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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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ý
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the Quarterly Period Ended March 31, 2017
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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Commission File Number 1-137533
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GCP Applied Technologies Inc.
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Delaware
(State of Incorporation)
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47-3936076
(I.R.S. Employer Identification No.)
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62 Whittemore Avenue, Cambridge, Massachusetts 02140-1623
(617) 876-1400
(Address and phone number of principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
ý
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
ý
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
o
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Accelerated filer
o
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Non-accelerated filer
ý
(Do not check if a
smaller reporting company)
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Smaller reporting company
o
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Emerging growth company
o
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
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No
ý
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
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Class
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Outstanding at May 2, 2017
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Common Stock, $0.01 par value per share
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71,465,608 shares
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TABLE OF CONTENTS
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_______________________________________________________________________________
2
Presentation of Information
Unless the context requires otherwise, references to "GCP Applied Technologies Inc.", "GCP", "we", "us", "our" and "the Company" refer to GCP Applied Technologies Inc., and its consolidated subsidiaries for periods subsequent to its separation from W.R. Grace & Co. on February 3, 2016. For periods prior to February 3, 2016, these terms refer to the combined historical business and operations of W.R. Grace & Co.’s construction products and packaging technologies businesses as they were historically managed as part of W.R. Grace & Co. Unless the context requires otherwise, references to "Grace" refer to W.R. Grace & Co., and its consolidated subsidiaries, which is the Company’s former parent company. References in this Quarterly Report on Form 10-Q to the "Separation" refer to the legal separation and transfer of Grace’s construction products and packaging technologies businesses to the Company through a dividend distribution of all of the then-outstanding common stock of GCP to Grace shareholders on February 3, 2016.
Forward-Looking Statements
This document contains, and our other public communications may contain, forward-looking statements, that is, information related to future, not past, 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, expected financial positions; results of operations; cash flows; financing plans; business strategy; operating plans; 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 events to materially differ from those contained in the forward-looking statements include, without limitation: risks related to foreign operations, especially in emerging regions; the cost and availability of raw materials and energy; the effectiveness of GCP's research and development and growth investments; acquisitions and divestitures of assets and gains and losses from dispositions; developments affecting GCP’s outstanding indebtedness; developments affecting GCP's funded and unfunded pension obligations; GCP's legal and environmental proceedings; uncertainties related to the Company’s ability to realize the anticipated benefits of the separation transaction; the inability to establish or maintain certain business relationships and relationships with customers and suppliers or the inability to retain key personnel; 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 the Securities 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.
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GCP Applied Technologies Inc.
Consolidated Statements of Operations (unaudited)
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Three Months Ended March 31,
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(In millions, except per share amounts)
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2017
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2016
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Net sales
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$
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225.3
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$
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237.7
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Cost of goods sold
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140.0
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144.5
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Gross profit
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85.3
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93.2
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Selling, general and administrative expenses
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72.8
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63.4
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Research and development expenses
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4.8
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4.1
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Interest expense and related financing costs
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17.0
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12.5
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Repositioning expenses
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2.0
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4.3
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Restructuring expenses
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1.1
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0.9
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Other income (expense), net
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1.0
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(0.1
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)
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Total costs and expenses
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98.7
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85.1
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(Loss) income from continuing operations before income taxes
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(13.4
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)
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8.1
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Provision for income taxes
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(11.6
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)
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(1.7
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)
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(Loss) income from continuing operations
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(25.0
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)
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6.4
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Income from discontinued operations, net of income taxes
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8.1
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11.8
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Net (loss) income
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(16.9
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)
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18.2
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Less: Net income attributable to noncontrolling interests
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—
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(0.4
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)
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Net (loss) income attributable to GCP shareholders
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$
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(16.9
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)
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$
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17.8
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Amounts Attributable to GCP Shareholders:
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(Loss) income from continuing operations attributable to GCP shareholders
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(25.0
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)
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6.0
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Income from discontinued operations, net of income taxes
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8.1
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11.8
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Net (loss) income attributable to GCP shareholders
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$
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(16.9
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$
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17.8
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Earnings Per Share Attributable to GCP Shareholders
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Basic earnings per share:
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(Loss) income from continuing operations attributable to GCP shareholders
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$
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(0.35
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)
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$
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0.08
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Income from discontinued operations, net of income taxes
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$
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0.11
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$
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0.17
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Net (loss) income attributable to GCP shareholders
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$
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(0.24
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)
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$
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0.25
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Weighted average number of basic shares
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71.2
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70.6
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Diluted earnings per share:
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(Loss) income from continuing operations attributable to GCP shareholders
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$
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(0.35
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)
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$
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0.08
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Income from discontinued operations, net of income taxes
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$
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0.11
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$
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0.17
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Net (loss) income attributable to GCP shareholders
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$
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(0.24
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)
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$
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0.25
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Weighted average number of diluted shares
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71.2
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70.9
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The Notes to Consolidated Financial Statements are an integral part of these statements.
4
GCP Applied Technologies Inc.
Consolidated Balance Sheets (unaudited)
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(In millions, except par value and shares)
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March 31,
2017 |
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December 31,
2016 |
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ASSETS
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Current Assets
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Cash and cash equivalents
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$
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109.5
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$
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146.1
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Trade accounts receivable, less allowance of $4.6 (2016—$4.5)
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169.4
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166.6
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Inventories
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101.3
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89.3
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Other current assets
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53.1
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42.9
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Current assets held for sale
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120.3
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108.9
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Total Current Assets
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553.6
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553.8
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Properties and equipment, net
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191.5
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192.2
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Goodwill
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115.1
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114.9
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Technology and other intangible assets, net
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51.0
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52.6
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Deferred income taxes
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59.0
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|
76.9
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||
|
Overfunded defined benefit pension plans
|
22.0
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21.2
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Other assets
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23.7
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|
22.4
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Noncurrent assets held for sale
|
61.8
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|
|
55.8
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Total Assets
|
$
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1,077.7
|
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$
|
1,089.8
|
|
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LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
|
|
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|
||||
|
Current Liabilities
|
|
|
|
||||
|
Debt payable within one year
|
$
|
37.9
|
|
|
$
|
47.9
|
|
|
Accounts payable
|
104.7
|
|
|
95.4
|
|
||
|
Other current liabilities
|
96.9
|
|
|
119.5
|
|
||
|
Current liabilities held for sale
|
54.8
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|
|
48.7
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|
||
|
Total Current Liabilities
|
294.3
|
|
|
311.5
|
|
||
|
Debt payable after one year
|
782.7
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|
|
783.0
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|
||
|
Deferred income taxes
|
5.9
|
|
|
6.6
|
|
||
|
Unrecognized tax benefits
|
10.9
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|
9.7
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|
||
|
Underfunded and unfunded defined benefit pension plans
|
86.2
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|
83.2
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|
||
|
Other liabilities
|
13.8
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|
|
13.9
|
|
||
|
Noncurrent liabilities held for sale
|
21.6
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|
|
20.9
|
|
||
|
Total Liabilities
|
1,215.4
|
|
|
1,228.8
|
|
||
|
Commitments and Contingencies - Note 7
|
|
|
|
||||
|
Stockholders' (Deficit) Equity
|
|
|
|
||||
|
Common stock issued, par value $0.01; 300,000,000 shares authorized; outstanding: 71,450,751
|
0.7
|
|
|
0.7
|
|
||
|
Paid-in capital
|
17.2
|
|
|
11.0
|
|
||
|
Accumulated deficit
|
(21.6
|
)
|
|
(4.7
|
)
|
||
|
Accumulated other comprehensive loss
|
(135.0
|
)
|
|
(147.6
|
)
|
||
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Treasury stock
|
(3.0
|
)
|
|
(2.1
|
)
|
||
|
Total GCP's Shareholders' (Deficit) Equity
|
(141.7
|
)
|
|
(142.7
|
)
|
||
|
Noncontrolling interests
|
4.0
|
|
|
3.7
|
|
||
|
Total Stockholders' (Deficit) Equity
|
(137.7
|
)
|
|
(139.0
|
)
|
||
|
Total Liabilities and Stockholders' (Deficit) Equity
|
$
|
1,077.7
|
|
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$
|
1,089.8
|
|
The Notes to Consolidated Financial Statements are an integral part of these statements.
5
GCP Applied Technologies Inc.
Consolidated Statements of Comprehensive Income (Loss) (unaudited)
|
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Three Months Ended March 31,
|
||||||
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(In millions)
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2017
|
|
2016
|
||||
|
Net (loss) income
|
$
|
(16.9
|
)
|
|
$
|
18.2
|
|
|
Other comprehensive income (loss):
|
|
|
|
||||
|
Currency translation adjustments
|
12.6
|
|
|
3.9
|
|
||
|
Loss from hedging activities, net of income taxes
|
—
|
|
|
(0.2
|
)
|
||
|
Total other comprehensive income attributable to noncontrolling interests
|
—
|
|
|
0.2
|
|
||
|
Total other comprehensive income
|
12.6
|
|
|
3.9
|
|
||
|
Comprehensive (loss) income
|
(4.3
|
)
|
|
22.1
|
|
||
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Less: Comprehensive income attributable to noncontrolling interests
|
—
|
|
|
(0.6
|
)
|
||
|
Comprehensive (loss) income attributable to GCP shareholders
|
$
|
(4.3
|
)
|
|
$
|
21.5
|
|
The Notes to Consolidated Financial Statements are an integral part of these statements.
6
GCP Applied Technologies Inc.
Consolidated Statements of Stockholders' Equity (Deficit) (unaudited)
|
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Common Stock
|
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Treasury Stock
|
|
|
|
|
|
|
|
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(In millions)
|
Number of Shares
|
|
Par Value
|
|
Number of Shares
|
|
Cost
|
|
Additional Paid-in Capital
|
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Accumulated Deficit
|
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Net Parent Investment
|
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Accumulated Other Comprehensive Loss
|
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Noncontrolling Interests
|
|
Total Stockholders' Equity (Deficit)
|
||||||||||||||||||
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Balance, December 31, 2015
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
598.3
|
|
|
$
|
(127.7
|
)
|
|
$
|
3.5
|
|
|
$
|
474.1
|
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10.6
|
|
|
7.2
|
|
|
—
|
|
|
0.4
|
|
|
18.2
|
|
||||||||
|
Net transfer to parent
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(677.9
|
)
|
|
—
|
|
|
—
|
|
|
(677.9
|
)
|
||||||||
|
Issuance of common stock and reclassification of net parent investment in connection with Separation
|
70.5
|
|
|
0.7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(73.1
|
)
|
|
72.4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
||||||||
|
Issuance of common stock in connection with stock plans
|
0.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
||||||||
|
Share-based compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.7
|
|
||||||||
|
Exercise of stock options
|
0.2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.6
|
|
||||||||
|
Treasury stock purchased under GCP 2016 Stock Incentive Plan
|
—
|
|
|
—
|
|
|
0.1
|
|
|
(1.7
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1.7
|
)
|
||||||||
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3.7
|
|
|
0.2
|
|
|
3.9
|
|
||||||||
|
Balance, March 31, 2016
|
70.8
|
|
|
$
|
0.7
|
|
|
0.1
|
|
|
$
|
(1.7
|
)
|
|
$
|
1.3
|
|
|
$
|
(62.5
|
)
|
|
$
|
—
|
|
|
$
|
(124.0
|
)
|
|
$
|
4.1
|
|
|
$
|
(182.1
|
)
|
|
Balance, December 31, 2016
|
71.2
|
|
|
$
|
0.7
|
|
|
0.1
|
|
|
$
|
(2.1
|
)
|
|
$
|
11.0
|
|
|
$
|
(4.7
|
)
|
|
$
|
—
|
|
|
$
|
(147.6
|
)
|
|
$
|
3.7
|
|
|
$
|
(139.0
|
)
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(16.9
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(16.9
|
)
|
||||||||
|
Issuance of common stock in connection with stock plans
|
0.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
||||||||
|
Share-based compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2.1
|
|
||||||||
|
Exercise of stock options
|
0.3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4.1
|
|
||||||||
|
Treasury stock purchased under GCP 2016 Stock Incentive Plan
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.9
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.9
|
)
|
||||||||
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
12.6
|
|
|
—
|
|
|
12.6
|
|
||||||||
|
Dividends and other changes in noncontrolling interest
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.3
|
|
|
0.3
|
|
||||||||
|
Balance, March 31, 2017
|
71.6
|
|
|
$
|
0.7
|
|
|
0.1
|
|
|
$
|
(3.0
|
)
|
|
$
|
17.2
|
|
|
$
|
(21.6
|
)
|
|
$
|
—
|
|
|
$
|
(135.0
|
)
|
|
$
|
4.0
|
|
|
$
|
(137.7
|
)
|
The Notes to Consolidated Financial Statements are an integral part of these statements.
7
GCP Applied Technologies Inc.
Consolidated Statements of Cash Flows (unaudited)
|
|
Three Months Ended March 31,
|
||||||
|
(In millions)
|
2017
|
|
2016
|
||||
|
OPERATING ACTIVITIES
|
|
|
|
||||
|
Net (loss) income
|
$
|
(16.9
|
)
|
|
$
|
18.2
|
|
|
Less: Income from discontinued operations
|
8.1
|
|
|
11.8
|
|
||
|
(Loss) income from continuing operations
|
(25.0
|
)
|
|
6.4
|
|
||
|
Reconciliation to net cash (used in) provided by operating activities:
|
|
|
|
||||
|
Depreciation and amortization
|
8.4
|
|
|
7.4
|
|
||
|
Amortization of debt discount and financing costs
|
0.8
|
|
|
0.5
|
|
||
|
Stock-based compensation expense
|
2.1
|
|
|
1.1
|
|
||
|
Currency and other losses in Venezuela
|
0.1
|
|
|
0.1
|
|
||
|
Deferred income taxes
|
8.5
|
|
|
(7.4
|
)
|
||
|
(Gain) loss on disposal of property and equipment
|
(0.8
|
)
|
|
0.7
|
|
||
|
Changes in assets and liabilities, excluding effect of currency translation:
|
|
|
|
||||
|
Trade accounts receivable
|
(0.4
|
)
|
|
(5.5
|
)
|
||
|
Inventories
|
(12.7
|
)
|
|
(1.0
|
)
|
||
|
Accounts payable
|
16.7
|
|
|
7.3
|
|
||
|
Pension assets and liabilities, net
|
1.9
|
|
|
1.1
|
|
||
|
Other assets and liabilities, net
|
(27.6
|
)
|
|
(2.5
|
)
|
||
|
Net cash (used in) provided by operating activities from continuing operations
|
(28.0
|
)
|
|
8.2
|
|
||
|
Net cash provided by operating activities from discontinued operations
|
14.3
|
|
|
16.3
|
|
||
|
Net cash (used in) provided by operating activities
|
(13.7
|
)
|
|
24.5
|
|
||
|
INVESTING ACTIVITIES
|
|
|
|
||||
|
Capital expenditures
|
(12.7
|
)
|
|
(12.7
|
)
|
||
|
Other investing activities
|
2.9
|
|
|
0.1
|
|
||
|
Net cash used in investing activities from continuing operations
|
(9.8
|
)
|
|
(12.6
|
)
|
||
|
Net cash used in investing activities from discontinued operations
|
(2.4
|
)
|
|
(1.0
|
)
|
||
|
Net cash used in investing activities
|
(12.2
|
)
|
|
(13.6
|
)
|
||
|
FINANCING ACTIVITIES
|
|
|
|
||||
|
Borrowings under credit arrangements
|
1.6
|
|
|
283.1
|
|
||
|
Repayments under credit arrangements
|
(13.0
|
)
|
|
(9.1
|
)
|
||
|
Proceeds from issuance of notes
|
—
|
|
|
525.0
|
|
||
|
Cash paid for debt financing costs
|
—
|
|
|
(18.2
|
)
|
||
|
Share repurchase under GCP 2016 Stock Incentive Plan
|
(0.9
|
)
|
|
(1.7
|
)
|
||
|
Proceeds from exercise of stock options
|
3.5
|
|
|
0.2
|
|
||
|
Transfers to parent, net
|
—
|
|
|
(758.7
|
)
|
||
|
Net cash (used in) provided by financing activities from continuing operations
|
(8.8
|
)
|
|
20.6
|
|
||
|
Net cash provided by (used in) financing activities from discontinued operations
|
0.4
|
|
|
(5.8
|
)
|
||
|
Net cash (used in) provided by financing activities
|
(8.4
|
)
|
|
14.8
|
|
||
|
Effect of currency exchange rate changes on cash and cash equivalents
|
2.8
|
|
|
2.4
|
|
||
|
(Decrease) increase in cash and cash equivalents
|
(31.5
|
)
|
|
28.1
|
|
||
|
Cash and cash equivalents, beginning of period
|
163.3
|
|
|
98.6
|
|
||
|
Cash and cash equivalents, end of period
|
131.8
|
|
|
126.7
|
|
||
|
Less: Cash and cash equivalents of discontinued operations
|
22.3
|
|
|
15.9
|
|
||
|
Cash and cash equivalents of continuing operations, end of period
|
$
|
109.5
|
|
|
$
|
110.8
|
|
The Notes to Consolidated Financial Statements are an integral part of these statements.
8
Notes to Consolidated Financial Statements
1. Basis of Presentation and Summary of Significant Accounting and Financial Reporting Policies
On January 27, 2016, GCP entered into a separation and distribution agreement pursuant to which W.R. Grace & Co. ("Grace") agreed to transfer its Grace Construction Products operating segment and the packaging technologies business, operated under the “Darex” name, of its Grace Materials Technologies operating segment to GCP (the "Separation"). The Separation occurred on February 3, 2016, by means of a pro rata distribution to Grace stockholders of all of the then-outstanding shares of Company common stock, at which time GCP became an independent public company and its common stock listed and began trading under the symbol "GCP" on the New York Stock Exchange.
GCP is engaged in the production and sale of specialty construction chemicals and specialty building materials through
two
operating segments. Specialty Construction Chemicals ("SCC") manufactures and markets concrete admixtures and cement additives. Specialty Building Materials ("SBM") manufactures and markets sheet and liquid membrane systems that protect structures from water, air and vapor penetration, fireproofing and other products designed to protect the building envelope.
On March 2, 2017, GCP announced the sale of its Darex Packaging Technologies ("Darex") business to Henkel AG & Co. KgaA (“Henkel”). As discussed further below under "Discontinued Operations," the results of operations for Darex have been excluded from continuing operations and segment results for all periods presented.
Basis of Presentation
The accompanying Consolidated Financial Statements are presented on a consolidated basis and include all of the accounts and operations of GCP and its majority-owned subsidiaries. The financial statements reflect the financial position, results of operations and cash flows of GCP in accordance with generally accepted accounting principles in the United States of America ("GAAP") and with the instructions to Form 10-Q and Article 10 of SEC Regulation S-X for interim financial information.
The interim financial statements presented herein are unaudited and should be read in conjunction with the Consolidated Financial Statements presented in the Company's
2016
Annual Report on Form 10-K. Such financial statements reflect all adjustments that, in the opinion of management, are necessary for a fair statement of the results of the interim periods presented; all such adjustments are of a normal recurring nature except for the impacts of adopting new accounting standards as discussed below. All significant intercompany accounts and transactions have been eliminated. The results of operations for the
three-month
period ended
March 31, 2017
are not necessarily indicative of the results of operations for the year ending
December 31, 2017
.
Discontinued Operations
As noted above, on March 2, 2017, the Company entered into a final, binding and irrevocable offer letter (the "Offer Letter") with Henkel, pursuant to which Henkel made a binding offer to acquire Darex for approximately
$1.05 billion
(the "Acquisition"). Pursuant to the terms of the Offer Letter, following the conclusion of statutory employee consultation processes in connection with the Acquisition by the relevant works councils in France, the Company accepted Henkel’s offer and countersigned the Stock and Asset Purchase Agreement (the “Purchase Agreement”) with respect to the Acquisition on April 28, 2017. The Purchase Agreement was previously executed by Henkel. Completion of the Acquisition remains subject to the satisfaction or waiver of customary closing conditions, including regulatory approvals.
In conjunction with this transaction and applicable GAAP, the assets and liabilities related to Darex have been reclassified and reflected as "held for sale" on the Consolidated Balance Sheets for all periods presented. Additionally, Darex has been reclassified and reflected as "discontinued operations" on the Consolidated Statements of Operations and Consolidated Statements of Cash Flows for all periods presented. Unless otherwise noted, the information throughout the Notes to the Consolidated Financial Statements pertains only to the continuing operations of GCP. Refer to Note 14 for further discussion of the Acquisition.
9
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements, and the reported amounts of revenues and expenses for the periods presented. Actual amounts could differ from those estimates, and the differences could be material. Changes in estimates are recorded in the period identified. GCP's accounting measurements that are most affected by management's estimates of future events are:
•
Contingent liabilities, which depend on an assessment of the probability of loss and an estimate of ultimate resolution cost, that may arise from circumstances such as legal disputes, environmental remediation, product liability claims, material commitments (refer to Note 7 to the Consolidated Financial Statements) and income taxes (refer to Note 4 to the Consolidated Financial Statements);
•
Pension and postretirement liabilities that depend on assumptions regarding participant life spans, future inflation, discount rates and total returns on invested funds (refer to Note 5 to the Consolidated Financial Statements); and
•
Realization values of net deferred tax assets, which depend on projections of future taxable income (refer to Note 4 to the Consolidated Financial Statements).
Reclassifications
Certain amounts in prior period financial statements have been reclassified to conform to the current period presentation. Such reclassifications have not materially affected previously reported amounts.
Income
Tax
As a global enterprise, GCP is subject to a complex array of tax regulations and must make assessments of applicable tax law and judgments in estimating its ultimate income tax liability. Refer to Note 4 for details regarding estimates used in accounting for income tax matters including unrecognized tax benefits.
Stock-Based Compensation Expense
Prior to the Separation, GCP was allocated stock-based compensation expense from Grace related to GCP employees receiving awards denominated in Grace equity instruments. In accordance with an employee matters agreement entered into between Grace and GCP on January 27, 2016 in connection with the Separation (the "Employee Matters Agreement"), previously outstanding stock-based compensation awards granted under Grace's equity compensation programs prior to the Separation and held by certain executives and employees of GCP and Grace were adjusted to reflect the impact of the Separation on these awards. To preserve the aggregate intrinsic value of these stock-based compensation awards, as measured immediately before and immediately after the Separation, each holder of Grace stock-based compensation awards generally received an adjusted award consisting of either (i) both a stock-based compensation award denominated in Grace equity as it existed subsequent to the Separation and a stock-based compensation award denominated in GCP equity or (ii) solely a stock-based compensation award denominated in the equity of the company at which the person was employed following the Separation. In the Separation, the determination as to which type of adjustment applied to a holder’s previously outstanding Grace award was based upon the type of stock-based compensation award that was to be adjusted and the date on which the award was originally granted under the Grace equity compensation programs prior to the Separation. Under the Employee Matters Agreement, GCP retains certain obligations related to all stock- and cash-settled stock-based compensation awards denominated in GCP equity, regardless of whether the holder is a GCP or Grace employee. Following the Separation, the Company records stock-based compensation expense for equity awards in accordance with authoritative accounting guidance.
Currency Translation
Assets and liabilities of foreign subsidiaries (other than those located in countries with highly inflationary economies) are translated into U.S. dollars at current exchange rates, while revenues, costs and expenses are translated at average exchange rates during each reporting period. The resulting currency translation adjustments are included in accumulated other comprehensive loss in the Consolidated Balance Sheets. The financial statements of any subsidiaries located in countries with highly inflationary economies are remeasured as if the functional currency were the U.S. dollar; the remeasurement creates translation adjustments that are reflected in net income in the Consolidated Statements of Operations.
10
Effective January 1, 2010, GCP began to treat Venezuela as a highly inflationary economy. As a result, the functional currency of its Venezuelan subsidiary became the U.S. dollar; therefore, all translation adjustments are reflected in net income in the accompanying Consolidated Statements of Operations. Effective September 30, 2015, the Company began accounting for its results in Venezuela at the SIMADI rate. In mid-February 2016, changes to the currency exchange systems were announced that eliminated the SICAD exchange rate and replaced the name SIMADI rate with DICOM. The DICOM rate was
708
bolivars to one U.S. dollar at March 31, 2017, an increase of approximately
4.9%
from the rate at December 31, 2016, resulting in an immaterial impact on income from continuing operations.
In March 2017, the Venezuelan government announced that a new exchange rate would be introduced to replace the DICOM rate, although further details have not been publicly announced. Management believes the new exchange rate would result in a further devaluation of the local currency and additional currency remeasurement losses in net income. At March 31, 2017, monetary net assets denominated in local currency within the Company's Venezuela subsidiary were
$8.7 million
, of which
$5.0 million
has been reflected as "held for sale" on the Consolidated Balance Sheet
.
During the quarter ended March 31, 2017, except as discussed above, there were no material changes to the Company's significant accounting and financial reporting policies from those reflected in the Annual Report on Form 10-K for the year ended December 31, 2016.
Recently Issued Accounting Standards
Business Combinations
In January 2017, the FASB issued Accounting Standards Update ("ASU") 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business
, which clarifies the definition of a business when evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The update provides that when substantially all the fair value of the assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, the transaction does not involve a business. The standard is effective for the Company on January 1, 2018, with early application permitted for certain transactions. GCP will consider the provisions of this update in conjunction with qualifying transactions in periods subsequent to March 31, 2017, as applicable.
Goodwill
In January 2017, the FASB issued ASU 2017-04,
Intangibles—Goodwill and Other (Topic 350)
. This ASU modifies the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value, which eliminates Step 2 from the goodwill impairment test. The standard is effective for the Company for annual or any interim goodwill impairment tests beginning on or after January 1, 2020. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.
Revenue from Contracts with Customers
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
. This update is intended to remove inconsistencies and weaknesses in revenue requirements; provide a more robust framework for addressing revenue issues; improve comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets; provide more useful information to users of financial statements through improved disclosure requirements; and simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer. The new requirements were to be effective for fiscal years beginning after December 15, 2016, and for interim periods within those fiscal years, with early adoption not permitted. In August 2015, the FASB issued ASU 2015-14,
Revenue from Contracts with Customers-Deferral of the Effective Date
, deferring the effective date by one year but permitting adoption as of the original effective date. The revised standard allows for two methods of adoption: (a) full retrospective adoption, meaning the standard is applied to all periods presented, or (b) modified retrospective adoption, meaning the cumulative effect of applying the new standard is recognized as an adjustment to the opening retained earnings balance. The standard will be effective for the Company on January 1, 2018.
11
In addition to the expanded disclosures regarding revenue, this guidance may impact timing of revenue recognition in some arrangements with variable consideration or contracts for the sale of goods and services. GCP is currently evaluating the available transition methods and the potential impact of the standard on its Consolidated Financial Statements and related disclosures. Specifically, management has established a mutli-disciplinary project team to evaluate and implement Topic 606, and the project team is currently collecting information from key organizational stakeholders to identify revenue streams for focused individual contract analysis.
Leases
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
, which is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term, including optional payments where they are reasonably certain to occur. The amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. GCP is currently evaluating the potential impact on its Consolidated Financial Statements and related disclosures.
Other new pronouncements issued but not effective until after March 31, 2017 are not expected to have a material impact on the Company's financial position, results of operations or liquidity.
Recently Adopted Accounting Standards
Pension and Other Postretirement Benefit Costs
In March 2017, the FASB issued ASU 2017-07,
Compensation—Retirement Benefits (Topic 715)
:
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,
which changes certain presentation and disclosure requirements for employers that sponsor defined benefit pension and other postretirement benefit plans. The amendments in this ASU require entities to (1) report the service cost component of net periodic pension/postretirement benefit cost in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period; (2) capitalize only the service cost component of net periodic pension/postretirement benefit cost (when applicable); and (3) present other components of net periodic pension/postretirement benefit cost separately from the service cost component and outside a subtotal of income from operations (if applicable). The standard is effective for the Company on January 1, 2018, with early adoption permitted as of January 1, 2017.
GCP elected to early adopt this standard in the first quarter of 2017 and has reflected only the service cost component of net periodic pension/postretirement benefit cost in "Cost of goods sold" and presented the other components of net periodic pension/postretirement benefit cost in "Other (income) expense, net," within the Consolidated Statements of Operations. In accordance with the standard, GCP utilized prior period footnote disclosures as a practical expedient to apply these retrospective presentation requirements and will prospectively apply the capitalization requirements. GCP's adoption of this standard did not have a material effect on the accompanying Consolidated Financial Statements.
Inventory
In July 2015, the FASB issued ASU 2015-11,
Simplifying the Measurement of Inventory
. The update requires that inventory be measured at the lower of cost or net realizable value for entities using first-in, first-out ("FIFO") or average cost methods. The new requirements are effective for fiscal years beginning after December 15, 2016, and for interim periods within those fiscal years, with early adoption permitted. GCP adopted this standard for the 2017 first quarter and there were no material effects on the accompanying Consolidated Financial Statements.
12
2. Inventories
Inventories are stated at the lower of cost or net realizable value. GCP determines cost using the FIFO methodology. Inventories presented on GCP's Consolidated Balance Sheets consisted of the following:
|
(In millions)
|
March 31,
2017 |
|
December 31,
2016 |
||||
|
Raw materials
|
$
|
35.9
|
|
|
$
|
35.7
|
|
|
In process
|
3.4
|
|
|
3.6
|
|
||
|
Finished products and other
|
62.0
|
|
|
50.0
|
|
||
|
Total inventories
|
$
|
101.3
|
|
|
$
|
89.3
|
|
Included above as "other" within "Finished products and other" are finished products purchased rather than produced by GCP of
$12.7 million
and
$10.9 million
as of
March 31, 2017
and
December 31, 2016
, respectively.
3. Debt and Other Financial Instruments
Components of Debt
__________________________
|
(In millions)
|
March 31,
2017 |
|
December 31,
2016 |
||||
|
9.5% Senior Notes due 2023, net of unamortized debt issuance costs of
$7.1
at March 31, 2017
(2016
—
$7.3)
|
$
|
517.9
|
|
|
$
|
517.7
|
|
|
Term Loan due 2022, net of unamortized discount of
$2.3
and unamortized debt issuance costs of
$4.1
at March 31, 2017
(1)
(2016
—
$2.4, $4.3)
|
265.9
|
|
|
266.2
|
|
||
|
Revolving credit facility due 2021
(2)
|
15.0
|
|
|
25.0
|
|
||
|
Other borrowings
(3)
|
21.8
|
|
|
22.0
|
|
||
|
Total debt
|
820.6
|
|
|
830.9
|
|
||
|
Less debt payable within one year
|
37.9
|
|
|
47.9
|
|
||
|
Debt payable after one year
|
$
|
782.7
|
|
|
$
|
783.0
|
|
|
Weighted average interest rates on total debt
|
7.7
|
%
|
|
7.5
|
%
|
||
|
(1)
|
Interest at LIBOR +
325 bps
with a
75 bps
LIBOR floor at
March 31, 2017
.
|
|
(2)
|
Interest at LIBOR +200 bps at
March 31, 2017
.
|
|
(3)
|
Represents borrowings under various lines of credit and other borrowings, primarily by non-U.S. subsidiaries.
|
The principal maturities of debt outstanding (net of unamortized discounts and debt issuance costs) at
March 31, 2017
, were as follows:
13
Credit Agreement
On February 3, 2016, GCP entered into a credit agreement (the “Credit Agreement”) that provides for senior secured credit facilities (the “Credit Facilities”) in an aggregate principal amount of
$525.0 million
, consisting of:
|
(a)
|
term loan (the “Term Loan”) in an aggregate principal amount of
$275.0 million
maturing in 2022; and
|
|
(b)
|
$250.0 million
revolving credit facility (the "Revolving Loan") due in 2021.
|
The Term Loan principal balance is scheduled to be repaid in equal quarterly installments in aggregate annual amounts equal to
1.0%
of the original principal amount, with the balance due upon the maturity date.
The Credit Agreement contains customary affirmative covenants, including, but not limited to (i) maintenance of legal existence and compliance with laws and regulations; (ii) delivery of consolidated financial statements and other information; (iii) payment of taxes; (iv) delivery of notices of defaults and certain other material events; and (v) maintenance of adequate insurance. The Credit Agreement also contains customary negative covenants, including but not limited to restrictions on (i) dividends on, and redemptions of, equity interests and other restricted payments; (ii) liens; (iii) loans and investments; (iv) the sale, transfer or disposition of assets and businesses; (vi) transactions with affiliates; and (vii) a maximum total leverage ratio. Certain debt covenants may restrict the entity's ability as it relates to dividends, acquisitions and other borrowings. The Credit Agreement contains conditions that would require mandatory principal payments in advance of the maturity date of the Term Loan and Revolving Credit Facility; the Company was in compliance with all terms as of
March 31, 2017
.
Events of default under the Credit Agreement include, but are not limited to: (i) failure to pay principal, interest, fees or other amounts under the Credit Agreement when due, taking into account any applicable grace period; (ii) any representation or warranty proving to have been incorrect in any material respect when made; (iii) failure to perform or observe covenants or other terms of the Credit Agreement subject to certain grace periods; (iv) a cross-default and cross-acceleration with certain other material debt; (v) bankruptcy events; (vi) certain defaults under ERISA; and (vii) the invalidity or impairment of security interests. There are no events of default as of
March 31, 2017
.
The Credit Facilities are secured on a first priority basis by a perfected security interest in, and mortgages on, substantially all tangible and intangible personal property and material fee-owned real property (specifically properties in Chicago, Illinois and Mount Pleasant, Tennessee) of the Company, a pledge of
100%
of the equity of each material U.S. subsidiary of the Company and
65%
of the equity of the United Kingdom holding company.
During 2016, GCP refinanced the existing Credit Agreement with a syndicate of banks (the “Amended Credit Agreement”). The Amended Credit Agreement reduced the interest rate margins applicable to the Term Loan from base rate plus a margin of
3.5%
or LIBOR plus a margin of
4.5%
to a base rate plus a margin of
2.25%
or LIBOR plus a margin of
3.25%
at GCP’s option. The outstanding principal balance was replaced by a like aggregate principal balance with substantially similar terms to the Credit Agreement.
The interest rate per annum applicable to the Revolving Loan is equal to, at GCP’s option, either a base rate plus a margin ranging from
0.5%
to
1.0%
or LIBOR plus a margin ranging from
1.5%
to
2.0%
, in either case based upon the total leverage ratio of GCP and its restricted subsidiaries. During 2016, GCP borrowed
$25.0 million
on its Revolving Loan and used the funds, together with cash on hand, to acquire Halex Corporation. Of the
$25.0 million
draw,
$15.0 million
was outstanding as of
March 31, 2017
alongside approximately
$9 million
in outstanding letters of credit, which reduced available credit under that facility to
$226.0 million
.
The summary above of the Credit Agreement and Amended Credit Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of such agreements, copies of which have been filed with the SEC.
Senior Notes
On January 27, 2016, GCP issued
$525.0 million
aggregate principal amount of
9.5%
Senior Notes due 2023 (the “Notes”). Interest is payable semi-annually in arrears on February 1 and August 1 of each year.
14
The Notes were issued subject to covenants that limit the Company's and certain of its subsidiaries’ ability, subject to certain exceptions and qualifications, to (i) create or incur liens on assets, (ii) incur additional debt (iii) sell certain assets (iv) make certain investments and acquisitions, merge or sell or otherwise dispose of all or substantially all assets.
Divestiture of Darex
As discussed in Note 1, on March 2, 2017, the Company entered into the Offer Letter with Henkel, pursuant to which Henkel made a binding offer to acquire Darex for approximately
$1.05 billion
, subject to working capital and certain other adjustments. The proposed sale of Darex is a permitted transaction under the Company's Credit Agreement and the Indenture governing the Notes. Under the Credit Agreement and Indenture, the Company would be required to use any net cash proceeds from the proposed sale of Darex to prepay debt or make investments in its business over a period of approximately
18 months
. Refer to Note 14 for further discussion of the proposed sale of Darex.
During 2016, GCP incurred debt issuance costs relating to issuance of the Notes, Term Loan, and Revolving Loan of
$8.0 million
,
$5.0 million
and
$5.2 million
, respectively. GCP deducted the debt issuance costs relating to the Notes and the Term Loan from the carrying amounts presented on its Consolidated Balance Sheet and is amortizing those costs over the terms of the underlying obligations.
GCP classified debt issuance costs relating to the Revolving Loan in "Other assets" on its Consolidated Balance Sheet and is amortizing those costs over the term of the Revolving Loan. The unamortized portion of these costs was
$4.0 million
as of
March 31, 2017
and
$4.2 million
as of
December 31, 2016
.
During the first quarter of 2016, GCP used certain proceeds from the Notes and Credit Facilities to fund a distribution to Grace in an amount of
$750.0 million
related to the Separation. Approximately
$50 million
was retained to meet operating requirements and to pay fees associated with the debt financing and other costs of the Separation that may be incurred subsequent to the Separation. Related party debt of approximately
$42 million
and related interest was transferred from Grace to GCP in connection with the Separation.
Debt Fair Value
At
March 31, 2017
, the carrying amounts and fair values of GCP's debt were as follows:
|
|
March 31, 2017
|
|
December 31, 2016
|
||||||||||||
|
(In millions)
|
Carrying Amount
|
|
Fair Value
|
|
Carrying Amount
|
|
Fair Value
|
||||||||
|
9.5% Senior Notes due 2023
|
$
|
517.9
|
|
|
$
|
595.7
|
|
|
$
|
517.7
|
|
|
$
|
603.1
|
|
|
Term Loan due 2022
|
265.9
|
|
|
268.9
|
|
|
266.2
|
|
|
274.6
|
|
||||
|
Revolving credit facility due 2021
|
15.0
|
|
|
15.0
|
|
|
25.0
|
|
|
25.0
|
|
||||
|
Other borrowings
|
21.8
|
|
|
21.8
|
|
|
22.0
|
|
|
22.0
|
|
||||
|
Total debt
|
$
|
820.6
|
|
|
$
|
901.4
|
|
|
$
|
830.9
|
|
|
$
|
924.7
|
|
Fair value is determined based on Level 2 inputs, including expected future cash flows (discounted at market interest rates), estimated current market prices and quotes from financial institutions. The decrease in fair value as of March 31, 2017 was due primarily to the Federal Reserve raising the federal funds target rate during the first quarter of 2017.
15
4. Income Taxes
The income tax provision on continuing operations for the
three months ended March 31, 2017
and
2016
was
$11.6 million
and
$1.7 million
, respectively, representing effective tax rates of (
86.6%
) and
21.0%
, respectively. The increase in the effective tax rate for the three month period of
107.6
percentage points compared to the same period in 2016 was primarily due to the recording of valuation allowances against certain U.S., Brazil, and Turkey deferred tax assets and a change in the Company’s assertion that it is indefinitely reinvested in Mexico, as further discussed below. The difference between the provision for income taxes at the U.S. federal income tax rate of
35%
and GCP’s overall income tax rate is summarized below.
|
|
Three Months Ended March 31,
|
||||||
|
(In millions)
|
2017
|
|
2016
|
||||
|
Tax provision at U.S. federal income tax rate
|
$
|
(4.7
|
)
|
|
$
|
2.8
|
|
|
Change in provision resulting from:
|
|
|
|
||||
|
Valuation allowance
|
13.8
|
|
|
—
|
|
||
|
Tax on undistributed foreign earnings
|
1.9
|
|
|
—
|
|
||
|
Effect of tax rates in foreign jurisdictions
|
0.7
|
|
|
(0.6
|
)
|
||
|
Permanent items and other
|
(0.1
|
)
|
|
(0.5
|
)
|
||
|
Provision for income taxes
|
$
|
11.6
|
|
|
$
|
1.7
|
|
For the three months ended March 31, 2017 and 2016, GCP recorded income tax expense on discontinued operations of
$1.8 million
and
$5.9 million
, respectively. Refer to Note 14 for further details.
As of December 31, 2016, GCP had the intent and ability to indefinitely reinvest undistributed earnings of its foreign subsidiaries outside the United States. During the first quarter of 2017, GCP determined it could no longer assert it is indefinitely reinvested in Mexico because that entity is anticipated to be sold as part of the Darex transaction. The tax associated with its outside book and tax basis difference in Mexico was recorded during the quarter as a discrete item resulting in a tax expense of
$1.9 million
. GCP believes that the anticipated sale of Darex is a one-time, non-recurring event and that recognition of deferred taxes of undistributed earnings during 2017 would not have occurred if not for the anticipated sale. As of March 31, 2017, GCP has the intent and ability to indefinitely reinvest undistributed earnings of all its other foreign subsidiaries outside the United States. Subsequent to the anticipated sale of Darex, GCP expects undistributed prior-year earnings of its foreign subsidiaries to remain indefinitely reinvested except in certain instances where repatriation of such earnings would result in minimal or no tax. GCP bases this assertion on:
|
(1)
|
the expectation that it will satisfy its U.S. cash obligations in the foreseeable future without requiring the repatriation of prior-year foreign earnings;
|
|
(2)
|
plans for significant and continued reinvestment of foreign earnings in organic and inorganic growth initiatives outside the U.S.; and
|
|
(3)
|
remittance restrictions imposed by local governments.
|
GCP will continually analyze and evaluate its cash needs to determine the appropriateness of its indefinite reinvestment assertion.
16
In evaluating GCP's ability to realize its deferred tax assets, GCP considers all reasonably available positive and negative evidence, including recent earnings experience, expectations of future taxable income and the tax character of that income, the period of time over which the temporary differences become deductible and the carryforward and/or carryback periods available to GCP for tax reporting purposes in the related jurisdiction. In estimating future taxable income, GCP relies upon assumptions and estimates about future activities, including the amount of future federal, state and foreign pretax operating income that GCP will generate; the reversal of temporary differences; and the implementation of feasible and prudent tax planning strategies. GCP records a valuation allowance to reduce deferred tax assets to the amount that it believes is more likely than not to be realized. During the first quarter of 2017, GCP determined it is more likely than not a portion of its deferred tax assets will not be realized. As a result, GCP recorded valuation allowances on those deferred tax assets during the quarter as discrete items, as they are significant, unusual and infrequent in nature. The allowances recorded relate to
$4.3 million
of U.S. foreign tax credit carryovers and
$9.1 million
and
$0.4 million
of Brazil and Turkey deferred tax assets, respectively, relating primarily to net operating loss carryovers. The determination to record the valuation allowances in the first quarter was made predominantly due to the anticipated sale of Darex and its impact on future taxable income and the ability to utilize those tax assets.
As also discussed in Note 1, on February 3, 2016 the Separation of Grace and GCP was completed. In conjunction with the Separation, GCP increased its deferred tax assets and prepaid taxes in the U.S. by approximately
$74 million
, which primarily relates to the step up in tax basis and transfer of a net pension liability.
In connection with the Separation, GCP and Grace entered into various agreements that govern the relationship between the parties going forward, including a tax matters agreement (the "Tax Sharing Agreement"). Under the Tax Sharing Agreement, which was entered into on the distribution date, GCP and Grace will indemnify and hold each other harmless in accordance with the principles outlined therein.
During the first quarter of 2017, GCP reached a proposed favorable settlement with the Canada Revenue Agency for tax years 2007-2015. As a result of the proposed settlement, a tax benefit of
$1.5 million
, primarily for an anticipated refund of previously paid tax, was recorded during the quarter. GCP is required to pay Grace for the amount of the expected tax refund pursuant to the Tax Sharing Agreement in effect. GCP also recorded a charge to its U.S. deferred tax assets of
$1.6 million
related to the settlement due to the reduction of its step-up in tax basis. Both adjustments were recorded as discrete tax items.
5. Pension Plans and Other Postretirement Benefit Plans
Postretirement Benefits Other Than Pensions
Prior to the Separation, Grace provided postretirement life insurance benefits for retired employees of certain U.S. business units and certain divested business units. GCP’s allocated income for these postretirement life insurance benefits plan was
$1.2 million
for the
three months ended March 31, 2016
. The postretirement life insurance benefits plan liability related to GCP employees who were participants in this plan at the time of Separation was legally transferred to GCP.
During the second half of 2016, GCP eliminated retiree life insurance benefits at the remaining bargaining locations and, as a result, did not recognize any related amounts in its Consolidated Statement of Operations for the three months ended March 31, 2017.
Pension Plans
GCP sponsors certain defined benefit pension plans, primarily in the U.S. and the U. K. in which GCP employees participate. GCP records an asset or liability to recognize the funded status of these pension plans in its Consolidated Balance Sheets.
17
The following table presents the funded status of GCP's overfunded, underfunded and unfunded defined pension plans from continuing operations:
|
(In millions)
|
March 31,
2017 |
|
December 31,
2016 |
||||
|
Overfunded defined benefit pension plans
|
$
|
22.0
|
|
|
$
|
21.2
|
|
|
Underfunded defined benefit pension plans
|
(57.7
|
)
|
|
(55.6
|
)
|
||
|
Unfunded defined benefit pension plans
|
(28.5
|
)
|
|
(27.6
|
)
|
||
|
Total underfunded and unfunded defined benefit pension plans
|
(86.2
|
)
|
|
(83.2
|
)
|
||
|
Pension liabilities included in other current liabilities
|
(0.5
|
)
|
|
(0.4
|
)
|
||
|
Net funded status
|
$
|
(64.7
|
)
|
|
$
|
(62.4
|
)
|
Overfunded plans include several advance-funded plans for which the fair value of the plan assets exceeds the projected benefit obligation ("PBO"). This group of plans was overfunded by
$22.0 million
as of
March 31, 2017
, and the overfunded status is reflected as assets in "Overfunded defined benefit pension plans" in the Consolidated Balance Sheets. Underfunded plans include a group of advance-funded plans that are underfunded on a PBO basis. Unfunded plans include several plans that are funded on a pay-as-you-go basis, and therefore, the entire PBO is unfunded. As of
March 31, 2017
, the combined balance of
$86.7 million
for the underfunded and unfunded plans included as liabilities in the Consolidated Balance Sheets is comprised of current and non-current components of
$0.5 million
in "Other current liabilities" and
$86.2 million
in "Underfunded and unfunded defined benefit pension plans," respectively.
Components of Net Periodic Benefit Cost (Income)
|
|
Three Months Ended March 31,
|
||||||||||||||||||||||
|
|
2017
|
|
2016
|
||||||||||||||||||||
|
|
Pension
|
|
Other Post
Retirement |
|
Pension
|
|
Other Post
Retirement |
||||||||||||||||
|
(In millions)
|
U.S.
|
|
Non-U.S.
|
|
|
U.S.
|
|
Non-U.S.
|
|
||||||||||||||
|
Service cost
|
$
|
1.9
|
|
|
$
|
1.0
|
|
|
$
|
—
|
|
|
$
|
1.5
|
|
|
$
|
0.9
|
|
|
$
|
—
|
|
|
Interest cost
|
1.5
|
|
|
1.5
|
|
|
—
|
|
|
1.2
|
|
|
2.1
|
|
|
—
|
|
||||||
|
Expected return on plan assets
|
(1.4
|
)
|
|
(1.7
|
)
|
|
—
|
|
|
(1.2
|
)
|
|
(2.3
|
)
|
|
—
|
|
||||||
|
Amortization of prior service credit
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.1
|
)
|
||||||
|
Net periodic benefit cost (income)
(1)
|
$
|
2.0
|
|
|
$
|
0.8
|
|
|
$
|
—
|
|
|
$
|
1.5
|
|
|
$
|
0.7
|
|
|
$
|
(0.1
|
)
|
|
Less: Discontinued operations
|
—
|
|
|
0.2
|
|
|
—
|
|
|
—
|
|
|
0.3
|
|
|
—
|
|
||||||
|
Net periodic benefit cost (income) from continuing operations
|
$
|
2.0
|
|
|
$
|
0.6
|
|
|
$
|
—
|
|
|
$
|
1.5
|
|
|
$
|
0.4
|
|
|
$
|
(0.1
|
)
|
|
(1)
|
Includes expense that was allocated to Grace of
$0.1 million
for the
three months ended
March 31, 2016
.
|
Plan Contributions and Funding
GCP intends to satisfy its funding obligations under the U.S. qualified pension plans and to comply with all of the requirements of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). For ERISA purposes, funded status is calculated on a different basis than under GAAP.
GCP intends to fund non-U.S. pension plans based on applicable legal requirements as well as actuarial and trustee recommendations.
Defined Contribution Retirement Plan
As part of the Separation, GCP established a defined contribution retirement plan for its employees in the U.S. This plan is qualified under section 401(k) of the U.S. tax code. Currently, GCP contributes an amount equal to
100%
of employee contributions, up to
6%
of an individual employee's salary or wages. GCP's costs included in selling, general and administrative expenses related to this benefit plan for the
three months ended March 31, 2017
were
$1.4 million
, compared with GCP's allocation of the total cost related to this benefit plan for the three months ended March 31, 2016 of
$1.0 million
.
18
6. Other Balance Sheet Accounts
|
(In millions)
|
March 31,
2017 |
|
December 31,
2016 |
||||
|
Other Current Assets:
|
|
|
|
||||
|
Non-trade receivables
|
$
|
19.0
|
|
|
$
|
19.9
|
|
|
Income tax receivable
|
18.0
|
|
|
10.6
|
|
||
|
Prepaid and other
|
16.1
|
|
|
12.4
|
|
||
|
Total other current assets
|
$
|
53.1
|
|
|
$
|
42.9
|
|
|
(In millions)
|
March 31,
2017 |
|
December 31,
2016 |
||||
|
Other Current Liabilities
|
|
|
|
||||
|
Customer volume rebates
|
$
|
21.7
|
|
|
$
|
30.5
|
|
|
Accrued compensation
(1)
|
20.0
|
|
|
28.0
|
|
||
|
Income tax payable
|
5.3
|
|
|
6.7
|
|
||
|
Accrued interest
|
8.3
|
|
|
20.8
|
|
||
|
Pension liabilities
|
0.5
|
|
|
0.4
|
|
||
|
Other accrued liabilities
|
41.1
|
|
|
33.1
|
|
||
|
Total other current liabilities
|
$
|
96.9
|
|
|
$
|
119.5
|
|
|
(1)
|
Accrued compensation in the table above includes salaries and wages as well as estimated current amounts due under the annual and long-term incentive programs.
|
7. Commitments and Contingent Liabilities
Purchase Commitments
GCP uses purchase commitments to ensure supply and to minimize the volatility of certain key raw materials including lignins, polycarboxylates, amines and other materials. Such commitments are for quantities that GCP fully expects to use in its normal operations.
Guarantees and Indemnification Obligations
GCP is a party to many contracts containing guarantees and indemnification obligations. These contracts primarily consist of:
|
•
|
Product warranties with respect to certain products sold to customers in the ordinary course of business. These warranties typically provide that products will conform to specifications. GCP accrues a general warranty liability at the time of sale based on historical experience and on a transaction-specific basis according to individual facts and circumstances. Both the liability and annual expense related to product warranties are immaterial to the Consolidated Financial Statements.
|
|
•
|
Performance guarantees offered to customers. GCP has not established a liability for these arrangements based on past performance.
|
|
•
|
Contracts providing for the sale of a former business unit or product line in which GCP has agreed to indemnify the buyer against liabilities arising prior to the closing of the transaction, including environmental liabilities.
|
|
•
|
The Tax Sharing Agreement, which may require GCP, in certain circumstances, to indemnify Grace if the Separation, together with certain related transactions, does not qualify under Section 355 and certain other relevant provisions of the Internal Revenue Code (the "Code"). If GCP is required to indemnify Grace under the Tax Sharing Agreement, it could be subject to significant tax liabilities.
|
19
Environmental Matters
GCP is subject to loss contingencies resulting from extensive and evolving federal, state, local and foreign environmental laws and regulations relating to the generation, storage, handling, discharge, disposition and stewardship of hazardous wastes and other materials. GCP accrues for anticipated costs associated with response efforts where an assessment has indicated that a probable liability has been incurred and the cost can be reasonably estimated. As of
March 31, 2017
, GCP did not have any material environmental liabilities.
GCP's environmental liabilities are reassessed whenever circumstances become better defined or response efforts and their costs can be better estimated. These liabilities are evaluated based on currently available information, including the progress of remedial investigations at each site, the current status of discussions with regulatory authorities regarding the method and extent of remediation at each site, existing technology, prior experience in contaminated site remediation and the apportionment of costs among potentially responsible parties.
Financial Assurances
Financial assurances have been established for a variety of purposes, including insurance and environmental matters and other matters. At
March 31, 2017
, GCP had gross financial assurances issued and outstanding of approximately
$9 million
, composed of standby letters of credit.
Lawsuits and Investigations
In Re: Library Gardens Balcony Litigation, Lead Case Beary v. Blackrock, Inc. Case No. RG15793054
was filed on November 12, 2015 in Alameda County Superior Court in California. It is the lead case in a consolidated lawsuit filed on behalf of
six
individuals who died and an additional
seven
individuals who were injured in a balcony collapse, which occurred on June 16, 2015 in Berkeley, California. The consolidated complaint names the Company as the sole party in the category of suppliers of materials and names
twenty
additional defendants in other categories, including categories for property owners, property managers, construction defendants, and development and design defendants. The consolidated complaint alleges product liability against the Company concerning one of its products. The plaintiffs seek unspecified monetary damages against all defendants and punitive damages only against the building owners, building manager and
two
construction company defendants. Discovery is ongoing and the trial date has been set for February 5, 2018. The Company intends to defend this action vigorously. At this time, based on available information regarding this litigation, the Company is unable to reasonably assess the ultimate outcome of this matter or determine an estimate, or a range of estimates, of potential losses, if any, that might result from an adverse resolution of this matter.
In addition to the above, from time to time, GCP and its subsidiaries are parties to, or targets of, lawsuits, claims, investigations and proceedings which are managed and defended in the ordinary course of business. While GCP is unable to predict the outcome of these matters, it does not believe, based upon currently available facts, that the ultimate resolution of any of such pending matters will have a material adverse effect on its overall financial condition, results of operations or cash flows.
Accounting for Contingencies
Although the outcome of each of the matters discussed above cannot be predicted with certainty, GCP has assessed its risk and has made accounting estimates and disclosures as required under GAAP.
8. Restructuring and Repositioning Expenses
Restructuring Expenses
GCP's Board of Directors approves all major restructuring programs that may involve the discontinuance of significant product lines or the shutdown of significant facilities. From time to time, GCP takes additional restructuring actions, including involuntary terminations that are not part of a major program. GCP accounts for these costs, which are reflected in "Restructuring expenses" in its Consolidated Statements of Operations, in the period that the related liabilities are incurred. Restructuring expenses are excluded from segment operating income.
For the
first quarter
of
2017
, GCP incurred
$1.1 million
(
$0.8 million
in SCC and $
0.3 million
in SBM) of restructuring expenses, which were comprised primarily of severance-related costs associated with the Separation, as well as costs related to plant closures. For the prior-year quarter, GCP incurred
$0.9 million
(
$0.5 million
in SCC and
$0.4 million
in SBM) of restructuring expenses related to the Separation.
20
GCP had restructuring liabilities of
$1.6 million
as of
March 31, 2017
and
$1.1 million
as of
December 31, 2016
primarily related to severance actions taken during the periods. GCP expects to pay substantially all costs related to its current restructuring programs by
December 31, 2017
.
|
Restructuring Liability
(In millions)
|
Total
|
||
|
Balance, December 31, 2016
|
$
|
1.1
|
|
|
Accruals for severance
|
0.8
|
|
|
|
Payments
|
(0.3
|
)
|
|
|
Balance, March 31, 2017
|
$
|
1.6
|
|
Repositioning Expenses
Post-Separation, GCP has incurred expenses related to its transition to a stand-alone public company. The Company expects to incur these repositioning expenses, ranging from
$18.0 million
to
$20.0 million
, by the end of the second quarter of 2017. Repositioning expenses primarily relate to the following:
|
•
|
accounting, tax, legal and other professional costs pertaining to the Separation and establishment as a stand-alone public company;
|
|
•
|
costs relating to information technology systems and marketing expense for repackaging and re-branding;
|
|
•
|
employee-related costs that would not be incurred absent the Separation primarily relating to compensation, benefits, retention bonuses related to new or transitioning employees; and
|
|
•
|
recruitment and relocation costs associated with hiring and relocating employees.
|
Due to the scope and complexity of these activities, the range of estimated repositioning expenses could increase or decrease and the timing of incurrence could change.
For the
three months ended March 31, 2017
, GCP incurred repositioning expenses as follows:
|
|
Three Months Ended March 31,
|
||||||
|
(In millions)
|
2017
|
|
2016
|
||||
|
Professional fees
|
$
|
1.4
|
|
|
$
|
2.1
|
|
|
Software and IT implementation fees
|
0.3
|
|
|
—
|
|
||
|
Employee-related costs
|
0.3
|
|
|
2.2
|
|
||
|
Total
|
$
|
2.0
|
|
|
$
|
4.3
|
|
GCP accounts for these costs, which are reflected in "Repositioning expenses" in the accompanying Consolidated Statements of Operations, in the period incurred. Substantially all of these costs have been or are expected to be settled in cash. Total cash payments for the
three months ended March 31, 2017
were
$1.1 million
for repositioning expenses and $
0.8
million for related capital expenditures.
21
9. Other Comprehensive Income
The following tables present the pre-tax, tax and after-tax components of GCP's other comprehensive income for the
three months ended March 31, 2017
and
2016
:
|
Three Months Ended March 31, 2017
(In millions)
|
Pre-Tax Amount
|
|
Tax (Expense)/
Benefit
|
|
After-Tax Amount
|
||||||
|
Currency translation adjustments
|
$
|
12.6
|
|
|
—
|
|
|
$
|
12.6
|
|
|
|
Other comprehensive income attributable to GCP shareholders
|
$
|
12.6
|
|
|
$
|
—
|
|
|
$
|
12.6
|
|
|
Three Months Ended March 31, 2016
(In millions)
|
Pre-Tax Amount
|
|
Tax (Expense)/
Benefit
|
|
After-Tax Amount
|
||||||
|
Defined benefit pension and other postretirement plans:
|
|
|
|
|
|
||||||
|
Amortization of net prior service cost included in net periodic benefit cost
|
$
|
(0.1
|
)
|
|
$
|
—
|
|
|
$
|
(0.1
|
)
|
|
Assumption of net prior service credit
|
1.2
|
|
|
(0.4
|
)
|
|
0.8
|
|
|||
|
Assumption of net actuarial loss
|
(1.1
|
)
|
|
0.4
|
|
|
(0.7
|
)
|
|||
|
Benefit plans, net
|
—
|
|
|
—
|
|
|
—
|
|
|||
|
Currency translation adjustments
|
3.9
|
|
|
—
|
|
|
3.9
|
|
|||
|
Loss from hedging activities
|
(0.2
|
)
|
|
—
|
|
|
(0.2
|
)
|
|||
|
Other comprehensive income attributable to GCP shareholders
|
$
|
3.7
|
|
|
$
|
—
|
|
|
$
|
3.7
|
|
The following tables present the changes in accumulated other comprehensive income (loss), net of tax, for the
three months ended
March 31, 2017
and
2016
:
|
Three Months Ended March 31, 2017
(In millions)
|
Defined Benefit Pension and Other Postretirement Plans
|
|
Currency Translation Adjustments
|
|
Gains (Losses) from Hedging Activities
|
|
Total
|
||||||||
|
Beginning balance
|
$
|
0.1
|
|
|
$
|
(147.7
|
)
|
|
$
|
—
|
|
|
$
|
(147.6
|
)
|
|
Other comprehensive income before reclassifications
|
—
|
|
|
12.6
|
|
|
0.1
|
|
|
12.7
|
|
||||
|
Amounts reclassified from accumulated other comprehensive income
|
—
|
|
|
—
|
|
|
(0.1
|
)
|
|
(0.1
|
)
|
||||
|
Net current-period other comprehensive income
|
—
|
|
|
12.6
|
|
|
—
|
|
|
12.6
|
|
||||
|
Ending balance
|
$
|
0.1
|
|
|
$
|
(135.1
|
)
|
|
$
|
—
|
|
|
$
|
(135.0
|
)
|
|
Three Months Ended March 31, 2016
(In millions)
|
Defined Benefit Pension and Other Postretirement Plans
|
|
Currency Translation Adjustments
|
|
Gains (Losses) from Hedging Activities
|
|
Total
|
||||||||
|
Beginning balance
|
$
|
0.1
|
|
|
$
|
(127.8
|
)
|
|
$
|
—
|
|
|
$
|
(127.7
|
)
|
|
Other comprehensive income (loss) before reclassifications
|
0.1
|
|
|
3.9
|
|
|
(0.5
|
)
|
|
3.5
|
|
||||
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
(0.1
|
)
|
|
—
|
|
|
0.3
|
|
|
0.2
|
|
||||
|
Net current-period other comprehensive income (loss)
|
—
|
|
|
3.9
|
|
|
(0.2
|
)
|
|
3.7
|
|
||||
|
Ending balance
|
$
|
0.1
|
|
|
$
|
(123.9
|
)
|
|
$
|
(0.2
|
)
|
|
$
|
(124.0
|
)
|
22
GCP is a global enterprise operating in over
35
countries with local currency generally deemed to be the functional currency for accounting purposes. The currency translation adjustments reflect translation of the balance sheets valued in local currencies to the U.S. dollar as of the end of each period presented, and translation of revenues and expenses at average exchange rates for each period presented.
10. Stock Incentive Plans
GCP has provided certain key employees equity awards in the form of stock options, performance-based units (“PBUs”) and restricted share units (“RSUs”) under the GCP 2016 Stock Incentive Plan, which was adopted at Separation. Certain employees and members of the Board of Directors are eligible to receive stock-based compensation, including stock, stock options, RSUs and PBUs.
Total cash and non-cash stock-based compensation cost included in "(Loss) income from continuing operations before income taxes" on the Consolidated Statements of Operations is
$2.7 million
and
$1.1 million
for the
three months ended March 31, 2017
and 2016, respectively.
During 2016, previously outstanding stock-based compensation awards granted under Grace’s equity compensation programs prior to the Separation were adjusted to reflect the impact of the Separation. To preserve the aggregate intrinsic value of those Grace awards, as measured immediately before and immediately after the Separation, each holder of Grace stock-based compensation awards generally received an adjusted award consisting of either (i) both a stock-based compensation award denominated in Grace equity as it existed subsequent to the Separation and a stock-based compensation award denominated in GCP equity or (ii) solely a stock-based compensation award denominated in the equity of the company at which the person was employed following the Separation. Adjusted awards consisting of stock-based compensation awards denominated in GCP equity are considered issued under the GCP 2016 Stock Incentive Plan. These adjusted awards generally will be subject to the same vesting conditions and other terms that applied to the original Grace awards before the Separation.
Under the Employee Matters Agreement, GCP is obligated to settle all of the stock-based compensation awards denominated in GCP equity, regardless of whether the holders are employees of GCP or Grace. Likewise, Grace is obligated to settle all of the stock-based compensation awards denominated in Grace shares, regardless of whether the holders are employees of GCP or Grace. As a result, GCP has recorded a liability for cash-settled awards held by Grace employees. The adjustment of the original Grace awards that resulted in the issuance of GCP stock-based compensation awards resulted in an immaterial charge in the first quarter of 2016.
In accordance with certain provisions of the GCP 2016 Stock Incentive Plan, GCP repurchases shares issued to certain holders of GCP awards in order to fulfill statutory tax withholding requirements for the employee. In the
three months ended
March 31, 2017
and 2016, GCP repurchased approximately
33,000
and
84,000
shares respectively, under these provisions. These purchases are reflected as "Treasury stock purchased under 2016 Stock Incentive Plan" in the Consolidated Statements of Equity (Deficit).
As of
March 31, 2017
,
656,205
shares of common stock were available for issuance under the GCP 2016 Stock Incentive Plan.
Stock Options
Stock options are non-qualified and are set at exercise prices not less than
100%
of the market value on the date of grant (market value is the average of the high price and low price from that trading day). Stock option awards that relate to Grace stock options originally granted prior to the Separation have a contractual term of
five years
from the original date of grant. Stock option awards granted post-Separation have a contractual term of
seven
or
ten
years from the original date of grant. Generally, stock options vest in substantially equal amounts each year over
three years
from the date of grant.
23
GCP values stock options using the Black-Scholes option pricing model, which was developed for use in estimating the fair value of traded options. The risk-free rate is based on the U.S. Treasury yield curve published as of the grant date, with maturities approximating the expected term of the options. GCP estimates the expected term of the options according to the simplified method as allowed by FASB Accounting Standards Codification ("ASC") Topic No. 718-20,
Awards Classified as Equity,
whereby the average between the vesting period and contractual term is used. GCP estimated the expected volatility using an industry peer group.
The following summarizes GCP's assumptions for estimating the fair value of stock options granted during
2017
:
|
Assumptions used to calculate expense for stock option
|
Three Months Ended March 31, 2017
|
|
Risk-free interest rate
|
1.95 - 2.10%
|
|
Average life of options (years)
|
5.5 - 6.5
|
|
Volatility
|
31.42 - 31.96%
|
|
Dividend yield
|
—
|
|
Average fair value per stock option
|
$9.13
|
The following table summarizes GCP stock option activity for the
three months ended March 31, 2017
:
|
Stock Option Activity
|
Number Of
Shares (in thousands) |
|
Weighted
Average Exercise Price |
|
Weighted
Average Remaining Contractual Term (years) |
|
Aggregated
Intrinsic Value (in thousands) |
|||||
|
Outstanding, December 31, 2016
|
2,122
|
|
|
$
|
16.92
|
|
|
3.57
|
|
$
|
20,748
|
|
|
Options exercised
|
325
|
|
|
12.73
|
|
|
|
|
|
|
||
|
Options forfeited/expired/canceled
|
4
|
|
|
18.79
|
|
|
|
|
|
|
||
|
Options granted
|
235
|
|
|
26.40
|
|
|
|
|
|
|
||
|
Outstanding, March 31, 2017
|
2,028
|
|
|
18.69
|
|
|
4.07
|
|
28,863
|
|
||
|
Exercisable March 31, 2017
|
814
|
|
|
$
|
17.05
|
|
|
2.89
|
|
$
|
5,776
|
|
The aggregate intrinsic values in the table above represent the total pre-tax intrinsic value (the difference between GCP's closing stock price on the last trading day of
March 31, 2017
and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their in-the-money options at period end. The amount changes based on the fair market value of GCP's stock. The intrinsic value of all options exercised in the
three-month
period ended
March 31, 2017
was
$12.9 million
.
Total unrecognized stock-based compensation expense for stock options outstanding at
March 31, 2017
, was
$3.0 million
and the weighted-average period over which this expense will be recognized is approximately
1.2
years.
Restricted Stock Units and Performance Based Units
Upon Separation, certain previously outstanding RSUs and PBUs granted under Grace's equity compensation programs prior to the Separation were adjusted, in accordance with the Employee Matters Agreement, such that holders of these original Grace RSUs and PBUs received RSUs denominated in GCP equity.
RSUs generally vest over a
three
year period, with vesting in substantially equal amounts each year over
three
years and some vesting
100%
after the third year from the date of grant. A smaller number of RSUs were designated as sign-on awards and used for purposes of attracting key employees and to cover outstanding awards from a prior employer and vest
100%
after
two years
.
24
GCP’s RSU activity for the
three months ended March 31, 2017
is as follows:
|
RSU Activity
|
Number Of
Shares (in thousands) |
|
Weighted
Average Grant Date Fair Value |
|||
|
Outstanding, December 31, 2016
|
538
|
|
|
$
|
17.22
|
|
|
RSUs settled
|
112
|
|
|
17.17
|
|
|
|
RSUs forfeited
|
1
|
|
|
16.90
|
|
|
|
RSUs granted
|
93
|
|
|
26.34
|
|
|
|
RSUs outstanding, March 31, 2017
|
518
|
|
|
$
|
18.86
|
|
During the
three months ended March 31, 2017
, GCP distributed
79,134
shares and
$0.9 million
of cash to settle RSUs. GCP's expectations of future RSU vesting and settlement are as follows:
|
Year
|
|
Number of Shares Vesting (in thousands)
|
|
Settled in Cash
|
|
Settled in Stock
|
|
2017
|
|
31
|
|
—%
|
|
100%
|
|
2018
|
|
197
|
|
10%
|
|
90%
|
|
2019
|
|
262
|
|
—%
|
|
100%
|
|
2020
|
|
28
|
|
—%
|
|
100%
|
During the
three months ended March 31, 2017
, GCP granted
162,328
PBUs under the GCP 2016 Stock Incentive Plan to Company employees. These awards vest on February
2020
subject to continued employment through the payment date, and have a weighted average grant date fair value of
$26.40
. PBUs that were granted during the year ended December 31, 2016 under the GCP 2016 Stock Incentive Plan to Company employees remain outstanding as of
March 31, 2017
. These awards vest in February
2019
subject to continued employment through the payment date, and have a weighted average grant date fair value of
$17.04
. GCP anticipates that
100%
of the PBUs will be settled in GCP common stock upon vesting. During the quarter ended
March 31, 2017
,
none
of these awards were forfeited.
PBUs granted in
2017
are measured based on a
three
-year cumulative adjusted diluted earnings per share metric that is modified up or down based on relative total shareholder return performance against the Russell 3000 Index. The number of shares ultimately provided to an employee who received a
2017
PBU grant will be based on Company performance against this measure, and can range from
0%
to
200%
of the target number of shares granted based upon the level of achievement of this measure. The awards will be settled in
2020
once actual performance, which is measured over fiscal years
2017
-
2019
, is certified by the Compensation Committee.
PBUs and RSUs are recorded at fair value at the date of grant. The common stock-settled portion of each such award is considered an equity award, with the stock compensation expense being determined based on GCP’s stock price on the grant date. The cash settled portion of the award is considered a liability award with the liability being remeasured each reporting period based on GCP’s then current stock price. PBUs are remeasured each reporting period based on the expected payout of the award, which may range from
0%
to
200%
of the targets for such awards; therefore, these portions of the awards are subject to volatility until the payout is finally determined at the end of the performance period.
As of
March 31, 2017
,
$11.7 million
of total unrecognized compensation expense related to the RSU and PBU awards is expected to be recognized over the remaining weighted-average service period of
1.5
years.
25
11. Earnings Per Share
The following table shows a reconciliation of the numerators and denominators used in calculating basic and diluted (loss) earnings per share:
|
|
Three Months Ended March 31,
|
||||||
|
(In millions, except per share amounts)
|
2017
|
|
2016
|
||||
|
Numerators
|
|
|
|
||||
|
Net (loss) income from continuing operations attributable to GCP shareholders
|
$
|
(25.0
|
)
|
|
$
|
6.0
|
|
|
Income from discontinued operations, net of income taxes
|
$
|
8.1
|
|
|
$
|
11.8
|
|
|
Net (loss) income attributable to GCP shareholders
|
$
|
(16.9
|
)
|
|
$
|
17.8
|
|
|
Denominators
|
|
|
|
||||
|
Weighted average common shares—basic calculation
|
71.2
|
|
|
70.6
|
|
||
|
Dilutive effect of employee stock awards
|
—
|
|
|
0.3
|
|
||
|
Weighted average common shares—diluted calculation
|
71.2
|
|
|
70.9
|
|
||
|
Basic (loss) earnings per share
|
|
|
|
||||
|
Net (loss) income from continuing operations attributable to GCP shareholders
|
$
|
(0.35
|
)
|
|
$
|
0.08
|
|
|
Income from discontinued operations, net of income taxes
|
$
|
0.11
|
|
|
$
|
0.17
|
|
|
Net (loss) income attributable to GCP shareholders
|
$
|
(0.24
|
)
|
|
$
|
0.25
|
|
|
Diluted (loss) earnings per share
|
|
|
|
||||
|
Net (loss) income from continuing operations attributable to GCP shareholders
|
$
|
(0.35
|
)
|
|
$
|
0.08
|
|
|
Income from discontinued operations, net of income taxes
|
$
|
0.11
|
|
|
$
|
0.17
|
|
|
Net (loss) income attributable to GCP shareholders
|
$
|
(0.24
|
)
|
|
$
|
0.25
|
|
In 2016, the computation of basic and diluted earnings per common share is calculated assuming the number of shares of GCP common stock outstanding on February 3, 2016 had been outstanding at the beginning of the period.
There were approximately
0.1 million
anti-dilutive options and
no
anti-dilutive RSUs outstanding on a weighted-average basis for the
three months ended March 31, 2017
. There were approximately
0.6 million
anti-dilutive options and
0.2 million
anti-dilutive RSUs outstanding on a weighted average basis for the
three months ended
March 31, 2016.
During the
three months ended
March 31, 2017
and 2016, GCP repurchased approximately
33,000
shares and
84,000
shares of Company common stock for
$0.9 million
and
$1.7 million
, respectively, in connection with its equity compensation programs.
12. Related Party Transactions and Transactions with Grace
Related Parties
All contracts with related parties are at rates and terms that GCP believes are comparable with those that could be entered into with independent third parties. Subsequent to the Separation, transactions with Grace represent third-party transactions.
Allocation of General Corporate Expenses
Prior to the Separation, the financial statements included expense allocations for certain functions provided by Grace as well as other Grace employees not solely dedicated to GCP, including, but not limited to, general corporate expenses related to finance, legal, information technology, human resources, communications, ethics and compliance, shared services, employee benefits and incentives and stock-based compensation. These expenses were allocated to GCP on the basis of direct usage when identifiable, with the remainder allocated on the basis of revenue, headcount or other measures.
26
Between January 1, 2016 and the Separation, GCP was allocated $
2.0 million
of general corporate expense, which is primarily included within "Selling, general and administrative expenses" in the accompanying Statement of Operations for the three months ended March 31, 2016.
Transition Services Agreement
In connection with the Separation, the Company entered into a transition services agreement pursuant to which GCP and Grace provide various services to each other on a temporary, transitional basis.
The services provided by Grace to GCP include information technology, treasury, tax administration, accounting, financial reporting, human resources and other services. Following the Separation, Grace has continued to provide some of these services on a transitional basis, generally for a period of up to
18 months
from the date of Separation.
Tax Sharing Agreement
The Tax Sharing Agreement governs the parties’ respective rights, responsibilities and obligations with respect to tax liabilities and benefits, tax attributes, the preparation and filing of tax returns, the control of audits and other tax proceedings, and other matters regarding taxes. In general, and subject to the terms of the Tax Sharing Agreement, GCP is responsible for all U.S. federal, state and foreign taxes (and any related interest, penalties or audit adjustments) reportable on a GCP separate return (a return that does not include Grace or any of its subsidiaries); and Grace is responsible for all U.S. federal, state and foreign income taxes (and any related interest, penalties or audit adjustments) reportable on a consolidated, combined or unitary return that includes Grace or any of its subsidiaries and GCP or any of its subsidiaries up to the Separation date. As of the balance sheet date, GCP has included
$3.7 million
of indemnified receivables in "Other assets" and
$2.4
million of indemnified payables in "Other current liabilities."
In addition, the Tax Sharing Agreement imposes certain restrictions on GCP and its subsidiaries (including restrictions on share issuances, business combinations, sales of assets and similar transactions) that are designed to preserve the qualification of the Distribution, together with certain related transactions, under Section 355 and certain other relevant provisions of the Code. The Tax Sharing Agreement provides special rules that allocate tax liabilities in the event the Distribution, together with certain related transactions, does not so qualify. In general, under the Tax Sharing Agreement, each party is expected to be responsible for any taxes imposed on, and certain related amounts payable by, GCP or Grace that arise from the failure of the Distribution and certain related transactions, to qualify under Section 355 and certain other relevant provisions of the Code, to the extent that the failure to so qualify is attributable to actions, events or transactions relating to such party’s respective stock, assets or business, or a breach of the relevant representations or covenants made by such party in the Tax Sharing Agreement.
Parent Company Equity
Net transfers to parent are included within net parent investment on the Consolidated Statements of (Deficit) Equity. The components of the net transfers to parent as of March 31, 2016 are as follows:
|
(In millions)
|
2016
|
||
|
Cash pooling and general financing activities
|
$
|
(690.8
|
)
|
|
GCP expenses funded by parent
|
6.6
|
|
|
|
Corporate costs allocations
|
2.0
|
|
|
|
Provision for income taxes
|
4.3
|
|
|
|
Total net transfers to parent
|
(677.9
|
)
|
|
|
Other, net
|
(80.8
|
)
|
|
|
Transfers to parent, net, per Consolidated Statement of Cash Flows
|
$
|
(758.7
|
)
|
In the three months ended March 31, 2017, there were no adjustments to parent company equity. In 2016, "Other, net" includes the non-cash transfer from parent of approximately
$44 million
of net pension liabilities, approximately
$23 million
of fixed assets and the non-cash transfer of approximately
$36 million
of related-party debt, deferred tax items and other items.
27
As discussed in Note 3, GCP used proceeds from the Notes and Credit Facilities to fund a distribution to Grace in an amount of
$750.0 million
related to the Separation. This distribution is reflected as a component of transfers to parent in the table above.
13. Operating Segment Information
GCP is engaged in the production and sale of specialty construction chemicals and specialty building materials through
two
operating segments. Specialty Construction Chemicals manufactures and markets concrete admixtures and cement additives. Specialty Building Materials manufactures and markets sheet and liquid membrane systems that protect structures from water, air and vapor penetration, fireproofing, and other products designed to protect the building envelope.
The table below presents information related to GCP's operating segments. Only those corporate expenses directly related to the operating segments are allocated for reporting purposes. GCP excludes certain functional costs, impacts of foreign exchange (related primarily to Venezuela) and other corporate costs such as certain performance-based incentive compensation and public company costs from segment operating income. GCP also excludes certain ongoing defined benefit pension costs recognized quarterly, which include service and interest costs, the effect of expected returns on plan assets and amortization of prior service costs/credits, from the calculation of segment operating income. GCP believes that the exclusion of certain corporate costs and pension costs provides a better indicator of its operating segment performance as such costs are not managed at an operating segment level.
Operating Segment Data
|
|
Three Months Ended March 31,
|
||||||
|
(In millions)
|
2017
|
|
2016
|
||||
|
Net Sales
|
|
|
|
||||
|
Specialty Construction Chemicals
|
$
|
134.0
|
|
|
$
|
137.0
|
|
|
Specialty Building Materials
|
91.3
|
|
|
100.7
|
|
||
|
Total
|
$
|
225.3
|
|
|
$
|
237.7
|
|
|
Segment Operating Income
|
|
|
|
||||
|
Specialty Construction Chemicals segment operating income
|
$
|
8.6
|
|
|
$
|
9.9
|
|
|
Specialty Building Materials segment operating income
|
15.2
|
|
|
27.8
|
|
||
|
Total segment operating income
|
$
|
23.8
|
|
|
$
|
37.7
|
|
28
Reconciliation of Operating Segment Data to Financial Statements
Total segment operating income for the
three months ended
March 31, 2017
and
2016
, is reconciled below to "(Loss) income from continuing operations before income taxes" presented in the accompanying Consolidated Statements of Operations:
|
|
Three Months Ended March 31,
|
||||||
|
(In millions)
|
2017
|
|
2016
|
||||
|
Total segment operating income
|
$
|
23.8
|
|
|
$
|
37.7
|
|
|
Corporate costs
(1)
|
(10.2
|
)
|
|
(7.7
|
)
|
||
|
Certain pension costs
|
(2.6
|
)
|
|
(1.9
|
)
|
||
|
Repositioning expenses
|
(2.0
|
)
|
|
(4.3
|
)
|
||
|
Restructuring expenses
|
(1.1
|
)
|
|
(0.9
|
)
|
||
|
Pension MTM adjustment and other related costs, net
|
—
|
|
|
(2.7
|
)
|
||
|
Third-party acquisition-related costs
|
(0.4
|
)
|
|
—
|
|
||
|
Amortization of acquired inventory fair value adjustment
|
(1.5
|
)
|
|
—
|
|
||
|
Tax indemnification adjustments
|
(2.4
|
)
|
|
—
|
|
||
|
Net income attributable to noncontrolling interests
|
—
|
|
|
0.4
|
|
||
|
Interest expense, net
|
(17.0
|
)
|
|
(12.5
|
)
|
||
|
(Loss) income from continuing operations before income taxes
|
$
|
(13.4
|
)
|
|
$
|
8.1
|
|
|
(1)
|
Corporate costs include approximately
$3.0 million
and
$1.6 million
of allocated costs in the three months ended March 31, 2017 and 2016, respectively, that were previously reported within the Darex operating segment. Such costs did not qualify to be reclassified to discontinued operations.
|
Geographic Area Data
The table below presents information related to the geographic areas in which GCP operates. Sales are attributed to geographic areas based on customer location.
|
|
Three Months Ended March 31,
|
||||||
|
(In millions)
|
2017
|
|
2016
|
||||
|
Net Sales
|
|
|
|
||||
|
United States
|
$
|
106.8
|
|
|
$
|
106.0
|
|
|
Canada and Puerto Rico
|
5.1
|
|
|
6.6
|
|
||
|
Total North America
|
111.9
|
|
|
112.6
|
|
||
|
Europe Middle East Africa
|
45.5
|
|
|
55.1
|
|
||
|
Asia Pacific
|
51.2
|
|
|
54.9
|
|
||
|
Latin America
|
16.7
|
|
|
15.1
|
|
||
|
Total
|
$
|
225.3
|
|
|
$
|
237.7
|
|
29
14. Discontinued Operations
As discussed in Note 1, on March 2, 2017, the Company entered into the Offer Letter with Henkel, pursuant to which Henkel made a binding offer (the "Offer") to acquire Darex for approximately
$1.05 billion
, subject to working capital and certain other adjustments. Pursuant to the terms of the Offer Letter, following the conclusion of statutory employee consultation processes in connection with the Acquisition by the relevant works councils in France, the Company accepted Henkel’s offer and countersigned the Purchase Agreement with respect to the Acquisition, which was previously executed by Henkel, on April 28, 2017. Completion of the Acquisition remains subject to the satisfaction or waiver of customary closing conditions, including regulatory approvals. The Company has received antitrust clearances in the United States, Germany, Brazil, Russia and Austria and has filed for antitrust clearance in South Africa. The Acquisition is expected to close in the middle of 2017.
In accordance with applicable accounting guidance for the disposal of long-lived assets, Darex met the criteria to be classified as held for sale in the first quarter of 2017. As such, the assets and liabilities related to Darex have been reclassified and reflected as "held for sale" on the Consolidated Balance Sheets for all periods presented. Additionally, Darex has been reclassified and reflected as "discontinued operations" on the Consolidated Statements of Operations and Consolidated Statements of Cash Flows for all periods presented.
In connection with the Offer, the Company and Henkel also entered into a Transition Services Agreement pursuant to which Henkel and the Company will provide various services to each other in connection with the transition of the Darex business to Henkel. These services are expected to be performed for various periods up to
24
months following the closing date and include real estate, information technology, accounts payable, payroll, and other financial functions and administrative services. The agreed upon charges for such services will be generally intended to allow the servicing party to recover all out-of-pocket costs and expenses of providing such services.
Additionally, in connection with the Offer, the Company and Henkel entered into a Master Tolling Agreement, whereby Henkel will operate certain equipment at facilities being sold to manufacture and prepare for shipping certain products related to product lines that will continue to be owned by the Company. These services are expected to be provided for a period of
24
months following the closing date, which can be further extended at that time.
"Income from discontinued operations, net of income taxes" in the accompanying Statements of Operations is comprised of the following:
|
|
Three Months Ended March 31,
|
||||||
|
(In millions)
|
2017
|
|
2016
|
||||
|
Net sales
|
$
|
71.8
|
|
|
$
|
76.4
|
|
|
Cost of goods sold
|
45.2
|
|
|
48.4
|
|
||
|
Selling, general and administrative expenses
|
14.8
|
|
|
7.9
|
|
||
|
Research and development expenses
|
1.1
|
|
|
1.2
|
|
||
|
Other non-operating income, net
|
0.8
|
|
|
1.2
|
|
||
|
Provision for income taxes
|
(1.8
|
)
|
|
(5.9
|
)
|
||
|
Income from discontinued operations, net of income taxes
|
$
|
8.1
|
|
|
$
|
11.8
|
|
30
The carrying amounts of the major classes of assets and liabilities of Darex classified as "held for sale" as of March 31, 2017 and December 31, 2016 consist of the following:
|
(In millions)
|
March 31, 2017
|
|
December 31, 2016
|
||||
|
Cash and cash equivalents
|
$
|
22.3
|
|
|
$
|
17.2
|
|
|
Trade accounts receivable
|
48.1
|
|
|
50.5
|
|
||
|
Inventories
|
38.7
|
|
|
32.3
|
|
||
|
Other current assets
|
9.2
|
|
|
8.9
|
|
||
|
Current assets held for sale
|
118.3
|
|
|
108.9
|
|
||
|
Properties and equipment, net
|
41.0
|
|
|
40.0
|
|
||
|
Goodwill
|
4.7
|
|
|
4.4
|
|
||
|
Technology and other intangible assets, net
|
0.4
|
|
|
0.4
|
|
||
|
Deferred income taxes
|
7.9
|
|
|
6.4
|
|
||
|
Other assets
|
4.6
|
|
|
4.6
|
|
||
|
Noncurrent assets held for sale
|
58.6
|
|
|
55.8
|
|
||
|
Accounts payable
|
33.3
|
|
|
27.2
|
|
||
|
Other current liabilities
|
19.4
|
|
|
21.5
|
|
||
|
Current liabilities held for sale
|
52.7
|
|
|
48.7
|
|
||
|
Deferred income taxes
|
2.4
|
|
|
2.3
|
|
||
|
Underfunded and unfunded defined benefit pension plans
|
15.6
|
|
|
14.8
|
|
||
|
Other liabilities
|
3.5
|
|
|
3.8
|
|
||
|
Noncurrent liabilities held for sale
|
$
|
21.5
|
|
|
$
|
20.9
|
|
15. Subsequent Events
On May 8, 2017, GCP announced that it has signed a definitive agreement to acquire U.K.-based Stirling Lloyd for approximately
$94 million
in cash.
The Company expects to fund the acquisition, in part, by drawing on its available credit facilities. Stirling Lloyd is a supplier of high-performance liquid waterproofing and coatings products with annual net sales of approximately
$40 million
. The Company expects to complete the transaction, which is subject to local regulatory approvals, in the second quarter of 2017.
On May 3, 2017, the Board of Directors approved an amendment to the Company's U.S. Salaried Pension Plan that closes the plan to new hires effective January 1, 2018 and freezes the accrual of plan benefits for all plan participants as of December 31, 2022. Management expects to recognize in 2017 a curtailment gain in the range of
$4 million
to
$6 million
as a result of this plan amendment.
31
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We generally refer to the quarter ended
March 31, 2017
, as the "
first quarter
," the quarter ended
March 31, 2016
, as the "prior-year quarter." See Analysis of Operations for a discussion of our non-GAAP performance measures.
On March 2, 2017, GCP announced the sale of Darex to Henkel. The results of operations of the Darex 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 following discussion and analysis pertains only to our continuing operations.
Results of Operations
Summary Description of Business
We are engaged in the production and sale of specialty construction chemicals and specialty building materials through two operating segments:
|
•
|
Specialty Construction Chemicals.
Specialty Construction Chemicals ("SCC") provides products, technologies, and services that reduce the cost and improve the performance of cement, concrete, mortar, masonry and other cementitious based construction materials.
|
|
•
|
Specialty Building Materials.
Specialty Building Materials ("SBM") produces and sells sheet and liquid membrane systems and other products that protect both new and existing structures from water, air, and vapor penetration, and from fire damage. We also manufacture and sell specialized cementitious and chemical grouts used for soil consolidation and leak-sealing applications.
|
We operate our business on a global scale with approximately
54.4%
of our annual
2016
net sales from outside the United States. We conduct business in over
35
countries 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.
On January 27, 2016, GCP entered into a separation and distribution agreement pursuant to which W.R. Grace & Co. ("Grace") agreed to transfer its Grace Construction Products operating segment and the packaging technologies business, operated under the “Darex” name, of its Grace Materials Technologies operating segment to GCP (the "Separation"). The Separation occurred on February 3, 2016, by means of a pro rata distribution to Grace stockholders of all of the then-outstanding shares of Company common stock, at which time GCP became an independent public company and its common stock listed and began trading under the symbol "GCP" on the New York Stock Exchange.
First Quarter
Performance Summary
Following is a summary of our financial performance for the
first quarter
compared with the prior-year quarter.
|
•
|
Net sales
decrease
d
5.2%
to
$225.3 million
.
|
|
•
|
Net loss from continuing operations attributable to GCP shareholders was
$25.0 million
or
$0.35
per diluted share, compared to net income from continuing operations attributable to GCP shareholders of
$6.0 million
or
$0.08
per diluted share, for the prior-year quarter. Adjusted EPS was
$(0.06)
per diluted share compared to
$0.15
in the prior-year quarter.
|
|
•
|
Adjusted EBIT
decrease
d
60.9%
to
$11.0 million
.
|
|
•
|
Adjusted EBIT Return On Invested Capital was
25.9%
on a trailing four quarters basis compared with
37.2%
for the
2016
first quarter
.
|
32
Analysis of Operations
We have set forth in the table below our key operating statistics with percentage changes for the
first quarter
and
three months
compared with the corresponding prior-year quarter. Please refer to this Analysis of Operations (the “table”) when reviewing our Management's Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”). In 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 comparability and provides insight to the information that our management uses to evaluate the performance of our businesses. Our management uses non-GAAP measures in financial and operational decision-making processes, for internal reporting, and as part of forecasting and budgeting processes, as these measures provide additional transparency to 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 our MD&A.
We define Adjusted EBIT (a non-GAAP financial measure) to be net income from continuing operations attributable to GCP shareholders adjusted for interest income; interest expense and related financing costs; income taxes; 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; income and expense items related to certain product lines and investments; gains and losses on sales of businesses, product lines and certain other investments; third-party acquisition-related costs; the amortization of acquired inventory fair value adjustment; tax indemnification adjustments; and certain other items that are not representative of underlying trends. We use Adjusted EBIT to assess and measure our operating performance and in determining performance-based compensation. We use Adjusted EBIT as a performance measure because it provides improved quarter-to-quarter comparability for decision-making and compensation purposes and because it allows management to measure the ongoing earnings results of our strategic and operating decisions.
We define Adjusted EBITDA (a non-GAAP financial measure) to be Adjusted EBIT adjusted for depreciation and amortization. We use Adjusted EBITDA as a performance measure in making significant business decisions.
We define Adjusted Earnings Per Share (a non-GAAP financial measure) to be earnings per share ("EPS") from continuing operations on a diluted basis adjusted for costs related to restructuring and repositioning expenses and asset impairments; pension costs other than service and interest costs, expected return on plan assets and amortization of prior service costs/credits; gains and losses on sales of businesses, product lines and certain other investments; third-party acquisition-related costs; other financing costs associated with the modification or extinguishment of debt; certain other items that are not representative of underlying trends; and certain discrete tax items. We use Adjusted EPS as a performance measure to review our diluted earnings per share results on a consistent basis.
We define Adjusted Gross Profit (a non-GAAP financial measure) to be gross profit adjusted for pension-related costs. 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.
We define Adjusted EBIT Return On Invested Capital (a non-GAAP financial measure) to be Adjusted EBIT (on a trailing four quarters basis) divided by the sum of net working capital, properties and equipment and certain other assets and liabilities. We use Adjusted EBIT Return On Invested Capital as a performance measure to review investments and to make capital allocation decisions.
Adjusted EBIT, Adjusted EBITDA, Adjusted EPS, Adjusted EBIT Return On Invested Capital and Adjusted Gross Margin do not purport to represent income measures as defined under U.S. GAAP. These measures are provided to investors and others to improve the quarter-to-quarter 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.
33
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. 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 under GAAP to present a complete analysis of our results of operations. Adjusted EBIT and Adjusted EBITDA should be evaluated together with net income measured under GAAP for a complete understanding of our results of operations.
34
We have provided in the following tables a reconciliation of these non-GAAP measures to the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP.
|
Analysis of Operations
(In millions, except per share amounts) |
Three Months Ended March 31,
|
|||||||||
|
2017
|
|
2016
|
|
% Change
|
||||||
|
Net sales:
|
|
|
|
|
|
|||||
|
Specialty Construction Chemicals
|
$
|
134.0
|
|
|
$
|
137.0
|
|
|
(2.2
|
)%
|
|
Specialty Building Materials
|
91.3
|
|
|
100.7
|
|
|
(9.3
|
)%
|
||
|
Total GCP net sales
|
$
|
225.3
|
|
|
$
|
237.7
|
|
|
(5.2
|
)%
|
|
Net sales by region:
|
|
|
|
|
|
|||||
|
North America
|
$
|
111.9
|
|
|
$
|
112.6
|
|
|
(0.6
|
)%
|
|
Europe Middle East Africa (EMEA)
|
45.5
|
|
|
55.1
|
|
|
(17.4
|
)%
|
||
|
Asia Pacific
|
51.2
|
|
|
54.9
|
|
|
(6.7
|
)%
|
||
|
Latin America
|
16.7
|
|
|
15.1
|
|
|
10.6
|
%
|
||
|
Total net sales by region
|
$
|
225.3
|
|
|
$
|
237.7
|
|
|
(5.2
|
)%
|
|
Profitability performance measures:
|
|
|
|
|
|
|||||
|
Adjusted EBIT(A):
|
|
|
|
|
|
|||||
|
Specialty Construction Chemicals segment operating income
|
$
|
8.6
|
|
|
$
|
9.9
|
|
|
(13.1
|
)%
|
|
Specialty Building Materials segment operating income
|
15.2
|
|
|
27.8
|
|
|
(45.3
|
)%
|
||
|
Corporate costs(B)
|
(10.2
|
)
|
|
(7.7
|
)
|
|
(32.5
|
)%
|
||
|
Certain pension costs(C)
|
(2.6
|
)
|
|
(1.9
|
)
|
|
(36.8
|
)%
|
||
|
Adjusted EBIT (non-GAAP)
|
11.0
|
|
|
28.1
|
|
|
(60.9
|
)%
|
||
|
Repositioning expenses
|
(2.0
|
)
|
|
(4.3
|
)
|
|
53.5
|
%
|
||
|
Restructuring expenses
|
(1.1
|
)
|
|
(0.9
|
)
|
|
(22.2
|
)%
|
||
|
Pension MTM adjustment and other related costs, net
|
—
|
|
|
(2.7
|
)
|
|
NM
|
|
||
|
Third-party acquisition-related costs
|
(0.4
|
)
|
|
—
|
|
|
NM
|
|
||
|
Amortization of acquired inventory fair value adjustment
|
(1.5
|
)
|
|
—
|
|
|
NM
|
|
||
|
Tax indemnification adjustments
|
(2.4
|
)
|
|
—
|
|
|
NM
|
|
||
|
Interest expense, net
|
(17.0
|
)
|
|
(12.5
|
)
|
|
36.0
|
%
|
||
|
Provision for income taxes
|
(11.6
|
)
|
|
(1.7
|
)
|
|
NM
|
|
||
|
Net (loss) income from continuing operations attributable to GCP shareholders (GAAP)
|
$
|
(25.0
|
)
|
|
$
|
6.0
|
|
|
NM
|
|
|
Diluted EPS from continuing operations (GAAP)
|
$
|
(0.35
|
)
|
|
$
|
0.08
|
|
|
NM
|
|
|
Adjusted EPS (non-GAAP)
|
$
|
(0.06
|
)
|
|
$
|
0.15
|
|
|
NM
|
|
35
|
Analysis of Operations
(In millions) |
Three Months Ended March 31,
|
|||||||||
|
2017
|
|
2016
|
|
% Change
|
||||||
|
Adjusted profitability performance measures:
|
|
|
|
|
|
|
|
|
||
|
Gross Profit:
|
|
|
|
|
|
|
|
|
||
|
Specialty Construction Chemicals
|
$
|
47.8
|
|
|
$
|
47.1
|
|
|
1.5
|
%
|
|
Specialty Building Materials
|
39.5
|
|
|
46.6
|
|
|
(15.2
|
)%
|
||
|
Adjusted Gross Profit (non-GAAP)
|
87.3
|
|
|
93.7
|
|
|
(6.8
|
)%
|
||
|
Amortization of acquired inventory fair value adjustment
|
(1.5
|
)
|
|
—
|
|
|
NM
|
|
||
|
Pension costs in cost of goods sold
|
(0.5
|
)
|
|
(0.3
|
)
|
|
(66.7
|
)%
|
||
|
Total GCP Gross Profit (GAAP)
|
85.3
|
|
|
93.4
|
|
|
(8.7
|
)%
|
||
|
Gross Margin:
|
|
|
|
|
|
|
|
|
||
|
Specialty Construction Chemicals
|
35.7
|
%
|
|
34.4
|
%
|
|
1.3 pts
|
|||
|
Specialty Building Materials
|
43.3
|
%
|
|
46.3
|
%
|
|
(3.0) pts
|
|||
|
Adjusted Gross Margin (non-GAAP)
|
38.7
|
%
|
|
39.4
|
%
|
|
(0.7) pts
|
|||
|
Amortization of acquired inventory fair value adjustment
|
(0.7
|
)%
|
|
—
|
%
|
|
NM
|
|
||
|
Pension costs in cost of goods sold
|
(0.2
|
)%
|
|
(0.1
|
)%
|
|
(0.1) pts
|
|||
|
Total GCP Gross Margin (GAAP)
|
37.8
|
%
|
|
39.3
|
%
|
|
(1.5) pts
|
|||
|
Adjusted EBIT(A)(B)(C):
|
|
|
|
|
|
|
|
|
||
|
Specialty Construction Chemicals segment operating income
|
$
|
8.6
|
|
|
$
|
9.9
|
|
|
(13.1
|
)%
|
|
Specialty Building Materials segment operating income
|
15.2
|
|
|
27.8
|
|
|
(45.3
|
)%
|
||
|
Corporate and certain pension costs
|
(12.8
|
)
|
|
(9.6
|
)
|
|
(33.3
|
)%
|
||
|
Total GCP Adjusted EBIT (non-GAAP)
|
11.0
|
|
|
28.1
|
|
|
(60.9
|
)%
|
||
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
||
|
Specialty Construction Chemicals
|
$
|
5.1
|
|
|
$
|
4.8
|
|
|
6.3
|
%
|
|
Specialty Building Materials
|
2.9
|
|
|
2.2
|
|
|
31.8
|
%
|
||
|
Corporate
|
0.4
|
|
|
0.4
|
|
|
—
|
%
|
||
|
Total GCP
|
8.4
|
|
|
7.4
|
|
|
13.5
|
%
|
||
|
Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
||
|
Specialty Construction Chemicals
|
$
|
13.7
|
|
|
$
|
14.7
|
|
|
(6.8
|
)%
|
|
Specialty Building Materials
|
18.1
|
|
|
30.0
|
|
|
(39.7
|
)%
|
||
|
Corporate and certain pension costs
|
(12.4
|
)
|
|
(9.2
|
)
|
|
(34.8
|
)%
|
||
|
Total GCP Adjusted EBITDA (non-GAAP)
|
19.4
|
|
|
35.5
|
|
|
(45.4
|
)%
|
||
|
Adjusted EBIT Margin:
|
|
|
|
|
|
|
|
|
||
|
Specialty Construction Chemicals
|
6.4
|
%
|
|
7.2
|
%
|
|
(0.8) pts
|
|||
|
Specialty Building Materials
|
16.6
|
%
|
|
27.6
|
%
|
|
(11.0) pts
|
|||
|
Total GCP Adjusted EBIT Margin (non-GAAP)
|
4.9
|
%
|
|
11.8
|
%
|
|
(6.9) pts
|
|||
|
Adjusted EBITDA Margin:
|
|
|
|
|
|
|
|
|
||
|
Specialty Construction Chemicals
|
10.2
|
%
|
|
10.7
|
%
|
|
(0.5) pts
|
|||
|
Specialty Building Materials
|
19.8
|
%
|
|
29.8
|
%
|
|
(10.0) pts
|
|||
|
Total GCP Adjusted EBITDA Margin (non-GAAP)
|
8.6
|
%
|
|
14.9
|
%
|
|
(6.3) pts
|
|||
36
|
Analysis of Operations
(In millions)
|
Four Quarters Ended
|
||||||
|
March 31, 2017
|
|
March 31, 2016
|
|||||
|
Calculation of Adjusted EBIT Return On Invested Capital (trailing four quarters):
|
|||||||
|
Adjusted EBIT
|
$
|
125.3
|
|
|
$
|
157.9
|
|
|
Invested Capital:
|
|
|
|
|
|
||
|
Trade accounts receivable
|
169.4
|
|
|
168.4
|
|
||
|
Inventories
|
101.3
|
|
|
79.2
|
|
||
|
Accounts payable
|
(104.7
|
)
|
|
(93.3
|
)
|
||
|
|
166.0
|
|
|
154.3
|
|
||
|
Other current assets (excluding income taxes and related party loans receivable)
|
35.0
|
|
|
24.0
|
|
||
|
Properties and equipment, net
|
191.5
|
|
|
182.1
|
|
||
|
Goodwill
|
115.1
|
|
|
99.7
|
|
||
|
Technology and other intangible assets, net
|
51.0
|
|
|
32.7
|
|
||
|
Investment in unconsolidated affiliate
|
—
|
|
|
—
|
|
||
|
Other assets (excluding capitalized financing fees)
|
19.7
|
|
|
17.2
|
|
||
|
Other current liabilities (excluding income taxes, restructuring, repositioning and accrued interest)
|
(81.4
|
)
|
|
(76.2
|
)
|
||
|
Other liabilities (excluding other postretirement benefits liability)
|
(13.8
|
)
|
|
(9.1
|
)
|
||
|
Total invested capital
|
$
|
483.1
|
|
|
$
|
424.7
|
|
|
Adjusted EBIT Return On Invested Capital (non-GAAP)
|
25.9
|
%
|
|
37.2
|
%
|
||
___________________________________________________________________________________________________________________
Amounts may not add due to rounding.
|
(A)
|
GCP's segment operating income includes only GCP's share of income of consolidated joint ventures.
|
|
(B)
|
Management allocates all costs within corporate to each segment to the extent such costs are directly attributable to the segments. Corporate costs include approximately
$3.0 million
and
$1.6 million
of allocated costs in the three months ended March 31, 2017 and 2016, respectively, that were previously reported within the Darex operating segment. Such costs did not qualify to be reclassified to discontinued operations.
|
|
(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. Other pension related costs including annual mark-to-market adjustments, actuarial gains and losses, gains or losses from curtailments and terminations, and other related costs are excluded from Adjusted EBIT. These amounts are not used by management to evaluate the performance of the GCP businesses and significantly affect the peer-to-peer and quarter-to-quarter comparability of our financial results. Mark-to-market adjustments, actuarial gains and losses, and other related costs relate primarily to changes in financial market values and actuarial assumptions and are not directly related to the operation of the GCP businesses. SCC and SBM segment operating income and corporate costs do not include any amounts for pension cost.
|
|
NM
|
Not meaningful.
|
37
Adjusted EPS
The following table reconciles our Diluted EPS (GAAP) to our Adjusted EPS (non-GAAP):
|
|
Three Months Ended March 31,
|
||||||||||||||||||||||||||||||
|
|
2017
|
|
2016
|
||||||||||||||||||||||||||||
|
(In millions, except per share amounts)
|
Pre-
Tax
|
|
Tax Effect
|
|
After-
Tax
|
|
Per
Share
|
|
Pre-
Tax
|
|
Tax Effect
|
|
After-
Tax
|
|
Per
Share
|
||||||||||||||||
|
Diluted EPS from continuing operations (GAAP)
|
|
|
|
|
|
|
|
|
|
$
|
(0.35
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
0.08
|
|
||||||
|
Repositioning expenses
|
$
|
2.0
|
|
|
$
|
0.8
|
|
|
$
|
1.2
|
|
|
0.02
|
|
|
$
|
4.3
|
|
|
$
|
1.7
|
|
|
$
|
2.6
|
|
|
0.04
|
|
||
|
Restructuring expenses
|
1.1
|
|
|
0.3
|
|
|
0.8
|
|
|
0.01
|
|
|
0.9
|
|
|
0.3
|
|
|
0.6
|
|
|
0.01
|
|
||||||||
|
Pension MTM adjustment and other related costs, net
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2.7
|
|
|
1.0
|
|
|
1.7
|
|
|
0.02
|
|
||||||||
|
Third-party acquisition-related costs
|
0.4
|
|
|
0.2
|
|
|
0.2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
||||||||
|
Amortization of acquired inventory fair value adjustment
|
1.5
|
|
|
0.6
|
|
|
0.9
|
|
|
0.01
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
||||||||
|
Tax indemnification adjustments
|
2.4
|
|
|
0.9
|
|
|
1.5
|
|
|
0.02
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
||||||||
|
Discrete tax items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
|
Discrete tax items, including adjustments to uncertain tax positions
|
—
|
|
|
(16.7
|
)
|
|
16.7
|
|
|
0.23
|
|
|
—
|
|
|
(0.1
|
)
|
|
0.1
|
|
|
—
|
|
||||||||
|
Adjusted EPS (non-GAAP)
|
|
|
|
|
|
|
$
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
0.15
|
|
|||||||||
GCP Overview
Following is an overview of our financial performance for the
first quarter
compared with the prior-year quarter.
Net Sales and Gross Margin
The following table identifies the year-over-year increase or decrease in sales attributable to changes in volume and/or mix, product price, and the impact of currency translation for the quarter.
38
|
|
Three Months Ended March 31, 2017
as a Percentage Increase (Decrease) from Three Months Ended March 31, 2016 |
||||||||||
|
Net Sales Variance Analysis
|
Volume
|
|
Price
|
|
Currency Translation
|
|
Total Change
|
||||
|
Specialty Construction Chemicals
|
(3.2
|
)%
|
|
7.3
|
%
|
|
(6.3
|
)%
|
|
(2.2
|
)%
|
|
Specialty Building Materials
|
(9.7
|
)%
|
|
1.8
|
%
|
|
(1.4
|
)%
|
|
(9.3
|
)%
|
|
Net sales
|
(5.9
|
)%
|
|
5.0
|
%
|
|
(4.3
|
)%
|
|
(5.2
|
)%
|
|
By Region:
|
|
|
|
|
|
|
|
||||
|
North America
|
(2.0
|
)%
|
|
1.2
|
%
|
|
0.2
|
%
|
|
(0.6
|
)%
|
|
Europe Middle East Africa
|
(12.8
|
)%
|
|
1.0
|
%
|
|
(5.6
|
)%
|
|
(17.4
|
)%
|
|
Asia Pacific
|
(4.8
|
)%
|
|
(1.5
|
)%
|
|
(0.4
|
)%
|
|
(6.7
|
)%
|
|
Latin America
|
(14.2
|
)%
|
|
71.2
|
%
|
|
(46.4
|
)%
|
|
10.6
|
%
|
Net sales of
$225.3 million
for the
first quarter
of
2017
decrease
d
$12.4 million
or
5.2%
compared with the prior-year quarter. The decrease was primarily due to lower sales volumes across all regions and the negative impact of foreign exchange in Latin America, EMEA and Asia Pacific, as the U.S. dollar strengthened against the majority of the foreign currencies in which we transact business. Price increases in both SCC and SBM partially offset the declines in sales volume and negative impacts of foreign exchange, especially in Latin America, which was driven by hyper-inflation in Venezuela.
GCP's gross margin of
37.8%
decrease
d
150
basis points for the
first quarter
compared with the prior-year quarter, primarily due to lower gross margin in SBM and the impact of an inventory fair value adjustment relating to the Halex acquisition, partially offset by higher gross margin in SCC. GCP's Adjusted Gross Margin of
38.7%
decrease
d
70
basis points for the
first quarter
compared with the prior-year quarter as a result of lower gross margin in SBM, partially offset by improved gross margin in SCC.
Net Income (Loss) Attributable to GCP Shareholders
Net loss from continuing operations attributable to GCP shareholders was
$25.0 million
for the
first quarter
of
2017
, compared to net income from continuing operations attributable to GCP shareholders of
$6.0 million
for the prior-year quarter. The change was primarily due to higher income taxes, interest expense, selling, general and administrative expenses and lower gross profit, partially offset by lower repositioning expenses. Selling, general, and administrative expenses increased primarily due to the acquisition of Halex in the fourth quarter of 2016, and higher employee-related costs, corporate facility costs, and professional fees as the Company built out its corporate and global support functions throughout 2016 as part of the Separation.
39
Adjusted EBIT
Adjusted EBIT was
$11.0 million
for the
first quarter
of 2017, a
decrease
of
60.9%
compared with the prior-year quarter. The decrease was primarily due to lower Adjusted Gross Profit and higher selling, general and administrative expenses.
Adjusted EBIT Return On Invested Capital
Adjusted EBIT Return On Invested Capital for the
first quarter
decrease
d to
25.9%
on a trailing four quarters basis from
37.2%
on the same basis for the prior-year quarter. The
decrease
was mainly driven by a
decline
in the trailing four quarters of Adjusted EBIT and a
13.8%
increase
in invested capital that resulted primarily from
the
acquisition of Halex in the fourth quarter of 2016.
We manage our operations with the objective of maximizing sales, earnings and cash flow over time. Doing so requires that we successfully balance our growth, profitability and working capital and other investments to support sustainable, long-term financial performance. We use Adjusted EBIT Return On Invested Capital as a performance measure in evaluating operating results, in making operating and investment decisions and in balancing the growth and profitability of our operations. Generally, we favor those businesses and investments that provide the highest return on invested capital.
40
Operating Segment Overview—Specialty Construction Chemicals (SCC)
Following is an overview of the financial performance of SCC for the
first quarter
compared with the corresponding prior-year quarter.
Net Sales—SCC
Net sales were
$134.0 million
for the
first quarter
, a
decrease
of
2.2%
compared with the prior-year quarter. The
decrease
in net sales was due primarily to unfavorable foreign exchange rates and volume declines in Asia, Europe and Latin America, partially offset by volume increases in North America and inflation-driven price increases in Venezuela.
Sales volumes declined in our Concrete business by
4.7%
, with increases in North America offset by the continued impact of geopolitical events in Turkey, a slow-down in the Middle East, lower demand in Latin America and year-over-year declines in Asia Pacific. Sales volumes increased
1.9%
in our Cement business, with growth across all regions.
Currency translation had an unfavorable impact primarily in Latin America and Europe, with Latin America reflecting currency declines in Venezuela.
41
Segment Operating Income (SOI) and Margin—SCC
Gross profit was
$47.8 million
for the
first quarter
, an
increase
of
$0.7 million
or
1.5%
compared with the prior-year quarter. Gross margin was
35.7%
, compared with
34.4%
for the prior-year quarter, with pricing and productivity gains partially offset by increases in raw material costs.
Segment operating income was
$8.6 million
for the
first quarter
, a
decrease
of
$1.3 million
or
13.1%
compared with the prior-year quarter. Segment operating margin
decrease
d
80
basis points to
6.4%
compared with the prior-year quarter, primarily due to investments in research and development and higher general and administrative expenses.
42
Operating Segment Overview—Specialty Building Materials (SBM)
Following is an overview of the financial performance of SBM for the
first quarter
compared with the corresponding prior-year quarter.
Net Sales—SBM
Net sales were
$91.3 million
for the
first quarter
, a
decrease
of
9.3%
compared with the prior-year quarter including
$8.4 million
, or
8.3%
of sales growth, from Halex. The
decrease
was due to lower sales volumes and unfavorable currency translation, which more than offset higher pricing. Net sales increased in Specialty Construction Products by
28.8%
but decreased in Building Envelope and Residential by
20.6%
and
18.4%
, respectively. Specialty Construction Products included
38%
growth from Halex
.
Product line sales volumes decreased in all regions (
5.9%
in North America,
6.1%
in Asia Pacific,
18.4%
in Europe and
60.4%
in Latin America). The decrease in North America was driven by a difficult comparison with the prior year due to abnormally mild winter weather in 2016 as well as project timing. The sales volume decrease in both Europe and Asia Pacific was a result of large infrastructure projects completed in the comparable prior-year quarter
.
Currency translation had an unfavorable impact in Europe and Asia Pacific and price improved in North America and Europe.
43
Segment Operating Income (SOI) and Margin—SBM
Gross profit was
$39.5 million
for the
first quarter
, a
decrease
of
15.2%
from the prior-year quarter. Gross margin was
43.3%
compared with
46.3%
for the prior-year quarter primarily due to Halex, which has gross margins that are below the average segment margin. The balance of the decrease was primarily due to increased raw material inflation, lower volumes and unfavorable product mix, partially offset by increased pricing and productivity.
Segment operating income was
$15.2 million
for the
first quarter
, a
decrease
of
45.3%
from the prior-year quarter. Segment operating margin for the
first quarter
was
16.6%
, a
decrease
from
27.6%
in the prior-year quarter. The decrease resulted from lower gross margin and higher selling, general and administrative costs, primarily due to the addition of Halex and higher employee-related costs.
44
Corporate Overview
Corporate costs include certain functional costs, impacts of foreign exchange and other corporate costs such as certain performance-based incentive compensation and public company costs that are not allocated to our operating segments. Corporate costs were
$10.2 million
for the
first quarter
, an
increase
of
32.5%
compared with the prior-year quarter. The
increase
was primarily due to higher global functional costs and increased stock-based compensation expense, which was partially due to accelerated vesting of certain awards.
Defined Benefit Pension Expense
Certain pension costs for the
first quarter
were
$2.6 million
compared with
$1.9 million
for the corresponding prior-year quarter. The increase relates primarily to lower discount rates and demographic factors related to plan participants.
Pension mark-to-market and other related costs, net, were
$2.7 million
in the prior-year quarter, primarily due to a
$2.4 million
liability recorded relating to a U.S. multi-employer plan that GCP participants withdrew from during the years 2007 to 2011, triggering a partial withdrawal under ERISA rules.
Restructuring and Repositioning Expenses
GCP incurred
$1.1 million
of restructuring expenses during the
first quarter
ended
March 31, 2017
, compared with
$0.9 million
for the prior-year quarter. The
increase
was primarily due to higher severance costs incurred as a result of the Separation.
Post-Separation, GCP has incurred expenses related to the transition to becoming a stand-alone public company. These costs are expected to range from
$18.0 million
to
$20.0 million
, of which $
17.2
million has been incurred through
March 31, 2017
. We expect to incur substantially all of these expenses by the end of the second quarter of 2017. Repositioning expenses for the
three months ended March 31, 2017
and 2016 were as follows:
|
|
Three Months Ended March 31,
|
||||||
|
(In millions)
|
2017
|
|
2016
|
||||
|
Professional fees
|
$
|
1.4
|
|
|
$
|
2.1
|
|
|
Software and IT implementation fees
|
0.3
|
|
|
—
|
|
||
|
Employee-related costs
|
0.3
|
|
|
2.2
|
|
||
|
Total
|
$
|
2.0
|
|
|
$
|
4.3
|
|
We exclude restructuring and repositioning expenses from Adjusted EBIT.
45
Interest and Financing Expenses
Net interest and financing expenses were $
17.0 million
for the
first quarter
of
2017
compared to
$12.5 million
in the corresponding prior-year quarter, an increase of
36.0%
. The increase resulted primarily from the February 2016 issuance of our debt, for which we did not incur a full quarterly period of interest expense.
Income Taxes
The income tax provision on continuing operations at the U.S. federal corporate rate of
35%
for the
first quarter
and the prior-year quarter would have been
$(4.7) million
and
$2.8 million
, respectively. The differences between these amounts and the recorded provision for income taxes of
$11.6 million
and
$1.7 million
, respectively, resulted primarily from the recording of a valuation allowance against U.S., Brazil, and Turkey deferred tax assets and against U.S. foreign tax credit carryovers, which resulted in an increase to the effective rate in the first quarter of 2017 of
103.0
percentage points, as well as a change in the Company’s assertion that it is indefinitely reinvested in Mexico, as discussed further below, which added
14.2
percentage points. Our effective tax rate may change over time as the amount or mix of income and taxes changes among the jurisdictions in which we are subject to tax. The foreign rate differential in the first quarter of 2017 and 2016 resulted in decreases to the annualized effective tax rate of
5.2
and
7.4
percentage points, respectively.
For the three months ended
March 31, 2017
and 2016, GCP recorded income tax expense on discontinued operations of
$1.8 million
and
$5.9 million
, respectively. Refer to Note 14 for further details.
As of December 31, 2016, GCP had the intent and ability to indefinitely reinvest undistributed earnings of its foreign subsidiaries outside the United States. During the first quarter of 2017, GCP determined it could no longer assert it is indefinitely reinvested in Mexico because that entity is anticipated to be sold as part of the Darex transaction. The tax associated with its outside book and tax basis difference in Mexico was recorded during the quarter as a discrete item resulting in a tax expense of
$1.9 million
. GCP believes that the anticipated sale of Darex is a one-time, non-recurring event and that recognition of deferred taxes of undistributed earnings during 2017 would not have occurred if not for the anticipated sale. As of
March 31, 2017
, GCP has the intent and ability to indefinitely reinvest undistributed earnings of all its other foreign subsidiaries outside the United States. Subsequent to the anticipated sale of Darex, GCP expects undistributed prior-year earnings of its foreign subsidiaries to remain indefinitely reinvested except in certain instances where repatriation of such earnings would result in minimal or no tax. GCP bases this assertion on:
|
(1)
|
the expectation that it will satisfy its U.S. cash obligations in the foreseeable future without requiring the repatriation of prior-year foreign earnings;
|
|
(2)
|
plans for significant and continued reinvestment of foreign earnings in organic and inorganic growth initiatives outside the U.S.; and
|
|
(3)
|
remittance restrictions imposed by local governments
|
GCP will continually analyze and evaluate its cash needs to determine the appropriateness of its indefinite reinvestment assertion.
Refer to Note 4, "Income Taxes," to the Consolidated Financial Statements for additional information.
Financial Condition, Liquidity, and Capital Resources
Following is an analysis of our financial condition, liquidity and capital resources at
March 31, 2017
.
Our principal uses of cash generally have been capital investments and acquisitions and working capital investments. In connection with our separation from Grace, we incurred
$800.0
million of indebtedness, including
$750.0
million borrowed to pay a distribution to Grace prior to the separation and approximately
$50
million retained to meet operating requirements and to pay separation associated fees. We believe our liquidity and capital resources, including cash on hand, cash we expect to generate during
2017
and thereafter, future borrowings if any, and other available liquidity and capital resources (discussed further below), are sufficient to finance our operations and growth strategy and to meet our debt obligations.
46
Divestiture of Darex
In conjunction with the proposed sale of Darex, we expect to receive after-tax net proceeds of approximately
$800 million
before deal and other one-time costs, subject to customary closing adjustments. We expect to receive these proceeds upon the closing date of the sale, which we anticipate will occur around mid-year 2017. We intend to use these proceeds primarily for general corporate purposes and to repay indebtedness.
Cash Resources and Available Credit Facilities
At
March 31, 2017
, we had available liquidity of
$372.4 million
, consisting of
$109.5 million
in cash and cash equivalents ($
26.7 million
in the U.S.),
$226.0 million
available under our revolving credit facility, and
$36.9 million
of available liquidity 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 to provide working capital during occasional cash shortfalls. We generally renew these credit facilities as they expire.
The following table summarizes our non-U.S. credit facilities as of
March 31, 2017
:
|
(In millions) |
Maximum Borrowing Amount
|
|
Available Liquidity
|
|
Expiration Date
|
||||
|
China
|
$
|
11.5
|
|
|
$
|
5.7
|
|
|
Open end
|
|
India
|
10.0
|
|
|
1.9
|
|
|
2/3/2021
|
||
|
Singapore
|
7.6
|
|
|
7.6
|
|
|
2/3/2021
|
||
|
Australia
|
6.0
|
|
|
3.0
|
|
|
2/3/2021
|
||
|
Canada
|
5.6
|
|
|
2.6
|
|
|
2/3/2021
|
||
|
Turkey
|
3.1
|
|
|
2.6
|
|
|
Open end
|
||
|
United Arab Emirates
|
2.5
|
|
|
2.5
|
|
|
11/30/2017
|
||
|
Other countries
|
11.6
|
|
|
11.0
|
|
|
Open end
|
||
|
Total
|
$
|
57.9
|
|
|
$
|
36.9
|
|
|
|
47
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)
|
2017
|
|
2016
|
||||
|
Net cash (used in) provided by operating activities from continuing operations
|
$
|
(28.0
|
)
|
|
$
|
8.2
|
|
|
Net cash used in investing activities from continuing operations
|
(9.8
|
)
|
|
(12.6
|
)
|
||
|
Net cash (used in) provided by financing activities from continuing operations
|
(8.8
|
)
|
|
20.6
|
|
||
Net cash used in operating activities from continuing operations for the
first quarter
was
$28.0 million
, compared with net cash provided by operating activities of
$8.2 million
for the
prior-year quarter
. The year-over-year change was primarily due to a decrease in net income, an increase in inventories, and changes in other assets and liabilities compared with the prior-year quarter. The changes in other assets and liabilities were driven by a
$25.4 million
increase in cash paid for interest related to our senior notes, as well as other changes in payments for incentive compensation and customer rebates, partially offset by a change in deferred taxes and an increase in accounts payable.
Net cash used in investing activities from continuing operations for the
first quarter
was
$9.8 million
, compared with
$12.6 million
for the
prior-year quarter
. The year-over-year change was primarily due to cash received in connection with post-closing adjustments related to the Halex acquisition and a decrease in other investing activities compared with the prior-year quarter
.
Net cash used in financing activities from continuing operations for the
first quarter
was
$8.8 million
, compared with net cash provided by financing activities of
$20.6 million
in the
prior-year quarter
. The year-over-year change in cash flow was primarily due to proceeds from the issuance of bonds and indebtedness incurred during the first quarter of 2016 and an increase in repayments under our credit arrangements during the first quarter of 2017.
Included in net cash (used in) provided by operating activities from continuing operations for the
three months ended March 31, 2017
and
March 31, 2016
, are restructuring payments of $
0.3 million
and $
1.8 million
, respectively, and repositioning payments of $
1.1 million
and $
3.9 million
for the
three months ended March 31, 2017
and
March 31, 2016
, respectively. These cash flows totaled
$1.4 million
and
$5.7 million
for the
first quarter
and
prior-year quarter
, respectively.
Debt and Other Contractual Obligations
Total debt outstanding at
March 31, 2017
was
$820.6 million
. Refer to Note 3, "Debt and Other Financial Instruments," to the Consolidated Financial Statements for additional information regarding our debt.
Refer to Note 7, "Commitments and Contingent Liabilities," to the Consolidated Financial Statements for a discussion of financial assurances.
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 quarter ended
March 31, 2017
, there were no material changes to our contractual obligations as previously reported in our Annual Report on Form 10-K for the year ended
December 31, 2016
.
Employee Benefit Plans
In the three months ended March 31, 2016, we made an accelerated contribution to the trusts that hold assets of the U.S. qualified pension plans of approximately
$1.0 million
. We intend to fund non-U.S. pension plans based upon applicable legal requirements as well as actuarial and trustee recommendations. We contributed
$0.8 million
to these non-U.S. plans during the
first quarter
of 2017 compared with
$0.3 million
during the
prior-year quarter
.
Refer to Note 5, "Pension Plans and Other Postretirement Benefit Plans," to the Consolidated Financial Statements for further discussion.
48
Other Contingencies
Refer to Note 7, "Commitments and Contingent Liabilities," to the Consolidated Financial Statements for a discussion of other contingencies.
Inflation
We recognize that inflationary pressures may have an adverse effect on us through higher asset replacement costs and higher raw materials and other operating costs. We try to minimize these impacts through effective control of operating expenses and productivity improvements as well as price increases to customers.
We estimate that the cost of replacing our property and equipment today is greater than its historical cost. Accordingly, our depreciation expense would be greater if the expense were stated on a current cost basis.
Venezuela
The operating environment in Venezuela is challenging, with high inflation, governmental restrictions in the form of currency exchange, price and margin controls, importation of raw materials, labor unrest, and the possibility of government actions such as further currency devaluations, business occupations or intervention and expropriation of assets. In addition, the foreign exchange controls in Venezuela limit our ability to purchase raw materials, repatriate earnings, remit dividends and pay intercompany balances at an official exchange rate or at all. Due to our inability to convert local currency at official exchange rates (including the DICOM rate), we have been purchasing imported raw materials from local distributors in local currency with an implicit foreign exchange rate ranging from
2,500
to
4,500
bolivar to one U.S. dollar in the first quarter of 2017.
Effective January 1, 2010, we began to account for Venezuela as a highly inflationary economy. As a result, the functional currency of our Venezuelan subsidiary became the U.S. dollar; therefore, all translation adjustments are reflected in net income in the accompanying Consolidated Statements of Operations.
Effective September 30, 2015, we began accounting for our results in Venezuela at the SIMADI rate. In mid-February 2016, changes to the currency exchange systems were announced that eliminated the SICAD exchange rate and replaced the name SIMADI rate with DICOM. The DICOM rate was
708
bolivars to one U.S. dollar at March 31, 2017, an increase of approximately
4.9%
from the rate at December 31, 2016, resulting in an immaterial impact on income from continuing operations.
In March 2017, the Venezuelan government announced that a new exchange rate would be introduced to replace the DICOM rate, although further details have not been publicly announced. We believe the new exchange rate would result in a further devaluation of the local currency and additional currency remeasurement losses in net income.
At March 31, 2017, the monetary net assets denominated in local currency within our Venezuela subsidiary were
$8.6 million
, of which
$5.0 million
has been reclassified as "held for sale" on our Consolidated Balance Sheet. Assuming an exchange rate of
3,000
bolivar to one U.S. dollar, the incremental remeasurement loss for the quarter ended March 31, 2017 would have been
$6.6 million
, of which
$2.8 million
would have been reported in "Loss from continuing operations before income taxes" and
$3.8 million
in "Income from discontinued operations, net of income taxes" on our Consolidated Statement of Operations. At March 31, 2017, we also had on our Consolidated Balance Sheet U.S. dollar- and Euro-denominated intercompany payables of approximately
$19 million
and a negative currency translation adjustment balance of approximately
$33 million
related to our Venezuela subsidiary.
Critical Accounting Estimates
Refer to the "Critical Accounting Estimates" heading in Item 7 of our Form 10-K for the year ended
December 31, 2016
.
Recent Accounting Pronouncements
Refer to Note 1, "Basis of Presentation and Summary of Significant Accounting and Financial Reporting Policies," to the Consolidated Financial Statements for a discussion of recent accounting pronouncements and their potential effect on our results of operations, financial position and related disclosures.
49
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
With respect to information disclosed in the "Quantitative and Qualitative Disclosures About Market Risk" section of our Annual Report on Form 10-K for the year ended
December 31, 2016
("
2016
Annual Report"), more recent numerical measures and other information are available in the "Financial Statements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" sections of this Report. These more recent measures and the information disclosed in the "Quantitative and Qualitative Disclosures About Market Risk" section of our
2016
Annual Report are incorporated herein by reference.
Item 4. CONTROLS AND PROCEDURES
Management’s Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, our principal executive officer and principal financial officer evaluated the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the "Exchange Act"), which are designed to provide reasonable assurance that we are able to record, process, summarize and report the information required to be disclosed in our reports under the Exchange Act within the time periods specified in SEC rules and forms. Based on their evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed in reports that we file or submit under the Exchange Act is accumulated and communicated to management, and made known to our principal executive officer and principal financial officer, on a timely basis to ensure that it is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended
March 31, 2017
, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
50
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Information with respect to this Item may be found in Note 7 to the Consolidated Financial Statements in this Quarterly Report on Form 10-Q, which information is incorporated herein by reference.
Additional information on our commitments and contingencies can be found in our Annual Report on Form 10-K for our fiscal year ended
December 31, 2016
.
Item 1A. RISK FACTORS
There are no material changes from the risk factors as previously disclosed in our Annual Report on Form 10-K for our fiscal year ended
December 31, 2016
.
Item 6. EXHIBITS
|
Exhibit No.
|
|
Description of Exhibit
|
|
10.1*
|
|
Form of GCP Applied Technologies Inc. Stock Option Award Agreement.***
|
|
10.2*
|
|
Form of GCP Applied Technologies Inc. Restricted Stock Unit Award Agreement.***
|
|
10.3*
|
|
Form of GCP Applied Technologies Inc. Performance-Based Stock Unit Award Agreement.***
|
|
31.1*
|
|
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
31.2*
|
|
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
32**
|
|
Certification of the Chief Executive Officer and Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002
|
|
101.INS*
|
|
XBRL Instance Document
|
|
101.SCH*
|
|
XBRL Taxonomy Extension Schema
|
|
101.CAL*
|
|
XBRL Taxonomy Extension Calculation Linkbase
|
|
101.DEF*
|
|
XBRL Taxonomy Extension Definition Linkbase
|
|
101.LAB*
|
|
XBRL Taxonomy Extension Label Linkbase
|
|
101.PRE*
|
|
XBRL Taxonomy Extension Presentation Linkbase
|
* Filed herewith.
** Furnished herewith.
*** Management contract or compensatory plan.
51
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
GCP Applied Technologies Inc.
(Registrant)
|
|
|
|
|
|
|
Date: May 9, 2017
|
By:
|
/s/ GREGORY E. POLING
|
|
|
|
Gregory E. Poling
President and Chief Executive Officer
(Principal Executive Officer)
|
|
|
|
|
|
Date: May 9, 2017
|
By:
|
/s/ DEAN P. FREEMAN
|
|
|
|
Dean P. Freeman
Vice President and Chief Financial Officer
(Principal Financial Officer)
|
|
|
|
|
|
Date: May 9, 2017
|
By:
|
/s/ KENNETH S. KOROTKIN
|
|
|
|
Kenneth S. Korotkin
Vice President, Controller and Chief Accounting Officer
(Principal Accounting Officer)
|
52
EXHIBIT INDEX
|
Exhibit No.
|
|
Description of Exhibit
|
|
10.1*
|
|
Form of GCP Applied Technologies Inc. Stock Option Award Agreement.***
|
|
10.2*
|
|
Form of GCP Applied Technologies Inc. Restricted Stock Unit Award Agreement.***
|
|
10.3*
|
|
Form of GCP Applied Technologies Inc. Performance-Based Stock Unit Award Agreement.***
|
|
31.1*
|
|
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
31.2*
|
|
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
32**
|
|
Certification of the Chief Executive Officer and Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002
|
|
101.INS*
|
|
XBRL Instance Document
|
|
101.SCH*
|
|
XBRL Taxonomy Extension Schema
|
|
101.CAL*
|
|
XBRL Taxonomy Extension Calculation Linkbase
|
|
101.DEF*
|
|
XBRL Taxonomy Extension Definition Linkbase
|
|
101.LAB*
|
|
XBRL Taxonomy Extension Label Linkbase
|
|
101.PRE*
|
|
XBRL Taxonomy Extension Presentation Linkbase
|
* Filed herewith.
** Furnished herewith.
*** Management contract or compensatory plan.
53