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| GRA > SEC Filings for GRA > Form 10-Q on 7-Aug-2009 | All Recent SEC Filings |
7-Aug-2009
Quarterly Report
Results of Operations
Financial Summary
Following is a summary of our financial performance for the three and six month periods ended June 30, 2009 compared with the corresponding prior year periods.
º •
º Sales for the three month period ended June 30, 2009 were
$711.0 million compared with $900.0 million in the prior year period,
a 21.0% decrease (13.4% before the effects of currency translation).
The sales decrease is due primarily to lower sales volumes and
unfavorable currency translation. Sales were down 19.7% in North
America, 25.4% in Europe, and 24.6% in Asia and up 10.9% in Latin
America. Sales in the second quarter of 2009 were up 4.2% compared
with sales in the first quarter of 2009. Excluding sales of
hydroprocessing catalysts, which are subject to uneven order patterns,
sales in the second quarter were up 12.7% compared with sales
calculated on the same basis for the first quarter of 2009.
º •
º Gross profit percentage for the three month period ended June 30, 2009
was 33.8% compared with 30.6% for the prior year period and 24.7% in
the first quarter of 2009. The improvement in gross profit percentage
is due to price increases implemented primarily in the second half of
2008, the decreases in raw materials and energy costs since their peak
in the fourth quarter of 2008, and lower factory overhead expenses
resulting primarily from our restructuring activities.
º •
º Net income attributable to Grace (Grace net income) for the three
month period ended June 30, 2009 was $19.3 million, or $0.26 per
diluted share, compared with $32.1 million, or $0.44 per diluted
share, for the prior year period, a 39.9% decrease. The results for
each period were negatively affected by Chapter 11 expenses,
litigation and other matters not related to core operations. Excluding
Chapter 11 expenses, the loss on noncore activities, and their tax
effects, Grace net income would have been $41.7 million for the three
month period ended June 30, 2009 compared with $57.5 million
calculated on the same basis for the prior year period, a 27.5%
decrease.
º •
º Pre-tax income from core operations (Core EBIT) was $74.4 million for
the three month period ended June 30, 2009 compared with
$101.8 million for the prior year period, a 26.9% decrease. Core EBIT
was up $77.8 million over the first quarter of 2009, primarily due to
a 9.1 point increase in gross profit percentage. This improvement in
gross profit percentage is attributable to lower raw material costs
and lower factory overhead expenses, primarily due to restructuring
activities.
º •
º Sales for the six month period ended June 30, 2009 were
$1,393.1 million compared with $1,659.2 million for the prior year
period, a 16.0% decrease (9.1% before the effects of currency
translation). Grace net loss for the six month period ended June 30,
2009 was $19.6 million, or $0.27 per diluted share, compared with
Grace net income of $49.8 million, or $0.69 per diluted share for the
prior year period. Excluding Chapter 11 expenses, the loss on noncore
activities, and their tax effects, Grace net income would have been
$33.8 million for the six month period ended June 30, 2009 compared
with $92.8 million calculated on the same basis for the prior year
period, a 63.6% decrease. Core EBIT was $71.0 million for the six
month period ended June 30, 2009, down 58.2% from the prior year
period.
º •
º Operating free cash flow was $147.0 million for the six month period
ended June 30, 2009 compared with $65.9 million in the prior year
period, a 123.1% increase. The increase in operating free cash flow
was due primarily to improvements in working capital and lower
capital expenditures, partially offset by the impact of lower Core EBIT. Net cash provided by operating activities was $118.6 million in the six month period ended June 30, 2009 compared to net cash used for operating activities of $85.9 million in the prior year period.
Summary Description of Core Business
We are engaged in specialty chemicals and specialty materials businesses on a worldwide basis through two operating segments.
Grace Davison includes specialty catalysts and materials used in a wide range of industrial applications that we manage through the following product groups:
º •
º Refining Technologies includes fluid catalytic cracking, or FCC, and
hydroprocessing catalysts and chemical additives used by petroleum
refineries;
º •
º Materials Technologies includes engineered materials, coatings and
sealants used in numerous industrial, consumer and packaging
applications; and
º •
º Specialty Technologies includes highly specialized catalysts and
materials used in unique or proprietary applications and markets.
Key external factors for our Refining Technologies product group are the economics of the petroleum refining industry, specifically the impacts of demand for transportation fuels and petrochemical products, and crude oil supply. FCC catalysts and some hydroprocessing catalysts are consumed at a relatively steady rate and replaced regularly, while other hydroprocessing catalysts are replaced in an irregular pattern. Sales of our Materials Technologies and Specialty Technologies product groups are affected by global economic conditions, including the underlying growth rate of targeted end-use applications.
Grace Construction Products includes specialty construction chemicals and specialty building materials used in commercial, infrastructure and residential construction that we manage by geographic region as follows:
º •
º GCP Americas includes products sold to customers in North, Central and
South America;
º •
º GCP Europe includes products sold to customers in Eastern and Western
Europe, the Middle East, Africa and India; and
º •
º GCP Asia Pacific includes products sold to customers in Asia
(excluding India), Australia and New Zealand.
Grace Construction Products sales are heavily influenced by global non-residential construction activity and U.S. residential construction activity.
Global scope
We operate our business on a global scale with approximately 68% of our 2009 sales outside the United States. We conduct business in over 40 countries and in more than 30 currencies. We manage our operating segments on a global basis, to serve global markets. Currency fluctuations in relation to the U.S. dollar affect our reported earnings, net assets and cash flows.
Summary of Financial Information and Metrics
Set forth below are our key operating statistics with dollar and percentage changes for the three months and six months ended June 30, 2009 and 2008. Please refer to this Analysis of Continuing Operations when reading Management's Discussion and Analysis of Financial Condition and Results of Operations.
In the Analysis of Continuing Operations, as well as in the financial information presented throughout Management's Discussion and Analysis of Financial Condition and Results of Operations, we present our financial results in the same manner as results are reviewed internally. We review our results of operations by operating segment and separate "core operations" from "noncore activities." Core operations include the financial results of Grace Davison, Grace Construction Products, and the costs of corporate activities that directly or indirectly support our business operations. In contrast, noncore activities include all other events and transactions not directly related to the generation of operating revenue or the support of our core operations and generally relate to our former operations and products. See "Pre-tax Loss from Noncore Activities" for more information about noncore activities.
We use Core EBIT and operating free cash flow as the performance measures in all significant business decisions and in determining certain incentive compensation. Core EBIT, Core EBIT as a percentage of sales, Core EBIT before depreciation and amortization ("Core EBITDA"), pre-tax loss from noncore activities, net income excluding noncore activities and Chapter 11 expenses, and operating free cash flow do not purport to represent income or cash flow measures as defined under United States Generally Accepted Accounting Principles ("U.S. GAAP"), and you should not consider them an alternative to such measures as an indicator of our performance. We provide these measures so you can distinguish the operating results of our current business base from the income and expenses and cash flows of our past businesses, discontinued products, and corporate legacies, and the effect of our Chapter 11 proceedings, and to ensure that you understand the key data that management uses to evaluate our results of operations. We have also provided reconciliations of these non U.S. GAAP measures to their closest U.S. GAAP measure.
Core EBIT has material limitations as an operating performance measure because it excludes income and expenses that comprise our noncore activities, which include, among other things, provisions for asbestos-related litigation and environmental remediation, income from insurance settlements, and legal costs, which have been material components of our net income. Core EBITDA also has material limitations as an operating performance measure since it excludes the impact of depreciation and amortization expense. Our business is substantially dependent on the successful deployment of our capital assets; therefore, depreciation and amortization expense is a necessary element of our costs and ability to generate revenue. We compensate for the limitations of these measurements by using these indicators together with net income as measured under U.S. GAAP to present a complete analysis of our results of operations. You should evaluate Core EBIT and Core EBITDA in conjunction with net income for a more complete analysis of our financial results.
Operating free cash flow also has material limitations as an operating performance measure because it excludes cash paid for income taxes, cash payments under defined benefit pension arrangements and post retirement benefit plans, and cash flows from our noncore activities, including, among other things, provisions for asbestos-related litigation and environmental remediation and legal defense costs, and costs related to our Chapter 11 proceedings, which have been material components of our cash flow. We compensate for the limitations of this measure by using it together with net cash flow provided by (used for) operating activities as defined under U.S. GAAP to present a complete analysis of our cash flows. You should evaluate operating free cash flow in conjunction with net cash flow provided by (used for) operating activities for a more complete analysis of our cash flow results.
Three Months Ended June 30, Six Months Ended June 30,
$ % $ %
Change Change Change Change
Analysis of Continuing Operations Fav Fav Fav Fav
(In millions) 2009 2008 (Unfav) (Unfav) 2009 2008 (Unfav) (Unfav)
Net sales:
Grace Davison $ 477.9 $ 584.8 $ (106.9 ) (18.3 )% $ 955.7 $ 1,081.9 $ (126.2 ) (11.7 )%
Refining Technologies 246.9 285.8 (38.9 ) (13.6 )% 523.6 522.7 0.9 0.2 %
Materials Technologies 146.9 194.6 (47.7 ) (24.5 )% 280.9 364.9 (84.0 ) (23.0 )%
Specialty Technologies 84.1 104.4 (20.3 ) (19.4 )% 151.2 194.3 (43.1 ) (22.2 )%
Grace Construction Products 233.1 315.2 (82.1 ) (26.0 )% 437.4 577.3 (139.9 ) (24.2 )%
GCP Americas 119.9 163.4 (43.5 ) (26.6 )% 231.7 295.9 (64.2 ) (21.7 )%
GCP Europe 80.1 113.4 (33.3 ) (29.4 )% 143.0 211.0 (68.0 ) (32.2 )%
GCP Asia 33.1 38.4 (5.3 ) (13.8 )% 62.7 70.4 (7.7 ) (10.9 )%
Total Grace net sales $ 711.0 $ 900.0 $ (189.0 ) (21.0 )% $ 1,393.1 $ 1,659.2 $ (266.1 ) (16.0 )%
Net Sales by Region:
North America $ 241.6 $ 300.7 $ (59.1 ) (19.7 )% $ 500.6 $ 574.3 $ (73.7 ) (12.8 )%
Europe Africa 274.0 367.1 (93.1 ) (25.4 )% 521.0 691.1 (170.1 ) (24.6 )%
Asia Pacific 132.1 175.1 (43.0 ) (24.6 )% 253.3 287.3 (34.0 ) (11.8 )%
Latin America 63.3 57.1 6.2 10.9 % 118.2 106.5 11.7 11.0 %
Total $ 711.0 $ 900.0 $ (189.0 ) (21.0 )% $ 1,393.1 $ 1,659.2 $ (266.1 ) (16.0 )%
Pre-tax operating income:
Grace Davison(a) $ 81.8 $ 84.7 $ (2.9 ) (3.4 )% $ 121.8 $ 159.0 $ (37.2 ) (23.4 )%
Grace Construction Products(b) 34.0 52.2 (18.2 ) (34.9 )% 46.3 78.5 (32.2 ) (41.0 )%
Corporate costs (19.5 ) (18.8 ) (0.7 ) (3.7 )% (39.0 ) (39.6 ) 0.6 1.5 %
Restructuring expenses(f) (5.9 ) (5.2 ) (0.7 ) (13.5 )% (24.0 ) (5.2 ) (18.8 ) NM
Defined benefit pension expense(c) (16.0 ) (11.1 ) (4.9 ) (44.1 )% (34.1 ) (22.7 ) (11.4 ) (50.2 )%
Core EBIT 74.4 101.8 (27.4 ) (26.9 )% 71.0 170.0 (99.0 ) (58.2 )%
Pre-tax income (loss) from noncore
activities(f) (21.3 ) (13.1 ) (8.2 ) (62.6 )% (61.2 ) (13.3 ) (47.9 ) NM
Interest expense, net (9.0 ) (13.3 ) 4.3 32.3 % (18.0 ) (27.3 ) 9.3 34.1 %
Income (loss) before Chapter 11
expenses and income taxes 44.1 75.4 (31.3 ) (41.5 )% (8.2 ) 129.4 (137.6 ) (106.3 )%
Chapter 11 expenses, net of interest
income (8.0 ) (18.0 ) 10.0 55.6 % (18.0 ) (36.4 ) 18.4 50.5 %
Benefit from (provision for) income
taxes (16.8 ) (25.3 ) 8.5 33.6 % 6.6 (43.2 ) 49.8 115.3 %
Net income (loss) attributable to
W. R. Grace & Co. shareholders $ 19.3 $ 32.1 $ (12.8 ) (39.9 )% $ (19.6 ) $ 49.8 $ (69.4 ) (139.4 )%
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Three Months Ended June 30, Six Months Ended June 30,
$ Change % Change $ Change % Change
Analysis of Continuing Operations Fav Fav Fav Fav
(In millions) 2009 2008 (Unfav) (Unfav) 2009 2008 (Unfav) (Unfav)
Reconciliation of Net Income (Loss) attributable to W. R. Grace & Co. shareholders to Net Income Excluding Noncore Activities
and Chapter 11 Expenses, net:
Net income (loss) attributable to
W. R. Grace & Co. shareholders $ 19.3 $ 32.1 $ (12.8 ) (39.9 )% $ (19.6 ) $ 49.8 $ (69.4 ) (139.4 )%
Pre-tax loss from noncore
activities 21.3 13.1 8.2 62.6 % 61.2 13.3 47.9 NM
Chapter 11 expenses, net 8.0 18.0 (10.0 ) (55.6 )% 18.0 36.4 (18.4 ) (50.5 )
Tax effects of noncore and
Chapter 11 items (6.9 ) (5.7 ) (1.2 ) (21.1 )% (25.8 ) (6.7 ) (19.1 ) NM
Net income excluding noncore
activities and Chapter 11
expenses, net $ 41.7 $ 57.5 $ (15.8 ) (27.5 )% $ 33.8 $ 92.8 $ (59.0 ) (63.6 )%
Reconciliation of Core EBIT to income (loss) before income taxes:
Core EBIT $ 74.4 $ 101.8 $ (27.4 ) (26.9 )% $ 71.0 $ 170.0 $ (99.0 ) (58.2 )%
Net income (loss) attributable to
noncontrolling interests 3.4 4.4 (1.0 ) (22.7 )% 3.5 7.3 (3.8 ) (52.1 )%
Interest expense, net (9.0 ) (13.3 ) 4.3 32.3 % (18.0 ) (27.3 ) 9.3 34.1 %
Chapter 11 expenses (8.0 ) (18.0 ) 10.0 55.6 % (18.0 ) (36.4 ) 18.4 50.5 %
Pre-tax income (loss) from
noncore activities(f) (21.3 ) (13.1 ) (8.2 ) (62.6 )% (61.2 ) (13.3 ) (47.9 ) NM
Income (loss) before income taxes $ 39.5 $ 61.8 $ (22.3 ) (36.1 )% $ (22.7 ) $ 100.3 $ (123.0 ) (122.6 )%
Reconciliation of operating free cash flow to net cash provided by (used for) operating activities:
Operating free cash flow $ 147.0 $ 65.9 $ 81.1
Chapter 11 expenses paid (25.1 ) (36.7 ) 11.6
Capital expenditures 36.5 58.7 (22.2 )
Dividends paid to noncontrolling
interests in consolidated
entities 13.7 13.3 0.4
Income taxes paid, net of refunds 0.4 (32.4 ) 32.8
Payments under defined benefit
pension arrangements and
postretirement benefit plans (25.0 ) (45.8 ) 20.8
Cash paid to resolve
contingencies subject to
Chapter 11 - (101.6 ) 101.6
Cash paid for environmental and
divestment reserves (3.7 ) (1.3 ) (2.4 )
Noncore and other activities (25.2 ) (6.0 ) (19.2 )
Net cash provided by (used for)
operating activities $ 118.6 $ (85.9 ) $ 204.5
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Three Months Ended June 30, Six Months Ended June 30,
$ Change % Change $ Change % Change
Analysis of Continuing Operations Fav Fav Fav Fav
(In millions) 2009 2008 (Unfav) (Unfav) 2009 2008 (Unfav) (Unfav)
Key Financial Measures:
Core EBIT as a percentage of
sales:
Grace Davison 17.1 % 14.5 % NM 2.6 pts 12.7 % 14.7 % NM (2.0 ) pts
Grace Construction Products 14.6 % 16.6 % NM (2.0 ) pts 10.6 % 13.6 % NM (3.0 ) pts
Total Core Operations 10.5 % 11.3 % NM (0.8 ) pts 5.1 % 10.2 % NM (5.1 ) pts
Total Core Operations adjusted
for profit sharing of joint
ventures(d) 10.9 % 11.8 % NM (0.9 ) pts 5.3 % 10.7 % NM (5.4 ) pts
Core EBITDA $ 103.2 $ 132.5 $(29.3) (22.1 )% $ 127.3 $ 230.9 $ (103.6 ) (44.9 )%
As a percentage of sales 14.5 % 14.7 % NM (0.2 ) pts 9.1 % 13.9 % NM (4.8 ) pts
Depreciation and amortization $ 28.8 $ 30.7 $1.9 6.2 % $ 56.3 $ 60.9 $ 4.6 7.6 %
Gross profit percentage (sales
less cost of goods sold as a
percent of sales)(e):
Grace Davison 32.3 % 28.2 % NM 4.1 pts 27.3 % 29.4 % NM (2.1 ) pts
Grace Construction Products 37.4 % 36.2 % NM 1.2 pts 34.5 % 35.0 % NM (0.5 ) pts
Total Grace 33.8 % 30.6 % NM 3.2 pts 29.4 % 31.0 % NM (1.6 ) pts
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º Note
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º Note
º (b): Grace Construction Products pre-tax operating income includes
noncontrolling interests related to consolidated joint ventures.
º Note
º (c): Pension expense includes all defined benefit pension expense of core
operations for all periods presented. These amounts were previously
allocated to the operating segments and corporate.
º Note
º (d): Reflects the add-back of noncontrolling interests expense.
º Note
º (e): Includes depreciation and amortization related to manufacturing of
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º Note
º (f): Restructuring expenses included in pre-tax income from core
operations above have been reflected by operating segment in Note 16 as
follows: For the three months ended June 30, 2009, Grace Davison
$1.0 million, Grace Construction Products $3.4 million, and Corporate
$1.5 million. For the six months ended June 30, 2009, Grace Davison
$12.7 million, Grace Construction Products $8.1 million, and Corporate
$3.2 million. An additional $1.0 million, reflected in pre-tax income
(loss) from noncore activities above, is also reflected in Corporate in
Note 16. For the three and six months ended June 30, 2008, Grace
Construction Products $4.7 million, and Corporate $0.5 million.
NM-Not Meaningful
Grace Overview
Following is an overview of our financial performance for the three and six month periods ended June 30, 2009 as compared to the corresponding prior year periods.
Net Sales
Grace Net Sales-Quarter Grace Net Sales-YTD
($ in millions) ($ in millions)
[[Image Removed: CHART]] [[Image Removed: CHART]]
The following table identifies the increase or decrease in sales
attributable to changes in sales volume, product price and/or mix, metals
volumes and prices, and the impact of foreign currency translation for the three
month period ended June 30, 2009 from the prior year period.
Three Months Ended June 30, 2009
as a Percentage Increase (Decrease) from
Three Months Ended June 30, 2008
Currency
Net Sales Variance Analysis Volume Price/Mix Translation Metals Total
Grace Davison (9.8 )% 5.5 % (7.7 )% (6.3 )% (18.3 )%
Grace Construction Products (21.5 )% 2.8 % (7.3 )% N/A (26.0 )%
Net sales (13.9 )% 4.6 % (7.6 )% (4.1 )% (21.0 )%
By Region:
North America (22.7 )% 4.8 % (0.7 )% (1.1 )% (19.7 )%
Europe Africa (13.3 )% 3.7 % (13.2 )% (2.6 )% (25.4 )%
Asia Pacific (11.0 )% 5.0 % (5.2 )% (13.4 )% (24.6 )%
Latin America 19.6 % 8.1 % (15.2 )% (1.6 )% 10.9 %
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Sales for the three month period ended June 30, 2009 were unfavorably affected by the global economic slowdown, which resulted in reduced sales volumes, and by foreign currency translation, partly offset by higher selling prices. Pricing actions were implemented primarily in the second half of 2008 to offset increased raw materials and energy costs and to reflect our upgrade of product technologies.
Sales volumes for the 2009 second quarter were up in all product lines except hydroprocessing catalysts, which are subject to uneven order patterns, from the 2009 first quarter.
Six Months Ended June 30, 2009
as a Percentage Increase (Decrease) from
Six Months Ended June 30, 2008
Currency
Net Sales Variance Analysis Volume Price/Mix Translation Metals Total
Grace Davison (7.7 )% 6.7 % (6.7 )% (4.0 )% (11.7 )%
Grace Construction Products (20.5 )% 3.5 % (7.2 )% N/A (24.2 )%
Net sales (12.2 )% 5.7 % (6.9 )% (2.6 )% (16.0 )%
By Region:
North America (18.0 )% 7.2 % (0.8 )% (1.2 )% (12.8 )%
Europe Africa (14.7 )% 3.1 % (11.6 )% (1.4 )% (24.6 )%
Asia Pacific (5.2 )% 6.8 % (4.5 )% (8.9 )% (11.8 )%
Latin America 16.2 % 11.1 % (15.6 )% (0.7 )% 11.0 %
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Sales for the six month period ended June 30, 2009 were unfavorably affected by the global economic slowdown, which resulted in reduced sales volumes, and by foreign currency translation, partly offset by higher selling prices.
Pre-tax Income from Core Operations (Core EBIT)
Grace Grace
Core EBIT-Quarter Core EBIT-YTD
($ in millions) ($ in millions)
[[Image Removed: CHART]] [[Image Removed: CHART]]
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Core EBIT was $74.4 million for the three month period ended June 30, 2009 compared with $101.8 million for the prior year period, a 26.9% decrease. Core EBIT for the three month period ended June 30, 2009 decreased compared to the prior year period due to the lower sales volumes and unfavorable foreign currency translation, partly offset by the favorable impact of higher selling prices, lower raw material costs, and reduced operating expenses, resulting primarily from our restructuring activities. Operating margin was 10.5% for the three month period ended June 30, 2009 compared to 11.3% for the prior year period.
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