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| GRA > SEC Filings for GRA > Form 10-Q on 6-Nov-2009 | All Recent SEC Filings |
6-Nov-2009
Quarterly Report
Results of Operations
Financial Summary
Following is a summary of our financial performance for the three and nine month periods ended September 30, 2009 compared with the corresponding prior year periods.
º •
º Sales for the three month period ended September 30, 2009 were
$753.6 million compared with $889.4 million in the prior year period,
a 15.3% decrease. The sales decrease was primarily due to lower sales
volumes (9.8%), lower cost of metals passed through to customers
(4.8%), and unfavorable currency translation (4.1%), partly offset by
price increases (3.4%). Sales were down 22.2% in North America, 12.8%
in Europe, and 12.9% in Asia and up 1.0% in Latin America. Sales in
the third quarter of 2009 were up 6.0% compared with sales in the
second quarter of 2009 due primarily to increased customer demand.
º •
º Gross profit percentage for the three month period ended September 30,
2009 was 34.8% compared with 29.1% for the prior year period and 33.8%
in the second 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. The decline in raw materials and energy costs that Grace
has experienced since late 2008 abated during the third quarter. Grace
experienced increasing costs for certain raw materials during the
quarter though raw materials and energy costs remained below prior
year levels.
º •
º Pre-tax income from core operations (Core EBIT) was $107.9 million for
the three month period ended September 30, 2009 compared with
$82.4 million for the prior year period, a 30.9% increase. Core EBIT
for the three month period ended September 30, 2009 included
$22.2 million of gains on product line divestitures and $1.9 million
of restructuring expenses. Excluding these two items, Core EBIT for
the three month period ended September 30, 2009 increased 6.3% over
the prior year period. Core EBIT margin was 14.3% compared with 9.3%
in the prior year quarter and 10.5% in the second quarter of 2009.
Core EBIT margin in the third quarter was positively affected by
2.9 percentage points due to the gains on the previously announced
product line divestitures.
º •
º Net income attributable to Grace (Grace net income) for the three
month period ended September 30, 2009 was $44.4 million, or $0.61 per
diluted share, compared with $28.3 million, or $0.39 per diluted
share, for the prior year period, a 56.9% increase. 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 $65.9 million for the three
month period ended September 30, 2009 compared with $45.4 million
calculated on the same basis for the prior year period, a 45.2%
increase. Grace net income for the three month period ending
September 30, 2009 included $22.2 million ($14.4 million after taxes)
of gains on product line divestitures.
º •
º Sales for the nine month period ended September 30, 2009 were
$2,146.7 million compared with $2,548.6 million for the prior year
period, a 15.8% decrease. Grace net income for the nine month period
ended September 30, 2009 was $24.8 million, or $0.34 per diluted
share, compared with Grace net income of $78.1 million, or $1.07 per
diluted share, for the prior year period.
º •
º Core EBIT for the nine month period ended September 30, 2009 was
$178.9 million, down 29.1% from the prior year period. Adjusted
operating cash flow was $338.3 million for the nine month period ended
September 30, 2009 compared with $172.0 million in the prior year
period, a 96.7% increase. The increase in adjusted operating cash flow
was primarily due to improvements in working capital and lower capital
expenditures, partially offset by the impact of lower Core EBIT.
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 nine months ended September 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 define Core EBIT (a non-U.S. GAAP measure) to be net income adjusted for income taxes, Chapter 11 expenses, interest income and expense, and pre-tax loss from noncore activities.
We define adjusted operating cash flow (a non-U.S. GAAP measure) to be Core EBIT before depreciation and amortization ("Core EBITDA") plus pension expense of core operations plus or minus the change in net working capital and specified other assets and liabilities of our core operations minus capital expenditures as set forth in the table below. Adjusted operating cash flow excludes income taxes paid (net of refunds), payments under defined benefit pension arrangements and post retirement benefit plans, cash paid for Chapter 11 expenses and contingencies, and cash paid for other noncore activities.
We use Core EBIT and adjusted operating cash flow as the performance measures in significant business decisions and in determining certain incentive compensation. Core EBIT, Core EBIT as a percentage of sales, Core EBITDA, pre-tax loss from noncore activities, net income excluding noncore activities and Chapter 11 expenses, and adjusted operating cash flow do not purport to represent income or cash flow measures as defined under 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 in the following tables 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. Additionally, 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.
Adjusted operating 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, costs for asbestos-related litigation and environmental remediation and legal defense costs, and costs related to our Chapter 11 proceedings, which have been material. We compensate for the limitations of this measure by using it together with net income as defined under U.S. GAAP to present a complete analysis of our results of operations. You should evaluate adjusted operating cash flow in conjunction with net income for a more complete analysis of our results of operations.
Three Months Ended Nine Months Ended
September 30, September 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 $ 518.9 $ 579.7 $ (60.8 ) (10.5 )% $ 1,474.6 $ 1,661.6 $ (187.0 ) (11.3 )%
Refining Technologies 267.9 305.3 (37.4 ) (12.3 )% 791.5 828.0 (36.5 ) (4.4 )%
Materials Technologies 164.3 183.4 (19.1 ) (10.4 )% 445.2 548.3 (103.1 ) (18.8 )%
Specialty Technologies 86.7 91.0 (4.3 ) (4.7 )% 237.9 285.3 (47.4 ) (16.6 )%
Grace Construction Products 234.7 309.7 (75.0 ) (24.2 )% 672.1 887.0 (214.9 ) (24.2 )%
Americas 119.5 164.4 (44.9 ) (27.3 )% 351.2 460.3 (109.1 ) (23.7 )%
Europe 79.1 106.1 (27.0 ) (25.4 )% 222.1 317.1 (95.0 ) (30.0 )%
Asia 36.1 39.2 (3.1 ) (7.9 )% 98.8 109.6 (10.8 ) (9.9 )%
Total Grace net sales $ 753.6 $ 889.4 $ (135.8 ) (15.3 )% $ 2,146.7 $ 2,548.6 $ (401.9 ) (15.8 )%
Net sales by region:
North America $ 250.1 $ 321.5 $ (71.4 ) (22.2 )% $ 750.7 $ 895.8 $ (145.1 ) (16.2 )%
Europe Africa 294.7 338.1 (43.4 ) (12.8 )% 815.7 1,029.2 (213.5 ) (20.7 )%
Asia Pacific 146.2 167.8 (21.6 ) (12.9 )% 399.5 455.1 (55.6 ) (12.2 )%
Latin America 62.6 62.0 0.6 1.0 % 180.8 168.5 12.3 7.3 %
Total net sales by region $ 753.6 $ 889.4 $ (135.8 ) (15.3 )% $ 2.146.7 $ 2,548.6 $ (401.9 ) (15.8 )%
Core EBIT(A)(B):
Grace Davison segment operating
income $ 112.5 $ 68.3 $ 44.2 64.7 % $ 234.3 $ 227.3 $ 7.0 3.1 %
Grace Construction Products segment
operating income 37.4 46.8 (9.4 ) (20.1 )% 83.7 125.3 (41.6 ) (33.2 )%
Corporate costs:
Support functions (10.9 ) (11.2 ) 0.3 2.7 % (32.5 ) (34.9 ) 2.4 6.9 %
Performance-related compensation
and other (11.9 ) (10.1 ) (1.8 ) (17.8 )% (29.3 ) (26.0 ) (3.3 ) (12.7 )%
Corporate costs (22.8 ) (21.3 ) (1.5 ) (7.0 )% (61.8 ) (60.9 ) (0.9 ) (1.5 )%
Restructuring expenses(C) (1.9 ) - (1.9 ) NM (25.9 ) (5.2 ) (20.7 ) NM
Defined benefit pension expense(B) (17.3 ) (11.4 ) (5.9 ) (51.8 )% (51.4 ) (34.1 ) (17.3 ) (50.7 )%
Core EBIT 107.9 82.4 25.5 30.9 % 178.9 252.4 (73.5 ) (29.1 )%
Pre-tax income (loss) from noncore
activities(C)(D) (12.1 ) (33.9 ) 21.8 64.3 % (73.3 ) (47.2 ) (26.1 ) (55.3 )%
Interest expense (9.7 ) (13.2 ) 3.5 26.5 % (28.5 ) (42.8 ) 14.3 33.4 %
Interest income of non-Debtor
subsidiaries 0.3 0.7 (0.4 ) (57.1 )% 1.1 3.0 (1.9 ) (63.3 )%
Chapter 11 expenses, net of interest
income (18.4 ) (12.0 ) (6.4 ) (53.3 )% (36.4 ) (48.4 ) 12.0 24.8 %
Benefit from (provision for) income
taxes (23.6 ) 4.3 (27.9 ) NM (17.0 ) (38.9 ) 21.9 56.3 %
Net income (loss) attributable to
W. R. Grace & Co. shareholders $ 44.4 $ 28.3 $ 16.1 56.9 % $ 24.8 $ 78.1 $ (53.3 ) (68.2 )%
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Three Months Ended Nine Months Ended
September 30, September 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 $ 44.4 $ 28.3 $ 16.1 56.9 % $ 24.8 $ 78.1 $ (53.3 ) (68.2 )%
Pre-tax loss from noncore
activities 12.1 33.9 (21.8 ) (64.3 )% 73.3 47.2 26.1 55.3 %
Chapter 11 expenses, net 18.4 12.0 6.4 53.3 % 36.4 48.4 (12.0 ) (24.8 )%
Tax effects of noncore and
Chapter 11 items (9.0 ) (28.8 ) 19.8 68.8 % (33.1 ) (35.5 ) 2.4 6.8 %
Net income excluding noncore
activities and Chapter 11
expenses, net $ 65.9 $ 45.4 $ 20.5 45.2 % $ 101.4 $ 138.2 $ (36.8 ) (26.6 )%
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Three Months Ended Nine Months Ended
September 30, September 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
adjusted operating cash flow:
Net income (loss) attributable to
W. R. Grace & Co. shareholders $ 44.4 $ 28.3 $ 16.1 56.9 % $ 24.8 $ 78.1 $ (53.3 ) (68.2 )%
(Benefit from) provision for
income taxes 23.6 (4.3 ) 27.9 NM 17.0 38.9 (21.9 ) (56.3 )%
Chapter 11 expenses, net of
interest income 18.4 12.0 6.4 53.3 % 36.4 48.4 (12.0 ) (24.8 )%
Interest income of non-Debtor
subsidiaries (0.3 ) (0.7 ) 0.4 (57.1 )% (1.1 ) (3.0 ) 1.9 (63.3 )%
Interest expense 9.7 13.2 (3.5 ) (26.5 )% 28.5 42.8 (14.3 ) (33.4 )%
Pre-tax income (loss) from
noncore activities 12.1 33.9 (21.8 ) (64.3 )% 73.3 47.2 26.1 55.3 %
Core EBIT 107.9 82.4 25.5 30.9 % 178.9 252.4 (73.5 ) (29.1 )%
Depreciation and amortization 28.2 29.9 (1.7 ) (5.7 )% 84.5 90.8 (6.3 ) (6.9 )%
Core EBITDA 136.1 112.3 23.8 21.2 % 263.4 343.2 (79.8 ) (23.3 )%
Defined benefit pension
expense(B) 17.3 11.4 5.9 51.8 % 51.4 34.1 17.3 50.7 %
Change in net working capital of
core operations 20.7 9.1 11.6 127.5 % 87.6 (83.0 ) 170.6 NM
Change in other assets and
liabilities of core operations 33.4 7.1 26.3 NM (10.5 ) (29.2 ) 18.7 64.0 %
Capital expenditures (17.1 ) (34.4 ) 17.3 50.3 % (53.6 ) (93.1 ) 39.5 42.4 %
Adjusted operating cash flow $ 190.4 $ 105.5 $ 84.9 80.5 % $ 338.3 $ 172.0 $ 166.3 96.7 %
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Three Months Ended Nine Months Ended
September 30, September 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:
Gross profit percentage:
Grace Davison 33.6 % 26.1 % NM 7.5 pts 29.6 % 28.1 % NM 1.5 pts
Grace Construction Products 37.9 % 34.9 % NM 3.0 pts 36.0 % 34.9 % NM 1.1 pts
Total Grace 34.8 % 29.1 % NM 5.7 pts 31.5 % 30.4 % NM 1.1 pts
Operating margin as a percentage
of sales(A)(B):
Grace Davison 21.7 % 11.8 % NM 9.9 pts 15.9 % 13.7 % NM 2.2 pts
Grace Construction Products 15.9 % 15.1 % NM 0.8 pts 12.5 % 14.1 % NM (1.6) pts
Core EBIT 14.3 % 9.3 % NM 5.0 pts 8.3 % 9.9 % NM (1.6) pts
Core EBITDA 18.1 % 12.6 % NM 5.5 pts 12.3 % 13.5 % NM (1.2) pts
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º Note
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º Note
º (B): Defined benefit pension expense includes all defined benefit
pension expense of core operations. Grace Davison and Grace Construction
Products segment operating income and corporate costs do not include
amounts for defined benefit pension expense.
º Note
º (C): Restructuring expenses included in Core EBIT above have been
reflected by operating segment in Note 17 as follows: For the three months
ended September 30, 2009, Grace Davison $(0.5) million, Grace Construction
Products $0.6 million, and Corporate $1.8 million. For the nine months
ended September 30, 2009, Grace Davison $12.2 million, Grace Construction
Products $8.6 million, and Corporate $5.1 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 nine months ended
September 30, 2008, Grace Construction Products $4.7 million, and Corporate
$0.5 million.
º Note
º (D): See "Pre-tax loss from Noncore Activities" below for a definition
and analysis of our noncore activities.
NM-Not Meaningful
Grace Overview
Following is an overview of our financial performance for the three and nine
month periods ended September 30, 2009 as compared to the corresponding prior
year periods.
Net Sales
Grace Net Sales-Quarter Grace Net Sales-YTD
($ in millions) ($ in millions)
[[Image Removed: GRAPHIC]] [[Image Removed: GRAPHIC]]
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The following table identifies the increase or decrease in sales attributable to changes in sales volume, product price and/or mix, the impact of currency translation, and metals volumes and prices for the three month period ended September 30, 2009 from the prior year period.
Three Months Ended September 30, 2009
as a Percentage Increase (Decrease) from
Three Months Ended September 30, 2008
Currency
Net Sales Variance Analysis Volume Price/Mix Translation Metals Total
Grace Davison (4.0 )% 4.7 % (3.8 )% (7.4 )% (10.5 )%
Grace Construction Products (20.7 )% 1.1 % (4.6 )% N/A (24.2 )%
Net sales (9.8 )% 3.4 % (4.1 )% (4.8 )% (15.3 )%
By Region:
North America (19.8 )% 3.4 % (0.3 )% (5.5 )% (22.2 )%
Europe Africa (6.4 )% 1.4 % (7.8 )% 0.0 % (12.8 )%
Asia Pacific (0.7 )% 4.0 % (1.3 )% (14.9 )% (12.9 )%
Latin America (1.0 )% 12.9 % (10.6 )% (0.3 )% 1.0 %
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Sales for the three month period ended September 30, 2009 were unfavorably affected by the global economic slowdown, which resulted in reduced sales volumes, by lower cost of metals passed through to customers, and by 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 third quarter were up in the three Grace Davison product groups and in Grace Construction Products from the 2009 second quarter.
Nine Months Ended September 30, 2009
as a Percentage Increase (Decrease) from
Nine Months Ended September 30, 2008
Currency
Net Sales Variance Analysis Volume Price/Mix Translation Metals Total
Grace Davison (6.4 )% 6.0 % (5.7 )% (5.2 )% (11.3 )%
Grace Construction Products (20.6 )% 2.7 % (6.3 )% N/A (24.2 )%
Net sales (11.3 )% 4.8 % (5.9 )% (3.4 )% (15.8 )%
By Region:
North America (18.6 )% 5.7 % (0.6 )% (2.7 )% (16.2 )%
Europe Africa (11.9 )% 2.6 % (10.4 )% (1.0 )% (20.7 )%
Asia Pacific (3.6 )% 5.8 % (3.3 )% (11.1 )% (12.2 )%
Latin America 9.9 % 11.7 % (13.8 )% (0.5 )% 7.3 %
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Sales for the nine month period ended September 30, 2009 were unfavorably affected by the global economic slowdown, which resulted in reduced sales volumes, by currency translation, and by lower cost of metals passed through to . . .
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