GCP APPLIED TECHNOLOGIES INC.

(GCP)
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05/09GCP APPLIED TECHNOLOGIES INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)
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GCP APPLIED TECHNOLOGIES INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

05/09/2022 | 07:46am EDT

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; 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 addmixtures 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 three months ended
March 31, 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


  On December 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 resurgences has
and will continue to impact global economic activity, particularly the timing of
fulfilling demands for our products. Furthermore, macroeconomic factors such as
the conflict in Ukraine and historic inflation headwinds impacted our results of
operation in the first quarter of 2022.

Our net sales in the first quarter of 2022 increased 6.5%. Despite this positive
momentum, inflation, specifically raw material prices, logistic costs and global
supply chain disruptions, had a tangible impact on our quarterly performance.
The combination of these factors adversely affected gross margins by
approximately 800 basis points. We took actions to protect margins in 2021 and
in the first quarter of 2022 by announcing new price increases in all regions to
offset the inflationary headwinds we are 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.

The following is an overview of our financial performance for the first quarter ended March 31, 2022 compared with the prior-year quarter.

                                                                            Three Months Ended
                                                                                 March 31,
                                                            2022                  2021                  % Change
                                                                  (in millions, except per share amounts)
Net sales                                            $        237.3           $    222.8                        6.5  %
Cost of goods sold                                            164.3                136.3                       20.5  %
Gross profit                                                   73.0                 86.5                      (15.6) %
Gross margin                                                   30.8   %             38.8  %                  (800) bps
Selling, general and administrative expenses                   62.5                 66.6                       (6.2) %

Interest expense, net                                           5.6                  5.6                          -  %
Restructuring and repositioning expenses                        3.5                  8.9                      (60.7) %

Other expense, net                                              3.1                  2.8                       10.7  %

(Loss) income from continuing operations before
income taxes                                                   (1.7)                 2.6                            NM
Income tax expense                                             (1.9)                (1.0)                      90.0  %

Loss from discontinued operations, net of income
taxes                                                          (0.3)                   -                     (100.0) %
Net (loss) income                                              (3.9)                 1.6                            NM
Less: Net income attributable to noncontrolling
interests                                                      (0.1)                (0.1)                         -  %

Net (loss) income attributable to GCP shareholders $ (4.0)

   $      1.5                            NM
(Loss) income from continuing operations
attributable to GCP shareholders                     $         (3.7)          $      1.5                            NM
Diluted EPS from continuing operations attributable
to GCP shareholders                                  $        (0.05)          $     0.02                            NM


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                                                                         Three Months Ended
                                                                             March 31,
                                                         2022                   2021                 % Change
                                                              (in millions, except per share amounts)
Net sales:
SCC                                              $           135.6          $    123.9                       9.4  %
SBM                                                          101.7                98.9                       2.8  %
Total GCP net sales                              $           237.3          $    222.8                       6.5  %
Net sales by region:
North America                                    $           132.2          $    118.1                      11.9  %
Europe, Middle East, Africa ("EMEA")                          45.8                44.6                       2.7  %
Asia Pacific                                                  42.1                46.7                      (9.9) %
Latin America                                                 17.2                13.4                      28.4  %
Total net sales by region                        $           237.3          $    222.8                       6.5  %

First Quarter Performance Summary

Following is a summary of our financial performance for the first quarter ended March 31, 2022 compared with the prior-year quarter.

•Net sales increased 6.5% to $237.3 million.

•Gross profit decreased 15.6% to $73.0 million; gross margin decreased approximately 800 basis points to 30.8%.

•Selling, general, and administrative expenses ("SG&A") decreased 6.2% to $62.5 million.

•Loss from continuing operations attributable to GCP shareholders was $3.7 million, or $0.05 per diluted share, compared to income from continuing operations of $1.5 million, or $0.02 per diluted share, for the prior-year period.


GCP Overview

Net Sales and Gross Margin

                    [[Image Removed: gcpwi-20220331_g1.jpg]]

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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 three months ended March 31, 2022 from
the same period in the prior year.
                                                                             Three Months Ended
Net Sales Variance Analysis                     Volume                Price            Currency Translation        Total Change
SCC                                                 6.0  %                6.2  %                    (2.8) %                9.4  %
SBM                                                 0.7  %                3.5  %                    (1.4) %                2.8  %
Net sales                                           3.8  %                4.8  %                    (2.1) %                6.5  %
By Region:
North America                                       7.2  %                4.7  %                       -  %               11.9  %
EMEA                                                1.6  %                4.8  %                    (3.7) %                2.7  %
Asia Pacific                                       (7.5) %                1.0  %                    (3.4) %               (9.9) %
Latin America                                      13.8  %               18.8  %                    (4.2) %               28.4  %


Net sales of $237.3 million for the first quarter ended March 31, 2022 increased
$14.5 million, or 6.5%, from the prior-year quarter primarily due to favorable
sale pricing of 4.8% and volume of 3.8% particularly in Latin America, North
America and EMEA. This was partially offset by decreases in volume in Asia
Pacific and foreign currency translation.

Gross profit of $73.0 million for the first quarter ended March 31, 2022 decreased $13.5 million, or 15.6%, from the prior-year quarter. Gross margin decreased 800 basis points to 30.8% primarily due to significant higher raw material and logistics costs.

SG&A


SG&A costs of $62.5 million decreased $4.1 million or 6.2%, for the first
quarter ended March 31, 2022 compared to the prior-year quarter 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 additional Merger-related costs.

Restructuring and repositioning expenses

2021 Restructuring Plan


Cumulative costs incurred under the 2021 Plan since its inception were $34.9
million with expected total costs of up to $37.0 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 at March 31, 2022, 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 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 Plan are expected to be completed by June
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
$33.2 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 at March 31, 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 by March 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 to U.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 first quarter
ended March 31, 2022 and 2021 were $1.5 million and $1.4 million, respectively.

Other Expense, Net

Other expenses, net consists primarily of research and development expense, pension mark-to-market adjustments, net, interest income, foreign currency exchange gains (losses) and defined benefit pension expenses exclusive of service costs.

Other expense, net stayed relatively consistent at $3.1 million during the first quarter ended March 31, 2022 compared to $2.8 million in the prior period.

Income Taxes

Income taxes attributable to continuing operations during the first quarter ended March 31, 2022 and the prior-year quarter was income tax expense of $1.9 million and $1.0 million, respectively, representing effective tax rates of 111.8% and 38.5%, respectively.


The difference between the U.S. federal income tax rate of 21.0% and our overall
income tax rate for the first quarter was primarily due to income tax expense of
$2.2 million for valuation allowances recorded, primarily in China due to
declined profitability. The difference between the U.S. federal income tax rate
of 21.0% and our overall income tax rate for the prior-year first quarter was
primarily due to income tax expense on unrecognized benefits of $0.3 million.

In general, it is our practice and intention to permanently reinvest the earnings of our foreign subsidiaries and repatriate earnings only when tax efficient.

Income from Continuing Operations Attributable to GCP Shareholders

                    [[Image Removed: gcpwi-20220331_g2.jpg]]

Loss from continuing operations attributable to GCP shareholders was $3.7 million for the first quarter of 2022 compared to income from continuing operations attributable to GCP shares of $1.5 million in the prior-year period.

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Operating Segment Overview


The following is an overview of the financial performance of the SCC and SBM
operating segments for the first 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, "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.


SCC

Net Sales and Gross Margin

                    [[Image Removed: gcpwi-20220331_g3.jpg]]

Net sales were $135.6 million for the first quarter ended March 31, 2022, an
increase of $11.7 million or 9.4%, compared with the prior-year quarter. The
increase was primarily due to the favorable impact of price increase and volume.
SCC had favorable price increases of 6.2% during the first quarter.

Gross profit was $37.1 million for the first quarter ended March 31, 2022, a
decrease of $8.3 million or 18.3%, compared with the prior-year quarter. Gross
margin decreased 920 basis points to 27.4% compared with the prior-year quarter
primarily due to historically higher raw material and logistic costs, partially
offset by price.

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Segment Operating Income and Operating Margin

                    [[Image Removed: gcpwi-20220331_g4.jpg]]

Segment operating income of $1.3 million for the first quarter ended March 31,
2022 decreased $4.8 million, or 78.7%, compared with the prior-year quarter
primarily due to lower gross profit. Segment operating margin of 1.0% decreased
390 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-20220331_g5.jpg]]

Net sales were $101.7 million for the first quarter ended March 31, 2022, an
increase of $2.8 million or 2.8%, compared with the prior-year quarter primarily
due to the favorable impact of price increases. North America increased volumes
by 8.1%, offset by decreases in Asia Pacific and EMEA.

Gross profit was $36.3 million for the first quarter ended March 31, 2022, a
decrease of $5.1 million or 12.3%, from the prior-year quarter. Gross margin
decreased 620 basis points to 35.7% primarily due to higher raw material costs,
partially offset by price increases.

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Segment Operating Income and Operating Margin

                    [[Image Removed: gcpwi-20220331_g6.jpg]]
Segment operating income of $15.8 million for the first quarter ended March 31,
2022 decreased by $3.6 million, or 18.6%, compared with the prior-year quarter
primarily due to lower gross profit, partially offset by lower SG&A. Segment
operating margin decreased 410 basis points to 15.5% 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 March 31, 2022.


Proposed Merger

On December 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


At March 31, 2022 we had $471.3 million in cash and cash equivalents of which
$323.2 million was held in the U.S. We had additional available liquidity of
$347.2 million under the U.S. revolving line agreement and $41.1 million was
available under various non-U.S. credit facilities. We expect to meet our U.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 fees from our foreign subsidiaries.
We may also repatriate future earnings from foreign subsidiaries if that results
in minimal or no U.S. tax consequences. We expect to have sufficient cash and
liquidity to finance our U.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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Analysis of Cash Flows

The following table summarizes our cash flows for the first quarter ended March 31, 2022 and the prior-year quarter:

                                                              Three Months Ended
                                                                   March 31,
                                                               2022            2021
                                                                 (in millions)

Cash flows (used in) provided by continuing operations

Operating activities                                     $    (16.0)         $   0.7
Investing activities                                          (12.5)            (8.1)
Financing activities                                              -              0.6
Effect of exchange rate changes on cash                        (0.8)        

(3.0)

Change in cash and cash equivalents                           (29.3)        

(9.8)

Cash and cash equivalents, beginning of period                500.6         

482.7

Cash and cash equivalents, end of period                 $    471.3         

$ 472.9



Cash flows from operating activities. As shown in the table below, our cash
flows provided by operating activities from continuing operations decreased by
$16.7 million

                                                                                Three Months Ended
                                                                                     March 31,
                                                                             2022                  2021
                                                                                   (in millions)
Collections from customers                                             $     231.3             $    230.3
Other disbursements, other than interest and income tax payments            (246.8)                (228.4)

Income tax payments, net                                                      (0.5)                  (1.2)

Cash (used in) provided by operating activities from continuing operations

                                                             $     (16.0)            $      0.7


For the first quarter ended March 31, 2022, our collection from customers
increased $1.0 million due to higher days sales outstanding. The increase in
disbursements, other than interest and income tax payments of $18.4 million was
due mostly to increase in raw material and logistic costs.

Cash flows from investing activities. Net cash used by investing activities from
continuing operations during the first quarter was $12.5 million compared to
$8.1 million during the prior-year quarter.

Cash flows from financing activities. There was no cash provided by financing
activities during the first quarter compared to $0.6 million during the
prior-year quarter. The period-over-period change was primarily due to higher
tax withholding obligations related to employee equity awards and payments for
finance lease obligations, partially offset by proceeds received from the
exercise of stock options.

Defined Benefit Pension Plans


Based on the U.S. advance-funded plans' status during the first quarter and the
prior-year period, there were no minimum required payments under ERISA. We made
contributions of $0.1 million and $0.3 million, respectively, to the U.S. and
non-U.S. pension plans during the first quarter and ended March 31, 2022,
respectively. We intend to fund non-U.S. pension plans based upon applicable
legal requirements, as well as actuarial and trustee recommendations.

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Debt


Total debt outstanding at March 31, 2022 was $349.3 million. Our debt service
requirements are expected to be funded through our existing sources of liquidity
and operating cash flows. Subject to certain conditions stated in the Indenture,
we may, at our option and at any time and from time to time, redeem the 5.5%
Senior Notes prior to their maturity date in whole or in part at certain
redemption prices, as discussed in Note 6, "Debt", 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 on our 5.5% Senior Notes and Credit Agreement, please
refer to Note 4, "Debt" in the Notes to the unaudited Condensed Consolidated
Financial Statements included in Item 1, "Financial Statements" on this
Quarterly Report on Form 10-Q.

Other Contractual Obligations and Contingencies


We have various future contractual obligations, including those for debt and
related interest payments, pension funding requirements, operating leases and
other operating commitments. Please refer to Note 12, "Commitments and
Contingencies", in the Notes to the unaudited Condensed Consolidated Financial
Statements included in Item 1, "Financial Statements" of this Quarterly Report
on Form 10-Q for a discussion of financial assurances and other contingencies.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES


For information on our significant accounting policies and estimates, please
refer to the Notes to our audited Consolidated Financial Statements included in
Item 8, "Financial Statements and Supplementary Data" of our 2021 Annual Report
on Form 10-K for the year ended December 31, 2021.


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