubordinated obligations of the Issuer and the Guarantors, respectively. The Notes are
Notes to Consolidated Financial Statements (Continued)
5. Debt (Continued)
effectively subordinated to any secured indebtedness to the extent of the value of the assets securing such indebtedness, and structurally subordinated to the debt and other liabilities of Grace’s non-guarantor subsidiaries.
The Notes were issued subject to covenants that limit the Issuer’s and certain of its subsidiaries’ ability, subject to certain exceptions and qualifications, to (i) create or incur liens on assets, (ii) enter into any sale and leaseback transaction and (iii) in the case of the Issuer, merge or consolidate with another company. Grace is in compliance with these covenants.
The Notes were also issued subject to customary events of default which include (subject in certain cases to customary grace and cure periods), among others, nonpayment of principal or interest; breach of other agreements in the Indenture; failure to pay certain other indebtedness; failure to discharge a final judgment for the payment of $75 million or more (excluding any amounts covered by insurance or indemnities) rendered against
Notes to Consolidated Financial Statements (Continued)
5. Debt (Continued)
the Issuer or any of its significant subsidiaries; and certain events of bankruptcy or insolvency. Generally, if any event of default occurs, the trustee or the holders of at least 25% in aggregate principal amount of the then outstanding series of Notes may declare all the Notes of such series to be due and payable immediately.
The foregoing is a summary of the Credit Agreement, the indentures, and the Notes. Grace has filed the full text of such agreements with the SEC, which are readily available on the Internet at www.sec.gov.
6. Fair Value Measurements and Risk
Certain of Grace’s assets and liabilities are reported at fair value on a gross basis. ASC 820 “Fair Value Measurements and Disclosures” 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 that are required to be reported at fair value.
Grace has identified the following financial assets and liabilities that are subject to the fair value analysis required by ASC 820:
Fair Value of Debt and Other Financial InstrumentsDebt payable is recorded at carrying value. Fair value is determined based on Level 2 inputs, including expected future cash flows (discounted at market interest rates), estimated current market prices, and quotes from financial institutions.
At December 31, 2018,2020, the carrying amounts, net of unamortized debt issuance costs and discounts (see Note 5), and fair values of Grace’s debt were as follows:
|
| | | | | | | | | | | | | | | |
| | 12/31/2018 | | 12/31/2017 |
| (In millions) | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
| 2018 U.S. dollar term loan(1) | $ | 938.9 |
| | $ | 914.8 |
| | $ | — |
| | $ | — |
|
| 5.125% senior notes due 2021(2) | 695.8 |
| | 697.5 |
| | 694.2 |
| | 728.7 |
|
| 5.625% senior notes due 2024(2) | 297.0 |
| | 301.8 |
| | 296.5 |
| | 321.3 |
|
| 2014 U.S. dollar term loan(3) | — |
| | — |
| | 404.1 |
| | 409.7 |
|
| 2014 Euro term loan(3) | — |
| | — |
| | 94.0 |
| | 93.7 |
|
| Other borrowings | 51.6 |
| | 51.6 |
| | 55.1 |
| | 55.1 |
|
| Total debt | $ | 1,983.3 |
| | $ | 1,965.7 |
| | $ | 1,543.9 |
| | $ | 1,608.5 |
|
| |
(1) | Carrying amounts are net of unamortized debt issuance costs and discounts of $8.7 million as of December 31, 2018. |
| |
(2) | Carrying amounts are net of unamortized debt issuance costs of $4.2 million and $3.0 million at December 31, 2018, and $5.8 million and $3.5 million as of December 31, 2017, related to the 5.125% senior notes due 2021 and 5.625% senior notes due 2024, respectively. |
| |
(3) | Carrying amounts are net of unamortized debt issuance costs and discounts of $4.3 million and $1.0 million as of December 31, 2017, related to the U.S. dollar term loan and euro term loan, respectively. |
Notes to Consolidated Financial Statements (Continued)
6. Fair Value Measurements and Risk (Continued)
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 | | December 31, 2019 |
| (In millions) | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
| 2018 U.S. dollar term loan | $ | 922.6 | | | $ | 904.1 | | | $ | 930.9 | | | $ | 938.1 | |
| 4.875% senior notes due 2027 | 739.9 | | | 784.7 | | | 0 | | | 0 | |
| 5.625% senior notes due 2024 | 298.1 | | | 322.4 | | | 297.6 | | | 329.2 | |
| 5.125% senior notes due 2021 | 0 | | | 0 | | | 697.3 | | | 727.1 | |
| Other borrowings | 29.8 | | | 29.8 | | | 54.6 | | | 54.6 | |
| Total debt | $ | 1,990.4 | | | $ | 2,041.0 | | | $ | 1,980.4 | | | $ | 2,049.0 | |
At December 31, 2018,2020, the recorded values of other financial instruments such as cash equivalents and trade receivables and payables approximated their fair values, based on the short-term maturities and floating rate characteristics of these instruments.
Currency DerivativesBecause Grace operates and/or sells to customers in over 7060 countries and in over 30 currencies, its results are exposed to fluctuations in currency exchange rates. Grace seeks to minimize exposure to these fluctuations by matching sales with expenditures in the same currencies, but it is not always possible to do so. From time to time, Grace uses financial instruments such as currency forward contracts, options, swaps, or combinations thereof to reduce the risk of certain specific transactions. However, Grace does not have a policy of hedging all exposures, because management does not believe that such a level of hedging would be cost-effective. Forward contracts with maturities of not more than 36 months are used and designated as cash flow hedges of forecasted repayments of intercompany loans. The effective portion of gains and losses on these currency hedges is recorded in “accumulated other comprehensive income (loss)” and reclassified into “other (income) expense, net” to offset the remeasurement of the underlying hedged loans. Excluded components (forward points) on these hedgesForward points are excluded from the assessment of effectiveness and amortized to income on a systematic basis.
Grace also enters into foreign currency forward contracts and swaps to hedge a portion of its net outstanding monetary assets and liabilities. These forward contracts and swaps are not designated as hedging instruments under applicable accounting guidance, and therefore all changes in thetheir fair value of the forward contracts and swaps are recorded in “other (income) expense, net,” in the Consolidated Statements of Operations. These forward contracts and swaps are intended to offset the foreign currency gains or losses associated with the underlying monetary assets and liabilities.
Notes to Consolidated Financial Statements (Continued)
6. Fair Value Measurements and Risk (Continued)
The valuation of Grace’s currency exchange rate forward contracts and swaps is determined using an income approach. Inputs used to value currency exchange rate forward contracts and swaps consist of: (1) spot rates, which are quoted by various financial institutions; (2) forward points, which are primarily affected by changes in interest rates; and (3) discount rates used to present value future cash flows, which are based on the London Interbank Offered Rate (LIBOR) curve or overnight indexed swap rates. Total notional amounts for forward contracts and swaps outstanding at December 31, 2018,2020, were $171.6$419.2 million.
Cross-Currency Swap Agreements Grace uses cross-currency swaps designated as cash flow hedges to manage fluctuations in currency exchange rates and interest rates on variable rate debt. The effective portion of gainsGains and losses on these cash flow hedges isare recorded in “accumulated other comprehensive income (loss)” and reclassified into “other (income) expense, net” and “interest expense and related financing costs” during the hedged period.
In April 2018, in connection with the Credit Agreement (see Note 5), Grace entered into new cross-currency swaps beginning on April 3, 2018, and maturing on March 31, 2023, to synthetically convert $600.0 million of U.S. dollar-denominated floating rate debt into €490.1 million of euro-denominated debt fixed at 2.0231%. These cross-currency swaps were de-designated and terminated on November 5, 2018, and replaced with new, at-market cross-currency swaps beginning on November 5, 2018, and maturing on March 31, 2023, to synthetically convert $600.0 million of U.S. dollar-denominated floating rate debt into €525.9 million of euro-denominated debt fixed at 1.785%. Grace received $33.1 million in cash proceeds from the swap settlement. The valuation of these cross-currency swaps is determined using an income approach, using LIBOR and EURIBOR (Euro Interbank Offered Rate) swap curves, currency basis spreads, and euro/U.S. dollar exchange rates.
Debt and Interest Rate Swap AgreementsGrace uses interest rate swaps designated as cash flow hedges to manage fluctuations in interest rates on variable rate debt. The effective portion of gains and losses on these interest rate cash flow hedges is recorded in “accumulated other comprehensive income (loss)” and reclassified into “interest expense and related financing costs” during the hedged interest period.
In connection with its emergence financing, Grace entered into interest rate swaps beginning on February 3, 2015, and maturing on February 3, 2020, fixing the LIBOR component of the interest on $250.0 million of Grace’s term debt at a rate of 2.393%. These interest rate swaps were de-designated and terminated in April 2018 in connection with Grace’s entry into a new credit agreement.
Notes to Consolidated Financial Statements (Continued)
6. Fair Value Measurements and Risk (Continued)
In connection with the Credit Agreement, (see Note 5), Grace entered into new interest rate swaps beginning on April 3, 2018, and maturing on March 31, 2023, fixing the LIBOR component of the interest on $100.0 million of term debt at 2.775%. The valuation of these interest rate swaps is determined using an income approach, using prevailing market interest rates and discount rates to present value future cash flows based on the forward LIBOR yield curves. Credit risk is also incorporated into derivative valuations.
The following tables present the fair value hierarchy for financial assets and liabilities measured at fair value on a recurring basis as of December 31, 20182020 and 2017:2019:
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements at December 31, 2020, Using |
| (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 | | | | | | | |
| Currency derivatives | $ | 1.6 | | | $ | — | | | $ | 1.6 | | | $ | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Total Assets | $ | 1.6 | | | $ | — | | | $ | 1.6 | | | $ | — | |
| Liabilities | | | | | | | |
| Currency derivatives | $ | 17.8 | | | $ | — | | | $ | 17.8 | | | $ | — | |
| Variable-to-fixed cross-currency derivatives | 51.0 | | | — | | | 51.0 | | | — | |
| Interest rate derivatives | 5.5 | | | — | | | 5.5 | | | — | |
| Total Liabilities | $ | 74.3 | | | $ | — | | | $ | 74.3 | | | $ | — | |
|
| | | | | | | | | | | | | | | |
| | Fair Value Measurements at December 31, 2018, Using |
| (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 | | | | | | | |
| Currency derivatives | $ | 3.7 |
| | $ | — |
| | $ | 3.7 |
| | $ | — |
|
| Total Assets | $ | 3.7 |
| | $ | — |
| | $ | 3.7 |
| | $ | — |
|
| Liabilities | | | | | | | |
| Currency derivatives | $ | 10.5 |
| | $ | — |
| | $ | 10.5 |
| | $ | — |
|
| Interest rate derivatives | 0.8 |
| | — |
| | 0.8 |
| | — |
|
| Variable-to-fixed cross-currency derivatives | 3.6 |
| | — |
| | 3.6 |
| | — |
|
| Total Liabilities | $ | 14.9 |
| | $ | — |
| | $ | 14.9 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | |
| | Fair Value Measurements at December 31, 2017, Using |
| (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 | | | | | | | |
| Currency derivatives | $ | 3.1 |
| | $ | — |
| | $ | 3.1 |
| | $ | — |
|
| Total Assets | $ | 3.1 |
| | $ | — |
| | $ | 3.1 |
| | $ | — |
|
| Liabilities | | | | | | | |
| Interest rate derivatives | $ | 1.8 |
| | $ | — |
| | $ | 1.8 |
| | $ | — |
|
| Currency derivatives | 23.8 |
| | — |
| | 23.8 |
| | — |
|
| Total Liabilities | $ | 25.6 |
| | $ | — |
| | $ | 25.6 |
| | $ | — |
|
Notes to Consolidated Financial Statements (Continued)
6. Fair Value Measurements and Risk (Continued)
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements at December 31, 2019, Using |
| (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 | | | | | | | |
| Currency derivatives | $ | 6.1 | | | $ | — | | | $ | 6.1 | | | $ | — | |
| | | | | | | |
| Variable-to-fixed cross-currency derivatives | 3.4 | | | — | | | 3.4 | | | — | |
| Total Assets | $ | 9.5 | | | $ | — | | | $ | 9.5 | | | $ | — | |
| Liabilities | | | | | | | |
| Currency derivatives | $ | 0.9 | | | $ | — | | | $ | 0.9 | | | $ | — | |
| | | | | | | |
| Interest rate derivatives | 3.4 | | | — | | | 3.4 | | | — | |
| | | | | | | |
| | | | | | | |
| Total Liabilities | $ | 4.3 | | | $ | — | | | $ | 4.3 | | | $ | — | |
The following tables present the location and fair values of derivative instruments included in the Consolidated Balance Sheets as of December 31, 20182020 and 2017:2019:
| | | | | | | | | | | | | | | | | | | | | | | |
| Asset Derivatives | | Liability Derivatives |
December 31, 2020
(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 | | | Other current liabilities | | $ | 17.7 | |
| Currency contracts | Other assets | | 0 | | | Other liabilities | | 0.1 | |
| Interest rate contracts | Other current assets | | 0 | | | Other current liabilities | | 2.5 | |
| Interest rate contracts | Other assets | | 0 | | | Other liabilities | | 3.0 | |
| Variable-to-fixed cross-currency swaps | Other current assets | | 0 | | | Other current liabilities | | 0.2 | |
| Variable-to-fixed cross-currency swaps | Other liabilities | | 0 | | | Other liabilities | | 50.8 | |
| Derivatives not designated as hedging instruments under ASC 815: | | | | | | | |
| Currency contracts | Other current assets | | 1.9 | | | Other current assets | | 0 | |
| Currency contracts | Other current liabilities | | (0.3) | | | Other current liabilities | | 0 | |
| Total derivatives | | | $ | 1.6 | | | | | $ | 74.3 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Asset Derivatives | | Liability Derivatives |
December 31, 2019
(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 | | $ | 2.1 | | | Other current assets | | $ | (3.1) | |
| Currency contracts | Other assets | | 4.0 | | | Other liabilities | | 4.0 | |
| Interest rate contracts | Other current assets | | 0 | | | Other current liabilities | | 1.0 | |
| Interest rate contracts | Other assets | | 0 | | | Other liabilities | | 2.4 | |
| Variable-to-fixed cross-currency swaps | Other current assets | | 10.2 | | | Other current liabilities | | 0 | |
| Variable-to-fixed cross-currency swaps | Other liabilities | | (6.8) | | | Other liabilities | | 0 | |
| Derivatives not designated as hedging instruments under ASC 815: | | | | | | | |
| Currency contracts | Other current assets | | 0 | | | Other current assets | | (0.2) | |
| Currency contracts | Other current assets | | 0 | | | Other current liabilities | | 0.2 | |
| Total derivatives | | | $ | 9.5 | | | | | $ | 4.3 | |
|
| | | | | | | | | | | |
| | Asset Derivatives | | Liability Derivatives |
December 31, 2018
(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 | | $ | 2.4 |
| | Other current assets | | $ | (2.9 | ) |
| Interest rate contracts | Other current assets | | — |
| | Other current liabilities | | 0.1 |
|
| Variable-to-fixed cross-currency swaps | Other current assets | | — |
| | Other current assets | | (15.4 | ) |
| Currency contracts | Other assets | | 1.3 |
| | Other liabilities | | 12.9 |
|
| Interest rate contracts | Other assets | | — |
| | Other liabilities | | 0.7 |
|
| Variable-to-fixed cross-currency swaps | Other assets | | — |
| | Other liabilities | | 19.0 |
|
| Derivatives not designated as hedging instruments under ASC 815: |
| | | |
| | |
| Currency contracts | Other current assets | | — |
| | Other current assets | | (0.1 | ) |
| Currency contracts | Other current assets | | — |
| | Other current liabilities | | 0.6 |
|
| Total derivatives | | | $ | 3.7 |
| | | | $ | 14.9 |
|
|
| | | | | | | | | | | |
| | Asset Derivatives | | Liability Derivatives |
December 31, 2017
(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 | | $ | 2.7 |
| | Other current liabilities | | $ | 1.4 |
|
| Interest rate contracts | Other current assets | | — |
| | Other current liabilities | | 1.3 |
|
| Currency contracts | Other assets | | — |
| | Other liabilities | | 22.2 |
|
| Interest rate contracts | Other assets | | — |
| | Other liabilities | | 0.5 |
|
| Derivatives not designated as hedging instruments under ASC 815: | | | | | | | |
| Currency contracts | Other current assets | | 0.4 |
| | Other current liabilities | | 0.2 |
|
| Total derivatives | | | $ | 3.1 |
| | | | $ | 25.6 |
|
Notes to Consolidated Financial Statements (Continued)
6. Fair Value Measurements and Risk (Continued)
The following tables present the location and amount of gains and losses on derivative instruments included in the Consolidated Statements of Operations or, when applicable, gains and losses initially recognized in “other comprehensive income (loss)” (“OCI”) for the years ended December 31, 2018, 2017,2020, 2019, and 2016:2018:
| | | | | | | | | | | | | | | | | |
Year Ended December 31, 2020
(In millions) | Amount of Gain (Loss) Recognized in OCI on Derivatives | | Location of Gain (Loss) Reclassified from Accumulated OCI into Income | | Amount of Gain (Loss) Reclassified from Accumulated OCI into Income |
| Derivatives in ASC 815 cash flow hedging relationships: | | | | | |
| Interest rate contracts | $ | (4.0) | | | Interest expense | | $ | (1.8) | |
| Currency contracts(1) | 1.8 | | | Other expense | | 2.3 | |
| Variable-to-fixed cross-currency swaps | 7.2 | | | Interest expense | | 4.0 | |
| Variable-to-fixed cross-currency swaps | (55.4) | | | Other expense | | (55.4) | |
| | | | | |
| | | | | |
| Total derivatives | $ | (50.4) | | | | | $ | (50.9) | |
| | | | | |
| | Location of Gain (Loss) Recognized in Income on Derivatives | | Amount of Gain (Loss) Recognized in Income on Derivatives |
| Derivatives not designated as hedging instruments under ASC 815: | | | | |
| Currency contracts | | | Other expense | | $ | 4.9 | |
(1)Amount of gain (loss) recognized in OCI includes $(0.7) million excluded from the assessment of effectiveness for which the difference between changes in fair value and periodic amortization is recorded in OCI.
| | | | | | | | | | | | | | | | | |
Year Ended December 31, 2019
(In millions) | Amount of Gain (Loss) Recognized in OCI on Derivatives | | Location of Gain (Loss) Reclassified from Accumulated OCI into Income | | Amount of Gain (Loss) Reclassified from Accumulated OCI into Income |
| Derivatives in ASC 815 cash flow hedging relationships: | | | | | |
| Interest rate contracts | $ | (2.9) | | | Interest expense | | $ | (0.3) | |
| Currency contracts(1) | 2.4 | | | Other expense | | 1.4 | |
| Variable-to-fixed cross-currency swaps | 9.1 | | | Interest expense | | 13.2 | |
| Variable-to-fixed cross-currency swaps | 12.5 | | | Other expense | | 12.5 | |
| | | | | |
| Total derivatives | $ | 21.1 | | | | | $ | 26.8 | |
| | | | | |
| | Location of Gain (Loss) Recognized in Income on Derivatives | | Amount of Gain (Loss) Recognized in Income on Derivatives |
| Derivatives not designated as hedging instruments under ASC 815: | | | | |
| Currency contracts | | Other expense | | $ | (0.4) | |
(1)Amount of gain (loss) recognized in OCI includes $0.6 million excluded from the assessment of effectiveness for which the difference between changes in fair value and periodic amortization is recorded in OCI.
|
| | | | | | | | | |
Year Ended December 31, 2018
(In millions) | Amount of Gain (Loss) Recognized in OCI on Derivatives | | Location of Gain (Loss) Reclassified from Accumulated OCI into Income | | Amount of Gain (Loss) Reclassified from OCI into Income |
| Derivatives in ASC 815 cash flow hedging relationships: | | | | | |
| Interest rate contracts | $ | 0.4 |
| | Interest expense | | $ | (0.6 | ) |
| Currency contracts(1) | 6.3 |
| | Other expense | | 6.3 |
|
| Variable-to-fixed cross-currency swaps | (0.6 | ) | | Interest expense | | 9.7 |
|
| Variable-to-fixed cross-currency swaps | 40.5 |
| | Other expense | | 40.5 |
|
| Total derivatives | $ | 46.6 |
| | | | $ | 55.9 |
|
| | | | | | |
| | | Location of Gain (Loss) Recognized in Income on Derivatives | | Amount of Gain (Loss) Recognized in Income on Derivatives |
| Derivatives not designated as hedging instruments under ASC 815: | | | | |
| Currency contracts | | Other expense | | $ | (4.0 | ) |
| |
(1) | Amount of gain (loss) recognized in OCI includes $(0.4) million excluded from the assessment of effectiveness for which the difference between changes in fair value and periodic amortization is recorded in OCI. |
|
| | | | | | | | | |
Year Ended December 31, 2017
(In millions) | Amount of Gain (Loss) Recognized in OCI on Derivatives | | Location of Gain (Loss) Reclassified from Accumulated OCI into Income | | Amount of Gain (Loss) Reclassified from OCI into Income |
| Derivatives in ASC 815 cash flow hedging relationships: | | | | | |
| Interest rate contracts | $ | 0.9 |
| | Interest expense | | $ | (2.7 | ) |
| Currency contracts(1) | (3.6 | ) | | Other expense | | (2.9 | ) |
| Total derivatives | $ | (2.7 | ) | | | | $ | (5.6 | ) |
| | | | | | |
| | | Location of Gain (Loss) Recognized in Income on Derivatives | | Amount of Gain (Loss) Recognized in Income on Derivatives |
| Derivatives not designated as hedging instruments under ASC 815: | | | | |
| Currency contracts | | Other expense | | $ | 1.0 |
|
| |
(1) | Amount of gain (loss) recognized in OCI includes $(0.6) million excluded from the assessment of effectiveness for which the difference between changes in fair value and periodic amortization is recorded in OCI. |
Notes to Consolidated Financial Statements (Continued)
6. Fair Value Measurements and Risk (Continued)
| | | | | | | | | | | | | | | | | |
Year Ended December 31, 2018
(In millions) | Amount of Gain (Loss) Recognized in OCI on Derivatives | | Location of Gain (Loss) Reclassified from Accumulated OCI into Income | | Amount of Gain (Loss) Reclassified from Accumulated OCI into Income |
| Derivatives in ASC 815 cash flow hedging relationships: | | | | | |
| Interest rate contracts | $ | 0.4 | | | Interest expense | | $ | (0.6) | |
| Currency contracts(1) | 6.3 | | | Other expense | | 6.3 | |
| Variable-to-fixed cross-currency swaps | (0.6) | | | Interest expense | | 9.7 | |
| Variable-to-fixed cross-currency swaps | 40.5 | | | Other expense | | 40.5 | |
| | | | | |
| Total derivatives | $ | 46.6 | | | | | $ | 55.9 | |
| | | | | |
| | Location of Gain (Loss) Recognized in Income on Derivatives | | Amount of Gain (Loss) Recognized in Income on Derivatives |
| Derivatives not designated as hedging instruments under ASC 815: | | | | |
| Currency contracts | | Other expense | | $ | (4.0) | |
|
| | | | | | | | | |
Year Ended December 31, 2016
(In millions) | Amount of Gain (Loss) Recognized in OCI on Derivatives | | Location of Gain (Loss) Reclassified from Accumulated OCI into Income | | Amount of Gain (Loss) Reclassified from OCI into Income |
| Derivatives in ASC 815 cash flow hedging relationships: | | | | | |
| Interest rate contracts | $ | (2.2 | ) | | Interest expense | | $ | (4.1 | ) |
| Currency contracts | (0.1 | ) | | Other expense | | 0.8 |
|
| Total derivatives | $ | (2.3 | ) | | | | $ | (3.3 | ) |
| | | | | | |
| | | Location of Gain (Loss) Recognized in Income on Derivatives | | Amount of Gain (Loss) Recognized in Income on Derivatives |
| Derivatives not designated as hedging instruments under ASC 815: | | | | |
| Currency contracts | | Other expense | | $ | (0.8 | ) |
The following table presents the total amounts of income and expense line items presented in the Consolidated Statements of Operations in which the effects of cash flow hedges are reported.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2020 | | | | 2019 | | | | 2018 |
| (In millions) | | | Interest expense | | Other income (expense) | | | | Interest expense | | Other income (expense) | | | | Interest expense | | Other income (expense) |
| Total amounts of income and expense line items in the Consolidated Statements of Operations in which the effects of cash flow hedges are recorded | | | $ | (76.0) | | | $ | (89.0) | | | | | $ | (76.7) | | | $ | (80.6) | | | | | $ | (80.2) | | | $ | 23.2 | |
| Gain (loss) on cash flow hedging relationships in ASC 815 | | | | | | | | | | | | | | | | | |
| Interest rate contracts | | | | | | | | | | | | | | | | | |
| Gain (loss) reclassified from accumulated OCI into income | | | $ | (1.8) | | | $ | — | | | | | $ | (0.3) | | | $ | — | | | | | $ | (0.6) | | | $ | — | |
| Variable-to-fixed cross-currency swaps | | | | | | | | | | | | | | | | | |
| Gain (loss) reclassified from accumulated OCI into income | | | 4.0 | | | (55.4) | | | | | 13.2 | | | 12.5 | | | | | 9.7 | | | 40.5 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Currency contracts | | | | | | | | | | | | | | | | | |
| Gain (loss) reclassified from accumulated OCI into income | | | — | | | 2.3 | | | | | — | | | 1.4 | | | | | — | | | 6.3 | |
| Amount excluded from effectiveness testing recognized in earnings based on amortization approach (included in above) | | | — | | | 1.2 | | | | | — | | | 2.8 | | | | | — | | | 3.0 | |
| | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| (In millions) | Interest expense | | Other income (expense) | | Interest expense | | Other income (expense) | | Interest expense | | Other income (expense) |
| Total amounts of income and expense line items in the Consolidated Statements of Operations in which the effects of cash flow hedges are recorded | $ | (80.2 | ) | | $ | 16.5 |
| | $ | (79.5 | ) | | $ | (30.2 | ) | | $ | (81.5 | ) | | $ | (61.4 | ) |
| Gain (loss) on cash flow hedging relationships in ASC 815 | | | | | | | | | | | |
| Interest rate contracts | | | | | | | | | | | |
| Amount of gain or (loss) reclassified from accumulated OCI into income | $ | (0.6 | ) | | $ | — |
| | $ | (2.7 | ) | | $ | — |
| | $ | (4.1 | ) | | $ | — |
|
| Variable-to-fixed cross-currency swaps | | | | | | | | | | | |
| Amount of gain (loss) reclassified from accumulated OCI into income | 9.7 |
| | 40.5 |
| | — |
| | — |
| | — |
| | — |
|
| Currency contracts | | | | | | | | | | | |
| Amount of gain or (loss) reclassified from accumulated OCI into income | — |
| | 6.3 |
| | — |
| | (2.9 | ) | | — |
| | 0.8 |
|
| Amount excluded from effectiveness testing recognized in earnings based on amortization approach (included in above) | — |
| | 3.0 |
| | — |
| | 0.6 |
| | — |
| | — |
|
Net Investment HedgesGrace uses cross-currency swaps as derivative hedging instruments in certain net investment hedges of its non-U.S. subsidiaries. The gains and losses attributable to these net investment hedges, adjusted for the impact of excluded components, are recorded net of tax to “currency translation adjustments” within “accumulated other comprehensive income (loss)” to offset the change in the carrying value of the net investment being hedged. Recognition in earnings of amounts previously recorded to “currency translation adjustments” is limited to circumstances such as complete or substantially complete liquidation of the net investment in the hedged foreign operation. Changes in the fair value of the hedging instrument related to time value, which are excluded from the assessment of hedge effectiveness, are recorded directly to interest expense on a systematic basis. These gains were $3.0 million, $3.3 million and $2.3 million for the yearyears ended December 31, 2018.2020, 2019, and 2018, respectively. At December 31, 2018,2020, the notional amount of €170.0 million
Notes to Consolidated Financial Statements (Continued)
6. Fair Value Measurements and Risk (Continued)
of Grace’s cross-currency swaps was designated as a hedging instrument of its net investment in its European subsidiaries.
Grace has also usesused foreign currency denominatedcurrency-denominated debt and deferred intercompany royalties as non-derivative hedging instruments in certain net investment hedges. At December 31, 2018, €11.2 million of2020, Grace’s deferred
Notes to Consolidated Financial Statements (Continued)
6. Fair Value Measurements and Risk (Continued)
intercompany royalties was designatedhave been fully amortized and de-designated as a hedging instrument of its net investment in its European subsidiaries. In April 2018, in connection with the Credit Agreement, Grace de-designated and repaid its euro-denominated term loan principal that had been designated as a hedge of its net investment in its European subsidiaries.
The following tables presenttable presents the amount of gains and losses on derivative and non-derivative instruments designated as net investment hedges recorded to “currency translation adjustments” within “accumulated other comprehensive income (loss)” for the years ended December 31, 2018, 2017,2020, 2019, and 2016.2018. There were no0 reclassifications of the effective portion of net investment hedges out of OCI and into earnings for the periods presented in the tables below.presented.
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| (In millions) | 2020 | | 2019 | | 2018 |
| Derivatives in ASC 815 net investment hedging relationships: | | | | | |
| Cross-currency swap | $ | (15.9) | | | $ | 9.1 | | | $ | 6.0 | |
| Non-derivatives in ASC 815 net investment hedging relationships: | | | | | |
| Foreign currency denominated debt | $ | 0 | | | $ | 0 | | | $ | (4.4) | |
| Foreign currency denominated deferred intercompany royalties | 0 | | | 0.1 | | | 0.5 | |
| $ | 0 | | | $ | 0.1 | | | $ | (3.9) | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| (In millions) | 2018 | | 2017 | | 2016 |
| Derivatives in ASC 815 net investment hedging relationships: | | | | | |
| Cross-currency swap | $ | 6.0 |
| | $ | (21.9 | ) | | $ | 5.6 |
|
| Non-derivatives in ASC 815 net investment hedging relationships: | | | | | |
| Foreign currency denominated debt | $ | (4.4 | ) | | $ | (11.2 | ) | | $ | 4.6 |
|
| Foreign currency denominated deferred intercompany royalties | 0.5 |
| | (6.5 | ) | | 2.5 |
|
| | $ | (3.9 | ) | | $ | (17.7 | ) | | $ | 7.1 |
|
Credit RiskGrace is exposed to credit risk in its trade accounts receivable. Customers in the petroleum refining industry represent the greatest exposure. Grace’s credit evaluation policies mitigate credit risk exposures, and it has a history of minimal credit losses. Grace does not generally require collateral for its trade accounts receivable, but may require a bank letter of credit in certain instances, particularly when selling to customers in cash-restricted countries.
Grace may also be exposed to credit risk in its derivatives contracts. Grace monitors counterparty credit risk and currently does not anticipate nonperformance by counterparties to its derivatives. Grace’s derivative contracts are with internationally recognized commercial financial institutions.
Notes to Consolidated Financial Statements (Continued)
7. Income Taxes
Provision for Income Taxes The components of income from continuing operations before income taxes and the related provision for income taxes for 2018, 2017,2020, 2019, and 20162018 are as follows:
|
| | | | | | | | | | | |
| (In millions) | 2018 | | 2017 | | 2016 |
| Income from continuing operations before income taxes: | | | | | |
| Domestic | $ | 82.2 |
| | $ | 28.3 |
| | $ | 72.7 |
|
| Foreign | 162.7 |
| | 182.6 |
| | 93.3 |
|
| Total | $ | 244.9 |
| | $ | 210.9 |
| | $ | 166.0 |
|
| Benefit from (provision for) income taxes: | | | | | |
| Federal—current | $ | (4.9 | ) | | $ | — |
| | $ | — |
|
| Federal—deferred | (29.3 | ) | | (144.6 | ) | | (11.8 | ) |
| State and local—current | 1.6 |
| | 0.2 |
| | (0.7 | ) |
| State and local—deferred | (3.5 | ) | | (1.7 | ) | | (17.7 | ) |
| Foreign—current | (49.9 | ) | | (50.8 | ) | | (36.6 | ) |
| Foreign—deferred | 7.9 |
| | (3.6 | ) | | 7.8 |
|
| Total | $ | (78.1 | ) | | $ | (200.5 | ) | | $ | (59.0 | ) |
Notes to Consolidated Financial Statements (Continued)
7. Income Taxes (Continued)
| | | | | | | | | | | | | | | | | |
| (In millions) | 2020 | | 2019 | | 2018 |
| Income from continuing operations before income taxes: | | | | | |
| Domestic | $ | (76.1) | | | $ | 79.2 | | | $ | 82.2 | |
| Foreign | 76.6 | | | 104.3 | | | 162.7 | |
| Total | $ | 0.5 | | | $ | 183.5 | | | $ | 244.9 | |
| Benefit from (provision for) income taxes: | | | | | |
| Federal—current | $ | (0.3) | | | $ | (6.3) | | | $ | (4.9) | |
| Federal—deferred | 24.8 | | | (19.8) | | | (29.3) | |
| State and local—current | 0 | | | (0.5) | | | 1.6 | |
| State and local—deferred | (7.2) | | | (5.8) | | | (3.5) | |
| Foreign—current | (35.1) | | | (42.4) | | | (49.9) | |
| Foreign—deferred | 15.6 | | | 18.0 | | | 7.9 | |
| Total | $ | (2.2) | | | $ | (56.8) | | | $ | (78.1) | |
The difference between the benefit from (provision for) income taxes on continuing operations at the U.S. federal income tax rate of 21% for 2018 (35% for 2017 and 2016) and Grace’s overall income tax provision is summarized as follows:
| | | | | | | | | | | | | | | | | |
| (In millions) | 2020 | | 2019 | | 2018 |
| Tax provision at U.S. federal income tax rate | $ | (0.1) | | | $ | (38.5) | | | $ | (51.4) | |
| Change in benefit (provision) resulting from: | | | | | |
| GILTI high-tax exclusion amended return | 25.2 | | | 0 | | | 0 | |
| Decrease (increase) in valuation allowance | (13.5) | | | (4.2) | | | (6.3) | |
| Nontaxable income/non-deductible expenses | (4.6) | | | (2.5) | | | (1.6) | |
| U.S. taxes on foreign earnings | (3.9) | | | (16.7) | | | (30.9) | |
| State and local income taxes, net | (3.4) | | | (3.4) | | | (1.9) | |
| Research and development credit | 3.3 | | | 3.4 | | | 9.4 | |
| Unrecognized tax benefit (accruals) releases | (3.1) | | | 2.3 | | | 5.7 | |
| Effect of tax rate differential in foreign jurisdictions | (2.0) | | | (2.9) | | | (11.3) | |
| Compensation-related adjustments | (1.8) | | | (1.7) | | | (3.4) | |
| Provision to return adjustments | (0.3) | | | 3.0 | | | (0.7) | |
| Benefits (charges) related to U.S. tax reform | 0 | | | 0 | | | 17.1 | |
| Other | 2.0 | | | 4.4 | | | (2.8) | |
| Benefit from (provision for) income taxes | $ | (2.2) | | | $ | (56.8) | | | $ | (78.1) | |
|
| | | | | | | | | | | |
| (In millions) | 2018 | | 2017 | | 2016 |
| Tax provision at U.S. federal income tax rate | $ | (51.4 | ) | | $ | (73.8 | ) | | $ | (58.1 | ) |
| Change in benefit (provision) resulting from: | | | | | |
| Tax on global intangible low-taxed income | (24.1 | ) | | — |
| | — |
|
| Benefits (charges) related to U.S. tax reform | 17.1 |
| | (143.0 | ) | | — |
|
| Effect of tax rates in foreign jurisdictions | (11.3 | ) | | 13.3 |
| | 6.8 |
|
| Research and development credit | 9.4 |
| | 5.1 |
| | — |
|
| U.S. tax on foreign earnings | (6.8 | ) | | (1.2 | ) | | (0.9 | ) |
| Decrease (increase) in valuation allowance | (6.3 | ) | | (0.3 | ) | | (2.5 | ) |
| Audit settlements | 5.7 |
| | — |
| | — |
|
| Prior-period adjustments | 2.8 |
| | 4.5 |
| | (2.7 | ) |
| Excess compensation | (2.7 | ) | | (0.1 | ) | | (0.4 | ) |
| State and local income taxes, net | (1.9 | ) | | (1.8 | ) | | (4.7 | ) |
| Nontaxable income/non-deductible expenses | (1.6 | ) | | (2.6 | ) | | (2.5 | ) |
| Stock-based compensation | (0.7 | ) | | 2.8 |
| | 6.7 |
|
| Other | (6.3 | ) | | (3.4 | ) | | (0.7 | ) |
| Benefit from (provision for) income taxes | $ | (78.1 | ) | | $ | (200.5 | ) | | $ | (59.0 | ) |
In 2017 Grace estimated its provision for income taxes in accordance withOn July 20, 2020, the TCJA and guidance available at the time and as a result recorded a provisional income tax expense of $143.0 million in the 2017 fourth quarter.
The provisional amountU.S. Treasury Department released final regulations related to the remeasurementGILTI HTE. Grace has recognized a benefit associated with the GILTI HTE regulations that resulted in a tax benefit related to 2018 and 2019 of $25.2 million resulting from the election and the re-establishment of certain deferred tax assetsU.S. federal net operating loss carryforwards, research and liabilities, based on the rates at which they are expected to reverse in the future, was $120.1 million.
The provisional amounts related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings and the statedevelopment credit carryforwards, and foreign taxes on the unremitted earnings were $37.4 million and $4.9 million, respectively. Effective December 31, 2017, Grace is no longer indefinitely reinvested with respect to its historical unremitted earnings of its foreign subsidiaries. In the fourth quarter of 2018 Grace finalized the provisional amounts recorded in the fourth quarter of 2017, which resulted in reductions of $9.5 million and $2.7 million in the one-time transition tax of foreign earnings and the state and foreign taxes on the unremitted earnings, respectively. The net reduction of the transition tax was due primarily to additional review of historical tax attributes of Grace’s foreign subsidiaries and changes in estimate based on guidance issued during the year. The adjustment of Grace’s provisional transition tax expense was recorded as a change in estimate in accordance with SAB 118. Despite the completion of Grace’s accounting for the TCJA under SAB 118, many aspects of the law remain uncertain at this time. We expect updates to federal and state guidance and regulations will continue throughout 2019. Grace will monitor and assess the impact of any new guidance as it becomes available.credit carryforwards.
Notes to Consolidated Financial Statements (Continued)
7. Income Taxes (Continued)
The table below summarizes the provisional amounts related to the TCJA recorded in 2017 and the adjustments recorded in 2018.
|
| | | | | | | | | | | |
| (In millions) | 2017 Provisional Amounts | | Remeasurement under SAB 118 | | Total |
| Revaluation of deferred tax assets and liabilities | $ | 120.1 |
| | $ | (4.9 | ) | | $ | 115.2 |
|
| Transition tax | 37.4 |
| | (9.5 | ) | | 27.9 |
|
| Federal tax credit valuation release | (17.4 | ) | | — |
| | (17.4 | ) |
| State valuation release | (2.0 | ) | | — |
| | (2.0 | ) |
| Foreign and state impact of unremitted earnings | 4.9 |
| | (2.7 | ) | | 2.2 |
|
| Total tax reform | $ | 143.0 |
| | $ | (17.1 | ) | | $ | 125.9 |
|
Deferred Tax Assets and Liabilities As of December 31, 20182020 and 2017,2019, the tax attributes giving rise to deferred tax assets and liabilities consisted of the following items.
|
| | | | | | | |
| | December 31, |
| (In millions) | 2018 | | 2017 |
| Deferred tax assets: | | | |
| Federal tax credit carryforwards | $ | 291.0 |
| | $ | 269.6 |
|
| Pension liabilities | 82.7 |
| | 104.8 |
|
| State net operating loss carryforwards | 52.9 |
| | 58.2 |
|
| U.S. net operating loss carryforwards | 44.3 |
| | 89.5 |
|
| Liability for environmental remediation | 29.3 |
| | 16.4 |
|
| Research and development | 24.6 |
| | 22.8 |
|
| Reserves and allowances | 22.8 |
| | 15.2 |
|
| Unrealized currency gains and losses | 12.8 |
| | — |
|
| Stock-based compensation | 6.5 |
| | 4.2 |
|
| Foreign net operating loss carryforwards | 5.7 |
| | 6.6 |
|
| Prepaid royalties | 3.0 |
| | 21.4 |
|
| Other | 6.5 |
| | 10.3 |
|
| Total deferred tax assets | $ | 582.1 |
| | $ | 619.0 |
|
| Deferred tax liabilities: | | | |
| Intangible assets | $ | (24.9 | ) | | $ | (15.1 | ) |
| Properties and equipment | (13.2 | ) | | (32.0 | ) |
| Other | (5.6 | ) | | (11.3 | ) |
| Total deferred tax liabilities | $ | (43.7 | ) | | $ | (58.4 | ) |
| Valuation allowance: | | | |
| State net operating loss carryforwards | $ | (6.6 | ) | | $ | (9.2 | ) |
| Federal tax credit carryforwards | (5.2 | ) | | (0.3 | ) |
| Foreign net operating loss carryforwards | (4.2 | ) | | (2.8 | ) |
| Foreign other | (3.9 | ) | | — |
|
| Total valuation allowance | (19.9 | ) | | (12.3 | ) |
| Net deferred tax assets | $ | 518.5 |
| | $ | 548.3 |
|
Notes to Consolidated Financial Statements (Continued)
7. Income Taxes (Continued)
Grace’s net deferred tax assets decreased by $29.8 million from December 31, 2017, to December 31, 2018, largely as a result of the utilization of net operating losses, the reduction of pension related deferred tax assets, and a reduction in prepaid royalty deferred tax assets. These reductions were partially offset by an increase in Grace’s federal tax credit carryforwards and unrealized foreign currency gains and losses. | | | | | | | | | | | |
| December 31, |
| (In millions) | 2020 | | 2019 |
| Deferred tax assets: | | | |
| Tax credit carryforwards | $ | 309.2 | | | $ | 294.7 | |
| Pension liabilities | 139.2 | | | 107.7 | |
| Net operating loss carryforwards | 65.2 | | | 60.3 | |
| Environmental remediation liabilities | 50.3 | | | 47.0 | |
| Research and development | 32.9 | | | 26.6 | |
| Unrealized currency gains and losses | 30.7 | | | 12.1 | |
| Reserves and allowances | 29.6 | | | 14.8 | |
| Operating lease liabilities | 7.4 | | | 8.1 | |
| Compensation-related | 4.0 | | | 5.4 | |
| Prepaid royalties | 1.1 | | | 6.3 | |
| Other | 6.8 | | | 6.9 | |
| Total deferred tax assets | $ | 676.4 | | | $ | 589.9 | |
| Deferred tax liabilities: | | | |
| Intangible assets | $ | (36.5) | | | $ | (27.7) | |
| Properties and equipment | (20.5) | | | (18.6) | |
| | | |
| Operating lease assets | (7.4) | | | (8.0) | |
| Other | (16.6) | | | (1.4) | |
| Total deferred tax liabilities | $ | (81.0) | | | $ | (55.7) | |
| | | |
| Valuation allowances | (38.7) | | | (24.1) | |
| Net deferred tax assets | $ | 556.7 | | | $ | 510.1 | |
Grace reduces the carrying amounts of deferred tax assets by a valuation allowance if, based on the available evidence, it is more likely than not that such assets will not be realized (see Note 1). The valuation allowance increased by $7.6 million from December 31, 2017, to December 31, 2018, due to increasesBased on all available evidence considered, Grace believes it is more likely than not that some portion of $4.9 million related to expectedthe U.S federal foreign tax credit utilization, $3.9 million related tocarryforwards recorded will not ultimately be realized. As of December 31, 2020, a foreign deferred tax asset the company is unlikely to utilize, and $1.4 million related to foreign net operating loss carryforwards, offset by a $2.6 million reduction to the valuation allowance for state deferred taxes.of $11.5 million was recorded against the more-likely-than-not U.S. federal foreign tax credit carryforwards expiring in 2021.
U.S. FederalTax Attributes—Tax Credit and State Net Operating Losses and CreditLoss Carryforwards Grace has $299.4$317.4 million in federal tax credit carryforwards and $13.1 million in federal net operating loss carryforwards before valuation allowances and unrecognized tax benefits. In order to fully utilize the credits before they expire from(from 2021 to 20282040), Grace willwould need to generate income of approximately $1.4$1.6 billion.
Grace has U.S. federal and state net operating losses. The deferredloss carryforwards of $47.4 million and state tax asset related to federal NOLs is $48.8credits of $1.6 million before unrecognized tax benefits. In order to fully utilize the NOLs before they expire in 2035, Grace will need to generate approximately $232 million in U.S. taxable income. The deferred tax asset, net of federal benefit, before valuation allowance related to state NOLs is $54.5 million beforeallowances and unrecognized tax benefits. In order to fully utilize the state NOLstax attributes before they expire (from 20182021 to 2035)2036), Grace would need to generate approximately $1.9$3.1 billion in state taxable income.
Notes to Consolidated Financial Statements (Continued)
7. Income Taxes (Continued)
The following table presents Grace’s tax effected net operating loss carryforwards and the related valuation allowances.
| | | | | | | | | | | |
| December 31, |
| (In millions) | 2020 | | 2019 |
| Net operating loss carryforwards | | | |
| U.S. state net operating losses | $ | 45.4 | | | $ | 49.5 | |
| U.S. federal net operating losses | 10.2 | | | 1.2 | |
| Foreign net operating losses | 9.6 | | | 9.6 | |
| Net operating loss carryforwards | $ | 65.2 | | | $ | 60.3 | |
| | | |
| Net operating loss—valuation allowances | | | |
| U.S. state—NOL valuation allowances | $ | (13.9) | | | $ | (10.1) | |
| Foreign—NOL valuation allowances | (6.5) | | | (8.0) | |
| Net operating loss—valuation allowances | $ | (20.4) | | | $ | (18.1) | |
Unrecognized Tax Benefits The balance of unrecognized tax benefits at December 31, 2018,2020, was $14.1$18.6 million compared with $17.7$15.4 million at December 31, 2017.2019. A rollforward of the balance of unrecognized tax benefits for the three years ended December 31, 2018,2020, follows.
| | | | | | | | | | | | | | | | | |
| December 31, |
| (In millions) | 2020 | | 2019 | | 2018 |
| Balance at beginning of year | $ | 15.4 | | | $ | 14.1 | | | $ | 17.7 | |
| Increase (decrease) in positions taken in prior periods | 0.2 | | | 2.6 | | | 1.2 | |
| Positions taken in the current period | 3.4 | | | 2.9 | | | 0.9 | |
| Decrease due to settlements with tax authorities | (0.4) | | | (4.2) | | | (5.7) | |
| | | | | |
| Balance at end of year | $ | 18.6 | | | $ | 15.4 | | | $ | 14.1 | |
|
| | | |
| (In millions) | Unrecognized Tax Benefits |
| Balance, December 31, 2015 | $ | 23.1 |
|
| Additions for current year tax positions | 6.8 |
|
| Additions for prior year tax positions | 0.2 |
|
| Reductions for prior year tax positions and reclassifications | (0.2 | ) |
| Settlements | (3.3 | ) |
| Transferred to GCP upon Separation | (7.9 | ) |
| Balance, December 31, 2016 | 18.7 |
|
| Additions for current year tax positions | 0.8 |
|
| Additions for prior year tax positions | 0.7 |
|
| Reductions for prior year tax positions and reclassifications | (2.5 | ) |
| Balance, December 31, 2017 | 17.7 |
|
| Additions for current year tax positions | 0.9 |
|
| Additions for prior year tax positions | 4.0 |
|
| Reductions for prior year tax positions and reclassifications | (2.8 | ) |
| Settlements | (5.7 | ) |
| Balance, December 31, 2018 | $ | 14.1 |
|
The entireIf the balance of unrecognized tax benefits as of December 31, 2018,2020, of $14.1$18.6 million ifis ultimately recognized, it would reduce the effective tax rate. TheA portion of this balance relates to tax positions with an indirect tax benefit that results in a correspondingimpact Grace’s deferred tax assetassets as of December 31, 2018.2020. Grace accrues potential interest and any associated penalties related to unrecognized tax benefits in “benefit from (provision for) income taxes” in the Consolidated
Notes to Consolidated Financial Statements (Continued)
7. Income Taxes (Continued)
Statements of Operations. There were noGrace accrued $0.2 million of interest and penalties accrued onassociated with these unrecognized tax benefits asin 2020. Grace believes that the amount of December 31, 2018 and 2017.the liability for unrecognized tax benefits will not change materially in the next 12 months.
Grace filesis subject to taxation in the U.S. federal income tax returns as well as income tax returns inand various state and foreign jurisdictions. Grace’s unrecognizedjurisdictions and is under continual audit by various tax benefits are related to income tax returns forauthorities. As of December 31, 2020, tax years that remain2017 through 2019 are subject to examination by the relevant taxingU.S. tax authorities. The following table summarizes these openIn the significant non-U.S. jurisdiction, tax years 2017 through 2019 are subject to examination by major jurisdiction:
|
| | | | |
| Tax Jurisdiction(1) | | Examination in Progress | | Examination Not Initiated |
| United States—Federal | | 2016 | | 2017 |
| United States—States | | 2011-2016 | | 2017 |
| Germany | | 2014-2016 | | 2017 |
| Sweden | | None | | 2013-2017 |
| |
(1) | Includes federal, state, provincial or local jurisdictions, as applicable. |
the German tax authorities. Grace notes that there arehas tax attributes generated in prior years that are otherwise closed by statute and were carried forward into years that are open to examination. Those attributes may still be subject to adjustment to the extent utilized in open years.
As a multinational taxpayer, Grace is under continual audit by various tax authorities. Grace believes that the amount
Notes to Consolidated Financial Statements (Continued)
8. Pension Plans and Other Retirement Plans
Pension Plans The following table presents the funded status of Grace’s underfunded and unfunded pension plans:
| | | | December 31, | | December 31, |
| (In millions) | 2018 | | 2017 | (In millions) | 2020 | | 2019 |
| Overfunded defined benefit pension plans | $ | 5.7 |
| | $ | — |
| Overfunded defined benefit pension plans | $ | 11.4 | | | $ | 8.5 | |
| Underfunded defined benefit pension plans | (67.1 | ) | | (110.5 | ) | Underfunded defined benefit pension plans | (128.3) | | | (85.2) | |
| Unfunded defined benefit pension plans | (366.0 | ) | | (391.9 | ) | Unfunded defined benefit pension plans | (520.7) | | | (434.6) | |
| Total underfunded and unfunded defined benefit pension plans | (433.1 | ) | | (502.4 | ) | Total underfunded and unfunded defined benefit pension plans | (649.0) | | | (519.8) | |
| Pension liabilities included in other current liabilities | (14.7 | ) | | (15.0 | ) | Pension liabilities included in other current liabilities | (15.7) | | | (14.8) | |
| Net funded status | $ | (442.1 | ) | | $ | (517.4 | ) | Net funded status | $ | (653.3) | | | $ | (526.1) | |
Fully-funded plans include several advance-funded plans where the fair value of the plan assets exceeds the projected benefit obligation ("PBO"). Underfunded plans include a group of advance-funded plans that are underfunded on a projected benefit obligation (“PBO”)PBO basis. Unfunded plans include several plans that are funded on a pay-as-you-go basis, and therefore, the entire PBO is unfunded.
Grace maintains defined benefit pension plans covering current and former employees of certain business units and divested business 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. The U.S. salaried plan was closed to new entrants after January 1, 2017. In the 2021 first quarter, Grace announced to employees that the U.S. salaried employees and certain U.S. hourly employees hired on or afterplan will be frozen effective January 1, 2017, and employees in Germany hired on or after January 1, 2016, participate in enhanced defined contribution plans instead of defined benefit pension plans.
Notes to Consolidated Financial Statements (Continued)
8. Pension Plans and Other Retirement Plans (Continued)
2025.
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 due to the participants.
During 2018, Grace implemented a special lump sum and early commencement window for certain terminated vested participants who terminated employment prior to May 1, 2018, and had not previously commenced their pension benefits. As a result of the transaction, the U.S. qualified pension plans paid $42.2 million in lump sum distributions that reduced the PBO by $43.5 million and resulted in a $1.3 million gain.
Additionally, in the 2018 fourth quarter, Grace entered into an agreement with Prudential Financial, Inc. (“Prudential Financial”) to purchase a group annuity contract for $116.4 million that transferred $117.4 million of our U.S. pension plan obligations to Prudential Financial. Prudential Financial assumed responsibility to pay monthly annuities to certain retirees and beneficiaries that were receiving a monthly benefit from certain U.S. pension plans. Grace recognized a $1.0 million gain on the settlement.
At the December 31, 2018,2020, measurement date for Grace’s defined benefit pension plans, the PBO was $1,332.7$1,682.7 million as measured under U.S. GAAP compared with $1,648.7$1,507.0 million as of December 31, 2017.2019. The PBO basis reflects the present value (using a 4.22%2.41% weighted average discount rate for U.S. plans and a 2.17%0.84% weighted average discount rate for non-U.S. plans as of December 31, 2018)2020) 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 an annual basis a full remeasurement of pension assets and pension liabilities is performed based on Grace’s estimates and actuarial valuations. These valuations reflect the terms of theeach pension plan and use participant-specific information as well as certain key assumptions provided by management.
Defined Contribution Retirement PlanPlans Grace sponsors a defined contribution retirement plan for its employees in the United States. This plan is qualified under section 401(k) of the U.S. tax code. Currently, Grace contributes an amount equal to 100% of employee contributions, up to 6% of an individual employee’s salary or wages. Grace’s cost related to this benefit plan was $12.6$14.3 million,, $11.5 $13.9 million,, and $11.1$12.6 million for the years ended December 31, 2018, 2017,2020, 2019, and 2016,2018, respectively.
U.S. salaried employees and certain U.S. hourly employees hired on or after January 1, 2017, participate in an enhanced defined contribution plan instead of a defined benefit pension plan. Grace contributes 4% of an individual employee’s salary or wages to this plan. Grace’s cost related to this enhanced defined contribution plan established in the U.S. was $3.5 million, $2.9 million, and $1.7 million for the years ended December 31, 2020, 2019, and 2018, respectively.
Notes to Consolidated Financial Statements (Continued)
8. Pension Plans and Other Retirement Plans (Continued)
Analysis of Plan Accounting and Funded Status The following table summarizes the changes in benefit obligations and fair values of retirement plan assets during 20182020 and 2017:2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Defined Benefit Pension Plans | | |
| U.S. | | Non-U.S. | | Total | |
| (In millions) | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 | | | | |
| Change in Projected Benefit Obligation: | | | | | | | | | | | | | | | |
| Benefit obligation at beginning of year | $ | 1,137.8 | | | $ | 1,027.1 | | | $ | 369.2 | | | $ | 305.6 | | | $ | 1,507.0 | | | $ | 1,332.7 | | | | | |
| Service cost | 18.9 | | | 15.7 | | | 11.1 | | | 8.6 | | | 30.0 | | | 24.3 | | | | | |
| Interest cost | 30.2 | | | 38.3 | | | 4.1 | | | 5.4 | | | 34.3 | | | 43.7 | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Actuarial (gain) loss—change in discount rates | 106.0 | | | 144.1 | | | 52.7 | | | 58.2 | | | 158.7 | | | 202.3 | | | | | |
| Actuarial (gain) loss—other changes | 8.9 | | | (10.7) | | | (3.7) | | | 4.1 | | | 5.2 | | | (6.6) | | | | | |
| Benefits paid | (79.1) | | | (76.7) | | | (8.4) | | | (8.4) | | | (87.5) | | | (85.1) | | | | | |
| | | | | | | | | | | | | | | |
| Currency exchange translation adjustments | — | | | — | | | 35.0 | | | (4.3) | | | 35.0 | | | (4.3) | | | | | |
| | | | | | | | | | | | | | | |
| Benefit obligation at end of year | $ | 1,222.7 | | | $ | 1,137.8 | | | $ | 460.0 | | | $ | 369.2 | | | $ | 1,682.7 | | | $ | 1,507.0 | | | | | |
| Change in Plan Assets: | | | | | | | | | | | | | | | |
| Fair value of plan assets at beginning of year | $ | 955.7�� | | | $ | 871.1 | | | $ | 25.2 | | | $ | 19.5 | | | $ | 980.9 | | | $ | 890.6 | | | | | |
| Actual return on plan assets | 115.7 | | | 154.6 | | | 2.3 | | | 4.1 | | | 118.0 | | | 158.7 | | | | | |
| Employer contributions | 8.4 | | | 6.7 | | | 8.8 | | | 9.1 | | | 17.2 | | | 15.8 | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Benefits paid | (79.1) | | | (76.7) | | | (8.4) | | | (8.4) | | | (87.5) | | | (85.1) | | | | | |
| Currency exchange translation adjustments | — | | | — | | | 0.8 | | | 0.9 | | | 0.8 | | | 0.9 | | | | | |
| | | | | | | | | | | | | | | |
| Fair value of plan assets at end of year | $ | 1,000.7 | | | $ | 955.7 | | | $ | 28.7 | | | $ | 25.2 | | | $ | 1,029.4 | | | $ | 980.9 | | | | | |
| Funded status at end of year (PBO basis) | $ | (222.0) | | | $ | (182.1) | | | $ | (431.3) | | | $ | (344.0) | | | $ | (653.3) | | | $ | (526.1) | | | | | |
| Amounts recognized in the Consolidated Balance Sheets consist of: | | | | | | | | | | | | | | | |
| Noncurrent assets | $ | 11.4 | | | $ | 8.5 | | | $ | 0 | | | $ | 0 | | | $ | 11.4 | | | $ | 8.5 | | | | | |
| Current liabilities | (7.2) | | | (7.3) | | | (8.5) | | | (7.5) | | | (15.7) | | | (14.8) | | | | | |
| Noncurrent liabilities | (226.2) | | | (183.3) | | | (422.8) | | | (336.5) | | | (649.0) | | | (519.8) | | | | | |
| Net amount recognized | $ | (222.0) | | | $ | (182.1) | | | $ | (431.3) | | | $ | (344.0) | | | $ | (653.3) | | | $ | (526.1) | | | | | |
| Amounts recognized in Accumulated Other Comprehensive (Income) Loss consist of: | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Prior service credit | $ | (2.0) | | | $ | (2.6) | | | $ | (0.1) | | | $ | (0.1) | | | $ | (2.1) | | | $ | (2.7) | | | | | |
| Net amount recognized | $ | (2.0) | | | $ | (2.6) | | | $ | (0.1) | | | $ | (0.1) | | | $ | (2.1) | | | $ | (2.7) | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Defined Benefit Pension Plans |
| U.S. | | Non-U.S. |
| 2020 | | 2019 | | 2020 | | 2019 |
| Weighted Average Assumptions Used to Determine Benefit Obligations as of December 31: | | | | | | | |
| Discount rate | 2.41 | % | | 3.13 | % | | 0.84 | % | | 1.41 | % |
| Rate of compensation increase | 4.50 | % | | 4.50 | % | | 2.58 | % | | 2.59 | % |
| Weighted Average Assumptions Used to Determine Net Periodic Benefit Cost for Years Ended December 31: | | | | | | | |
| Discount rate for determining service cost | 3.40 | % | | 4.46 | % | | 1.61 | % | | 2.42 | % |
| Discount rate for determining interest cost | 2.75 | % | | 3.86 | % | | 1.12 | % | | 1.84 | % |
| Expected return on plan assets | 5.25 | % | | 5.75 | % | | 4.17 | % | | 4.43 | % |
| Rate of compensation increase | 4.50 | % | | 4.10 | % | | 2.59 | % | | 2.59 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Defined Benefit Pension Plans |
(In millions) | U.S. | | Non-U.S. | | Total |
| 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 |
| Change in Projected Benefit Obligation (PBO): | | | | | | | | | | | |
| Benefit obligation at beginning of year | $ | 1,325.6 |
| | $ | 1,274.2 |
| | $ | 323.1 |
| | $ | 269.1 |
| | $ | 1,648.7 |
| | $ | 1,543.3 |
|
| Service cost | 19.2 |
| | 17.1 |
| | 9.5 |
| | 8.4 |
| | 28.7 |
| | 25.5 |
|
| Interest cost | 40.9 |
| | 42.0 |
| | 5.0 |
| | 4.4 |
| | 45.9 |
| | 46.4 |
|
| Settlements | (160.9 | ) | | — |
| | — |
| | — |
| | (160.9 | ) | | — |
|
| Acquisitions | — |
| | — |
| | 0.6 |
| | 0.4 |
| | 0.6 |
| | 0.4 |
|
| Actuarial (gain) loss | (102.6 | ) | | 88.3 |
| | (11.9 | ) | | 13.4 |
| | (114.5 | ) | | 101.7 |
|
| Benefits paid | (95.1 | ) | | (91.2 | ) | | (8.4 | ) | | (7.8 | ) | | (103.5 | ) | | (99.0 | ) |
| Currency exchange translation adjustments | — |
| | — |
| | (12.3 | ) | | 35.2 |
| | (12.3 | ) | | 35.2 |
|
| Other | — |
| | (4.8 | ) | | — |
| | — |
| | — |
| | (4.8 | ) |
| Benefit obligation at end of year | $ | 1,027.1 |
| | $ | 1,325.6 |
| | $ | 305.6 |
| | $ | 323.1 |
| | $ | 1,332.7 |
| | $ | 1,648.7 |
|
| Change in Plan Assets: | | | | | | | | | | | |
| Fair value of plan assets at beginning of year | $ | 1,109.8 |
| | $ | 1,086.4 |
| | $ | 21.5 |
| | $ | 18.2 |
| | $ | 1,131.3 |
| | $ | 1,104.6 |
|
| Actual return on plan assets | (41.9 | ) | | 112.7 |
| | (1.7 | ) | | 1.6 |
| | (43.6 | ) | | 114.3 |
|
| Employer contributions | 56.9 |
| | 9.6 |
| | 9.6 |
| | 8.2 |
| | 66.5 |
| | 17.8 |
|
| Settlements | (158.6 | ) | | — |
| | — |
| | — |
| | (158.6 | ) | | — |
|
| Benefits paid | (95.1 | ) | | (91.2 | ) | | (8.4 | ) | | (7.8 | ) | | (103.5 | ) | | (99.0 | ) |
| Currency exchange translation adjustments | — |
| | — |
| | (1.5 | ) | | 1.3 |
| | (1.5 | ) | | 1.3 |
|
| Other | — |
| | (7.7 | ) | | — |
| | — |
| | — |
| | (7.7 | ) |
| Fair value of plan assets at end of year | $ | 871.1 |
| | $ | 1,109.8 |
| | $ | 19.5 |
| | $ | 21.5 |
| | $ | 890.6 |
| | $ | 1,131.3 |
|
| Funded status at end of year (PBO basis) | $ | (156.0 | ) | | $ | (215.8 | ) | | $ | (286.1 | ) | | $ | (301.6 | ) | | $ | (442.1 | ) | | $ | (517.4 | ) |
| Amounts recognized in the Consolidated Balance Sheets consist of: | | | | | | | | | | | |
| Noncurrent assets | $ | 5.7 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 5.7 |
| | $ | — |
|
| Current liabilities | (7.0 | ) | | (7.0 | ) | | (7.7 | ) | | (8.0 | ) | | (14.7 | ) | | (15.0 | ) |
| Noncurrent liabilities | (154.7 | ) | | (208.8 | ) | | (278.4 | ) | | (293.6 | ) | | (433.1 | ) | | (502.4 | ) |
| Net amount recognized | $ | (156.0 | ) | | $ | (215.8 | ) | | $ | (286.1 | ) | | $ | (301.6 | ) | | $ | (442.1 | ) | | $ | (517.4 | ) |
| Amounts recognized in Accumulated Other Comprehensive (Income) Loss consist of: | | | | | | | | | | | |
| Prior service credit | $ | (3.2 | ) | | $ | (3.9 | ) | | $ | (0.1 | ) | | $ | (0.1 | ) | | $ | (3.3 | ) | | $ | (4.0 | ) |
| Net amount recognized | $ | (3.2 | ) | | $ | (3.9 | ) | | $ | (0.1 | ) | | $ | (0.1 | ) | | $ | (3.3 | ) | | $ | (4.0 | ) |
Notes to Consolidated Financial Statements (Continued)
8. Pension Plans and Other Retirement Plans (Continued)
|
| | | | | | | | | | | |
| | Defined Benefit Pension Plans |
(In millions) | U.S. | | Non-U.S. |
| 2018 | | 2017 | | 2018 | | 2017 |
| Weighted Average Assumptions Used to Determine Benefit Obligations as of December 31: | | | | | | | |
| Discount rate | 4.22 | % | | 3.57 | % | | 2.17 | % | | 1.84 | % |
| Rate of compensation increase | 4.10 | % | | 4.10 | % | | 2.59 | % | | 2.64 | % |
| Weighted Average Assumptions Used to Determine Net Periodic Benefit Cost for Years Ended December 31: | | | | | | | |
| Discount rate for determining service cost | 3.77 | % | | 4.41 | % | | 1.99 | % | | 2.09 | % |
| Discount rate for determining interest cost | 3.20 | % | | 3.42 | % | | 1.57 | % | | 1.69 | % |
| Expected return on plan assets | 5.25 | % | | 5.50 | % | | 4.69 | % | | 4.69 | % |
| Rate of compensation increase | 4.10 | % | | 4.10 | % | | 2.64 | % | | 3.09 | % |
The following table presents the components of net periodic benefit cost (income) and other amounts recognized in “other comprehensive (income) loss.”
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | 2020 | | 2019 | | 2018 |
| U.S. | | Non-U.S. | | U.S. | | Non-U.S. | | U.S. | | Non-U.S. |
| Net Periodic Benefit Cost (Income) | | | | | | | | | | | |
| Service cost | $ | 18.9 | | | $ | 11.1 | | | $ | 15.7 | | | $ | 8.6 | | | $ | 19.2 | | | $ | 9.5 | |
| Interest cost | 30.2 | | | 4.1 | | | 38.3 | | | 5.4 | | | 40.9 | | | 5.0 | |
| Expected return on plan assets | (48.3) | | | (1.0) | | | (48.2) | | | (0.9) | | | (57.2) | | | (1.0) | |
| Amortization of prior service cost (credit) | (0.6) | | | 0 | | | (0.6) | | | 0 | | | (0.6) | | | 0 | |
| | | | | | | | | | | |
| Annual mark-to-market adjustment (gain) loss | 47.5 | | | 47.1 | | | 26.8 | | | 59.1 | | | (3.4) | | | (9.2) | |
| | | | | | | | | | | |
| Net curtailment and settlement gain | 0 | | | 0 | | | 0 | | | 0 | | | (2.3) | | | 0 | |
| Net periodic benefit cost (income) | $ | 47.7 | | | $ | 61.3 | | | $ | 32.0 | | | $ | 72.2 | | | $ | (3.4) | | | $ | 4.3 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Other Changes in Plan Assets and Benefit Obligations Recognized in OCI | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Amortization of prior service cost (credit) | $ | 0.6 | | | $ | 0 | | | $ | 0.6 | | | $ | 0 | | | $ | 0.6 | | | $ | 0 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Total recognized in OCI | 0.6 | | | 0 | | | 0.6 | | | 0 | | | 0.6 | | | 0 | |
| Total recognized in net periodic benefit cost (income) and OCI | $ | 48.3 | | | $ | 61.3 | | | $ | 32.6 | | | $ | 72.2 | | | $ | (2.8) | | | $ | 4.3 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | 2018 | | 2017 | | 2016 |
| U.S. | | Non-U.S. | | U.S. | | Non-U.S. | | U.S. | | Non-U.S. |
| Net Periodic Benefit Cost (Income) | | | | | | | | | | | |
| Service cost | $ | 19.2 |
| | $ | 9.5 |
| | $ | 17.1 |
| | $ | 8.4 |
| | $ | 17.8 |
| | $ | 6.8 |
|
| Interest cost | 40.9 |
| | 5.0 |
| | 42.0 |
| | 4.4 |
| | 40.5 |
| | 5.1 |
|
| Expected return on plan assets | (57.2 | ) | | (1.0 | ) | | (57.5 | ) | | (0.9 | ) | | (56.7 | ) | | (1.0 | ) |
| Amortization of prior service cost (credit) | (0.6 | ) | | — |
| | (0.4 | ) | | — |
| | (0.2 | ) | | — |
|
| Annual mark-to-market adjustment (gain) loss | (3.4 | ) | | (9.2 | ) | | 36.0 |
| | 13.2 |
| | 23.3 |
| | 40.1 |
|
| Net curtailment and settlement gain | (2.3 | ) | | — |
| | — |
| | — |
| | — |
| | (1.0 | ) |
| Net periodic benefit cost (income) | $ | (3.4 | ) | | $ | 4.3 |
| | $ | 37.2 |
| | $ | 25.1 |
| | $ | 24.7 |
| | $ | 50.0 |
|
| Other Changes in Plan Assets and Benefit Obligations Recognized in OCI | | | | | | | | | | | |
| Net prior service credit | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (1.3 | ) | | $ | — |
|
| Amortization of prior service cost (credit) | 0.6 |
| | — |
| | 0.4 |
| | — |
| | 0.2 |
| | — |
|
| Total recognized in OCI | 0.6 |
| | — |
| | 0.4 |
| | — |
| | (1.1 | ) | | — |
|
| Total recognized in net periodic benefit cost (income) and OCI | $ | (2.8 | ) | | $ | 4.3 |
| | $ | 37.6 |
| | $ | 25.1 |
| | $ | 23.6 |
| | $ | 50.0 |
|
The estimatedDuring 2020 the pension plans experienced a loss on liability mainly due to the decrease in discount rates from the prior service credityear. A change in the mortality assumption for the defined benefitU.S. pension plans that willto better reflect anticipated future experience also contributed to the loss. The loss was partially offset due to return on assets greater than expected and salary increases during the year less than expected.
The tables below present the funded status of U.S. and non-U.S. pension plans.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Funded Status of U.S. Pension Plans | Fully-Funded U.S. Qualified
Pension Plans(1) | | Underfunded U.S.
Qualified Pension Plans(1) | | Unfunded Pay-As-You-Go
U.S. Nonqualified Plans(2) |
| (In millions) | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 |
| Projected benefit obligation | $ | 36.5 | | | $ | 35.6 | | | $ | 1,076.3 | | | $ | 993.8 | | | $ | 109.9 | | | $ | 108.3 | |
| Fair value of plan assets | 47.9 | | | 44.1 | | | 952.8 | | | 911.5 | | | — | | | — | |
| Funded status (PBO basis) | $ | 11.4 | | | $ | 8.5 | | | $ | (123.5) | | | $ | (82.3) | | | $ | (109.9) | | | $ | (108.3) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Funded Status of Non-U.S. Pension Plans | | | Underfunded Non-U.S.
Pension Plans(1) | | Unfunded Pay-As-You-Go
Non-U.S. Pension Plans(2) |
| (In millions) | | | | | 2020 | | 2019 | | 2020 | | 2019 |
| Projected benefit obligation | | | | | $ | 33.5 | | | $ | 29.0 | | | $ | 426.5 | | | $ | 340.2 | |
| Fair value of plan assets | | | | | 28.7 | | | 25.2 | | | — | | | — | |
| Funded status (PBO basis) | | | | | $ | (4.8) | | | $ | (3.8) | | | $ | (426.5) | | | $ | (340.2) | |
(1)Plans intended to be amortized from “accumulatedadvance-funded.
(2)Plans intended to be pay-as-you-go. The U.S. unfunded plans are Grace’s supplemental executive retirement plan and other comprehensive (income) loss” into net periodic benefit cost (income) oversupplemental executive pension arrangements, and the next fiscal year is $0.6 million.non-U.S. plans primarily relate to an unfunded German pension plan.
|
| | | | | | | | | | | | | | | | | | | | | | | |
Funded Status of U.S. Pension Plans (In millions) | Fully-Funded U.S. Qualified Pension Plans(1) | | Underfunded U.S. Qualified Pension Plans(1) | | Unfunded Pay-As-You-Go U.S. Nonqualified Plans(2) |
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| Projected benefit obligation | $ | 32.4 |
| | $ | — |
| | $ | 897.6 |
| | $ | 1,217.1 |
| | $ | 97.1 |
| | $ | 108.5 |
|
| Fair value of plan assets | 38.1 |
| | — |
| | 833.0 |
| | 1,109.8 |
| | — |
| | — |
|
| Funded status (PBO basis) | $ | 5.7 |
| | $ | — |
| | $ | (64.6 | ) | | $ | (107.3 | ) | | $ | (97.1 | ) | | $ | (108.5 | ) |
Notes to Consolidated Financial Statements (Continued)
8. Pension Plans and Other Retirement Plans (Continued)
|
| | | | | | | | | | | | | | | |
Funded Status of Non-U.S. Pension Plans (In millions) | Underfunded Non-U.S. Pension Plans(1) | | Unfunded Pay-As-You-Go Non-U.S. Pension Plans(2) |
| 2018 | | 2017 | | 2018 | | 2017 |
| Projected benefit obligation | $ | 22.7 |
| | $ | 24.7 |
| | $ | 282.9 |
| | $ | 298.4 |
|
| Fair value of plan assets | 19.5 |
| | 21.5 |
| | — |
| | — |
|
| Funded status (PBO basis) | $ | (3.2 | ) | | $ | (3.2 | ) | | $ | (282.9 | ) | | $ | (298.4 | ) |
| |
(1) | Plans intended to be advance-funded. |
| |
(2) | Plans intended to be pay-as-you-go. |
The accumulated benefit obligation for all defined benefit pension plans was approximately $1,263$1,590 million and $1,570$1,423 million as of December 31, 20182020 and 2017,2019, respectively.
The following table presents the funded status of defined benefit pension plans that are underfunded or unfunded on an accumulated benefit obligation basis.
Notes to Consolidated Financial Statements (Continued)
8. Pension Plans and Other Retirement Plans (Continued)
| |
(In millions) | U.S. | | Non-U.S. | | Total |
(In millions) | U.S. | | Non-U.S. | | Total |
| 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 |
| Projected benefit obligation | $ | 994.8 |
| | $ | 1,325.6 |
| | $ | 284.5 |
| | $ | 298.4 |
| | $ | 1,279.3 |
| | $ | 1,624.0 |
| Projected benefit obligation | $ | 1,186.2 | | | $ | 1,102.1 | | | $ | 429.4 | | | $ | 342.1 | | | $ | 1,615.6 | | | $ | 1,444.2 | |
| Accumulated benefit obligation | 960.1 |
| | 1,286.0 |
| | 253.2 |
| | 263.6 |
| | 1,213.3 |
| | 1,549.6 |
| Accumulated benefit obligation | 1,144.2 | | | 1,058.6 | | | 384.0 | | | 306.7 | | | 1,528.2 | | | 1,365.3 | |
| Fair value of plan assets | 833.0 |
| | 1,109.8 |
| | 0.7 |
| | — |
| | 833.7 |
| | 1,109.8 |
| Fair value of plan assets | 952.8 | | | 911.6 | | | 1.3 | | | 0.8 | | | 954.1 | | | 912.4 | |
| | Estimated Expected Future Benefit Payments Including Future Service for the Fiscal Years Ending (In millions) | Pension Plans | | Total Payments | Estimated Expected Future Benefit Payments Including Future Service for the Fiscal Years Ending
(In millions) | Pension Plans | | Total
Payments |
| U.S. | | Non-U.S.(1) | | U.S. | | Non-U.S.(1) | |
Benefit Payments | | Benefit Payments | | Benefit
Payments | | Benefit
Payments | |
| 2019 | $ | 72.1 |
| | $ | 8.5 |
| | $ | 80.6 |
| |
| 2020 | 71.9 |
| | 8.4 |
| | 80.3 |
| |
| 2021 | 71.9 |
| | 8.6 |
| | 80.5 |
| 2021 | $ | 84.5 | | | $ | 9.7 | | | $ | 94.2 | |
| 2022 | 72.2 |
| | 8.8 |
| | 81.0 |
| 2022 | 77.5 | | | 9.4 | | | 86.9 | |
| 2023 | 71.7 |
| | 9.1 |
| | 80.8 |
| 2023 | 76.4 | | | 9.6 | | | 86.0 | |
| 2024 - 2028 | 349.9 |
| | 50.0 |
| | 399.9 |
| |
| 2024 | | 2024 | 76.0 | | | 10.1 | | | 86.1 | |
| 2025 | | 2025 | 74.2 | | | 10.2 | | | 84.4 | |
| 2026 - 2030 | | 2026 - 2030 | 348.6 | | | 60.5 | | | 409.1 | |
| |
(1) | Non-U.S. estimated benefit payments for 2019 and future periods have been translated at the applicable December 31, 2018, exchange rates. |
(1)Non-U.S. estimated benefit payments for 2021 and future periods have been translated at the applicable December 31, 2020, exchange rates.
Discount Rate Assumption 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 overall market interest rates. For the U.S. qualified pension plans, the assumed weighted average discount rate of 4.22%2.41% as of December 31, 2018,2020, 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.
As of December 31, 20182020 and 2017,2019, the German pension plans represented approximately 92% and 91%, respectively, of the benefit obligation of the non-U.S. pension plans. The assumed weighted average discount rate as of December 31, 2018,2020, for Germany (2.05%)of 0.70% was selected by Grace, in consultation with its independent actuaries, based on a yield curve constructed from a portfolio of euro-denominated high quality bonds for which the timing and amount of cash outflows approximate the estimated payouts of the plans. The assumed discount rates for the remaining non-U.S. pension plans were determined based on the nature of the liabilities, local economic environments and available bond indices.
Notes to Consolidated Financial Statements (Continued)
8. Pension Plans and Other Retirement Plans (Continued)
Investment Guidelines for Advance-Funded Pension Plans The investment goal for the U.S. qualified pension plans subject to advance funding is to earn a long-term rate of return consistent with the related cash flow profile of the underlying benefit obligation. The plans are pursuing a well-defined risk management strategy designed to reduce investment risks as their funded status improves.
The U.S. qualified pension plans have adopted a diversified set of portfolio management strategies to optimize the risk reward profile of the plans:
•Liability hedging portfolio: primarily invested in intermediate-term and long-term investment grade corporate bonds in actively managed strategies.
•Return-seeking portfolio: invested in a diversified set of assets designed to deliver performance in excess of the underlying liabilities with controls regarding the level of risk.
U.S. equity securities:◦Global public equities: the portfolio contains both domestic U.S. and non-U.S. equities that are both passively managed to theand actively managed. Benchmarks for individual managers include S&P 500 and Russell 2000 benchmarks and an allocation to an active portfolio benchmarked to the Russell Mid-Cap and Russell 2000 indices.
Non-U.S. equity securities: the portfolio contains non-U.S. equities in an actively managed strategy benchmarked to theas well as MSCI ACWI ex US index. Currency futures
Notes to Consolidated Financial Statements (Continued)
8. Pension Plans and forward contracts may be held for the sole purpose of hedging existing currency risk in the portfolio.Other Retirement Plans (Continued)
◦Other investments: may include (a) high yield bonds: fixed income portfolio of securities below investment grade including up to 30% of the portfolio in non-U.S. issuers; and (b) global real estate securities: portfolio of diversified REIT and other liquid real estate related securities.issuers. These portfolios combine income generation and capital appreciation opportunities from developed markets globally.
•Liquidity portfolio: invested in short-term assets intended to pay periodic plan benefits and expenses.
For 2018,2020, the expected long-term rate of return on assets for the U.S. qualified pension plans was 5.25%. Average annual returns over one-, three-, five-, and ten-year periods were approximately (3)%13%, 6%9%, 5%10%, and 8%, respectively.
The expected return on plan assets for the U.S. qualified pension plans for 20182020 was selected by Grace, in consultation with its independent actuaries, using an expected return model. The model determines the weighted average return for an investment portfolio based on the target asset allocation and expected future returns for each asset class, which were developed using a building block approach based on observable inflation, available interest rate information, current market characteristics, and historical results.
The target allocation of investment assets at December 31, 2018,2020, and the actual allocation at December 31, 20182020 and 2017,2019, for Grace’s U.S. qualified pension plans are as follows:
|
| | | | | | | | |
| | Target Allocation | | Percentage of Plan Assets December 31, |
| U.S. Qualified Pension Plans Asset Category | 2018 | | 2018 | | 2017 |
| U.S. equity securities | 9 | % | | 8 | % | | 11 | % |
| Non-U.S. equity securities | 4 | % | | 4 | % | | 5 | % |
| Short-term debt securities | 4 | % | | 4 | % | | 10 | % |
| Intermediate-term debt securities | 36 | % | | 36 | % | | 32 | % |
| Long-term debt securities | 45 | % | | 46 | % | | 40 | % |
| Other investments | 2 | % | | 2 | % | | 2 | % |
| Total | 100 | % | | 100 | % | | 100 | % |
Notes to Consolidated Financial Statements (Continued)
8. Pension Plans and Other Retirement Plans (Continued)
| | | | | | | | | | | | | | | | | |
| Target
Allocation | | Percentage of Plan Assets
December 31, |
| U.S. Qualified Pension Plans Asset Category | 2020 | | 2020 | | 2019 |
| Global equities | 22 | % | | 23 | % | | 22 | % |
| Multi-asset credit | 3 | % | | 3 | % | | 3 | % |
| Liability-hedging assets | 75 | % | | 74 | % | | 75 | % |
| | | | | |
| | | | | |
| | | | | |
| Total | 100 | % | | 100 | % | | 100 | % |
The following tables present the fair value hierarchy for the U.S. qualified pension plan assets measured at fair value as of December 31, 20182020 and 2017.2019.
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements at December 31, 2020, Using |
(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) |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Common/collective trust funds | $ | 8.1 | | | $ | — | | | $ | 8.1 | | | $ | — | |
| Annuity and immediate participation contracts | 21.1 | | | — | | | 21.1 | | | — | |
| $ | 29.2 | | | $ | — | | | $ | 29.2 | | | $ | — | |
| Investments measured at net asset value(1) | 971.5 | | | | | | | |
| Total Assets at Fair Value | $ | 1,000.7 | | | | | | | |
(1)In accordance with ASC 820-10, certain investments that are measured at net asset value (“NAV”) per share (or its equivalent) have not been classified in the fair value hierarchy. NAV is provided by the investment account manager as a practical expedient to estimate fair value. Fair values presented in the table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the Consolidated Balance Sheets.
Notes to Consolidated Financial Statements (Continued)
8. Pension Plans and Other Retirement Plans (Continued)
| | | | Fair Value Measurements at December 31, 2019, Using |
(In millions) | |
(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) |
| | | | Fair Value Measurements at December 31, 2018, Using | |
(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) | |
| | Common/collective trust funds | $ | 10.5 |
| | $ | — |
| | $ | 10.5 |
| | $ | — |
| Common/collective trust funds | $ | 8.0 | | | $ | — | | | $ | 8.0 | | | $ | — | |
| Annuity and immediate participation contracts | 19.8 |
| | — |
| | 19.8 |
| | — |
| Annuity and immediate participation contracts | 20.5 | | | — | | | 20.5 | | | — | |
| | $ | 30.3 |
| | $ | — |
| | $ | 30.3 |
| | $ | — |
| | $ | 28.5 | | | $ | — | | | $ | 28.5 | | | $ | — | |
| Investments measured at net asset value(1) | 840.8 |
| | | | | | | Investments measured at net asset value(1) | 927.2 | | | | | | | |
| Total Assets at Fair Value | $ | 871.1 |
| | | | | | | Total Assets at Fair Value | $ | 955.7 | | |
| |
(1) | In accordance with ASC 820-10, certain investments that are measured at net asset value (“NAV”) per share (or its equivalent) have not been classified in the fair value hierarchy. NAV is provided by the investment account manager as a practical expedient to estimate fair value. Fair values presented in the table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the Consolidated Balance Sheets. |
(1)In accordance with ASC 820-10, certain investments that are measured at NAV per share (or its equivalent) have not been classified in the fair value hierarchy. NAV is provided by the investment account manager as a practical expedient to estimate fair value. Fair values presented in the table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the Consolidated Balance Sheets.
|
| | | | | | | | | | | | | | | |
| | Fair Value Measurements at December 31, 2017, Using |
(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) |
| Common/collective trust funds | $ | 10.2 |
| | $ | — |
| | $ | 10.2 |
| | $ | — |
|
| Annuity and immediate participation contracts | 19.0 |
| | — |
| | 19.0 |
| | — |
|
| | $ | 29.2 |
| | $ | — |
| | $ | 29.2 |
| | $ | — |
|
| Investments measured at net asset value(1) | 1,080.6 |
| | | | | | |
| Total Assets at Fair Value | $ | 1,109.8 |
| | | | | | |
| |
(1) | In accordance with ASC 820-10, certain investments that are measured at NAV per share (or its equivalent) have not been classified in the fair value hierarchy. NAV is provided by the investment account manager as a practical expedient to estimate fair value. Fair values presented in the table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the Consolidated Balance Sheets. |
Non-U.S. pension plans accounted for approximately 2%3% of total global pension assets at December 31, 20182020 and 2017.2019. Each of these plans, where applicable, follows local requirements and regulations. Some of the local requirements include the establishment of a local pension committee, a formal statement of investment policy and procedures, and routine valuations by plan actuaries.
The target allocation of investment assets for non-U.S. pension plans varies depending on the investment goals of the individual plans. The plan assets of the Canadian pension plan represent approximately 96%95% and 97%96% of the total non-U.S. pension plan assets at December 31, 20182020 and 2017, respectively.2019, respectively The expected long-term rate of return on assets for the Canadian pension plan was 4.75%4.25% for 2018.2020.
The target allocation of investment assets at December 31, 2018,2020, and the actual allocation at December 31, 20182020 and 2017,2019, for the Canadian pension plan are as follows:
Notes to Consolidated Financial Statements (Continued)
8. Pension Plans and Other Retirement Plans (Continued)
| | | | Target Allocation | | Percentage of Plan Assets December 31, | | Target
Allocation | | Percentage of Plan Assets
December 31, |
| Canadian Pension Plan Asset Category | 2018 | | 2018 | | 2017 | Canadian Pension Plan Asset Category | 2020 | | 2020 | | 2019 |
| Equity securities | 27 | % | | 28 | % | | 28 | % | Equity securities | 23 | % | | 25 | % | | 25 | % |
| Bonds | 58 | % | | 58 | % | | 58 | % | Bonds | 65 | % | | 63 | % | | 62 | % |
| Other investments | 15 | % | | 14 | % | | 14 | % | Other investments | 12 | % | | 12 | % | | 13 | % |
| Total | 100 | % | | 100 | % | | 100 | % | Total | 100 | % | | 100 | % | | 100 | % |
The plan assets of the other country plans represent approximately 4%5% and 3%4% in the aggregate of total non-U.S. pension plan assets at December 31, 20182020 and 2017,2019, respectively.
Notes to Consolidated Financial Statements (Continued)
8. Pension Plans and Other Retirement Plans (Continued)
The following table presentstables present the fair value hierarchy for the non-U.S. pension plan assets measured at fair value as of December 31, 20182020 and 2017.2019.
| | | | Fair Value Measurements at December 31, 2018, Using | | Fair Value Measurements at December 31, 2020, Using |
| (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) | (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) |
| | Corporate bonds | $ | 0.4 |
| | $ | — |
| | $ | 0.4 |
| | $ | — |
| Corporate bonds | $ | 0.5 | | | $ | — | | | $ | 0.5 | | | $ | — | |
| Insurance contracts and other investments | 0.4 |
| | — |
| | 0.4 |
| | — |
| Insurance contracts and other investments | 0.5 | | | — | | | 0.5 | | | — | |
| Cash | 0.1 |
| | 0.1 |
| | — |
| | — |
| Cash | 0.2 | | | 0.2 | | | — | | | — | |
| | $ | 0.9 |
| | $ | 0.1 |
|
| $ | 0.8 |
| | $ | — |
| | $ | 1.2 | | | $ | 0.2 | | | $ | 1.0 | | | $ | — | |
| Investments measured at net asset value(1) | 18.6 |
| | | | | | | Investments measured at net asset value(1) | 27.5 | | | | | | | |
| Total Assets at Fair Value | $ | 19.5 |
| | | | | | | Total Assets at Fair Value | $ | 28.7 | | |
| |
(1) | In accordance with ASC 820-10, certain investments that are measured at NAV per share (or its equivalent) have not been classified in the fair value hierarchy. NAV is provided by the investment account manager as a practical expedient to estimate fair value. Fair values presented in the table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the Consolidated Balance Sheets. |
(1)In accordance with ASC 820-10, certain investments that are measured at NAV per share (or its equivalent) have not been classified in the fair value hierarchy. NAV is provided by the investment account manager as a practical expedient to estimate fair value. Fair values presented in the table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the Consolidated Balance Sheets. | | | | Fair Value Measurements at December 31, 2017, Using | | Fair Value Measurements at December 31, 2019, Using |
| (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) | (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) |
| | Corporate bonds | $ | 0.4 |
| | $ | — |
| | $ | 0.4 |
| | $ | — |
| Corporate bonds | $ | 0.4 | | | $ | — | | | $ | 0.4 | | | $ | — | |
| Insurance contracts and other investments | 0.3 |
| | — |
| | 0.3 |
| | — |
| Insurance contracts and other investments | 0.5 | | | — | | | 0.5 | | | — | |
| Cash | | Cash | 0.1 | | | 0.1 | | | — | | | — | |
| | $ | 0.7 |
| | $ | — |
| | $ | 0.7 |
| | $ | — |
| | $ | 1.0 | | | $ | 0.1 | | | $ | 0.9 | | | $ | — | |
| Investments measured at net asset value(1) | 20.8 |
| | | | | | | Investments measured at net asset value(1) | 24.2 | | | | | | | |
| Total Assets at Fair Value | $ | 21.5 |
| | | | | | | Total Assets at Fair Value | $ | 25.2 | | |
| |
(1) | In accordance with ASC 820-10, certain investments that are measured at NAV per share (or its equivalent) have not been classified in the fair value hierarchy. NAV is provided by the investment account manager as a practical expedient to estimate fair value. Fair values presented in the table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the Consolidated Balance Sheets. |
(1)In accordance with ASC 820-10, certain investments that are measured at NAV per share (or its equivalent) have not been classified in the fair value hierarchy. NAV is provided by the investment account manager as a practical expedient to estimate fair value. Fair values presented in the table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the Consolidated Balance Sheets.
Plan Contributions and Funding 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. Based on
Notes to Consolidated Financial Statements (Continued)
8. Pension Plans and Other Retirement Plans (Continued)
the U.S. qualified pension plans’ status as of December 31, 2018,2020, there is a $0.1$0.5 million minimum required payment under ERISA for 2019.2021.
Grace intends to fund non-U.S. pension plans based on applicable legal requirements and actuarial and trustee recommendations. Grace expects to contributemake contributions of approximately $9$10 million related to its non-U.S. pension plans in 2019.2021.
Notes to Consolidated Financial Statements (Continued)
9. Other Balance Sheet Accounts
|
| | | | | | | |
| | December 31, |
| (In millions) | 2018 | | 2017 |
| Other Current Liabilities | | | |
| Accrued compensation | $ | 62.4 |
| | $ | 60.7 |
|
| Deferred revenue (see Note 17) | 40.6 |
| | 19.5 |
|
| Environmental contingencies (see Note 10) | 19.5 |
| | 23.5 |
|
| Pension liabilities (see Note 8) | 14.7 |
| | 15.0 |
|
| Accrued interest (see Note 5) | 13.3 |
| | 16.5 |
|
| Income taxes payable (see Note 7) | 11.3 |
| | 12.2 |
|
| Other accrued liabilities | 81.7 |
| | 70.4 |
|
| | $ | 243.5 |
| | $ | 217.8 |
|
| | | | | | | | | | | |
| December 31, |
| (In millions) | 2020 | | 2019 |
| Other Current Assets | | | |
| Non-trade accounts receivable | $ | 23.1 | | | $ | 24.1 | |
| Income taxes receivable (see Note 7) | 7.6 | | | 4.2 | |
| Fair value of currency, interest rate, and commodity contracts (see Note 6) | 2.2 | | | 15.6 | |
| Plant under construction—unconsolidated affiliate (see Note 19) | 0 | | | 173.9 | |
| Other current assets | 18.3 | | | 17.3 | |
| $ | 51.2 | | | $ | 235.1 | |
| | | | | | | | | | | |
| December 31, |
| (In millions) | 2020 | | 2019 |
| Other Current Liabilities | | | |
| Accrued compensation | $ | 60.6 | | | $ | 53.6 | |
| Deferred revenue (see Note 17) | 33.8 | | | 35.0 | |
| Fair value of currency, interest rate, and commodity contracts (see Note 6) | 21.6 | | | 2.6 | |
| Liability for dam spillway replacement (see Note 10) | 20.3 | | | 4.7 | |
| Pension liabilities (see Note 8) | 15.7 | | | 14.8 | |
| Environmental contingencies (see Note 10) | 13.8 | | | 17.8 | |
| Operating lease liabilities (see Note 3) | 10.1 | | | 9.3 | |
| Accrued interest (see Note 5) | 5.8 | | | 13.3 | |
| Income taxes payable (see Note 7) | 5.1 | | | 8.6 | |
| Liability to unconsolidated affiliate for plant under construction (see Note 19) | 0 | | | 173.9 | |
| Other accrued liabilities | 95.1 | | | 86.1 | |
| $ | 281.9 | | | $ | 419.7 | |
Accrued compensation includes salaries and wages as well as estimated current amounts due under the annual and long-term incentive programs.
| | | | | | | | | | | |
| December 31, |
| (In millions) | 2020 | | 2019 |
| Other Liabilities | | | |
| Environmental contingencies (see Note 10) | $ | 95.4 | | | $ | 97.5 | |
| Liability for dam spillway replacement (see Note 10) | 69.3 | | | 61.7 | |
| Fair value of currency and interest rate contracts (see Note 6) | 53.9 | | | 13.2 | |
| Operating lease liabilities (see Note 3) | 25.8 | | | 26.2 | |
| Legacy product liability (see Note 10) | 24.0 | | | 24.0 | |
| Deferred revenue (see Note 17) | 23.4 | | | 29.5 | |
| Retained obligations of divested businesses | 12.2 | | | 12.7 | |
| Deferred income taxes (see Note 7) | 10.4 | | | 7.5 | |
| Asset retirement obligation | 9.6 | | | 9.4 | |
| Unrecognized tax benefits (see Note 7) | 3.9 | | | 4.1 | |
| Other noncurrent liabilities | 19.7 | | | 22.4 | |
| $ | 347.6 | | | $ | 308.2 | |
|
| | | | | | | |
| | December 31, |
| (In millions) | 2018 | | 2017 |
| Other Liabilities | | | |
| Environmental contingencies (see Note 10) | $ | 106.9 |
| | $ | 46.8 |
|
| Liability to unconsolidated affiliate (see Note 19) | 98.8 |
| | 32.7 |
|
| Fair value of currency and interest rate contracts (see Note 6) | 32.6 |
| | 22.7 |
|
| Deferred revenue (see Note 17) | 29.2 |
| | 14.9 |
|
| Deferred income taxes (see Note 7) | 10.9 |
| | 8.2 |
|
| Asset retirement obligation | 8.8 |
| | 10.4 |
|
| Postemployment liability | 4.7 |
| | 5.2 |
|
| Other noncurrent liabilities | 27.9 |
| | 28.4 |
|
| | $ | 319.8 |
| | $ | 169.3 |
|
Notes to Consolidated Financial Statements (Continued)
10. Commitments and Contingent Liabilities
Legacy LiabilitiesMatters
Over the years, Grace operated numerous types of businesses that are no longer part of its ongoing operations. As Grace divested or otherwise ceased operating these businesses, it retained certain liabilities and obligations, which Grace refers to as legacy liabilities. These liabilities include product, environmental, and other liabilities. Although the outcome of each of the matters discussed below cannot be predicted with certainty, Grace has assessed its risk and has made accounting estimatesrecorded estimated liabilities as required under U.S. GAAP.
Legacy Product Liabilities Grace emerged from an asbestos-related Chapter 11 bankruptcy on February 3, 2014 (the “Effective Date”). Under its plan of reorganization, all pending and future asbestos-related
Notes to Consolidated Financial Statements (Continued)
10. Commitments and Contingent Liabilities (Continued)
claims are channeled for resolution to either a personal injury trust (the “PI Trust”) or a property damage trust (the “PD Trust”). The trusts are the sole recourse for holders of asbestos-related claims. The channeling injunctions issued by the bankruptcy court prohibit holders of asbestos-related claims from asserting such claims directly against Grace.
Grace has satisfied all of its financial obligations to the PI Trust. Grace has contingent financial obligations remaining to the PD Trust. With respect to property damage claims related to Grace’s former Zonolite attic insulation product installed in the U.S. (“ZAI PD Claims”), the PD Trust was funded with $34.4$49.4 million on the Effective Date(net of $15 million of attorneys’ fees) to pay claims and $30.0 million on February 3, 2017.expenses. Grace is also obligated to make up to 10 contingent deferred payments of $8 million per year to the PD Trust in respect of ZAI PD Claims during the 20-year period beginning on the fifth anniversary of the Effective Date,February 3, 2019, with each such payment due only if the assets of the PD Trust in respect of ZAI PD Claims fall below $10 million during the preceding year. As of December 31, 2018, Grace has evaluated the activity in the PD Trust with respect to ZAI PD Claims and other trust expenses. Through December 31, 2018,2020, the PD Trust has paid out approximately $15$38 million in ZAI PD Claims and expenses, leaving a balance of approximately $6$18 million, in operatingincluding the benefit of realized investment gains.
Due to the limited claims history, the unique nature of this product, and education expenses, and approximately $15 million in one-time attorneys’ fees. The PD Trust balancethe uncertainty of future claims patterns, an actuarial analysis was approximately $30 million as of December 31, 2018. Grace expects ZAI PD Claims payments to decline over time but has limited informationcompleted to estimate the amountrange of possible future payments. The analysis was conducted by a third-party actuarial firm directed by Grace and timingusing historical claims data provided by the ZAI trustee. Certain key assumptions employed in the analysis were (1) projections of the future number of filed claims, assuming a percentage increase in claims during earlier years and annual decreases in later years; (2) application of historical percentages of claims closed with indemnity payment compared to total closed claims, applied on a regional basis; and (3) application of the average claim payout, which reflects the average indemnity cost per claim closing with payment. As a result of the analysis and taking into account the relative uncertainty of future claims payments. It isactivity, Grace determined that contingent funding obligations beyond 2025 are not reasonably possible that one or more contingent deferred payments will be made in the future.estimable. Grace estimates that the present valuereasonable range of reasonably possible future payments over the period of 2021 to range2025 is expected to be between $0$16 million and $20 million.$24 million and projects that the first payment could be due as early as 2022. In the 2019 fourth quarter, Grace has not accrued for any contingent deferred payments as it does not believe that payment is probable. Grace will continuerecorded a $24.0 million liability related to evaluate new information as it becomes available and will revise its estimate of the amount and timing ofprobable future claims payments and any contingent deferred payments at that time. Grace is not obligatedobligations to make additional payments tofund the PD Trust in respect offor ZAI PD Claims beyondClaims. Grace’s maximum financial obligation over the payments described above. Grace has satisfied all of its financial obligations with respect to Canadian ZAI PD Claims.next 18 years is $80.0 million, and no single year’s payment can exceed $8.0 million.
With respect to other asbestos property damage claims (“Other PD Claims”), claims unresolved as of the Effective Date are to be litigated in the bankruptcy court and any future claims are to be litigated in a federal district court, in each case pursuant to procedures approved by the bankruptcy court. To the extent any such Other PD Claims are determined to be allowed claims, they are to be paid in cash by the PD Trust. Grace is obligated to make a payment to the PD Trust every six months in the amount of any Other PD Claims allowed during the preceding six months plus interest (if applicable) and the amount of PD Trust expenses for the preceding six months (the “PD Obligation”). Grace has not paid any Other PD Claims since emergence. Annual expenses have been approximately $0.2 million per year. The aggregate amount to be paid under the PD Obligation is not capped, and Grace may be obligated to make additional payments to the PD Trust in respect of the PD Obligation. Grace has accrued for those unresolved Other PD Claims that it believes are probable and estimable. Grace has not accrued for other unresolved or unasserted Other PD Claims as it does not believe that payment is probable.
All payments to the PD Trust required after the Effective Date are secured by the Company’s obligation to issue 77,372,257 shares of Company common stock to the PD Trust in the event of default, subject to customary anti-dilution provisions.
Notes to Consolidated Financial Statements (Continued)
10. Commitments and Contingent Liabilities (Continued)
This summary of the commitments and contingencies related to the Chapter 11 proceeding does not purport to be complete and is qualified in its entirety by reference to the plan of reorganization and the exhibits and documents related thereto, which have been filed with the SEC and are readily available on the internet at www.sec.gov.
Legacy Environmental Liabilities Grace is subject to loss contingencies resulting from extensive and evolving federal, state, local and foreign environmental laws and regulations relating to its manufacturing operations. Grace has procedures in place to minimize such contingencies; nevertheless, it has liabilities associated with past operations and additional claims may arise in the future.future, which may be material. To address its legacy liabilities, Grace accrues for anticipated costs of response 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.
Notes to Consolidated Financial Statements (Continued)
10. Commitments and Contingent Liabilities (Continued)
Grace’s environmental liabilities are reassessed regularly and adjusted when circumstances become better defined or response efforts and their costs can be better estimated, typically as a matter moves through the life-cycle of environmental investigation and remediation. These liabilities are evaluated based on currently available information relating to the nature and extent of contamination, risk assessments, feasibility of response actions, and apportionment amongst other potentially responsible parties, all evaluated in light of prior experience.
At December 31, 2018,2020, Grace’s estimated liability for legacy environmental response costs totaled $126.4$109.2 million, compared with $70.3$115.3 million at December 31, 2017,2019, and was included in “other current liabilities” and “other liabilities” in the Consolidated Balance Sheets. These amounts are based on agreements in place or on Grace’s estimate of costs where no formal remediation plan or agreement to pay exists, yet there is sufficient information to estimate response costs.
Grace recorded pre-tax charges of $73.8$1.6 million, $24.4$1.7 million, and $29.2$73.8 million for legacy environmental matters in 2018, 2017,2020, 2019, and 2016,2018, respectively, which is included in “provision for environmental remediation”“costs related to legacy matters” in the Consolidated Statements of Operations.
Vermiculite-Related Matters
Grace purchased a vermiculite mine in Libby, Montana, in 1963 and operated it until 1990. Vermiculite concentrate from the Libby mine was used in the manufacture of attic insulation and other products. Some of the vermiculite ore contained naturally occurring asbestos.
Grace is engaged with the U.S. Environmental Protection Agency (the “EPA”) and other federal, state and local governmental agencies in a remedial investigation and feasibility study (“RI/FS”) of the Libby mine and the surrounding area, known as Operable Unit 3 (“OU3”). The RI/FS will determinestudy the specific areas within OU3 requiring remediation and will identify possible remedial action alternatives. Possible remedial actions within OU3 are wide-ranging, from institutional controls such as land use restrictions, to more active measures involving soil removal, containment projects, or other protective measures.
Grace accrued $70.2 million, $9.5 million, and $24.8 million in 2018, 2017, and 2016, respectively, for future costs related to vermiculite-related matters.
As part of the RI/FS process, Grace contracted an engineering and consulting firm to develop a range of possible remedial alternatives and associated cost estimates for OU3. Based on this work, Grace recorded a pre-tax charge of $70.0 million induring the three months ended September 30, 2018, third quarter for the estimated costs of remediation of OU3. Grace believes that this amount should provide for a protective remedy meeting the statutory requirements of the Comprehensive Environmental Response, Compensation, and Liability Act.
The estimated costs of remediation are preliminary and consist of several components, each of which may vary significantly as the remedial alternatives are further developed. It is reasonably possible that the ultimate costs of remediation could range between $30 million and $170 million. Grace is working closely with the EPA, and the ultimate remedy will be determined by the EPA after the RI/FS is finalized. Such remedy will be set forth in a Record of Decision (“ROD”) that is currently expected to be issued by the EPA during or after 2020.no earlier than 2024. Costs associated with the more active remedial alternatives would be expected to be incurred over a decade or more. Grace will reevaluate its estimated liability as remedial alternatives evolve based on further work by the engineering and consulting firm and discussions with the EPA as the RI/FS process moves toward a ROD. Technical memoranda expected prior to the issuance of the ROD may provide insight into the likely remedial
Notes to Consolidated Financial Statements (Continued)
10. Commitments and Contingent Liabilities (Continued)
alternatives ultimately selected, allowing Grace to update its cost of remediation estimate. Depending on the remedial alternatives that the EPA selects in the ROD, the total cost of remediating OU3 may exceed Grace’s current estimate by material amounts. The amounts set forth above do not include possible liability for natural resources damage. Based on ecological studies conducted by the EPA, Grace does not believe that natural resources damage has occurred. However, if a party were to be successful in asserting a natural resources damage claim, liability related to such obligation could be material.
TheGrace has cooperated with the EPA is alsoin investigating orand remediating a number of formerly owned or operated sites that processed Libby vermiculite into finished products. Grace is cooperating with the EPA on these investigation and remediation activities and has recorded a liability to the extent that itsfor remaining expected response costs, including costs for EPA oversight and potential future site remediation, where a review has indicated that aliability is probable liability has been incurred and the cost is estimable. These liabilities cover the estimated cost of investigations and, to the extent an assessment has indicated that remediation is necessary, the estimated cost of response actions. Response actions typically involve soil excavation and removal, and replacement with clean fill. The EPA may commence additional investigations in the future at other sites that processed Libby vermiculite,vermiculite. Liability for unaccrued additional investigation and remediation costs is probable but not yet estimable, and could be material.
Grace does not believe,
Notes$0.1 million, $0.0 million, and $70.2 million in 2020, 2019, and 2018, respectively, for future costs related to Consolidated Financial Statements (Continued)
10. Commitments and Contingent Liabilities (Continued)
based on its knowledge of prior and current operations and site conditions, that liability for remediation at such other sites is probable.
vermiculite-related matters. Grace’s total estimated liability for response costs that are currently estimable for the Libby mineOU3 and surrounding area, and at vermiculite processing sites outside of Libby at December 31, 20182020 and 2017, was $81.72019, totaled $71.2 million and $25.8$76.0 million,, respectively. It is possible that Grace’s ultimate liability for these vermiculite-related matters will exceed current estimates by material amounts.
Non-Vermiculite-Related Environmental Matters
During 2018, Grace accruedrecorded pre-tax charges of $1.5 million, $1.7 million, and $3.6 million to increase non-vermiculite environmental reserves. During 2017, Grace accrued $14.9 million to increase non-vermiculitenon-vermiculite-related environmental reserves including $7.2 million for ten years of operationin 2020, 2019, and maintenance expenses following remediation at a former manufacturing site.2018, respectively. At December 31, 2018 and 2017,2020, Grace’s estimated legacy environmental liability for response costs at sites not related to its former vermiculite mining and processing activities was $44.7totaled $38.0 million, and $44.5compared with $39.3 million respectively.at December 31, 2019. This liability relates to Grace’s former businesses or operations, including its share of liability at off-site disposal facilities. Grace’s estimated liability is based upon regulatory requirements and environmental conditions at each site. As Grace receives new information, its estimated liability may change materially.
Other Legacy LiabilitiesAs Beginning in 1971, as part of implementing a wet milling process at the process for renewing Grace’s permit forLibby, Montana, vermiculite mine, Grace constructed a dam onat the Libby mine site, which expires in March 2019, the Montana Department of Natural Resources and Conservation is expected to require Grace to replace the dam spillway, which is deteriorating, with a new spillway. Grace constructed the dam in 1971 to preventproperty that now prevents vermiculite ore tailings from moving into nearby creeks and rivers. Based on information provided by third-party consultants, the costOngoing operation of the dam is regulated by the Montana Department of Natural Resources and Conservation (“DNRC”). In April 2019, the DNRC renewed the permit necessary for operation of the dam. Grace is legally obligated to operate the dam and construct a new spillway is estimated to be between $40 million and $45 million. Grace expects to record a liability for this project atin accordance with the time thelatest permit renewal is approved. Grace anticipates that approval of the renewal of such permit will occur in the first quarter of 2019. conditions.
Construction of the new dam spillway at the former mine site is a key element of Grace’s overall remediation strategy. The project includes both an upper spillway and a lower spillway that are being managed as two separate projects with different engineering design and construction timelines. In 2019, Grace contracted a third-party engineering and consulting firm to develop an initial range of cost estimates for the total project. Based on this work, Grace recorded a liability of $68.0 million in 2019 for the estimated costs of the project. These costs were preliminary and subject to change as new information becomes available, including defining the final scope of the projects through the contract bidding process. During the three months ended September 30, 2020, Grace completed a review of contractor bids for the replacement of the upper spillway and increased its cost estimate for this portion of the project by $27.0 million, bringing the estimate for the total project to $95.0 million. Regarding the lower spillway, final engineering will be completed and submitted to the state of Montana for design approval in 2021, after which Grace will seek contract bids for this portion of the project. Grace believes it is reasonably possible that the ultimate costs of the two spillway projects could range between $80 million and $120 million. As Grace receives new information, its estimated liability may change materially. Construction will begin in 2021 and is expected to take three to four years.
Commercial and Financial Commitments and Contingencies
Purchase Commitments Grace uses purchase commitments to ensure supply and to minimize the volatility of major components of direct manufacturing costs including natural gas, certain metals, rare earths, and other materials. Such commitments are for quantities that Grace fully expects to use in its normal operations.
Notes to Consolidated Financial Statements (Continued)
10. Commitments and Contingent Liabilities (Continued)
Guarantees and Indemnification Obligations Grace is a party to many contracts containing guarantees and indemnification obligations. These contracts primarily consist of:
•Product warranties with respect to certain products sold to customers in the ordinary course of business. These warranties typically provide that products will conform to specifications. Grace accrues a warranty liability on a transaction-specific basis depending on the individual facts and circumstances related to each sale.
•Performance guarantees offered to customers under certain licensing arrangements. Grace has not established a liability for these arrangements based on past performance.
•Licenses of intellectual property by Grace to third parties in which Grace has agreed to indemnify the licensee against third party infringement claims.
•Contracts providing for the sale or spin-off of a former business unit or product line in which Grace has agreed to indemnify the buyer or resulting entity against certain liabilities related to activities prior to the closing of the transaction, including environmental, tax, and employee liabilities.
Guarantees•Indemnification obligations of Grace as a tenant of real property leases; and 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.
Notes to Consolidated Financial Statements (Continued)
10. Commitments and Contingent Liabilities (Continued)
Financial Assurances Financial assurances have been established for a variety of purposes, including insurance and environmental matters, trade-related commitments and other matters. At December 31, 2018,2020, Grace had gross financial assurances issued and outstanding of $145.5$141.1 million,, composed of $68.7$77.8 million of surety bonds issued by various insurance companies and $76.8$63.3 million of standby letters of credit and other financial assurances issued by various banks.
11. Restructuring Expenses and Repositioning Expenses
Restructuring Expenses Restructuring expensescosts in 2020 primarily related to an increase in estimated contractual costs related to a 2018 plant exit. Costs in 2019 primarily related to severance costs pertaining to the idling of our methanol-to-olefins (“MTO”) manufacturing facility, which were substantially paid in 2019. Costs in 2018 primarily related to the closure of two smaller2 small manufacturing plants, the activities from which have beenwere moved to larger, more cost-effective plants as part of ourGrace’s strategy to capture synergies from our recent catalysts acquisitions. ExpensesThese costs are included in 2017 primarily related to workforce reduction programs“restructuring and repositioning expenses” in Grace’s manufacturing, supply chain, financethe Consolidated Statements of Operations, and IT functions. Expensesare not included in 2016 primarily related to the exit of certain non-strategic product lines in Materials Technologies.segment operating income.
The following table presents restructuring expenses by reportable segment for the years ended December 31, 2018, 2017,2020, 2019, and 2016.2018.
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| (In millions) | 2020 | | 2019 | | 2018 |
| Catalysts Technologies | $ | 1.8 | | | $ | 1.6 | | | $ | 13.7 | |
| Materials Technologies | 0.1 | | | 1.0 | | | 0.5 | |
| Corporate | 0 | | | 0 | | | (0.2) | |
| Total restructuring expenses | $ | 1.9 | | | $ | 2.6 | | | $ | 14.0 | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| (In millions) | 2018 | | 2017 | | 2016 |
| Catalysts Technologies | $ | 13.7 |
| | $ | 3.7 |
| | $ | 3.4 |
|
| Materials Technologies | 0.5 |
| | (0.1 | ) | | 15.1 |
|
| Corporate | (0.2 | ) | | 7.9 |
| | 5.8 |
|
| Total restructuring expenses | $ | 14.0 |
| | $ | 11.5 |
| | $ | 24.3 |
|
These costs are not included in segment operating income. Substantially all costs related to the restructuring programs are expected to be paid by December 31, 2021,June 30, 2023, but could be paid earlier subject to negotiations around certain plant exit costs.
The following table presents components of the change in the restructuring liability for the years ended December 31, 2018, 2017,2020, 2019, and 2016:2018:
Notes to Consolidated Financial Statements (Continued)
11. Restructuring Expenses and Repositioning Expenses (Continued)
|
| | | |
| (In millions) | Total |
| Balance, December 31, 2015 | $ | 7.6 |
|
| Accruals for severance and other costs | 17.8 |
|
| Payments | (16.0 | ) |
| Currency translation adjustments and other | 0.2 |
|
| Balance, December 31, 2016 | $ | 9.6 |
|
| Accruals for severance and other costs | 11.4 |
|
| Payments | (14.4 | ) |
| Currency translation adjustments and other | 0.1 |
|
| Balance, December 31, 2017 | $ | 6.7 |
|
| Accruals for severance and other costs | 10.1 |
|
| Payments | (6.1 | ) |
| Balance, December 31, 2018 | $ | 10.7 |
|
| | | | | |
| (In millions) | Total |
| Balance, December 31, 2017 | $ | 6.7 | |
| Accruals for severance and other costs | 10.1 | |
| Payments | (6.1) | |
| |
| Balance, December 31, 2018 | $ | 10.7 | |
| Accruals for severance and other costs | 2.6 | |
| Payments | (10.2) | |
| Currency translation adjustments and other | 0.7 | |
| Balance, December 31, 2019 | $ | 3.8 | |
| Accruals for severance and other costs | 3.2 | |
| Payments | (3.1) | |
| |
| Balance, December 31, 2020 | $ | 3.9 | |
Repositioning Expenses Repositioning expenses included in continuing operations for the years ended December 31, 2020, 2019, and 2018 2017,were $35.0 million, $11.1 million, and 2016 were $32.4 million $15.2respectively.
During 2020, Grace implemented changes to its Refining Technologies manufacturing operations and global footprint to drive capital and operating efficiencies and to support global growth. Grace, in agreement with its local joint venture partner, discontinued the previously announced project to build a full-scale fluid catalytic cracking catalysts plant in the Middle East. As a result, repositioning expenses in 2020 included a charge of $19.7 million to write off engineering and $14.3site costs. Repositioning expenses in 2020 also included $7.2 million respectively.in costs related to our review of strategic alternatives.
ExpensesIn 2020, 2019, and 2018, Grace incurred in 2018 primarily include $13.7 million forexpenses related to a multi-year program to transform Grace’s manufacturing and business processes to extend itsGrace’s competitive advantages and improve its cost position,position. Expenses in 2018 also included $11.7 million of severance and stock compensation costs related to employee separations and write-offs of $8.5 million
Notes to Consolidated Financial Statements (Continued)
11. Restructuring Expenses and Repositioning Expenses (Continued)
of previously capitalized plant engineering costs as a result of terminating ana manufacturing plant expansion project no longer necessary due to the polyolefin catalysts acquisition (see Note 20). Expenses incurred in 2017 primarily related to third-party costs associated with productivity and transformation initiatives, as well as costs related to the Separation. Expenses incurred in 2016 primarily related to the Separation. Excluding asset write-offs and stock compensation costs, substantially all of these costs have been or are expected to be settled in cash by December 31, 2019.cash.
12. Other (Income) Expense, net
Components of other (income) expense, net are as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| (In millions) | 2020 | | 2019 | | 2018 |
| Defined benefit pension (income) expense other than service cost | $ | 79.5 | | | $ | 79.9 | | | $ | (27.8) | |
| Business interruption insurance recoveries | (16.3) | | | (10.7) | | | 0 | |
| Hurricane-related costs | 13.2 | | | 0 | | | 0 | |
| Net (gain) loss on sales of investments and disposals of assets | 5.9 | | | 4.5 | | | 4.9 | |
| Third-party acquisition-related costs | 5.2 | | | 3.6 | | | 7.3 | |
| Currency transaction effects | (0.1) | | | (0.8) | | | (3.6) | |
| | | | | |
| Other miscellaneous (income) expense | 1.6 | | | 4.1 | | | (4.0) | |
| Total other (income) expense, net | $ | 89.0 | | | $ | 80.6 | | | $ | (23.2) | |
During 2020, Hurricane Laura caused severe and widespread damage to Lake Charles, Louisiana, and surrounding communities, including catastrophic damage to the regional power grid. The hurricane-related costs were primarily due to on-site power generation, incremental operations and logistics costs to supply customers during the outage, temporary housing and employee assistance, and property damage and clean-up. In addition
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| (In millions) | 2018 | | 2017 | | 2016 |
| Defined benefit pension (income) expense other than service cost | $ | (27.8 | ) | | $ | 38.6 |
| | $ | 48.0 |
|
| Third-party acquisition-related costs | 7.3 |
| | 2.9 |
| | 2.5 |
|
| Loss on early extinguishment of debt | 4.8 |
| | — |
| | 11.1 |
|
| Currency transaction effects | (4.0 | ) | | 5.0 |
| | (1.0 | ) |
| Net (gain) loss on sales of investments and disposals of assets | 2.6 |
| | 1.6 |
| | (1.4 | ) |
| Chapter 11 expenses, net | 2.6 |
| | 1.4 |
| | 3.4 |
|
| Business interruption insurance recoveries | — |
| | (26.6 | ) | | — |
|
| Accounts receivable reserve—Venezuela | — |
| | 10.0 |
| | — |
|
| Other miscellaneous expense (income) | (2.0 | ) | | (2.7 | ) | | (1.2 | ) |
| Total other (income) expense, net | $ | (16.5 | ) | | $ | 30.2 |
| | $ | 61.4 |
|
Notes to Consolidated Financial Statements (Continued)
12. Other (Income) Expense, net (Continued)
to the amount shown above, Grace’s equity in earnings from unconsolidated affiliate was reduced by $1.9 million due to hurricane-related costs incurred by the joint venture.
In January 2017,July 2019, a Catalysts TechnologiesNorth American FCC catalysts customer experienced an explosion andfiled for bankruptcy protection after announcing it would not resume refinery operations following a fire resulting in an extended outage.its refinery. Grace received $25.0$16.3 million in payments from its third-party insurer in 2017during the six months ended June 30, 2020, under its business interruption insurance policy for profits lost as a resultpolicy. Including the $8.0 million received in the 2019 fourth quarter, Grace received $24.3 million of insurance recoveries related to this event, reflecting approximately 8 quarters of the outage. The policyimpact of the incident on earnings. This claim has a $25 million limit per event.been fully resolved.
During the 2017 third quarter, Grace recorded a $10.0 million charge to fully reserve for a trade receivable from a Venezuela-based customer related to increased economic uncertainty and the recent political unrest and sanctions.
See Note 5 for more information related to Grace’s early extinguishments of debt in 2018 and 2016.
13. Other Comprehensive Income (Loss)
The following tables present the pre-tax, tax, and after-tax components of Grace’s other comprehensive income (loss) for the years ended December 31, 2018, 2017,2020, 2019, and 2016:2018:
| | | | | | | | | | | | | | | | | |
Year Ended December 31, 2020
(In millions) | Pre-Tax Amount | | Tax Benefit/ (Expense) | | After-Tax Amount |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Amortization of net prior service credit included in net periodic benefit cost and other costs (credits), net | $ | (0.5) | | | $ | 0.1 | | | $ | (0.4) | |
| Currency translation adjustments | (53.6) | | | 3.7 | | | (49.9) | |
| Gain (loss) from hedging activities | 1.6 | | | (0.8) | | | 0.8 | |
| Other comprehensive income (loss) attributable to W. R. Grace & Co. shareholders | $ | (52.5) | | | $ | 3.0 | | | $ | (49.5) | |
| | | | | | | | | | | | | | | | | |
Year Ended December 31, 2019
(In millions) | Pre-Tax Amount | | Tax Benefit/ (Expense) | | After-Tax Amount |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Amortization of net prior service credit included in net periodic benefit cost and other costs (credits), net | $ | (0.9) | | | $ | 0.2 | | | $ | (0.7) | |
| Currency translation adjustments | 18.5 | | | (2.0) | | | 16.5 | |
| Gain (loss) from hedging activities | (7.0) | | | 2.1 | | | (4.9) | |
| Other comprehensive income (loss) attributable to W. R. Grace & Co. shareholders | $ | 10.6 | | | $ | 0.3 | | | $ | 10.9 | |
| | | | | | | | | | | | | | | | | |
Year Ended December 31, 2018
(In millions) | Pre-Tax Amount | | Tax Benefit/ (Expense) | | After-Tax Amount |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Amortization of net prior service credit included in net periodic benefit cost and other costs (credits), net | $ | (1.2) | | | $ | 0.3 | | | $ | (0.9) | |
| Currency translation adjustments | 34.6 | | | (2.2) | | | 32.4 | |
| Gain (loss) from hedging activities | (10.0) | | | 4.3 | | | (5.7) | |
| Other comprehensive income (loss) attributable to W. R. Grace & Co. shareholders | $ | 23.4 | | | $ | 2.4 | | | $ | 25.8 | |
|
| | | | | | | | | | | |
Year Ended December 31, 2018
(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 | ) | | $ | 0.4 |
| | $ | (1.2 | ) |
| Amortization of net deferred actuarial loss included in net periodic benefit cost | 0.4 |
| | (0.1 | ) | | 0.3 |
|
| Benefit plans, net | (1.2 | ) | | 0.3 |
| | (0.9 | ) |
| Currency translation adjustments | 34.6 |
| | (2.2 | ) | | 32.4 |
|
| Gain (loss) from hedging activities | (10.0 | ) | | 4.3 |
| | (5.7 | ) |
| Other comprehensive income (loss) attributable to W. R. Grace & Co. shareholders | $ | 23.4 |
| | $ | 2.4 |
| | $ | 25.8 |
|
Notes to Consolidated Financial Statements (Continued)
13. Other Comprehensive Income (Loss) (Continued)
|
| | | | | | | | | | | |
Year Ended December 31, 2017
(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 | $ | (2.3 | ) | | $ | 0.8 |
| | $ | (1.5 | ) |
| Amortization of net deferred actuarial loss included in net periodic benefit cost | 0.4 |
| | (0.1 | ) | | 0.3 |
|
| Net deferred actuarial gain (loss) arising during period | (0.1 | ) | | — |
| | (0.1 | ) |
| Benefit plans, net | (2.0 | ) | | 0.7 |
| | (1.3 | ) |
| Currency translation adjustments | (23.1 | ) | | (2.9 | ) | | (26.0 | ) |
| Gain (loss) from hedging activities | 2.9 |
| | (2.1 | ) | | 0.8 |
|
| Other comprehensive income (loss) attributable to W. R. Grace & Co. shareholders | $ | (22.2 | ) | | $ | (4.3 | ) | | $ | (26.5 | ) |
|
| | | | | | | | | | | |
Year Ended December 31, 2016
(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 | $ | (2.4 | ) | | $ | 0.9 |
| | $ | (1.5 | ) |
| Amortization of net deferred actuarial loss included in net periodic benefit cost | 0.5 |
| | (0.2 | ) | | 0.3 |
|
| Net prior service credit arising during period | 1.4 |
| | (0.5 | ) | | 0.9 |
|
| Loss on curtailment of postretirement plans | (0.5 | ) | | 0.2 |
| | (0.3 | ) |
| Benefit plans, net | (1.0 | ) | | 0.4 |
| | (0.6 | ) |
| Currency translation adjustments | (1.8 | ) | | — |
| | (1.8 | ) |
| Gain (loss) from hedging activities | 0.6 |
| | (0.3 | ) | | 0.3 |
|
| Other comprehensive income (loss) attributable to W. R. Grace & Co. shareholders | $ | (2.2 | ) | | $ | 0.1 |
| | $ | (2.1 | ) |
The following table presents the changes in accumulated other comprehensive income (loss), net of tax, for the years ended December 31, 2018, 2017,2020, 2019, and 2016:2018:
|
| | | | | | | | | | | | | | | |
| | Defined Benefit Pension and Other Postretirement Plans | | Currency Translation Adjustments | | Gain (Loss) from Hedging Activities | | Total |
| Balance, December 31, 2015 | $ | 3.0 |
| | $ | (66.1 | ) | | $ | (3.7 | ) | | $ | (66.8 | ) |
| OCI before reclassifications | 0.9 |
| | (1.8 | ) | | (1.8 | ) | | (2.7 | ) |
| Amounts reclassified from accumulated OCI | (1.5 | ) | | — |
| | 2.1 |
| | 0.6 |
|
| Net current-period other comprehensive income (loss) | (0.6 | ) | | (1.8 | ) | | 0.3 |
| | (2.1 | ) |
| Distribution of GCP | (0.2 | ) | | 135.5 |
| | — |
| | 135.3 |
|
| Balance, December 31, 2016 | $ | 2.2 |
| | $ | 67.6 |
| | $ | (3.4 | ) | | $ | 66.4 |
|
| OCI before reclassifications | (0.1 | ) | | (26.0 | ) | | (2.7 | ) | | (28.8 | ) |
| Amounts reclassified from accumulated OCI | (1.2 | ) | | — |
| | 3.5 |
| | 2.3 |
|
| Net current-period other comprehensive income (loss) | (1.3 | ) | | (26.0 | ) | | 0.8 |
| | (26.5 | ) |
| Balance, December 31, 2017 | $ | 0.9 |
| | $ | 41.6 |
| | $ | (2.6 | ) | | $ | 39.9 |
|
| OCI before reclassifications | — |
| | 32.4 |
| | 11.1 |
| | 43.5 |
|
| Amounts reclassified from accumulated OCI | (0.9 | ) | | — |
| | (16.8 | ) | | (17.7 | ) |
| Net current-period other comprehensive income (loss) | (0.9 | ) | | 32.4 |
| | (5.7 | ) | | 25.8 |
|
| Effect of adopting ASU 2018-02 | 0.2 |
| | 2.2 |
| | (0.2 | ) | | 2.2 |
|
| Balance, December 31, 2018 | $ | 0.2 |
| | $ | 76.2 |
| | $ | (8.5 | ) | | $ | 67.9 |
|
Notes to Consolidated Financial Statements (Continued)
13. Other Comprehensive Income (Loss) (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Defined Benefit Pension and Other Postretirement Plans | | Currency Translation Adjustments | | Gain (Loss) from Hedging Activities | | | | | | Total |
| Balance, December 31, 2017 | $ | 0.9 | | | $ | 41.6 | | | $ | (2.6) | | | | | | | $ | 39.9 | |
| OCI before reclassifications | 0 | | | 32.4 | | | 11.1 | | | | | | | 43.5 | |
| Amounts reclassified from accumulated OCI | (0.9) | | | 0 | | | (16.8) | | | | | | | (17.7) | |
| Net current-period other comprehensive income (loss) | (0.9) | | | 32.4 | | | (5.7) | | | | | | | 25.8 | |
| Effect of adopting ASU 2018-02 | 0.2 | | | 2.2 | | | (0.2) | | | | | | | 2.2 | |
| Balance, December 31, 2018 | $ | 0.2 | | | $ | 76.2 | | | $ | (8.5) | | | | | | | $ | 67.9 | |
| OCI before reclassifications | 0 | | | 16.5 | | | 14.0 | | | | | | | 30.5 | |
| Amounts reclassified from accumulated OCI | (0.7) | | | 0 | | | (18.9) | | | | | | | (19.6) | |
| Net current-period other comprehensive income (loss) | (0.7) | | | 16.5 | | | (4.9) | | | | | | | 10.9 | |
| | | | | | | | | | | |
| Balance, December 31, 2019 | $ | (0.5) | | | $ | 92.7 | | | $ | (13.4) | | | | | | | $ | 78.8 | |
| OCI before reclassifications | 0 | | | (49.9) | | | (33.7) | | | | | | | (83.6) | |
| Amounts reclassified from accumulated OCI | (0.4) | | | 0 | | | 34.5 | | | | | | | 34.1 | |
| Net current-period other comprehensive income (loss) | (0.4) | | | (49.9) | | | 0.8 | | | | | | | (49.5) | |
| Balance, December 31, 2020 | $ | (0.9) | | | $ | 42.8 | | | $ | (12.6) | | | | | | | $ | 29.3 | |
Grace is a global enterprise operating in many countries with local currency generally deemed to be the functional currency for accounting purposes. The currency translation amount represents the adjustments necessary to translate the balance sheets valued in local currencies to the U.S. dollar as of the end of each period presented, and to translate revenues and expenses at average exchange rates for each period presented.
presented, as well as amounts related to net investment hedges. See Note 6 for a discussion of hedging activities. See Note 8 for a discussion of pension plans.
14. Shareholders’ Equity
Under its Amended and Restated Certificate of Incorporation, the Company is authorized to issue 300,000,000 shares of common stock, $0.01$0.01 par value per share. As of December 31, 2018,2020, the W. R. Grace & Co. 2018 Stock Incentive Plan (together with the 2014 Stock Incentive Plan, collectively, the “Stock Incentive Plans”) had 7,455,1446,474,722 shares of unissued stock reserved for issuance in the event of the exercise of stock options or the issuance or settlement of stock-based compensation or awards. Shares issuable upon the exercise of stock options or the issuance or settlement of stock-based compensation or awards are covered by reissuing treasury stock, to the extent available; otherwise they are covered through newly issued shares. For the years ended December 31, 2018, 2017, and 2016, 243,502, 386,300, and 745,938 stock options were exercised for aggregate proceeds of $6.7 million, $16.4 million, and $17.0 million, respectively. Additionally in 2018, 10,346In 2020, 15,960 common shares were issued to members of the Board of Directors, in partial payment of their annual retainer; 7,719 shares were issued through net share settlement;retainer, and 54,525112,344 shares were issued to settle vested PBUs and vested tranches of Restricted Stock Units (RSUs).RSUs.
Notes to Consolidated Financial Statements (Continued)
14. Shareholders’ Equity (Continued)
The following table sets forth information relating to common stock activity for the years ended December 31, 2018, 2017,2020, 2019, and 2016:2018:
| | | | | | | | | | | |
| (In millions, except shares) | Number of Shares | | Aggregate Proceeds |
| Balance of outstanding shares, December 31, 2017 | 67,780,410 | | | |
| Stock options exercised | 243,502 | | | $ | 6.7 | |
| Shares issued | 72,590 | | | |
| Shares forfeited through net share exercise | (132,393) | | | |
| Shares repurchased | (1,171,141) | | | |
| Balance of outstanding shares, December 31, 2018 | 66,792,968 | | | |
| Stock options exercised | 388,174 | | | $ | 19.1 | |
| Shares issued | 94,796 | | | |
| Shares forfeited through net share exercise | (130,256) | | | |
| Shares repurchased | (409,769) | | | |
| Balance of outstanding shares, December 31, 2019 | 66,735,913 | | | |
| Stock options exercised | — | | | $ | 0 | |
| Shares issued | 128,304 | | | |
| | | |
| Shares repurchased | (673,807) | | | |
| Balance of outstanding shares, December 31, 2020 | 66,190,410 | | | |
|
| | |
Balance of outstanding shares, December 31, 2015 | 70,533,515 |
|
Stock options exercised | 745,938 |
|
Shares issued | 110,953 |
|
Shares forfeited | (305,678 | ) |
Shares repurchased | (2,775,297 | ) |
Balance of outstanding shares, December 31, 2016 | 68,309,431 |
|
Stock options exercised | 386,300 |
|
Shares issued | 49,897 |
|
Shares forfeited through net share exercise | (29,783 | ) |
Shares repurchased | (935,435 | ) |
Balance of outstanding shares, December 31, 2017 | 67,780,410 |
|
Stock options exercised | 243,502 |
|
Shares issued | 72,590 |
|
Shares forfeited through net share exercise | (132,393 | ) |
Shares repurchased | (1,171,141 | ) |
Balance of outstanding shares, December 31, 2018 | 66,792,968 |
|
15. Stock Incentive Plans
The Stock Incentive Plans are administered by the Compensation Committee of the Board of Directors. Pursuant to the Stock Incentive Plans, the Company maintains Long-term Incentive Plans (the “LTIP”) under which it issues RSUs, PBUs, and stock options.
The Company has granted nonstatutory stock options to certain key employees under the Stock Incentive Plans. The Stock Incentive Plans are administered by the Compensation Committee of the Board of Directors. Stock options are generally non-qualified and are at exercise prices not less than 100% of the average per share fair market value on the date of grant. Stock-based compensation awards granted under the Company’s stock incentive plans are generally subject to a vesting period from the date of the grant ranging from 1 - 3 years. Currently outstanding options expire on various dates through November 2028.
Notes to Consolidated Financial Statements (Continued)
15. Stock Incentive Plans (Continued)
May 2030.
On May 9, 2018, the Company’s stockholders approved the W. R. Grace & Co. 2018 Stock Incentive Plan. Under this new plan, stock options have a 10 year10-year life. The Company began issuing stock-based compensation awards from this plan in the second half of 2018. The Company’s annual grant made in February 2018 wasprior grants were issued under the previous plan in which options have a 5 year5-year life.
Previously outstanding stock-based compensation awards granted under equity compensation programs prior
Notes to the Separation and held by certain executives and employees were adjusted in 2016 to reflect the impact of the Separation on these awards. To preserve the aggregate intrinsic value of awards held prior to the Separation, as measured immediately before and immediately after the Separation, each holder of stock-based compensation awards generally received an adjusted award consisting of either (i) both a stock-based compensation award denominated in Company equity as it existed subsequent to the Separation and a stock-based compensation award denominated in GCP equity or (ii) solely a stock-based compensation award denominated in Company equity. In the Separation, the determination as to which type of adjustment applied to a holder’s previously outstanding award was based upon the date on which the award was originally granted under the equity compensation programs prior to the Separation. The adjustment of the original awards resulted in $0.6 million of incremental compensation cost in 2016.Consolidated Financial Statements (Continued)
15. Stock Incentive Plans (Continued)
The following table sets forth information relating to such options during 2018, 2017,2020, 2019, and 2016.2018.
| | | | | | | | | Number of
Shares | | Average
Exercise
Price | | Weighted-
Average
Grant Date
Fair Value |
| Stock Option Activity | Number Of Shares | | Average Exercise Price | | Weighted- Average Grant Date Fair Value | |
| Balance, December 31, 2015 | 2,320,687 |
| | $ | 71.01 |
| | | |
| Options exercised | (745,938 | ) | | 36.97 |
| | | |
| Options forfeited | (9,458 | ) | | 73.40 |
| | | |
| Options terminated | (2,426 | ) | | 67.06 |
| |
|
| |
| Options granted | 377,920 |
| | 68.32 |
| | $ | 12.90 |
| |
| Balance, December 31, 2016 | 1,940,785 |
| | 66.83 |
| | | |
| Options exercised | (386,300 | ) | | 45.21 |
| | | |
| Options forfeited | (34,545 | ) | | 72.97 |
| | | |
| Options terminated | (23,320 | ) | | 75.60 |
| | | |
| Options granted | 316,830 |
| | 71.37 |
| | 13.00 |
| |
| Balance, December 31, 2017 | 1,813,450 |
| | 72.04 |
| | | Balance, December 31, 2017 | 1,813,450 | | | $ | 72.04 | | | |
| Options exercised | (243,502 | ) | | 61.92 |
| | | Options exercised | (243,502) | | | 61.92 | | |
| Options forfeited | (90,862 | ) | | 69.82 |
| | | Options forfeited | (90,862) | | | 69.82 | | |
| Options terminated | (33,481 | ) | | 75.07 |
| | | Options terminated | (33,481) | | | 75.07 | | |
| Options granted | 428,190 |
| | 67.36 |
| | 12.30 |
| Options granted | 428,190 | | | 67.36 | | | $ | 12.30 | |
| Balance, December 31, 2018 | 1,873,795 |
| | 72.34 |
| | | Balance, December 31, 2018 | 1,873,795 | | | 72.34 | | |
| Options exercised | | Options exercised | (388,174) | | | 74.33 | | |
| Options forfeited | | Options forfeited | (35,216) | | | 71.21 | | |
| Options terminated | | Options terminated | (74,583) | | | 77.30 | | |
| Options granted | | Options granted | 189,787 | | | 78.11 | | | $ | 17.94 | |
| Balance, December 31, 2019 | | Balance, December 31, 2019 | 1,565,609 | | | 72.30 | | |
| Options exercised | | Options exercised | — | | | — | | |
| Options forfeited | | Options forfeited | (26,696) | | | 60.26 | | |
| Options terminated | | Options terminated | (473,582) | | | 76.67 | | |
| Options granted | | Options granted | 348,005 | | | 55.34 | | | $ | 9.64 | |
| Balance, December 31, 2020 | | Balance, December 31, 2020 | 1,413,336 | | | 66.89 | | |
The following is a summary of nonvested option activity for the year ended December 31, 2018.2020.
| | | | | | | | | | | |
| Number Of
Shares | | Weighted-
Average
Grant Date
Fair Value |
| Nonvested options outstanding at beginning of year | 506,593 | | | $ | 14.81 | |
| Granted | 348,005 | | | 9.64 | |
| Vested | (269,148) | | | 13.93 | |
| Forfeited | (20,787) | | | 9.90 | |
| Nonvested options outstanding at end of year | 564,663 | | | 12.16 | |
|
| | | | | | |
| Stock Option Activity | Number Of Shares | | Weighted- Average Grant Date Fair Value |
| Nonvested options outstanding at beginning of year | 719,027 |
| | $ | 15.47 |
|
| Granted | 428,190 |
| | 12.30 |
|
| Vested | (358,511 | ) | | 18.14 |
|
| Forfeited | (124,343 | ) | | 14.99 |
|
| Nonvested options outstanding at end of year | 664,363 |
| | 12.88 |
|
Notes to Consolidated Financial Statements (Continued)
15. Stock Incentive Plans (Continued)
As of December 31, 2018,2020, the intrinsic value (the difference between the exercise price and the market price) for options outstanding was immaterial.immaterial and for options exercisable was 0. The total intrinsic value of all options exercised during the years ended December 31, 2018, 20172019 and 20162018 was $1.6$0.8 million, $10.3 and $1.6 million, and $25.9 million, respectively. No options were exercised in 2020. A summary of our stock options outstanding and exercisable at December 31, 2018,2020, follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Exercise Price Range | Number Outstanding | | Number Exercisable | | Outstanding Weighted- Average Remaining Contractual Life (Years) | | Exercisable Weighted- Average Exercise Price |
| | | | | | | |
| | | | | | | |
| $40 - $50 | 1,802 | | | 0 | | | 9.35 | | $ | 0 | |
| $50 - $60 | 326,051 | | | 0 | | | 9.17 | | 0 | |
| $60 - $70 | 640,777 | | | 522,178 | | | 1.31 | | 67.92 | |
| $70 - $80 | 444,706 | | | 326,495 | | | 3.90 | | 72.65 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| 1,413,336 | | | 848,673 | | | | | |
Notes to Consolidated Financial Statements (Continued)
15. Stock Incentive Plans (Continued)
|
| | | | | | | | | | |
| Exercise Price Range | Number Outstanding | | Number Exercisable | | Outstanding Weighted- Average Remaining Contractual Life (Years) | | Exercisable Weighted- Average Exercise Price |
| $60 - $70 | 710,321 |
| | 226,938 |
| | 3.23 | | 68.27 |
|
| $70 - $80 | 1,139,369 |
| | 958,389 |
| | 1.46 | | 75.72 |
|
| $80 - $90 | 24,105 |
| | 24,105 |
| | 0.16 | | 80.76 |
|
| | 1,873,795 |
| | 1,209,432 |
| | | | |
At December 31, 2018,2020, the weighted-average remaining contractual term of all options outstanding and exercisable was 2.113.95 years.
Options GrantedFor the years ended December 31, 2018, 20172020, 2019, and 2016,2018, the Company recognized non-cash stock-based compensation expense with respect to stock option grants of $5.8$2.8 million,, $4.3 $3.1 million, and $6.0$5.8 million,, respectively, which is included in “selling, general and administrative expenses” in the Consolidated Statements of Operations. The actual tax benefit realized from stock options exercisedoption arrangements totaled $2.2$0.6 million, $7.4$1.9 million, and $11.2$2.2 million for the years ended December 31, 2020, 2019 and 2018, 2017 and 2016, respectively.
The Company values options using the Black-Scholes option-pricing model, which was developed for use in estimating the fair value of traded options. The risk-free rate is based on the U.S. Treasury yield curve published as of the grant date, with maturities approximating the expected term of the options. The expected term of the options is estimated using the simplified method as allowed by ASC 718-20, whereby the average between the vesting period and contractual term is used. For options granted prior to 2018, theThe expected volatility was estimated using both actual Company stock volatility and the volatility of an industry peer group. The Company believes its actual stock volatility was not representative of future volatility during the time it was in Chapter 11. For options granted in 2018, Grace actual stock volatility was used.volatility. The following summarizes the weighted average assumptions used for estimating the fair value of stock options granted during 2018, 20172020, 2019, and 2016,2018, respectively.
| | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2018 |
| Expected volatility | 22.7% - 29.4% | | 22.7% - 23.1% | | 22.9% - 24.4% |
| Weighted average expected volatility | 22.9% | | 23.0% | | 23.7% |
| Expected term | 5.5 - 6.5 years | | 5.5 - 6.5 years | | 3.0 - 6.5 years |
| Risk-free rate | 1.18% | | 2.58% | | 2.55% |
| Dividend yield | 2.2% | | 1.4% | | 1.4% |
|
| | | | | |
| | 2018 | | 2017 | | 2016 |
| Expected volatility | 22.9% - 24.4% | | 23.8% - 25.1% | | 26.2% - 27.5% |
| Weighted average expected volatility | 23.7% | | 24.8% | | 26.6% |
| Expected term | 3.00 - 6.50 years | | 3.00 - 4.00 years | | 3.00 - 4.00 years |
| Risk-free rate | 2.55% | | 1.66% | | 1.01% |
| Dividend yield | 1.4% | | 1.2% | | 1.0% |
Total unrecognized stock-based compensation expense at December 31, 2018,2020, was $1.8$2.1 million,, and the weighted-average period over which this expense will be recognized is 0.8 of a year.
Restricted Stock and Performance Based Units During 2018 In 2019, the Company granted 86,698modified a majority of its 2017 and 2018 cash-settled LTIP awards to be stock-settled. The following is a summary of RSUs and 93,216 PBUs awarded under the Company’s Long-term Incentive Plan (“LTIP”). During 2017 the Company granted 57,600 RSUs and 115,158 PBUs under the LTIP. During 2016 the Company granted 77,358 RSUs and 124,952 PBUs under the LTIP. During 2018, 2017, and 2016, awards covering 44,279, 16,395, and 15,197 shares were forfeited, respectively.
| | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2018 |
| PBUs granted under the LTIP | 120,161 | | 88,174 | | 93,216 |
| RSUs granted under the LTIP | 68,658 | | 57,900 | | 86,698 |
| Shares covered by awards forfeited under the LTIP | 17,250 | | 17,323 | | 44,279 |
| Weighted average grant date fair value of PBUs | $55.33 | | $78.11 | | $67.39 |
| Weighted average grant date fair value of RSUs | $55.05 | | $76.91 | | $67.54 |
| Approximate percentage of awards expected to settle in common stock(1) | 96 | % | | 96 | % | | 94 | % |
| Approximate percentage of awards expected to settle in cash(1) | 4 | % | | 4 | % | | 6 | % |
(1) Assumes full vesting.
The PBUs cliff vest after the completion of the performance periods ending December 31, 2020, 2019,2022, 2021, and 2018, and have a weighted average grant date fair value of $67.39, $71.37 and $68.50, respectively.2020. The RSUs vest in three equal annual installments and have a weighted average grant date fair value of $67.54, $71.37, and $68.90, respectively.installments. Vesting for all awards is subject to continued employment through the payment
Notes to Consolidated Financial Statements (Continued)
15. Stock Incentive Plans (Continued)
date (subject to certain exceptions for retirement, death or disability, change in control scenarios, and in the discretion of the Compensation Committee).
The Company anticipates that approximately 64% of the awards granted in 2018 will be settled in common stock and approximately 36% will be settled in cash, assuming full vesting. The Company anticipates that approximately 65% of the awards granted in 2017 will be settled in common stock and approximately 35% will be settled in cash, assuming full vesting. The Company anticipates that approximately 67% of the awards granted in 2016 will be settled in common stock and approximately 33% will be settled in cash, assuming full vesting.
PBUs and RSUs are recorded at fair value at the date of grant. The common stock settled portion is considered an equity award with the payout being valued based on the Company’s stock price on the grant date. The cash settled portion of the award is considered a liability award with payout being remeasured each reporting period based on the Company’s current stock price. PBU equity and cash awards are remeasured each reporting period based on the expected payout of the award, which may range from 0% to 200% of the targets for such awards; therefore, these portions of the awards are subject to volatility until the payout is finally determined at the end of
Notes to Consolidated Financial Statements (Continued)
15. Stock Incentive Plans (Continued)
the performance period. During 2018, 2017,2020, 2019, and 2016,2018, the Company recognized $13.2$8.0 million, $10.3$9.2 million, and $8.6$13.2 million in compensation expense for these awards. As of December 31, 2018, $9.52020, $11.0 million of total unrecognized compensation expense related to the awards is expected to be recognized over the remaining weighted-average service period of 1.50.9 years.
16. Earnings Per Share
The following table shows a reconciliation of the numerators and denominators used in calculating basic and diluted earnings per share.
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| (In millions, except per share amounts) | 2020 | | 2019 | | 2018 |
| Numerators | | | | | |
| | | | | |
| | | | | |
| Net income (loss) attributable to W. R. Grace & Co. shareholders | $ | (1.8) | | | $ | 126.3 | | | $ | 167.6 | |
| Denominators | | | | | |
| Weighted average common shares—basic calculation | 66.3 | | | 66.8 | | | 67.2 | |
| Dilutive effect of employee stock options | 0 | | 0.1 | | 0.1 |
| Weighted average common shares—diluted calculation | 66.3 | | | 66.9 | | | 67.3 | |
| | | | | |
| | | | | |
| | | | | |
| Basic earnings per share | $ | (0.03) | | | $ | 1.89 | | | $ | 2.49 | |
| | | | | |
| | | | | |
| | | | | |
| Diluted earnings per share | $ | (0.03) | | | $ | 1.89 | | | $ | 2.49 | |
|
| | | | | | | | | | | |
| (In millions, except per share amounts) | 2018 | | 2017 | | 2016 |
| Numerators | | | | | |
| Income (loss) from continuing operations attributable to W. R. Grace & Co. shareholders | $ | 167.6 |
| | $ | 11.2 |
| | $ | 107.0 |
|
| Income (loss) from discontinued operations, net of income taxes | — |
| | — |
| | (12.9 | ) |
| Net income (loss) attributable to W. R. Grace & Co. shareholders | $ | 167.6 |
| | $ | 11.2 |
| | $ | 94.1 |
|
| Denominators | | | | | |
| Weighted average common shares—basic calculation | 67.2 |
| | 68.1 |
| | 70.1 |
|
| Dilutive effect of employee stock options | 0.1 |
| | 0.1 |
| | 0.4 |
|
| Weighted average common shares—diluted calculation | 67.3 |
| | 68.2 |
| | 70.5 |
|
| Basic earnings per share attributable to W. R. Grace & Co. shareholders | | | | | |
| Income (loss) from continuing operations | $ | 2.49 |
| | $ | 0.16 |
| | $ | 1.53 |
|
| Income (loss) from discontinued operations, net of income taxes | — |
| | — |
| | (0.19 | ) |
| Net income (loss) | $ | 2.49 |
| | $ | 0.16 |
| | $ | 1.34 |
|
| Diluted earnings per share attributable to W. R. Grace & Co. shareholders | | | | | |
| Income (loss) from continuing operations | $ | 2.49 |
| | $ | 0.16 |
| | $ | 1.52 |
|
| Income (loss) from discontinued operations, net of income taxes | — |
| | — |
| | (0.19 | ) |
| Net income (loss) | $ | 2.49 |
| | $ | 0.16 |
| | $ | 1.33 |
|
There were approximately 1.6 million, 1.0 million and 1.7 million, 1.5 million and 1.3 million anti-dilutive options outstanding for the years ended December 31, 2018, 20172020, 2019, and 2016,2018, respectively.
On February 5, 2015,8, 2017, the Company announced that its Board of Directors had authorized a share repurchase program of up to $500 million, which it completed on July 10, 2017.$250 million. On February 8, 2017, the Company28, 2020, Grace announced that its Board of Directors had authorized an additionalincreased its share repurchase program of upauthorization to
Notes to Consolidated Financial Statements (Continued)
16. Earnings Per Share (Continued)
$250 million. $250 million, including approximately $83 million remaining under the previously announced program. The timing of the repurchases and the actual amount repurchased will depend on a variety of factors, including the market price of the Company’s shares, strategic priorities for the strategic deployment of capital, and general market and economic conditions. During 2018, 20172020, 2019, and 2016,2018, the Company repurchased 1,171,141; 935,435;673,807; 409,769; and 2,775,2971,171,141 shares of Company common stock for $80.0$40.4 million, $65.0$29.8 million, and $195.1$80.0 million, respectively, pursuant to the terms of the share repurchase programs.program. As of December 31, 2018, $138.92020, $235.0 million remained under the current authorization.
17. Revenues
Grace generates revenues from customer arrangements primarily by manufacturing and delivering specialty chemicals and specialty materials, and by licensing technology, through its two2 reportable segments. See Note 18 for additional information about Grace’s reportable segments.
Notes to Consolidated Financial Statements (Continued)
17. Revenues (Continued)
Disaggregation of Revenue The following tables present Grace'sGrace’s revenues by geography and product group, within its respective reportable segments, for the years ended December 31, 2018, 2017,2020, 2019, and 2016.2018.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Year Ended December 31, 2020
(In millions) | North America | | Europe Middle East Africa (EMEA) | | Asia Pacific | | Latin America | | Total |
| | | | | | | | | |
| Polyolefin and Chemical Catalysts | $ | 172.3 | | | $ | 231.7 | | | $ | 201.1 | | | $ | 16.5 | | | $ | 621.6 | |
| Refining Catalysts | 216.6 | | | 279.1 | | | 120.4 | | | 33.7 | | | 649.8 | |
| Total Catalysts Technologies | $ | 388.9 | | | $ | 510.8 | | | $ | 321.5 | | | $ | 50.2 | | | $ | 1,271.4 | |
| | | | | | | | | |
| Pharma/Consumer | $ | 61.5 | | | $ | 60.9 | | | $ | 19.8 | | | $ | 20.3 | | | $ | 162.5 | |
| Coatings | 25.4 | | | 66.6 | | | 35.8 | | | 9.7 | | | 137.5 | |
| Chemical process | 28.5 | | | 69.4 | | | 36.1 | | | 6.6 | | | 140.6 | |
| Other | 4.1 | | | 13.3 | | | 0.3 | | | 0.1 | | | 17.8 | |
| Total Materials Technologies | $ | 119.5 | | | $ | 210.2 | | | $ | 92.0 | | | $ | 36.7 | | | $ | 458.4 | |
| Total Grace | $ | 508.4 | | | $ | 721.0 | | | $ | 413.5 | | | $ | 86.9 | | | $ | 1,729.8 | |
| Year Ended December 31, 2019
(In millions) | | Year Ended December 31, 2019
(In millions) | North America | | EMEA | | Asia Pacific | | Latin America | | Total |
| Year Ended December 31, 2018
(In millions) | North America | | Europe Middle East Africa (EMEA) | | Asia Pacific | | Latin America | | Total | |
| Polyolefin and Chemical Catalysts | | Polyolefin and Chemical Catalysts | $ | 191.4 | | | $ | 283.0 | | | $ | 213.7 | | | $ | 17.2 | | | $ | 705.3 | |
| Refining Catalysts | $ | 282.8 |
| | $ | 266.0 |
| | $ | 193.4 |
| | $ | 59.8 |
| | $ | 802.0 |
| Refining Catalysts | 291.4 | | | 288.4 | | | 171.7 | | | 39.9 | | | 791.4 | |
| Polyolefin and Chemical Catalysts | 192.6 |
| | 255.4 |
| | 193.2 |
| | 20.3 |
| | 661.5 |
| |
| Total Catalysts Technologies | $ | 475.4 |
| | $ | 521.4 |
| | $ | 386.6 |
| | $ | 80.1 |
| | $ | 1,463.5 |
| Total Catalysts Technologies | $ | 482.8 | | | $ | 571.4 | | | $ | 385.4 | | | $ | 57.1 | | | $ | 1,496.7 | |
| | Pharma/Consumer | | Pharma/Consumer | $ | 45.2 | | | $ | 59.1 | | | $ | 20.1 | | | $ | 20.2 | | | $ | 144.6 | |
| Coatings | $ | 28.1 |
| | $ | 75.3 |
| | $ | 43.3 |
| | $ | 8.7 |
| | $ | 155.4 |
| Coatings | 25.9 | | | 67.8 | | | 36.9 | | | 9.2 | | | 139.8 | |
| Consumer/Pharma | 36.2 |
| | 58.0 |
| | 19.0 |
| | 19.4 |
| | 132.6 |
| |
| Chemical process | 35.2 |
| | 81.6 |
| | 32.2 |
| | 8.3 |
| | 157.3 |
| Chemical process | 38.1 | | | 79.1 | | | 32.3 | | | 6.6 | | | 156.1 | |
| Other | 6.8 |
| | 15.9 |
| | 0.4 |
| | 0.2 |
| | 23.3 |
| Other | 5.8 | | | 14.2 | | | 0.7 | | | 0.2 | | | 20.9 | |
| Total Materials Technologies | $ | 106.3 |
| | $ | 230.8 |
| | $ | 94.9 |
| | $ | 36.6 |
| | $ | 468.6 |
| Total Materials Technologies | $ | 115.0 | | | $ | 220.2 | | | $ | 90.0 | | | $ | 36.2 | | | $ | 461.4 | |
| Total Grace | $ | 581.7 |
|
| $ | 752.2 |
| | $ | 481.5 |
| | $ | 116.7 |
| | $ | 1,932.1 |
| Total Grace | $ | 597.8 | | | $ | 791.6 | | | $ | 475.4 | | | $ | 93.3 | | | $ | 1,958.1 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Year Ended December 31, 2018
(In millions) | North America | | EMEA | | Asia Pacific | | Latin America | | Total |
| | | | | | | | | |
| Polyolefin and Chemical Catalysts | $ | 192.6 | | | $ | 255.4 | | | $ | 193.2 | | | $ | 20.3 | | | $ | 661.5 | |
| Refining Catalysts | 282.8 | | | 266.0 | | | 193.4 | | | 59.8 | | | 802.0 | |
| Total Catalysts Technologies | $ | 475.4 | | | $ | 521.4 | | | $ | 386.6 | | | $ | 80.1 | | | $ | 1,463.5 | |
| | | | | | | | | |
| Pharma/Consumer | $ | 36.2 | | | $ | 58.0 | | | $ | 19.0 | | | $ | 19.4 | | | $ | 132.6 | |
| Coatings | 28.1 | | | 75.3 | | | 43.3 | | | 8.7 | | | 155.4 | |
| Chemical process | 35.2 | | | 81.6 | | | 32.2 | | | 8.3 | | | 157.3 | |
| Other | 6.8 | | | 15.9 | | | 0.4 | | | 0.2 | | | 23.3 | |
| Total Materials Technologies | $ | 106.3 | | | $ | 230.8 | | | $ | 94.9 | | | $ | 36.6 | | | $ | 468.6 | |
| Total Grace | $ | 581.7 | | | $ | 752.2 | | | $ | 481.5 | | | $ | 116.7 | | | $ | 1,932.1 | |
|
| | | | | | | | | | | | | | | | | | | |
Year Ended December 31, 2017
(In millions) | North America | | EMEA | | Asia Pacific | | Latin America | | Total |
| Refining Catalysts | $ | 269.5 |
| | $ | 236.4 |
| | $ | 199.3 |
| | $ | 52.9 |
| | $ | 758.1 |
|
| Polyolefin and Chemical Catalysts | 117.4 |
| | 218.1 |
| | 166.4 |
| | 16.5 |
| | 518.4 |
|
| Total Catalysts Technologies | $ | 386.9 |
| | $ | 454.5 |
| | $ | 365.7 |
| | $ | 69.4 |
| | $ | 1,276.5 |
|
| Coatings | $ | 26.0 |
| | $ | 66.9 |
| | $ | 41.3 |
| | $ | 8.0 |
| | $ | 142.2 |
|
| Consumer/Pharma | 38.2 |
| | 48.3 |
| | 17.8 |
| | 19.0 |
| | 123.3 |
|
| Chemical process | 28.5 |
| | 83.7 |
| | 34.8 |
| | 6.5 |
| | 153.5 |
|
| Other | 6.4 |
| | 14.3 |
| | 0.2 |
| | 0.1 |
| | 21.0 |
|
| Total Materials Technologies | $ | 99.1 |
| | $ | 213.2 |
| | $ | 94.1 |
| | $ | 33.6 |
| | $ | 440.0 |
|
| Total Grace(1) | $ | 486.0 |
| | $ | 667.7 |
| | $ | 459.8 |
| | $ | 103.0 |
| | $ | 1,716.5 |
|
| |
(1) | Under the modified retrospective method, prior-period information has not been adjusted and continues to be reported in accordance with Grace’s historical accounting under ASC 605. |
Notes to Consolidated Financial Statements (Continued)
17. Revenues (Continued)
|
| | | | | | | | | | | | | | | | | | | |
Year Ended December 31, 2016
(In millions) | North America | | EMEA | | Asia Pacific | | Latin America | | Total |
| Refining Catalysts | $ | 285.8 |
| | $ | 235.5 |
| | $ | 141.2 |
| | $ | 62.4 |
| | $ | 724.9 |
|
| Polyolefin and Chemical Catalysts | 100.4 |
| | 203.3 |
| | 119.9 |
| | 15.2 |
| | 438.8 |
|
| Total Catalysts Technologies | $ | 386.2 |
| | $ | 438.8 |
| | $ | 261.1 |
| | $ | 77.6 |
| | $ | 1,163.7 |
|
| Coatings | $ | 25.4 |
| | $ | 63.9 |
| | $ | 38.9 |
| | $ | 8.3 |
| | $ | 136.5 |
|
| Consumer/Pharma | 43.0 |
| | 47.3 |
| | 14.7 |
| | 16.9 |
| | 121.9 |
|
| Chemical process | 26.8 |
| | 78.2 |
| | 29.3 |
| | 8.3 |
| | 142.6 |
|
| Other | 9.3 |
| | 19.6 |
| | 4.9 |
| | 0.1 |
| | 33.9 |
|
| Total Materials Technologies | $ | 104.5 |
| | $ | 209.0 |
| | $ | 87.8 |
| | $ | 33.6 |
| | $ | 434.9 |
|
| Total Grace(1) | $ | 490.7 |
| | $ | 647.8 |
| | $ | 348.9 |
| | $ | 111.2 |
| | $ | 1,598.6 |
|
| |
(1) | Under the modified retrospective method, prior-period information has not been adjusted and continues to be reported in accordance with Grace’s historical accounting under ASC 605. |
Contract Balances Grace invoices customers for product sales once performance obligations have been satisfied, generally at the point of delivery, at which point payment becomes unconditional. Accordingly, Grace'sGrace’s product sales contracts generally do not give rise to material contract assets or liabilities under ASC 606; however, from time to time certain customers may pay in advance.advance, which results in a contract liability. In the technology licensing business, Grace typically invoices licensees based onat the time that contractual milestones achieved but has obligationsare achieved. However, in respect of the milestone billings, Grace is frequently obligated to provide services in future periods, whichand this results in recording contract liabilities.
Notes to Consolidated Financial Statements (Continued)
17. Revenues (Continued)
The following table presents Grace’s deferred revenue balances as of December 31, 20182020 and 2017:2019:
| | | | | | | | | | | |
| December 31, |
| (In millions) | 2020 | | 2019 |
| Current | $ | 33.8 | | | $ | 35.0 | |
| Noncurrent | 23.4 | | | 29.5 | |
| Total | $ | 57.2 | | | $ | 64.5 | |
|
| | | | | | | |
| | December 31, |
| (In millions) | 2018 | | 2017 |
| Current | $ | 40.6 |
| | $ | 19.5 |
|
| Noncurrent | 29.2 |
| | 14.9 |
|
| Total | $ | 69.8 |
| | $ | 34.4 |
|
These amounts are included as deferred revenue in “other current liabilities” and “other liabilities” in Grace's Consolidated Balance Sheets. Grace records deferred revenues when cash payments are received or due in advance of performance. The increasechange in deferred revenue reflects cash payments from customers received or due in advance of satisfying performance obligations, offset by $16.6$31.0 million of revenue recognized that was included in the deferred revenue balance as of December 31, 2017, and the $3.2 million cumulative adjustment recorded to “retained earnings” as part of the adoption of ASC 606.2019.
The noncurrent portion of the technology licensingdeferred revenue will be recognized as performance obligations under the technology licensing agreements are satisfied; the noncurrent balancesatisfied, which is expected to be recognized over the next four years.
Remaining performance obligations represent the estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied). The aggregate amount of the transaction price allocated to remaining performance obligations for such contracts with a duration of more than one year was approximately $103$148 million as of December 31, 2018,2020, and includes certain amounts reported as deferred revenue above. In accordance with the available practical expedient, in ASC 606-10-50-14, Grace does not disclose information about remaining performance obligations that have original expected durations of one year or less, which generally relate to customer prepayments on product sales and are generally satisfied in less than one year. Grace expects to recognize revenue related to remaining performance obligations over several years, as follows:
Notes to Consolidated Financial Statements (Continued)
17. Revenues (Continued)
|
| | | |
| Year | | Approximate percentage of revenue related to remaining performance obligations recognized |
| 2019 | | 31 | % |
| 2020 | | 24 | % |
| 2021 | | 20 | % |
| Thereafter through 2025 | | 25 | % |
| | | 100 | % |
| | | | | | | | |
| Year | | Approximate percentage of revenue related to remaining performance obligations recognized |
| 2021 | | 27 | % |
| 2022 | | 19 | % |
| 2023 | | 17 | % |
| 2024 | | 16 | % |
| Thereafter through 2030 | | 21 | % |
For the years ended December 31, 2018, 2017,2020, 2019, and 2016,2018, revenue recognized from performance obligations related to prior periods was not material. Grace has not capitalized any costs to obtain or fulfill contracts with customers under ASC 606. No material impairment losses have been recognized on any receivables or contract assets arising from contracts with customers.
18. Segment Information
Grace is a global producer of specialty chemicals and specialty materials. Grace’s two2 reportable business segments are Grace Catalysts Technologies and Grace Materials Technologies. Grace Catalysts Technologies includes catalysts and related products and technologies used in petrochemical, refining, petrochemical and other chemical manufacturing applications. Advanced Refining Technologies (“ART”), Grace’s joint venture with Chevron Products Company, a division of Chevron U.S.A. Inc. (“Chevron”), is managed in this segment. (See Note 19.) Grace Catalysts Technologies comprises two2 operating segments, Grace Refining TechnologiesSpecialty Catalysts and Grace Specialty Catalysts,Refining Technologies, which are aggregated into one reportable segment based upon similar economic characteristics, the nature of the products and production processes, type and class of customer, and channels of distribution. Grace Materials Technologies includes specialty materials, including silica-based and silica-alumina-based materials, used in consumer/pharma,pharma/consumer, coatings, and chemical process and coatings applications. The table below presents information related to Grace’s reportable segments. Only those corporate expenses directly related to the reportable segments are allocated for reporting purposes. All remaining corporate items are reported separately and labeled as such.
Notes to Consolidated Financial Statements (Continued)
18. Segment Information (Continued)
Grace excludes defined benefit pension expense from the calculation of segment operating income. Grace believes that the exclusion of defined benefit pension expense provides a better indicator of its reportable segment performance as defined benefit pension expense is not managed at a reportable segment level.
Grace defines Adjusted EBIT to be net income from continuing operations attributable to W. R. Grace & Co. shareholders adjusted for interest income and expense; income taxes; costs related to legacy product, environmental and other claims;matters; restructuring and repositioning expenses and asset impairments; pension costs other than service and interest costs, expected returns on plan assets, and amortization of prior service costs/credits; income and expense items related to divested businesses, product lines, and certain other investments; gains and losses on sales or exits of businesses, product lines, and certain other investments; third-party acquisition-related costs and the amortization of acquired inventory fair value adjustment; gains and losses on modification or extinguishment of debt; the effects of these items on equity in earnings of unconsolidated affiliate; and certain other items that are not representative of underlying trends.
Notes to Consolidated Financial Statements (Continued)
18. Segment Information (Continued)
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| (In millions) | 2018 | | 2017 | | 2016 |
| Net Sales | | | | | |
| Catalysts Technologies | $ | 1,463.5 |
| | $ | 1,276.5 |
| | $ | 1,163.7 |
|
| Materials Technologies | 468.6 |
| | 440.0 |
| | 434.9 |
|
| Total | $ | 1,932.1 |
| | $ | 1,716.5 |
| | $ | 1,598.6 |
|
| Adjusted EBIT | | | | | |
| Catalysts Technologies segment operating income | $ | 440.5 |
| | $ | 395.4 |
| | $ | 367.8 |
|
| Materials Technologies segment operating income | 105.6 |
| | 100.6 |
| | 104.0 |
|
| Corporate costs | (73.5 | ) | | (69.0 | ) | | (59.4 | ) |
| Gain on termination and curtailment of postretirement plans related to current businesses | — |
| | — |
| | 0.2 |
|
| Certain pension costs | (15.9 | ) | | (13.0 | ) | | (12.3 | ) |
| Total | $ | 456.7 |
| | $ | 414.0 |
| | $ | 400.3 |
|
| Depreciation and Amortization | | | | | |
| Catalysts Technologies | $ | 81.7 |
| | $ | 87.1 |
| | $ | 77.4 |
|
| Materials Technologies | 15.5 |
| | 19.6 |
| | 19.5 |
|
| Corporate | 3.6 |
| | 4.8 |
| | 3.4 |
|
| Total | $ | 100.8 |
| | $ | 111.5 |
| | $ | 100.3 |
|
| Capital Expenditures | | | | | |
| Catalysts Technologies | $ | 150.3 |
| | $ | 100.9 |
| | $ | 84.9 |
|
| Materials Technologies | 56.1 |
| | 20.9 |
| | 24.0 |
|
| Corporate | 9.9 |
| | 3.4 |
| | 8.0 |
|
| Total | $ | 216.3 |
| | $ | 125.2 |
| | $ | 116.9 |
|
| Total Assets | | | | | |
| Catalysts Technologies | $ | 2,326.6 |
| | $ | 1,757.1 |
| | $ | 1,675.1 |
|
| Materials Technologies | 375.9 |
| | 326.8 |
| | 313.1 |
|
| Corporate | 862.8 |
| | 823.1 |
| | 923.6 |
|
| Total | $ | 3,565.3 |
| | $ | 2,907.0 |
| | $ | 2,911.8 |
|
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| (In millions) | 2020 | | 2019 | | 2018 |
| Net Sales | | | | | |
| Catalysts Technologies | $ | 1,271.4 | | | $ | 1,496.7 | | | $ | 1,463.5 | |
| Materials Technologies | 458.4 | | | 461.4 | | | 468.6 | |
| Total | $ | 1,729.8 | | | $ | 1,958.1 | | | $ | 1,932.1 | |
| Adjusted EBIT | | | | | |
| Catalysts Technologies segment operating income | $ | 309.6 | | | $ | 466.4 | | | $ | 440.9 | |
| Materials Technologies segment operating income | 85.0 | | | 97.8 | | | 105.6 | |
| Corporate costs | (68.0) | | | (72.7) | | | (73.5) | |
| | | | | |
| Certain pension costs | (14.4) | | | (18.4) | | | (15.9) | |
| Total | $ | 312.2 | | | $ | 473.1 | | | $ | 457.1 | |
| Depreciation and Amortization | | | | | |
| Catalysts Technologies | $ | 85.3 | | | $ | 81.9 | | | $ | 81.7 | |
| Materials Technologies | 15.0 | | | 14.2 | | | 15.5 | |
| Corporate | 4.7 | | | 4.2 | | | 3.6 | |
| Total | $ | 105.0 | | | $ | 100.3 | | | $ | 100.8 | |
| Capital Expenditures | | | | | |
| Catalysts Technologies | $ | 107.8 | | | $ | 114.6 | | | $ | 150.3 | |
| Materials Technologies | 36.2 | | | 68.8 | | | 56.1 | |
| Corporate | 13.6 | | | 10.7 | | | 9.9 | |
| Total | $ | 157.6 | | | $ | 194.1 | | | $ | 216.3 | |
| Total Assets | | | | | |
| Catalysts Technologies | $ | 2,294.9 | | | $ | 2,556.1 | | | $ | 2,326.6 | |
| Materials Technologies | 448.2 | | | 430.3 | | | 375.9 | |
| Corporate | 1,022.4 | | | 946.2 | | | 862.8 | |
| Total | $ | 3,765.5 | | | $ | 3,932.6 | | | $ | 3,565.3 | |
Corporate costs include corporate support functionfunctional costs and other corporate costs such as professional fees, incentive compensation, and insurance premiums. Certain pension costs include only ongoing costs recognized quarterly, which include service and interest costs, expected returns on plan assets, and amortization of prior service costs/credits.
See Note 17 for sales of similar products within each reportable segment.
Notes to Consolidated Financial Statements (Continued)
18. Segment Information (Continued)
Reconciliation of Reportable Segment Data to Financial Statements
Grace Adjusted EBIT for the years ended December 31, 2018, 20172020, 2019, and 20162018 is reconciled below to income from continuing operations(loss) before income taxes presented in the accompanying Consolidated Statements of Operations.
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| (In millions) | 2020 | | 2019 | | 2018 |
| Grace Adjusted EBIT | $ | 312.2 | | | $ | 473.1 | | | $ | 457.1 | |
| Pension MTM adjustment and other related costs, net | (94.6) | | | (85.9) | | | 15.2 | |
| Loss on early extinguishment of debt | (39.4) | | | 0 | | | (4.8) | |
| Costs related to legacy product, environmental and other claims | (39.4) | | | (103.5) | | | (82.3) | |
| Restructuring and repositioning expenses | (36.9) | | | (13.7) | | | (46.4) | |
| Inventory write-offs and disposal costs(1) | (20.7) | | | (3.6) | | | 0 | |
| Third-party acquisition-related costs | (5.2) | | | (3.6) | | | (7.3) | |
| Taxes and interest included in equity in earnings of unconsolidated affiliate | (0.7) | | | 0.1 | | | (0.4) | |
| | | | | |
| Benefit plan adjustment | 0 | | | (5.0) | | | 0 | |
| Amortization of acquired inventory fair value adjustment | 0 | | | 0 | | | (6.9) | |
| | | | | |
| Interest expense, net | (74.9) | | | (74.8) | | | (78.5) | |
| Net income (loss) attributable to noncontrolling interests | 0.1 | | | 0.4 | | | (0.8) | |
| Income (loss) before income taxes | $ | 0.5 | | | $ | 183.5 | | | $ | 244.9 | |
(1)Inventory write-off in 2020 related to the changes in hydroprocessing catalysts manufacturing operations (see Note 2). Inventory write-off in 2019 related to the idling of Grace’s MTO manufacturing facility.
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| (In millions) | 2018 | | 2017 | | 2016 |
| Grace Adjusted EBIT | $ | 456.7 |
| | $ | 414.0 |
| | $ | 400.3 |
|
| Costs related to legacy product, environmental and other claims | (84.6 | ) | | (30.8 | ) | | (35.4 | ) |
| Restructuring and repositioning expenses | (46.4 | ) | | (26.7 | ) | | (38.6 | ) |
| Pension MTM adjustment and other related costs, net | 15.2 |
| | (51.1 | ) | | (60.3 | ) |
| Third-party acquisition-related costs | (7.3 | ) | | (2.9 | ) | | (2.5 | ) |
| Amortization of acquired inventory fair value adjustment | (6.9 | ) | | — |
| | (8.0 | ) |
| Loss on early extinguishment of debt | (4.8 | ) | | — |
| | (11.1 | ) |
| Income and expense items related to divested businesses | 2.3 |
| | (2.3 | ) | | 0.1 |
|
| Accounts receivable reserve—Venezuela | — |
| | (10.0 | ) | | — |
|
| Gain (loss) on sale of product line | — |
| | — |
| | 1.7 |
|
| Gain on termination and curtailment of postretirement plans related to divested businesses | — |
| | — |
| | 0.3 |
|
| Interest expense, net | (78.5 | ) | | (78.5 | ) | | (80.5 | ) |
| Net income (loss) attributable to noncontrolling interests | (0.8 | ) | | (0.8 | ) | | — |
|
| Income (loss) from continuing operations before income taxes | $ | 244.9 |
| | $ | 210.9 |
| | $ | 166.0 |
|
Notes to Consolidated Financial Statements (Continued)
18. Segment Information (Continued)
Geographic Area Data
The table below presents information related to the geographic areas in which Grace operates. Sales are attributed to geographic areas based on customer location.the location to which the product is transported.
| | | | Year Ended December 31, | | Year Ended December 31, |
| (In millions) | 2018 | | 2017 | | 2016 | (In millions) | 2020 | | 2019 | | 2018 |
| Net Sales | | | | | | Net Sales | | | | | |
| United States | $ | 533.8 |
| | $ | 437.3 |
| | $ | 446.2 |
| United States | $ | 459.8 | | | $ | 540.2 | | | $ | 533.8 | |
| Canada | 47.9 |
| | 48.7 |
| | 44.5 |
| Canada | 48.6 | | | 57.6 | | | 47.9 | |
| Total North America | 581.7 |
| | 486.0 |
| | 490.7 |
| Total North America | 508.4 | | | 597.8 | | | 581.7 | |
| Europe Middle East Africa | 752.2 |
| | 667.7 |
| | 647.8 |
| Europe Middle East Africa | 721.0 | | | 791.6 | | | 752.2 | |
| Asia Pacific | 481.5 |
| | 459.8 |
| | 348.9 |
| Asia Pacific | 413.5 | | | 475.4 | | | 481.5 | |
| Latin America | 116.7 |
| | 103.0 |
| | 111.2 |
| Latin America | 86.9 | | | 93.3 | | | 116.7 | |
| Total | $ | 1,932.1 |
| | $ | 1,716.5 |
| | $ | 1,598.6 |
| Total | $ | 1,729.8 | | | $ | 1,958.1 | | | $ | 1,932.1 | |
| Long-Lived Assets(1) | | | | | | Long-Lived Assets(1) | | | | | |
| United States | $ | 793.0 |
| | $ | 599.8 |
| | $ | 564.5 |
| United States | $ | 799.1 | | | $ | 937.9 | | | $ | 793.0 | |
| Canada | 16.5 |
| | 15.5 |
| | 13.9 |
| Canada | 23.2 | | | 18.9 | | | 16.5 | |
| Total North America | 809.5 |
| | 615.3 |
| | 578.4 |
| Total North America | 822.3 | | | 956.8 | | | 809.5 | |
| Germany | 172.5 |
| | 142.2 |
| | 109.7 |
| Germany | 267.4 | | | 228.2 | | | 172.5 | |
| Rest of Europe Middle East Africa | 48.9 |
| | 45.3 |
| | 39.5 |
| Rest of Europe Middle East Africa | 41.0 | | | 45.2 | | | 48.9 | |
| Total Europe Middle East Africa | 221.4 |
| | 187.5 |
| | 149.2 |
| Total Europe Middle East Africa | 308.4 | | | 273.4 | | | 221.4 | |
| Asia Pacific | 72.9 |
| | 21.1 |
| | 21.5 |
| Asia Pacific | 72.2 | | | 80.3 | | | 72.9 | |
| Latin America | 6.7 |
| | 7.9 |
| | 7.5 |
| Latin America | 5.9 | | | 7.2 | | | 6.7 | |
| Total | $ | 1,110.5 |
| | $ | 831.8 |
| | $ | 756.6 |
| Total | $ | 1,208.8 | | | $ | 1,317.7 | | | $ | 1,110.5 | |
| |
(1) | Long-lived assets include properties and equipment and the noncurrent asset related to a hydroprocessing catalyst plant to be transferred to ART upon completion. (See Note 19.) |
(1)Long-lived assets as of December 31, 2019 and 2018, include properties and equipment and the current asset related to a hydroprocessing catalyst plant to be transferred to ART upon completion. (See Note 19.) 19. Related Party Transactions
Unconsolidated Affiliate Grace accounts for its 50% ownership interest in ART, its joint venture with Chevron, using the equity method of accounting. Grace’s investment in ART amounted to $156.1$175.5 million and $125.9$181.9 million as of December 31, 20182020 and 2017, respectively, and the amount included in “equity in earnings of unconsolidated affiliate” in the accompanying Consolidated Statements of Operations totaled $31.8 million, $25.9 million and $29.8 million for the years ended December 31, 2018, 2017 and 2016,2019, respectively. ART is a private, limited liability company, taxed as a partnership, and accordingly does not have a quoted market price available. During 2020, Grace received dividends of $20.0 million from ART.
Notes to Consolidated Financial Statements (Continued)
19. Related Party Transactions (Continued)
The table below presents the components of Grace’s “equity in earnings of unconsolidated affiliate” in the Consolidated Statements of Operations.
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| (In millions) | 2020 | | 2019 | | 2018 |
| | | | | |
| Operating income | $ | 17.5 | | | $ | 28.2 | | | $ | 32.7 | |
| Depreciation and amortization | (3.3) | | | (0.5) | | | (0.5) | |
| Interest expense and income taxes | (0.7) | | | 0.1 | | | (0.4) | |
| Equity in earnings of unconsolidated affiliate | 13.5 | | | 27.8 | | | 31.8 | |
The table below presents summary financial data related to ART’s balance sheet and results of operations.
| | | | | | | | | | | |
| December 31, |
| (In millions) | 2020 | | 2019 |
| Summary Balance Sheet information: | | | |
| Current assets | $ | 286.4 | | | $ | 300.7 | |
| Noncurrent assets | 235.8 | | | 237.8 | |
| Total assets | $ | 522.2 | | | $ | 538.5 | |
| | | |
| Current liabilities | $ | 173.0 | | | $ | 177.1 | |
| Noncurrent liabilities | 0.3 | | | 0.3 | |
| Total liabilities | $ | 173.3 | | | $ | 177.4 | |
|
| | | | | | | |
| | December 31, |
| (In millions) | 2018 | | 2017 |
| Summary Balance Sheet information: | | | |
| Current assets | $ | 307.4 |
| | $ | 239.8 |
|
| Noncurrent assets | 160.2 |
| | 91.5 |
|
| Total assets | $ | 467.6 |
| | $ | 331.3 |
|
| | | | |
| Current liabilities | $ | 133.3 |
| | $ | 82.4 |
|
| Noncurrent liabilities | 25.3 |
| | 0.3 |
|
| Total liabilities | $ | 158.6 |
| | $ | 82.7 |
|
| | | | Year Ended December 31, | | Year Ended December 31, |
| (In millions) | 2018 | | 2017 | | 2016 | (In millions) | 2020 | | 2019 | | 2018 |
| Summary Statement of Operations information: | | | | | | Summary Statement of Operations information: | | | | | |
| Net sales | $ | 487.5 |
| | $ | 447.3 |
| | $ | 388.9 |
| Net sales | $ | 481.9 | | | $ | 527.5 | | | $ | 487.5 | |
| Costs and expenses applicable to net sales | 410.6 |
| | 379.8 |
| | 322.1 |
| Costs and expenses applicable to net sales | 431.4 | | | 453.4 | | | 410.6 | |
| Income before income taxes | 65.5 |
| | 53.6 |
| | 60.8 |
| Income before income taxes | 28.2 | | | 59.0 | | | 65.5 | |
| Net income | 64.2 |
| | 52.1 |
| | 59.3 |
| Net income | 27.0 | | | 56.5 | | | 64.2 | |
Grace and ART transact business on a regular basis and maintain several agreements in order to operate the joint venture. These agreements and the resulting transactions are treated as related party activities with an unconsolidated affiliate. Product manufactured by Grace for ART is accounted for on a net basis, with a mark-up, inwhich reduces “cost of goods sold” in the Consolidated Statements of Operations. Grace also receives reimbursement from ART for fixed costs,costs; research and development,development; selling, general and administrative services,services; and depreciation. Grace records reimbursements against the respective line items onin Grace’s Consolidated StatementStatements of Operations. The table below presents summary financial data related to transactions between Grace and ART.
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| (In millions) | 2020 | | 2019 | | 2018 |
| Product manufactured for ART | $ | 261.1 | | | $ | 260.8 | | | $ | 229.1 | |
| Mark-up on product manufactured for ART included as a reduction of Grace’s cost of goods sold | 5.1 | | | 5.1 | | | 4.5 | |
| Charges for fixed costs; research and development; selling, general and administrative services; and depreciation to ART | 54.3 | | | 51.1 | | | 41.8 | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| (In millions) | 2018 | | 2017 | | 2016 |
| Product manufactured for ART | $ | 229.1 |
| | $ | 213.8 |
| | $ | 210.4 |
|
| Mark-up on product manufactured for ART included as a reduction of Grace’s cost of goods sold | 4.5 |
| | 4.2 |
| | 4.2 |
|
| Charges for fixed costs; research and development; selling, general and administrative services; and depreciation to ART | 41.8 |
| | 41.7 |
| | 33.8 |
|
Notes to Consolidated Financial Statements (Continued)
19. Related Party Transactions (Continued)
The table below presents balances in Grace’s Consolidated Financial Statements related to ART.
|
| | | | | | | |
| | December 31, |
| (in millions) | 2018 | | 2017 |
| Accounts receivable | $ | 16.2 |
| | $ | 20.1 |
|
| Noncurrent asset | 98.8 |
| | 32.7 |
|
| Accounts payable | 32.0 |
| | 22.3 |
|
| Debt payable within one year | 9.8 |
| | 8.6 |
|
| Debt payable after one year | 38.3 |
| | 33.8 |
|
| Noncurrent liability | 98.8 |
| | 32.7 |
|
Notes to Consolidated Financial Statements (Continued)
19. Related Party Transactions (Continued)
| | | | | | | | | | | |
| December 31, |
| (in millions) | 2020 | | 2019 |
| Trade accounts receivable | $ | 28.3 | | | $ | 17.5 | |
| Other current assets | 0 | | | 173.9 | |
| | | |
| Accounts payable | 19.8 | | | 37.7 | |
| Debt payable within one year | 3.5 | | | 9.9 | |
| Debt payable after one year | 22.1 | | | 37.5 | |
| Other current liabilities | 0 | | | 173.9 | |
| | | |
The noncurrentcurrent asset and noncurrentcurrent liability as of December 31, 2019, in the table above representrepresented spending to date related to a residue hydroprocessing catalyst production plant that is under constructionhas been constructed in Lake Charles, Louisiana. Grace managesmanaged the design and construction of the plant, and the asset will continue to bewas included in “other current assets” in Grace’s Consolidated Balance Sheets until construction iscommissioning and start-up activities were completed. Grace hashad likewise recorded a liability for the transfer of the asset to ART upon completion, included in “other current liabilities” in the Consolidated Balance Sheets. Grace transferred the asset to ART in the 2020 third quarter.
Grace and ART maintain an agreement whereby ART loans Grace funds for maintenance capital expenditures at manufacturing facilities used to produce catalysts for ART. Grace makes principal and interest payments on the loans on a monthly basis. These unsecured loans have repayment terms of up to eight8 years, unless earlier repayment is demanded by ART. The loans bear interest at the three-month LIBOR plus 1.25%.
Grace and Chevron provide lines of credit in the amount of $15.0 million each at a commitment fee of 0.1% of the credit amount. These agreements have been approved by the ART Executive Committee for renewal until February 2020. No2022. NaN amounts were outstanding at December 31, 20182020 and 2017.2019.
Joint Venture Arrangement In 2018, Grace formed a joint venture in a developing country in Asia. The purpose of the joint venture is to establish a logistics facility and catalyst testing laboratory and to be the exclusive FCC catalysts and additives supplier to certain customers in the country. Grace’s joint venture partner is the parent company of the customers. Grace has an 87.5% ownership interest in the joint venture and consolidates the activities of the entity. Grace’s Consolidated Financial StatementsBalance Sheets as of and for the year ended December 31, 2018,2020 and 2019, include trade accounts receivable of $2.2 million and revenues$3.6 million, respectively, from these customers. Grace’s Consolidated Statements of $3.7Operations for the years ended December 31, 2020, 2019, and 2018, include $11.3 million, $11.8 million, and $14.0 million, respectively, of revenues from these customers.
20. Acquisitions
Rive Technology, Inc. On June 17, 2019, Grace completed the acquisition of the business and assets of Rive Technology, Inc. for $22.8 million, with an additional $2.0 million holdback payment remitted in the three months ended September 30, 2020. The business is included in the Refining Technologies operating segment of the Catalysts Technologies reportable segment. The acquisition included Rive’s MOLECULAR HIGHWAY® zeolite technology for catalytic processes, which allows Grace to offer a broader spectrum of products for converting crude oil to petrochemical feedstocks.
Polyolefin catalysts business of Albemarle CorporationOn April 3, 2018, using cash on hand and borrowings under the Credit Agreement, Grace acquired the assets of the polyolefin catalysts business of Albemarle Corporation. Grace acquired the business for $418.0 million, net of cash acquired and including customary post-closing adjustments. The business is included in the Specialty Catalysts operating segment of the Catalysts Technologies reportable segment. The acquisition is complementary to Grace'sGrace’s existing specialty catalysts business and strengthens Grace'sGrace’s commercial relationships, catalysts technology portfolio, and manufacturing network.
The acquisition purchase price has been preliminarily allocated to the tangible and identifiable intangible assets and liabilities acquired based on their estimated fair values at the acquisition date in accordance with ASC 805 “Business Combinations.” The excess of the purchase price over the fair value of the tangible and intangible assets acquired was recorded as goodwill. The goodwill recognized is attributable to the expected growth and operating synergies that Grace expects to realize from this acquisition. The full $140.6 million of goodwill generated from the acquisition will be deductible for U.S. income tax purposes. The purchase price allocation is still preliminary as Grace is waiting for the valuation to be finalized. Grace does not expect any material adjustments to the preliminary valuation. During the six months ended December 31, 2018, Grace recorded adjustments related to deferred taxes, working capital, and intangible assets.
The Consolidated Statements of Operations for the year ended December 31, 2018, includes approximately $86 million of sales attributable to this acquisition. Disclosure of earnings attributable to this acquisition is not practicable due to the integration of operations into Grace’s existing business.
Notes to Consolidated Financial Statements (Continued)
20. Acquisitions (Continued)
The table below presents the preliminary allocation of the acquisition purchase price.
|
| | | |
| | (In millions) |
| Accounts receivable | $ | 13.9 |
|
| Inventories | 28.6 |
|
| Other current assets | 0.7 |
|
| Properties and equipment | 119.8 |
|
| Goodwill | 140.6 |
|
| Intangible assets | 121.2 |
|
| Other assets | 0.5 |
|
| Liabilities assumed | (7.3 | ) |
| Net assets acquired, net of cash acquired | $ | 418.0 |
|
The table below presents the intangible assets acquired and the periods over which they will be amortized.
|
| | | | | |
| | Amount (In millions) | | Weighted Average Amortization Period (in years) |
| Customer Lists | $ | 105.4 |
| | 20.0 |
| Technology | 11.5 |
| | 15.0 |
| Trademarks | 4.3 |
| | 15.0 |
| Total | $ | 121.2 |
| | 19.3 |
21. Discontinued Operations
As a result of the Separation and Distribution, GCP is now an independent public company and its common stock is listed under the symbol “GCP” on the New York Stock Exchange. Grace does not beneficially own any shares of GCP common stock and will not consolidate the financial results of GCP in its future financial reporting, as GCP is no longer a related party to Grace subsequent to the Separation. GCP’s historical financial results through the Distribution Date are reflected in Grace’s Consolidated Financial Statements as discontinued operations.
Separation and Distribution Agreement Prior to the completion of the Separation and the Distribution, W. R. Grace & Co., Grace–Conn. and GCP entered into a Separation and Distribution Agreement and certain related agreements that govern the post-Separation relationship between Grace and GCP. The Separation and Distribution Agreement identifies the transfer of Grace’s assets and liabilities that are specifically identifiable or otherwise allocable to GCP, the elimination of Grace’s equity interest in GCP, the removal of certain non-recurring separation costs directly related to the Separation and Distribution, the cash distribution from GCP to Grace, and the reduction in Grace’s debt using the cash received from GCP, and it provides for when and how these transfers, assumptions and assignments have occurred or will occur.
The foregoing is a summary of the Separation and Distribution Agreement. Grace has filed the full texts of the Separation and Distribution Agreement and a related Tax Sharing Agreement with the SEC, which are readily available on the Internet at www.sec.gov.
Notes to Consolidated Financial Statements (Continued)
21. Discontinued Operations (Continued)
GCP’s historical financial results through the Distribution Date and other effects of the Separation for the year ended December 31, 2016, are presented as discontinued operations as summarized below:
|
| | | |
| (In millions) | Year Ended December 31, 2016 |
| Net sales | $ | 99.6 |
|
| Cost of goods sold | 62.6 |
|
| Gross profit | 37.0 |
|
| Selling, general and administrative expenses | 21.6 |
|
| Research and development expenses | 1.7 |
|
| Repositioning expenses | 22.0 |
|
| Interest expense and related financing costs | 0.7 |
|
| Other expense, net | 3.9 |
|
| Total costs and expenses | 49.9 |
|
| (Loss) Income from discontinued operations before income taxes | (12.9 | ) |
| Benefit from (provision for) income taxes | 0.1 |
|
| (Loss) Income from discontinued operations after income taxes | (12.8 | ) |
| Less: Net income attributable to noncontrolling interests | (0.1 | ) |
| Net (loss) income from discontinued operations | $ | (12.9 | ) |
|
| | | |
| (In millions) | Year Ended December 31, 2016 |
| Cash flows from discontinued operations | |
| Net cash provided by (used for) operating activities | $ | 23.9 |
|
| Net cash provided by (used for) investing activities | (9.5 | ) |
| Net cash provided by (used for) financing activities | 31.4 |
|
| Effect of currency exchange rate changes on cash and cash equivalents | (1.0 | ) |
| Increase (decrease) in cash and cash equivalents from discontinued operations | $ | 44.8 |
|
In January 2016, GCP completed the sale of $525.0 million aggregate principal amount of 9.500% Senior Notes due in 2023. GCP used a portion of these proceeds to fund a $500.0 million distribution to Grace in connection with the Separation and the Distribution.
In February 2016, GCP entered into a credit agreement that provides for new senior secured credit facilities in an aggregate principal amount of $525.0 million, consisting of term loans in an aggregate principal amount of $275.0 million maturing in 2022 and of revolving loans in an aggregate principal amount of $250.0 million maturing in 2021, which were undrawn at closing. GCP used a portion of these proceeds to fund a $250.0 million distribution to Grace in connection with the Separation and the Distribution.
Notes to Consolidated Financial Statements (Continued)
22. Quarterly Financial Information (Unaudited)
| | | (In millions, except per share amounts) | March 31 | | June 30 | | September 30(2) | | December 31(3) | (In millions, except per share amounts) | March 31 | | June 30 | | September 30(2) | | December 31(3) |
| 2018 | | | | | | | | |
| 2020 | | 2020 | | | | | | | |
| Net sales | $ | 431.5 |
| | $ | 485.7 |
| | $ | 494.9 |
| | $ | 520.0 |
| Net sales | $ | 421.5 | | | $ | 418.7 | | | $ | 419.4 | | | $ | 470.2 | |
| Gross profit | 169.5 |
| | 198.7 |
| | 202.2 |
| | 196.3 |
| Gross profit | 159.6 | | | 119.3 | | | 156.4 | | | 181.2 | |
| Net income (loss) | 43.4 |
| | 38.6 |
| | 15.9 |
| | 68.9 |
| Net income (loss) | 42.1 | | | (9.6) | | | 6.7 | | | (40.9) | |
| Net income (loss) attributable to W. R. Grace & Co. shareholders | 43.6 |
| | 38.8 |
| | 16.1 |
| | 69.1 |
| Net income (loss) attributable to W. R. Grace & Co. shareholders | 42.0 | | | (7.3) | | | 7.0 | | | (43.5) | |
| Net income (loss) per share:(1) | | | | | | | | Net income (loss) per share:(1) | |
| Basic earnings (loss) per share: | $ | 0.64 |
| | $ | 0.58 |
| | $ | 0.24 |
| | $ | 1.03 |
| Basic earnings (loss) per share: | $ | 0.63 | | | $ | (0.11) | | | $ | 0.11 | | | $ | (0.66) | |
| Diluted earnings (loss) per share: | 0.64 |
| | 0.58 |
| | 0.24 |
| | 1.03 |
| Diluted earnings (loss) per share: | 0.63 | | | (0.11) | | | 0.11 | | | (0.66) | |
| Dividends declared per share | 0.24 |
| | 0.24 |
| | 0.24 |
| | 0.24 |
| Dividends declared per share | 0.30 | | | 0.30 | | | 0.30 | | | 0.30 | |
| |
(1) | Per share results for the four quarters may differ from full-year per share results, as a separate computation of the weighted average number of shares outstanding is made for each quarter presented. |
| |
(2) | Third quarter “net income (loss)” and “net income (loss) attributable to W. R. Grace & Co. shareholders” include the effects of a pre-tax charge of $70.0 million for the estimated costs of future remediation-related activities at the former vermiculite mine site in Libby, Montana. |
| |
(3) | Fourth quarter “gross profit,(1)Per share results for the four quarters may differ from full-year per share results, as a separate computation of the weighted average number of shares outstanding is made for each quarter presented. (2)Third quarter “net income (loss),” “net income (loss),” and “net income (loss) attributable to W. R. Grace & Co. shareholders” include the effects of the annual pension mark-to-market adjustment. |
|
| | | | | | | | | | | | | | | |
| (In millions, except per share amounts) | March 31 | | June 30 | | September 30 | | December 31(2) |
| 2017 | | | | | | | |
| Net sales | $ | 398.0 |
| | $ | 429.5 |
| | $ | 429.5 |
| | $ | 459.5 |
|
| Gross profit | 153.2 |
| | 167.2 |
| | 171.3 |
| | 184.4 |
|
| Net income (loss) | 42.9 |
| | 43.5 |
| | 47.1 |
| | (123.1 | ) |
| Net income (loss) attributable to W. R. Grace & Co. shareholders | 42.9 |
| | 43.9 |
| | 47.4 |
| | (123.0 | ) |
| Net income (loss) per share:(1) | | | | | | | |
| Basic earnings (loss) per share: | $ | 0.63 |
| | $ | 0.64 |
| | $ | 0.70 |
| | $ | (1.81 | ) |
| Diluted earnings (loss) per share: | 0.63 |
| | 0.64 |
| | 0.70 |
| | (1.81 | ) |
| Dividends declared per share | 0.21 |
| | 0.21 |
| | 0.21 |
| | 0.21 |
|
| |
(1) | Per share results for the four quarters may differ from full-year per share results, as a separate computation of the weighted average number of shares outstanding is made for each quarter presented. |
| |
(2) | Fourth quarter “gross profit,” “net income (loss),” and “net income (loss) attributable to W. R. Grace & Co. shareholders” include the effects of the annual pension mark-to-market adjustment, as well as adjustments related to the estimated impacts of the U.S. Tax Cuts and Jobs Act of 2017. |
SELECTED FINANCIAL DATA
|
| | | | | | | | | | | | | | | | | | | |
| (In millions, except per share amounts) | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| Statement of Operations | | | | | | | | | |
| Net sales | $ | 1,932.1 |
| | $ | 1,716.5 |
| | $ | 1,598.6 |
| | $ | 1,628.2 |
| | $ | 1,757.3 |
|
| Income (loss) from continuing operations(1)(2) | 166.8 |
| | 10.4 |
| | 107.0 |
| | 123.9 |
| | 116.9 |
|
| Financial Position | | | | | | | | | |
| Total assets | 3,565.3 |
| | 2,907.0 |
| | 2,911.8 |
| | 3,645.7 |
| | 4,057.1 |
|
| Debt payable after one year | 1,961.0 |
| | 1,523.8 |
| | 1,507.6 |
| | 2,111.5 |
| | 1,882.5 |
|
| Shareholders’ equity | 337.0 |
| | 263.3 |
| | 372.4 |
| | 212.5 |
| | 369.0 |
|
| Data Per Common Share | | | | | | | | | |
| Income (loss) from continuing operations—basic | $ | 2.49 |
| | $ | 0.16 |
| | $ | 1.53 |
| | $ | 1.72 |
| | $ | 1.55 |
|
| Income (loss) from continuing operations—diluted | 2.49 |
| | 0.16 |
| | 1.52 |
| | 1.71 |
| | 1.54 |
|
| Dividends declared | 0.96 |
| | 0.84 |
| | 0.51 |
| | — |
| | — |
|
| Other Statistics | | | | | | | | | |
| Common shareholders of record | 4,369 |
| | 4,646 |
| | 4,895 |
| | 5,142 |
| | 5,839 |
|
| |
(1) | Adjustments related to our legacy liabilities, Chapter 11, and pension mark-to-market accounting are included in and affect the period-to-period comparability of “income (loss) from continuing operations” and the related data per common share. See Note 18 to the Consolidated Financial Statements for a detail of these items. |
| |
(2) | For 2017, “Income (loss) from continuing operations” includes a charge of $143.0 million related to the estimated impacts of the U.S. Tax Cuts and Jobs Act of 2017. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations
See “Analysis of Operations” for a discussion of our non-GAAP performance measures. Our references to “advanced economies” and “emerging regions” refer to classifications established by the International Monetary Fund.
Results of Operations
2018 Performance Summary
Following is a summary of our financial performance for the year ended December 31, 2018, compared with the prior year.
Net sales increased 12.6% to $1,932.1 million.
Income from continuing operations attributable to Grace increased to $167.6 million, including a pre-tax charge of $70.0 million for the estimated costs to remediate our former vermiculite mine site.
Adjusted EBIT increased 10.3% to $456.7 million.
Diluted earnings per share from continuing operations increased to $2.49 per diluted share.
Adjusted EPS increased 21.8% to $4.14 per diluted share.
Summary Description of Business
We are engaged in specialty chemicals and specialty materials businesses on a worldwide basis through our two reportable segments, Grace Catalysts Technologies and Grace Materials Technologies. See Item 1 (Business—Business Overview) of this Report for a summary description of our business.
Analysis of Operations
We have set forth in the table below our key operating statistics with percentage changes for the years ended December 31, 2018, 2017, and 2016. Please refer to this Analysis of Operations when reviewing this Management’s Discussion and Analysis of Financial Condition and Results of Operations. In the table we present financial information in accordance with U.S. GAAP, as well as the non-GAAP financial information described below. We believe that the non-GAAP financial information provides useful supplemental information about the performance of our businesses, improves period-to-period comparability and provides clarity on the information our management uses to evaluate the performance of our businesses. In the table, we have provided reconciliations of these non-GAAP financial measures to the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP. The non-GAAP financial measures should not be considered as a substitute for financial measures calculated in accordance with U.S. GAAP, and the financial results calculated in accordance with U.S. GAAP and reconciliations from those results should be evaluated carefully.
We define Adjusted EBIT (a non-GAAP financial measure) to be income from continuing operations attributable to W. R. Grace & Co. shareholders, adjusted” and the related earnings per share data include the effects of a pre-tax charge of $27.0 million for interestestimated costs to construct a new dam spillway at the former vermiculite mine site in Libby, Montana, as well as a $39.4 million loss on early extinguishment of debt.
(3)Fourth quarter “net income (loss),” “net income (loss) attributable to W. R. Grace & Co. shareholders,” and expense; income taxes; coststhe related earnings per share data include the effects of the annual pension mark-to-market adjustment, as well as charges related to legacy product, environmental and other claims; restructuring and repositioning expenses and asset impairments; pension costs other than service and interest costs, expected returns on plan assets, and amortizationitems (see Note 10).
| | | | | | | | | | | | | | | | | | | | | | | |
| (In millions, except per share amounts) | March 31(2) | | June 30 | | September 30 | | December 31(3) |
| 2019 | | | | | | | |
| Net sales | $ | 469.5 | | | $ | 513.6 | | | $ | 470.5 | | | $ | 504.5 | |
| Gross profit | 188.6 | | | 209.4 | | | 191.0 | | | 204.7 | |
| Net income (loss) | 24.6 | | | 76.4 | | | 53.8 | | | (28.1) | |
| Net income (loss) attributable to W. R. Grace & Co. shareholders | 24.7 | | | 76.2 | | | 53.7 | | | (28.3) | |
| Net income (loss) per share:(1) | | | | | | | |
| Basic earnings (loss) per share: | $ | 0.37 | | | $ | 1.14 | | | $ | 0.81 | | | $ | (0.42) | |
| Diluted earnings (loss) per share: | 0.37 | | | 1.14 | | | 0.80 | | | (0.42) | |
| Dividends declared per share | 0.27 | | | 0.27 | | | 0.27 | | | 0.27 | |
(1)Per share results for the four quarters may differ from full-year per share results, as a separate computation of prior service costs/credits;the weighted average number of shares outstanding is made for each quarter presented.
(2)First quarter “net income and expense items related(loss),” “net income (loss) attributable to divested businesses, product lines, and certain other investments; gains and losses on sales of businesses, product lines, and certain other investments; third-party acquisition-related costsW. R. Grace & Co. shareholders,” and the amortizationrelated earnings per share data include the effects of acquired inventory fair value adjustment; and certain other items that are not representativea pre-tax charge of underlying trends.$45.0 million for estimated costs to construct a new dam spillway at the former vermiculite mine site in Libby, Montana.
We define Adjusted EBITDA (a non-GAAP financial measure)(3)Fourth quarter “net income (loss),” “net income (loss) attributable to be Adjusted EBIT adjusted for depreciation and amortization.
We define Adjusted EBIT Return On Invested Capital (a non-GAAP financial measure) to be Adjusted EBIT (on a trailing four quarters basis) divided by the sum of net working capital, properties and equipment and certain other assets and liabilities.
We define Adjusted Gross Margin (a non-GAAP financial measure) to be gross margin adjusted for pension-related costs included in cost of goods soldW. R. Grace & Co. shareholders,” and the amortizationrelated earnings per share data include the effects of acquired inventory fair value adjustment.
We define Adjusted Earnings Per Share (EPS) (a non-GAAP financial measure) to be diluted EPS from continuing operations adjusted for coststhe annual pension mark-to-market adjustment, as well as charges related to legacy product, environmental and other claims; restructuring and repositioning expenses and asset impairments; pension costs other than service and interest costs, expected returns on plan assets, and amortization of prior service costs/credits; income and expense items related to divested businesses, product lines, and certain other investments; gains and losses on sales of businesses, product lines and certain other investments; third-party acquisition-related costs and the amortization of acquired inventory fair value adjustment; certain other items that are not representative of underlying trends; certain discrete tax items; and income tax expense related to historical tax attributes.
We define Net Sales, constant currency (a non-GAAP financial measure) to be the period-over-period change in net sales calculated using the foreign currency exchange rates that were in effect during the previous comparable period.
We use Adjusted EBIT as a performance measure in significant business decisions and in determining certain incentive compensation. We use Adjusted EBIT as a performance measure because it provides improved period-to-period comparability for decision making and compensation purposes, and because it better measures the ongoing earnings results of our strategic and operating decisions by excluding the earnings effects of our legacy product, environmental, and other claims; restructuring and repositioning activities; divested businesses; the effects of acquisitions; and certain other items that are not representative of underlying trends.
We use Adjusted EBITDA, Adjusted EBIT Return On Invested Capital, Adjusted Gross Margin, and Adjusted EPS as performance measures and may use these measures in determining certain incentive compensation. We use Adjusted EBIT Return On Invested Capital in making operating and investment decisions and in balancing the growth and profitability of our operations.
We use Net Sales, constant currency as a performance measure to compare current period financial performance to historical financial performance by excluding the impact of foreign currency exchange rate fluctuations that are not representative of underlying business trends and are largely outside of our control.
Adjusted EBIT, Adjusted EBITDA, Adjusted EBIT Return On Invested Capital, Adjusted Gross Margin, Adjusted EPS, and Net Sales, constant currency are non-GAAP financial measures; do not purport to represent income measures as defined under U.S. GAAP; and should not be used as alternatives to such measures as an indicator of our performance. These measures are provided to investors and others to improve the period-to-period comparability and peer-to-peer comparability of our financial results, and to ensure that investors understand the information we use to evaluate the performance of our businesses. They distinguish the operating results of Grace’s current business base from the costs of Grace’s legacy product, environmental and other claims; restructuring and repositioning activities; divested businesses; and certain other items. These measures may have material limitations due to the exclusion or inclusion of amounts that are included or excluded, respectively, in the most directly comparable measures calculated and presented in accordance with U.S. GAAP, and thus investors and others should review carefully the financial results calculated in accordance with U.S. GAAP.
Adjusted EBIT has material limitations as an operating performance measure because it excludes costs related to legacy product, environmental and other claims, and may exclude income and expenses from restructuring and repositioning activities and divested businesses, which historically have been material components of our net income. Adjusted EBITDA also has material limitations as an operating performance measure because it excludes the impact of depreciation and amortization expense. Our business is substantially dependent on the successful deployment of capital, and depreciation and amortization expense is a necessary element of our costs. We compensate for the limitations of these measurements by using these indicators together with net income as measured under U.S. GAAP to present a complete analysis of our results of operations. Adjusted EBIT and Adjusted EBITDA should be evaluated together with net income and net income attributable to Grace shareholders, measured under U.S. GAAP, for a complete understanding of our results of operations.
|
| | | | | | | | | | | | | | | | | |
Analysis of Operations (In millions, except per share amounts) | 2018 | | 2017 | | % Change | | 2016 | | % Change |
| Net sales: | | | | | | | | | |
| Catalysts Technologies | $ | 1,463.5 |
| | $ | 1,276.5 |
| | 14.6 | % | | $ | 1,163.7 |
| | 9.7 | % |
| Materials Technologies | 468.6 |
| | 440.0 |
| | 6.5 | % | | 434.9 |
| | 1.2 | % |
| Total Grace net sales | $ | 1,932.1 |
| | $ | 1,716.5 |
| | 12.6 | % | | $ | 1,598.6 |
| | 7.4 | % |
| Net sales by region: | | | | | | | | | |
| North America | $ | 581.7 |
| | $ | 486.0 |
| | 19.7 | % | | $ | 490.7 |
| | (1.0 | )% |
| Europe Middle East Africa | 752.2 |
| | 667.7 |
| | 12.7 | % | | 647.8 |
| | 3.1 | % |
| Asia Pacific | 481.5 |
| | 459.8 |
| | 4.7 | % | | 348.9 |
| | 31.8 | % |
| Latin America | 116.7 |
| | 103.0 |
| | 13.3 | % | | 111.2 |
| | (7.4 | )% |
| Total net sales by region | $ | 1,932.1 |
| | $ | 1,716.5 |
| | 12.6 | % | | $ | 1,598.6 |
| | 7.4 | % |
| Performance measures: | | | | | | | | | |
| Adjusted EBIT(A): | | | | | | | | | |
| Catalysts Technologies segment operating income | $ | 440.5 |
| | $ | 395.4 |
| | 11.4 | % | | $ | 367.8 |
| | 7.5 | % |
| Materials Technologies segment operating income | 105.6 |
| | 100.6 |
| | 5.0 | % | | 104.0 |
| | (3.3 | )% |
| Corporate costs | (73.5 | ) | | (69.0 | ) | | (6.5 | )% | | (59.4 | ) | | (16.2 | )% |
| Gain on termination and curtailment of postretirement plans related to current businesses | — |
| | — |
| | NM |
| | 0.2 |
| | NM |
|
| Certain pension costs(B)(C) | (15.9 | ) | | (13.0 | ) | | (22.3 | )% | | (12.3 | ) | | (5.7 | )% |
| Adjusted EBIT | 456.7 |
| | 414.0 |
| | 10.3 | % | | 400.3 |
| | 3.4 | % |
| Costs related to legacy product, environmental and other claims, net | (84.6 | ) | | (30.8 | ) | | | | (35.4 | ) | | |
| Restructuring and repositioning expenses | (46.4 | ) | | (26.7 | ) | | | | (38.6 | ) | | |
| Pension MTM adjustment and other related costs, net(B)(C) | 15.2 |
| | (51.1 | ) | | | | (60.3 | ) | | |
| Third-party acquisition-related costs | (7.3 | ) | | (2.9 | ) | | | | (2.5 | ) | | |
| Amortization of acquired inventory fair value adjustment | (6.9 | ) | | — |
| | | | (8.0 | ) | | |
| Loss on early extinguishment of debt | (4.8 | ) | | — |
| | | | (11.1 | ) | | |
| Income and expense items related to divested businesses | 2.3 |
| | (2.3 | ) | | | | 0.1 |
| | |
| Accounts receivable reserve—Venezuela | — |
| | (10.0 | ) | | | | — |
| | |
| Gain (loss) on sale of product line | — |
| | — |
| | | | 1.7 |
| | |
| Gain on termination and curtailment of postretirement plans related to divested businesses | — |
| | — |
| | | | 0.3 |
| | |
| Interest expense, net | (78.5 | ) | | (78.5 | ) | | — | % | | (80.5 | ) | | 2.5 | % |
| (Provision for) benefit from income taxes | (78.1 | ) | | (200.5 | ) | | 61.0 | % | | (59.0 | ) | | NM |
|
| Income (loss) from continuing operations attributable to W. R. Grace & Co. shareholders | $ | 167.6 |
| | $ | 11.2 |
| | NM |
| | $ | 107.0 |
| | (89.5 | )% |
| Diluted EPS from continuing operations | $ | 2.49 |
| | $ | 0.16 |
| | NM |
| | $ | 1.52 |
| | (89.5 | )% |
| Adjusted EPS | $ | 4.14 |
| | $ | 3.40 |
| | 21.8 | % | | $ | 3.10 |
| | 9.7 | % |
|
| | | | | | | | | | | | | | | | | |
Analysis of Operations (In millions) | 2018 | | 2017 | | % Change | | 2016 | | % Change |
| Adjusted performance measures: | | | | | | | | | |
| Gross Margin: | | | | | | | | | |
| Catalysts Technologies | 41.7 | % | | 40.8 | % | | 0.9 pts |
| | 44.4 | % | | (3.6) pts |
|
| Materials Technologies | 37.8 | % | | 37.9 | % | | (0.1) pts |
| | 39.6 | % | | (1.7) pts |
|
| Adjusted Gross Margin | 40.7 | % | | 40.1 | % | | 0.6 pts |
| | 43.1 | % | | (3.0) pts |
|
| Amortization of acquired inventory fair value adjustment | (0.3 | )% | | — | % | | NM |
| | (0.5 | )% | | NM |
|
| Pension costs in cost of goods sold | (0.7 | )% | | (0.7 | )% | | 0.0 pts |
| | (1.2 | )% | | 0.5 pts |
|
| Total Grace | 39.7 | % | | 39.4 | % | | 0.3 pts |
| | 41.4 | % | | (2.0) pts |
|
| Adjusted EBIT: | | | | | | | | | |
| Catalysts Technologies | $ | 440.5 |
| | $ | 395.4 |
| | 11.4 | % | | $ | 367.8 |
| | 7.5 | % |
| Materials Technologies | 105.6 |
| | 100.6 |
| | 5.0 | % | | 104.0 |
| | (3.3 | )% |
| Corporate, pension, and other | (89.4 | ) | | (82.0 | ) | | (9.0 | )% | | (71.5 | ) | | (14.7 | )% |
| Total Grace | 456.7 |
| | 414.0 |
| | 10.3 | % | | 400.3 |
| | 3.4 | % |
| Depreciation and amortization: | | | | | | | | | |
| Catalysts Technologies | $ | 81.7 |
| | $ | 87.1 |
| | (6.2 | )% | | $ | 77.4 |
| | 12.5 | % |
| Materials Technologies | 15.5 |
| | 19.6 |
| | (20.9 | )% | | 19.5 |
| | 0.5 | % |
| Corporate | 3.6 |
| | 4.8 |
| | (25.0 | )% | | 3.4 |
| | 41.2 | % |
| Total Grace | 100.8 |
| | 111.5 |
| | (9.6 | )% | | 100.3 |
| | 11.2 | % |
| Adjusted EBITDA: | | | | | | | | | |
| Catalysts Technologies | $ | 522.2 |
| | $ | 482.5 |
| | 8.2 | % | | $ | 445.2 |
| | 8.4 | % |
| Materials Technologies | 121.1 |
| | 120.2 |
| | 0.7 | % | | 123.5 |
| | (2.7 | )% |
| Corporate, pension, and other | (85.8 | ) | | (77.2 | ) | | (11.1 | )% | | (68.1 | ) | | (13.4 | )% |
| Total Grace | 557.5 |
| | 525.5 |
| | 6.1 | % | | 500.6 |
| | 5.0 | % |
| Adjusted EBIT margin: | | | | | | | | | |
| Catalysts Technologies | 30.1 | % | | 31.0 | % | | (0.9) pts |
| | 31.6 | % | | (0.6) pts |
|
| Materials Technologies | 22.5 | % | | 22.9 | % | | (0.4) pts |
| | 23.9 | % | | (1.0) pts |
|
| Total Grace | 23.6 | % | | 24.1 | % | | (0.5) pts |
| | 25.0 | % | | (0.9) pts |
|
| Adjusted EBITDA margin: | | | | | | | | | |
| Catalysts Technologies | 35.7 | % | | 37.8 | % | | (2.1) pts |
| | 38.3 | % | | (0.5) pts |
|
| Materials Technologies | 25.8 | % | | 27.3 | % | | (1.5) pts |
| | 28.4 | % | | (1.1) pts |
|
| Total Grace | 28.9 | % | | 30.6 | % | | (1.7) pts |
| | 31.3 | % | | (0.7) pts |
|
|
| | | | | | | | | | | |
Analysis of Operations (In millions) | 2018 | | 2017 | | 2016 |
| Calculation of Adjusted EBIT Return On Invested Capital (trailing four quarters): | | | | | |
| Adjusted EBIT | $ | 456.7 |
| | $ | 414.0 |
| | $ | 400.3 |
|
| Invested Capital: | | | | | |
| Trade accounts receivable | 288.5 |
| | 285.2 |
| | 273.9 |
|
| Inventories | 281.1 |
| | 230.9 |
| | 228.0 |
|
| Accounts payable | (248.6 | ) | | (210.3 | ) | | (195.4 | ) |
| | 321.0 |
| | 305.8 |
| | 306.5 |
|
| Other current assets (excluding income taxes) | 76.5 |
| | 42.1 |
| | 32.0 |
|
| Properties and equipment, net | 1,011.7 |
| | 799.1 |
| | 729.6 |
|
| Goodwill | 540.4 |
| | 402.4 |
| | 394.2 |
|
| Technology and other intangible assets, net | 356.5 |
| | 255.4 |
| | 269.1 |
|
| Investment in unconsolidated affiliate | 156.1 |
| | 125.9 |
| | 117.6 |
|
| Other assets (excluding capitalized financing fees) | 111.0 |
| | 37.4 |
| | 34.9 |
|
| Other current liabilities (excluding income taxes, legacy environmental matters, accrued interest, and restructuring) | (189.8 | ) | | (158.6 | ) | | (144.4 | ) |
| Other liabilities (excluding income taxes and legacy environmental matters) | (201.5 | ) | | (113.7 | ) | | (89.3 | ) |
| Total invested capital | $ | 2,181.9 |
| | $ | 1,695.8 |
| | $ | 1,650.2 |
|
| Adjusted EBIT Return On Invested Capital | 20.9 | % | | 24.4 | % | | 24.3 | % |
Amounts may not add due to rounding.
NM—Not Meaningful
| |
(A) | Grace’s segment operating income includes only Grace’s share of income of consolidated and unconsolidated joint ventures. |
| |
(B) | Certain pension costs include only ongoing costs recognized quarterly, which include service and interest costs, expected returns on plan assets, and amortization of prior service costs/credits. Catalysts Technologies and Materials Technologies segment operating income and corporate costs do not include any amounts for pension expense. Other pension related costs including annual mark-to-market (MTM) adjustments and actuarial gains and losses are excluded from Adjusted EBIT. These amounts are not used by management to evaluate the performance of Grace’s businesses and significantly affect the peer-to-peer and period-to-period comparability of our financial results. Mark-to-market adjustments and actuarial gains and losses relate primarily to changes in financial market values and actuarial assumptions and are not directly related to the operation of Grace’s businesses. |
| |
(C) | “Defined benefit pension expense” as measured under U.S. GAAP includes actuarial gains and losses and actual returns on assets. Adjusted EBIT includes expected returns on assets but excludes both actuarial gains and losses and actual returns on assets. The table below presents expected and actual returns on plan assets for U.S. and non-U.S. plans for the years ended December 31, 2018, 2017, and 2016. |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| (In millions) | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| Actual return on plan assets | $ | (41.9 | ) | | $ | (1.7 | ) | | $ | 112.7 |
| | $ | 1.6 |
| | $ | 95.6 |
| | $ | (0.5 | ) |
| Actual return on plan assets | (3.51 | )% | | (8.01 | )% | | 11.20 | % | | 8.62 | % | | 9.65 | % | | (2.55 | )% |
| Expected return on plan assets | $ | 57.2 |
| | $ | 1.0 |
| | $ | 57.5 |
| | $ | 0.9 |
| | $ | 56.7 |
| | $ | 1.0 |
|
| Expected return on plan assets | 5.25 | % | | 4.69 | % | | 5.50 | % | | 4.69 | % | | 5.50 | % | | 5.08 | % |
Grace Overview
Following is an overview of our financial performance for the years ended December 31, 2018, 2017, and 2016.
Net Sales and Gross Margin
Sales were $1,932.1 million, $1,716.5 million, and $1,598.6 million for the years ended December 31, 2018, 2017, and 2016. Gross margin was39.7%, 39.4%, and 41.4% for the years ended December 31, 2018, 2017, and 2016. Adjusted Gross Margin was40.7%, 40.1%, and 43.1% for the years ended December 31, 2018, 2017, and 2016.
The following tables identify the year-over-year increase or decrease in sales attributable to changes in sales volume and/or mix, product price, and the impact of currency translation.
|
| | | | | | | | | | | |
| | 2018 as a Percentage Increase (Decrease) from 2017 |
| Net Sales Variance Analysis | Volume | | Price | | Currency Translation | | Total |
| Catalysts Technologies | 12.1 | % | | 1.6 | % | | 0.9 | % | | 14.6 | % |
| Materials Technologies | 3.1 | % | | 1.6 | % | | 1.8 | % | | 6.5 | % |
| Net sales | 9.8 | % | | 1.6 | % | | 1.2 | % | | 12.6 | % |
| By Region: | | | | | | |
|
| North America | 17.6 | % | | 2.1 | % | | — | % | | 19.7 | % |
| Europe Middle East Africa | 6.8 | % | | 2.7 | % | | 3.2 | % | | 12.7 | % |
| Asia Pacific | 4.0 | % | | 0.4 | % | | 0.3 | % | | 4.7 | % |
| Latin America | 19.0 | % | | (2.2 | )% | | (3.5 | )% | | 13.3 | % |
Sales for 2018 increased 12.6% overall compared with the prior year, up 11.4% on constant currency. Higher sales volumes in Catalysts Technologies were driven by the polyolefin catalysts acquisition and growth in the existing businesses across all regions except Asia. Sales volumes in Materials Technologies were up driven by growth in Europe, North America, and Latin America.
Gross margin increased 30 basis points to 39.7% from 39.4% for the prior year. Adjusted Gross Margin increased 60 basis points to 40.7% from 40.1% for the prior year. The increases were primarily due to lower depreciation expense, improved pricing, higher sales volumes, and favorable product and regional mix, partially offset by higher manufacturing costs including a 170 basis point impact related to higher raw materials and energy costs.
|
| | | | | | | | | | | |
| | 2017 as a Percentage Increase (Decrease) from 2016 |
| Net Sales Variance Analysis | Volume | | Price | | Currency Translation | | Total |
| Catalysts Technologies | 9.7 | % | | (0.3 | )% | | 0.3 | % | | 9.7 | % |
| Materials Technologies | 0.3 | % | | (0.2 | )% | | 1.1 | % | | 1.2 | % |
| Net sales | 7.2 | % | | (0.3 | )% | | 0.5 | % | | 7.4 | % |
| By Region: | | | | | | | |
| North America | (0.5 | )% | | (0.5 | )% | | — | % | | (1.0 | )% |
| Europe Middle East Africa | 2.6 | % | | (0.6 | )% | | 1.1 | % | | 3.1 | % |
| Asia Pacific | 31.3 | % | | 0.6 | % | | (0.1 | )% | | 31.8 | % |
| Latin America | (7.9 | )% | | (0.2 | )% | | 0.7 | % | | (7.4 | )% |
Sales for 2017 increased 7.4% overall compared with the prior year, up 6.9% on constant currency. Catalysts sales volumes increased primarily due to higher demand in Asia and the full-year benefit of the 2016 polyolefin catalysts acquisition, partially offset by lower demand in Latin America. Lower pricing in Catalysts Technologies was primarily due to customer mix. Sales in Materials Technologies increased, primarily driven by higher sales volumes and favorable currency translation. Higher sales volumes in the silicas business, primarily in Asia, were partially offset by the impact related to the exit of certain products lines in the 2016 first half and lower pharmaceutical fine chemicals sales in North America.
Gross margin decreased 200 basis points to 39.4% from 41.4% for the prior year. Adjusted Gross Margin decreased 300 basis points to 40.1% from 43.1% for the prior year. The decreases were primarily due to higher manufacturing costs, including 110 basis points related to higher raw materials costs, and product and regional mix.
Grace Income From Continuing Operations
Income from continuing operations was $167.6 million for 2018 compared with $11.2 million for the prior year. The increase was primarily due to the $143.0 million provisional tax charge for the estimated impacts of the U.S. Tax Cuts and Jobs Act of 2017 (the “TCJA”), which was recorded in 2017. This was partially offset by higher restructuring and repositioning expenses and a higher provision for environmental remediation in 2018, which was primarily due to the $70.0 million charge for the estimated costs of future remediation-related activities at the Libby, Montana, mine site (see Note 10 to the Consolidated Financial Statements)10).
Income from continuing operations was $11.2 million for 2017 compared with $107.0 million for the prior year. The decrease was primarily due to a higher provision for income taxes due to a $143.0 million provisional charge for the estimated impacts of the TCJA (see Note 7 to the Consolidated Financial Statements) and an accounts receivable reserve for a customer in Venezuela, partially offset by higher segment operating income, lower restructuring and repositioning expenses, and a lower pension mark-to-market adjustment.
During the 2018 first quarter, we completed a study to evaluate the useful lives of our operating machinery and equipment, including a review of historical asset retirement data as well as review and analysis of relevant industry practices. As a result of this study, effective January 1, 2018, we revised the accounting useful lives of
certain machinery and equipment, which was determined to be a change in accounting estimate and is being applied prospectively. As a result of this change in accounting estimate, depreciation expense with respect to such machinery and equipment was reduced by $23.5 million, resulting in an increase to net income of $18.0 million or $0.27 per diluted share for the year ended December 31, 2018. Estimated useful lives for operating machinery and equipment, which previously ranged from 3 to 10 years, now range from 5 to 25 years.
Adjusted EBIT
Adjusted EBIT was $456.7 million for 2018, an increase of 10.3% compared with the prior year primarily due to higher gross profit, higher income from our ART joint venture, and favorable currency translation, partially offset by business interruption insurance recoveries in the prior year that did not repeat in 2018 and higher operating expenses.
Adjusted EBIT was $414.0 million for 2017, an increase of 3.4% compared with the prior year primarily due to higher sales volumes and business interruption insurance recoveries for lost profits as a result of a customer outage. The increase was partially offset by higher manufacturing costs, unfavorable product and regional mix, and higher operating expenses.
Adjusted EPS
The following table reconciles our Diluted EPS (GAAP) to our Adjusted EPS (non-GAAP):
|
| | | | | | | | | | | | | | | |
| | 2018 |
| (In millions, except per share amounts) | Pre-Tax | | Tax Effect | | After-Tax | | Per Share |
| Diluted Earnings Per Share (GAAP) | | | | | | | $ | 2.49 |
|
| Costs related to legacy product, environmental and other claims, net | $ | 84.6 |
| | $ | 18.2 |
| | $ | 66.4 |
| | 0.99 |
|
| Restructuring and repositioning expenses | 46.4 |
| | 10.0 |
| | 36.4 |
| | 0.54 |
|
| Pension MTM adjustment and other related costs, net(B)(C) | (15.2 | ) | | (3.4 | ) | | (11.8 | ) | | (0.18 | ) |
| Third-party acquisition-related costs | 7.3 |
| | 1.6 |
| | 5.7 |
| | 0.08 |
|
| Amortization of acquired inventory fair value adjustment | 6.9 |
| | 1.5 |
| | 5.4 |
| | 0.08 |
|
| Loss on early extinguishment of debt | 4.8 |
| | 1.0 |
| | 3.8 |
| | 0.06 |
|
| Income and expense items related to divested businesses | (2.3 | ) | | (0.5 | ) | | (1.8 | ) | | (0.03 | ) |
| Income tax expense related to historical tax attributes(1) | | | (25.6 | ) | | 25.6 |
| | 0.38 |
|
| Provisional charge related to the U.S. Tax Cuts and Jobs Act of 2017 | | | 17.1 |
| | (17.1 | ) | | (0.25 | ) |
| Discrete tax items, including adjustments to uncertain tax positions | | | 1.4 |
| | (1.4 | ) | | (0.02 | ) |
| Adjusted EPS (non-GAAP) | | |
|
| | | | $ | 4.14 |
|
| |
(1) | Our historical tax attribute carryforwards (net operating losses and tax credits) unfavorably affect our tax expense with respect to certain provisions of the TCJA. To normalize the effective tax rate, an adjustment is made to eliminate the tax expense impact associated with the historical tax attributes. |
|
| | | | | | | | | | | | | | | |
| | 2017 |
| (In millions, except per share amounts) | Pre-Tax | | Tax Effect | | After-Tax | | Per Share |
| Diluted Earnings Per Share (GAAP) | | | | | | | $ | 0.16 |
|
| Pension MTM adjustment and other related costs, net(B)(C) | $ | 51.1 |
| | $ | 17.4 |
| | $ | 33.7 |
| | 0.49 |
|
| Costs related to legacy product, environmental and other claims, net | 30.8 |
| | 11.4 |
| | 19.4 |
| | 0.28 |
|
| Restructuring and repositioning expenses | 26.7 |
| | 8.9 |
| | 17.8 |
| | 0.26 |
|
| Accounts receivable reserve-Venezuela | 10.0 |
| | 3.5 |
| | 6.5 |
| | 0.10 |
|
| Third-party acquisition-related costs | 2.9 |
| | 1.1 |
| | 1.8 |
| | 0.03 |
|
| Income and expense items related to divested businesses | 2.3 |
| | 0.8 |
| | 1.5 |
| | 0.02 |
|
| Provisional charge related to the U.S. Tax Cuts and Jobs Act of 2017 | | | (143.0 | ) | | 143.0 |
| | 2.10 |
|
| Discrete tax items, including adjustments to uncertain tax positions | | | 2.7 |
| | (2.7 | ) | | (0.04 | ) |
| Adjusted EPS (non-GAAP) | | | | | | | $ | 3.40 |
|
|
| | | | | | | | | | | | | | | |
| | 2016 |
| (In millions, except per share amounts) | Pre-Tax | | Tax Effect | | After-Tax | | Per Share |
| Diluted Earnings Per Share (GAAP) | | | | | | | $ | 1.52 |
|
| Pension MTM adjustment and other related costs, net(B)(C) | $ | 60.3 |
| | $ | 19.8 |
| | $ | 40.5 |
| | 0.57 |
|
| Restructuring and repositioning expenses | 38.6 |
| | 11.6 |
| | 27.0 |
| | 0.38 |
|
| Costs related to legacy product, environmental and other claims, net | 35.4 |
| | 13.2 |
| | 22.2 |
| | 0.31 |
|
| Loss on early extinguishment of debt | 11.1 |
| | 4.1 |
| | 7.0 |
| | 0.10 |
|
| Amortization of acquired inventory fair value adjustment | 8.0 |
| | 3.0 |
| | 5.0 |
| | 0.07 |
|
| Third-party acquisition-related costs | 2.5 |
| | 0.7 |
| | 1.8 |
| | 0.03 |
|
| (Gain) loss on sale of product line | (1.7 | ) | | (0.6 | ) | | (1.1 | ) | | (0.02 | ) |
| Gain on termination and curtailment of postretirement plans related to divested businesses | (0.3 | ) | | (0.1 | ) | | (0.2 | ) | | — |
|
| Income and expense items related to divested businesses | (0.1 | ) | | — |
| | (0.1 | ) | | — |
|
| Discrete tax items, including adjustments to uncertain tax positions | | | (9.8 | ) | | 9.8 |
| | 0.14 |
|
| Adjusted EPS (non-GAAP) | | | | | | | $ | 3.10 |
|
Adjusted EBIT Return On Invested Capital
Adjusted EBIT Return On Invested Capital for 2018 was 20.9% on a trailing four quarters basis, a decrease compared with 2017 and 2016 on the same basis, due to the polyolefin catalysts acquisition. The acquisition, which was completed on April 3, 2018, increased invested capital at that date, while Adjusted EBIT includes only three quarters of income from the acquired business.
We manage our operations with the objective of maximizing sales, earnings and cash flow over time. Doing so requires that we successfully balance our growth, profitability and working capital and other investments to support sustainable, long-term financial performance. We use Adjusted EBIT Return On Invested Capital as a performance measure in evaluating operating results, in making operating and investment decisions, and in balancing the growth and profitability of our operations.
Grace Value Model
In March 2018, we introduced investors to the Grace Value Model (“GVM”), our framework for creating and delivering value to customers, investors, and employees. At the company level, we create value through our focused portfolio, strong strategic position, and disciplined capital allocation. At the business level, we create value through customer-driven innovation, commercial excellence, and operating excellence. Great talent, our high-performance culture, and integrated business management processes support all of our activities and are a source of competitive advantage.
The GVM framework also encompasses our multi-year initiatives to transform our manufacturing and business processes to extend our competitive advantages and improve our cost position. We expect to significantly improve our manufacturing performance, reduce our manufacturing costs, and improve our integrated business management capabilities. We also expect to invest significant capital in our manufacturing plants to
accelerate growth and improve manufacturing performance. Our investments in commercial excellence are yielding positive results in account management, pipeline management and conversion, and pricing.
Segment Overview—Grace Catalysts Technologies
Following is an overview of the financial performance of Catalysts Technologies for the years ended December 31, 2018, 2017, and 2016.
Net Sales—Grace Catalysts Technologies
Sales were $1,463.5 million for 2018, an increase of 14.6% compared with the prior year. The increase was due to higher sales volumes (+12.1%), improved pricing (+1.6%), and favorable currency translation (+0.9%). Higher sales were driven by the 2018 polyolefin catalysts acquisition (+6.8%) and growth in the existing businesses across all regions except Asia Pacific, driven by higher demand from new and existing customers and higher licensing revenues, improved pricing, and favorable currency translation as the U.S. dollar weakened against multiple currencies, especially the euro, compared with the prior year.
Sales were $1,276.5 million for 2017, an increase of 9.7% compared with the prior year. The increase was due to higher sales volumes (+9.7%), and favorable currency translation (+0.3%), partially offset by lower pricing (-0.3%) primarily due to customer mix. Higher sales volumes were driven by higher demand, primarily in Asia Pacific, and the full-year benefit of the 2016 polyolefin catalysts acquisition. Specialty Catalysts sales volumes increased due to the 2016 polyolefin catalysts acquisition and organic growth in the existing businesses driven by higher demand in all markets. Refining Catalysts sales volumes increased primarily in Asia Pacific, due to demand for new products, bid business, and new customer acquisition. Sales volumes in Latin America decreased primarily due to a delay in contract renewals in the region and lower sales into Venezuela. Favorable currency translation affected both product groups as the U.S. dollar weakened against multiple currencies, especially the euro, compared with the prior year.
Segment Operating Income (SOI) and Margin—Grace Catalysts Technologies
Gross profit was $610.0 million for 2018, an increase of 17.0% compared with the prior year. Gross margin was 41.7% compared with 40.8% for the prior year. The increases were primarily due to lower depreciation expense, higher sales volumes, improved pricing, and favorable product and regional mix, partially offset by higher manufacturing costs including a 180 basis point impact related to higher raw materials and energy costs.
Segment operating income was $440.5 million for 2018, an increase of 11.4% compared with the prior year, primarily due to higher gross profit, higher income from our ART joint venture, and favorable currency translation. The increase was partially offset by the absence of business interruption insurance recoveries that were included in the prior year and higher operating expenses. The ART joint venture contributed $31.8 million to operating income, an increase of $5.9 million from the prior-year period. Segment operating margin for 2018 decreased to 30.1%, a decline of 90 basis points compared with the prior year primarily due to the absence of business interruption insurance recoveries.
Gross profit was $521.2 million for 2017, an increase of 0.9% compared with the prior year. Gross margin was 40.8% compared with 44.4% for the prior year. The decrease in gross margin was primarily due to higher manufacturing costs, including 130 basis points related to higher raw materials costs, and product and regional mix, including the effect of the customer outage and the full-year effect of the 2016 polyolefin catalysts acquisition.
Segment operating income was $395.4 million for 2017, an increase of 7.5% compared with the prior year, primarily due to higher sales volumes and business interruption insurance recoveries, partially offset by higher manufacturing costs and product and regional mix. The ART joint venture contributed $25.9 million to operating income, a decrease of $3.9 million from the prior-year period, primarily due to a change in costs included in the partner service level agreements with ART. Segment operating margin for 2017 decreased to 31.0%, a decline of 60 basis points compared with the prior year.
In January 2017, a Catalysts Technologies customer experienced an explosion and fire resulting in an extended outage. We recognized a benefit of and received $25.0 million in payments from our third-party insurer during 2017 under our business interruption insurance policy for a portion of profits lost as a result of the outage. The policy had a $25.0 million limit for this event.
In the 2017 third quarter, we recorded a $10.0 million charge to fully reserve for a trade receivable from a Venezuela-based customer related to increased economic uncertainty and the recent political unrest and sanctions. This charge has been excluded from Adjusted EBIT due to the nature of the situation.
Segment Overview—Grace Materials Technologies
Following is an overview of the financial performance of Materials Technologies for the years ended December 31, 2018, 2017, and 2016.
Net Sales—Grace Materials Technologies
Sales were $468.6 million for 2018, an increase of 6.5% compared with the prior year. The increase was due to higher sales volumes (+3.1%), favorable currency translation (+1.8%), and improved pricing (+1.6%). The increase in sales volumes was primarily driven by higher consumer/pharma and coatings sales in Europe, higher chemical process and coatings sales in North America, and higher sales across all product groups in Latin America. The remainder of the increase was driven by improved pricing across all regions and favorable currency translation as the U.S. dollar weakened against multiple currencies, especially the euro, compared with the prior year. Materials Technologies is our reportable segment most sensitive to changes in the euro.
Sales were $440.0 million for 2017, an increase of 1.2% compared with the prior year. The increase was due to favorable currency translation (+1.1%) and higher sales volumes (+0.3%), partially offset by lower pricing (-0.2%). Higher sales volumes in the silicas business, primarily in Asia Pacific, were partially offset by the impact related to the exit of certain products lines in the 2016 first half and lower pharmaceutical fine chemicals sales in North America. Favorable currency translation was due to the U.S. dollar weakening against multiple currencies, especially the euro, compared with the prior year.
Segment Operating Income (SOI) and Margin—Grace Materials Technologies
Gross profit was $177.0 million for 2018, an increase of 6.1% compared with the prior year, primarily due to higher sales volumes and favorable product and regional mix, partially offset by higher manufacturing costs. Gross margin was 37.8% compared with 37.9% for the prior year. The decrease in gross margin was primarily due to higher manufacturing costs including a 120 basis point impact related to higher raw materials and energy costs, partially offset by favorable product and regional mix, improved pricing, and lower depreciation expense.
Segment operating income was $105.6 million for 2018, an increase of 5.0% compared with the prior year, primarily due to higher gross profit, partially offset by higher operating expenses. Segment operating margin for 2018 decreased to 22.5%, a decline of 40 basis points compared with the prior year.
Gross profit was $166.9 million for 2017, a decrease of 3.2% compared with the prior year, primarily due to the impact related to the exit of product lines in the 2016 first half and higher manufacturing costs. Gross margin was 37.9% compared with 39.6% for the prior year. The decrease in gross margin was primarily due to higher manufacturing costs, including 60 basis points related to higher raw materials costs.
Segment operating income was $100.6 million for 2017, a decrease of 3.3% compared with the prior year, primarily due to higher manufacturing costs and higher operating expenses, partially offset by higher sales volumes and favorable currency translation. Segment operating margin for 2017 decreased to 22.9%, a decline of 100 basis points compared with the prior year.
Corporate Overview
Corporate costs include corporate functional costs and other corporate costs such as professional fees and insurance premiums. Corporate costs for 2018 increased 6.5% compared with the prior year, primarily due to higher incentive compensation expense.
Corporate costs for 2017 increased 16.2% compared with the prior year, primarily due to a favorable settlement of an insurance claim in 2016 and higher incentive compensation expense in 2017.
Restructuring and Repositioning Expenses
During 2018, we incurred $14.0 million of restructuring expenses primarily related to the closure of two smaller manufacturing plants, the activities from which have been moved to larger, more cost-effective plants as part of our strategy to capture synergies from our recent Catalysts Technologies acquisitions. Restructuring expenses of $11.5 million in 2017 primarily related to workforce reduction programs in our manufacturing, supply chain, finance and IT functions. Restructuring expenses of $24.3 million in 2016 related to workforce reductions and the exit of certain non-strategic product lines in Materials Technologies. Substantially all costs related to the restructuring programs are expected to be paid by December 31, 2021, but could be paid earlier subject to negotiations around certain plant exit costs.
Repositioning expenses included in continuing operations for the years ended December 31, 2018, 2017, and 2016 were $32.4 million, $15.2 million, and $14.3 million respectively. Expenses incurred in 2018 primarily include $13.7 million of third-party costs related to a multi-year program to transform Grace’s manufacturing and
business processes to extend its competitive advantages and improve its cost position, $11.7 million of severance and stock compensation costs related to employee separations, and write-offs of $8.5 million of previously capitalized plant engineering costs as a result of terminating an expansion project no longer necessary due to the 2018 polyolefin catalysts acquisition (see Note 20 to the Consolidated Financial Statements). Expenses incurred in 2017 primarily related to third-party costs associated with productivity and transformation initiatives, as well as costs related to the Separation. Expenses incurred in 2016 primarily related to the Separation. Excluding asset write-offs and stock compensation costs, substantially all of these costs have been or are expected to be settled in cash by December 31, 2019.
The following table presents the major components of restructuring and repositioning expenses for the years ended December 31, 2018, 2017, and 2016.
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| (in millions) | 2018 | | 2017 | | 2016 |
| Third-party costs of manufacturing and business transformation programs | $ | 13.7 |
| | $ | 8.2 |
| | $ | — |
|
| Costs related to plant closures | 13.4 |
| | 0.6 |
| | — |
|
| Employee severance and accelerated stock compensation | 12.3 |
| | 13.5 |
| | 16.1 |
|
| Write-off of engineering costs | 8.5 |
| | — |
| | — |
|
| Costs related to the Separation | 0.2 |
| | 0.9 |
| | 12.0 |
|
| Write-off related to sale of product lines | — |
| | — |
| | 6.6 |
|
| Other | (1.7 | ) | | 3.5 |
| | 3.9 |
|
| Total restructuring and repositioning expenses | $ | 46.4 |
| | $ | 26.7 |
| | $ | 38.6 |
|
Defined Benefit Pension Expense
Defined benefit pension expense includes costs under U.S. and non-U.S. defined benefit pension plans that provide benefits to business segment and corporate employees, as well as retirees and former employees of divested businesses where we retained these obligations.
Under mark-to-market accounting, our pension costs consist of two elements: 1) “certain pension costs”—ongoing costs recognized quarterly, which include service and interest costs, expected returns on plan assets, and amortization of prior service costs/credits; and 2) “pension mark-to-market adjustment and other related costs, net”—mark-to-market gains and losses recognized annually in the fourth quarter, or at an interim period should a significant event occur, resulting from changes in actuarial assumptions, such as discount rates and the difference between actual and expected returns on plan assets.
Certain pension costs were $15.9 million, $13.0 million and $12.3 million for 2018, 2017 and 2016, respectively. The increases were primarily due to a decrease in discount rates.
Pension mark-to-market adjustment and other related costs, net were $(15.2) million, $51.1 million and $60.3 million for 2018, 2017 and 2016, respectively. These costs are reported in “other (income) expense, net” in our Consolidated Financial Statements. The 2018 mark-to-market pension income of $15.2 million was primarily due to the increase in discount rates used to value the projected benefit obligations of our plans from year-end 2017 to year-end 2018, partially offset by lower than expected return on assets. The 2017 mark-to-market pension expense of $51.1 million was primarily due to the decrease in discount rates used to value the projected benefit obligations of our plans from year-end 2016 to year-end 2017, partially offset by higher than expected return on assets in the U.S. The 2016 mark-to-market pension expense of $60.3 million was primarily due to the decrease in discount rates used to value the projected benefit obligations of our plans from year-end 2015 to year-end 2016, partially offset by higher than expected return on assets in the U.S.
Interest and Financing Expenses
Net interest and financing expenses were $78.5 million for 2018, flat compared with 2017. Interest and financing expenses were $78.5 million for 2017, a decrease of 2.5% compared with 2016, primarily due to voluntary prepayments of our term loans in February and March 2016, partially offset by higher interest expense due to borrowings on our floating rate term loans and revolving credit facility.
Income Taxes
Income tax expense (benefit) for 2018, 2017 and 2016 was $78.1 million, $200.5 million and $59.0 million, respectively, on income from continuing operations before income taxes of $244.9 million, $210.9 million and $166.0 million in 2018, 2017 and 2016, respectively.
Our 2018 effective tax rate of 31.9% was higher than the 21% U.S. statutory rate. The higher rate was primarily caused by recognition of the GILTI tax that could not be offset with a corresponding GILTI deduction due to Grace utilizing NOLs in 2018. Once we have fully utilized our NOLs, we will be able to take advantage of the GILTI deduction that is currently limited due to NOL utilization. The geographic mix of income also contributed to the higher rate since the statutory rates in effect for our foreign subsidiaries exceed the 21% U.S. statutory rate.
Our 2017 effective tax rate includes $143.0 million in charges related to the TCJA. The effective tax rate without the impact of the TCJA was 27.3%, lower than the 35% U.S. statutory rate, primarily due to the geographic mix of income and the R&D credit.
Our 2016 effective tax rate of 35.5% was slightly higher than the 35% U.S. statutory rate. The benefit from the geographic mix of income and stock compensation windfall was nearly fully offset by state income taxes and other permanent items.
See Note 7 to the Consolidated Financial Statements for additional information regarding income taxes.
Financial Condition, Liquidity, and Capital Resources
Following is an analysis of our financial condition, liquidity and capital resources at December 31, 2018.
Our principal uses of cash are generally capital investments and acquisitions; working capital investments; compensation paid to employees, including contributions to our defined benefit pension plans and defined contribution plans; the repayment of debt and interest payments thereon; and the return of cash to shareholders through repurchase of shares and dividends.22. Subsequent Event
On February 8, 2017, we announced that the Board of Directors had authorized a share repurchase program of up to $250 million. Under this program, during 2018 we repurchased 1,171,141 shares of Company common stock for $80.0 million. As of December 31, 2018, $138.9 million remained under the current authorization.
We paid cash dividends of $64.6 million during 2018. On February 8, 2018, we announced that the Board of Directors had approved an increase in the annual dividend rate, from $0.84 to $0.96 per share of Company common stock, effective with the dividend paid March 22, 2018. On February 7, 2019, we announced that the Board of Directors had approved a further increase to $1.08 per share of Company common stock.
We believe that the cash we expect to generate during 2019 and thereafter, together with other available liquidity and capital resources, are sufficient to finance our operations, growth strategy, share repurchase program and expected dividend payments, and meet our debt and pension obligations.
On April 3, 2018, we25, 2021, Grace entered into the Credit Agreement, which provides for new secured credit facilities, consisting of:
| |
(a) | a $950 million term loan due in 2025, with interest at LIBOR +175 basis points, and |
| |
(b) | a $400 million revolving credit facility due in 2023, with interest at LIBOR +175 basis points. |
We used the proceeds from the term loan to repay in full the outstanding borrowings of $507.0 million under our 2014 credita definitive agreement to fundacquire the 2018 polyolefin catalysts acquisition for $418.0 million, and to make a voluntary $50.0 million accelerated contribution to our U.S. qualified pension plans. See Note 5 to the Consolidated Financial Statements for additional information related to the Credit Agreement.
Cash Resources and Available Credit Facilities
At December 31, 2018, we had available liquidity of $606.7 million, consisting of $200.5 million in cash and cash equivalents ($100.5 million in the U.S.), $367.6 million available under our revolving credit facility, and $38.6 million of available liquidity under various non-U.S. credit facilities. The $400 million revolving credit facility includes a $100 million sublimit for letters of credit.
Our non-U.S. credit facilities are extended to various subsidiaries that use them primarily to issue bank guarantees supporting trade activity and to provide working capital during occasional cash shortfalls. We generally renew these credit facilities as they expire.
The following table summarizes our non-U.S. credit facilities as of December 31, 2018:
|
| | | | | | | | | |
(In millions) | Maximum Borrowing Amount | | Available Liquidity | | Expiration Date |
| China | $ | 22.9 |
| | $ | 20.6 |
| | April 3, 2023 |
| Other countries | 28.4 |
| | 18.0 |
| | Various through 2023, as well as open-ended |
| Total | $ | 51.3 |
| | $ | 38.6 |
| | |
Analysis of Cash Flows
The following table summarizes our cash flows for the years ended December 31, 2018, 2017, and 2016:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| (In millions) | 2018 | | 2017 | | 2016 |
| Net cash provided by (used for) operating activities from continuing operations | $ | 342.0 |
| | $ | 319.2 |
| | $ | 267.5 |
|
| Net cash provided by (used for) investing activities from continuing operations | (618.5 | ) | | (129.2 | ) | | (344.4 | ) |
| Net cash provided by (used for) financing activities from continuing operations | 316.5 |
| | (134.8 | ) | | (60.2 | ) |
| Effect of currency exchange rate changes on cash and cash equivalents | (2.5 | ) | | 7.7 |
| | (3.0 | ) |
| Increase (decrease) in cash and cash equivalents from continuing operations | 37.5 |
| | 62.9 |
| | (140.1 | ) |
| Increase (decrease) in cash and cash equivalents from discontinued operations | — |
| | — |
| | 44.8 |
|
| Net increase (decrease) in cash and cash equivalents | 37.5 |
| | 62.9 |
| | (95.3 | ) |
| Less: cash and cash equivalents of discontinued operations | — |
| | — |
| | (143.4 | ) |
| Cash and cash equivalents, beginning of period | 163.5 |
| | 100.6 |
| | 339.3 |
|
| Cash and cash equivalents, end of period | $ | 201.0 |
| | $ | 163.5 |
| | $ | 100.6 |
|
Net cash provided by operating activities in 2018 was $342.0 million compared with $319.2 million in the prior year. The year-over-year change in cash flow was primarily due to higher income from continuing operations and the timing of advance payments from customers in 2018, and a 2017 payment of $30 million to satisfy a deferred payment obligation to the asbestos property damage trust required under the joint plan of reorganization, partially offset by a $50.0 million accelerated contribution to the U.S. defined benefit pension plans, higher net cash paid for income taxes, and the prior-year dividend received from ART that did not repeat in 2018.
Net cash provided by operating activities in 2017 was $319.2 million compared with $267.5 million in the prior year. The year-over-year change in cash flow was primarily due to higher income from continuing operations before income taxes and lower net cash paid for income taxes, partially offset by a 2017 payment of $30 million to satisfy a deferred payment obligation to the asbestos property damage trust required under the joint plan of reorganization.
Net cash used for investing activities in 2018 was $618.5 million compared with $129.2 million in the prior year and $344.4 million in 2016. Net cash used for investing activities primarily includes the net cash paid for capital expenditures and businesses acquired. Our capital expenditures include investments in new capacity, improved productivity, information technology, and maintenance of our manufacturing and office facilities. We expect our capital expenditures in 2019 to be in the range of $200 million to $210 million and have entered into commitments related to a portion of those expenditures. We expect to fund our capital expenditures from net cash provided by operating activities.
In 2018, we completed the purchase of the polyolefin catalystsFine Chemistry Services business of Albemarle Corporation (“Albemarle”) for $418.0approximately $570 million, and in 2016, we completed the purchase of the BASF polyolefin catalysts business for $246.5 million. The 2016 acquisition cost was partially offset by $11.3including $300 million in proceeds from the sale of assets.
Net cash provided by financing activities in 2018 was $316.5 million compared with cash used of $134.8 million in 2017 and $60.2 million in 2016. In 2018, we entered into a new Credit Agreement and used a portion of
the proceeds to repay in full the borrowings outstanding under our 2014 credit agreement. Cash paid for repurchases of common stock in 2018 was $80.0 million, compared with $65.0 million in 2017 and $195.1 million in 2016. We paid cash dividends of $64.6 million in 2018, compared with $57.3 million in 2017 and $36.0 million in 2016. In 2016, we received a $750 million distribution of cash from GCP, of which we used $600 million to pay down our euro and U.S. dollar term loans in the first quarter.
Debt and Other Contractual Obligations
Total debt outstanding at December 31, 2018, was $1,983.3 million. Set forth below are our contractual obligations as of December 31, 2018:
|
| | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period |
| (In millions) | Total | | Less than 1 Year | | 2-3 Years | | 4-5 Years | | More Than 5 Years |
| Debt | $ | 1,983.3 |
| | $ | 22.3 |
| | $ | 731.7 |
| | $ | 31.6 |
| | $ | 1,197.7 |
|
| Expected interest payments on debt(1) | 452.5 |
| | 96.3 |
| | 181.6 |
| | 114.2 |
| | 60.4 |
|
| Operating lease obligations | 32.5 |
| | 8.3 |
| | 9.6 |
| | 3.2 |
| | 11.4 |
|
| Operating commitments(2) | 256.8 |
| | 166.6 |
| | 86.9 |
| | 3.3 |
| | — |
|
| Pension funding requirements per ERISA(3) | 5.5 |
| | 0.1 |
| | 0.6 |
| | 4.8 |
| | — |
|
| Pension funding requirements for non-U.S. pension plans(4) | 46.5 |
| | 8.8 |
| | 18.3 |
| | 19.4 |
| | — |
|
| Total Contractual Obligations | $ | 2,777.1 |
| | $ | 302.4 |
| | $ | 1,028.7 |
| | $ | 176.5 |
| | $ | 1,269.5 |
|
| |
(1) | Amounts are based on current interest rates as of December 31, 2018, for principal debt outstanding as of December 31, 2018. Actual interest payments may vary based on any interest rate swaps in effect. |
| |
(2) | Amounts do not include open purchase commitments, which are routine in nature and normally settle within 90 days, or obligations to employees under annual or long-term incentive programs. |
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(3) | Based on the U.S. qualified pension plans’ status as of December 31, 2018, minimum funding requirements under ERISA have been estimated for the next five years. Amounts in subsequent years or additional payments have not yet been determined. |
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(4) | Based on the non-U.S. pension plans’ status as of December 31, 2018, funding requirements have been estimated for the next five years. Amounts in subsequent years have not yet been determined. |
See Note 10 to the Consolidated Financial Statements for a discussion of Financial Assurances.
Employee Benefit Plans
See Note 8 to the Consolidated Financial Statements for further discussion of Pension Plans and Other Retirement Plans.
Defined Contribution Retirement Plan
We sponsor a defined contribution retirement plan for our employees in the United States. This plan is qualified under section 401(k) of the U.S. tax code. Currently, we contribute an amount equal to 100% of employee contributions, up to 6% of an individual employee’s salary or wages. Our costs related to this benefit plan were $12.6 million, $11.5 million and $11.1 million for the years ended December 31, 2018, 2017 and 2016, respectively.
Defined Benefit Pension Plans
We sponsor defined benefit pension plans for our employees in the U.S., Canada, Germany, and a number of other countries, and fund government-sponsored programs in other countries where we operate. Certain of our defined benefit pension plans are advance-funded and others are pay-as-you-go. The advance-funded plans are administered by trustees who receive direction related to the management of plan assets and arrange to have obligations paid when due. Our most significant advance-funded plans cover current and former salaried employees in the U.S. and employees covered by collective bargaining agreements at certain of our U.S. facilities. Our U.S. advance-funded plans are qualified under the U.S. tax code.
The following table presents the funded status of our underfunded and unfunded pension plans:
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| | | | | | | | | | | | | | | |
| | Underfunded Pension Plans(1) | | Unfunded Pension Plans(2) |
| (In millions) | 2018 | | 2017 | | 2018 | | 2017 |
| Projected benefit obligation | $ | 920.3 |
| | $ | 1,241.8 |
| | $ | 380.0 |
| | $ | 406.9 |
|
| Fair value of plan assets | 852.5 |
| | 1,131.3 |
| | — |
| | — |
|
| Funded status (PBO basis) | $ | (67.8 | ) | | $ | (110.5 | ) | | $ | (380.0 | ) | | $ | (406.9 | ) |
| |
(1) | Plans intended to be advance-funded. |
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(2) | Plans intended to be pay-as-you-go. |
Underfunded plans include a group of advance-funded plans that are underfunded on a PBO basis by a total of $67.8 million as of December 31, 2018. Additionally, we have several plans that are funded on a pay-as-you-go basis, and therefore, the entire PBO of $380.0 million at December 31, 2018, is unfunded. The combined balance of the underfunded and unfunded plans was $447.8 million as of December 31, 2018, and is presented as a liability on the Consolidated Balance Sheets as follows: $14.7 million in “other current liabilities” and $433.1 million included in “underfunded and unfunded defined benefit pension plans.”
At the December 31, 2018, measurement date for the U.S. advance-funded plans, the PBO was approximately $930 million as measured under U.S. GAAP. The PBO is measured as the present value (using a 4.22% weighted average discount rate as of December 31, 2018) of vested and non-vested benefits earned from employee service to date, based upon current services and estimated future pay increases for active employees. Of the participants in the U.S. advance-funded plans, approximately 78% are retired or former employees or employees of our former businesses, which shortens the duration of the PBO. Assets available to fund the PBO for the U.S. advance-funded plans at December 31, 2018, were approximately $871 million, or approximately $59 million less than the measured obligation.
The following table presents the components of cash contributions for the advance-funded and pay-as-you-go plans:
|
| | | | | | | | | | | |
| (In millions) | 2018 | | 2017 | | 2016 |
| U.S. advance-funded plans | $ | 50.0 |
| | $ | 2.1 |
| | $ | — |
|
| U.S. pay-as-you-go plans | 6.9 |
| | 7.5 |
| | 7.5 |
|
| Non-U.S. advance-funded plans | 1.9 |
| | 1.1 |
| | 1.3 |
|
| Non-U.S. pay-as-you-go plans | 7.7 |
| | 7.1 |
| | 7.1 |
|
| Total Cash Contributions | $ | 66.5 |
| | $ | 17.8 |
| | $ | 15.9 |
|
We intend to fund non-U.S. pension plans based upon applicable legal requirements and actuarial and trustee recommendations. We contributed $9.6 million to these plans in 2018.
Other Contingencies
See Note 10 to the Consolidated Financial Statements for a discussion of our other contingent matters.
Inflation
We recognize that inflationary pressures may have an adverse effect on us through higher asset replacement costs and higher raw materials and other operating costs. We experienced raw materials cost inflation during the 2017 second half and throughout 2018 and expect to see continued inflation in 2019 but at a lower rate than in 2018. We try to minimize these impacts through effective control of operating expenses, productivity improvements, and hedging purchases of certain raw materials, as well as price increases on our products.
Critical Accounting Estimates
The preparation of financial statements in conformity with U.S. GAAP requires that we make estimates and assumptions affecting the assets and liabilities reported at the date of the Consolidated Financial Statements, and
the revenues and expenses reported for the periods presented. We believe that our accounting estimates are appropriate and the related balances are reasonable; however, actual amounts could differ from the original estimates, requiring adjustments in future periods. Changes in estimates are recorded in the period in which the change is identified. Our accounting policies are described in Note 1 to the Consolidated Financial Statements. Critical accounting estimates are described in this section.
An accounting estimate is considered critical if the estimate requires management to make assumptions and judgments about matters that were highly uncertain at the time the estimate was made, if different estimates reasonably could have been used, or if changes in the estimate are reasonably likely to occur from period to period that could have a material impact on our financial condition or results of operations. As part of our quarterly disclosure controls and procedures, management has discussed the development, selection and disclosure of the critical accounting estimates with the Audit Committee of the Board of Directors.
Contingent Liabilities
We have recorded a liability for the resolution of contingencies related to asbestos property damage, environmental remediation, and litigation. We record a liability if we have determined that a loss is probable and we are able to reasonably estimate the amount of the loss or have another reasonable basis for recording a liability. We have determined that each of the contingencies discussed below involves an accounting judgment that is material to our Consolidated Financial Statements.
Legacy Product Liabilities
We emerged from an asbestos-related Chapter 11 bankruptcy on February 3, 2014, as discussed in Note 10 to the Consolidated Financial Statements. Under the plan of reorganization, all pending and future asbestos-related claims are channeled for resolution to either the PI Trust or the PD Trust. The trusts are the sole recourse for holders of asbestos-related claims. The channeling injunctions issued by the bankruptcy court prohibit holders of asbestos-related claims from asserting such claims directly against us.
We have satisfied all of our financial obligations to the PI Trust. We have contingent financial obligations remaining to the PD Trust. With respect to property damage claims related to ZAI PD Claims, the PD Trust was funded with $34.4 million on the Effective Date and $30 million on February 3, 2017. We are also obligated to make up to 10 contingent deferred payments of $8 million per year to the PD Trust in respect of ZAI PD Claims during the 20-year period beginning on the fifth anniversary of the Effective Date, with each such payment due only if the assets of the PD Trust in respect of ZAI PD Claims fall below $10 million during the preceding year. As of December 31, 2018, we have evaluated the activity in the PD Trust with respect to ZAI PD Claims and other trust expenses.
Through December 31, 2018, the PD Trust has paid approximately $15 million in ZAI PD Claims, approximately $6 million in operating and education expenses, and approximately $15 million in one-time attorneys’ fees. The PD Trust balance was approximately $30 million as of December 31, 2018. We expect ZAI PD Claims payments to decline over time but have limited information to estimate the amount and timing of future claims payments. It is reasonably possible that one or more contingent deferred payments will be made in the future. We estimate the present value of reasonably possible future payments to range between $0 million and $20 million. We have not accrued for any contingent deferred payments as we do not believe that payment is probable. We will continue to evaluate new information as it becomes available and will revise our estimate of the amount and timing of future claims payments and any contingent deferred payments at that time. We are not obligated to make additional payments to the PD Trust in respect of ZAI PD Claims beyond the payments described above. We have satisfied all of our financial obligations with respect to Canadian ZAI PD Claims.
With respect to Other PD Claims, claims unresolved as of the Effective Date are to be litigated in the bankruptcy court and any future claims are to be litigated in a federal district court, in each case pursuant to procedures approved by the bankruptcy court. To the extent any such Other PD Claims are determined to be allowed claims, they are to be paid in cash by the PD Trust. We are obligated to make a payment to the PD Trust every six months in the amount of any Other PD Claims allowed during the preceding six months plus interest (if applicable)at closing and the amount of PD Trust expenses for the preceding six months. We have not paid any Other PD Claims since emergence. Annual expenses have been approximately $0.2$270 million per year. The aggregate amount to be paid underfunded through the PD Obligation is not capped, and we may be obligatedissuance to make additional payments to the PD Trust in respectAlbemarle of the PD Obligation. We have accrued for those unresolved Other PD Claims that we
believe are probable and estimable. We have not accrued for other unresolved or unasserted Other PD Claims as we do not believe that payment is probable.
All payments to the PD Trust required after the Effective Date are secured by our obligation to issue 77,372,257 shares of Company common stock to the PD Trust in the event of default, subject to customary anti-dilution provisions.
Environmental Remediation
We are obligated under applicable law to remediate certain properties related to our business or former businesses. At some sites we outsource all or a newly created wholly owned Grace subsidiary. The cash portion of the remediation to third parties, and at others we perform the required remediation ourselves. Our environmental remediation obligation has a significant impact on our Consolidated Financial Statements. See disclosure in this Report in Item 1 (Business—Environment, Health and Safety Matters) and in Note 10 to the Consolidated Financial Statements for a discussion of our environmental remediation liabilities.
At sites where third parties conduct remediation, we estimate our obligations from information available to us through such third parties, including actual costs incurred, expected future costs and time to completion. At sites where we conduct remediation, we use available information, work with regulatory authorities to define compliance requirements, and then estimate the cost required to meet those requirements. We base our estimates on our historical knowledge and engineering assessments specific to conditions at each site, and we update our estimates as necessary.
Our estimates can fluctuate significantly due to the extended duration of some remediation projects. The accuracy of our estimates is dependent on the validity of assumptions regarding regulatory approaches and such matters as labor rates, indirect costs and capital costs, which are each difficult to forecast over extended periods. It is not practicable to estimate the impact on our Consolidated Financial Statements of using other reasonably possible assumptions. Future changes in estimates, if required, may lead to material adjustments to our Consolidated Financial Statements, and the ultimate resolution of these obligations could have a material impact on our liquidity and capital resources.
We purchased a vermiculite mine in Libby, Montana, in 1963 and operated it until 1990. Vermiculite concentrate from the Libby mine was used in the manufacture of attic insulation and other products. Some of the vermiculite ore contained naturally occurring asbestos. We are engaged with the EPA and other federal, state and local governmental agencies in a remedial investigation and feasibility study of the Libby mine and the surrounding area, known as OU3. The RI/FS will determine the specific areas within OU3 requiring remediation and will identify possible remedial action alternatives. Possible remedial actions within OU3 are wide-ranging, from institutional controls such as land use restrictions, to more active measures involving soil removal, containment projects, or other protective measures.
As part of the RI/FS process, we contracted an engineering and consulting firm to develop a range of possible remedial alternatives and associated cost estimates for OU3. Based on this work, we recorded a pre-tax charge of $70.0 million in the 2018 third quarter for the estimated costs of remediation of OU3. We believe that this amount should provide for a protective remedy meeting the statutory requirements of the Comprehensive Environmental Response, Compensation, and Liability Act.
The estimated costs of remediation are preliminary and consist of several components, each of which may vary significantly as the remedial alternatives are further developed. It is reasonably possible that the ultimate costs of remediation could range between $30 million and $170 million. Grace is working closely with the EPA, and the ultimate remedy will be determined by the EPA after the RI/FS is finalized. Such remedy will be set forth in a Record of Decision (“ROD”) thattransaction is expected to be issued byfunded through a combination of debt and cash on hand. This acquisition would strengthen and expand Grace’s existing pharma portfolio, within the EPA during or after 2020. Costs associated with the more active remedial alternatives would be expectedMaterials Technologies segment. The transaction is subject to be incurred over a decade or more. We will reevaluate our estimated liability as remedial alternatives evolve based on further work by the engineering and consulting firm and discussions with the EPA as the RI/FS process moves toward a ROD. Depending on the remedial alternatives that the EPA selects in the ROD, the total costcustomary closing conditions, including receipt of remediating OU3 may exceed our current estimate by material amounts.
The EPA is also investigating or remediating formerly owned or operated sites that processed Libby vermiculite into finished products. We are cooperating with the EPA on these investigation and remediation activities and have recorded a liability to the extent that our review has indicated that a probable liability has beencertain regulatory approvals.
incurred and the cost is estimable. These liabilities cover the estimated cost of investigations and, to the extent an assessment has indicated that remediation is necessary, the estimable cost of response actions. Response actions typically involve soil excavation and removal, and replacement with clean fill. The EPA may commence additional investigations in the future at other sites that processed Libby vermiculite, but we do not believe, based on our knowledge of prior and current operations and site conditions, that liability for remediation at such other sites is probable.
Our current estimates of our environmental remediation obligations do not include the costs related to any additional EPA claims, which may be material but are not currently estimable. It is possible that our ultimate liability for environmental remediation will exceed our current estimates by material amounts.
Other Legacy Liabilities
As part of the process for renewing our permit for a dam on the Libby mine site, which expires in March 2019, the Montana Department of Natural Resources and Conservation is expected to require us to replace the dam spillway, which is deteriorating, with a new spillway. We constructed the dam in 1971 to prevent vermiculite ore tailings from moving into nearby creeks and rivers. Based on information provided by third-party consultants, the cost of the new spillway is estimated to be between $40 million and $45 million. We expect to record a liability for this project at the time the permit renewal is approved. We anticipate that approval of the renewal of such permit will occur in the first quarter of 2019. Construction of the new spillway is expected to take three to four years.
Litigation
We are subject to legal proceedings and claims arising out of the normal course of business. To estimate the cost to resolve our legal obligations, we review the facts of each matter to determine the merits of the case and the corresponding probability of a loss. If we determine that a loss is probable, we determine if there is sufficient information to make a reasonable estimate of the loss amount. Our estimates regarding the outcome of our legal proceedings and claims involve substantial uncertainties that could cause our actual losses to differ materially from our estimates. In estimating the likely outcome of a legal proceeding, we consider the nature of the specific claim (or unasserted claim), our experience with similar claims, the jurisdiction in which the proceeding is filed, court rulings, the status of any settlement negotiations, the likelihood of resolution through settlement or alternative dispute resolution, the proceeding’s current status and other relevant information and events. We adjust our recorded liability for litigation contingencies as necessary to reflect our current evaluation of these and other factors.
Goodwill and Intangible Assets
We account for business combinations under the acquisition method of accounting, which requires us to allocate the purchase price to the tangible and identifiable intangible assets and liabilities acquired based on their estimated fair values at the acquisition date in accordance with ASC 805 “Business Combinations.” The excess of the purchase price over the fair values of these identifiable assets and liabilities is recorded to goodwill. The assessment of fair value requires management to make significant estimates, including future expected revenues, earnings, and cash flows; expected useful lives; and attrition and discount rates. The allocation of the purchase price may be adjusted during the measurement period, which may not exceed one year after the acquisition date.
We review our finite-lived tangible and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. We have no indefinite-lived intangible assets. There were no impairment charges recorded in any of the periods presented.
We review our goodwill for impairment on an annual basis at October 31 and whenever events or a change in circumstances indicate that the carrying amount may not be fully recoverable. We have identified our operating segments as reporting units for goodwill impairment testing. Our Catalysts Technologies reportable segment has two reporting units for goodwill impairment testing, which are our Refining Technologies and Specialty Catalysts operating segments. Our Materials Technologies operating segment represents a single reporting unit for goodwill impairment testing.
We performed a quantitative analysis as of October 31, 2018, and concluded that the estimated fair value of all of our reporting units substantially exceeded their carrying values.
Pension Expenses and Liabilities
We sponsor defined benefit pension plans for our employees in the United States and a number of other countries, including Canada and Germany, and fund government-sponsored programs in other countries where we operate. See Note 8 to the Consolidated TOC—Financial Statements for a detailed discussion of our pension plans.
In order to estimate our pension expenses and liabilities we evaluate the range of possible assumptions to be used in the calculation of pension expenses and liabilities. We select the assumptions that we believe to be most indicative of factors such as participant demographics, past experiences and market indices, and provide the assumptions to independent actuaries. These assumptions are updated annually and primarily include factors such as discount rates, expected return on plan assets, mortality rates, retirement rates, and rate of compensation increase. The independent actuaries review our assumptions for reasonableness, and use the assumptions to calculate our estimated liability and future pension expense. We review the actuarial reports for reasonableness and adjust our expenses, assets and liabilities to reflect the amounts calculated in the actuarial reports.
The two key assumptions used in determining our pension benefit obligations and pension expense are the discount rate and expected return on plan assets. Our most significant pension assets and pension liabilities relate to U.S. pension plans.
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 overall market interest rates. For the U.S. pension plans, the assumed weighted average discount rate was selected in consultation with our 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.
We selected the expected return on plan assets for the U.S. qualified pension plans for 2018 in consultation with our independent actuaries, using an expected return model. The model determines the weighted average return for an investment portfolio based on the target asset allocation and expected future returns for each asset class, which were developed using a building block approach based on observable inflation, available interest rate information, current market characteristics, and historical results.
The following table reflects the sensitivity of 2019 pre-tax expense (excluding the effects of the annual mark-to-market adjustment) and our year-end projected benefit obligation, or PBO, to a change in the discount rate and expected rate of return on plan assets assumptions for the U.S. pension plans:
|
| | | | | | | |
Change in Assumption (In millions) | Effect on 2019 Pre-Tax Pension Expense | | Effect on December 31, 2018 PBO |
| 25 basis point decrease in discount rate | $ | (1 | ) | | $ | 27 |
|
| 25 basis point increase in discount rate | 1 |
| | (26 | ) |
| 25 basis point decrease in expected return on plan assets | 2 |
| | — |
|
| 25 basis point increase in expected return on plan assets | (2 | ) | | — |
|
Income Taxes
Our effective tax rate is primarily determined based on our pre-tax income and the statutory income tax rates in the jurisdictions in which we operate. The effective tax rate also reflects the tax impacts of items treated differently for tax purposes than for financial reporting purposes. Some of these differences are permanent, such as expenses that are not deductible in our tax returns, and some differences are temporary, reversing over time, such as depreciation expense. These temporary differences create deferred income tax assets and liabilities. Deferred income tax assets are also recorded for NOL and federal tax credit carryforwards.
Deferred income tax assets and liabilities are recognized by applying enacted tax rates to temporary differences that exist as of the balance sheet date. We reduce the carrying amounts of deferred tax assets by a valuation allowance if, based on the available evidence, it is more likely than not that such assets will not be realized. The need to establish valuation allowances for deferred tax assets is assessed quarterly. In assessing the requirement for, and amount of, a valuation allowance in accordance with the more likely than not standard, we give appropriate consideration to all positive and negative evidence related to the realization of the deferred
tax assets. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability and foreign source income (“FSI”), the duration of statutory carryforward periods, and our experience with operating loss and tax credit carryforward expirations. A history of cumulative losses is a significant piece of negative evidence used in our assessment. If a history of cumulative losses is incurred for a tax jurisdiction, forecasts of future profitability are not used as positive evidence related to the realization of the deferred tax assets in the assessment.
As further described in Note 7 to the Consolidated Financial Statements, our Consolidated Balance Sheet as of December 31, 2018, includes net deferred income tax assets of $518.5 million. Included in this amount are deferred U.S. federal income tax assets representing federal tax credit carryforwards of $291.0 million, federal NOL carryforwards of $44.3 million, state NOL deferred income tax assets of $52.9 million, and foreign NOL deferred tax assets of $5.7 million. We have established valuation allowances in the amount of $19.9 million, consisting of $6.6 million for state NOL carryforwards, $4.2 million for foreign deferred tax assets, primarily foreign operating loss carryforwards, and 5.2 million for federal tax credits.
In order to fully utilize our U.S. federal tax credits before they expire from 2021 to 2028, we will need to generate income of approximately $1.4 billion. We estimate that we will need to generate future U.S. taxable income of approximately $232 million before 2035 to fully utilize the federal NOLs. We will need to generate approximately $1.9 billion for state income tax purposes during the respective realization periods (ranging from 2018 to 2035) in order to fully realize the state NOLs.
Inherent in determining our effective tax rate are judgments regarding business plans and expectations about future operations. These judgments include the amount and geographic mix of future taxable income, the amount of FSI, limitations on the usage of NOL carryforwards, the impact of ongoing or potential tax audits, and other future tax consequences.
The federal tax credit carryforwards arose primarily as a result of the payment of intercompany dividends from our foreign affiliates, from the mandatory repatriation under the TCJA, and from research and development credits. The federal and state NOLs arose primarily as a result of the amounts paid as a result of our bankruptcy proceedings.
Our ability to utilize deferred tax assets may be impacted by certain future events, such as changes in tax legislation or insufficient future taxable income or FSI prior to expiration of certain deferred tax assets.
We recognize the tax benefits of an uncertain tax position if those benefits are more likely than not to be sustained based on existing tax law. Additionally, we establish a reserve for tax positions that are more likely than not to be sustained based on existing tax law, but uncertain in the ultimate benefit to be sustained upon examination by the relevant taxing authorities. Unrecognized tax benefits are subsequently recognized at the time the more likely than not recognition threshold is met, the tax matter is effectively settled or the statute of limitations for the relevant taxing authority to examine and challenge the tax position has expired, whichever is earlier.
Recent Accounting Pronouncements
See Note 1 to the Consolidated Financial Statements for a discussion of recent accounting pronouncements and their effect on us.
W. R. GRACE & CO. AND SUBSIDIARIES
FINANCIAL STATEMENT SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(In millions)
For the Year Ended December 31, 2020
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | | Balance at beginning of period | | Additions charged to costs and expenses | | Deductions | | Other,
net(1) | | Balance at end of period |
| Valuation and qualifying accounts deducted from assets: | | | | | | | | | | |
| Allowances for notes and accounts receivable | | $ | 13.7 | | | $ | 0.6 | | | $ | (12.1) | | | $ | 0.1 | | | $ | 2.3 | |
| Valuation allowance for deferred tax assets(2) | | 24.1 | | | 15.5 | | | (0.9) | | | 0 | | | 38.7 | |
For the Year Ended December 31, 2019
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | | Balance at beginning of period | | Additions charged to costs and expenses | | Deductions | | Other,
net(1) | | Balance at end of period |
| Valuation and qualifying accounts deducted from assets: | | | | | | | | | | |
| Allowances for notes and accounts receivable | | $ | 12.0 | | | $ | 3.2 | | | $ | (1.5) | | | $ | 0 | | | $ | 13.7 | |
| Valuation allowance for deferred tax assets(3) | | 19.9 | | | 9.2 | | | (5.0) | | | 0 | | | 24.1 | |
For the Year Ended December 31, 2018
|
| | | | | | | | | | | | | | | | | | | |
| Description | Balance at beginning of period | | Additions charged to costs and expenses | | Deductions | | Other, net(1) | | Balance at end of period |
| Valuation and qualifying accounts deducted from assets: | | | | | | | | | |
| Allowances for notes and accounts receivable | $ | 12.0 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 12.0 |
|
| Valuation allowance for deferred tax assets(2) | 12.0 |
| | 10.7 |
| | (2.8 | ) | | — |
| | 19.9 |
|
| Reserves: | | | | | | | | | |
| Reserves for environmental remediation(3) | 70.3 |
| | 73.8 |
| | (17.7 | ) | | — |
| | 126.4 |
|
| Reserves for retained obligations of divested businesses | 12.8 |
| | 1.0 |
| | (1.6 | ) | | — |
| | 12.2 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | | Balance at beginning of period | | Additions charged to costs and expenses | | Deductions | | Other,
net(1) | | Balance at end of period |
| Valuation and qualifying accounts deducted from assets: | | | | | | | | | | |
| Allowances for notes and accounts receivable | | $ | 12.0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 12.0 | |
| Valuation allowance for deferred tax assets(4) | | 12.0 | | | 10.7 | | | (2.8) | | | 0 | | | 19.9 | |
(1)Effects of currency translation.
For the Year Ended(2)The valuation allowance increased $14.6 million from December 31, 2017 |
| | | | | | | | | | | | | | | | | | | |
| Description | Balance at beginning of period | | Additions charged to costs and expenses | | Deductions | | Other, net(1) | | Balance at end of period |
| Valuation and qualifying accounts deducted from assets: | | | | | | | | | |
| Allowances for notes and accounts receivable(4) | $ | 2.8 |
| | $ | 10.6 |
| | $ | (1.3 | ) | | $ | (0.1 | ) | | $ | 12.0 |
|
| Valuation allowance for deferred tax assets(5) | 31.4 |
| | 0.3 |
| | (19.7 | ) | | — |
| | 12.0 |
|
| Reserves: | | | | | | | | | |
| Reserves for environmental remediation | 66.3 |
| | 24.4 |
| | (20.4 | ) | | — |
| | 70.3 |
|
| Reserves for retained obligations of divested businesses | 11.7 |
| | 1.5 |
| | (0.4 | ) | | — |
| | 12.8 |
|
For the Year Ended2019, to December 31, 20162020. The increase was primarily due to projected consolidated taxable income, causing the expiration of foreign tax credits in 2021.
(3)The valuation allowance increased $4.2 million from December 31, 2018, to December 31, 2019. The increase was primarily due to the projected taxable income in certain foreign jurisdictions.
(4)The valuation allowance increased $7.9 million from December 31, 2017, to December 31, 2018. The increase was primarily due to changes in expected foreign tax credit utilization.
|
| | | | | | | | | | | | | | | | | | | |
| Description | Balance at beginning of period | | Additions charged to costs and expenses | | Deductions | | Other, net(1) | | Balance at end of period |
| Valuation and qualifying accounts deducted from assets: | | | | | | | | | |
| Allowances for notes and accounts receivable | $ | 1.4 |
| | $ | 2.4 |
| | $ | (1.1 | ) | | $ | 0.1 |
| | $ | 2.8 |
|
| Valuation allowance for deferred tax assets(6) | 8.4 |
| | 11.6 |
| | (9.1 | ) | | 20.5 |
| | 31.4 |
|
| Reserves: | | | | | | | | | |
| Reserves for environmental remediation | 55.2 |
| | 29.2 |
| | (18.1 | ) | | — |
| | 66.3 |
|
| Reserves for retained obligations of divested businesses | 13.5 |
| | — |
| | (1.8 | ) | | — |
| | 11.7 |
|
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 9A. CONTROLS AND PROCEDURES
Except as provided below, the disclosure required by this Item appears in Item 8 under the headings “Management’s Report on Internal Control Over Financial Reporting” and “Report of Independent Registered Public Accounting Firm,” which disclosure is incorporated herein by reference.
There was no change in Grace’s internal control over financial reporting during the quarter ended December 31, 2020, that has materially affected, or is reasonably likely to materially affect, Grace’s internal control over financial reporting.
Item 9B. OTHER INFORMATION
None.
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information required by this Item regarding Grace’s executive officers appears at Part I after Item 4 of this report. The other information required by this Item is incorporated by reference to the definitive proxy statement that Grace will file with the SEC no later than 120 days after December 31, 2020 (the “2021 Proxy Statement”).
Item 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the 2021 Proxy Statement.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated by reference to the 2021 Proxy Statement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item is incorporated by reference to the 2021 Proxy Statement.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is Incorporated by reference to the 2021 Proxy Statement.
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Financial Statements and Schedules. The required information is set forth in Item 8, which is incorporated herein by reference.
Exhibits. The exhibits to this Report are listed below. Other than exhibits that are filed herewith, all exhibits listed below are incorporated by reference.
In reviewing the agreements included as exhibits to this and other Reports filed by Grace with the Securities and Exchange Commission, please remember they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about Grace or other parties to the agreements. The agreements generally contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement. These representations and warranties:
•are not statements of fact, but rather are used to allocate risk to one of the parties if the statements prove to be inaccurate;
•may have been qualified by disclosures that were made to the other parties in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;
•may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and
•were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and do not reflect more recent developments.
Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. Additional information about Grace may be found elsewhere in this report and Grace’s other public filings, which are available without charge through the Securities and Exchange Commission’s website at http://www.sec.gov.
| | | | | | | | | | | | | | |
(1)Exhibit No. | Effects of currency translation and, in 2016, the Separation. |
| Exhibit | | Location |
(2)2.1 | The valuation allowance increased $7.9 million from December 31, 2017, to December 31, 2018. The increase was primarily due to expected foreign tax credit utilization. |
| |
(3) | The increase was primarily related to a pre-tax charge |
| |
(4) | The allowance for accounts receivable increased primarily due to a $10.0 million charge to fully reserve for a trade receivable from a Venezuela-based customer related to increased economic uncertainty and the recent political unrest and sanctions. |
| |
(5) | The valuation allowance decreased $19.4 million from December 31, 2016, to December 31, 2017. The decrease was primarily due to the effects of U.S. tax reform. |
| |
(6) | The valuation allowance increased $23.0 million from December 31, 2015, to December 31, 2016. The increase was primarily due to the adoption of ASU 2016-09 as well as the ability to utilize NOL carryforwards as a result of the Separation. |
EXHIBIT 31(i).1
CERTIFICATION OF PERIODIC REPORT UNDER SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Hudson La Force, certify that:
| |
1. | I have reviewed this annual report on Form 10-KReorganization of W. R. Grace & Co.; and its Debtor Subsidiaries. |
| Exhibit 2.01 to Form 8-K (filed 2/07/14) SEC File No.: 001-13953 |
2.2.2 | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| | | Exhibit 2.02 to Form 8-K (filed 2/07/14) SEC File No.: 001-13953 |
3.2.3 | Based on my knowledge, the financial statements, | |
| Exhibit 2.1 to Form 8-K (filed 1/28/16) SEC File No.: 001-13953 |
4.2.4 | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| | | Exhibit 2.4 to Form 10-K (filed 2/22/18) SEC File No.: 001-13953 |
(a)2.5 | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| | | Filed herewith. |
(b)3.1 | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| | | Exhibit 3.01 to Form 8-K (filed 2/07/14) SEC File No.: 001-13953 |
(c)3.2 | evaluated the effectiveness of the registrant’s disclosure controls | | | Exhibit 3.01 to Form 8-K (filed 1/23/15) SEC File No.: 001-13953 |
| 4.1 | | | | Exhibit 4.01 to Form 8-K (filed 2/07/14) SEC File No.: 001-13953 |
| |
(d) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| |
5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| |
(a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| |
(b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: February 28, 2019
|
| | | | | | | | | | | | | |
| Exhibit No. | | Exhibit | | Location |
| 4.2 | | First Amendment and Consent to Credit Agreement and First Amendment to Security Agreement, dated as of November 25, 2015, by and among W. R. Grace & Co., W. R. Grace & Co.–Conn., Grace GmbH & Co. KG, Alltech Associates, Inc., each lender from time to time party thereto, and Goldman Sachs Bank USA, as Administrative Agent and lender. | | Exhibit 10.1 to Form 8-K (filed 11/25/15) SEC File No.: 001-13953 |
| 4.3 | | | | Exhibit 4.04 to Form 8-K (filed 2/07/14) SEC File No.: 001-13953 |
| 4.4 | | | | Exhibit 4.05 to Form 8-K (filed 2/07/14) SEC File No.: 001-13953 |
| 4.5 | | | | Exhibit 4.06 to Form 8-K (filed 2/07/14) SEC File No.: 001-13953 |
| 4.6 | | | | Exhibit 4.07 to Form 8-K (filed 2/07/14) SEC File No.: 001-13953 |
| 4.7 | | | | Exhibit 4.08 to Form 8-K (filed 2/07/14) SEC File No.: 001-13953 |
| 4.8 | | | | Exhibit 4.1 to Form 8-K (filed 9/19/14) SEC File No.: 001-13953 |
| 4.9 | | | | Exhibit 4.2 to Form 8-K (filed 9/19/14) SEC File No.: 001-13953 |
| 4.10 | | | | Exhibit 4.3 (included as Exhibit A-1 to Exhibit 4.2) to Form 8-K (filed 9/19/14) SEC File No.: 001-13953 |
| 4.11 | | | | Exhibit 4.4 (included as Exhibit A-2 to Exhibit 4.2) to Form 8-K (filed 9/19/14) SEC File No.: 001-13953 |
| 4.12 | | | | Exhibit 4.1 to Form 8-K (filed 4/03/18) SEC File No.: 001-13953 |
| 4.13 | | | | Exhibit 4.2 to Form 10-Q (filed 5/09/18) SEC File No.: 001-13953 |
| 4.14 | | | | Exhibit 4.14 to Form 10-K (filed 2/27/20) SEC File No.: 001-13953 |
| 4.15 | | | | Exhibit 4.2 to Form 8-K (filed 6/26/20) SEC File No.: 001-13953 |
| 4.16 | | | | Exhibit 4.3 (included as Exhibit A to Exhibit 4.2) to Form 8-K (filed 6/26/20) SEC File No.: 001-13953 |
| 10.1 | | | | Exhibit 10.02 to Form 8-K (filed 2/07/14) SEC File No.: 001-13953 |
| 10.2 | | | | Exhibit 10.03 to Form 8-K (filed 2/07/14) SEC File No.: 001-13953* |
| 10.3 | | | | Exhibit 10.2 to Form 8-K (filed 2/09/16) SEC File No.: 001-13953* |
| 10.4 | | | | Exhibit 10.1 to Form 8-K (filed 2/09/16) SEC File No.: 001-13953* |
| | | | | | | | | | | | | | |
| Exhibit No. | | Exhibit | | Location |
| 10.5 | | | | Exhibit 10.3 to Form 8-K (filed 2/09/16) SEC File No.: 001-13953* |
| 10.6 | | | | Exhibit 10.7 to Form 10-K (filed 3/28/02) SEC File No.: 001-13953* |
| 10.7 | | | | Exhibit 10.8 to Form 10-K (filed 3/28/02) SEC File No.: 001-13953* |
| 10.8 | | | | Exhibit 10.17 to Form 10-K (filed 3/13/03) SEC File No.: 001-13953* |
| 10.9 | | | | Exhibit 10.2 to Form 8-K (filed 2/04/16) SEC File No.: 001-13953* |
| 10.10 | | | | Exhibit 10.1 to Form 8-K (filed 5/12/15) SEC File No.: 001-13953* |
| 10.11 | | | | Exhibit 10.1 to Form 8-K (filed 1/28/16) SEC File No.: 001-13953 |
| 10.12 | | | | Exhibit 10.1 to Form 8-K (filed 3/07/08) SEC File No.: 001-13953* |
| 10.13 | | | | Exhibit 10.20 to Form 10-K (filed 2/25/15) SEC File No.: 001-13953* |
| 10.14 | | | | Exhibit 10.1 to Form 10-Q (filed 5/07/15) SEC File No.: 001-13953* |
| 10.15 | | | | Exhibit 10.1 to Form 10-Q (filed 5/09/18) SEC File No.: 001-13953* |
| 10.16 | | | | Exhibit 10.2 to Form 10-Q (filed 5/09/18) SEC File No.: 001-13953* |
| 10.17 | | | | Exhibit 10.1 to Form 8-K (filed 5/14/18) SEC File No.: 001-13953* |
| 10.18 | | | | Exhibit 10.2 to Form 10-Q (filed 8/08/18) SEC File No.: 001-13953* |
| 10.19 | | | | Exhibit 10.3 to Form 10-Q (filed 8/08/18) SEC File No.: 001-13953* |
| 10.20 | | | | Exhibit 10.4 to Form 10-Q (filed 8/08/18) SEC File No.: 001-13953* |
| 10.21 | | | | Exhibit 10.5 to Form 10-Q (filed 8/08/18) SEC File No.: 001-13953* |
| 10.22 | | | | Exhibit 99.1 to Form 8-K (filed 2/20/19) SEC File No.: 001-13953* |
| 10.23 | | | | Filed herewith* |
| 21 | | | | Filed herewith |
| 23 | | | | Filed herewith |
| 24 | | | | Filed herewith |
| 31(i).1 | | | | Filed herewith |
| 31(i).2 | | | | Filed herewith |
| 32 | | | | | Furnished herewith |
| 95 | | | | | Filed herewith |
| | | | | | | | | | | | | | |
| Exhibit No. | | Exhibit | | Location |
| 101.INS | | Inline XBRL Instance Document | | The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
| 101.SCH | | Inline XBRL Taxonomy Extension Schema | | Filed herewith |
| 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase | | Filed herewith |
| 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase | | Filed herewith |
| 101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase | | Filed herewith |
| 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase | | Filed herewith |
| 104 | | Cover Page Interactive Data File (formatted as Inline XBRL and included in Exhibit 101) | | Filed herewith |
* Management contracts and compensatory plans, contracts or arrangements required to be filed as exhibits to this Report.
Item 16. FORM 10-K SUMMARY
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | |
| W. R. GRACE & CO. |
| By: | /s/ HUDSON LA FORCE |
| | Hudson La Force President and Chief Executive Officer (Principal Executive Officer) |
EXHIBIT 31(i).2
CERTIFICATION OF PERIODIC REPORT UNDER SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Hudson La Force, certify that:
| |
1.By: | I have reviewed this annual report on Form 10-K of W. R. Grace & Co.; |
| |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| |
4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| |
(a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| |
(b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| |
(c) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| |
(d) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| |
5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| |
(a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| |
(b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: February 28, 2019
| /s/ WILLIAM C. DOCKMAN |
| | |
| | /s/ HUDSON LA FORCE |
| | Hudson La ForceWilliam C. Dockman
Senior Vice President and Chief ExecutiveFinancial Officer (Acting Principal Financial Officer and Principal Accounting Officer) |
EXHIBIT 32
CERTIFICATION UNDER SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350), the undersigned certifies that (1) this Annual Report of W. R. Grace & Co. (the “Company”) on Form 10-K for the period ended December 31, 2018, as filed with the Securities and Exchange Commission on the date hereof (this “Report”), fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and (2) the information contained in this Report fairly presents, in all material respects,has been signed below by the financial condition and results of operationsfollowing persons on behalf of the Company.
registrant and in the capacities indicated on February 25, 2021. |
| | | | | | | | | | | | | |
| Signature | | | | Title |
| R. F. Cummings, Jr.* | | } | | |
| D. H. Gulyas* | | } | | |
| J. Fasone Holder* | | } | | |
| H. R. Slack* | | } | | Directors |
| C. J. Steffen* | | } | | |
| M. E. Tomkins* | | } | | |
| S. Yanai* | | } | | |
| | | | | | | | |
| /s/ HUDSON LA FORCE | | |
Hudson La Force
President and Chief Executive Officer
and Director
(Principal Executive Officer) | | |
| | |
/s/ HUDSON LA FORCE | | |
Hudson La Force | |
| /s/ WILLIAM C. DOCKMAN | | Senior Vice President and Chief ExecutiveFinancial Officer
(Acting Principal Financial Officer and Principal Accounting Officer)
|
| William C. Dockman | | |
Date: February 28, 2019
A signed original*By signing her name hereto, Cherée H. Johnson is signing this document on behalf of this written statement requiredeach of the persons indicated above pursuant to powers of attorney duly executed by Section 906 has been provided to the Companysuch persons and will be retained by the Company and furnished tofiled with the Securities and Exchange Commission or its staff upon request.Commission.
| | | | | | | | |
| By: | /s/ CHERÉE H. JOHNSON |
| | Cherée H. Johnson (Attorney-in-Fact) |
