GCP APPLIED TECHNOLOGIES INC. We generally refer to the quarter endedMarch 31, 2021 as the "first quarter", the quarter endingDecember 31, 2021 as the "fourth quarter" and the quarter endedMarch 31, 2020 as the "prior-year quarter". See Analysis of Operations for a discussion of our non-GAAP performance measures. The unaudited Consolidated Financial Statements for the three months endedMarch 31, 2020 have been revised to correct prior period errors as discussed in Note 1, "Basis of Presentation and Summary of Significant Accounting and Financial Reporting Policies" and Note 18, "Revisions of Previously Issued Unaudited Consolidated Financial Statements" in the Notes to the unaudited Consolidated Financial Statements included in Item 1, "Financial Statements" on this Quarterly Report on Form 10-Q. Accordingly, the tables presented in the Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") reflect the impact of those revisions. Information Related to Forward-Looking Statements This document contains, and our other public communications may contain, forward-looking statements, that is, information related to future, not historical events. Such statements generally include the words "believes," "plans," "intends," "targets," "will," "expects," "suggests," "anticipates," "outlook," "continues" or similar expressions. Forward-looking statements include, without limitation, statements about 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; 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 regulation, and those factors set forth in our most recent Annual Report on Form 10-K, this Quarterly Report on Form 10-Q and Current Reports on Form 8-K, which have been filed with theSecurities and Exchange Commission ("SEC") and are available on the Internet at www.sec.gov. Our reported results should not be considered as an indication of our future performance. Readers are cautioned not to place undue reliance on our projections and forward-looking statements, which speak only as of the date thereof. We undertake no obligation to publicly release any revisions to the projections and forward-looking statements contained in this document, or to update them to reflect events or circumstances occurring after the date of this document. 34 -------------------------------------------------------------------------------- Table of Contents 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. Our Specialty Construction Chemicals ("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. •SpecialtyBuilding Materials . Our SpecialtyBuilding Materials ("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 first quarter, approximately 50% of our sales were generated outside of theU.S. We operate and have locations in over 30 countries and transact business in over 30 currencies. We manage our operating segments on a global basis to serve global markets. Currency fluctuations affect our reported results of operations, cash flows, and financial position. Impact of COVID-19 Pandemic The global health crisis caused by the novel coronavirus ("COVID-19") outbreak and its resurgences has and will continue to negatively impact global economic activity, which, despite progress in vaccination efforts, remains uncertain and cannot be predicted with confidence. We have been closely monitoring the impact of COVID-19 and managing its effects on our business globally as the situation continues to evolve. During the first quarter, we saw an improvement in business conditions and construction market activity as global economies began to reopen. The impact of COVID-19 on our business varied across different geographies and product lines during the first quarter and the prior-year quarter. We have taken actions to preserve our liquidity by reducing discretionary spending. 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. Responsive measures we adopted include working remotely when possible, establishing procedures for deep cleaning of facilities, restricting business travel, providing personal protective equipment, using appropriate social distancing practices, and restricting visitor access to our facilities. We are monitoring a number of factors to assess the potential duration and extent of the impact of COVID-19 on our operations, including the health of the global economy and construction industry, specifically on demand drivers for our construction products, as well as operational disruptions including those resulting from government actions, such as mandatory halts of construction activity, travel restrictions, as well as facility and work site closures. We will continue to prioritize the health and safety of our employees and serving our customers while minimizing disruption to the extent possible. We will also continue to monitor the health of the construction industry in the geographic markets in which we operate and respond accordingly. The following is an overview of our financial performance for the first quarter compared with the prior-year quarter. 35 --------------------------------------------------------------------------------
Table of Contents
Three Months Ended March 31,
(In millions, except per share amounts) 2021 2020 % Change
Net sales $ 222.8 $ 216.7 2.8 %
Cost of goods sold 136.3 133.9 1.8 %
Gross profit 86.5 82.8 4.5 %
Gross margin 38.8 % 38.2 % 0.6 pts
Selling, general and administrative expenses 66.6 68.1 (2.2) %
Research and development expenses 4.5 4.9 (8.2) %
Interest expense and related financing costs 5.6 5.7 (1.8) %
Repositioning expenses 1.3 2.7 (51.9) %
Restructuring expenses and asset write offs 7.6 3.1 NM
Other income, net (1.7) (2.2) (22.7) %
Total costs and expenses 83.9 82.3 1.9 %
Income from continuing operations before income taxes 2.6 0.5 NM
(Provision for) benefit from income taxes (1.0) 1.6 NM
Income from continuing operations 1.6 2.1 (23.8) %
Loss from discontinued operations, net of income taxes - (0.3) 100.0 %
Net income 1.6 1.8 (11.1) %
Less: Net income attributable to noncontrolling interests (0.1) (0.1) - %
Net income attributable to GCP shareholders $ 1.5 $ 1.7 (11.8) %
Income from continuing operations attributable to GCP shareholders
$ 1.5 $ 2.0 (25.0) %
Diluted EPS from continuing operations attributable to GCP shareholders
$ 0.02 $ 0.03 (33.3) % Net sales: Specialty Construction Chemicals$ 123.9 $ 125.4 (1.2) % Specialty Building Materials 98.9 91.3 8.3 % Total GCP net sales$ 222.8 $ 216.7 2.8 % Net sales by region: North America$ 118.1 $ 119.2 (0.9) % Europe Middle East Africa (EMEA) 44.6 44.3 0.7 % Asia Pacific 46.7 40.3 15.9 % Latin America 13.4 12.9 3.9 % Total net sales by region$ 222.8 $ 216.7 2.8 % First Quarter Performance Summary Following is a summary of our financial performance for the first quarter compared with the prior-year quarter. •Net sales increased 2.8% to$222.8 million . •Gross profit increased 4.5% to$86.5 million ; gross margin increased approximately 60 basis points to 38.8%. •Selling, general, and administrative expenses decreased 2.2% to$66.6 million . •Income from continuing operations attributable to GCP shareholders was$1.5 million , or$0.02 per diluted share, compared to$2.0 million , or$0.03 per diluted share, for the prior-year quarter. 36 -------------------------------------------------------------------------------- Table of Contents GCP OverviewNet Sales and Gross Margin [[Image Removed: gcpwi-20210331_g1.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 period.
Three Months Ended
as a Percentage Increase (Decrease) from
March 31, 2020
Currency
Net Sales Variance Analysis Volume Price Translation Total Change
Specialty Construction Chemicals (1.7) % (0.3) % 0.8 % (1.2) %
Specialty Building Materials 6.2 % (0.2) % 2.3 % 8.3 %
Net sales 1.6 % (0.3) % 1.5 % 2.8 %
By Region :
North America (0.3) % (0.7) % 0.1 % (0.9) %
Europe Middle East Africa (6.0) % (0.1) % 6.8 % 0.7 %
Asia Pacific 12.0 % (0.9) % 4.8 % 15.9 %
Latin America 13.3 % 5.4 % (14.8) % 3.9 %
Net sales of $222.8 million for the first quarter increased $6.1 million , or
2.8%, from the prior-year quarter primarily due to higher sales volumes and
favorable impact of foreign currency translation. Sales volumes in SBM were
higher in the first quarter in North America and Asia Pacific , partially offset
by lower volumes in EMEA due to the impact of COVID-19. Sales volumes in SCC
were lower in the first quarter in North America and EMEA, partially offset by
higher volumes in Latin America and Asia Pacific .
Gross profit of $86.5 million for the first quarter increased $3.7 million , or
4.5%, from the prior-year quarter primarily due to higher sales volumes,
partially offset by unfavorable impact of product and geographic mix. Gross
margin increased 60 basis points to 38.8% primarily due to improved operational
productivity, partially offset by unfavorable impact of product and geographic
mix.
37-------------------------------------------------------------------------------- Table of Contents Selling, General, and Administration Expenses Selling, general and administrative costs of$66.6 million decreased$1.5 million , or 2.2%, for the first quarter compared to the prior-year quarter primarily due to shareholder activism and other related costs incurred during the prior-year quarter and lower employee-related costs resulting from restructuring programs. These favorable impacts were partially offset by higher employee incentive compensation costs and higher facility costs related to corporate headquarters. 38 -------------------------------------------------------------------------------- Table of Contents Restructuring and Repositioning Expenses 2021 Restructuring Plan OnMarch 30, 2021 , our Board of Directors (the "Board") approved a business restructuring and repositioning plan (the "2021 Plan") related to the relocation of our corporate headquarters to theAtlanta, Georgia area, the closure of theCambridge, Massachusetts campus, the build-out of a new global research and development center 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. Cumulative costs incurred under the 2021 Plan since its inception were$6.6 million with expected total costs of$26 million -$29 million . 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. These savings are expected to benefit both theSpecialty Construction Chemicals and SpecialtyBuilding Materials operating segments and result in overall general administrative and overhead cost reductions. Substantially all of the restructuring actions under the 2021 Plan are expected to be completed byJune 30, 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 (the "2019 Phase 2 Plan") OnJuly 31, 2019 , the Board approved a business restructuring and repositioning plan to further optimize the design and footprint of the Company's global organization, primarily with respect to its general administration and business support functions, and streamline cross-functional activities. Cumulative costs incurred under the 2019 Phase 2 Plan since its inception were$33.8 million . We achieved total annualized pre-tax cost savings through a reduction in general and administrative expenses under the 2019 Phase 2 Plan of approximately$13.3 million as ofMarch 31, 2021 , which benefited both the SCC and the SBM operating segments and Corporate function. We expect to achieve total estimated cost savings of approximately$20 million . With the exception of asset write offs, substantially all of the restructuring and repositioning activities are expected to be settled in cash, and the program was substantially completed as ofMarch 31, 2021 . 2019 Restructuring and Repositioning Plan (the "2019 Plan") OnFebruary 22, 2019 , the Board approved a business restructuring and repositioning plan (the "2019 Plan"). The 2019 Plan is focused on our global supply chain strategy, processes and execution, including our manufacturing, purchasing, logistics, and warehousing operations. The plan also addresses our service delivery model, primarily inNorth America , to streamline the Company's pursuit of combined admixture and VERIFI® opportunities. Cumulative costs incurred under the 2019 Plan since its inception were$12.6 million . We achieved annualized pre-tax cost savings of$17 million through a reduction in cost of goods sold as a result of supply chain, warehouse operations, and logistical enhancements that benefited both the SCC and SBM operating segments under the 2019 Plan. We expect to achieve total estimated cost savings of approximately$19 million . Substantially all of the activities under the 2019 Plan were completed as ofDecember 31, 2020 . For further information on our restructuring expenses, please refer to Note 12, "Restructuring and Repositioning Expenses, Asset Write Offs" in the Notes to the unaudited Consolidated Financial Statements included in Item 1, "Financial Statements" on this Quarterly Report on Form 10-Q, and Note 14, "Restructuring and Repositioning Expenses, Asset Write Offs" to the Company's Consolidated Financial Statements included in the 2020 Annual Report in the Form 10-K. 39 -------------------------------------------------------------------------------- Table of Contents Pension Expense Defined benefit expense includes costs relating toU.S. and non-U.S. defined benefit pension and other postretirement benefit (the "OPEB") 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 were$1.4 million and$1.3 million , respectively, during the first quarter and the prior-year quarter. We did not incur any "pension market-to-market adjustment and other related costs" in the first quarter or the prior-year quarter. Other Income, Net Other income, net consists primarily of 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, net was$1.7 million and$2.2 million , respectively, during the first quarter and the prior-year quarter. The decrease of$0.5 million was primarily due to lower interest income. Income Taxes Income taxes attributable to continuing operations during the first quarter and the prior-year quarter was income tax expense (benefit) of$1.0 million and$(1.6) million , respectively, representing effective tax rates of 38.5% and (320.0)%, respectively. The difference between theU.S. federal income tax rate of 21.0% and our overall income tax rate for the for the first quarter was primarily due to tax expense on unrecognized tax benefits of$0.3 million . The difference between theU.S. federal income tax rate of 21.0% and our overall income tax rate during the prior-year quarter was primarily due to benefits recognized as a result of the Coronavirus Aid Relief and Economic Security ("CARES") Act. The CARES Act allowed for accelerated interest and depreciation deductions which caused estimated net operating losses in 2019 and 2020. Under the CARES Act, those losses can be carried back to offset prior taxable income previously taxed at theU.S. federal income tax rate of 35% resulting in an income tax benefit of$2.8 million , offset by increases in unrecognized tax benefits of$0.4 million and valuation allowance expense of$0.6 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-20210331_g2.jpg]] 40 -------------------------------------------------------------------------------- Table of Contents Income from continuing operations attributable to GCP shareholders was$1.5 million for the first quarter compared to$2.0 million for the prior-year quarter. The decrease was primarily attributable to higher restructuring and repositioning costs and higher income tax expense, partially offset by higher gross profit and lower selling, general and administrative expenses. OnJuly 3, 2017 , we completed the sale of ourDarex business to Henkel AG & Co. KGaA ("Henkel"). The results of operations of theDarex segment are presented as discontinued operations and, as such, have been excluded from continuing operations and segment results for all periods presented. Unless otherwise noted, the discussion and analysis pertains only to our continuing operations. 41 -------------------------------------------------------------------------------- Table of Contents 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 quarter. For further information on our accounting policies related to allocating certain functional and corporate costs and measuring segment operating income, please refer to Note 17, "Operating Segment and Geographic Information" in the Notes to the unaudited Consolidated Financial Statements included in Item 1, "Financial Statements" on this Quarterly Report on Form 10-Q. Refer to the table in the "Analysis of Operations" section below for the related segment financial performance information. 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. Specialty Construction Chemicals (SCC)Net Sales and Gross Margin [[Image Removed: gcpwi-20210331_g3.jpg]] Net sales were$123.9 million for the first quarter, a decrease of$1.5 million , or 1.2%, compared with the prior-year quarter. The decrease was primarily due to lower sales volumes, partially offset by the favorable impact of foreign currency translation. Sales volumes were lower inNorth America and EMEA, partially offset by higher volumes inLatin America andAsia Pacific . Sales volumes decreased 1.7% in the first quarter compared with the prior-year quarter resulting primarily from self-manufacturing from certain customers. Concrete and Cement volumes decreased 2.0% and 0.8%, respectively. Gross profit was$45.4 million for the first quarter, a decrease of$2.2 million , or 4.6%, compared with the prior-year quarter, primarily due to lower sales volumes. Gross margin decreased 140 basis points to 36.6% compared with the prior-year quarter primarily due to unfavorable impact of product mix, partially offset by lower costs resulting from improved operational and logistics productivity. 42
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Segment Operating Income and Operating Margin
[[Image Removed: gcpwi-20210331_g4.jpg]]
Segment operating income of $6.1 million for the first quarter decreased $2.4
million , or 28.2%, compared with the prior-year quarter primarily due to lower
gross profit, as well as higher depreciation and amortization costs related to
our growth initiatives. Segment operating margin of 4.9% decreased 190 basis
points compared with the prior-year quarter primarily due to lower gross margin.
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Specialty Building Materials (SBM)
Net Sales and Gross Margin
[[Image Removed: gcpwi-20210331_g5.jpg]]
Net sales were $98.9 million for the first quarter, an increase of $7.6 million ,
or 8.3%, compared with the prior-year quarter primarily due to higher sales
volumes in North America and Asia Pacific , partially offset by lower volumes in
EMEA, as well as the favorable impact of foreign currency translation.
Residential volumes increased 69.2% driven by the strong demand in North America
for roofing materials and the timing of our promotional activity. Building
Envelope and Specialty Construction Products volumes declined 7.1% and 1.5%,
respectively, in the first quarter compared with the prior-year quarter
primarily due to lower construction activity.
Gross profit was $41.4 million for the first quarter, an increase of $5.8
million , or 16.3%, from the prior-year quarter, while gross margin increased 290
basis points to 41.9% primarily due to improved productivity related to raw
material utilization and higher sales volumes resulting in improved operating
leverage.
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Segment Operating Income and Operating Margin
[[Image Removed: gcpwi-20210331_g6.jpg]]
Segment operating income of $19.4 million for the first quarter increased by
$5.3 million , or 37.6%, compared with the prior-year quarter primarily due to
higher gross profit. Segment operating margin increased 420 basis points to
19.6% primarily due to higher gross margin.
Analysis of Operations
We have set forth in the table below our key operating statistics with
percentage changes for the first quarter compared to the corresponding
prior-year quarter. In the Analysis of Operations (the "table"), we present
financial information in accordance with U.S. GAAP, as well as certain non-GAAP
financial measures, which we describe below in further detail.
We believe that the non-GAAP financial information supplements our discussions
about the performance of our businesses, improves quarter-to-quarter and
year-over-year comparability, and provides insight into the information that our
management uses to evaluate the performance of our businesses. Our management
uses GAAP and non-GAAP measures in financial and operational decision-making
processes, for internal reporting, and as part of forecasting and budgeting
processes since non-GAAP measures provide additional transparency into our core
operations.
In the table, we have provided reconciliations of these non-GAAP financial
measures to the most directly comparable financial measures calculated and
presented in accordance with U.S. GAAP. These non-GAAP financial measures should
not be considered substitutes for financial measures calculated in accordance
with U.S. GAAP, and the financial results that we calculate and present in the
table in accordance with U.S. GAAP, as well as the corresponding reconciliations
from those results, should be carefully evaluated as part of this Quarterly
Report on Form 10-Q.
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The following are the non-GAAP financial measures presented in the table:
•Adjusted EBIT (a non-GAAP financial measure)- is defined as net income (loss)
from continuing operations attributable to GCP shareholders adjusted for: (i)
gains and losses on sales of businesses, product lines and certain other
investments; (ii) currency and other financial losses in Venezuela ; (iii) costs
related to legacy product, environmental and other claims; (iv) restructuring
and repositioning expenses, and asset write offs; (v) defined benefit plan costs
other than service and interest costs, expected returns on plan assets and
amortization of prior service costs/credits; (vi) third-party and other
acquisition-related costs; (vii) other financing costs associated with the
modification or extinguishment of debt; (viii) amortization of acquired
inventory fair value adjustments; (ix) tax indemnification adjustments; (x)
interest income, interest expense and related financing costs; (xi) income
taxes; (xii) shareholder activism and other related costs; (xiii) gain on sale
of corporate headquarters, net of related costs; and (xiv) certain other items
that are not representative of underlying trends. Adjusted EBIT Margin is
defined as Adjusted EBIT divided by net sales. We use Adjusted EBIT to assess
and measure our operating performance and determine performance-based employee
compensation. We use Adjusted EBIT as a performance measure because it provides
improved quarter-to-quarter and year-over-year comparability for decision-making
and compensation purposes and allows management to measure the ongoing earnings
results of our strategic and operating decisions.
•Adjusted EBITDA (a non-GAAP financial measure)- is defined as Adjusted EBIT
adjusted for depreciation and amortization. Adjusted EBITDA Margin is defined as
Adjusted EBITDA divided by net sales. We use Adjusted EBITDA as a performance
measure in making significant business decisions.
•Adjusted Earnings Per Share (a non-GAAP financial measure)- is defined as
earnings per share ("EPS") from continuing operations on a diluted basis
adjusted for: (i) gains and losses on sales of businesses, product lines and
certain other investments; (ii) currency and other financial losses in
Venezuela ; (iii) costs related to legacy product, environmental and other
claims; (iv) restructuring and repositioning expenses and asset write offs; (v)
defined benefit plan costs other than service and interest costs, expected
returns on plan assets and amortization of prior service costs/credits; (vi)
third-party and other acquisition-related costs; (vii) other financing costs
associated with the modification or extinguishment of debt; (viii) amortization
of acquired inventory fair value adjustments; (ix) tax indemnification
adjustments; (x) shareholder activism and other related costs; (xi) certain
discrete tax items; (xii) gain on sale of corporate headquarters, net of related
costs; and (xiii) certain other items that are not representative of underlying
trends. We use Adjusted EPS as a performance measure to review our diluted
earnings per share results on a consistent basis and in determining certain
performance-based employee compensation.
•Adjusted Gross Profit (a non-GAAP financial measure)- is defined as gross
profit adjusted for: (i) corporate and pension-related costs included in cost of
goods sold; (ii) loss in Venezuela included in cost of goods sold; (iii)
amortization of acquired inventory fair value adjustment; and (iv) certain other
items that are not representative of underlying trends. Adjusted Gross Margin
means Adjusted Gross Profit divided by net sales. We use this performance
measure to understand trends and changes and to make business decisions
regarding core operations.
Adjusted EBIT, Adjusted EBIT Margin, Adjusted EBITDA, Adjusted EBITDA Margin,
Adjusted EPS, Adjusted Gross Profit and Adjusted Gross Margin do not purport to
represent income measures as defined in accordance with U.S. GAAP. These
measures are provided to investors and others to improve the quarter-to-quarter,
year-to-year, and peer-to-peer comparability of our financial results and to
ensure that investors understand the information we use to evaluate the
performance of our businesses.
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Adjusted EBIT has material limitations as an operating performance measure
because it excludes costs related to income and expenses from restructuring and
repositioning activities which historically has been a material component of our
net income (loss) from continuing operations attributable to GCP shareholders.
Adjusted EBITDA also has material limitations as an operating performance
measure because it excludes the impact of depreciation and amortization expense.
Our business is substantially dependent on the successful deployment of capital,
and depreciation and amortization expense is a necessary element of our costs.
We compensate for the limitations of these measurements by using these
indicators together with net income (loss) measured in accordance with U.S. GAAP
to present a complete analysis of our results of operations. Adjusted EBIT and
Adjusted EBITDA should be evaluated together with net income (loss) from
continuing operations attributable to GCP shareholders measured in accordance
with U.S. GAAP for a complete understanding of our results of operations.
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We have provided in the following tables a reconciliation of these non-GAAP
measures to the most directly comparable financial measures calculated and
presented in accordance with U.S. GAAP.
Analysis of Operations Three Months Ended March 31,
(In millions, except per share amounts) 2021 2020 % Change
Profitability performance measures:
Adjusted EBIT (A):
Specialty Construction Chemicals segment operating income $ 6.1 $ 8.5 (28.2) %
Specialty Building Materials segment operating income 19.4 14.1 37.6 %
Corporate costs (B) (7.2) (5.9) 22.0 %
Certain pension costs (C) (1.4) (1.3) 7.7 %
Adjusted EBIT (non-GAAP) $ 16.9 $ 15.4 9.7 %
Repositioning expenses (1.3) (2.7) (51.9) %
Restructuring expenses and asset write offs (7.6) (3.1) NM
Shareholder activism and other related costs (D) - (3.6) 100.0 %
Third-party and other acquisition-related costs (0.1) (0.5) (80.0) %
Interest expense, net (5.4) (5.1) 5.9 %
Income tax (provision) benefit (1.0) 1.6 NM
Income from continuing operations attributable to GCP shareholders
$ 1.5 $ 2.0 (25.0) %
Income from continuing operations attributable to GCP shareholders as a percentage of net sales
0.7 % 0.9 % (0.2) pts
Diluted EPS from continuing operations (
$ 0.03 (33.3) % Adjusted EPS (non-GAAP)$ 0.12 $ 0.10 20.0 % 48
-------------------------------------------------------------------------------- Table of Contents Analysis of Operations Three Months Ended March 31, (In millions) 2021 2020 % Change Gross Profit: Specialty Construction Chemicals$ 45.4 $ 47.6 (4.6) % Specialty Building Materials 41.4 35.6 16.3 % Adjusted Gross Profit (non-GAAP) 86.8 83.2 4.3 %
Corporate costs and pension costs in cost of goods sold (C)
(0.3) (0.4) (25.0) %
Total GCP Gross Profit (U.S. GAAP) $ 86.5 $ 82.8 4.5 %
Gross Margin:
Specialty Construction Chemicals 36.6 % 38.0 % (1.4) pts
Specialty Building Materials 41.9 % 39.0 % 2.9 pts
Adjusted Gross Margin (non-GAAP) 39.0 % 38.4 % 0.6 pts
Corporate costs and pension costs in cost of goods sold (0.1) %
(0.2) % 0.1 pts
Total GCP Gross Margin (U.S. GAAP) 38.8 % 38.2 % 0.6 pts
Adjusted EBIT (A)(B)(C): Specialty Construction Chemicals segment operating income
$ 6.1 $ 8.5 (28.2) % Specialty Building Materials segment operating income 19.4 14.1 37.6 % Corporate and certain pension costs (8.6) (7.2) 19.4 % Total GCP Adjusted EBIT (non-GAAP)$ 16.9 $ 15.4 9.7 % Depreciation and amortization: Specialty Construction Chemicals$ 6.9 $ 6.4 7.8 % Specialty Building Materials 3.8 3.6 5.6 % Corporate 0.6 1.0 (40.0) % Total GCP depreciation and amortization$ 11.3 $ 11.0 2.7 % Adjusted EBITDA: Specialty Construction Chemicals$ 13.0 $ 14.9 (12.8) % Specialty Building Materials 23.2 17.7 31.1 % Corporate and certain pension costs (8.0) (6.2) 29.0 % Total GCP Adjusted EBITDA (non-GAAP)$ 28.2 $ 26.4 6.8 % Adjusted EBIT Margin: Specialty Construction Chemicals 4.9 % 6.8 % (1.9) pts Specialty Building Materials 19.6 % 15.4 % 4.2 pts Total GCP Adjusted EBIT Margin (non-GAAP) 7.6 % 7.1 % 0.5 pts Adjusted EBITDA Margin: Specialty Construction Chemicals 10.5 % 11.9 % (1.4) pts Specialty Building Materials 23.5 % 19.4 % 4.1 pts Total GCP Adjusted EBITDA Margin (non-GAAP) 12.7 % 12.2 % 0.5 pts 49
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(A)Our segment operating income includes only our share of income of consolidated joint ventures. (B)Management allocates certain corporate costs to each operating segment to the extent such costs are directly attributable to the segments. (C)Certain pension costs include only ongoing costs, recognized quarterly, which include service and interest costs, expected returns on plan assets and amortization of prior service costs/credits. "Corporate costs and pension costs in cost of goods sold" represent service costs related to our manufacturing employees. Corporate costs do not include any amounts for pension expense. Other pension-related costs, including annual mark-to-market adjustments, gains or losses from curtailments and terminations, as well as other related costs, are excluded from Adjusted EBIT. These amounts are not used by management to evaluate the performance of our businesses and significantly affect the peer-to-peer and period-to-period comparability of our financial results. Mark-to-market adjustments and other related costs are primarily attributable to changes in financial market values and actuarial assumptions and are not directly related to the operation of our businesses. (D)Shareholder activism and other related costs consist primarily of professional fees incurred in connection with the actions by certain of our shareholders seeking changes in the composition of our Board of Directors and nomination of candidates to stand for election at the 2020 Annual Shareholders' Meeting, as well as other related matters. NM•Not meaningful. Corporate Costs Corporate costs include certain functional support costs, the impacts of foreign exchange, certain performance-based employee incentive compensation, public company costs, and other costs that are not allocated or directly attributable to our operating segments. Corporate costs were$7.2 million for the first quarter, an increase of$1.3 million , or 22.0%, compared with the prior-year quarter. The increase was primarily related to higher employee incentive compensation and increased facility and public company costs, partially offset by cost savings attributable to our restructuring programs. Adjusted EBIT Adjusted EBIT was$16.9 million for the first quarter, an increase of 9.7% compared with the prior-year quarter primarily due to higher SBM operating income, partially offset by lower SCC operating income and higher corporate costs. Adjusted EBIT margin was 7.6% for the first quarter, an increase of 50 basis points, primarily due to higher gross margin. Adjusted EBITDA Adjusted EBITDA was$28.2 million for the first quarter, an increase of 6.8% compared with the prior-year quarter, primarily due to higher Adjusted EBIT. Adjusted EBITDA Margin was 12.7% for the first quarter, an increase of 50 basis points compared to the prior-year quarter, primarily due to higher Adjusted EBIT margin. 50 -------------------------------------------------------------------------------- Table of Contents Adjusted EPS Adjusted EPS was$0.12 per diluted share in the first quarter compared to$0.10 in the prior-year quarter. The following table reconciles Diluted EPS (U.S. GAAP) to Adjusted EPS (non-GAAP): Three Months Ended March 31, 2021 2020 Pre- After- Per Pre- After- Per (In millions, except per share amounts) Tax Tax Effect Tax Share Tax Tax Effect Tax Share Diluted EPS from continuing operations (U.S. GAAP)$ 0.02 $ 0.03 Repositioning expenses$ 1.3 $ 0.3 $ 1.0 0.01$ 2.7 $ 0.7 $ 2.0 0.03 Restructuring expenses and asset write offs 7.6 1.9 5.7 0.08 3.1 0.8 2.3 0.03 Shareholder activism and other related costs - - - - 3.6 0.9 2.7 0.04 Third-party and other acquisition-related costs 0.1 - 0.1 - 0.5 0.1 0.4 0.01 Discrete tax and other items, including adjustments to uncertain tax positions - (0.4) 0.4 0.01 - 2.6 (2.6) (0.04) Adjusted EPS (non-GAAP)$ 0.12 $ 0.10 FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES The following is an analysis of our financial condition, liquidity and capital resources atMarch 31, 2021 . AtMarch 31, 2021 andDecember 31, 2020 , we had$472.9 million and$482.7 million , respectively, in cash and cash equivalents. Cash inflows (outflows) from operating, investing and financing activities related to continuing operations were$0.7 million ,$(8.1) million and$0.6 million , respectively, during the first quarter. Cash inflows (outflows) from operating, investing and financing activities related to continuing operations were$14.3 million ,$(8.8) million and$(0.1) million , respectively, during the prior-year quarter. Our principal uses of cash generally consist of capital investments, acquisitions and working capital investments. It is difficult for us to predict at this time the duration and extent of the impact of COVID-19 on our business, financial position, results of operations, or liquidity. Due to this uncertainty, we believe our results of operations and cash flows may be significantly impacted in future periods. We have significant liquidity and capital resources, and we are actively managing our cash flow by reducing planned capital expenditures and managing operating expenses and discretionary spending. We believe our liquidity and capital resources, including cash on hand and cash we expect to generate during 2021 and thereafter, future borrowings, if any, as well as other available liquidity and capital resources discussed further below, are sufficient to finance our operations and growth strategy and to meet our debt obligations. 51 -------------------------------------------------------------------------------- Table of Contents Sale and Relocation of Corporate Headquarters OnJuly 31, 2020 , we sold our corporate headquarters located at62 Whittemore Avenue ,Cambridge, Massachusetts 02140 to IQHQ, L.P, entered into a leaseback transaction with the buyer, and received from the buyer cash proceeds of$122.5 million , net of the related transaction costs and commissions of$2.5 million , pursuant to the sale of the property. During 2020, we made cash tax payments of approximately$15 million related to the gain on sale of$110.2 million and expect to make additional cash tax payments of approximately$13 million in future years. The lease commenced onJuly 31, 2020 and has an initial rent-free term of eighteen months which can be extended for an additional six months at our option, subject to monthly rental payments of$0.6 million . The exercise of the extension option was not reasonably certain as ofMarch 31, 2021 . Pursuant to the terms of the lease, we are required to make certain payments for real estate taxes and other operating expenses related to the property. OnMarch 30, 2021 , the Board approved a business restructuring and repositioning plan which is focused on relocation of our corporate headquarters to theAtlanta, Georgia metro area with a planned opening by the fourth quarter of 2021, the closure of theCambridge, Massachusetts facility and the build-out of a new global research and development center near theBoston /Cambridge area, amongst other things. We expect to incur approximately$6 million of capital expenditures mostly related to the build-out of the global R&D facility, corporate headquarters and information technology infrastructure associated with the relocation. Share Repurchase Program OnJuly 30, 2020 , our Board of Directors authorized a program to repurchase up to$100 million of our common stock which is effective throughJuly 30, 2022 . Share repurchases under the program may be made from time to time at Board's discretion through open market purchases or privately negotiated transactions in accordance with applicable federal securities laws, including Rule 10b-18 of the Exchange Act. The share repurchase program is subject to a periodic review by the Board and may be suspended periodically or discontinued at any time. We plan to fund repurchases from our existing cash balance. We did not repurchase any shares during the first quarter. Cash Resources and Available Credit Facilities AtMarch 31, 2021 , we had available liquidity of$862.0 million , consisting of$472.9 million in cash and cash equivalents, of which$317.7 million was held in theU.S. ,$347.4 million available under our revolving credit facility, and$41.7 million available under various non-U.S. credit facilities. 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. We expect to meet ourU.S. cash and liquidity requirements with cash on hand, cash we expect to generate during 2021 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 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 in theU.S. Please refer to Note 1, "Basis of Presentation and Summary of Significant Accounting and Financial Reporting Policies," to the Company's Consolidated Financial Statements included in the 2020 Annual Report in the Form 10-K for a discussion of our cash and cash equivalents. 52 -------------------------------------------------------------------------------- Table of Contents The following table summarizes our non-U.S. credit facilities as ofMarch 31, 2021 : (In millions) Maximum Borrowing Amount Available Liquidity Maturity Date Singapore $ 6.0 $ 6.0 4/15/2023 China 6.0 5.5 4/15/2023 Australia 5.5 4.9 4/15/2023 Canada 6.0 6.0 4/15/2023 India 5.0 3.3 4/15/2023 Korea 4.0 4.0 4/15/2023 Hong Kong 3.0 3.0 4/15/2023 Other countries 9.6 9.0 Open ended Total $ 45.1 $ 41.7 53
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Analysis of Cash Flows
The following table summarizes our cash flows for the first quarter and
prior-year quarter:
Three Months Ended March 31,
(In millions) 2021 2020Net cash provided by operating activities from continuing operations
$ 0.7 $ 14.3
Net cash used in investing activities from continuing operations (8.1) (8.8)
Net cash provided by (used in) financing activities from continuing operations
0.6 (0.1)
Net cash provided by operating activities from continuing operations during the
first quarter was $0.7 million compared to $14.3 million for the prior-year
quarter. The period-over-period change was primarily due to the change in
accounts receivable and inventory, partially offset by the change in accounts
payable and lower tax payments.
Net cash used by investing activities from continuing operations during the
first quarter was $8.1 million compared to $8.8 million during the prior-year
quarter. The period-over-period change was primarily due to lower capital
expenditures in the current period.
Net cash provided by financing activities from continuing operations during the
first quarter was $0.6 million compared to $0.1 million of cash used during the
prior-year quarter. The period-over-period change was primarily due to higher
proceeds received from the exercise of stock options in the current period.
Defined Benefit Pension Plans
Based on the U.S. advance-funded plans' status during the first quarter and the
prior-year quarter, there were no minimum required payments under ERISA. We made
contributions of $0.2 million and $0.1 million , respectively, to the U.S.
pension plans during the first quarter and prior-year quarter. We intend to fund
non-U.S. pension plans based upon applicable legal requirements, as well as
actuarial and trustee recommendations. We contributed $0.2 million
and $0.5 million , respectively, to the non-U.S. plans during the first quarter
and the prior-year quarter. Please refer to Note 8, "Pension Plans and Other
Postretirement Benefit Plans," in the Notes to the unaudited Consolidated
Financial Statements included in Item 1, "Financial Statements" of this
Quarterly Report on Form 10-Q for further discussion on our pension and other
postretirement benefit plans.
Debt and Other Contractual Obligations
Debt
Total debt outstanding at March 31, 2021 and December 31, 2020 was $351.4
million and $351.7 million , respectively. 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 8, "Debt and Other Borrowings", in the Notes to the
Consolidated Financial Statements included in Item 8, "Financial Statements and
Supplementary Data" of the 2020 Annual Report on Form 10-K.
For further information on our 5.5% Senior Notes and Credit Agreement, please
refer to Note 5, "Debt and Other Borrowings" in the Notes to the unaudited
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. During the first quarter, there were no material
changes to our contractual obligations as previously reported in the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Financial Condition, Liquidity and Capital Resources" in the Annual
Report on Form 10-K for the year ended December 31, 2020 .
Please refer to Note 11, "Commitments and Contingencies", in the Notes to the
unaudited 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.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
For information on our significant accounting policies and estimates, please
refer to Note 1, "Basis of Presentation and Summary of Significant Accounting
and Financial Reporting Policies" in the Notes to the unaudited Consolidated
Financial Statements included in Item 1, "Consolidated Financial Statements" of
this Quarterly Report on Form 10-Q and in the Notes to our audited Consolidated
Financial Statements included in Item 8, "Financial Statements and Supplementary
Data" of our 2020 Annual Report on Form 10-K for the year ended December 31,
2020 .
We grant equity awards to certain key employees which include restricted share
units ("RSUs"), as well as stock options and performance-based units ("PBUs")
with and without 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 . 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, as described in Note 14, "Stock Incentive
Plans", in the Notes to the unaudited Consolidated Financial Statements included
in Item 1, "Consolidated Financial Statements" of this Quarterly Report on Form
10-Q. As a result, these awards are subject to volatility until the payout is
determined at the end of the performance period. A hypothetical change in the
expected payout target of PBUs granted in 2021 and 2020 from 100% to 0% would
result in a stock-based compensation expense reductions of $1.2 million during
the first quarter.
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