Grace will need to generate approximately $1,700 million of U.S. federal taxable income by 2035 (or approximately $95 million per year during the carryforward period) to fully realize the U.S. federal net deferred tax assets.
The following table summarizes expiration dates in jurisdictions where Grace has, or will have, material tax loss and credit carryforwards:
|
| |
| Expiration Dates |
United States—Federal (NOLs) | 2034 - 2035 |
United States—Federal (Credits) | 2019 - 2027 |
United States—States (NOLs) | 2017 - 2035 |
In evaluating its ability to realize its deferred tax assets, Grace considers all reasonably available positive and negative evidence, including recent earnings experience, expectations of future taxable income and the tax
Notes to Consolidated Financial Statements (Continued)
5. Income Taxes (Continued)
Grace’s effective tax rates for the three months ended March 31, 2021 and 2020, were 21.1% and 27.2%, respectively.
characterGrace’s effective tax rate for the three months ended March 31, 2021, approximated the U.S. federal statutory rate as the effect of that income taxed in jurisdictions with higher statutory tax rates than the period of time over whichU.S. was offset by the temporary differences become deductible and the carryforward and/or carryback periods available to Grace for tax reporting purposesGlobal Intangible Low-Taxed Income (“GILTI”) high-tax exclusion benefit recorded in the related jurisdiction. In estimating future taxablequarter for the filing of the 2018 Federal Amended Return.
Grace’s effective tax rate for the three months ended March 31, 2020, was higher than the U.S. federal statutory rate primarily due to income taxed in jurisdictions with higher statutory tax rates than the U.S.
As of March 31, 2021, and December 31, 2020, Grace relies upon assumptions and estimates about future activities, including the amount of futurehad $317.4 million in federal state and international pretax operating income that Grace will generate; the reversal of temporary differences; and the implementation of feasible and prudent tax planning strategies. Grace records a valuation allowance to reduce deferredcredit carryforwards before unrecognized tax assets to the amount that it believes is more likely than not to be realized.benefits.
6. Pension Plans and Other Postretirement BenefitRetirement Plans
Pension Plans The following table presents the funded status of Grace's underfunded and unfundedGrace’s pension plans:
| | | | | | | | | | | |
(In millions) | March 31, 2021 | | December 31, 2020 |
Overfunded defined benefit pension plans | $ | 11.8 | | | $ | 11.4 | |
Underfunded defined benefit pension plans | (91.2) | | | (128.3) | |
Unfunded defined benefit pension plans | (501.6) | | | (520.7) | |
Total underfunded and unfunded defined benefit pension plans | (592.8) | | | (649.0) | |
Pension liabilities included in other current liabilities | (15.4) | | | (15.7) | |
Net funded status | $ | (596.4) | | | $ | (653.3) | |
|
| | | | | | | |
(In millions) | September 30, 2017 | | December 31, 2016 |
Underfunded defined benefit pension plans | $ | (80.4 | ) | | $ | (83.1 | ) |
Unfunded defined benefit pension plans | (371.7 | ) | | (341.2 | ) |
Total underfunded and unfunded defined benefit pension plans | (452.1 | ) | | (424.3 | ) |
Pension liabilities included in other current liabilities | (15.3 | ) | | (14.4 | ) |
Net funded status | $ | (467.4 | ) | | $ | (438.7 | ) |
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.
ComponentsThe following table presents the components of Net Periodic Benefit Cost (Income)net periodic benefit cost (income).
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2021 | | 2020 |
(In millions) | U.S. | | Non-U.S. | | U.S. | | Non-U.S. |
Service cost | $ | 4.3 | | | $ | 3.5 | | | $ | 4.7 | | | $ | 2.7 | |
Interest cost | 5.4 | | | 0.7 | | | 7.6 | | | 1.0 | |
Expected return on plan assets | (11.3) | | | (0.3) | | | (12.0) | | | (0.3) | |
Amortization of prior service credit | (0.1) | | | 0 | | | (0.2) | | | 0 | |
| | | | | | | |
Mark-to-market adjustment | (13.7) | | | 0 | | | 0 | | | 0 | |
Curtailment gain | (25.6) | | | 0 | | | 0 | | | 0 | |
| | | | | | | |
| | | | | | | |
Net periodic benefit cost (income) | $ | (41.0) | | | $ | 3.9 | | | $ | 0.1 | | | $ | 3.4 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
| 2017 | | 2016 |
| Pension | | Other Post Retirement | | Pension | | Other Post Retirement |
(In millions) | U.S. | | Non-U.S. | | | U.S. | | Non-U.S. | |
Service cost | $ | 4.3 |
| | $ | 2.2 |
| | $ | — |
| | $ | 4.5 |
| | $ | 1.7 |
| | $ | — |
|
Interest cost | 10.5 |
| | 1.1 |
| | — |
| | 10.1 |
| | 1.3 |
| | — |
|
Expected return on plan assets | (14.4 | ) | | (0.2 | ) | | — |
| | (14.2 | ) | | (0.2 | ) | | — |
|
Amortization of prior service credit | (0.1 | ) | | — |
| | (0.5 | ) | | (0.1 | ) | | — |
| | (0.5 | ) |
Amortization of net deferred actuarial loss | — |
| | — |
| | 0.1 |
| | — |
| | — |
| | 0.1 |
|
Curtailment gain | — |
| | — |
| | — |
| | — |
| | (0.2 | ) | | — |
|
Net periodic benefit cost (income) from continuing operations | $ | 0.3 |
| | $ | 3.1 |
| | $ | (0.4 | ) | | $ | 0.3 |
| | $ | 2.6 |
| | $ | (0.4 | ) |
In the 2021 first quarter, Grace announced to employees that the U.S. salaried plan will be frozen effective January 1, 2025. Grace recorded a $13.7 million mark-to-market gain on remeasurement of the liability as a result of an increase in discount rates since December 31, 2020, partially offset by actual asset performance less than expected through the remeasurement date. Additionally, Grace recorded a $25.6 million gain on the plan curtailment, which is attributable to the elimination of future pay recognition in the pension benefit after 2024.
Notes to Consolidated Financial Statements (Continued)
6. Pension Plans and Other Postretirement Benefit Plans (Continued)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2017 | | 2016 |
| Pension | | Other Post Retirement | | Pension | | Other Post Retirement |
(In millions) | U.S. | | Non-U.S. | | | U.S. | | Non-U.S. | |
Service cost | $ | 12.9 |
| | $ | 6.2 |
| | $ | — |
| | $ | 13.9 |
| | $ | 5.4 |
| | $ | — |
|
Interest cost | 31.5 |
| | 3.2 |
| | — |
| | 30.8 |
| | 4.6 |
| | — |
|
Expected return on plan assets | (43.2 | ) | | (0.6 | ) | | — |
| | (43.0 | ) | | (1.5 | ) | | — |
|
Amortization of prior service credit | (0.3 | ) | | — |
| | (1.5 | ) | | (0.2 | ) | | — |
| | (1.7 | ) |
Amortization of net deferred actuarial loss | — |
| | — |
| | 0.3 |
| | — |
| | — |
| | 0.4 |
|
Curtailment gain | — |
| | — |
| | — |
| | — |
| | (0.9 | ) | | — |
|
Net periodic benefit cost (income) | 0.9 |
| | 8.8 |
| | (1.2 | ) | | 1.5 |
| | 7.6 |
| | (1.3 | ) |
Less: discontinued operations | — |
| | — |
| | — |
| | (0.5 | ) | | (0.2 | ) | | — |
|
Net periodic benefit cost (income) from continuing operations | $ | 0.9 |
| | $ | 8.8 |
| | $ | (1.2 | ) | | $ | 1.0 |
| | $ | 7.4 |
| | $ | (1.3 | ) |
Plan Contributions and Funding Grace intends to continue 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
Notes to Consolidated Financial Statements (Continued)
6. Pension Plans and Other Retirement Plans (Continued)
Security Act of 1974 ("ERISA"(“ERISA”). For ERISA purposes, funded status is calculated on a different basis than under U.S. GAAP.
Grace intends to continue to fund non-U.S. pension plans based on applicable legal requirements and actuarial recommendations.
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'semployee’s salary or wages. Grace's costsGrace’s cost related to this benefit plan for the three and nine months ended September 30, 2017, were $2.8 million and $8.5March 31, 2021, was $3.5 million compared with $2.9 million and $8.3$3.3 million for the corresponding prior-year periods. quarter.
U.S. salaried employees and certain U.S. hourly employees that are hired on or after January 1, 2017, and employees in Germany that are hired on or after January 1, 2016, participate in additionalan enhanced defined contribution plansplan instead of a defined benefit pension plans.plan. Grace contributes 4% of an individual employee’s salary or wages. Grace’s cost related to this enhanced defined contribution plan for the three months ended March 31, 2021, was $1.2 million compared with $1.0 million for the prior-year quarter.
7. Other Balance Sheet Accounts
|
| | | | | | | |
(In millions) | September 30, 2017 | | December 31, 2016 |
Other Current Liabilities | | | |
Accrued compensation | $ | 49.7 |
| | $ | 49.6 |
|
Accrued interest | 29.9 |
| | 16.2 |
|
Environmental contingencies | 24.5 |
| | 32.5 |
|
Deferred revenue | 16.4 |
| | 27.2 |
|
Pension liabilities | 15.3 |
| | 14.4 |
|
Income taxes payable | 14.9 |
| | 5.7 |
|
Other accrued liabilities | 57.2 |
| | 63.3 |
|
| $ | 207.9 |
| | $ | 208.9 |
|
| | | | | | | | | | | |
(In millions) | March 31, 2021 | | December 31, 2020 |
Other Current Liabilities | | | |
Accrued compensation | $ | 44.5 | | | $ | 60.6 | |
Deferred revenue (see Note 13) | 34.3 | | | 33.8 | |
Liability for dam spillway replacement (see Note 8) | 24.8 | | | 20.3 | |
Accrued interest (see Note 3) | 19.2 | | | 5.8 | |
Pension liabilities (see Note 6) | 15.4 | | | 15.7 | |
Environmental contingencies (see Note 8) | 15.0 | | | 13.8 | |
Fair value of currency, interest rate, and commodity contracts (see Note 4) | 13.7 | | | 21.6 | |
Operating lease liabilities | 12.1 | | | 10.1 | |
Income taxes payable (see Note 5) | 9.0 | | | 5.1 | |
| | | |
Other accrued liabilities | 94.7 | | | 95.1 | |
| $ | 282.7 | | | $ | 281.9 | |
Accrued compensation includes salaries and wages as well as estimated current amounts due under the annual and long-term incentive programs.
Notes to Consolidated Financial Statements (Continued)
7. Other Balance Sheet Accounts (Continued)
| | | | | | | | | | | |
(In millions) | March 31, 2021 | | December 31, 2020 |
Other Liabilities | | | |
Environmental contingencies (see Note 8) | $ | 94.8 | | | $ | 95.4 | |
Liability for dam spillway replacement (see Note 8) | 60.8 | | | 69.3 | |
Operating lease liabilities | 37.4 | | | 25.8 | |
Fair value of currency and interest rate contracts (see Note 4) | 30.7 | | | 53.9 | |
Legacy product liability (see Note 8) | 24.0 | | | 24.0 | |
Deferred revenue (see Note 13) | 21.1 | | | 23.4 | |
Retained obligations of divested businesses | 11.8 | | | 12.2 | |
Deferred income taxes | 9.9 | | | 10.4 | |
Asset retirement obligations | 9.3 | | | 9.6 | |
Unrecognized tax benefits | 3.8 | | | 3.9 | |
Other noncurrent liabilities | 19.8 | | | 19.7 | |
| $ | 323.4 | | | $ | 347.6 | |
|
| | | | | | | |
(In millions) | September 30, 2017 | | December 31, 2016 |
Other Liabilities | | | |
Environmental contingencies | $ | 46.1 |
| | $ | 33.8 |
|
Liability to unconsolidated affiliate | 28.0 |
| | 27.0 |
|
Fair value of currency and interest rate contracts | 20.1 |
| | 3.2 |
|
Deferred revenue | 9.5 |
| | 2.3 |
|
Asset retirement obligation | 8.5 |
| | 10.2 |
|
Postemployment liability | 6.9 |
| | 7.2 |
|
Other noncurrent liabilities | 46.2 |
| | 43.0 |
|
| $ | 165.3 |
| | $ | 126.7 |
|
8. Commitments and Contingent Liabilities
Legacy Matters
Over the years, Grace operated numerous types of businesses that are no longer part of its business portfolio.ongoing operations. As Grace divested or otherwise ceased operating these businesses, it retained certain liabilities and obligations, which we referGrace refers to as legacy liabilities. The principal legacyThese liabilities areinclude product, environmental and environmentalother 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 and Environmental Liabilities
Legacy Product LiabilitiesGrace emerged from an asbestos-related Chapter 11 bankruptcy on February 3, 2014 (the "Effective Date"“Effective Date”). Under its plan of reorganization, all pending and future asbestos-related claims are channeled for resolution to either a personal injury trust (the "PI Trust"“PI Trust”) or a property damage trust (the "PD Trust"“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"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. Grace has not accrued for the 10 additional payments as Grace does not currently believe they are probable. Grace is not obligated to make additional payments toAs of March 31, 2021, the PD Trust has paid out approximately $40 million in respect of ZAI PD Claims and expenses, leaving a balance of approximately $17 million, including the benefit of net 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 Grace 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, Grace determined that contingent funding obligations beyond 2025 are not reasonably estimable. Grace estimates that the reasonable range of payments described above.over the period of 2021 to 2025 is expected to
Notes to Consolidated Financial Statements (Continued)
8. Commitments and Contingent Liabilities (Continued)
be between $16 million and $24 million and projects that the first payment could be due as early as 2022. In the 2019 fourth quarter, Grace has satisfied all of its financialrecorded a $24.0 million liability related to probable future obligations with respect to Canadianfund the PD Trust for ZAI PD Claims. Grace’s maximum financial obligation over the 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”), 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"“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.
Notes to Consolidated Financial Statements (Continued)
8. Commitments and Contingent Liabilities (Continued)
All payments to the PD Trust required after the Effective Date are secured by the Company'sCompany’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.
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 SecuritiesSEC and Exchange Commission (the "SEC").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.
Grace'sGrace’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 September 30, 2017, Grace'sMarch 31, 2021, Grace’s estimated liability for legacy environmental response costs totaled $70.6$109.8 million, compared with $66.3$109.2 million at December 31, 2016,2020, and was included in "other“other current liabilities"liabilities” and "other liabilities"“other liabilities” in the Consolidated Balance Sheets. These amounts are based on agreements in place or on Grace'sGrace’s estimate of costs where no formal remediation plan or agreement to pay exists, yet there is sufficient information to estimate response costs.
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"“EPA”) and other federal, state, and local governmental agencies in a remedial investigation and feasibility study ("(“RI/FS"FS”) of the Libby mine and the surrounding area. In its 2017 Annual Project Update for the Libby Asbestos Superfund Site, the EPA announced a narrowing of its focus from the former "OU3 Study Area" to a smallerarea, known as Operable Unit 3 or "OU3." Within this revised area, the(“OU3”). The RI/FS will determinestudy the specific areas within OU3 requiring
Notes to Consolidated Financial Statements (Continued)
8. Commitments and Contingent Liabilities (Continued)
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 expects
As part of the RI/FS process, Grace contracted an engineering and consulting firm to develop a recordrange of decisionpossible remedial alternatives and associated cost estimates for OU3. Based on this work, Grace 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. 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 completedissued by the end of 2019. When meaningful new information becomes available,EPA 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 foras remedial alternatives evolve based on further work by the costs for remediationengineering 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 mineROD may provide insight into the likely remedial 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.
Grace has cooperated with the EPA in investigating and surrounding area and adjust its reserves accordingly.
The EPA is also investigating or 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 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,vermiculite. Liability for unaccrued additional investigation and remediation costs is probable but Grace does not believe, based on its knowledge of prioryet estimable, and current operations and site conditions, that liability for remediation at such other sites is probable.could be material.
Notes to Consolidated Financial Statements (Continued)
8. Commitments and Contingent Liabilities (Continued)
Grace accrued $0.5 million in the three months ended September 30, 2017, for future costs related to vermiculite-related matters, which reflects provision for an agreed-upon remedy at a former vermiculite processing site. Grace's totalGrace’s 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 September 30, 2017,March 31, 2021, and December 31, 2016, was $25.12020, totaled $70.6 million and $31.2$71.2 million, respectively. It is probablepossible that Grace'sGrace’s ultimate liability for these vermiculite-related matters will exceed current estimates by material amounts.
Non-Vermiculite-Related Environmental Matters
During the three months ended September 30, 2017, Grace increased an existing reserve by $5.9 million based on refinement of a scope of work for remediation of materials related to a legacy business located at a current manufacturing site. At September 30, 2017,March 31, 2021, and December 31, 2016, Grace's2020, Grace’s estimated legacy environmental liability for response costs at sites not related to its former vermiculite mining and processing activities was $45.5totaled $39.2 million and $35.1$38.0 million, respectively. This liability relates to Grace'sGrace’s former businesses or operations, including its share of liability at off-site disposal facilities. Grace'sGrace’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 Liabilities Beginning in 1971, as part of implementing a wet milling process at the Libby, Montana, vermiculite mine, Grace 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. Grace is 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 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-
Notes to Consolidated Financial Statements (Continued)
8. Commitments and Contingent Liabilities (Continued)
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 2022, 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.
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.
Contracts related to the Separation in which•Indemnification obligations of Grace has agreed to indemnify GCP against liabilities related to activities prior to the closingas a tenant of the transaction, including tax, employee,real property leases; and environmental liabilities.
Guaranteesguarantees 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.
Financial Assurances Financial assurances have been established for a variety of purposes, including insurance and environmental matters, trade-related commitments and other matters. At September 30, 2017,As of March 31, 2021, Grace had gross financial assurances issued and outstanding of $121.6$140.0 million, composed of $39.5$78.8 million of surety bonds issued by various insurance companies and $82.1$61.2 million of standby letters of credit and other financial assurances issued by various banks.
9. Restructuring Expenses and Repositioning Expenses
Restructuring Expenses The restructuring gain for the three months ended March 31, 2021, was due to the adjustment of the estimated asset write-off in connection with the idling of our methanol-to-olefins (“MTO”) manufacturing facility. Costs for the three months ended March 31, 2020, primarily related to severance costs pertaining to sales force reorganization. These costs are included in “restructuring and repositioning expenses” in the Consolidated Statements of Operations, and are not included in segment operating income.
Notes to Consolidated Financial Statements (Continued)
9. Restructuring Expenses and Repositioning Expenses (Continued)
Restructuring ExpensesIn the 2017 third quarter, Grace incurred costs from restructuring actions, primarily related to workforce reductions as a result of changes in the business environment and its business structure, which are included in "restructuring and repositioning expenses" in the Consolidated Statements of Operations. Costs in the nine months ended September 30, 2016, primarily related to the exit of certain non-strategic product lines in the Materials Technologies reportable segment in the first half of 2016.
The following table presents restructuring expensesactivity by reportable segment for the three and nine months ended September 30, 2017.March 31, 2021 and 2020.
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
(In millions) | | | | | 2021 | | 2020 |
Catalysts Technologies | | | | | $ | (0.1) | | | $ | 0 | |
Materials Technologies | | | | | 0 | | | 0.2 | |
| | | | | | | |
Total restructuring (income) expense | | | | | $ | (0.1) | | | $ | 0.2 | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(In millions) | 2017 | | 2016 | | 2017 | | 2016 |
Catalysts Technologies | $ | 2.4 |
| | $ | 1.6 |
| | $ | 2.8 |
| | $ | 2.7 |
|
Materials Technologies | 0.2 |
| | (0.1 | ) | | 0.5 |
| | 15.1 |
|
Corporate | 2.7 |
| | 0.3 |
| | 6.8 |
| | 0.4 |
|
Total restructuring expenses | $ | 5.3 |
| | $ | 1.8 |
| | $ | 10.1 |
| | $ | 18.2 |
|
The following table presents components of the change in the restructuring liability from December 31, 2020, to March 31, 2021.These costs are not included in segment operating income. | | | | | |
| (In millions) |
Balance, December 31, 2020 | $ | 3.9 | |
Accruals for severance and other costs | 0 | |
Payments | (0.1) | |
| |
Balance, March 31, 2021 | $ | 3.8 | |
Substantially all costs related to the restructuring programs are expected to be paid by SeptemberJune 30, 2018.2023, but could be paid earlier subject to negotiations around certain plant exit costs.
The following table presents components of the change in restructuring liability from December 31, 2016, to September 30, 2017.
|
| | | |
Restructuring Liability (In millions) | Total |
Balance, December 31, 2016 | $ | 9.6 |
|
Accruals for severance and other costs | 9.5 |
|
Payments | (10.9 | ) |
Currency translation adjustments and other | 0.1 |
|
Balance, September 30, 2017 | $ | 8.3 |
|
Repositioning ExpensesPretax repositioning Repositioning expenses included in continuing operations for the three and nine months ended September 30, 2017,March 31, 2021, were $4.0$12.9 million and $6.9 million, respectively, compared with $3.8primarily related to Grace’s review of strategic alternatives. Repositioning expenses for the three months ended March 31, 2020, were $2.5 million and $10.4 million for the corresponding prior-year periods. The expenses incurred in 2017 primarily relate to third-party consulting costs related to productivity initiatives. Substantially all of these costs have been or are expecteda multi-year program to be settled in cash.
transform manufacturing and business processes to extend Grace’s competitive advantages and improve its cost position.
Notes to Consolidated Financial Statements (Continued)
10. Other (Income) Expense, net
Components of other (income) expense, net are as follows:
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
(In millions) | | | | | 2021 | | 2020 |
Gain on curtailment of U.S. salaried pension plan (see Note 6) | | | | | $ | (25.6) | | | $ | 0 | |
Defined benefit pension (income) expense other than service cost | | | | | (19.3) | | | (3.9) | |
Weather-related impacts | | | | | 1.7 | | | 0 | |
Third-party acquisition-related costs | | | | | 1.3 | | | 1.5 | |
Net (gain) loss on sales of investments and disposals of assets | | | | | 0.7 | | | 0.5 | |
Currency transaction effects | | | | | (0.1) | | | (0.9) | |
| | | | | | | |
Business interruption insurance recoveries | | | | | 0 | | | (8.0) | |
Other miscellaneous (income) expense | | | | | (0.8) | | | 2.0 | |
Total other (income) expense, net | | | | | $ | (42.1) | | | $ | (8.8) | |
During the three months ended March 31, 2021, Winter Storm Uri caused widespread manufacturing disruption across Texas and Louisiana. Grace operates four manufacturing facilities in the region. All sites experienced interruptions, with extended downtime at three plants ranging from 8 to 24 days. All Grace sites have resumed operations; however, operating costs are expected to remain higher than normal while some maintenance and repair activity is ongoing. Most customers have restarted operations and returned to normal operating rates. The total estimated weather-related costs are expected to be approximately $15 million, with $8.5 million impacting the first quarter and approximately $6.5 million expected in the second quarter. The
Notes to Consolidated Financial Statements (Continued)
10. Other (Income) Expense, net (Continued)
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(In millions) | 2017 | | 2016 | | 2017 | | 2016 |
Business interruption insurance recovery | $ | (11.9 | ) | | $ | — |
| | $ | (25.0 | ) | | $ | — |
|
Accounts receivable reserve—Venezuela | 10.0 |
| | — |
| | 10.0 |
| | — |
|
Currency transaction effects | 1.8 |
| | (0.2 | ) | | 3.8 |
| | 0.1 |
|
Chapter 11 expenses, net | 0.4 |
| | 0.4 |
| | 1.9 |
| | 2.4 |
|
Net (gain) loss on sales of investments and disposals of assets | 0.7 |
| | (0.1 | ) | | 1.5 |
| | 0.1 |
|
Third-party acquisition-related costs | 0.4 |
| | — |
| | 0.4 |
| | 2.5 |
|
Loss on early extinguishment of debt | — |
| | — |
| | — |
| | 11.1 |
|
Other miscellaneous (income) expense | (1.6 | ) | | (0.6 | ) | | (4.6 | ) | | (2.9 | ) |
Total other (income) expense, net | $ | (0.2 | ) | | $ | (0.5 | ) | | $ | (12.0 | ) | | $ | 13.3 |
|
weather-related costs were primarily due to lower fixed cost absorption during the downtime, increased costs to supply customers from other Grace manufacturing plants, and costs to repair plants impacted by the weather.The weather-related costs in other (income) expense of $1.7 million primarily related to the costs to repair the plants in order to resume operations. Cost of goods sold includes weather-related impacts of $6.2 million. In addition, Grace’s equity in earnings from unconsolidated affiliate was reduced by $0.6 million due to weather-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 has received $25.0$16.3 million in payments from its third-party insurer through Septemberduring the six months ended June 30, 2017,2020, under its business interruption insurance policy for lost profits, 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 third quarter of 2017, 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 3 for more information related to Grace's 2016 early extinguishment of debt.
11. Other Comprehensive Income (Loss)
The following tables present the pre-tax, tax, and after-tax components of Grace'sGrace’s other comprehensive income (loss) for the three and nine months ended September 30, 2017March 31, 2021 and 2016:2020:
| | | | | | | | | | | | | | | | | |
Three Months Ended March 31, 2021 (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 | $ | (0.1) | | | $ | 0 | | | $ | (0.1) | |
Currency translation adjustments | 27.3 | | | (2.2) | | | 25.1 | |
Gain (loss) from hedging activities | 2.7 | | | (0.7) | | | 2.0 | |
| | | | | |
| | | | | |
Other comprehensive income (loss) attributable to W. R. Grace & Co. shareholders | $ | 29.9 | | | $ | (2.9) | | | $ | 27.0 | |
|
| | | | | | | | | | | |
Three Months Ended September 30, 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 | $ | (0.6 | ) | | $ | 0.2 |
| | $ | (0.4 | ) |
Amortization of net deferred actuarial loss included in net periodic benefit cost | 0.1 |
| | — |
| | 0.1 |
|
Benefit plans, net | (0.5 | ) | | 0.2 |
| | (0.3 | ) |
Currency translation adjustments(1) | (3.6 | ) | | (8.5 | ) | | (12.1 | ) |
Gain (loss) from hedging activities | 0.7 |
| | (1.1 | ) | | (0.4 | ) |
Other comprehensive income (loss) attributable to W. R. Grace & Co. shareholders | $ | (3.4 | ) | | $ | (9.4 | ) | | $ | (12.8 | ) |
(1) Tax expense relates to Grace's euro loan net investment hedge, and includes an out-of-period adjustment to recognize the accumulated deferred tax liability related to this hedge. See Note 5. | | | | | | | | | | | | | | | | | |
Three Months Ended March 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 | $ | (0.1) | | | $ | 0 | | | $ | (0.1) | |
Currency translation adjustments | 3.9 | | | (1.4) | | | 2.5 | |
Gain (loss) from hedging activities | (1.4) | | | 0.4 | | | (1.0) | |
| | | | | |
| | | | | |
Other comprehensive income (loss) attributable to W. R. Grace & Co. shareholders | $ | 2.4 | | | $ | (1.0) | | | $ | 1.4 | |
Notes to Consolidated Financial Statements (Continued)
11. Other Comprehensive Income (Loss) (Continued)
|
| | | | | | | | | | | |
Nine Months Ended September 30, 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 | $ | (1.8 | ) | | $ | 0.6 |
| | $ | (1.2 | ) |
Amortization of net deferred actuarial loss included in net periodic benefit cost | 0.3 |
| | (0.1 | ) | | 0.2 |
|
Benefit plans, net | (1.5 | ) | | 0.5 |
| | (1.0 | ) |
Currency translation adjustments | (17.9 | ) | | (3.9 | ) | | (21.8 | ) |
Gain (loss) from hedging activities | 1.5 |
| | (1.4 | ) | | 0.1 |
|
Other comprehensive income (loss) attributable to W. R. Grace & Co. shareholders | $ | (17.9 | ) | | $ | (4.8 | ) | | $ | (22.7 | ) |
|
| | | | | | | | | | | |
Three Months Ended September 30, 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 | $ | (0.6 | ) | | $ | 0.2 |
| | $ | (0.4 | ) |
Amortization of net deferred actuarial loss included in net periodic benefit cost | 0.1 |
| | — |
| | 0.1 |
|
Benefit plans, net | (0.5 | ) | | 0.2 |
| | (0.3 | ) |
Currency translation adjustments | (2.3 | ) | | — |
| | (2.3 | ) |
Gain (loss) from hedging activities | 0.9 |
| | (0.3 | ) | | 0.6 |
|
Other comprehensive income (loss) attributable to W. R. Grace & Co. shareholders | $ | (1.9 | ) | | $ | (0.1 | ) | | $ | (2.0 | ) |
|
| | | | | | | | | | | |
Nine Months Ended September 30, 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 | $ | (1.9 | ) | | $ | 0.7 |
| | $ | (1.2 | ) |
Amortization of net deferred actuarial loss included in net periodic benefit cost | 0.4 |
| | (0.2 | ) | | 0.2 |
|
Benefit plans, net | (1.5 | ) | | 0.5 |
| | (1.0 | ) |
Currency translation adjustments | (6.4 | ) | | — |
| | (6.4 | ) |
Gain (loss) from hedging activities | (4.2 | ) | | 1.5 |
| | (2.7 | ) |
Other comprehensive income (loss) attributable to W. R. Grace & Co. shareholders | $ | (12.1 | ) | | $ | 2.0 |
| | $ | (10.1 | ) |
The following tables present the changes in accumulated other comprehensive income (loss), net of tax, for the ninethree months endedSeptember 30, 2017 March 31, 2021 and 2016:2020:
| | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended March 31, 2021 (In millions) | Defined Benefit Pension and Other Postretirement Plans | | Currency Translation Adjustments | | Gain (Loss) from Hedging Activities | | Total |
Balance, December 31, 2020 | $ | (0.9) | | | $ | 42.8 | | | $ | (12.6) | | | $ | 29.3 | |
Other comprehensive income (loss) before reclassifications | 0 | | | 25.1 | | | 21.0 | | | 46.1 | |
Amounts reclassified from accumulated other comprehensive income (loss) | (0.1) | | | 0 | | | (19.0) | | | (19.1) | |
Net current-period other comprehensive income (loss) | (0.1) | | | 25.1 | | | 2.0 | | | 27.0 | |
| | | | | | | |
Balance, March 31, 2021 | $ | (1.0) | | | $ | 67.9 | | | $ | (10.6) | | | $ | 56.3 | |
|
| | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2017 (In millions) | Defined Benefit Pension and Other Postretirement Plans | | Currency Translation Adjustments | | Gain (Loss) from Hedging Activities | | Total |
Beginning balance | $ | 2.2 |
| | $ | 67.6 |
| | $ | (3.4 | ) | | $ | 66.4 |
|
Other comprehensive income (loss) before reclassifications | — |
| | (21.8 | ) | | (1.6 | ) | | (23.4 | ) |
Amounts reclassified from accumulated other comprehensive income (loss) | (1.0 | ) | | — |
| | 1.7 |
| | 0.7 |
|
Net current-period other comprehensive income (loss) | (1.0 | ) | | (21.8 | ) | | 0.1 |
| | (22.7 | ) |
Ending balance | $ | 1.2 |
| | $ | 45.8 |
| | $ | (3.3 | ) | | $ | 43.7 |
|
Notes to Consolidated Financial Statements (Continued)
11. Other Comprehensive Income (Loss) (Continued)
|
| | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2016 (In millions) | Defined Benefit Pension and Other Postretirement Plans | | Currency Translation Adjustments | | Gain (Loss) from Hedging Activities | | Total |
Beginning balance | $ | 3.0 |
| | $ | (66.1 | ) | | $ | (3.7 | ) | | $ | (66.8 | ) |
Other comprehensive income (loss) before reclassifications | — |
| | (6.4 | ) | | (4.3 | ) | | (10.7 | ) |
Amounts reclassified from accumulated other comprehensive income (loss) | (1.0 | ) | | — |
| | 1.6 |
| | 0.6 |
|
Net current-period other comprehensive income (loss) | (1.0 | ) | | (6.4 | ) | | (2.7 | ) | | (10.1 | ) |
Distribution of GCP | (0.2 | ) | | 135.5 |
| | — |
| | 135.3 |
|
Ending balance | $ | 1.8 |
| | $ | 63.0 |
| | $ | (6.4 | ) | | $ | 58.4 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended March 31, 2020 (In millions) | Defined Benefit Pension and Other Postretirement Plans | | Currency Translation Adjustments | | Gain (Loss) from Hedging Activities | | Total |
Balance, December 31, 2019 | $ | (0.5) | | | $ | 92.7 | | | $ | (13.4) | | | $ | 78.8 | |
Other comprehensive income (loss) before reclassifications | 0 | | | 2.5 | | | 7.2 | | | 9.7 | |
Amounts reclassified from accumulated other comprehensive income (loss) | (0.1) | | | 0 | | | (8.2) | | | (8.3) | |
Net current-period other comprehensive income (loss) | (0.1) | | | 2.5 | | | (1.0) | | | 1.4 | |
| | | | | | | |
Balance, March 31, 2020 | $ | (0.6) | | | $ | 95.2 | | | $ | (14.4) | | | $ | 80.2 | |
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 4 for a discussion of hedging activities. See Note 6 for a discussion of pension plans and other postretirement benefit plans.
Notes to Consolidated Financial Statements (Continued)
12. Earnings Per Share
The following table shows a reconciliation of the numerators and denominators used in calculating basic and diluted earnings per share.
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(In millions, except per share amounts) | 2017 | | 2016 | | 2017 | | 2016 |
Numerators | | | | | | | |
Income (loss) from continuing operations attributable to W. R. Grace & Co. shareholders | $ | 47.4 |
| | $ | 41.2 |
| | $ | 134.2 |
| | $ | 89.7 |
|
Income (loss) from discontinued operations, net of income taxes | — |
| | (1.6 | ) | | — |
| | (10.9 | ) |
Net income (loss) attributable to W. R. Grace & Co. shareholders | $ | 47.4 |
| | $ | 39.6 |
| | $ | 134.2 |
| | $ | 78.8 |
|
Denominators | | | | | | | |
Weighted average common shares—basic calculation | 67.9 |
| | 70.3 |
| | 68.2 |
| | 70.5 |
|
Dilutive effect of employee stock options | 0.1 |
| | 0.4 |
| | 0.1 |
| | 0.4 |
|
Weighted average common shares—diluted calculation | 68.0 |
|
| 70.7 |
|
| 68.3 |
|
| 70.9 |
|
Basic earnings per share attributable to W. R. Grace & Co. shareholders | | | | | | | |
Income (loss) from continuing operations | $ | 0.70 |
| | $ | 0.59 |
| | $ | 1.97 |
| | $ | 1.27 |
|
Income (loss) from discontinued operations, net of income taxes | — |
| | (0.03 | ) | | — |
| | (0.15 | ) |
Net income (loss) | $ | 0.70 |
| | $ | 0.56 |
| | $ | 1.97 |
| | $ | 1.12 |
|
Diluted earnings per share attributable to W. R. Grace & Co. shareholders | | | | | | | |
Income (loss) from continuing operations | $ | 0.70 |
| | $ | 0.58 |
| | $ | 1.96 |
| | $ | 1.27 |
|
Income (loss) from discontinued operations, net of income taxes | — |
| | (0.02 | ) | | — |
| | (0.16 | ) |
Net income (loss) | $ | 0.70 |
| | $ | 0.56 |
| | $ | 1.96 |
| | $ | 1.11 |
|
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
(In millions, except per share amounts) | | | | | 2021 | | 2020 |
Numerators | | | | | | | |
| | | | | | | |
| | | | | | | |
Net income (loss) attributable to W. R. Grace & Co. shareholders | | | | | $ | 68.4 | | | $ | 42.0 | |
Denominators | | | | | | | |
Weighted average common shares—basic calculation | | | | | 66.2 | | | 66.5 | |
Dilutive effect of employee stock options | | | | | 0.1 | | | 0 | |
Weighted average common shares—diluted calculation | | | | | 66.3 | | | 66.5 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Basic earnings per share | | | | | $ | 1.03 | | | $ | 0.63 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Diluted earnings per share | | | | | $ | 1.03 | | | $ | 0.63 | |
There were 1.6 million and 1.51.3 million anti-dilutive options outstanding for the three and nine months ended September 30, 2017,March 31, 2021, compared with 1.01.7 million for the corresponding prior-year periods.quarter.
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 authorized a newhad increased its share repurchase program of upauthorization to $250 million, expected to be completed overincluding approximately $83 million remaining under the next 24 to 36previously announced program. The Company did not repurchase Company common stock during the three months at the discretion of management. 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, the strategic deployment of capital, and general market and economic conditions.ended March 31, 2021. During the ninethree months ended September 30, 2017 and 2016,March 31, 2020, the Company repurchased 935,435 shares and 737,922673,807 shares of Company common stock for $65.0$40.4 million, and $55.1 million, respectively, pursuant to the terms of the share repurchase programs. Asprogram. Consistent with the terms of September 30, 2017, $218.9the Merger Agreement (see Note 17), the Company will not repurchase shares of Company common stock going forward.
Notes to Consolidated Financial Statements (Continued)
13. Revenues
Grace generates revenues from customer arrangements primarily by manufacturing and delivering specialty chemicals and specialty materials, and by licensing technology through its 2 reportable segments. See Note 14 for additional information about Grace’s reportable segments.
Disaggregation of Revenue The following tables present Grace's revenues by geography and product group, within its respective reportable segments, for the three months ended March 31, 2021 and 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended March 31, 2021 (In millions) | North America | | Europe Middle East Africa (EMEA) | | Asia Pacific | | Latin America | | Total |
Polyolefin and Chemical Catalysts | $ | 40.3 | | | $ | 48.7 | | | $ | 57.3 | | | $ | 5.5 | | | $ | 151.8 | |
Refining Catalysts | 52.8 | | | 76.1 | | | 40.1 | | | 8.8 | | | 177.8 | |
Total Catalysts Technologies | 93.1 | | | 124.8 | | | 97.4 | | | 14.3 | | | 329.6 | |
Pharma & Consumer | 15.8 | | | 14.0 | | | 5.3 | | | 5.2 | | | 40.3 | |
Coatings | 7.2 | | | 20.2 | | | 11.4 | | | 2.8 | | | 41.6 | |
Chemical process | 8.7 | | | 20.3 | | | 9.0 | | | 1.3 | | | 39.3 | |
Other | 1.6 | | | 4.1 | | | 0.1 | | | 0.1 | | | 5.9 | |
Total Materials Technologies | 33.3 | | | 58.6 | | | 25.8 | | | 9.4 | | | 127.1 | |
Total Grace | $ | 126.4 | | | $ | 183.4 | | | $ | 123.2 | | | $ | 23.7 | | | $ | 456.7 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended March 31, 2020 (In millions) | North America | | EMEA | | Asia Pacific | | Latin America | | Total |
Polyolefin and Chemical Catalysts | $ | 35.3 | | | $ | 52.7 | | | $ | 46.6 | | | $ | 4.8 | | | $ | 139.4 | |
Refining Catalysts | 57.8 | | | 73.8 | | | 31.5 | | | 5.5 | | | 168.6 | |
Total Catalysts Technologies | 93.1 | | | 126.5 | | | 78.1 | | | 10.3 | | | 308.0 | |
Pharma & Consumer | 10.3 | | | 13.6 | | | 4.8 | | | 4.8 | | | 33.5 | |
Coatings | 7.2 | | | 18.4 | | | 8.6 | | | 2.4 | | | 36.6 | |
Chemical process | 8.2 | | | 19.0 | | | 8.7 | | | 1.9 | | | 37.8 | |
Other | 1.4 | | | 4.1 | | | 0.1 | | | 0 | | | 5.6 | |
Total Materials Technologies | 27.1 | | | 55.1 | | | 22.2 | | | 9.1 | | | 113.5 | |
Total Grace | $ | 120.2 | | | $ | 181.6 | | | $ | 100.3 | | | $ | 19.4 | | | $ | 421.5 | |
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’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, which results in a contract liability. In the technology licensing business, Grace typically invoices licensees at the time that contractual milestones are achieved. However, in respect of the milestone billings, Grace is frequently obligated to provide services in future periods, and this results in recording contract liabilities.
The following table presents Grace’s deferred revenue balances as of March 31, 2021, and December 31, 2020:
| | | | | | | | | | | |
(In millions) | March 31, 2021 | | December 31, 2020 |
Current | $ | 34.3 | | | $ | 33.8 | |
Noncurrent | 21.1 | | | 23.4 | |
Total | $ | 55.4 | | | $ | 57.2 | |
Notes to Consolidated Financial Statements (Continued)
13. Revenues (Continued)
Grace records deferred revenues when cash payments are received or due in advance of performance. The change in deferred revenue reflects cash payments from customers received or due in advance of satisfying performance obligations, offset by $9.6 million remainedof revenue recognized for the three months ended March 31, 2021, that was included in the deferred revenue balance as of December 31, 2020.
The noncurrent portion of deferred revenue will be recognized as performance obligations under the current authorization.technology licensing agreements are satisfied, which is expected to be 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 $160 million as of March 31, 2021, and includes certain amounts reported as deferred revenue above. In accordance with the available practical expedient, 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: 13. | | | | | | | | |
Year | | Approximate percentage of revenue related to remaining performance obligations recognized |
Remainder of 2021 | | 19 | % |
2022 | | 20 | % |
2023 | | 19 | % |
2024 | | 17 | % |
Thereafter through 2030 | | 25 | % |
For the three months ended March 31, 2021 and 2020, 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.
14. Segment Information
Grace is a global producer of specialty chemicals and specialty materials. Grace's twoGrace’s 2 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"LLC (“ART”), Grace'sGrace’s joint venture with Chevron Products Company, a division of Chevron U.S.A. Inc. ("Chevron"(“Chevron”), is managed in this segment. (See Note 14.15.)
Notes to Consolidated Financial Statements (Continued)
13. Segment Information (Continued)
Grace Catalysts Technologies comprises two2 operating segments, Grace Refining TechnologiesSpecialty Catalysts and Grace Specialty Catalysts,Refining Technologies, which are aggregated into one1 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,complex organic molecules, used in pharma & consumer, coatings, consumer, industrial, and pharmaceuticalchemical process applications. The table below presents information related to Grace'sGrace’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.
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
Notes to Consolidated Financial Statements (Continued)
14. Segment Information (Continued)
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.
Reportable Segment Data
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | | Three Months Ended March 31, |
(In millions) | 2017 | | 2016 | | 2017 | | 2016 | (In millions) | | 2021 | | 2020 |
Net Sales | | | | | | | | Net Sales | | | | |
Catalysts Technologies | $ | 317.5 |
| | $ | 295.8 |
| | $ | 931.8 |
| | $ | 834.8 |
| Catalysts Technologies | | $ | 329.6 | | | $ | 308.0 | |
Materials Technologies | 112.0 |
| | 108.7 |
| | 325.2 |
| | 323.0 |
| Materials Technologies | | 127.1 | | | 113.5 | |
Total | $ | 429.5 |
| | $ | 404.5 |
| | $ | 1,257.0 |
| | $ | 1,157.8 |
| Total | | $ | 456.7 | | | $ | 421.5 | |
Adjusted EBIT | | | | | | | | Adjusted EBIT | | | | |
Catalysts Technologies segment operating income | $ | 103.6 |
| | $ | 94.3 |
| | $ | 286.1 |
| | $ | 260.1 |
| Catalysts Technologies segment operating income | | $ | 75.8 | | | $ | 82.0 | |
Materials Technologies segment operating income | 26.4 |
| | 26.4 |
| | 75.4 |
| | 75.0 |
| Materials Technologies segment operating income | | 26.8 | | | 19.0 | |
Corporate costs | (18.5 | ) | | (14.9 | ) | | (52.9 | ) | | (44.4 | ) | Corporate costs | | (15.4) | | | (15.6) | |
| Certain pension costs | (3.4 | ) | | (3.1 | ) | | (9.7 | ) | | (9.3 | ) | Certain pension costs | | (2.0) | | | (3.1) | |
Total | $ | 108.1 |
| | $ | 102.7 |
| | $ | 298.9 |
| | $ | 281.4 |
| Total | | $ | 85.2 | | | $ | 82.3 | |
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.
Reconciliation of Reportable Segment Data to Financial Statements Grace Adjusted EBIT for the three months ended March 31, 2021 and 2020, is reconciled below to “income (loss) before income taxes” presented in the accompanying Consolidated Statements of Operations.
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
(In millions) | | | | | 2021 | | 2020 |
Grace Adjusted EBIT | | | | | $ | 85.2 | | | $ | 82.3 | |
Gain on curtailment of U.S. salaried pension plan | | | | | 25.6 | | | 0 | |
Pension MTM adjustment and other related costs, net | | | | | 13.7 | | | 0 | |
Restructuring and repositioning expenses | | | | | (12.8) | | | (2.7) | |
| | | | | | | |
Costs related to legacy matters | | | | | (4.6) | | | (2.7) | |
Third-party acquisition-related costs | | | | | (1.3) | | | (1.5) | |
| | | | | | | |
| | | | | | | |
Taxes and interest included in equity in earnings of unconsolidated affiliate | | | | | (0.2) | | | 0 | |
| | | | | | | |
Interest expense, net | | | | | (18.9) | | | (17.7) | |
Net income (loss) attributable to noncontrolling interests | | | | | 0.2 | | | 0.1 | |
Income (loss) before income taxes | | | | | $ | 86.9 | | | $ | 57.8 | |
Notes to Consolidated Financial Statements (Continued)
13.14. Segment Information (Continued)
Reconciliation of Reportable Segment Data to Financial StatementsGrace Adjusted EBIT for the three and nine months ended September 30, 2017 and 2016, is reconciled below to income from continuing operations before income taxes presented in the accompanying Consolidated Statements of Operations.
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(In millions) | 2017 | | 2016 | | 2017 | | 2016 |
Grace Adjusted EBIT | $ | 108.1 |
| | $ | 102.7 |
| | $ | 298.9 |
| | $ | 281.4 |
|
(Costs) benefit related to legacy product, environmental and other claims | (8.5 | ) | | (13.1 | ) | | (25.5 | ) | | (24.2 | ) |
Restructuring and repositioning expenses | (9.3 | ) | | (5.6 | ) | | (17.0 | ) | | (28.6 | ) |
Accounts receivable reserve—Venezuela | (10.0 | ) | | — |
| | (10.0 | ) | | — |
|
Pension MTM adjustment and other related costs, net | — |
| | 0.2 |
| | (1.9 | ) | | 1.1 |
|
Income and expense items related to divested businesses | (0.3 | ) | | (0.1 | ) | | (1.3 | ) | | (0.3 | ) |
Third-party acquisition-related costs | (0.4 | ) | | — |
| | (0.4 | ) | | (2.5 | ) |
Gain (loss) on sale of product line | (0.4 | ) | | — |
| | (0.4 | ) | | 0.7 |
|
Loss on early extinguishment of debt | — |
| | — |
| | — |
| | (11.1 | ) |
Amortization of acquired inventory fair value adjustment | — |
| | (4.1 | ) | | — |
| | (4.1 | ) |
Interest expense, net | (20.2 | ) | | (19.4 | ) | | (59.0 | ) | | (60.6 | ) |
Net income (loss) attributable to noncontrolling interests | (0.3 | ) | | 0.1 |
| | (0.7 | ) | | (0.3 | ) |
Income (loss) from continuing operations before income taxes | $ | 58.7 |
| | $ | 60.7 |
| | $ | 182.7 |
| | $ | 151.5 |
|
Geographic Area DataThe 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.
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
(In millions) | | | | | 2021 | | 2020 |
Net Sales | | | | | | | |
United States | | | | | $ | 115.6 | | | $ | 108.8 | |
Canada | | | | | 10.8 | | | 11.4 | |
Total North America | | | | | 126.4 | | | 120.2 | |
Europe Middle East Africa | | | | | 183.4 | | | 181.6 | |
Asia Pacific | | | | | 123.2 | | | 100.3 | |
Latin America | | | | | 23.7 | | | 19.4 | |
Total | | | | | $ | 456.7 | | | $ | 421.5 | |
15. Related Party Transactions
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(In millions) | 2017 | | 2016 | | 2017 | | 2016 |
Net Sales | | | | | | | |
United States | $ | 106.7 |
| | $ | 115.8 |
| | $ | 319.3 |
| | $ | 336.4 |
|
Canada | 12.1 |
| | 11.8 |
| | 36.0 |
| | 34.1 |
|
Total North America | 118.8 |
| | 127.6 |
| | 355.3 |
| | 370.5 |
|
Europe Middle East Africa | 173.2 |
| | 171.6 |
| | 485.8 |
| | 472.4 |
|
Asia Pacific | 119.6 |
| | 76.7 |
| | 335.0 |
| | 231.9 |
|
Latin America | 17.9 |
| | 28.6 |
| | 80.9 |
| | 83.0 |
|
Total | $ | 429.5 |
| | $ | 404.5 |
| | $ | 1,257.0 |
| | $ | 1,157.8 |
|
14. Unconsolidated Affiliate
Grace accounts for its 50% ownership interest in ART, its joint venture with Chevron, using the equity method of accounting. Grace'sGrace’s investment in ART amounted to $118.0$177.4 million and $117.6$175.5 million as of September 30, 2017,March 31, 2021, and December 31, 2016, respectively, and the amount included in "equity in earnings of unconsolidated affiliate" in the accompanying Consolidated Statements of Operations totaled $4.8 million and $17.9 million for the three and nine months ended September 30, 2017, compared with $8.5 million and $18.0 million for the corresponding prior-year periods.2020, respectively. ART is a private, limited liability company, taxed as a partnership, and accordingly does not have a quoted market price available.
The table below presents the components of Grace’s “equity in earnings of unconsolidated affiliate” in the Consolidated Statements of Operations.
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
(In millions) | | | | | 2021 | | 2020 |
Operating income | | | | | $ | 4.5 | | | $ | 1.6 | |
Depreciation and amortization | | | | | (1.1) | | | (0.4) | |
Interest expense and income taxes | | | | | (0.2) | | | 0 | |
Equity in earnings of unconsolidated affiliate | | | | | $ | 3.2 | | | $ | 1.2 | |
The table below presents summary financial data related to ART’s balance sheet and results of operations.
| | | | | | | | | | | |
(In millions) | March 31, 2021 | | December 31, 2020 |
Summary Balance Sheet information: | | | |
Current assets | $ | 265.5 | | | $ | 286.4 | |
Noncurrent assets | 234.5 | | | 235.8 | |
Total assets | $ | 500.0 | | | $ | 522.2 | |
| | | |
Current liabilities | $ | 147.0 | | | $ | 173.0 | |
Noncurrent liabilities | 0.3 | | | 0.3 | |
Total liabilities | $ | 147.3 | | | $ | 173.3 | |
Notes to Consolidated Financial Statements (Continued)
14. Unconsolidated Affiliate15. Related Party Transactions (Continued)
The following summary presents ART's assets, liabilities and results of operations.
|
| | | | | | | |
(In millions) | September 30, 2017 | | December 31, 2016 |
Summary Balance Sheet information: | | | |
Current assets | $ | 268.5 |
| | $ | 249.2 |
|
Noncurrent assets | 85.5 |
| | 84.8 |
|
Total assets | $ | 354.0 |
| | $ | 334.0 |
|
| | | |
Current liabilities | $ | 121.7 |
| | $ | 102.0 |
|
Noncurrent liabilities | — |
| | 0.3 |
|
Total liabilities | $ | 121.7 |
| | $ | 102.3 |
|
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | | Three Months Ended March 31, |
(In millions) | 2017 | | 2016 | | 2017 | | 2016 | (In millions) | | 2021 | | 2020 |
Summary Statement of Operations information: | | Summary Statement of Operations information: | | | | |
Net sales | $ | 113.5 |
| | $ | 110.1 |
| | $ | 321.4 |
| | $ | 255.8 |
| Net sales | | $ | 95.2 | | | $ | 75.3 | |
Costs and expenses applicable to net sales | 100.1 |
| | 89.8 |
| | 273.7 |
| | 213.2 |
| Costs and expenses applicable to net sales | | 83.7 | | | 68.0 | |
Income before income taxes | 10.4 |
| | 18.2 |
| | 37.2 |
| | 37.4 |
| Income before income taxes | | 6.5 | | | 2.9 | |
Net income | 9.6 |
| | 17.0 |
| | 35.8 |
| | 35.9 |
| Net income | | 6.5 | | | 2.5 | |
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. Sales toProduct manufactured by Grace for ART areis accounted for on a net basis, with a mark-up, in "costwhich reduces “cost of goods sold"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 servicesservices; and depreciation. Grace records reimbursements against the respective line items on Grace'sin Grace’s Consolidated StatementStatements of Operations. The table below presents summary financial data related to transactions between Grace and ART.
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(In millions) | 2017 | | 2016 | | 2017 | | 2016 |
Grace sales of catalysts to ART | $ | 54.5 |
| | $ | 56.1 |
| | $ | 159.0 |
| | $ | 156.4 |
|
Mark-up on Grace's sales to ART included as a reduction of Grace's cost of goods sold | 1.1 |
| | 1.1 |
| | 3.1 |
| | 3.1 |
|
Charges for fixed costs, research and development, selling, general and administrative services, and depreciation to ART | 10.4 |
| | 6.2 |
| | 31.2 |
| | 18.5 |
|
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
(In millions) | | | | | 2021 | | 2020 |
Product manufactured for ART | | | | | $ | 67.6 | | | $ | 71.1 | |
Mark-up on product manufactured for ART included as a reduction of Grace’s cost of goods sold | | | | | 1.3 | | | 1.4 | |
Charges for fixed costs; research and development; selling, general and administrative services; and depreciation to ART | | | | | 14.1 | | | 14.1 | |
The table below lists Gracepresents balances in Grace’s Consolidated Financial Statements related to ART.
| | | | | | | | | | | |
(in millions) | March 31, 2021 | | December 31, 2020 |
Trade accounts receivable | $ | 20.3 | | | $ | 28.3 | |
| | | |
Accounts payable | 16.6 | | | 19.8 | |
Debt payable within one year | 3.9 | | | 3.5 | |
Debt payable after one year | 23.5 | | | 22.1 | |
| | | |
|
| | | | | | | |
(in millions) | September 30, 2017 | | December 31, 2016 |
Accounts receivable | $ | 14.5 |
| | $ | 14.9 |
|
Noncurrent asset | 28.0 |
| | 27.0 |
|
Accounts payable | 24.5 |
| | 28.7 |
|
Debt payable within one year | 7.7 |
| | 7.6 |
|
Debt payable after one year | 33.7 |
| | 31.9 |
|
Noncurrent liability | 28.0 |
| | 27.0 |
|
Notesup to Consolidated Financial Statements (Continued)
14. Unconsolidated Affiliate (Continued)
eight years, unless earlier repayment is demanded by ART. The noncurrent asset and noncurrent liability inloans bear interest at the table above represent spending to date related to a planned residue hydroprocessing catalyst production plant in Lake Charles, Louisiana. Grace manages the design and construction of the plant, and the asset will be included in "other assets" in Grace's Consolidated Balance Sheets until construction is completed. Grace has likewise recorded a liability for the transfer of the asset to ART upon completion, included in "other liabilities" in the Consolidated Balance Sheets.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 24, 2018. No2022. NaN amounts were outstanding at September 30, 2017,March 31, 2021, or December 31, 2020.
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 Balance Sheets as of March 31, 2021, and December 31, 2016.2020, include trade accounts receivable of $0.0 million and $2.2 million, respectively, from these customers. Grace’s
29
15. Discontinued Operations
Notes 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. For a summary(Continued)
15. Related Party Transactions (Continued)
Consolidated Statements of the Separation and Distribution Agreement and the related Tax Sharing Agreement, see Note 21, "Discontinued Operations" to the Consolidated Financial Statements in Grace's Form 10-KOperations for the year ended December 31, 2016. Grace has filed the full texts of the Separation and Distribution Agreement and the Tax Sharing Agreement with the SEC, which are readily available on the Internet at www.sec.gov.
GCP's historical financial results through the February 3, 2016, Distribution Date and other effects of the Separation for the ninethree months ended September 30, 2016, are presented as discontinued operations as summarized below:March 31, 2021, include $1.6 million of revenues from these customers, compared with $1.9 million in the prior-year quarter.
|
| | | |
(In millions) | Nine Months Ended September 30, 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 | 4.4 |
|
Total costs and expenses | 50.4 |
|
(Loss) Income from discontinued operations before income taxes | (13.4 | ) |
Benefit from (provision for) income taxes | 2.6 |
|
(Loss) Income from discontinued operations after income taxes | (10.8 | ) |
Less: Net income attributable to noncontrolling interests | (0.1 | ) |
Net (loss) income from discontinued operations | $ | (10.9 | ) |
16. AcquisitionsIn 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 toOn February 25, 2021, Grace in connection with the Separation and the Distribution.
In February 2016, GCP entered into a creditdefinitive agreement that providesto acquire the Fine Chemistry Services business of Albemarle Corporation (“Albemarle”) for approximately $570 million, including $300 million to be paid in cash at closing and $270 million to be funded through the issuance to Albemarle of non-participating preferred equity of a newly created wholly owned Grace subsidiary. On March 31, 2021, Grace secured financing for the cash portion of the purchase price with a new $300 million 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 millionloan maturing in 20222028. This acquisition would strengthen and expand Grace’s existing pharma portfolio, within the Materials Technologies segment. The transaction is expected to close in the 2021 second quarter and is subject to customary closing conditions.
17. Subsequent Events
On April 26, 2021, Grace announced that it had entered into a definitive agreement (the “Merger Agreement”) providing for the acquisition of revolving loansthe Company by an affiliate of Standard Industries Holdings Inc. (“Standard Industries”), subject to the terms and conditions contained therein. Under the terms of the agreement, Standard Industries Holdings will acquire all of the outstanding shares of Grace common stock for $70.00 per share in an aggregate principal amountcash. Grace also announced that Standard Industries’ related investment platform 40 North Latitude Master Fund Ltd. (“40 North”), which owns approximately 14.9% of $250.0 million maturingthe Company’s outstanding common stock, has entered into a voting agreement pursuant to which 40 North has agreed to vote its shares of Grace common stock in 2021, which were undrawn at closing. GCP used a portionfavor of these proceeds to fund a $250.0 million distribution to Grace in connection with the Separation and the Distribution.transaction.
ITEM 2. MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
References
We generally refer to the quarter ended September 30, 2017,March 31, 2021, as the "third quarter," the quarter ended September 30, 2016, as the "prior-year quarter," the quarter ended June 30, 2017, as the "2017 second quarter,"“first quarter” and the quarter ended March 31, 2017,2020, as the "2017 first quarter,"“prior-year quarter.” Our references to “advanced economies” and “emerging regions” refer to classifications established by the nine months ended September 30, 2017, as the "nine months," and the nine months ended September 30, 2016, as the "prior-year period."International Monetary Fund. See Analysis of Operations for a discussion of our non-GAAP performance measures. Our references to "emerging regions" refer to emerging and developing regions as defined by the International Monetary Fund.
Results of Operations
ThirdFirst Quarter Performance Summary
Following is a summary of our financial performance for the thirdfirst quarter compared with the prior-year quarter.
•Net sales increased 6.2%8.4% to $429.5$456.7 million.
Income from continuing operations•Net income attributable to Grace shareholders was $68.4 million.
•Adjusted EBIT1increased15.0% 3.5% to $47.4$85.2 million.
•Diluted earnings per share from continuing operations increased 20.7% to $0.70was $1.03 per diluted share.
•Adjusted EPS1 increased 12.5%2.8% to $0.90$0.73 per diluted share.
Adjusted EBIT increased 5.3% to $108.1 million.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 produces and sells catalysts and related products and technologies used in petrochemical, refining, petrochemical and other chemical manufacturing applications, as follows:
Fluid catalytic cracking catalysts, also called FCC catalysts, that help to "crack" the hydrocarbon chain in distilled crude oil to produce transportation fuels, such as gasoline and diesel fuels, and other petroleum-based products; and 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.
Hydroprocessing catalysts (HPC), most of which are marketed through our ART joint venture with Chevron in which we hold a 50% economic interest, that are used in process reactors to upgrade heavy oils into lighter, more useful products by removing impurities such as nitrogen, sulfur and heavy metals, allowing less expensive feedstocks to be used in the petroleum refining process (ART is not consolidated in our financial statements, so ART's sales are excluded from our sales).
•Polyolefin catalysts and catalyst supports, also called specialty catalysts (SC), for the production of polyethylene (PE) and polypropylene and polyethylene(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; chemicaltextiles. High-activity, non-phthalate catalysts used in a varietyallow customers to produce phthalate-free PP products and cleaner, clearer PP products. Our catalysts also improve resin properties that allow for the lightweighting of industrial, environmental and consumer applications; and gas-phaseautomobiles by replacing steel parts with PP while meeting demanding performance standards of automakers.
•Gas-phase polypropylene process technology, which provides our 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. This capability, coupled with a complete family of catalysts and donors with a suite of value-added solutions, enables our licensees to compete effectively in their markets over the lifetime of the plant. We are the leading independent supplier that provides both PP process technology licenses and catalysts.
•Fluid catalytic cracking catalysts, also called FCC catalysts, that help to “crack” the hydrocarbon chains in distilled crude oil to produce transportation fuels, such as gasoline and diesel fuels, and feeds for production of petrochemicals; and 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.
•Hydroprocessing catalysts (HPC), most of which are marketed through our Advanced Refining Technologies LLC (“ART”) joint venture with Chevron U.S.A. Inc. (“Chevron”), that 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 regulations. These 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. (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.)
•Chemical catalysts, which include hydrogenation and dehydrogenation catalyst products. These catalysts can be customized for use in a variety of petrochemical chain conversions as well as fine chemical production.
Grace Materials Technologies produces and sells specialty materials, which are either silica-based or complex organic molecules, that can be used in pharma & consumer, coatings, and chemical process applications, including silica-based and silica-alumina-basedas follows:
•Pharma & Consumer, specialty materials used as additives, intermediates and purification aids for pharmaceuticals, nutraceuticals, toothpaste, beer, food, and cosmetic segments. Our Fine Chemicals business specializes in coatings, consumer,regulatory starting materials and intermediates, especially peptide building blocks, specialty amino acids, chiral boronic acids, and esters.
•Coatings, functional additives for wood, coil, general industrial, and pharmaceutical applications, as follows:
Coatings and print media applications, functional additivesarchitectural coatings that provide mattingsurface effects and corrosion protection for industrial and consumer coatings and media and paper products to enhance quality in ink jet coatings.metal substrates.
Consumer/Pharma applications, as a free-flow agent, carrier or processing aid in food and personal care products; as a toothpaste abrasive and thickener; and for the processing and stabilization of edible oils and beverages; as well as pharmaceutical, life science and related applications including silica-based separation media, excipients and pharmaceutical intermediates.
•Chemical Process applications, such as tires and rubber, plastics, precision investment casting, refractory, insulating glass windows, adsorbentsprocess, functional materials for use in plastics, rubber, tire, and metal casting, and adsorbent products for petrochemical, and natural gas, processes and biofuels, various functions such as reinforcement, high temperature binding and moisture scavenging.more specialized applications.
Global Scope
We operate our business on a global scale with approximately 72%73% of our annual 20162020 sales and 75% of our nine monthsfirst quarter sales to customers located outside the United States. We operate and/or sell to customers in over 60 countries and do business 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.
Analysis of Operations
We have set forth in the table below our key operating statistics with percentage changes for the thirdfirst quarter and nine months compared with the corresponding prior-year periods.quarter. Please refer to this Analysis of Operations when reviewing this Management'sManagement’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 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 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.amortization, and depreciation and amortization included in equity in earnings of unconsolidated affiliate (collectively, Adjusted Depreciation and Amortization).
We define Adjusted EBIT Return Onon Invested Capital (a non-GAAP financial measure) to be Adjusted EBIT (on a trailing four quarters basis) divided by the sum ofAdjusted 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 working capital, properties and equipmentincome 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, and the amortization of acquired inventory fair value adjustment.adjustment, write-offs of inventory related to exits of businesses and product lines and significant manufacturing process changes, and certain other items that are not representative of underlying trends.
We define Adjusted Earnings Per Share (EPS) (a non-GAAP financial measure) to be diluted EPS from continuing operations adjusted for 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 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; and certain discrete tax items.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.
Grace.
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;matters; restructuring and repositioning activities; divested businesses; the effects of acquisitions;certain acquisition-related items; and certain other items that are not representative of underlying trends.
We use Adjusted EBITDA, Adjusted EBIT Return Onon 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 Onon 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 Onon Invested Capital, Adjusted Gross Margin, and 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,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'sGrace’s current business base from the costs of Grace'sGrace’s legacy product, environmental and other claims;matters; 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 theour 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,matters, and may exclude income and expenses from restructuring, repositioning, and repositioningother 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) | | | Three Months Ended March 31, |
| | | | | | 2021 | | 2020 | | % Change |
Net sales: | | | | | | | | | | | |
Catalysts Technologies | | | | | | | $ | 329.6 | | | $ | 308.0 | | | 7.0 | % |
Materials Technologies | | | | | | | 127.1 | | | 113.5 | | | 12.0 | % |
Total Grace net sales | | | | | | | $ | 456.7 | | | $ | 421.5 | | | 8.4 | % |
Net sales by region: | | | | | | | | | | | |
North America | | | | | | | $ | 126.4 | | | $ | 120.2 | | | 5.2 | % |
Europe Middle East Africa | | | | | | | 183.4 | | | 181.6 | | | 1.0 | % |
Asia Pacific | | | | | | | 123.2 | | | 100.3 | | | 22.8 | % |
Latin America | | | | | | | 23.7 | | | 19.4 | | | 22.2 | % |
Total net sales by region | | | | | | | $ | 456.7 | | | $ | 421.5 | | | 8.4 | % |
Performance measures: | | | | | | | | | | | |
Adjusted EBIT(A): | | | | | | | | | | | |
Catalysts Technologies segment operating income | | | | | | | $ | 75.8 | | | $ | 82.0 | | | (7.6) | % |
Materials Technologies segment operating income | | | | | | | 26.8 | | | 19.0 | | | 41.1 | % |
Corporate costs | | | | | | | (15.4) | | | (15.6) | | | 1.3 | % |
| | | | | | | | | | | |
Certain pension costs(B) | | | | | | | (2.0) | | | (3.1) | | | 35.5 | % |
Adjusted EBIT | | | | | | | 85.2 | | | 82.3 | | | 3.5 | % |
| | | | | | | | | | | |
Gain on curtailment of U.S. salaried pension plan | | | | | | | 25.6 | | | — | | | |
Pension MTM adjustment and other related costs, net | | | | | | | 13.7 | | | — | | | |
Restructuring and repositioning expenses | | | | | | | (12.8) | | | (2.7) | | | |
Costs related to legacy matters | | | | | | | (4.6) | | | (2.7) | | | |
| | | | | | | | | | | |
Third-party acquisition-related costs | | | | | | | (1.3) | | | (1.5) | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Taxes and interest included in equity in earnings of unconsolidated affiliate | | | | | | | (0.2) | | | — | | | |
Interest expense, net | | | | | | | (18.9) | | | (17.7) | | | (6.8) | % |
(Provision for) benefit from income taxes | | | | | | | (18.3) | | | (15.7) | | | (16.6) | % |
Net income (loss) attributable to W. R. Grace & Co. shareholders | | | | | | | $ | 68.4 | | | $ | 42.0 | | | 62.9 | % |
Diluted EPS | | | | | | | $ | 1.03 | | | $ | 0.63 | | | 63.5 | % |
Adjusted EPS | | | | | | | $ | 0.73 | | | $ | 0.71 | | | 2.8 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
Analysis of Operations (In millions) | | | Three Months Ended March 31, |
| | | | | | 2021 | | 2020 | | % Change |
Adjusted performance measures: | | | | | | | | | | | |
Gross Margin: | | | | | | | | | | | |
Catalysts Technologies | | | | | | | 40.2 | % | | 40.7 | % | | (50) bps |
Materials Technologies | | | | | | | 36.8 | % | | 33.0 | % | | 380 bps |
Adjusted Gross Margin | | | | | | | 39.3 | % | | 38.7 | % | | 60 bps |
| | | | | | | | | | | |
Weather-related impacts in cost of goods sold | | | | | | | (1.2) | % | | — | % | | (120) bps |
| | | | | | | | | | | |
Pension costs in cost of goods sold | | | | | | | (0.9) | % | | (0.8) | % | | (10) bps |
Total Grace | | | | | | | 37.2 | % | | 37.9 | % | | (70) bps |
Adjusted EBIT: | | | | | | | | | | | |
Catalysts Technologies | | | | | | | $ | 75.8 | | | $ | 82.0 | | | (7.6) | % |
Materials Technologies | | | | | | | 26.8 | | | 19.0 | | | 41.1 | % |
Corporate, pension, and other | | | | | | | (17.4) | | | (18.7) | | | 7.0 | % |
Total Grace | | | | | | | $ | 85.2 | | | $ | 82.3 | | | 3.5 | % |
Depreciation and amortization: | | | | | | | | | | | |
Catalysts Technologies depreciation and amortization | | | | | | | $ | 22.2 | | | $ | 20.7 | | | 7.2 | % |
Depreciation and amortization included in equity in earnings of unconsolidated affiliate | | | | | | | 1.1 | | | 0.4 | | | 175.0 | % |
Catalysts Technologies | | | | | | | 23.3 | | | 21.1 | | | 10.4 | % |
Materials Technologies | | | | | | | 5.1 | | | 3.6 | | | 41.7 | % |
Corporate | | | | | | | 0.8 | | | 1.2 | | | (33.3) | % |
Adjusted Depreciation and Amortization | | | | | | | 29.2 | | | 25.9 | | | 12.7 | % |
Depreciation and amortization included in equity in earnings of unconsolidated affiliate | | | | | | | (1.1) | | | (0.4) | | | (175.0) | % |
Total Grace | | | | | | | $ | 28.1 | | | $ | 25.5 | | | 10.2 | % |
Adjusted EBITDA: | | | | | | | | | | | |
Catalysts Technologies | | | | | | | $ | 99.1 | | | $ | 103.1 | | | (3.9) | % |
Materials Technologies | | | | | | | 31.9 | | | 22.6 | | | 41.2 | % |
Corporate, pension, and other | | | | | | | (16.6) | | | (17.5) | | | 5.1 | % |
Total Grace | | | | | | | $ | 114.4 | | | $ | 108.2 | | | 5.7 | % |
Adjusted EBIT margin: | | | | | | | | | | | |
Catalysts Technologies | | | | | | | 23.0 | % | | 26.6 | % | | (360) bps |
Materials Technologies | | | | | | | 21.1 | % | | 16.7 | % | | 440 bps |
Total Grace | | | | | | | 18.7 | % | | 19.5 | % | | (80) bps |
Net income margin | | | | | | | 15.0 | % | | 10.0 | % | | 500 bps |
Adjusted EBITDA margin: | | | | | | | | | | | |
Catalysts Technologies | | | | | | | 30.1 | % | | 33.5 | % | | (340) bps |
Materials Technologies | | | | | | | 25.1 | % | | 19.9 | % | | 520 bps |
Total Grace | | | | | | | 25.0 | % | | 25.7 | % | | (70) bps |
|
| | | | | | | | | | | | | | | | | | | | | |
Analysis of Operations (In millions, except per share amounts) | Three Months Ended September 30, | | Nine Months Ended September 30, |
2017 | | 2016 | | % Change | | 2017 | | 2016 | | % Change |
Net sales: | | | | | | | | | | | |
Catalysts Technologies | $ | 317.5 |
| | $ | 295.8 |
| | 7.3 | % | | $ | 931.8 |
| | $ | 834.8 |
| | 11.6 | % |
Materials Technologies | 112.0 |
| | 108.7 |
| | 3.0 | % | | 325.2 |
| | 323.0 |
| | 0.7 | % |
Total Grace net sales | $ | 429.5 |
| | $ | 404.5 |
| | 6.2 | % | | $ | 1,257.0 |
| | $ | 1,157.8 |
| | 8.6 | % |
Net sales by region: | | | | | | | | | | | |
North America | $ | 118.8 |
| | $ | 127.6 |
| | (6.9 | )% | | $ | 355.3 |
| | $ | 370.5 |
| | (4.1 | )% |
Europe Middle East Africa | 173.2 |
| | 171.6 |
| | 0.9 | % | | 485.8 |
| | 472.4 |
| | 2.8 | % |
Asia Pacific | 119.6 |
| | 76.7 |
| | 55.9 | % | | 335.0 |
| | 231.9 |
| | 44.5 | % |
Latin America | 17.9 |
| | 28.6 |
| | (37.4 | )% | | 80.9 |
| | 83.0 |
| | (2.5 | )% |
Total net sales by region | $ | 429.5 |
| | $ | 404.5 |
| | 6.2 | % | | $ | 1,257.0 |
| | $ | 1,157.8 |
| | 8.6 | % |
Performance measures: | | | | | | | | | | | |
Adjusted EBIT(A): | | | | | | | | | | | |
Catalysts Technologies segment operating income | $ | 103.6 |
| | $ | 94.3 |
| | 9.9 | % | | $ | 286.1 |
| | $ | 260.1 |
| | 10.0 | % |
Materials Technologies segment operating income | 26.4 |
| | 26.4 |
| | — | % | | 75.4 |
| | 75.0 |
| | 0.5 | % |
Corporate costs | (18.5 | ) | | (14.9 | ) | | (24.2 | )% | | (52.9 | ) | | (44.4 | ) | | (19.1 | )% |
Certain pension costs(B) | (3.4 | ) | | (3.1 | ) | | (9.7 | )% | | (9.7 | ) | | (9.3 | ) | | (4.3 | )% |
Adjusted EBIT | 108.1 |
| | 102.7 |
| | 5.3 | % | | 298.9 |
| | 281.4 |
| | 6.2 | % |
(Costs) benefit related to legacy product, environmental and other claims | (8.5 | ) | | (13.1 | ) | | | | (25.5 | ) | | (24.2 | ) | | |
Restructuring and repositioning expenses | (9.3 | ) | | (5.6 | ) | | | | (17.0 | ) | | (28.6 | ) | | |
Accounts receivable reserve—Venezuela | (10.0 | ) | | — |
| | | | (10.0 | ) | | — |
| | |
Pension MTM adjustment and other related costs, net | — |
| | 0.2 |
| | | | (1.9 | ) | | 1.1 |
| | |
Income and expense items related to divested businesses | (0.3 | ) | | (0.1 | ) | | | | (1.3 | ) | | (0.3 | ) | | |
Third-party acquisition-related costs | (0.4 | ) | | — |
| | | | (0.4 | ) | | (2.5 | ) | | |
Gain (loss) on sale of product line | (0.4 | ) | | — |
| | | | (0.4 | ) | | 0.7 |
| | |
Loss on early extinguishment of debt | — |
| | — |
| | | | — |
| | (11.1 | ) | | |
Amortization of acquired inventory fair value adjustment | — |
| | (4.1 | ) | | | | — |
| | (4.1 | ) | | |
Interest expense, net | (20.2 | ) | | (19.4 | ) | | (4.1 | )% | | (59.0 | ) | | (60.6 | ) | | 2.6 | % |
(Provision for) benefit from income taxes | (11.6 | ) | | (19.4 | ) | | 40.2 | % | | (49.2 | ) | | (62.1 | ) | | 20.8 | % |
Income (loss) from continuing operations attributable to W. R. Grace & Co. shareholders | $ | 47.4 |
| | $ | 41.2 |
| | 15.0 | % | | $ | 134.2 |
| | $ | 89.7 |
| | 49.6 | % |
Diluted EPS from continuing operations | $ | 0.70 |
| | $ | 0.58 |
| | 20.7 | % | | $ | 1.96 |
| | $ | 1.27 |
| | 54.3 | % |
Adjusted EPS | $ | 0.90 |
| | $ | 0.80 |
| | 12.5 | % | | $ | 2.42 |
| | $ | 2.15 |
| | 12.6 | % |
|
| | | | | | | | | | | | | | | | | | | | | |
Analysis of Operations (In millions) | Three Months Ended September 30, | | Nine Months Ended September 30, |
2017 | | 2016 | | % Change | | 2017 | | 2016 | | % Change |
Adjusted performance measures: | |
| | |
| | |
| | | | | | |
Gross Margin: | |
| | |
| | |
| | | | | | |
Catalysts Technologies | 41.4 | % | | 44.6 | % | | (3.2) pts |
| | 40.4 | % | | 44.8 | % | | (4.4) pts |
|
Materials Technologies | 38.4 | % | | 37.8 | % | | 0.6 pts |
| | 38.3 | % | | 39.3 | % | | (1.0) pts |
|
Adjusted Gross Margin | 40.6 | % | | 42.8 | % | | (2.2) pts |
| | 39.8 | % | | 43.2 | % | | (3.4) pts |
|
Amortization of acquired inventory fair value adjustment | — | % | | (1.0 | )% | | 1.0 pts |
| | — | % | | (0.4 | )% | | 0.4 pts |
|
Pension costs in cost of goods sold | (0.2 | )% | | (0.2 | )% | | 0.0 pts |
| | (0.3 | )% | | (0.1 | )% | | (0.2) pts |
|
Total Grace | 40.4 | % | | 41.6 | % | | (1.2) pts |
| | 39.5 | % | | 42.7 | % | | (3.2) pts |
|
Adjusted EBIT: | |
| | |
| | |
| | |
| | |
| | |
|
Catalysts Technologies | $ | 103.6 |
| | $ | 94.3 |
| | 9.9 | % | | $ | 286.1 |
| | $ | 260.1 |
| | 10.0 | % |
Materials Technologies | 26.4 |
| | 26.4 |
| | — | % | | 75.4 |
| | 75.0 |
| | 0.5 | % |
Corporate, pension, and other | (21.9 | ) | | (18.0 | ) | | (21.7 | )% | | (62.6 | ) | | (53.7 | ) | | (16.6 | )% |
Total Grace | 108.1 |
| | 102.7 |
| | 5.3 | % | | 298.9 |
| | 281.4 |
| | 6.2 | % |
Depreciation and amortization: | |
| | |
| | |
| | |
| | |
| | |
|
Catalysts Technologies | $ | 22.2 |
| | $ | 21.0 |
| | 5.7 | % | | $ | 64.6 |
| | $ | 56.5 |
| | 14.3 | % |
Materials Technologies | 5.0 |
| | 5.0 |
| | — | % | | 14.5 |
| | 14.7 |
| | (1.4 | )% |
Corporate | 1.2 |
| | 1.0 |
| | 20.0 | % | | 3.5 |
| | 2.6 |
| | 34.6 | % |
Total Grace | 28.4 |
| | 27.0 |
| | 5.2 | % | | 82.6 |
| | 73.8 |
| | 11.9 | % |
Adjusted EBITDA: | |
| | |
| | |
| | |
| | |
| | |
|
Catalysts Technologies | $ | 125.8 |
| | $ | 115.3 |
| | 9.1 | % | | $ | 350.7 |
| | $ | 316.6 |
| | 10.8 | % |
Materials Technologies | 31.4 |
| | 31.4 |
| | — | % | | 89.9 |
| | 89.7 |
| | 0.2 | % |
Corporate, pension, and other | (20.7 | ) | | (17.0 | ) | | (21.8 | )% | | (59.1 | ) | | (51.1 | ) | | (15.7 | )% |
Total Grace | 136.5 |
| | 129.7 |
| | 5.2 | % | | 381.5 |
| | 355.2 |
| | 7.4 | % |
Adjusted EBIT margin: | |
| | |
| | |
| | | | | | |
Catalysts Technologies | 32.6 | % | | 31.9 | % | | 0.7 pts |
| | 30.7 | % | | 31.2 | % | | (0.5) pts |
|
Materials Technologies | 23.6 | % | | 24.3 | % | | (0.7) pts |
| | 23.2 | % | | 23.2 | % | | 0.0 pts |
|
Total Grace | 25.2 | % | | 25.4 | % | | (0.2) pts |
| | 23.8 | % | | 24.3 | % | | (0.5) pts |
|
Adjusted EBITDA margin: | |
| | |
| | |
| | |
| | |
| | |
|
Catalysts Technologies | 39.6 | % | | 39.0 | % | | 0.6 pts |
| | 37.6 | % | | 37.9 | % | | (0.3) pts |
|
Materials Technologies | 28.0 | % | | 28.9 | % | | (0.9) pts |
| | 27.6 | % | | 27.8 | % | | (0.2) pts |
|
Total Grace | 31.8 | % | | 32.1 | % | | (0.3) pts |
| | 30.4 | % | | 30.7 | % | | (0.3) pts |
|
|
| | | | | | | |
Analysis of Operations (In millions) | Four Quarters Ended |
September 30, 2017 | | December 31, 2016 |
Calculation of Adjusted EBIT Return On Invested Capital (trailing four quarters): |
Adjusted EBIT | $ | 417.8 |
| | $ | 400.3 |
|
Invested Capital: | | | |
Trade accounts receivable | 253.1 |
| | 273.9 |
|
Inventories | 239.5 |
| | 228.0 |
|
Accounts payable | (195.2 | ) | | (195.4 | ) |
| 297.4 |
| | 306.5 |
|
Other current assets (excluding income taxes) | 31.1 |
| | 32.0 |
|
Properties and equipment, net | 762.8 |
| | 729.6 |
|
Goodwill | 401.7 |
| | 394.2 |
|
Technology and other intangible assets, net | 259.2 |
| | 269.1 |
|
Investment in unconsolidated affiliate | 118.0 |
| | 117.6 |
|
Other assets (excluding capitalized financing fees) | 32.9 |
| | 34.9 |
|
Other current liabilities (excluding income taxes, legacy environmental matters, accrued interest, and restructuring) | (129.8 | ) | | (144.4 | ) |
Other liabilities (excluding legacy environmental matters) | (118.7 | ) | | (89.3 | ) |
Total invested capital | $ | 1,654.6 |
| | $ | 1,650.2 |
|
Adjusted EBIT Return On Invested Capital | 25.3 | % | | 24.3 | % |
| | | | | | | | | | | |
Analysis of Operations (In millions) | Four Quarters Ended March 31, |
2021 | | 2020 |
Calculation of Adjusted EBIT Return on Invested Capital (trailing four quarters): |
Net income (loss) attributable to W. R. Grace & Co. shareholders | $ | 24.6 | | | $ | 143.6 | |
Adjusted EBIT | 315.1 | | | 451.1 | |
| | | |
Reconciliation to Adjusted Invested Capital: | | | |
Total equity | 308.3 | | | 383.9 | |
Total debt | 1,989.2 | | | 1,978.3 | |
Underfunded and unfunded defined benefit pension plans | 592.8 | | | 514.8 | |
Liabilities related to legacy matters | 220.3 | | | 203.1 | |
Cash, cash equivalents, and restricted cash | (292.5) | | | (193.7) | |
Income taxes, net | (543.2) | | | (498.6) | |
Other items | 27.3 | | | 32.0 | |
Adjusted Invested Capital | $ | 2,302.2 | | | $ | 2,419.8 | |
| | | |
Return on equity | 8.0 | % | | 37.4 | % |
Adjusted EBIT Return on Invested Capital | 13.7 | % | | 18.6 | % |
Amounts may not add due to rounding.
| |
(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 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. |
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.
Grace Overview
Following is an overview of our financial performance for the thirdfirst quarter and nine months compared with the corresponding prior-year periods.quarter.
Gulf Coast Freeze Update
In mid-February, Winter Storm Uri caused widespread manufacturing disruption across the Gulf Coast region as a result of freezing temperatures and loss of electricity, gas, water, and other utilities. Most polyolefin manufacturers and refineries in the region were forced to shut down or operate at reduced rates following the storm. We operate four manufacturing facilities in the region. All sites experienced interruptions, with extended downtime at three plants ranging from 8 to 24 days. All Grace sites have resumed operations; however, operating costs are expected to remain higher than normal while some maintenance and repair activity is ongoing. Most customers have restarted operations and returned to normal operating rates.
•The weather-related impact on sales in the first quarter was approximately 3% or $13 million, which impacted our Refining Technologies and Specialty Catalysts operating segments.
•In addition, the total estimated weather-related costs are expected to be approximately $15 million. Weather-related costs recorded in the first quarter were $8.5 million, or $0.09 per share, with approximately $6.5 million expected in the second quarter. The costs are included in “cost of goods sold” and “other (income) expense” in the Consolidated Statements of Operations and impact both net income and Adjusted EBIT. They are primarily due to lower fixed cost absorption during the downtime, increased costs to supply customers from other Grace manufacturing facilities, and costs to repair plants impacted by the weather.
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. While COVID-19 had a significant negative impact on our financial results for 2020 and the 2021 first quarter, we are starting to see increasing demand across many of the markets that were impacted.
Net Sales and Gross Margin
Sales were $429.5 million and $1,257.0 million for the third quarter and nine months compared with $404.5 million and $1,157.8 million for the corresponding prior-year periods. Gross margin was 40.4% and 39.5% for the third quarter and nine months compared with 41.6% and 42.7% for the corresponding prior-year periods. Adjusted Gross Margin was 40.6% and 39.8% for the third quarter and nine months compared with 42.8% and 43.2% for the corresponding prior-year periods.
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.
|
| | | | | | | | | | | |
| Three Months Ended September 30, 2017 as a Percentage Increase (Decrease) from Three Months Ended September 30, 2016 |
Net Sales Variance Analysis | Volume | | Price | | Currency Translation | | Total |
Catalysts Technologies | 6.8 | % | | (0.5 | )% | | 1.0 | % | | 7.3 | % |
Materials Technologies | 0.2 | % | | 0.1 | % | | 2.7 | % | | 3.0 | % |
Net sales | 5.1 | % | | (0.4 | )% | | 1.5 | % | | 6.2 | % |
By Region: | | | | | | | |
North America | (4.8 | )% | | (2.1 | )% | | — | % | | (6.9 | )% |
Europe Middle East Africa | (2.0 | )% | | (0.7 | )% | | 3.6 | % | | 0.9 | % |
Asia Pacific | 53.4 | % | | 2.8 | % | | (0.3 | )% | | 55.9 | % |
Latin America | (38.7 | )% | | 1.1 | % | | 0.2 | % | | (37.4 | )% |
Sales for the thirdfirst quarter increased 6.2%8.4%, up 5.8% on constant currency, despite the weather-related impact of approximately 3% or $13 million, compared with the prior-year quarter. Higher sales volumes in Catalysts Technologies were primarily due to higher demand in Asia. Sales in Materials Technologies were up, primarily driven by favorable currency translation. Sales volumes in Latin America decreased primarily due to discontinued sales in Venezuela and the timing of contract renewals in the region.
Gross margin decreased 120 basis points to 40.4% for the third quarter. Adjusted Gross Margin decreased 220 basis points to 40.6% for the third quarter. The decreases were primarily due to higher manufacturing costs, and product and regional mix.
|
| | | | | | | | | | | |
| Nine Months Ended September 30, 2017 as a Percentage Increase (Decrease) from Nine Months Ended September 30, 2016 |
Net Sales Variance Analysis | Volume | | Price | | Currency Translation | | Total |
Catalysts Technologies | 11.9 | % | | — | % | | (0.3 | )% | | 11.6 | % |
Materials Technologies | 0.6 | % | | (0.2 | )% | | 0.3 | % | | 0.7 | % |
Net sales | 8.8 | % | | (0.1 | )% | | (0.1 | )% | | 8.6 | % |
By Region: | | | | | | | |
North America | (4.0 | )% | | (0.1 | )% | | — | % | | (4.1 | )% |
Europe Middle East Africa | 3.4 | % | | (0.3 | )% | | (0.3 | )% | | 2.8 | % |
Asia Pacific | 44.2 | % | | 0.6 | % | | (0.3 | )% | | 44.5 | % |
Latin America | (3.4 | )% | | (0.2 | )% | | 1.1 | % | | (2.5 | )% |
Sales for the nine months increased 8.6% compared with the prior-year period. Higher sales volumes in Catalysts Technologies were primarily due to the 2016 polyolefin catalysts acquisition and growth in the existing businesses driven by higher demand in Asia and the Middle East. Higher sales volumes in Materials Technologies were due to higher demand in Asia and Europe, offset by the effect of product lines exited in the first half of 2016.
Gross margin decreased 320 basis points to 39.5% for the nine months from 42.7% for the prior-year period. Adjusted Gross Margin decreased 340 basis points to 39.8% for the nine months from 43.2% for the prior-year period. The decreases were primarily due to product and regional mix including the effect of the 2016 polyolefin catalysts acquisition, and higher manufacturing costs.
Grace Income From Continuing Operations
Income from continuing operations attributable to Grace was $47.4 million for the third quarter, an increase of 15.0% compared with $41.2 million for the prior-year quarter. The increase was primarily due to higher Catalysts Technologies segment operating income and a lower provision for income taxes, partially offset by an accounts receivable reserve for a customer in Venezuela.
Income from continuing operations attributable to Grace was $134.2 million for the nine months, an increase of 49.6% compared with $89.7 million for the prior-year period. The increase was primarily due to higher Catalysts Technologies segment operating income, a lower provision for income taxes, lower restructuring and repositioning expenses, and the 2016 loss on early extinguishment of debt, partially offset by an accounts receivable reserve for a customer in Venezuela and higher corporate costs.
Adjusted EBIT
Adjusted EBIT was $108.1 million for the third quarter, an increase of 5.3% compared with the prior-year quarter. The increase was due to business interruption insurance recoveries for lost profits as a result of a customer outage and higher sales volumes in Catalysts Technologies, partially offset by higher manufacturing costs, unfavorable product and regional mix, lower income from our ART joint venture, and higher operating expenses.
Adjusted EBIT was $298.9 million for the nine months, an increase of 6.2% compared with the prior-year period. The increase was primarily due to higher sales volumes in both segments as we continue to recover from the pandemic and favorable currency translation.
Gross margin decreased 70 basis points to 37.2% for the first quarter, as weather-related costs more than offset improvement due to increased production volumes and strong operating performance. Adjusted Gross Margin increased 60 basis points to 39.3%.
Grace Net Income (Loss)
Net income attributable to Grace was $68.4 million for the first quarter, compared with $42.0 million for the prior-year quarter. The increase was primarily due to the $25.6 million curtailment gain and $13.7 million mark-to-market gain related to the freeze of the U.S. salaried pension plan. These gains were partially offset by weather-related costs of $8.5 million and higher repositioning expenses related to our review of strategic alternatives, as well as $8.0 million in business interruption insurance recoveries during the 2020 first quarter.
Adjusted EBIT
Adjusted EBIT was $85.2 million for the first quarter, an increase of 3.5% compared with the prior-year quarter. The increase was primarily due to higher sales and higher income from our ART joint venture, partially offset by higher manufacturingweather-related costs unfavorable product and regional mix, and higher operating expenses.and depreciation expenses, as well as business interruption insurance recoveries in the 2020 first quarter.
Adjusted EPS
The following table reconciles our Diluted EPS (GAAP) to our Adjusted EPS:EPS (non-GAAP):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2021 | | 2020 |
(In millions, except per share amounts) | Pre-Tax | | Tax Effect | | After-Tax | | Per Share | | Pre-Tax | | Tax Effect | | After-Tax | | Per Share |
Diluted EPS | | | | | | | $ | 1.03 | | | | | | | | | $ | 0.63 | |
| | | | | | | | | | | | | | | |
Gain on curtailment of U.S. salaried pension plan | $ | (25.6) | | | $ | (8.1) | | | $ | (17.5) | | | (0.26) | | | $ | — | | | $ | — | | | $ | — | | | — | |
Pension MTM adjustment and other related costs, net | (13.7) | | | (4.2) | | | (9.5) | | | (0.14) | | | — | | | — | | | — | | | — | |
Restructuring and repositioning expenses | 12.8 | | | 4.0 | | | 8.8 | | | 0.13 | | | 2.7 | | | 0.6 | | | 2.1 | | | 0.03 | |
Costs related to legacy matters | 4.6 | | | 1.4 | | | 3.2 | | | 0.05 | | | 2.7 | | | 0.6 | | | 2.1 | | | 0.03 | |
| | | | | | | | | | | | | | | |
Third-party acquisition-related costs | 1.3 | | | 0.4 | | | 0.9 | | | 0.01 | | | 1.5 | | | 0.3 | | | 1.2 | | | 0.02 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Discrete tax items | | | 5.9 | | | (5.9) | | | (0.09) | | | | | 0.1 | | | (0.1) | | | — | |
| | | | | | | | | | | | | | | |
Adjusted EPS | | | | | | | $ | 0.73 | | | | | | | | | $ | 0.71 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
| 2017 | | 2016 |
(In millions, except per share amounts) | Pre- Tax | | Tax Effect | | After- Tax | | Per Share | | Pre- Tax | | Tax Effect | | After- Tax | | Per Share |
Diluted earnings per share from continuing operations | |
| | |
| | |
| | $ | 0.70 |
| | |
| | |
| | |
| | $ | 0.58 |
|
Accounts receivable reserve—Venezuela | $ | 10.0 |
| | $ | 3.5 |
| | $ | 6.5 |
| | 0.10 |
| | $ | — |
| | $ | — |
| | $ | — |
| | — |
|
Restructuring and repositioning expenses | 9.3 |
| | 2.7 |
| | 6.6 |
| | 0.10 |
| | 5.6 |
| | 1.4 |
| | 4.2 |
| | 0.06 |
|
Costs (benefit) related to legacy product, environmental and other claims | 8.5 |
| | 3.0 |
| | 5.5 |
| | 0.08 |
| | 13.1 |
| | 4.9 |
| | 8.2 |
| | 0.12 |
|
Third-party acquisition-related costs | 0.4 |
| | 0.1 |
| | 0.3 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Loss (gain) on sale of product line | 0.4 |
| | 0.1 |
| | 0.3 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Income and expense items related to divested businesses | 0.3 |
| | 0.1 |
| | 0.2 |
| | — |
| | 0.1 |
| | — |
| | 0.1 |
| | — |
|
Amortization of acquired inventory fair value adjustment | — |
| | — |
| | — |
| | — |
| | 4.1 |
| | 1.5 |
| | 2.6 |
| | 0.04 |
|
Pension MTM adjustment and other related costs, net | — |
| | — |
| | — |
| | — |
| | (0.2 | ) | | (0.1 | ) | | (0.1 | ) | | — |
|
Discrete tax items, including adjustments to uncertain tax positions | |
| | 5.3 |
| | (5.3 | ) | | (0.08 | ) | | |
| | (0.3 | ) | | 0.3 |
| | — |
|
Adjusted EPS | |
| | |
| | |
| | $ | 0.90 |
| | |
| | |
| | |
| | $ | 0.80 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2017 | | 2016 |
(In millions, except per share amounts) | Pre- Tax | | Tax Effect | | After- Tax | | Per Share | | Pre- Tax | | Tax Effect | | After- Tax | | Per Share |
Diluted earnings per share from continuing operations | |
| | |
| | |
| | $ | 1.96 |
| | | | | | | | $ | 1.27 |
|
Costs (benefit) related to legacy product, environmental and other claims | $ | 25.5 |
| | $ | 9.4 |
| | $ | 16.1 |
| | 0.24 |
| | $ | 24.2 |
| | $ | 9.0 |
| | $ | 15.2 |
| | 0.21 |
|
Restructuring and repositioning expenses | 17.0 |
| | 6.0 |
| | 11.0 |
| | 0.16 |
| | 28.6 |
| | 9.5 |
| | 19.1 |
| | 0.27 |
|
Accounts receivable reserve—Venezuela | 10.0 |
| | 3.5 |
| | 6.5 |
| | 0.10 |
| | — |
| | — |
| | — |
| | — |
|
Pension MTM adjustment and other related costs, net | 1.9 |
| | 0.7 |
| | 1.2 |
| | 0.02 |
| | (1.1 | ) | | (0.3 | ) | | (0.8 | ) | | (0.01 | ) |
Income and expense items related to divested businesses | 1.3 |
| | 0.5 |
| | 0.8 |
| | 0.01 |
| | 0.3 |
| | 0.1 |
| | 0.2 |
| | — |
|
Third-party acquisition-related costs | 0.4 |
| | 0.1 |
| | 0.3 |
| | — |
| | 2.5 |
| | 0.7 |
| | 1.8 |
| | 0.03 |
|
Loss (gain) on sale of product line | 0.4 |
| | 0.1 |
| | 0.3 |
| | — |
| | (0.7 | ) | | (0.3 | ) | | (0.4 | ) | | (0.01 | ) |
Loss on early extinguishment of debt | — |
| | — |
| | — |
| | — |
| | 11.1 |
| | 4.1 |
| | 7.0 |
| | 0.10 |
|
Amortization of acquired inventory fair value adjustment | — |
| | — |
| | — |
| | — |
| | 4.1 |
| | 1.5 |
| | 2.6 |
| | 0.04 |
|
Discrete tax items, including adjustments to uncertain tax positions | |
| | 4.9 |
| | (4.9 | ) | | (0.07 | ) | |
|
| | (17.7 | ) | | 17.7 |
| | 0.25 |
|
Adjusted EPS | |
| | |
| | |
| | $ | 2.42 |
| | |
| | |
| | |
| | $ | 2.15 |
|
Return on Equity and Adjusted EBIT Return Onon Invested Capital
Adjusted EBIT Return On Invested Capitalon equity for the thirdfirst quarter was 25.3%8.0% on a trailing four quarters basis compared with 24.3%37.4% on the same basis as of DecemberMarch 31, 2016.2020. The decline was due to lower net income, including the 2020 fourth quarter mark-to-market pension expense and the 2020 second quarter write-offs of obsolete inventory and engineering and site costs, partially offset by the mark-to-market pension income and curtailment gain recorded in the 2021 first quarter. Adjusted EBIT Return on Invested Capital for the first quarter was 13.7% on a trailing four quarters basis, compared with 18.6% calculated on the same basis as of March 31, 2020. The decline was due to lower Adjusted EBIT, reflecting the effects of the COVID-19 pandemic, as well as weather-related events in the second half of 2020 and the 2021 first quarter.
We manage our operationsbusinesses 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 Onon 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.businesses.
Segment Overview—Grace Catalysts Technologies
Following is an overview of the financial performance of Catalysts Technologies for the thirdfirst quarter and nine months compared with the corresponding prior-year periods.quarter.
Net Sales—Grace Catalysts Technologies
Sales were $317.5$329.6 million for the thirdfirst quarter, an increase of 7.3%7.0%, up 5.0% on constant currency, despite the weather-related impact of approximately 4% or $13 million, compared with the prior-year quarter. The increase on a constant currency basis was primarily due to higher sales volumes. Specialty Catalysts sales increased primarily due to higher sales volumes (+6.8%) and favorable currency translation (+1.0%), partially offset by lower pricing (-0.5%). Higherincreased licensing revenue. Refining Technologies sales volumes were driven by higher demand,increased primarily in Asia. Sales volumes of refining catalysts increased compared with the prior-year quarter, primarily in Asia, due to higher bid business, demand for new products, and new customer acquisition. Sales volumes of specialty catalysts increased compared with the prior-year quarter primarily due to stronger demand and order timing for polypropylene and polyethylene catalysts in Asia. Specialty catalysts sales volumes were down in North America and Europe compared to the prior-year quarter as both regions were negatively impacted by customer and supplier outages related to hurricane events, which had an unfavorable impact on sales of approximately $7 million.volumes. Favorable currency translation affected both product groupsimpacted the segment as the U.S. dollar weakened, against multiple currencies, especially the euro, compared with the prior-year quarter.
Sales were $931.8 million for the nine months, an increase of 11.6% compared with the prior-year period. The increase was due to higher sales volumes (+11.9%), partially offset by unfavorable currency translation (-0.3%). Higher sales volumes primarily related to the 2016 polyolefin catalysts acquisition and organic growth in the existing businesses driven by higher demand in Asia, the Middle East, and Eastern Europe. Sales volumes of refining catalysts increased compared with the prior-year period, primarily in Asia and the Middle East due to bid business, penetration of new products, and new customer acquisition. Sales volumes of specialty catalysts, excluding the sales resulting from the polyolefin catalysts acquisition from the 2017 first half, increased in Asia due to higher demand for polypropylene and polyethylene catalysts and customer order timing of chemical catalysts compared with the prior-year period. Specialty catalysts sales volumes were negatively impacted in the third quarter by customer and supplier outages related to hurricane events. Unfavorable currency translation affected both product groups as the U.S. dollar strengthened against multiple currencies, especially the euro, compared with the prior-year period.
5.6% compared with the prior-year quarter. Gross margin of 40.2% decreased 50 basis points compared with the prior-year quarter of 40.7%, primarily driven by unfavorable product mix and higher manufacturing costs, including 70 basis points related to higher raw materials and energy costs.
Segment Operating Income (SOI) and Margin—Grace Catalysts Technologies
Gross profitOperating income was $131.3$75.8 million for the thirdfirst quarter, a decrease of 0.5% compared with the prior-year quarter. Gross margin of 41.4% decreased 320 basis points from 44.6% for the prior-year quarter. The decrease in gross margin was primarily due to product and regional mix, higher manufacturing costs, and lower pricing.
Operating income was $103.6 million for the third quarter, an increase of 9.9%7.6% compared with the prior-year quarter, primarily due to weather-related costs of approximately $8.5 million and business interruption insurance recoveries and higher sales volumes. Hurricane events had an unfavorable impact on operating incomeincluded in the third2020 first quarter, of approximately $4 million. The increase was partially offset by the impact of lowerhigher gross marginsprofit and lower incomehigher ART joint venture income. Our equity in earnings from the ART joint venture. The ART joint venture contributed $4.8was $3.2 million, to operating income, a decreasean increase of $3.7$2.0 million compared with the prior-yearprior-
year quarter. Operating margin for the thirdfirst quarter was 32.6%23.0%, an increasea decrease of 70360 basis points compared with the prior-year quarter.
Gross profit was $376.2 millionIn July 2019, a North American FCC catalysts customer filed for the nine months, an increase of 0.6% compared with the prior-year period. Gross margin of 40.4% decreased 440 basis points compared with 44.8% for the prior-year period. The decreasebankruptcy protection after announcing that it would not resume operations following a fire in gross margin was primarily due to product and regional mix, including the effect of the 2016 polyolefin catalysts acquisition, and higher manufacturing costs.
Operating income was $286.1 million for the nine months, an increase of 10.0% compared with the prior-year period, primarily due to business interruptionits refinery. We received insurance recoveries and higher gross profit, partially offset by unfavorable currency translation. The ART joint venture contributed $17.9 million to operating income, a decrease of $0.1 million compared with the prior-year period. Operating margin for the nine months was 30.7%, a decrease of 50 basis points compared with the prior-year period.
In January 2017, a Catalysts Technologies customer experienced an explosion and fire resulting in an extended outage. We have recognized a benefit of and received $25.0$16.3 million in payments from our third-party insurer through September 30, 2017,the first half of 2020 under our business interruption insurance policy for lost profits as a resultpolicy. 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 outage. The policy has a $25.0 million limit per event.
Inimpact of the 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.incident on earnings. This chargeclaim has been excluded from Adjusted EBIT due to the nature of the situation.
fully resolved.
Segment Overview—Grace Materials Technologies
Following is an overview of the financial performance of Materials Technologies for the thirdfirst quarter and nine months compared with the corresponding prior-year periods.quarter.
Net Sales—Grace Materials Technologies
Sales were $112.0$127.1 million for the thirdfirst quarter, an increase of 3.0%12.0%, up 7.8% on constant currency, compared with the prior-year quarter. The increase was due to favorableon a constant currency translation (+2.7%), higher sales volumes (+0.2%), and improved pricing (+0.1%). Sales volumes increased due to higher silica sales, primarily in Asia, offset by lower pharma fine chemicals sales.
Sales were $325.2 million for the nine months, an increase of 0.7% compared with the prior-year period, including the negative effect (-3.6%) of product lines exited in 2016. The increasebasis was due to higher sales volumes. Sales volumes (+0.6%)increased in all subsegments, led by pharma & consumer and favorablecoatings. Favorable currency translation (+0.3%), partially offset by lower pricing (-0.2%).
Segment Operating Income (SOI) and Margin—Grace Materials Technologies
impacted the segment as the U.S. dollar weakened, primarily against the euro, compared with the prior-year period.Gross profit was $43.0$46.8 million for the thirdfirst quarter, an increase of 4.6%24.8% compared with the prior-year quarter. Gross margin was 38.4%of 36.8% increased 380 basis points compared with 37.8%33.0% for the prior-year quarter. The increase in gross margin was primarily due to productincreased production volumes, strong operating performance, and regionalfavorable mix, partially offset by higher manufacturingdepreciation expense, increased logistics costs, and 110 basis points related to higher raw materials and energy costs.
Segment Operating Income (SOI) and Margin—Grace Materials Technologies
Operating income was $26.4$26.8 million for the thirdfirst quarter, flatan increase of 41.1% compared with the prior-year quarter. Higherquarter, primarily due to higher gross profit and favorable currency translation were offset by higher operating expenses.profit. Operating margin for the thirdfirst quarter was 23.6%21.1%, a decreasean increase of 70440 basis points compared with the prior-year quarter.
Gross profit was $124.4 million for the nine months, a decrease of 2.0% compared with the prior-year period. Gross margin of 38.3% decreased 100 basis points compared with 39.3% for the prior-year period. The decrease in gross margin was primarily due to higher manufacturing costs.
Operating income was $75.4 million for the nine months, an increase of 0.5% compared with the prior-year period. Operating margin for the nine months was 23.2%, flat compared with the prior-year period.
Corporate Costs
Corporate costs include corporate functional costs and other corporate costs such as professional fees, incentive compensation, and insurance premiums. Corporate costs for the thirdfirst quarter were $18.5$15.4 million, an increasea decrease of $3.6 million from the prior-year quarter primarily due to the absence of Separation-related transition services income and an unfavorable comparison to lowered incentive accruals in 2016.
Corporate costs for the nine months were $52.9 million, an increase of $8.5$0.2 million compared with the prior-year period,period.
Restructuring and Repositioning Expenses
Repositioning expenses for the first quarter were $12.9 million and primarily duerelated to our review of strategic alternatives. Repositioning expenses for the prior-year quarter were $2.5 million and primarily related to a favorable settlementmulti-year program to transform manufacturing and business processes to extend our competitive advantages and improve our cost position.
The following table presents the major components of restructuring and repositioning expenses recorded in 2016the first quarter and an unfavorable comparison to lowered incentive accruals in 2016.the prior-year quarter.
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
(In millions) | | | | | 2021 | | 2020 |
Costs related to review of strategic alternatives | | | | | $ | 9.7 | | | $ | — | |
Employee severance | | | | | 1.5 | | | 0.6 | |
Other | | | | | 0.9 | | | (0.6) | |
Third-party costs of manufacturing and business transformation programs | | | | | 0.8 | | | 2.7 | |
Costs related to plant closures | | | | | (0.1) | | | — | |
Total restructuring and repositioning expenses | | | | | $ | 12.8 | | | $ | 2.7 | |
| | | | | | | |
| | | | | | | |
Defined Benefit Pension Expense
Certain pension costs for the thirdfirst quarter and nine months were $3.4 million and $9.7$2.0 million, compared with $3.1 million and $9.3 million for the corresponding prior-year periods.quarter. The decrease was primarily due to a decrease in interest cost due to a decrease in discount rates partially offset by a decrease in expected return on assets.
In the first quarter, we announced to employees that the U.S. salaried plan will be frozen effective January 1, 2025. We recorded a $13.7 million mark-to-market gain on remeasurement of the liability as a result of an increase in discount rates since December 31, 2020, partially offset by actual asset performance less than expected through the remeasurement date. Additionally, we recorded a $25.6 million gain on the plan curtailment, which is attributable to the elimination of future pay recognition in the pension benefit after 2024.
Interest and Financing Expenses
Net interest and financing expenses were $20.2$18.9 million for the thirdfirst quarter, an increase of 4.1%6.8% compared with the prior-year quarter. This increase was due to lower capitalized interest in 2021 related primarily to the completion of high-value capital projects in 2020.
Income Taxes
Our effective tax rates for the first quarter and prior-year quarter, were 21.1% and 27.2%, respectively. Income tax expense was $18.3 million and $15.7 million, on income before income taxes of $86.9 million and $57.8 million for the first quarter and prior-year quarter, respectively.
The provision for income taxes for the first quarter was greater than the prior-year quarter primarily due to borrowings on the revolving credit facility. Net interest and financing expenses were $59.0 million for the nine months, a decrease of 2.6%higher pre-tax income compared with the prior-year period, primarily due to voluntary prepayments related to our term loansquarter, including an increase in February and March 2016.
Income Taxes
The income in foreign jurisdictions where the statutory tax provision atrates are higher than the statutory rates of the U.S. federal corporate rate of 35%, partially offset by the Global Intangible Low-Taxed Income (“GILTI”) high-tax exclusion benefit recorded in the quarter for the third quarter andfiling of the prior-year quarter would have been $20.5 million and $21.2 million, respectively, compared with the recorded provision of $11.6 million and $19.4 million, respectively. The income tax provision at the statutory rate of 35% for the nine months and the prior-year period would have been $63.9 million and $53.0 million, respectively, compared with the recorded provision of $49.2 million and $62.1 million, respectively. The primary differences between the tax provision at the U.S. statutory rate and the recorded2018 Federal Amended Return.
Our provision for income taxes are the effectis based on projections of lower tax rates in foreign jurisdictions, share-based compensation deductions, the impact of state law changes, research and development credits, and other adjustments to deferred tax assets.
We generated U.S. federal tax deductions relating to our emergence from bankruptcy. These deductions generated U.S. federal NOL carryforwards in 2014, which we will carry forward and expect to utilize in subsequent
years. Under U.S. federal income tax law, a corporation is generally permitted to carry forward NOLs for a 20-year period for deduction against future taxable income. We also generated U.S. federalSuch projections may change in subsequent quarters, which could change our tax deductions of $30 million upon payment of the ZAI PD obligationexpense and net income in the 2017 first quarter. (See Note 8.) The total domestic deferred tax assets associated with NOLs, credits, and other tax attributes as of September 30, 2017, was approximately $640 million.future periods.
We pay cash taxes in foreign jurisdictions and a limited number of states. Income taxes paid in cash were $44.1 million for the nine months, or approximately 24% of income before income taxes. Income tax refunds received for the nine months were $30.2 million. Income taxes paid in cash for the prior-year period, including payments related to the Separation, were $42.4 million, or approximately 28% of income before taxes. Income tax refunds received for the prior-year period were $2.3 million.
See Note 5 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 September 30, 2017.March 31, 2021.
Our principal uses of cash are generally capital investments and acquisitions; working capital investments; compensation paid to employees, including contributions related to our defined benefit pension plans and defined contribution plans; the repayment of debt;debt and interest payments thereon; and the return of cash to shareholders through the payment of dividends and the repurchase of shares and dividends.shares.
On February 5, 2015,8, 2017, we announced that the 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 had authorized a newincreased its share repurchase program of upauthorization to $250 million. Under these programs,million, including approximately $83 million remaining under the previously announced program. We did not repurchase shares during the nine months we repurchased 935,435first quarter. Consistent with the terms
of the Merger Agreement (see Note 17 to the Consolidated Financial Statements), the Company will not repurchase shares of Company common stock for $65.0 million. Asgoing forward.
We paid cash dividends of September 30, 2017, $218.9$22.0 million remained underduring the current authorization.
In the 2016 second quarter, we began to pay a quarterly cash dividend, at an annual rate of $0.68 per share of Company common stock.first quarter. On February 8, 2017,4, 2020, we announced that theour Board of Directors had approved an increase in the annual dividend rate, from $1.08 to $0.84$1.20 per share of Company common stock, which became effective inwith the 2017 first quarter. Wedividend paid cash dividendson March 17, 2020. On February 9, 2021, we announced that our Board of $43.0 million duringDirectors had approved a further increase to $1.32 per share of Company common stock, effective with the nine months.dividend paid on March 23, 2021. Consistent with the terms of the Merger Agreement, we will suspend payment of a dividend going forward.
We believe that the cash we expect to generate during 20172021 and thereafter, together with other available liquidity and capital resources, are sufficient to finance our operations and growth strategy, share repurchase program and expected dividend payments, andto meet our debt, pension, and pensionlegacy and other obligations.
Debt and Other Contractual Obligations
Total debt outstanding at March 31, 2021, was $1,989.2 million. We have limited debt service requirements, with no material maturities related to our term loans, revolving credit facility, or notes until September 2024. On March 31, 2021, Grace secured financing for the cash portion of the purchase price of the announced acquisition of the Fine Chemistry Services business of Albemarle Corporation (see Note 16 to the Consolidated Financial Statements) with a new $300 million senior secured term loan maturing in 2028. See Note 8 to the Consolidated Financial Statements for a discussion of Financial Assurances.
Cash Resources and Available Credit Facilities
At September 30, 2017,March 31, 2021, we had available liquidity of $475.5$724.1 million, consisting of $175.7$290.8 million in cash and cash equivalents ($30.3164.4 million in the U.S.), $265.0$391.8 million available under our revolving credit facility, and $34.8$41.5 million of available liquidity under various non-U.S. credit facilities. The $300$400 million revolving credit facility includes a $150$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. Our credit facility in Germany is secured by third-party accounts receivable, with availability determined on the basis of eligible outstanding receivables. We generally renew these credit facilities as they expire.
The following table summarizes our non-U.S. credit facilities as of September 30, 2017:March 31, 2021:
| | | | | | | | | | | | | | | | | |
(In millions) | Maximum Borrowing Amount | | Available Liquidity | | Expiration Date |
Singapore | $ | 18.0 | | | $ | 8.2 | | | April 3, 2023 |
China | 12.1 | | | 12.1 | | | April 3, 2023 |
Malaysia | 7.0 | | | 6.5 | | | April 3, 2023 |
Other countries | 15.3 | | | 14.7 | | | various |
Total | $ | 52.4 | | | $ | 41.5 | | | |
|
| | | | | | | | | |
(In millions) | Maximum Borrowing Amount | | Available Liquidity | | Expiration Date |
Germany | $ | 58.7 |
| | $ | 5.5 |
| | 12/31/2017 |
Other countries | 51.4 |
| | 29.3 |
| | Various through 2020 |
Total | $ | 110.1 |
| | $ | 34.8 |
| | |
Analysis of Cash Flows
The following table summarizes our cash flows for the nine monthsfirst quarter and prior-year period:quarter:
|
| | | | | | | |
| Nine Months Ended September 30, |
(In millions) | 2017 | | 2016 |
Net cash provided by (used for) operating activities from continuing operations | $ | 267.5 |
| | $ | 207.6 |
|
Net cash provided by (used for) investing activities from continuing operations | (90.0 | ) | | (324.6 | ) |
Net cash provided by (used for) financing activities from continuing operations | (99.6 | ) | | 87.4 |
|
Effect of currency exchange rate changes on cash and cash equivalents | 7.2 |
| | 2.7 |
|
Increase (decrease) in cash and cash equivalents from continuing operations | 85.1 |
| | (26.9 | ) |
Increase (decrease) in cash and cash equivalents from discontinued operations | — |
| | 44.8 |
|
Net increase (decrease) in cash and cash equivalents | 85.1 |
| | 17.9 |
|
Less: cash and cash equivalents of discontinued operations | — |
| | (143.4 | ) |
Cash and cash equivalents, beginning of period | 90.6 |
| | 329.9 |
|
Cash and cash equivalents, end of period | $ | 175.7 |
| | $ | 204.4 |
|
| | | | | | | | | | | |
| Three Months Ended March 31, |
(In millions) | 2021 | | 2020 |
Net cash provided by (used for) operating activities | $ | 69.0 | | | $ | 54.6 | |
Net cash provided by (used for) investing activities | (52.4) | | | (73.7) | |
Net cash provided by (used for) financing activities | (26.2) | | | (67.0) | |
Effect of currency exchange rate changes on cash, cash equivalents, and restricted cash | (4.1) | | | (3.1) | |
| | | |
| | | |
Net increase (decrease) in cash, cash equivalents, and restricted cash | (13.7) | | | (89.2) | |
| | | |
Cash, cash equivalents, and restricted cash, beginning of period | 306.2 | | | 282.9 | |
Cash, cash equivalents, and restricted cash, end of period | $ | 292.5 | | | $ | 193.7 | |
Net cash provided by operating activities from continuing operations for the nine monthsfirst quarter was $267.5$69.0 million compared with $207.6$54.6 million for the prior-year period.quarter. The year-over-year change in cash flow was primarily due to higher incomelower cash paid for incentive compensation, lower cash paid related to legacy matters, and lower cash paid for repositioning due toincome taxes compared with the completion of the Separation in 2016, and an income tax refund, partially offset by the 2017 first quarter payment of $30.0 million to fund the PD Trust.prior-year quarter.
Net cash used for investing activities from continuing operations for the nine monthsfirst quarter was $90.0$52.4 million compared with $324.6$73.7 million for the prior-year period.quarter. The year-over-year change in cash flow was primarily due to the 2016 secondprior year cash flows related to the residue hydroprocessing catalysts plant that was transferred to ART in the third quarter payment of $245.12020. Cash paid for capital expenditures, primarily related to our strategic growth investments, was $55.0 million for the polyolefin catalysts acquisition, which was partially offset by $11.3first quarter compared with $57.1 million in proceeds fromfor the sale of assets in the sameprior-year quarter.
Net cash used for financing activities from continuing operations for the nine monthsfirst quarter was $99.6$26.2 million compared with net cash provided of $87.4 million in the prior-year period. In 2016, we received a $750 million distribution of cash from GCP, of which $600 million was used to pay down our euro and U.S. dollar term loans. In 2017, we paid cash dividends of $43.0 million, compared with $24.1 million in the prior-year period.
Included in net cash provided by (used for) operating activities from continuing operations are legacy product, environmental and other claims paid of $50.1 million and $17.3 million, restructuring expenses paid of $10.9 million and $13.6 million, repositioning expenses paid of $6.3 million and $35.4 million, and cash paid for third-party acquisition-related costs of $0.1 million and $1.6 million for the nine months and prior-year period, respectively; and cash taxes related to repositioning of $2.6$67.0 million for the prior-year period. Includedquarter. The change was primarily due to $40.4 million cash paid for repurchases of common stock in capital expenditures are $1.8 million related to repositioning for the prior-year period. These cash flows totaled $67.4 million and $72.3 million for the nine months and prior-year period, respectively. We do not include these cash flows when evaluating the performance of our businesses.
Debt and Other Contractual Obligations
Total debt outstanding at September 30, 2017, was $1,568.4 million.
See Note 8 to the Consolidated Financial Statements for a discussion of Financial Assurances.quarter.
Employee Benefit Plans
See Note 6 to the Consolidated Financial Statements for further discussion of Pension Plans and Other Postretirement Benefit Plans.
Defined Benefit Pension Plans
The following table presents the components of cash contributions for the advance-funded and pay-as-you-go plans:
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | | Three Months Ended March 31, |
(In millions) | 2017 | | 2016 | | 2017 | | 2016 | (In millions) | | 2021 | | 2020 |
U.S. advance-funded plans | $ | 0.3 |
| | $ | — |
| | $ | 0.3 |
| | $ | — |
| |
| U.S. pay-as-you-go plans | $ | 2.1 |
| | $ | 2.0 |
| | $ | 5.8 |
| | $ | 5.6 |
| U.S. pay-as-you-go plans | | 1.8 | | | 2.4 | |
Non-U.S. advance-funded plans | 0.2 |
| | 0.4 |
| | 0.7 |
| | 1.0 |
| Non-U.S. advance-funded plans | | 0.3 | | | 0.2 | |
Non-U.S. pay-as-you-go plans | 1.8 |
| | 1.7 |
| | 5.4 |
| | 5.5 |
| Non-U.S. pay-as-you-go plans | | 2.1 | | | 1.8 | |
Total Cash Contributions | $ | 4.4 |
| | $ | 4.1 |
| | $ | 12.2 |
| | $ | 12.1 |
| |
Total cash contributions | | Total cash contributions | | $ | 4.2 | | | $ | 4.4 | |
We intendhave minimal pension funding requirements. Our U.S. qualified pension plans are well funded, with expected cash contributions of approximately $1 million per year for the next three years. Cash contributions related to fundpay-as-you-go unfunded plans and non-U.S. pension plans based upon applicable legal requirementsare expected to be approximately $17 million per year for the next three years.
Defined Contribution Plans
The following table presents cash payments related to our defined contribution plans.
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
(In millions) | | | | | 2021 | | 2020 |
U.S. defined contribution plan | | | | | $ | 3.5 | | | $ | 3.3 | |
U.S. enhanced defined contribution plan | | | | | 1.2 | | | 1.0 | |
Total cash payments | | | | | $ | 4.7 | | | $ | 4.3 | |
See Note 6 to the Consolidated Financial Statements for further discussion of Pension Plans and actuarial and trustee recommendations. We contributed $6.1 million and $6.5 million to these plans during the nine months and the prior-year period.Other Retirement Plans.
Other Contingencies
See Note 8 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 through effective controlby developing alternative formulations, increasing productivity, hedging purchases of operating expensescertain raw materials, and productivity improvements as well as price increases on our products.
We estimate that the cost of replacing our property and equipment today is greater than its historical cost. Accordingly, our depreciation expense would be greater if the expense were stated on a current cost basis.increasing prices.
Critical Accounting Estimates
See the "Critical“Critical Accounting Estimates"Estimates” heading in Management'sItem 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K for the year ended December 31, 2016,2020, for a discussion of our critical accounting estimates, incorporated by reference into Item 7 thereof.estimates.
Recent Accounting Pronouncements
See Note 1 to the Consolidated Financial Statements for a discussion of recent accounting pronouncements and their effect on us.
Forward Looking Statements46
This document 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, expected financial positions; results of operations; cash flows; financing plans; business strategy; operating plans; capital and other expenditures; competitive positions; growth opportunities for existing products; benefits from new technology and cost reduction initiatives, plans and objectives; 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. Like other businesses, 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 results to differ materially from those contained in the forward-looking statements include, without limitation: risks related to foreign operations, especially in emerging regions; the cost and availability of raw materials, energy and transportation; the effectiveness of Grace's research and development and growth investments; acquisitions and divestitures of assets and businesses; developments affecting Grace’s outstanding indebtedness; developments affecting Grace's funded and unfunded pension obligations; Grace's legal and
environmental proceedings and insurance recoveries; environmental compliance costs; uncertainties related to Grace's ability to realize the anticipated benefits of the separation transaction; the inability to establish or maintain certain business relationships; the inability to retain key personnel; natural disasters such as storms and floods; changes in tax laws and regulations; and those additional factors set forth in our most recent Annual Report on Form 10-K, this quarterly report on Form 10-Q and current reports on Form 8-K, which have been filed with the Securities and Exchange Commission and are readily available on the Internet at www.sec.gov. 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 dates those projections and statements are made. We undertake no obligation to release publicly 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.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
With respect to information disclosed in the "Quantitative“Quantitative and Qualitative Disclosures About Market Risk"Risk” section of our Annual Report on Form 10-K for the year ended December 31, 2016,2020, more recent numerical measures and other information are available in the "Financial Statements"“Financial Statements” and "Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations"Operations” sections of this Report. These more recent measures and information are incorporated herein by reference.
Item 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As of September 30, 2017,March 31, 2021, Grace carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"“Exchange Act”). Based upon that evaluation, Grace's ChiefGrace’s Principal Executive Officer and ChiefPrincipal Financial Officer concluded that Grace'sGrace’s disclosure controls and procedures are effective to ensure that information required to be disclosed in Grace'sGrace’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC'sSEC’s rules and forms, and that material information relating to Grace is made known to management, including Grace's ChiefGrace’s Principal Executive Officer and ChiefPrincipal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in Grace'sGrace’s internal control over financial reporting during the quarter ended September 30, 2017,March 31, 2021, that have materially affected, or are reasonably likely to materially affect, Grace'sGrace’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Note 8, “Commitments and Contingent Liabilities,” to the interim Consolidated Financial Statements in Part I of this Report is incorporated herein by reference.
Item 1A. RISK FACTORS
In addition to the other information set forth below and elsewhere in this Report, you should carefully consider the risk factors discussed in the "Risk Factors"“Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2016,2020, which could materially affect our business, financial condition, or future results. The risks we described in this Report and in our Annual Report on Form 10-K are not the only risks facing Grace. Additional risks and uncertainties not currently known to us, not currently estimable, or that we currently deem to be immaterial, as well as generic business risks not included here, also may materially adversely affect our business, financial condition, or future results. With respect to certain risk factors that we discussed in our Annual Report on Form 10-K, more recent numerical measures and other information are available in the "Financial Statements"“Financial Statements” and "Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations"Operations” sections of this Report, including, without limitation, Note 8, “Commitments and Contingent Liabilities,” to the interim Consolidated Financial Statements in Part I of this Report. In addition, see our cautionary language about Forward-Looking Statements, also in Part I of this Report. These more recent measures and information are incorporated herein by reference.
In addition to the risks and uncertainties that we discussed in our Annual Report on Form 10-K and identify elsewhere in this Report, we face the following risks:
We may not complete the proposed transaction with affiliates of Standard Industries Holdings Inc. within the time frame we anticipate or at all, which could have an adverse effect on our business, financial results and/or operations, as well as the price of our common stock.
On April 26, 2021, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Gibraltar Acquisition Holdings LLC, a Delaware limited liability company (“Parent”) and a wholly owned subsidiary of Standard Industries Holdings Inc., and Gibraltar Merger Sub Inc., a Delaware corporation and wholly owned subsidiary of Parent, pursuant to which Parent agreed to acquire us subject to the terms and conditions set forth therein (the “Merger”). There can be no assurance that the Merger will occur. Completion of the Merger is subject to a number of closing conditions, including Grace shareholder approval, expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and receipt of certain required regulatory approvals. We can provide no assurance that all required approvals will be obtained or that all closing conditions will be satisfied, and, if all required approvals are obtained and the closing conditions are satisfied, we can provide no assurance as to the terms, conditions and timing of such approvals or the timing of the completion of the Merger. In addition, the Merger Agreement may be terminated under certain specified circumstances.
If the Merger is not completed within the expected time frame or at all, we may be subject to a number of material risks. The price of our common stock may decline to the extent that current market prices reflect a market assumption that the Merger will be completed. In addition, some costs related to the Merger must be paid whether or not the Merger is completed, and we have incurred, and will continue to incur, significant costs, expenses and fees for professional services and other transaction costs in connection with the proposed Merger, as well as the direction of management resources towards the Merger, for which we will have received little or no benefit if the closing of the Merger does not occur. We may also experience negative reactions from our shareholders and other investors, employees, customers, suppliers, partners and other third parties. If the Merger is not approved by our shareholders, or if the Merger is not completed for any other reason, there can be no assurance that any other transaction acceptable to us will be offered or that our business, prospects or results of operations will not be adversely affected.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Dividends on Company common stock
Consistent with the terms of the Merger Agreement (see Note 17 to the Consolidated Financial Statements), the Company will suspend payment of a dividend going forward.
Share Repurchase Program
On February 5, 2015,8, 2017, we announced that our 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 $83 million remaining under the previously announced program. Repurchases under the programsprogram may be made through one or more open market transactions at prevailing market prices; unsolicited or solicited privately negotiated transactions; accelerated share repurchase programs; or through any combination of the foregoing,foregoing; or in such other manner as determined by management. The timingConsistent with the terms of the repurchases andMerger Agreement (see Note 17 to the actual amount repurchasedConsolidated Financial Statements), the Company will depend on a varietynot repurchase shares of factors, includingCompany common stock going forward.
During the market price of the Company's shares, the strategic deployment of capital, and general market and economic conditions.
The following table presents information regarding the repurchasethree months ended March 31, 2021, there were no repurchases of Company common stock by or on behalf of Grace or any "affiliated purchaser"“affiliated purchaser,” as reflected in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Period | | Total number of shares purchased (#) | | Average price paid per share ($/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) |
1/1/2021 - 1/31/2021 | | — | | | — | | | — | | | 235.0 | |
2/1/2021 - 2/28/2021 | | — | | | — | | | — | | | 235.0 | |
3/1/2021 - 3/31/2021 | | — | | | — | | | — | | | 235.0 | |
Total | | — | | | — | | | — | | | |
|
| | | | | | | | | | | | |
Period | | 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) |
7/1/2017 - 7/31/2017 | | 144,700 |
| | 71.38 |
| | 144,700 |
| | 243.6 |
|
8/1/2017 - 8/31/2017 | | 365,062 |
| | 67.58 |
| | 365,062 |
| | 218.9 |
|
9/1/2017 - 9/30/2017 | | — |
| | — |
| | — |
| | 218.9 |
|
Total | | 509,762 |
| | 68.66 |
| | 509,762 |
| |
|
|
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.
Item 6. EXHIBITS
In reviewing the agreements included as exhibits to this and other Reports filed by Grace with the Securities and Exchange Commission (the "SEC"),SEC, 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 generallymay 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'sin Grace’s other public filings, which are available without charge through the SEC'sSEC’s website at http://www.sec.gov.
The following is a list of Exhibits filed as part of this Quarterly Report on Form 10-Q:
|
| | | | | | | | | | | | | |
Exhibit No. | | Description of Exhibit | | Location |
3.12.1 | | | | Exhibit 2.5 to Form 10-K (filed 2/26/21) SEC File No.: 001-13953 |
2.2 | | | | Exhibit 2.1 to Form 8-K (filed 4/26/21) 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 |
1510.1 | | | | Filed herewithExhibit 10.1 to Form 8-K (filed 4/26/21) SEC File No.: 001-13953 |
31(i).1 | | | | Filed herewith |
31(i).2 | | | | Filed herewith |
32 | | | | Filed herewith |
95 | | | | Filed herewith |
| | | | | | | | | | | | | | |
101.INSExhibit No. | | Description of Exhibit | | Location |
101.INS | | Inline XBRL Instance Document | | Filed herewithThe 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. |
* Management contracts and compensatory plans, contracts or arrangements required to be filed as exhibits to this Report.
** The Company has omitted schedules and other similar attachments to such agreement pursuant to Item 601(b) of Regulation S-K. The Company will furnish a copy of such omitted document to the SEC upon request.
SIGNATURES
Pursuant to the requirements 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. (Registrant) |
| | |
Date: May 7, 2021 | By: | /s/ HUDSON LA FORCE |
| | Hudson La Force President and Chief Executive Officer(Principal Executive Officer) | | | | | | | W. R. GRACE & CO.
(Registrant)
| | | | | Date: November 2, 2017May 7, 2021 | By: | /s/ A. E. FESTA | | | A. E. Festa
(Chairman and
Chief Executive Officer)
| | | | Date: November 2, 2017 | By: | /s/ THOMAS E. BLASER | | | Thomas E. Blaser
(Senior Vice President and
Chief Financial Officer)
| | | | Date: November 2, 2017 | By: | /s/ WILLIAM C. DOCKMAN | | | William C. Dockman (Senior Vice President and Controller)Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer) |
|