GCP APPLIED TECHNOLOGIES INC. Management's Discussion and Analysis of Financial Condition and Results of Operations, (the "MD&A"), describes the principal factors affecting the results of our operations, financial condition and liquidity, as well as our critical accounting policies and estimates that require significant judgment and thus have the most significant potential impact on our Consolidated Financial Statements. Our MD&A generally includes a discussion of results of operations, financial condition, liquidity and capital resources related to year-over-year comparisons betweenDecember 31, 2021 ("2021") andDecember 31, 2020 ("2020"). Our MD&A is organized as follows:
•Results of Operations: This section provides an analysis of our financial results compared to the prior year.
•Financial Condition, Liquidity and Capital Resources: This section provides an analysis of our liquidity and changes in cash flows, as well as a discussion of available borrowings and contractual commitments. •Critical Accounting Policies and Estimates. This section discusses accounting policies and estimates that require us to exercise significant judgments in their application. We believe these accounting policies and estimates are important to understanding the assumptions and judgments incorporated in our reported financial results. 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 Annual Report on Form 10-K, 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 this Annual Report on Form 10K for further information. InOctober 2021 , the Company approved the sale of a business unit within the SBM segment, classified as held for sale the net assets of$19.4 million , and at that point recorded a loss on sale of$0.8 million in the Statements of Operations. This product line had net sales of approximately$20 million in both 2021 and 2020. The MD&A should be read in conjunction with our Consolidated Financial Statements and related notes in this Form 10-K. In addition to historical information, the MD&A contains forward-looking statements that involve risks and uncertainties. See "Information Related to Forward-Looking Statements" included above in this Form 10K and Item 1A, "Risk Factors" for a discussion of important factors that could cause our actual results to differ materially from our expectations. RESULTS OF OPERATIONS Business Description Summary
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 add mixtures 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.
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We operate our business on a global scale. Approximately 50% of our sales in 2021 were generated outside of theU.S. We operate and have locations in over 30 countries, and transact in over 30 currencies. We manage our operating segments on a global basis, and serve our markets on a regional basis. Currency fluctuations affect our reported results of operations, cash flows and financial position. Impact of COVID-19 Pandemic The global health crisis caused by the COVID-19 outbreak and its resurgences has and will continue to impact global economic activity, particularly the timing of fulfilling demands for our products. We have been closely monitoring its impact and effects on our business globally and saw strong demand in 2021 across business segments and geographic locations and expect this growth to continue into 2022. Despite this positive momentum, inflation headwinds, specifically raw material prices, logistic costs and global supply chain disruptions, had a tangible impact on our yearly performance. The combination of these factors, adversely affected volumes and gross margins in both the SCC and SBM segments. We took actions to protect margins in the second half of 2021 by announcing new price increases in all regions to offset the inflationary headwinds we were experiencing. However, the effect of the ongoing global supply chain disruptions and continued increases in the cost of raw materials and freight transportation have outpaced our mitigating efforts and we expect margin compression to remain into the first half of 2022. It is difficult for us to predict at this time the duration and extent of the impact of COVID-19 on the global construction industry and our business, financial position, results of operations, and liquidity although we expect that managing the impacts of the pandemic will be a part of our ongoing operations for the foreseeable future. We are focused on protecting the health, safety and well-being of our employees in accordance with guidelines issued by national and other health and safety authorities, while seeking to meet the needs of our global customers and suppliers. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees, customers, suppliers and stockholders.
2021 Performance Summary
Following is a summary of our financial performance for 2021 compared to 2020.
•Net sales increased 7.4% to
•Gross profit decreased 3.9% to
•Selling, general, and administrative ("SG&A") expenses decreased 3.7% to
•Income from continuing operations attributable to GCP shareholders was$21.5 million , or$0.29 per diluted share, compared to$100.5 million , or$1.37 per diluted share, in 2020. The prior year included gains from the sale of theCambridge, Massachusetts corporate headquarters. 30
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Table of Contents Results of Operations
The following is an overview of our financial performance in 2021 and 2020.
2021 2020 % Change
Net sales $ 970.1 $ 903.2 7.4 %
Cost of goods sold 626.2 545.3 14.8 %
Gross profit 343.9 357.9 (3.9) %
Gross margin 35.4 % 39.6 % (420) bps
SG&A 254.6 264.5 (3.7) %
Restructuring and repositioning expenses 33.3 30.3 9.9 %
Interest expense, net 22.5 21.5 4.7 %
Other (income) expenses, net (0.4) 14.1 NM
Gain on sale of corporate headquarters - (110.2) (100.0) %
Income from continuing operations before income taxes 33.9
137.7 (75.4) %
Income tax expense (12.1) (36.7) (67.0) %
Income from continuing operations 21.8 101.0 (78.4) %
Loss from discontinued operations, net of income taxes (0.3)
(0.3) - %
Net income 21.5 100.7 (78.6) %
Less: Net income attributable to noncontrolling (0.3) (0.5) (40.0) %
interests
Net income attributable to GCP shareholders$ 21.2 $ 100.2 (78.8) %
Income from continuing operations attributable to GCP
(78.6) %
shareholders
Diluted EPS from continuing operations attributable to$ 0.29 $ 1.37 (78.8) % GCP shareholders Net sales: SCC$ 558.5 $ 518.9 7.6 % SBM 411.6 384.3 7.1 % Total net sales$ 970.1 $ 903.2 7.4 % Net sales by region: North America$ 519.6 $ 502.5 3.4 % EMEA 195.8 172.6 13.4 % Asia Pacific 191.9 180.8 6.1 % Latin America 62.8 47.3 32.8 % Total net sales by region$ 970.1 $ 903.2 7.4 % 31
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Table of Contents GCP Overview
Following is an overview of our financial performance for 2021 and 2020.
[[Image Removed: gcpwi-20211231_g2.jpg]]The following table identifies the year-over-year changes in sales attributable to volume and/or mix, product price, and the impact of currency exchange for 2021 compared to 2020:
Net Sales Variance Analysis Volume/Mix Price Currency Translation Total Change SCC 4.3 % 2.1 % 1.2 % 7.6 % SBM 4.3 % 0.8 % 2.0 % 7.1 % Net sales 4.3 % 1.5 % 1.6 % 7.4 %By Region : North America 2.0 % 1.1 % 0.3 % 3.4 % EMEA 5.2 % 3.1 % 5.1 % 13.4 % Asia Pacific 3.7 % (0.8) % 3.2 % 6.1 % Latin America 27.4 % 9.7 % (4.3) % 32.8 % Net sales of$970.1 million for 2021 increased$66.9 million or 7.4%, compared with the prior-year period primarily due to higher sales volumes in SCC and SBM, the favorable impact of foreign currency translation and pricing. Sales volumes were higher in the year due to increased construction activity in all regions. Gross profit of$343.9 million for 2021 decreased$14.0 million , or 3.9% compared with the prior-year period, primarily due to higher raw material and transportation costs, partially offset by higher volume. Gross margin decreased 420 basis points to 35.4% primarily due to higher raw material and logistics costs. SG&A SG&A costs of$254.6 million decreased$9.9 million or 3.7%, for 2021 compared to the prior-year primarily due to lower employee-related costs resulting from restructuring programs and lower incentive compensation costs. These favorable impacts were partially offset by higher acquisition-related and facility costs related to the corporate headquarters. 32
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Restructuring and repositioning expenses
2021 Restructuring Plan
Cumulative costs incurred under the 2021 Restructuring Plan since its inception were$30.9 million with expected total costs of$32 million-$36 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 Restructuring Plan of approximately$8.4 million atDecember 31, 2021 , which benefited both the SCC and the SBM operating segments and corporate functions. We expect to realize total pre-tax cost structure savings associated with the 2021 Restructuring Plan of approximately$13 million to$15 million mostly in general, administrative and overhead costs, with most of the savings occurring in 2022. Substantially all of the restructuring actions under the 2021 Restructuring Plan are expected to be completed byJune 2022 . With the exception of asset write offs, substantially all of the restructuring and repositioning activities are expected to be settled in cash.
2019 Phase 2 Restructuring and Repositioning Plan
Cumulative costs incurred under the 2019 Phase 2 Plan since its inception were$33.7 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$20.2 million atDecember 31, 2021 , which benefited 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 .
2019 Restructuring and Repositioning Plan
Cumulative costs incurred under the 2019 Plan since its inception were$12.6 million . We achieved annualized pre-tax cost savings of approximately$18.0 million through a reduction in cost of goods sold as a result of supply chain, warehouse operations, and logistical enhancements that benefited the SCC and SBM operating segments under the 2019 Plan. Substantially all of the activities under the 2019 Plan were completed byDecember 2020 . For further information on the restructuring and repositioning expenses, please refer to Note 4, "Restructuring and Repositioning Expenses", in the Notes to the Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10K.
Defined Benefit Pension Plans
Defined benefit pension expenses include costs related toU.S. and non-U.S. defined benefit pension and other postretirement benefit ("OPEB") plans that provide benefits to retirees and former employees of divested businesses where we retained these obligations. In accordance with pension mark-to-market ("MTM") accounting, pension costs recognized in our results of operations consist of the following two components: (i) "certain pension costs," which represent ongoing costs recognized throughout the year, including service and interest costs, expected return on plan assets and amortization of prior service costs/credits; and (ii) "pension MTM adjustment" which represent mark-to-market gains and losses recognized annually during the fourth quarter or during interim periods when significant events occur, such as plan amendments or curtailments. Pension MTM gains and losses result from changes in actuarial assumptions, such as discount rates and the difference between actual and expected returns on plan assets. Additionally, we recognize applicable material events within "Pension curtailment gains" during the period in which they occur.
The following table summarizes pension costs for 2021 and 2020:
2021 2020
(in millions)
Certain pension costs $ 5.8 $ 5.2
Pension MTM adjustment, net (10.3) 2.8
Pension curtailment gains - -
Total pension (benefit) costs from continuing operations
Certain pension costs were$5.8 million and$5.2 million , respectively, in 2021 and 2020. The change in pension costs from 2020 to 2021 was primarily due to lower interest cost resulting from lower discount rates and lower return on plan assets. Pension MTM adjustment was a gain of$10.3 million in 2021 and a loss of$2.8 million in 2020. The higher amount of Pension MTM adjustment gains in 2021 was primarily attributable to lower interest rate for ourU.S. and non-U.S. corporate bonds and changes in our mortality experience. 33
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Please refer to Note 10, "Retirement Plans" in the Notes to the Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10K for further information on pension plans. Employee Benefit Plans
Defined Contribution Retirement Plan
We sponsor a defined contribution retirement plan for our employees in theU.S. which is a qualified plan under section 401(k) of theU.S. tax code. Under this plan, we contribute an amount equal to 100% of employee contributions, up to 6% of an individual employee's salary or wages. Additionally, we contribute up to 2% of a full amount of applicable employee compensation subject to a three year vesting requirement. We will no longer contribute the additional 2% after 2022. Applicable employees include those who began employment with GCP on or afterJanuary 1, 2018 who are not eligible to participate inGCP Applied Technologies Inc. Retirement Plan for Salaried Employees, which closed to new hires afterJanuary 1, 2018 . Costs related to this plan were$4.2 million and$4.6 million during 2021 and 2020, respectively.
Defined Benefit Pension Plans
We sponsor defined benefit pension plans for our employees in theU.S. , theU.K. and a number of other countries. We also fund government-sponsored programs in other countries in which we operate. A portion of our defined benefit pension plans are advance-funded, and others are pay-as-you-go. The advance-funded plans are administered by trustees who direct the management of plan assets and arrange to have obligations paid when due. Our most significant advance-funded plans cover current and former salaried employees in theU.K. and certain of ourU.S. employees who are covered by collective bargaining agreements. OurU.S. advance-funded plans are qualified under theU.S. tax code. Fully-funded plans include several advance-funded plans where the fair value of the plan assets exceeds the projected benefit obligation ("PBO"). This group of plans was overfunded by$31.0 million atDecember 31, 2021 , and is reflected as "Other assets" in the Consolidated Balance Sheets. Underfunded plans include a group of advance-funded plans that are underfunded on a PBO basis by a total of$43.6 million atDecember 31, 2021 . Additionally, we have several plans that are funded on a pay-as-you-go basis; and therefore, the entire PBO of$12.9 million atDecember 31, 2021 is unfunded. The combined balance of the underfunded and unfunded plans was$58.0 million atDecember 31, 2021 . This amount is presented as$1.5 million in "Other current liabilities" and$56.5 million in "Defined benefit pension plans" on the Consolidated Balance Sheets. Based on theU.S. funded plans' status atDecember 31, 2021 , there were no minimum required payments under ERISA. We made a contribution of$0.6 million and$15.9 million , respectively, to theU.S. pension plans in 2021 and in 2020. In 2020 we made a$15.0 million voluntary contribution to theU.S. qualified pension plans. We intend to fund non-U.S. pension plans based upon applicable legal requirements, as well as actuarial and trustee recommendations. We expect to contribute$1.5 million to non-U.S. pension plans during 2022. We contributed$1.2 million and$1.5 million , respectively, to the non-U.S. pension plans in 2021 and 2020. Please refer to Note 10, "Retirement Plans" in the Notes to the Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10K for further discussion on our pension and other postretirement benefit plans.
Other (Income) Expenses, Net
Other (income) expenses, net consists primarily of research and development expense, pension MTM adjustments, net, interest income, foreign currency exchange gains (losses), defined benefit pension expenses exclusive of service costs, income from our Transition Services Agreement related to the sale ofDarex , and other items.
Other (income) expenses, net was income of
Income Tax (Expense) Benefit
Income tax expense was
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Table of Contents Tax Reform AtDecember 31, 2021 , the unpaid balance of the Transition Tax obligation, which was a one-time mandatory deemed repatriation tax on undistributed earnings, was$24.1 million , net of overpayments and foreign tax credits and is payable between 2024 and 2025. During 2020, as a result of the additional deductions and net operating loss carryback allowable to the Company under the Coronavirus Aid, Relief, and Economic Security ("CARES") Act, along with the application of the 2017 Tax Act ("The Act") final regulations, we recorded a net tax benefit of$5.5 million , an increase in currentU.S. income tax receivable of$1.8 million , a decrease inU.S. deferred tax assets of$9.3 million , and a decrease to the Company's long term payable by$13.0 million .
Repatriation
It is our practice and intention to permanently reinvest the earnings of our foreign subsidiaries and repatriate earnings only when the tax impact is efficient. This position has not changed subsequent to the one-time transition tax under the Tax Act. Effective Tax Rate
Our effective tax rate was approximately 36% and 27%, respectively, in 2021 and 2020.
Our 2021 effective tax rate of 36% differed from the 21%U.S. statutory rate primarily due to the income tax rate change in theU.K. of$2.8 million , non-deductible expenses of$3.2 million consisting primarily of executive compensation, and$1.8 million of foreign rate differential, offset by$2.8 million in valuation allowance releases predominantly in theU.S. andFrance on foreign tax credits and net operating loss deferred tax assets, respectively. Our 2020 effective tax rate of 27% differed from the 21%U.S. statutory rate primarily due to the non-deductibility of executive compensation of$1.9 million , the gain on sale of the corporate headquarters resulted in state tax of$5.2 million , and rate changes inU.K. of$1.0 million partially offset by aU.S. tax benefit of$5.5 million due to the net operating losses carrybacks to earlier years at the higher 35% tax rate allowed under the CARES Act. The change in the effective tax rate for 2021 compared to the same period in 2020 was primarily due to the higher impact of the income tax rate change in theU.K. , and the non-recurrence of the benefit of theU.S. net operating loss carryback at the higher 35%U.S. income tax rate. Income taxes paid in cash, net of refunds, were$19.1 million and$35.4 million , respectively, in 2021and 2020. Our annual cash tax rate was approximately 56% and 26%, respectively, in 2021 and 2020. Please refer to Note 9, "Income Taxes" in the Notes to the Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10K for additional information regarding income tax. 35
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Income from Continuing Operations Attributable to GCP Shareholders
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Income from continuing operations attributable to GCP shareholders was $21.5
million in 2021 compared to $100.5 million in 2020. 2020 included gains from the
sale of the Cambridge, Massachusetts corporate headquarters.
Operating Segment Overview
The following is an overview of the financial performance of the SCC and SBM operating segments for 2021 and 2020. For further information on our accounting policies related to allocating certain functional and corporate costs and measuring segment operating income, please refer to Note 19, "Segments" in the Notes to the Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10K. 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.
SCC
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Net sales were$558.5 million in 2021, an increase of$39.6 million , or 7.6%, compared to 2020. The increase was primarily due to higher sales volumes of 4.3% particularly inLatin America , EMEA andAsia Pacific , higher pricing of 2.1% and favorable impact of foreign currency translation of 1.2%.
Sales volumes increased 4.3% in 2021 compared to 2020 primarily due to higher construction and manufacturing activity.
Gross profit was$187.9 million in 2021, a decrease of$14.9 million , or 7.3%, compared to 2020 primarily due to higher raw material costs. Gross margin decreased 550 basis points to 33.6% compared with the prior-year primarily due to higher raw material and logistic costs, partially offset by price and volume.
Segment Operating Income and Operating Margin
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Segment operating income ("SOI") was $39.3 million in 2021, a decrease of
$13.6 million , or 25.7%, compared to 2020 primarily due to lower gross profit.
Segment operating margin of 7.0% decreased 320 basis points compared with the
prior-year primarily due to lower gross margin. 240 basis points improvement was
achieved through greater operating leverage due to increased volume in the
period.
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Table of Contents SBMNet Sales and Gross Margin
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Net sales were $411.6 million in 2021, an increase of $27.3 million , or 7.1%,
compared to 2020 due to higher sales volume of 4.3%, the favorable impact of
foreign currency translation of 2.0% and pricing of 0.8%.
Sales volumes increased 4.3% due to higher construction and manufacturing
activity in all regions. Residential volumes increased 12.0% in 2021 driven by
the strong demand in North America for roofing materials. In 2021 compared to
2020, volume increases within Specialty Construction Products were mostly offset
by volume decreases within Building Envelope .
Gross profit was $157.5 million for 2021, an increase of $0.9 million , or 0.6%,
compared to 2020 primarily due to higher sales volumes. Gross margin of 38.3%
decreased from 2020 by 240 basis points primarily due to higher raw material
costs partially offset by higher sale volumes.
Segment Operating Income and Operating Margin
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Segment operating income was$74.3 million in 2021, an increase of$3.2 million , or 4.5%, compared to 2020 primarily due to higher gross profit and lower SG&A expense. Segment operating margin for 2021 was 18.1%, a decrease of 40 basis points compared to 2020. The decrease was primarily due to higher raw material costs.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
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.
Cash Resources and Available Credit Facilities
AtDecember 31, 2021 we had$500.6 million in cash and cash equivalents of which$341.1 million was held in theU.S. We had additional available liquidity of$347.2 million under theU.S. revolving line agreement and$40.7 million was available 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, future borrowings, if any, and other available liquidity, including royalties and service 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. Please refer to Note 2, "Summary of Significant Accounting and Financial Reporting Policies" in the Notes to the Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10K for a discussion of our cash and cash equivalents.
The following table summarizes our non-
Maximum Borrowing Amount Available Liquidity Expiration Date
(in millions)
China $ 8.0 $ 6.1 4/15/2023
Singapore 6.0 6.0 4/15/2023
Canada 5.9 5.9 4/15/2023
Australia 5.5 4.9 4/15/2023
India 5.0 3.7 4/15/2023
Hong Kong 3.0 3.0 4/15/2023
Korea 2.0 2.0 4/15/2023
Other countries 9.5 9.1 Open ended
Total $ 44.9 $ 40.7
Tax Reform
The Organization for Economic Co-operation and Development ("OECD") has proposed
a multi-jurisdictional inclusive framework to address base erosion and profit
sharing. Adoption of the framework by relevant jurisdictions and possible
changes in U.S. tax laws or interpretations, could materially impact our
effective tax rate and future cash flows.
Beginning in 2022, the Tax Cuts and Jobs Act of 2017 ("TCJA") eliminates the
option to deduct research and development expenditures currently and requires
taxpayers to amortize them over five years pursuant to IRC Section 174. Although
Congress is considering legislation that would defer the amortization
requirement to later years, we have no assurance that the provision will be
repealed or otherwise modified. We expect this provision may materially reduce
cash flows beginning in 2022.
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Sale and Relocation of Corporate Headquarters
InJuly 2020 , GCP sold itsCambridge, Massachusetts corporate headquarters and entered into a leaseback transaction with the buyer. GCP received cash proceeds of$122.5 million , net of the related transaction costs and recorded a gain of$110.2 million in its Consolidated Statements of Operations. During 2020, we made cash tax payments of approximately$15 million related to the gain on the sale of theCambridge facility and expect to make additional cash tax payments in future years. The lease endedDecember 2021 and we were required to make certain payments for real estate taxes and other operating expenses related to the property. InMarch 2021 , the Board approved a business restructuring and repositioning plan related to the relocation of the Company's corporate headquarters to theAtlanta, Georgia area, the closure of itsCambridge, Massachusetts campus, the build-out of new R&D locations near theBoston /Cambridge area, as well as the consolidation of other regional facilities and offices, including an organizational redesign, which is expected to lower costs. InAugust 2021 , the Company entered into new leases for its corporate headquarters and global R&D facility inAlpharetta, Georgia andWilmington, Massachusetts , respectively, and recorded a right-of-use asset and corresponding lease liability of$19.5 million .
Share Repurchase Program
OnJuly 30, 2020 , the Board authorized a program to repurchase up to a maximum of$100 million of our common stock throughJuly 30, 2022 . No shares were repurchased during 2021 or 2020. The Merger Agreement does not permit GCP to repurchase any shares without the prior consent of Saint-Gobain, and currently, we do not intend to repurchase any shares.
Analysis of Cash Flows
The following table summarizes our cash flows:
2021 2020
(in millions) Cash flows provided by (used in) continuing operations: Net cash provided by operating activities from continuing operations
$ 49.4
(0.3) (2.7)
Net cash provided by operating activities 49.1 70.6
Net cash (used in) provided by investing activities from continuing operations
(32.2) 87.1
Net cash used in investing activities from discontinued operations
- -
Net cash (used in) provided by investing activities (32.2) 87.1
Net cash provided by (used in) financing activities from continuing operations
7.4 (2.0)
Effect of currency exchange rate changes on cash and cash equivalents
(6.4) 2.0
Increase (decrease) in cash and cash equivalents 17.9 157.7
Cash and cash equivalents, beginning of year 482.7 325.0
Cash and cash equivalents, end of year $ 500.6
Cash flows from operating activities. As shown in the table below, our cash
flows provided by operating activities from continuing operations decreased by
For 2021, our disbursements, other than interest and income tax payments increased by$100.0 million due mostly to higher raw material and transportation costs. This was partially offset by increased collection from customers of$59.6 million due to higher net sales of 7.4% and by lower income tax payments, net of$16.3 million because 2020 included a$15 million tax payment for the sale of our formerCambridge Massachusetts corporate headquarters. 40
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2021 2020
(in millions)
Collections from customers $ 977.1 $ 917.5
Other disbursements, other than interest and income tax
payments (889.3) (789.3)
Interest payments, net (19.3) (19.5)
Income tax payments, net (19.1) (35.4)Cash provided by operating activities from continuing operations
$ 49.4
Cash flows from investing activities. Net cash used by investing activities from continuing operations during 2021 was$32.2 million compared to cash provided by investing activities from continuing operations of$87.1 million during the prior year. The prior year included proceeds from the sale of ourCambridge headquarters of$122.5 million . Cash flows from financing activities. Net cash provided by financing activities from continuing operations during the 2021 was$7.4 million compared to$2.0 million of cash used during the prior year. The year-over-year change was primarily due to higher proceeds received from the exercise of stock options of$10.3 million . 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. We generally renew these credit facilities as they expire.
Debt and Other Contractual Obligations
Total debt outstanding at
5.5% Senior Notes
The Company issued the 5.5% Senior Notes inApril 2018 with an aggregate principal amount of$350 million maturing inApril 2026 . Interest on the 5.5% Senior Notes is payable semi-annually in arrears onApril 15 andOctober 15 of each year. During 2021 and 2020, we made interest payments of$19.3 million and$19.3 million , respectively. The 5.5% Senior Notes are reported net of unamortized discount and debt issuance costs, respectively of$2.7 million and$3.3 million , atDecember 21, 2021 and 2020. Based on quotes from dealers where obtainable or the value of the most recent trade in the market (Level 2), the outstanding 5.5% Senior Notes has a fair value of$358.9 million atDecember 31, 2021 . The 5.5% Senior Notes were issued pursuant to an Indenture (the "Indenture"), by and among GCP, the guarantors party thereto (the "Note Guarantors") andWilmington Trust, National Association , as trustee. The 5.5% Senior Notes and the related guarantees rank equally with all of the existing and future unsubordinated indebtedness of GCP and the Note Guarantors and senior in right of payment to any existing and future subordinated indebtedness of GCP and the Note Guarantors. The 5.5% Senior Notes and related guarantees are effectively subordinated to any secured indebtedness of GCP or the Note Guarantors, as applicable, to the extent of the value of the assets securing such indebtedness and structurally subordinated to all existing and future indebtedness and other liabilities of GCP's non-guarantor subsidiaries. Subject to certain conditions stated in the Indenture, GCP may at any time afterApril 15, 2021 , redeem the 5.5% Senior Notes in whole or in part at the redemption price equal: (i) 102.8% of the par value if redeemed afterApril 15, 2021 , (ii) 101.4% of the par value if redeemed afterApril 15, 2022 , and (iii) 100.0% of the par value if redeemed afterApril 15, 2023 and thereafter. Upon occurrence of a change of control, as defined in the Indenture, GCP will be required to make an offer to repurchase the 5.5% Senior Notes at a price equal to 101.0% of their aggregate principal amount repurchased plus accrued and unpaid interest, if any, to, but excluding, the date of repurchase. The Indenture contains certain covenants and provides for customary events of default subject to customary grace periods in certain cases. Please refer to Note 6, "Debt" in the Notes to the Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10K for additional information regarding our debt. AtDecember 31 2021 , we were in compliance with all covenants and conditions under the Indenture. There are no events of default under the Indenture atDecember 31, 2021 .
Credit Agreement
The Company entered into a$350 million Revolving Credit Facility onApril 2018 . AtDecember 31, 2021 , there were no outstanding borrowings on the Revolving Credit Facility. There were$2.8 million in outstanding letters of credit which resulted in available credit of$347.2 million atDecember 31, 2021 . The interest rate per annum applicable to the Revolving 41
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Credit Facility is equal to, at GCP's option, either: (i) a base rate plus a margin ranging from 0.25% to 1.0%, or (ii) LIBOR plus a margin ranging from 1.25% to 2.0%, based upon the total leverage ratio of GCP and its restricted subsidiaries in both scenarios. Please refer to Note 6, "Debt" in the Notes to the Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10K for additional information regarding our debt.
Contractual Obligations
AtDecember 31, 2021 , our contractual obligations consist of: (1)$350.9 million related to principal and interest payments on 5.5% Senior Notes, finance lease obligations and borrowings outstanding under various lines of credit, primarily by non-U.S. subsidiaries, based on variable interest rates in effect on that date; (2)$70.6 million of undiscounted operating lease payments, of which$8.9 million is payable in 2022 and$61.7 million thereafter; (3)$24.1 million of income tax liability associated with the 2017 Tax Act payable, of which$8.8 million is payable in 2024 and$15.3 million in 2025. There are no minimum payment requirements under ERISA for 2022. Please refer to Note 6, "Debt" and Note 8, "Leases" in the Notes to the Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10K for the schedule of principal maturities of debt and lease obligations. AtDecember 31, 2021 , we had approximately$30.3 million of unrecognized tax benefits and$0.6 million of associated interest and penalties pertaining to unrecognized tax benefits. Included in these amounts are$0.6 million indemnified by Grace. Our liability for unrecognized tax benefits decreased by$0.5 million during 2021. We also believe it is reasonably possible that in the next 12 months due to expiration of the statute of limitation that the amount of the liability for unrecognized tax benefits could further decrease by approximately$1.6 million , of which$0.6 million is indemnified by Grace. Unrecognized tax benefits represent a potential future cash outlay. We are unable to make a reasonably reliable estimate of the timing of the cash settlement for this liability since the timing of future tax examinations by various tax jurisdictions and the related resolution is uncertain. Please refer to Note 9, "Income Taxes", in the Notes to the Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10K for further information on our unrecognized tax benefit. The letters of credit of approximately$6.3 million are related primarily to customer advances and other performance obligations atDecember 31, 2021 . Please refer to Note 17, "Commitments and Contingencies" to the Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10K for further information on guarantees, indemnification obligations and financial assurances, none of which were material atDecember 31, 2021 , as well as other contingencies at the year then ended.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles ("GAAP") requires us to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenue, expenses, as
well as related disclosures of contingent assets and liabilities within the
Consolidated Financial Statements. Changes in estimates are recognized in the
period in which they are identified. We believe that our accounting estimates
are appropriate and the related balances included within the Consolidated
Financial Statements are reasonable. Actual amounts could differ from the
initial estimates which may require adjustments in future periods that could
have a material impact on our financial condition and results of operations. A
description of our accounting policies is included in Note 2, "Summary of
Significant Accounting and Financial Reporting Policies" in the Notes to the
Consolidated Financial Statements included in Item 8, "Financial Statements and
Supplementary Data" of this Form 10K.
We believe that the assumptions and estimates associated with the critical
accounting policies and estimates described in this section involve significant
judgment and thus have the most significant potential impact on our Consolidated
Financial Statements. An accounting estimate is considered critical if
management is required to make assumptions and judgments about matters that were
highly uncertain at the time the estimate was made, if different estimates
reasonably could have been used, or if changes in the estimate are reasonably
likely to occur from period to period that could have a material impact on our
financial condition or results of operations. As a part of our disclosure
controls and procedures, management has discussed the development, selection and
disclosure of the critical accounting estimates with the Audit Committee of the
GCP Board of Directors.
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Table of Contents Pension and OPEB We sponsor defined benefit pension plans for our employees inthe United States , theUnited Kingdom , and a number of other countries, and fund government-sponsored programs in other countries where we operate. Please refer to Note 10, "Retirement Plans" in the Notes to the Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data" of this Form 10K and "Employee Benefit Plans" section presented above for a detailed discussion of our pension plans and other postretirement benefit plans. In order to estimate our pension and other postretirement benefits, expenses and liabilities, we select from a range of possible assumptions derived from participant demographics, past experiences and market indices. These assumptions are updated annually and primarily include discount rates, expected return on plan assets, mortality rates, retirement rates, and rate of compensation increase. The independent actuaries review our assumptions for reasonableness and use such assumptions to calculate our estimated liability and future pension expense. We review the actuarial reports for reasonableness and adjust our expenses, assets and liabilities to reflect the amounts calculated in the actuarial reports. The two key assumptions used in determining our pension benefit obligations and pension expense are the discount rate and expected return on plan assets. Our most significant pension assets and pension liabilities are related toU.S. andU.K. pension plans. The assumed discount rates for pension plans reflect currently available market rates for high-quality corporate bonds. For theU.S. pension plans, the assumed weighted average discount rate was selected in consultation with our independent actuaries based on a yield curve constructed from a portfolio of high quality bonds for which the timing and amount of cash outflows approximate the estimated payouts of the plan. For theU.K. pension plan, the assumed weighted average discount rate was selected in consultation with our independent actuaries based on a yield curve constructed from a portfolio of sterling-denominated high quality bonds for which the timing and amount of cash outflows approximate the estimated payouts of the plan. The assumed weighted average discount rate for theU.S. and non-U.S. pension plans was 2.85% and 1.71%, respectively, in 2021 compared to 2.61% and 1.17%, respectively, in 2020. We recognized a gain of$10.3 million in 2021 and a loss of$2.8 million in 2020 of Pension MTM adjustments primarily due to a change in assumed weighted average discount rates. A hypothetical 100 basis point increase or decrease in the weighted average discount rate for theU.S. and a 100 basis point increase or decrease for the non-U.S. pension plans could result in a change in Pension MTM adjustments and other related costs by approximately$50.4 million and$48.0 million , respectively. We selected the expected return on plan assets for theU.S. qualified pension plans for 2021 and 2020 in consultation with our independent actuaries using an expected return model. The model determines the weighted average return for an investment portfolio based on the target asset allocation and expected future returns for each asset class which were developed using a building block approach based on observable inflation, available interest rate information, current market characteristics and historical results. For the expected return on plan assets for theU.K. pension plan, we considered the trustees' strategic investment policy together with long-term historical returns and investment community forecasts for each asset class.
Income Taxes
We are a global enterprise with operations in over 30 countries. This global reach results in a complexity of tax regulations, which require assessments of applicable tax law and judgments in estimating our ultimate income tax liability. Please refer to Note 2, "Summary of Significant Accounting and Financial Reporting Policies" and Note 9, "Income Taxes" in the Notes to the Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data" of this Form 10K for additional details.
Stock-Based Compensation
We grant equity awards to certain key employees which include stock options,
restricted share units ("RSUs") and performance-based units ("PBUs") with market
conditions in accordance with provisions of the GCP Applied Technologies Inc.
Equity and Incentive Plan (the "Plan"), as amended and restated on February 28,
2017 , and the GCP Applied Technologies Inc. 2020 Inducement Plan (the
"Inducement Plan") adopted on October 1, 2020 . Stock-based compensation expense
was $6.9 million and $7.0 million , respectively, during 2021 and 2020. In
December 2021 , the Company recorded stock-based compensation expense of $1.8
million related to the accelerated vesting of RSUs held by certain executives.
We estimate the fair value of equity awards issued at the grant date. The fair
value of the awards is recognized as stock-based compensation expense on a
straight line basis, net of estimated forfeitures, for each separately vesting
portion of the award over the employee's requisite service period. We use the
Black-Scholes option pricing model for determining the fair
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value of stock options granted and the Monte Carlo simulation model to estimate
the fair value of options and PBUs with market conditions, both of which require
management to make significant judgments and estimates regarding participant
activity and market results. The use of different assumptions and estimates
could have a material impact on the estimated fair value of these awards and the
related stock-based compensation expense recognized during each period. The
inputs and assumptions used in determining fair values of equity awards are the
expected life, expected volatility, risk-free interest rate, expected dividend
yield and correlation coefficient.
We make estimates of the expected forfeiture rate and recognize stock-based
compensation expense during each reporting period based on the number of equity
awards expected to vest which requires significant judgment. Stock-based
compensation expense is adjusted as changes are made to the estimated forfeiture
rates based on actual forfeiture activity during the vesting period. We consider
many factors in developing estimated forfeiture rates, including voluntary
termination behavior and future workforce reduction programs. Estimated
forfeitures are trued up to actual forfeitures as each equity award vests.
We make estimates related to the likelihood of achieving performance goals for
PBUs that vest upon the satisfaction of these goals. The number of shares
ultimately provided to employees who received a PBU grant will be based on the
level of achievement of these Company targets. PBUs are remeasured during each
reporting period based on the expected payout of the award, which may range from
0% to 200% of the targets for such awards. PBUs granted in 2021 include
performance criteria based on the following performance metrics: (i) a 2-year
cumulative free cash flow target metric for approximately 33.3% of awards; (ii)
a 2 -year cumulative adjusted earnings before interest, tax, depreciation and
amortization metric for approximately 33.3% of awards; (iii) the Company's
2-year total shareholder return ("TSR") relative to the performance of the
Russell 3000 Specialty Building Materials Index and the peer group approved by
the Board's Compensation Committee for approximately 33.3% of awards. PBUs
granted in 2020 and 2019 are based on a three-year cumulative adjusted diluted
earnings per share measure that is modified, up or down, based on the Company's
TSR relative to the performance of the Russell 3000 Specialty Chemicals and
Building Materials Indices . As a result, these awards are subject to volatility
until the payout is determined at the end of the performance period. During 2021
and 2020, we recorded stock-based compensation expense reductions of $0.7
million and $0.6 million , respectively, related to remeasurement of PBUs based
on their estimated expected payout at the end of the applicable performance
period.
Recent Accounting Pronouncements
InDecember 2019 , theFinancial Accounting Standards Board ("FASB") issued ASU 2019-12, Income Taxes, Simplifying the Accounting for Income Taxes. This guidance removes certain exceptions to the general principles of ASC 740, and clarifies and amends the existing guidance to improve consistent application. GCP adopted this guidance onJanuary 1, 2021 . The adoption did not have a material impact on its results of operations, financial position and cash flows.
For a summary of recently issued accounting pronouncements applicable to our Consolidated Financial Statements which is incorporated here by reference, please refer to Note 2, "Summary of Significant Accounting and Financial Reporting Policies" in the Notes to the Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data" of this Form 10K.
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