GCP APPLIED TECHNOLOGIES INC. Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, and these
statements involve substantial risks and uncertainties. All statements other
than statements of historical fact contained in this Quarterly Report on Form
10-Q are forward-looking statements. Forward-looking statements generally relate
to future events and our future financial or operating performance. Such
statements generally include the words "believes," "plans," "intends,"
"targets," "will," "expects," "suggests," "anticipates," "outlook," "continues"
or the negative of these words or other similar terms or expressions that
concern our expectations, strategy, plans or intentions. Forward-looking
statements include, without limitation, expected financial positions; results of
operations; cash flows; financing plans; business strategy; operating plans;
strategic alternatives; consummation of the Merger and expected timing thereof;
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. 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
materially differ from those contained in the forward-looking statements, or
that could cause other forward-looking statements to prove incorrect, include,
without limitation, risks related to the cyclical and seasonal nature of the
industries that GCP serves; foreign operations, especially in emerging regions;
changes in currency exchange rates; business disruptions due to public health or
safety emergencies, such as the novel strain of coronavirus ("COVID-19")
pandemic; the cost and availability of raw materials and energy; the
effectiveness of GCP's research and development, new product introductions and
growth investments; acquisitions and divestitures of assets and gains and losses
from dispositions; developments affecting GCP's outstanding liquidity and
indebtedness, including debt covenants and interest rate exposure; developments
affecting GCP's funded and unfunded pension obligations; the timing of the
closing of the proposed merger, including the risks that a condition to closing
would not be satisfied within the expected timeframe and the occurrence of any
event, change or other circumstance or condition that could give rise to the
termination of the proposed merger agreement; warranty and product liability
claims; legal proceedings; the inability to establish or maintain certain
business relationships and relationships with customers and suppliers or the
inability to retain key personnel; the handling of hazardous materials and the
costs of compliance with environmental regulations; extreme weather events and
natural disasters. These and other factors are identified and described in more
detail in Item 1A in our Annual Report on Form 10-K.
The forward-looking statements made in this Quarterly Report on Form 10-Q and
our reported results should not be considered as an indication of our future
performance. The forward-looking statements made in this Quarterly Report on
Form 10-Q relate only to events as of the date on which the statements are made.
We undertake no obligation to update any forward-looking statements made in this
Quarterly Report on Form 10-Q to reflect events or circumstances after the date
of this Quarterly Report on Form 10-Q or to reflect new information or the
occurrence of unanticipated events, except as required by law.
RESULTS OF OPERATIONS
We are engaged in the production and sale of specialty construction chemicals and specialty building materials through two global operating segments:
•Specialty Construction Chemicals ("SCC"). Our SCC operating segment provides
products, services and technologies to the concrete and cement industries,
including concrete admixtures and cement, as well as in-transit monitoring and
management systems, which reduce the cost and improve the performance and
quality of cement, concrete, mortar, masonry, and other cementitious-based
construction materials.
•Specialty Building Materials ("SBM"). Our SBM operating segment produces and
sells sheet and liquid membrane systems and other products that protect both new
and existing structures from water, air, and vapor penetration, as well as from
fire damage. We also manufacture and sell specialized cementitious and chemical
grouts used for soil consolidation and leak-sealing applications in addition to
a moisture barrier system and installation tools for the flooring industry.
We operate our business on a global scale. During the six months ended June 30,
2022 , approximately 47% of our net sales were generated outside of the U.S. We
operate and have locations in over 30 countries and transact business in over 30
currencies.
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Proposed Merger
OnDecember 5, 2021 , we entered into the Merger Agreement with Saint-Gobain. Pursuant to the terms of the Merger Agreement, at the effective time of the Merger, each share of our common stock that is issued and outstanding immediately prior to the effective time of the Merger shall be automatically converted into the right to receive$32.00 in cash, without interest. Because the Merger is not yet complete, and except as otherwise specifically stated, the descriptions and disclosures presented elsewhere in this Quarterly Report on Form 10-Q, including those that present forward-looking information, assume the continuation of GCP as a public company. If the Merger is consummated, our actions and results may be different than those anticipated by such forward-looking statements. See Note 20, "Proposed Merger" in the Notes to the Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data" of the 2021 Annual Report on Form 10-K for further information.
Business Update
The global health crisis caused by the COVID-19 outbreak and its resurgence has and will continue to impact global economic activity, particularly raw material inflation and supply chain disruption are impacting the timing of fulfilling demand and cost of our products. Furthermore, factors such as the conflict inUkraine and the resulting increases in petroleum-based raw materials and historic inflation headwinds impacted our results of operation in the first half of 2022. Our net sales in the second quarter of 2022 increased 5.9%. Despite this positive momentum, inflation, specifically raw material prices, logistic costs and global supply chain disruptions, had a significant impact on our quarterly performance. The combination of these factors adversely affected gross margins by approximately 460 basis points, but was an improvement sequentially of 130 basis points from the first quarter. On multiple occasions we have raised prices to reduce margin impacts during 2022 by announcing further price increases in most regions to address the inflationary headwinds we are experiencing. However, the effect of the ongoing global supply chain disruptions and accelerating cost of raw materials and freight transportation, specifically in the second quarter of 2022 have outpaced our actions in the short term. We have taken additional actions and we expect margins to improve through the balance of 2022. 23 --------------------------------------------------------------------------------
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Following is a summary of our financial performance for the second quarter ended
Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 % Change 2022 2021 % Change
(in millions, except per share amounts)
Net sales $ 268.4 $ 253.4 5.9 % $ 505.7 $ 476.2 6.2 %
Cost of goods sold 182.3 160.3 13.7 % 346.6 296.6 16.9 %
Gross profit 86.1 93.1 (7.5) % 159.1 179.6 (11.4) %
Gross margin 32.1 % 36.7 % (460) bps 31.5 % 37.7 % (620) bps
Selling, general and administrative
expenses 64.7 64.2 0.8 % 127.2 130.8 (2.8) %
Interest expense, net 5.4 5.6 (3.6) % 11.0 11.2 (1.8) %
Restructuring and repositioning
expenses 1.1 7.0 (84.3) % 4.6 15.9 (71.1) %
Other expense (income), net 4.1 (1.2) NM 7.2 1.6 NM
Income from continuing operations
before income taxes 10.8 17.5 (38.3) % 9.1 20.1 (54.7) %
Income tax expense (3.6) (7.0) (48.6) % (5.5) (8.0) (31.3) %
Loss from discontinued operations,
net of income taxes (1.7) (0.2) NM (2.0) (0.2) NM
Net income 5.5 10.3 (46.6) % 1.6 11.9 (86.6) %
Less: Net income attributable to
noncontrolling interests - (0.1) 100.0 % (0.1) (0.2) (50.0) %
Net income attributable to GCP
shareholders $ 5.5 $ 10.2 (46.1) % $ 1.5 $ 11.7 (87.2) %
Income from continuing operations
attributable to GCP shareholders $ 7.2 $ 10.4 (30.8) % $ 3.5 $ 11.9 (70.6) %
Diluted EPS from continuing
operations attributable to GCP
shareholders $ 0.07 $ 0.14 (50.0) % $ 0.02 $ 0.16 (87.5) %
Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 % Change 2022 2021 % Change
(in millions, except per share amounts)
Net sales:
SCC $ 158.3 $ 144.6 9.5 % $ 293.9 $ 268.5 9.5 %
SBM 110.1 108.8 1.2 % 211.8 207.7 2.0 %
Total GCP net sales $ 268.4 $ 253.4 5.9 % $ 505.7 $ 476.2 6.2 %
Net sales by region:
North America $ 151.1 $ 132.1 14.4 % $ 283.3 $ 250.2 13.2 %
Europe , Middle East , Africa
("EMEA") 50.1 54.1 (7.4) % 95.9 98.7 (2.8) %
Asia Pacific 47.8 52.6 (9.1) % 89.9 99.3 (9.5) %
Latin America 19.4 14.6 32.9 % 36.6 28.0 30.7 %
Total net sales by region $ 268.4 $ 253.4 5.9 % $ 505.7 $ 476.2 6.2 %
Second Quarter Performance Summary
•Net sales increased 5.9% to
•Gross profit decreased 7.5% to
•Selling, general, and administrative expenses ("SG&A") stayed relatively flat
at
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•Income from continuing operations attributable to GCP shareholders was$7.2 million , or$0.07 per diluted share, compared to$10.4 million , or$0.14 per diluted share, for the prior-year period. GCP OverviewNet Sales and Gross Margin
[[Image Removed: gcpwi-20220630_g1.jpg]][[Image Removed: gcpwi-20220630_g2.jpg]]
The following table identifies the period-over-period increase or decrease in sales attributable to changes in volume and/or mix, product price, and the impact of currency translation for the three months endedJune 30, 2022 from the same period in the prior year. Three Months Ended Net Sales Variance Analysis Volume Price Currency Translation Total Change SCC 5.6 % 7.0 % (3.1) % 9.5 % SBM (3.6) % 7.1 % (2.3) % 1.2 % Net sales 1.6 % 7.1 % (2.8) % 5.9 %By Region : North America 6.6 % 8.0 % (0.2) % 14.4 % EMEA (6.0) % 6.9 % (8.3) % (7.4) % Asia Pacific (6.4) % 1.5 % (4.2) % (9.1) % Latin America 10.4 % 20.0 % 2.5 % 32.9 % Net sales of$268.4 million for the second quarter endedJune 30, 2022 increased$15.0 million , or 5.9%, from the prior-year quarter primarily due to favorable sale pricing of 7.1% and volume of 1.6% particularly inLatin America andNorth America . This was partially offset by decreases in volume inAsia Pacific and EMEA due partially to supply chain disruptions and our tighter credit policies inChina and foreign currency translation.
Gross profit of
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The following table identifies the period-over-period increase or decrease in sales attributable to changes in volume and/or mix, product price, and the impact of currency translation for the six months endedJune 30, 2022 from the same period in the prior year. Six Months Ended Net Sales Variance Analysis Volume Price Currency Translation Total Change SCC 6.0 % 6.5 % (3.0) % 9.5 % SBM (1.5) % 5.4 % (1.9) % 2.0 % Net sales 2.7 % 6.0 % (2.5) % 6.2 %By Region : North America 7.0 % 6.3 % (0.1) % 13.2 % EMEA (2.5) % 5.9 % (6.2) % (2.8) % Asia Pacific (7.0) % 1.3 % (3.8) % (9.5) % Latin America 12.1 % 19.3 % (0.7) % 30.7 % Net sales of$505.7 million for the six months endedJune 30, 2022 increased$29.5 million , or 6.2%, from the prior-year period primarily due to favorable sale pricing of 6.0% particularly inLatin America ,North America and EMEA and increased volumes inLatin America andNorth America . This was partially offset by decreases in volume inAsia Pacific and EMEA and foreign currency translation. Gross profit of$159.1 million for the six months endedJune 30, 2022 decreased$20.5 million , or 11.4%, from the prior-year period. Gross margin decreased 620 basis points to 31.5% primarily due to significant higher raw material and logistics costs.
SG&A
SG&A costs of$64.7 million stayed relatively flat for the second quarter endedJune 30, 2022 compared to the prior-year quarter. Lower employee costs resulting from prior year restructuring programs were mostly offset by Merger-related costs. SG&A costs of$127.2 million decreased$3.6 million or 2.8%, for the six months endedJune 30, 2022 compared to the prior-year period primarily due to lower employee and Cambridge headquarters-related costs resulting from restructuring programs and lower incentives compensation costs. These favorable impacts were partially offset by Merger-related costs.
Restructuring and repositioning expenses
2021 Restructuring Plan
Cumulative costs incurred under the 2021 Plan since its inception were$35.4 million . We have achieved total annualized pre-tax cost savings through a reduction in general and administrative expenses and a reduction in overhead costs under the 2021 Plan of approximately$12 million atJune 30, 2022 , which benefited both the SCC and the SBM operating segments and corporate functions. Substantially all of the restructuring actions under the 2021 Plan were completed byJune 2022 . With the exception of asset write offs, substantially all of the restructuring and repositioning activities were settled in cash.
2019 Phase 2 Restructuring and Repositioning Plan
Cumulative costs incurred under the 2019 Phase 2 Plan since its inception were$33.3 million . We have achieved total annualized pre-tax cost savings through a reduction in general and administrative expenses under the 2019 Phase 2 Plan of approximately$20 million atJune 30, 2022 , which benefited both the SCC and the SBM operating segments and corporate functions. Substantially all of the activities under the 2019 Phase 2 Plan were completed byMarch 2021 .
For further information on our restructuring expenses, please refer to Note 3, "Restructuring and repositioning expenses" in the Notes to the unaudited Condensed Consolidated Financial Statements.
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Pension Expense
Defined benefit expense includes costs relating toU.S. and non-U.S. defined benefit pension and other postretirement benefit plans that provide benefits for retirees and former employees of divested businesses where we retained these obligations. Certain pension costs represent ongoing costs recognized quarterly, including service and interest costs, expected return on plan assets and amortization of prior service costs/credits. Certain pension costs during the second quarter and six months endedJune 30, 2022 were$1.6 million and$3.1 million , respectively compared with$1.5 million and$2.9 million , respectively, for the corresponding prior-year periods.
Other Expense (Income), Net
Other expenses (income), net consists primarily of research and development expense, interest income, foreign currency exchange gains (losses), defined benefit pension expenses exclusive of service costs and pension mark-to-market adjustments, net.
Other expense increased to$4.1 million during the second quarter endedJune 30, 2022 compared to income of$1.2 million in the prior period. The prior period included a$3.3 million Gain onBrazil tax recoveries and$1.0 million of higher interest income.
Other expense (income), net increased to
Income Taxes Income taxes attributable to continuing operations during the second quarter endedJune 30, 2022 and the prior-year quarter was income tax expense of$3.6 million and$7.0 million , respectively, representing effective tax rates of 33.3% and 40.0%, respectively. Income taxes attributable to continuing operations during the six months endedJune 30, 2022 and the prior-year quarter was income tax expense of$5.5 million and$8.0 million , respectively, representing effective tax rates of 60.4% and 39.8%, respectively. The difference between theU.S. federal income tax rate of 21.0% and our overall income tax rate for the second quarter ended 2022 was primarily due to$0.4 million of income tax expense for valuation allowances on net operating losses,$0.4 million of foreign rate differential,$0.3 million of state and local taxes, and$0.3 million of tax rate change. The difference between theU.S. federal income tax rate of 21.0% and our overall income tax rate for the second quarter ended 2021 was primarily due to income tax expense on theU.K. rate change on$2.9 million , foreign rate differential of$1.0 million , non-deductible expenses of$0.7 million , offset by income tax benefit on valuation releases of$1.2 million . The difference between theU.S. federal income tax rate of 21.0% and our overall income tax rate for the six months ended 2022 was primarily due to income tax expense of$2.6 million for valuation allowances, mostly recorded on deferred tax assets inChina due to declined profitability. The difference between theU.S. federal income tax rate of 21.0% and our overall income tax rate for the prior-year second quarter and six-month period, 2021 was primarily due to income tax rate change in theUnited Kingdom , non-deductible executive compensation and other expenses, and foreign rate differential offset by a valuation allowance release inFrance .
In general, it is our practice and intention to permanently reinvest the earnings of our foreign subsidiaries and repatriate earnings only when tax efficient.
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Income from Continuing Operations Attributable to GCP Shareholders
[[Image Removed: gcpwi-20220630_g3.jpg]][[Image Removed: gcpwi-20220630_g4.jpg]]
Income from continuing operations attributable to GCP shareholders was
Income from continuing operations attributable to GCP shareholders was
Operating Segment Overview
The following is an overview of the financial performance of the SCC and SBM
operating segments for the second quarter compared with the prior-year period.
For further information on our accounting policies related to allocating certain
functional and corporate costs and measuring segment operating income, please
refer to Note 14, "Operating Segments" in the Notes to the unaudited Condensed
Consolidated Financial Statements included in Item 1, "Financial Statements" on
this Quarterly Report on Form 10-Q.
Segment operating margin is defined as segment operating income divided by
segment net sales. It represents an operating performance measure related to
ongoing earnings and trends in our operating segments that are engaged in
revenue generation and other core business activities. We use this metric to
allocate resources between the segments and assess our strategic and operating
decisions related to core operations of our business.
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Net sales were$158.3 million for the second quarter endedJune 30, 2022 , an increase of$13.7 million or 9.5%, compared with the prior-year quarter. The increase was primarily due to the favorable impact of price increases and volume. SCC had favorable price and volume increases of 7.0% and 5.6%, respectively, during the second quarter. Gross profit was$47.0 million for the second quarter endedJune 30, 2022 , a decrease of$5.2 million or 10.0%, compared with the prior-year quarter. Gross margin decreased 640 basis points to 29.7% compared with the prior-year quarter primarily due to historically higher raw material and logistic costs, partially offset by price.
Net sales were
Gross profit was$84.1 million for the six months endedJune 30, 2022 , a decrease of$13.5 million or 13.8%, compared with the prior-year period. Gross margin decreased 780 basis points to 28.6% compared with the prior-year period primarily due to historically higher raw material and logistic costs, partially offset by price. 29 --------------------------------------------------------------------------------
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Segment Operating Income and Operating Margin
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Segment operating income of$9.0 million for the second quarter endedJune 30, 2022 decreased$6.3 million , or 41.2%, compared with the prior-year quarter primarily due to lower gross profit. Segment operating margin of 5.7% decreased 490 basis points compared with the prior-year quarter primarily due to higher raw material costs, offset by lower SG&A. Segment operating income of$10.3 million for the six months endedJune 30, 2022 decreased$11.1 million , or 51.9%, compared with the prior-year quarter primarily due to lower gross profit. Segment operating margin of 3.5% decreased 450 basis points compared with the prior-year quarter primarily due to higher raw material costs, offset by lower SG&A
SBM
Net Sales and Gross Margin [[Image Removed: gcpwi-20220630_g9.jpg]][[Image Removed: gcpwi-20220630_g10.jpg]] Net sales were$110.1 million for the second quarter endedJune 30, 2022 , an increase of$1.3 million or 1.2%, compared with the prior-year quarter primarily due to the favorable impact of price increases and was negatively impacted by supply chain constraints.North America increased volumes by 8.4%, offset by decreases inAsia Pacific and EMEA. 30 --------------------------------------------------------------------------------
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Gross profit was$39.5 million for the second quarter endedJune 30, 2022 , a decrease of$1.9 million or 4.6%, from the prior-year quarter. Gross margin decreased 220 basis points to 35.9% primarily due to significantly higher raw material costs, specifically on oil related raw material inputs, partially offset by price increases. Net sales were$211.8 million for the six months endedJune 30, 2022 , an increase of$4.1 million or 2.0%, compared with the prior-year period primarily due to the favorable impact of price increases.North America increased volumes by 8.3%, offset by decreases inAsia Pacific and EMEA.
Gross profit was
Segment Operating Income and Operating Margin
[[Image Removed: gcpwi-20220630_g11.jpg]][[Image Removed: gcpwi-20220630_g12.jpg]] Segment operating income of$17.2 million for the second quarter endedJune 30, 2022 decreased by$2.7 million , or 13.6%, compared with the prior-year quarter primarily due to lower gross profit. Segment operating margin decreased 270 basis points to 15.6% primarily due to significantly higher raw material costs. Segment operating income of$33.0 million for the six months endedJune 30, 2022 decreased by$6.3 million , or 16.0%, compared with the prior-year quarter primarily due to lower gross profit, partially offset by lower SG&A. Segment operating margin decreased 330 basis points to 15.6% primarily due to higher raw material costs.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The following is an analysis of our financial condition, liquidity and capital
resources at
Proposed Merger OnDecember 5, 2021 , we entered into the Merger Agreement, with Saint-Gobain. Pursuant to the terms of the Merger Agreement, we are prohibited from certain actions without Saint-Gobain's consent, including the incurrence of debt, capital expenditures above certain thresholds, share repurchases and payment of dividends. Further, we may be required to pay a cash termination fee to Saint-Gobain of up to$71 million , as required under the Merger Agreement under certain circumstances, including in the event GCP terminates the Merger Agreement to enter into a "Superior Proposal," as defined in the Merger Agreement, or in the event GCP enters into an alternative transaction within nine months of termination of the Merger Agreement in certain circumstances and such alternative transaction is consummated.
Cash Resources and Available Credit Facilities
AtJune 30, 2022 we had$459.4 million in cash and cash equivalents of which$316.6 million was held in theU.S. We had additional available liquidity of$347.2 million under theU.S. revolving line agreement and$44.1 million under various non-U.S. credit facilities. We expect to meet ourU.S. cash and liquidity requirements with cash on hand, cash we expect to generate during 2022 and thereafter, future borrowings, if any, and other available liquidity, including royalties and service 31 --------------------------------------------------------------------------------
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fees from our foreign subsidiaries. We may also repatriate future earnings from foreign subsidiaries if that results in minimal or noU.S. tax consequences. We expect to have sufficient cash and liquidity to finance ourU.S. operations and growth strategy and meet our debt obligations. Our non-U.S. credit facilities are extended to various subsidiaries that use them primarily to issue bank guarantees supporting trade activity and provide working capital during occasional cash shortfalls in certain foreign entities. We generally renew these credit facilities as they expire.
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