W. R. GRACE & CO. References
We generally refer to the quarter endedJune 30, 2021 , as the "second quarter," the quarter endedJune 30, 2020 , as the "prior-year quarter," the quarter endedMarch 31, 2021 , as the "2021 first quarter," the six months endedJune 30, 2021 , as the "six months," and the six months endedJune 30, 2020 , as the "prior-year period." Our references to "advanced economies" and "emerging regions" refer to classifications established by theInternational Monetary Fund . See Analysis of Operations for a discussion of our non-GAAP performance measures. Results of Operations Second Quarter Performance Summary Following is a summary of our financial performance for the second quarter compared with the prior-year quarter. •Net sales increased 22.5% to$512.9 million . •Net income attributable to Grace shareholders was$45.4 million . •Adjusted EBIT1 increased 70.0% to$109.0 million . •Diluted earnings per share was$0.68 per diluted share. •Adjusted EPS1 increased 106.1% to$1.01 per diluted share. 1 Non-GAAP performance measures further discussed below. Recent Developments Merger Agreement with affiliates of Standard Industries OnApril 26, 2021 , Grace announced that it had entered into a definitive agreement (the "Merger Agreement") providing for the acquisition of the Company by an affiliate ofStandard Industries Holdings Inc. ("Standard Industries "), subject to the terms and conditions contained therein (the "Merger"). Under the terms of the Merger Agreement, Standard Industries, through its affiliates, would acquire all of the outstanding shares of Grace common stock for$70.00 per share in cash. Grace also announced that Standard Industries' related investment platform, 40North Latitude Master Fund Ltd. ("40 North"), which owns approximately 14.9% of the Company's outstanding common stock, has entered into a voting agreement pursuant to which 40 North has agreed to vote its shares of Grace common stock in favor of the Merger. Summary Description of Business We are engaged in specialty chemicals and specialty materials businesses on a worldwide basis through our two reportable segments. Grace Catalysts Technologies produces and sells catalysts and related products and technologies used in petrochemical, refining, and other chemical manufacturing applications, as follows: •Polyolefin catalysts and catalyst supports, also called specialty catalysts (SC), for the production of polyethylene (PE) and polypropylene (PP) thermoplastic resins, which can be customized to enhance the performance of a wide range of industrial and consumer end-use applications including high pressure pipe, geomembranes, food packaging, automotive parts, medical devices, and textiles. High-activity, non-phthalate catalysts allow customers to produce phthalate-free PP products and cleaner, clearer PP products. Our catalysts also improve resin properties that allow for the lightweighting of automobiles by replacing steel parts with PP while meeting demanding performance standards of automakers. •Gas-phase polypropylene process technology, which provides our licensees with a cost-effective, flexible, and reliable capability to manufacture polypropylene products having a wide spectrum of performance attributes, enabling customers to manufacture products for a broad array of end-use applications. This capability, coupled with a complete family of catalysts and donors with a suite of 36 -------------------------------------------------------------------------------- Table of Contents value-added solutions, enables our licensees to compete effectively in their markets over the lifetime of the plant. We are the leading independent supplier that provides both PP process technology licenses and catalysts. •Fluid catalytic cracking catalysts, also called FCC catalysts, that help to "crack" the hydrocarbon chains in distilled crude oil to produce transportation fuels, such as gasoline and diesel fuels, and feeds for production of petrochemicals; and FCC additives used to reduce sulfur in gasoline, maximize propylene production from refinery FCC units, and reduce emissions of sulfur oxides, nitrogen oxides, andcarbon monoxide from refinery FCC units. •Hydroprocessing catalysts (HPC), most of which are marketed through ourAdvanced Refining Technologies LLC ("ART") joint venture withChevron U.S.A. Inc. ("Chevron"), that are used in process reactors to upgrade heavy oils into lighter, more useful products, enabling less expensive feedstock usage in the petroleum refining process, and to produce products that meet more stringent environmental regulations. These catalysts and solutions allow our customers to improve their profitability in the production of cleaner petroleum-based fuels to meet regulatory and fuel quality standards. (We hold a 50% economic interest in ART, which is not consolidated in our financial statements, so ART's sales are excluded from our sales.) •Chemical catalysts, which include hydrogenation and dehydrogenation catalyst products. These catalysts can be customized for use in a variety of petrochemical chain conversions as well as fine chemical production. Grace Materials Technologies produces and sells specialty materials, which are either silica-based or complex organic molecules, that can be used in pharma & consumer, coatings, and chemical process applications, including as follows: •Pharma & Consumer, specialty materials used as additives, intermediates and purification aids for pharmaceuticals, nutraceuticals, toothpaste, beer, food, and cosmetic segments. Our Fine Chemicals business, including Fine Chemical Manufacturing Services, is a leading fully-integratedContract Development and Manufacturing Organization inNorth America specializing in active pharmaceutical ingredients (APIs), regulatory starting materials (RSMs), and intermediates. •Coatings, functional additives for wood, coil, general industrial, and architectural coatings that provide surface effects and corrosion protection for metal substrates. •Chemical process, functional materials for use in plastics, rubber, tire, and metal casting, and adsorbent products for petrochemical, natural gas, and more specialized applications. Global Scope We operate our business on a global scale with approximately 73% of our annual 2020 sales and 73% of our six months sales to customers located outsidethe United States . We operate and/or sell to customers in over 60 countries and do business in over 30 currencies. We manage our operating segments on a global basis, to serve global markets. Currency fluctuations affect our reported results of operations, cash flows, and financial position. Analysis of Operations We have set forth in the table below our key operating statistics with percentage changes for the second quarter and six months compared with the corresponding prior-year periods. Please refer to this Analysis of Operations when reviewing this Management's Discussion and Analysis of Financial Condition and Results of Operations. In the table we present financial information in accordance withU.S. GAAP, as well as the non-GAAP financial information described below. We believe that the non-GAAP financial information provides useful supplemental information about the performance of our businesses, improves period-to-period comparability, and provides clarity on the information our management uses to evaluate the performance of our businesses. In the table, we have provided reconciliations of these non-GAAP financial measures to the most directly comparable financial measure calculated and presented in accordance withU.S. GAAP. The non-GAAP financial measures should not be considered as a substitute for financial measures calculated in accordance withU.S. GAAP, and the 37 -------------------------------------------------------------------------------- Table of Contents financial results calculated in accordance withU.S. GAAP and reconciliations from those results should be evaluated carefully. We define Adjusted EBIT (a non-GAAP financial measure) to be net income attributable toW. R. Grace & Co. shareholders adjusted for interest income and expense; income taxes; costs related to legacy matters; restructuring and repositioning expenses and asset impairments; pension costs other than service and interest costs, expected returns on plan assets, and amortization of prior service costs/credits; gains and losses on sales and exits of businesses, product lines, and certain other investments; third-party acquisition-related costs and the amortization of acquired inventory fair value adjustment; gains and losses on modification or extinguishment of debt; the effects of these items on equity in earnings of unconsolidated affiliate; and certain other items that are not representative of underlying trends. We define Adjusted EBITDA (a non-GAAP financial measure) to be Adjusted EBIT adjusted for depreciation and amortization, and depreciation and amortization included in equity in earnings of unconsolidated affiliate (collectively, Adjusted Depreciation and Amortization). We define Adjusted EBIT Return onInvested Capital (a non-GAAP financial measure) to be Adjusted EBIT (on a trailing four quarters basis) divided byAdjusted Invested Capital , which is defined as equity adjusted for debt; underfunded and unfunded defined benefit pension plans; liabilities related to legacy matters; cash, cash equivalents, and restricted cash; net income tax assets; and certain other assets and liabilities. We define Adjusted Gross Margin (a non-GAAP financial measure) to be gross margin adjusted for pension-related costs included in cost of goods sold, the amortization of acquired inventory fair value adjustment, write-offs of inventory related to exits of businesses and product lines and significant manufacturing process changes, and certain other items that are not representative of underlying trends. We define Adjusted Earnings Per Share (EPS) (a non-GAAP financial measure) to be diluted EPS adjusted for costs related to legacy matters; restructuring and repositioning expenses and asset impairments; pension costs other than service and interest costs, expected returns on plan assets, and amortization of prior service costs/credits; gains and losses on sales and exits of businesses, product lines and certain other investments; third-party acquisition-related costs and the amortization of acquired inventory fair value adjustment; gains and losses on modification or extinguishment of debt; certain other items that are not representative of underlying trends; certain discrete tax items; and income tax expense related to historical tax attributes. We define the change in net sales on a constant currency basis (a non-GAAP financial measure) to be the period-over-period change in net sales calculated using the foreign currency exchange rates that were in effect during the previous comparable period. "Legacy matters" include legacy (i) product, (ii) environmental, and (iii) other liabilities, relating to past activities of Grace. We use Adjusted EBIT as a performance measure in significant business decisions and in determining certain incentive compensation. We use Adjusted EBIT as a performance measure because it provides improved period-to-period comparability for decision making and compensation purposes, and because it better measures the ongoing earnings results of our strategic and operating decisions by excluding the earnings effects of our legacy matters; restructuring and repositioning activities; certain acquisition-related items; and certain other items that are not representative of underlying trends. We use Adjusted EBITDA, Adjusted EBIT Return onInvested Capital , Adjusted Gross Margin, and Adjusted EPS as performance measures and may use these measures in determining certain incentive compensation. We use Adjusted EBIT Return onInvested Capital in making operating and investment decisions and in balancing the growth and profitability of our operations. We use the change in net sales on a constant currency basis as a performance measure to compare current period financial performance to historical financial performance by excluding the impact of foreign currency exchange rate fluctuations that are not representative of underlying business trends and are largely outside of our control. Adjusted EBIT, Adjusted EBITDA, Adjusted EBIT Return onInvested Capital , Adjusted Gross Margin, Adjusted EPS, and the change in net sales on a constant currency basis are non-GAAP financial measures; do 38 -------------------------------------------------------------------------------- Table of Contents not purport to represent income measures as defined underU.S. GAAP; and should not be used as alternatives to such measures as an indicator of our performance. These measures are provided to investors and others to improve the period-to-period comparability and peer-to-peer comparability of our financial results, and to ensure that investors understand the information we use to evaluate the performance of our businesses. They distinguish the operating results of Grace's current business base from the costs of Grace's legacy matters; restructuring and repositioning activities; and certain other items. These measures may have material limitations due to the exclusion or inclusion of amounts that are included or excluded, respectively, in the most directly comparable measures calculated and presented in accordance withU.S. GAAP, and thus investors and others should review carefully our financial results calculated in accordance withU.S. GAAP. Adjusted EBIT has material limitations as an operating performance measure because it excludes costs related to legacy matters, and may exclude income and expenses from restructuring, repositioning, and other activities, which historically have been material components of our net income. Adjusted EBITDA also has material limitations as an operating performance measure because it excludes the impact of depreciation and amortization expense. Our business is substantially dependent on the successful deployment of capital, and depreciation and amortization expense is a necessary element of our costs. We compensate for the limitations of these measurements by using these indicators together with net income as measured underU.S. GAAP to present a complete analysis of our results of operations. Adjusted EBIT and Adjusted EBITDA should be evaluated together with net income and net income attributable to Grace shareholders, measured underU.S. GAAP, for a complete understanding of our results of operations. 39 -------------------------------------------------------------------------------- Table of Contents Analysis of Operations Three Months Ended June 30, Six Months Ended June 30, (In millions, except per share amounts) 2021 2020 % Change 2021 2020 % Change Net sales: Catalysts Technologies$ 373.3 $ 309.0 20.8 %$ 702.9 $ 617.0 13.9 % Materials Technologies 139.6 109.7 27.3 % 266.7 223.2 19.5 % Total Grace net sales$ 512.9 $ 418.7 22.5 %$ 969.6 $ 840.2 15.4 % Net sales by region: North America$ 157.5 $ 130.2 21.0 %$ 283.9 $ 250.4 13.4 % Europe Middle East Africa 205.7 157.1 30.9 % 389.1 338.7 14.9 % Asia Pacific 125.2 112.7 11.1 % 248.4 213.0 16.6 % Latin America 24.5 18.7 31.0 % 48.2 38.1 26.5 % Total net sales by region$ 512.9 $ 418.7 22.5 %$ 969.6 $ 840.2 15.4 % Performance measures: Adjusted EBIT(A): Catalysts Technologies segment operating income$ 102.4 $ 71.7 42.8 %$ 178.2 $ 153.7 15.9 % Materials Technologies segment operating income 26.3 12.6 108.7 % 53.1 31.6 68.0 % Corporate costs (17.5) (16.7) (4.8) % (32.9) (32.3) (1.9) % Certain pension costs(B) (2.2) (3.5) 37.1 % (4.2) (6.6) 36.4 % Adjusted EBIT 109.0 64.1 70.0 % 194.2 146.4 32.7 % Gain on curtailment ofU.S. salaried pension plan - - 25.6 - Restructuring and repositioning expenses (11.8) (21.4) (24.6) (24.1) Pension MTM adjustment and other related costs, net - - 13.7 - Costs related to legacy matters (4.6) (2.8) (9.2) (5.5) Third-party acquisition-related costs (6.7) (2.0) (8.0) (3.5) Amortization of acquired inventory fair value adjustment (2.2) - (2.2) - Taxes and interest included in equity in earnings of unconsolidated affiliate (0.3) (0.2) (0.5) (0.2) Inventory write-offs (0.1) (19.7) (0.1) (19.7) Interest expense, net (19.7) (18.9) (4.2) % (38.6) (36.6) (5.5) % (Provision for) benefit from income taxes (18.2) (6.4) (184.4) % (36.5) (22.1) (65.2) % Net income (loss) attributable to W. R. Grace & Co. shareholders$ 45.4 $ (7.3) NM$ 113.8 $ 34.7 NM Diluted EPS$ 0.68 $ (0.11) NM$ 1.71 $ 0.52 NM Adjusted EPS$ 1.01 $ 0.49 106.1 %$ 1.74 $ 1.20 45.0 % 40
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Table of Contents Analysis of Operations Three Months Ended June 30, Six Months Ended June 30, (In millions) 2021 2020 % Change 2021 2020 % Change Adjusted performance measures: Gross Margin: Catalysts Technologies 42.7 % 36.6 % 610 bps 41.5 % 38.7 % 280 bps Materials Technologies 35.1 % 26.9 % 820 bps 35.9 % 30.0 % 590 bps Adjusted Gross Margin 40.6 % 34.1 % 650 bps 40.0 % 36.4 % 360 bps Weather-related impacts in cost of goods sold (1.4) % - % (140) bps (1.3) % - % (130) bps Pension costs in cost of goods sold (0.8) % (0.9) % 10 bps (0.9) % (0.9) % - bps Amortization of acquired inventory fair value adjustment (0.4) % - % (40) bps (0.2) % - % (20) bps Inventory write-offs - % (4.7) % 470 bps - % (2.3) % 230 bps Total Grace 38.0 % 28.5 % 950 bps 37.6 % 33.2 % 440 bps Adjusted EBIT: Catalysts Technologies$ 102.4 $ 71.7 42.8 %$ 178.2 $ 153.7 15.9 % Materials Technologies 26.3 12.6 108.7 % 53.1 31.6 68.0 % Corporate, pension, and other (19.7) (20.2) 2.5 % (37.1) (38.9) 4.6 % Total Grace$ 109.0 $ 64.1 70.0 %$ 194.2 $ 146.4 32.7 % Depreciation and amortization: Catalysts Technologies depreciation and amortization$ 21.8 $ 20.6 5.8 %$ 44.0 $ 41.3 6.5 % Depreciation and amortization included in equity in earnings of unconsolidated affiliate 1.8 0.4 NM 2.9 0.8 NM Catalysts Technologies 23.6 21.0 12.4 % 46.9 42.1 11.4 % Materials Technologies 6.3 3.5 80.0 % 11.4 7.0 62.9 % Corporate 1.2 1.2 - % 2.0 2.6 (23.1) % Adjusted Depreciation and Amortization 31.1 25.7 21.0 % 60.3 51.7 16.6 % Depreciation and amortization included in equity in earnings of unconsolidated affiliate (1.8) (0.4) NM (2.9) (0.8) NM Total Grace$ 29.3 $ 25.3 15.8 %$ 57.4 $ 50.9 12.8 % Adjusted EBITDA: Catalysts Technologies$ 126.0 $ 92.7 35.9 %$ 225.1 $ 195.8 15.0 % Materials Technologies 32.6 16.1 102.5 % 64.5 38.6 67.1 % Corporate, pension, and other (18.5) (19.0) 2.6 % (35.1) (36.3) 3.3 % Total Grace$ 140.1 $ 89.8 56.0 %$ 254.5 $ 198.1 28.5 % Adjusted EBIT margin: Catalysts Technologies 27.4 % 23.2 % 420 bps 25.4 % 24.9 % 50 bps Materials Technologies 18.8 % 11.5 % 730 bps 19.9 % 14.2 % 570 bps Total Grace 21.3 % 15.3 % 600 bps 20.0 % 17.4 % 260 bps Net income margin 8.9 % (1.7) % 1060 bps 11.7 % 4.1 % 760 bps Adjusted EBITDA margin: Catalysts Technologies 33.8 % 30.0 % 380 bps 32.0 % 31.7 % 30 bps Materials Technologies 23.4 % 14.7 % 870 bps 24.2 % 17.3 % 690 bps Total Grace 27.3 % 21.4 % 590 bps 26.2 % 23.6 % 260 bps 41
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Table of Contents Analysis of Operations Four Quarters Ended June 30, (In millions) 2021 2020
Calculation of Adjusted EBIT Return on
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