GCP Applied Technologies Inc. - Quarter Report: 2020 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||||||
| For the Quarterly Period Ended | September 30, 2020 | ||||||||||
| OR | |||||||||||
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||||||
| Commission File Number | 1-37533 | ||||||||||
GCP Applied Technologies Inc.
| Delaware | 47-3936076 | |||||||
| (State of Incorporation) | (I.R.S. Employer Identification No.) | |||||||
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 every Interactive Data File required to be submitted 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, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ý | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | ☐ | Emerging growth company | ☐ | ||||||||||||||||||||
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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
| Class | Trading Symbol | Exchange on which registered | ||||||||||||
| Common Stock, $0.01 par value per share | GCP | New York Stock Exchange | ||||||||||||
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
| Class | Outstanding at October 29, 2020 | |||||||
| Common Stock, $0.01 par value per share | 73,058,299 | |||||||
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| TABLE OF CONTENTS | ||||||||||||||
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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.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GCP Applied Technologies Inc.
Consolidated Statements of Operations (unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (In millions, except per share amounts) | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
| Net sales | $ | 248.4 | $ | 266.9 | $ | 660.5 | $ | 755.2 | |||||||||||||||
| Cost of goods sold | 147.0 | 161.8 | 400.8 | 468.9 | |||||||||||||||||||
| Gross profit | 101.4 | 105.1 | 259.7 | 286.3 | |||||||||||||||||||
| Selling, general and administrative expenses | 65.2 | 66.3 | 199.0 | 206.7 | |||||||||||||||||||
| Research and development expenses | 4.5 | 4.5 | 13.1 | 13.8 | |||||||||||||||||||
| Interest expense and related financing costs | 5.6 | 5.7 | 16.3 | 17.3 | |||||||||||||||||||
| Repositioning expenses | 0.1 | 4.4 | 3.8 | 15.6 | |||||||||||||||||||
| Restructuring expenses and asset impairments | 7.7 | 3.8 | 11.2 | 8.8 | |||||||||||||||||||
| Gain on sale of corporate headquarters | (110.2) | — | (110.2) | — | |||||||||||||||||||
| Other income, net | (1.8) | (2.2) | (6.7) | (5.7) | |||||||||||||||||||
| Total costs and expenses | (28.9) | 82.5 | 126.5 | 256.5 | |||||||||||||||||||
| Income from continuing operations before income taxes | 130.3 | 22.6 | 133.2 | 29.8 | |||||||||||||||||||
| (Provision for) benefit from income taxes | (30.6) | (5.5) | (33.2) | 5.2 | |||||||||||||||||||
| Income from continuing operations | 99.7 | 17.1 | 100.0 | 35.0 | |||||||||||||||||||
| (Loss) income from discontinued operations, net of income taxes | (0.1) | (0.4) | (0.4) | 5.9 | |||||||||||||||||||
| Net income | 99.6 | 16.7 | 99.6 | 40.9 | |||||||||||||||||||
| Less: Net income attributable to noncontrolling interests | (0.2) | (0.1) | (0.4) | (0.3) | |||||||||||||||||||
| Net income attributable to GCP shareholders | $ | 99.4 | $ | 16.6 | $ | 99.2 | $ | 40.6 | |||||||||||||||
| Amounts Attributable to GCP Shareholders: | |||||||||||||||||||||||
| Income from continuing operations attributable to GCP shareholders | 99.5 | 17.0 | 99.6 | 34.7 | |||||||||||||||||||
| (Loss) income from discontinued operations, net of income taxes | (0.1) | (0.4) | (0.4) | 5.9 | |||||||||||||||||||
| Net income attributable to GCP shareholders | $ | 99.4 | $ | 16.6 | $ | 99.2 | $ | 40.6 | |||||||||||||||
| Earnings (Loss) Per Share Attributable to GCP Shareholders | |||||||||||||||||||||||
Basic earnings (loss) per share:(2) | |||||||||||||||||||||||
| Income from continuing operations attributable to GCP shareholders | $ | 1.36 | $ | 0.23 | $ | 1.37 | $ | 0.48 | |||||||||||||||
| (Loss) income from discontinued operations, net of income taxes | $ | — | $ | (0.01) | $ | (0.01) | $ | 0.08 | |||||||||||||||
Net income attributable to GCP shareholders(1) | $ | 1.36 | $ | 0.23 | $ | 1.36 | $ | 0.56 | |||||||||||||||
| Weighted average number of basic shares | 73.0 | 72.7 | 72.9 | 72.5 | |||||||||||||||||||
Diluted earnings (loss) per share:(2) | |||||||||||||||||||||||
| Income from continuing operations attributable to GCP shareholders | $ | 1.36 | $ | 0.23 | $ | 1.36 | $ | 0.48 | |||||||||||||||
| (Loss) income from discontinued operations, net of income taxes | $ | — | $ | (0.01) | $ | (0.01) | $ | 0.08 | |||||||||||||||
Net income attributable to GCP shareholders(1) | $ | 1.36 | $ | 0.23 | $ | 1.36 | $ | 0.56 | |||||||||||||||
| Weighted average number of diluted shares | 73.2 | 72.8 | 73.1 | 72.9 | |||||||||||||||||||
______________________________
(1)Amounts may not sum due to rounding.
(2)Dilutive effect is only applicable to the periods during which GCP generated net income from continuing operations.
The Notes to Consolidated Financial Statements are an integral part of these statements.
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GCP Applied Technologies Inc.
Consolidated Statements of Comprehensive Income (unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (In millions) | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
| Net income | $ | 99.6 | $ | 16.7 | $ | 99.6 | $ | 40.9 | |||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||
Defined benefit pension and other postretirement plans, net of income taxes | 0.1 | — | 0.2 | — | |||||||||||||||||||
Currency translation adjustments, net of income taxes | 10.8 | (14.9) | (18.1) | (15.5) | |||||||||||||||||||
| (Loss) gain from hedging activities, net of income taxes | (0.1) | 0.1 | — | — | |||||||||||||||||||
| Total other comprehensive income (loss) | 10.8 | (14.8) | (17.9) | (15.5) | |||||||||||||||||||
| Comprehensive income | 110.4 | 1.9 | 81.7 | 25.4 | |||||||||||||||||||
Less: Comprehensive income attributable to noncontrolling interests | (0.2) | (0.1) | (0.4) | (0.3) | |||||||||||||||||||
| Comprehensive income attributable to GCP shareholders | $ | 110.2 | $ | 1.8 | $ | 81.3 | $ | 25.1 | |||||||||||||||
The Notes to Consolidated Financial Statements are an integral part of these statements.
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GCP Applied Technologies Inc.
Consolidated Balance Sheets (unaudited)
| (In millions, except par value and shares) | September 30, 2020 | December 31, 2019 | |||||||||
| ASSETS | |||||||||||
| Current Assets | |||||||||||
| Cash and cash equivalents | $ | 473.4 | $ | 325.0 | |||||||
Trade accounts receivable, net of allowance for credit losses of $7.3 million and $7.5 million, respectively | 172.8 | 183.7 | |||||||||
| Inventories, net | 91.3 | 95.9 | |||||||||
| Other current assets | 39.7 | 43.7 | |||||||||
| Total Current Assets | 777.2 | 648.3 | |||||||||
| Properties and equipment, net | 222.4 | 245.3 | |||||||||
| Operating lease right-of-use assets | 40.5 | 29.3 | |||||||||
| Goodwill | 206.0 | 208.9 | |||||||||
| Technology and other intangible assets, net | 71.9 | 80.7 | |||||||||
| Deferred income taxes | 9.1 | 26.1 | |||||||||
| Overfunded defined benefit pension plans | 26.1 | 25.0 | |||||||||
| Other assets | 37.4 | 38.0 | |||||||||
| Non-current assets held for sale | — | 0.5 | |||||||||
| Total Assets | $ | 1,390.6 | $ | 1,302.1 | |||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||
| Current Liabilities | |||||||||||
| Debt payable within one year | $ | 4.1 | $ | 2.7 | |||||||
| Operating lease obligations payable within one year | 7.9 | 8.1 | |||||||||
| Accounts payable | 83.3 | 88.4 | |||||||||
| Other current liabilities | 134.7 | 113.6 | |||||||||
| Total Current Liabilities | 230.0 | 212.8 | |||||||||
| Debt payable after one year | 348.8 | 346.5 | |||||||||
| Income taxes payable | 28.4 | 41.4 | |||||||||
| Deferred income taxes | 13.5 | 13.1 | |||||||||
| Operating lease obligations | 25.9 | 21.6 | |||||||||
| Unrecognized tax benefits | 43.2 | 42.2 | |||||||||
| Underfunded and unfunded defined benefit pension plans | 57.0 | 67.5 | |||||||||
| Other liabilities | 15.9 | 15.9 | |||||||||
| Total Liabilities | 762.7 | 761.0 | |||||||||
| Commitments and Contingencies - Note 11 | |||||||||||
| Stockholders' Equity | |||||||||||
Series A Junior Participating Preferred Stock, par value $0.01; 10,000,000 shares authorized, no shares issued or outstanding (Note 12) | — | — | |||||||||
Common stock issued, par value $0.01; 300,000,000 shares authorized; outstanding: 73,056,914 and 72,850,268, respectively | 0.7 | 0.7 | |||||||||
| Paid-in capital | 60.4 | 53.4 | |||||||||
| Accumulated earnings | 709.4 | 610.2 | |||||||||
| Accumulated other comprehensive loss | (134.9) | (117.0) | |||||||||
| Treasury stock | (10.0) | (8.6) | |||||||||
| Total GCP's Shareholders' Equity | 625.6 | 538.7 | |||||||||
| Noncontrolling interests | 2.3 | 2.4 | |||||||||
| Total Stockholders' Equity | 627.9 | 541.1 | |||||||||
| Total Liabilities and Stockholders' Equity | $ | 1,390.6 | $ | 1,302.1 | |||||||
The Notes to Consolidated Financial Statements are an integral part of these statements.
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GCP Applied Technologies Inc.
Consolidated Statements of Stockholders' Equity (unaudited)
| Common Stock | Treasury Stock | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| (In millions) | Number of Shares(1) | Par Value | Number of Shares(1) | Cost | Additional Paid-in Capital | Accumulated Earnings | Accumulated Other Comprehensive Loss | Noncontrolling Interests | Total Stockholders' Equity | ||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2018 | 72.4 | $ | 0.7 | 0.2 | $ | (4.8) | $ | 39.6 | $ | 563.9 | $ | (120.0) | $ | 2.0 | $ | 481.4 | |||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 40.6 | — | 0.3 | 40.9 | ||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock in connection with stock plans(1) | 0.3 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | 7.5 | — | — | 7.5 | |||||||||||||||||||||||||||||||||||||||||||||
Exercise of stock options (1) | 0.3 | — | — | — | 5.1 | — | — | — | 5.1 | ||||||||||||||||||||||||||||||||||||||||||||
| Tax benefit related to stock plans | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
Share repurchases(3) | — | — | 0.1 | (3.3) | — | — | — | — | (3.3) | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | (15.5) | — | (15.5) | ||||||||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2019 | 73.0 | $ | 0.7 | 0.3 | $ | (8.1) | $ | 52.2 | $ | 604.5 | $ | (135.5) | $ | 2.3 | $ | 516.1 | |||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2019 | 73.2 | $ | 0.7 | 0.3 | $ | (8.6) | $ | 53.4 | $ | 610.2 | $ | (117.0) | $ | 2.4 | $ | 541.1 | |||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 99.2 | — | 0.4 | 99.6 | ||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock in connection with stock plans(1) | 0.2 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
Share-based compensation(2) | — | — | — | — | 5.9 | — | — | — | 5.9 | ||||||||||||||||||||||||||||||||||||||||||||
Exercise of stock options (1) | 0.1 | — | — | — | 1.1 | — | — | — | 1.1 | ||||||||||||||||||||||||||||||||||||||||||||
Share repurchases(3) | — | — | 0.1 | (1.4) | — | — | — | — | (1.4) | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | (17.9) | — | (17.9) | ||||||||||||||||||||||||||||||||||||||||||||
| Dividends and other changes in noncontrolling interest | — | — | — | — | — | — | — | (0.5) | (0.5) | ||||||||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2020 | 73.5 | $ | 0.7 | 0.4 | $ | (10.0) | $ | 60.4 | $ | 709.4 | $ | (134.9) | $ | 2.3 | $ | 627.9 | |||||||||||||||||||||||||||||||||||||
________________________________
(1)The par value of common shares issued may not be included in the table due to rounding. Total share amounts for common stock and treasury stock may not sum due to rounding.
(2)During the nine months ended September 30, 2020, $1.8 million of the stock-based compensation expense is included in "Restructuring expenses and asset impairments" related to accelerated vesting of stock options and RSUs due to the CEO's departure from the Company effective September 11, 2020 following Board approval.
(3)Refer to Note 15, “Stock Incentive Plans”, for further information.
The Notes to Consolidated Financial Statements are an integral part of these statements.
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GCP Applied Technologies Inc.
Consolidated Statements of Cash Flows (unaudited)
| Nine Months Ended September 30, | |||||||||||
| (In millions) | 2020 | 2019 | |||||||||
| OPERATING ACTIVITIES | |||||||||||
| Net income | $ | 99.6 | $ | 40.9 | |||||||
| Less: (Loss) income from discontinued operations | (0.4) | 5.9 | |||||||||
| Income from continuing operations | 100.0 | 35.0 | |||||||||
| Reconciliation to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 34.5 | 31.6 | |||||||||
| Amortization of debt discount and financing costs | 1.1 | 1.1 | |||||||||
| Stock-based compensation expense | 3.8 | 7.3 | |||||||||
| Unrealized loss on foreign currency | 2.7 | 1.0 | |||||||||
| Deferred income taxes | 21.1 | (12.4) | |||||||||
| (Gain) loss on disposal of property and equipment | (109.7) | 0.1 | |||||||||
| Changes in assets and liabilities, excluding effect of currency translation: | |||||||||||
| Trade accounts receivable | 8.6 | 7.2 | |||||||||
| Inventories | 3.2 | (0.3) | |||||||||
| Accounts payable | (3.9) | (13.6) | |||||||||
| Pension assets and liabilities, net | (12.4) | 4.1 | |||||||||
| Other assets and liabilities, net | 10.3 | (14.6) | |||||||||
| Net cash provided by operating activities from continuing operations | 59.3 | 46.5 | |||||||||
| Net cash used in operating activities from discontinued operations | (2.5) | (13.0) | |||||||||
| Net cash provided by operating activities | 56.8 | 33.5 | |||||||||
| INVESTING ACTIVITIES | |||||||||||
| Capital expenditures | (28.0) | (46.0) | |||||||||
| Proceeds from sale of corporate headquarters, net of transaction costs | 122.5 | — | |||||||||
| Other investing activities | 0.4 | 0.4 | |||||||||
| Net cash provided by (used in) investing activities from continuing operations | 94.9 | (45.6) | |||||||||
| Net cash used in investing activities from discontinued operations | — | (0.4) | |||||||||
| Net cash provided by (used in) investing activities | 94.9 | (46.0) | |||||||||
| FINANCING ACTIVITIES | |||||||||||
| Borrowings under credit arrangements | 1.5 | — | |||||||||
| Repayments under credit arrangements | — | (7.6) | |||||||||
| Payments on finance lease obligations | (0.6) | (0.6) | |||||||||
| Payments of tax withholding obligations related to employee equity awards | (0.4) | (3.3) | |||||||||
| Proceeds from exercise of stock options | 1.1 | 5.1 | |||||||||
| Payments of dividends to noncontrolling interests | (0.5) | — | |||||||||
| Other financing activities | (0.4) | (0.4) | |||||||||
| Net cash provided by (used in) financing activities from continuing operations | 0.7 | (6.8) | |||||||||
| Effect of currency exchange rate changes on cash and cash equivalents | (4.0) | (3.0) | |||||||||
| Increase (decrease) in cash and cash equivalents | 148.4 | (22.3) | |||||||||
| Cash and cash equivalents, beginning of period | 325.0 | 326.1 | |||||||||
| Cash and cash equivalents, end of period | $ | 473.4 | $ | 303.8 | |||||||
| Supplemental disclosures of cash flow information: | |||||||||||
| Supplemental disclosure of non-cash investing activities: | |||||||||||
| Property and equipment purchases unpaid and included in accounts payable | $ | 4.9 | $ | 8.9 | |||||||
The Notes to Consolidated Financial Statements are an integral part of these statements.
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GCP Applied Technologies Inc.
Notes to Consolidated Financial Statements (unaudited)
1. Basis of Presentation and Summary of Significant Accounting and Financial Reporting Policies
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 and supplies in-transit monitoring systems for concrete producers. 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 July 3, 2017 (the "Closing Date"), GCP completed the sale of its Darex Packaging Technologies ("Darex") business to Henkel AG & Co. KGaA (“Henkel”) for $1.06 billion in cash. As discussed further below under "Discontinued Operations," the results of operations for Darex have been excluded from GCP's continuing operations and segment results for all periods presented.
Basis of Presentation
The accompanying unaudited Consolidated Financial Statements are presented on a consolidated basis and include all of the accounts and operations of GCP and its majority-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. 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 ("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 audited Consolidated Financial Statements and notes thereto contained in GCP's Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2019 (the "2019 Annual Report on Form 10-K"). The Consolidated Balance Sheet as of December 31, 2019 was derived from the audited annual consolidated financial statements as of the period then ended. Certain information and footnote disclosures typically included in GCP's annual consolidated financial statements have been condensed or omitted. The unaudited 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 discussed below. The results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the results of operations for the year ending December 31, 2020.
Discontinued Operations
On July 3, 2017, the Company completed the sale of Darex to Henkel. The agreement with Henkel governing the Disposition (the “Amended Purchase Agreement”) provides for a series of delayed closings in certain non-U.S. jurisdictions. In conjunction with this transaction and applicable GAAP, the assets and liabilities related to Darex in the applicable delayed close countries have been reclassified and reflected as held for sale in the accompanying unaudited Consolidated Balance Sheets as of December 31, 2019, as discussed further in Note 19, "Discontinued Operations." Additionally, Darex results of operations and cash flows have been reclassified and reflected as "discontinued operations" in the accompanying unaudited Consolidated Statements of Operations and unaudited Consolidated Statements of Cash Flows for all periods presented.
Unless otherwise noted, the information throughout the Notes to the accompanying unaudited Consolidated Financial Statements pertains only to the continuing operations of GCP.
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Notes to Consolidated Financial Statements (unaudited) - Continued
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the unaudited Consolidated Financial Statements, and the reported amounts of revenues and expenses for the periods presented. The Company assesses the estimates on an ongoing basis and records changes in estimates in the period they occur and become known. GCP's accounting measurements that are most affected by management's estimates of future events are disclosed in its 2019 Annual Report on Form 10-K. Actual results could differ from those estimates.
On March 11, 2020, the World Health Organization declared the outbreak of the novel strain of coronavirus ("COVID-19") a global pandemic and recommended a number of restrictive measures to contain the spread. Many governments in the regions where GCP generates the majority of its revenue have adopted such policies, including social distancing and restrictions on construction activities deemed non-essential. GCP has been closely monitoring the impact of COVID-19 and working to manage the effects on its business globally. While certain restrictive measures in some of the regions where GCP operates have been lifted by government authorities, it is difficult to estimate with reasonable certainty at this time the duration and extent of the impact of the pandemic on the global economy, the Company's business, financial position and results of operations. GCP has made certain estimates within its financial statements related to the impact of COVID-19, including allowances for credit losses related to the estimated amount of receivables not expected to be collected and excess, obsolete or damaged inventories, future expected cash flows related to impairment assessments of goodwill and long-lived assets, incentive compensation accruals, contingent liabilities, and sales allowances related to volume rebates recognized based on anticipated sales volume. There may be changes to the Company's estimates in future periods due to uncertainty associated with the impact of COVID-19, the extent of which will depend largely on future developments, including new information which may emerge concerning the severity, duration and resurgence of the pandemic, additional and unanticipated actions by government authorities to further contain the spread of COVID-19 or address its impact, as well as the timing of development of an antiviral vaccine or a medical treatment to prevent further spread of the virus and facilitate recovery, among other things.
Income Tax
As a global enterprise, GCP is subject to a complex array of tax regulations and needs to make assessments of applicable tax law and judgments in estimating its ultimate income tax liability. Income tax expense and income tax balances represent GCP’s federal, state and foreign income taxes as an independent company. GCP files a U.S. consolidated income tax return, along with foreign and state corporate income tax filings, as required. Please refer to Note 8, "Income Taxes," for details regarding estimates used in accounting for income tax matters, including unrecognized tax benefits.
Foreign Currency Transactions and Translation
Certain transactions of the Company and its subsidiaries are denominated in currencies other than their functional currency. Foreign currency exchange gains (losses) generated from the settlement and remeasurement of these transactions are recognized in earnings and presented within “Other income, net” in the Company’s accompanying unaudited Consolidated Statements of Operations. Net foreign currency transaction and remeasurement gains (losses) reflected in “Other income, net” were $0.9 million and $1.7 million for the three and nine months ended September 30, 2020. Net foreign currency transaction and remeasurement gains (losses) were immaterial for the three and nine months ended September 30, 2019.
GCP continues to account for its operations in Argentina as a highly inflationary economy. Losses related to the remeasurement of the monetary assets and liabilities of the subsidiary operating in Argentina are included in "Other income, net" in the accompanying unaudited Consolidated Statements of Operations and were immaterial during the three and nine months ended September 30, 2020. Losses incurred during the three and nine months ended September 30, 2019 were $0.6 million and $0.9 million, respectively.
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.
10
Notes to Consolidated Financial Statements (unaudited) - Continued
Recently Adopted Accounting Standards
Credit Losses
In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2016-13, Financial Instruments- Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which applies to most financial assets measured at amortized cost, as well as certain other instruments, including trade receivables, other receivables and other financial assets. Topic 326 replaces the incurred credit loss methodology with the expected credit loss model which requires recognition of an allowance against the assets’ amortized cost to reflect the amount expected to be collected. Expected credit losses are estimated over the contractual life of financial assets and recognized at inception. GCP has adopted Topic 326 effective January 1, 2020 using the modified retrospective approach. The adoption did not have a material impact on its financial position as of September 30, 2020 and results of operations and cash flows for the three and nine months ended September 30, 2020. GCP did not recognize any cumulative effect adjustments to the retained earnings as of January 1, 2020 as a result of the adoption. The adoption of Topic 326 did not result in any significant modifications to the Company's policies related to recognizing allowance for trade receivables not expected to be collected which are disclosed in Note 1, "Basis of Presentation and Summary of Significant Accounting and Financial Reporting Policies," to the Company’s Consolidated Financial Statements included in the 2019 Annual Report on Form 10-K. Please refer to Note 3, "Accounts Receivable, Allowance for Credit Losses" for further information on the Company's policies and methodologies resulting from the adoption.
Goodwill
In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350). The amendments in this update eliminate the requirement to calculate the implied fair value of goodwill (Step 2) when measuring a goodwill impairment loss which is based on the excess of a reporting unit’s carrying amount over its fair value. The standard is effective for the Company for its annual or any interim goodwill impairment tests to be performed beginning on or after January 1, 2020. GCP adopted the standard effective January 1, 2020. The adoption did not have a material impact on its financial position, results of operations and cash flows upon adoption.
Other
During the three and nine months ended September 30, 2020, 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, 2019. For further information with regard to the Company’s Significant Accounting Policies, please refer to Note 1, "Basis of Presentation and Summary of Significant Accounting and Financial Reporting Policies," to the Company’s Consolidated Financial Statements included in the 2019 Annual Report on Form 10-K.
11
Notes to Consolidated Financial Statements (unaudited) - Continued
2. Revenue from Lessor Arrangements and Contracts with Customers
The majority of the Company’s revenue is generated from short-term arrangements associated with the production and sale of concrete admixtures and cement additives within its SCC operating segment, as well as sheet and liquid membrane systems and other specialty products designed to protect the building envelope within its SBM operating segment. For such arrangements, the transfer of control takes place at a point in time when products are shipped to the customer.
Short-term arrangements within its SCC operating segment involve selling concrete admixtures and providing dispensers to customers. Such arrangements contain a lease element due to the customer's right to control the use of dispensers over a period of time in exchange for consideration. Dispenser leases have a non-cancelable lease term of thirty days or less. The Company classifies leases as operating and recognizes revenue on a straight line basis over the lease term. Revenue for concrete admixtures is recognized at the point of time when control is transferred to the customer.
The Company generates revenue from long-term arrangements within its SCC operating segment, which generally consist of VERIFI® and Ductilcrete sales arrangements.
VERIFI® sales arrangements involve installing equipment on the customers’ trucks and at their plants, as well as performing slump management and truck location tracking services. The installed equipment represents a lease since the customer has the right to control its use over a period of time in exchange for consideration. Slump management and truck location tracking services represent a separate performance obligation for which revenue is recognized over the performance period. The Company classifies these leases as operating leases and recognizes revenue on a straight line basis over the lease term. The transaction price in VERIFI® sales arrangements consists of fixed installation fees and other fixed payments included in the contract consideration, as well as slump management fees which are dependent on the quantity of material poured and represent variable consideration. The Company allocates the contract consideration and the variable consideration between the lease element and the services based on their relative stand-alone selling prices. Revenue related to variable consideration is recorded at the time the services are performed and constrained by the amount for which a significant revenue reversal is not probable to occur. Revenue generated from VERIFI® sales arrangements represented less than 10% of the Company's consolidated revenue during the three and nine months ended September 30, 2020 and 2019.
The following table summarizes the revenue recognized for these sales arrangements for the three and nine months ended September 30, 2020 and 2019 and distinguishes between the lease and the service revenue:
12
Notes to Consolidated Financial Statements (unaudited) - Continued
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (In millions) | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
Lease revenue(1): | |||||||||||||||||||||||
| Lease payments revenue | $ | 7.1 | $ | 6.5 | $ | 20.9 | $ | 19.7 | |||||||||||||||
| Variable lease revenue | 2.8 | 2.1 | 7.5 | 5.6 | |||||||||||||||||||
| Total lease revenue | $ | 9.9 | $ | 8.6 | $ | 28.4 | $ | 25.3 | |||||||||||||||
Service revenue(2): | |||||||||||||||||||||||
| Fixed fee revenue | $ | 0.4 | $ | — | $ | 0.8 | $ | 0.1 | |||||||||||||||
| Variable fee revenue | 1.7 | 1.4 | 4.6 | 3.4 | |||||||||||||||||||
| Total service revenue | $ | 2.1 | $ | 1.4 | $ | 5.4 | $ | 3.5 | |||||||||||||||
| Total revenue | $ | 12.0 | $ | 10.0 | $ | 33.8 | $ | 28.8 | |||||||||||||||
________________________________
(1)Lease revenue consists of dispenser lease revenue, as well as an allocated portion of VERIFI® fixed fees and variable slump management fees. Lease revenue is included within "Net Sales" in the accompanying unaudited Consolidated Statements of Operations.
(2)Service revenue consists of an allocated portion of VERIFI® fixed fees and variable slump management fees. Service revenue is included within "Net Sales" in the accompanying unaudited Consolidated Statements of Operations.
As of September 30, 2020 and December 31, 2019, the Company’s total trade accounts receivable balance was $172.8 million and $183.7 million, respectively, of which $5.9 million and $5.6 million, respectively, was related to trade accounts receivable associated with lease revenue generated from certain SCC contracts. The future minimum lease payments receivable under the operating leases were not material as of September 30, 2020.
Revenue generated from Ductilcrete sales arrangements represented less than 10% of the Company's consolidated revenue during the three and nine months ended September 30, 2020 and 2019.
The Company’s revenue is principally recognized as goods and services are delivered and performance obligations are satisfied upon delivery. The Company has certain long-term arrangements resulting in remaining obligations for which the work has not been performed or has been partially performed. As of September 30, 2020, the aggregate amount of the transaction price allocated to remaining performance obligations was $9.5 million, including the estimated transaction price to be earned as revenue over the remaining term of these contracts, which is generally to five years. The Company’s contract assets and liabilities resulting from its contracts in the SCC or SBM operating segments were not material as of September 30, 2020 and December 31, 2019. Additionally, the amounts recorded in the accompanying unaudited Consolidated Statements of Operations during the three and nine months ended September 30, 2020 and 2019 related to changes in the contract assets and liabilities were not material.
For further information on revenue recognition related to product sale arrangements, please refer to Note 2, "Revenue from Lessor Arrangements and Contracts with Customers", to the Company’s Consolidated Financial Statements included in the 2019 Annual Report on Form 10-K.
13
Notes to Consolidated Financial Statements (unaudited) - Continued
3. Accounts Receivable, Allowance for Credit Losses
Trade accounts receivable are amounts due from customers for products sold or services performed in the ordinary course of business and are stated at their estimated net realizable value representing amounts expected to be collected. Allowance for credit losses is recorded upon the initial recognition of trade accounts receivable and reviewed during each reporting period over their contractual life. Allowance for credit losses is measured based on historical loss rates and the impact of current and future conditions, including an assessment of customer creditworthiness, historical payment experience, the age of outstanding receivables and collateral to the extent applicable. The Company evaluates the allowance for credit losses for the entire portfolio of trade accounts receivable on an aggregate basis due to similar risk characteristics of its customers based on similar industry and historical loss patterns. Accounts receivable balances are written off against the allowance for credit losses when the Company determines that the balances are not recoverable. Provisions for expected credit losses are recorded in "Selling, general and administrative expenses" in the accompanying unaudited Consolidated Statements of Operations. As of September 30, 2020 and December 31, 2019, allowance for credit losses was $7.3 million and $7.5 million, respectively.
The following table summarizes the activity for the allowance for credit losses during the three and nine months ended September 30, 2020 and 2019:
| (In millions) | Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||
| Beginning balance | $ | 7.3 | $ | 6.3 | $ | 7.5 | $ | 5.8 | ||||||||||||||||||
| Provision for expected credit losses | 0.3 | 0.6 | 1.0 | 2.1 | ||||||||||||||||||||||
| Write offs | (0.4) | (0.2) | (0.9) | (1.2) | ||||||||||||||||||||||
| Foreign currency translation adjustments | 0.1 | (0.2) | (0.3) | (0.2) | ||||||||||||||||||||||
| Ending balance | $ | 7.3 | $ | 6.5 | $ | 7.3 | $ | 6.5 | ||||||||||||||||||
14
Notes to Consolidated Financial Statements (unaudited) - Continued
4. Inventories, net
The following is a summary of inventories presented in the accompanying unaudited Consolidated Balance Sheets at September 30, 2020 and December 31, 2019:
| (In millions) | September 30, 2020 | December 31, 2019 | |||||||||
| Raw materials | $ | 39.3 | $ | 40.0 | |||||||
| In process | 4.6 | 4.0 | |||||||||
| Finished products and other | 47.4 | 51.9 | |||||||||
| Total inventories, net | $ | 91.3 | $ | 95.9 | |||||||
The "Finished products and other" category presented in the table above includes "other" inventories, which consist of finished products purchased rather than produced by GCP of $9.6 million and $10.6 million, respectively, as of September 30, 2020 and December 31, 2019.
15
Notes to Consolidated Financial Statements (unaudited) - Continued
5. Derivative Instruments
The Company uses derivative instruments to partially offset its business exposure to foreign currency risk on net investments in certain foreign subsidiaries. The Company enters into foreign currency forward contracts to offset a portion of the changes in the carrying amounts of its net investments in foreign operations due to fluctuations in foreign currency exchange rates. As of September 30, 2020, the Company was a party to four forward contracts with an aggregate notional amount of €40.0 million to hedge foreign currency exposure on net investments in certain of its European subsidiaries whose functional currency is the Euro. These forward contracts are designated as hedging instruments and recognized at fair value as assets or liabilities in the accompanying unaudited Consolidated Balance Sheets. Each contract has a notional amount of €10.0 million and matures annually starting on June 14, 2021 through June 17, 2024. During the nine months ended September 30, 2020, GCP settled one contract with a notional amount of €10.0 million upon its maturity and entered into a new contract with a notional amount of €10.0 million maturing on June 17, 2024. The forward contracts are designated and qualify as net investment hedges for which effectiveness is assessed based on the spot rate method. Please refer to Note 4, "Derivative Instruments", to the Company’s Consolidated Financial Statements included in the 2019 Annual Report on Form 10-K for further information on net investment hedges.
The following table summarizes the fair value of the Company’s derivative instruments designated as net investment hedges as of September 30, 2020 and December 31, 2019:
| (In millions) | September 30, 2020 | December 31, 2019 | ||||||||||||
Derivative assets(1): | ||||||||||||||
| Foreign exchange forward contracts | $ | 0.7 | $ | 1.1 | ||||||||||
Derivative liability(1): | ||||||||||||||
| Foreign exchange forward contracts | $ | (0.6) | $ | — | ||||||||||
__________________________
(1)The fair value of derivative instruments is measured based on expected future cash flows discounted at market interest rates using observable market inputs and classified as Level 2 within the fair value hierarchy. As of September 30, 2020, fair value of derivative assets of $0.1 million and $0.6 million, respectively, is recorded within "Other Current Assets" and "Other Assets" in the accompanying unaudited Consolidated Balance Sheets, and fair value of derivative liability is recorded within "Other Liabilities" in the accompanying unaudited Consolidated Balance Sheets. As of December 31, 2019, fair value of derivative assets of $0.3 million and $0.8 million, respectively, is recorded within "Other Current Assets" and "Other Assets" in the accompanying unaudited Consolidated Balance Sheets.
The following table summarizes the amounts recorded in the Company's accompanying unaudited Consolidated Statements of Operations and Consolidated Statements of Comprehensive Income (Loss) related to forward contracts designated as net investment hedges for the three and nine months ended September 30, 2020 and 2019:
| (In millions) | Three Months Ended September 30, 2020 | Three Months Ended September 30, 2019 | ||||||||||||||||||||||||
| Other Income, net | Cumulative Translation Adjustments(1) | Other Income, net | Cumulative Translation Adjustments(1) | |||||||||||||||||||||||
| Gains (losses) on foreign exchange forward contracts | $ | 0.2 | $ | (1.5) | $ | 0.2 | $ | 1.5 | ||||||||||||||||||
| (In millions) | Nine Months Ended September 30, 2020 | Nine Months Ended September 30, 2019 | ||||||||||||||||||||||||
| Other Income, net | Cumulative Translation Adjustments(1) | Other Income, net | Cumulative Translation Adjustments(1) | |||||||||||||||||||||||
| Gains (losses) on foreign exchange forward contracts | $ | 0.8 | $ | (1.0) | $ | 0.3 | $ | 1.3 | ||||||||||||||||||
__________________________
(1)The amounts are presented net of tax benefit of $0.5 million and $0.3 million, respectively, for the three and nine months ended September 30, 2020. The amounts are presented net of tax liability of $0.5 million and $0.4 million, respectively, for the three and nine months ended September 30, 2019.
16
Notes to Consolidated Financial Statements (unaudited) - Continued
6. Debt and Other Borrowings
Components of Debt and Other Borrowings
The following is a summary of obligations under senior notes and other borrowings at September 30, 2020 and December 31, 2019:
| (In millions) | September 30, 2020 | December 31, 2019 | |||||||||
5.5% Senior Notes due in 2026, net of unamortized debt issuance costs of $3.5 million and $3.9 million, respectively, at September 30, 2020 and December 31, 2019 | $ | 346.5 | $ | 346.1 | |||||||
Revolving credit facility due 2023(1) | — | — | |||||||||
Other borrowings(2) | 6.4 | 3.1 | |||||||||
| Total debt | 352.9 | 349.2 | |||||||||
| Less: debt payable within one year | 4.1 | 2.7 | |||||||||
| Debt payable after one year | $ | 348.8 | $ | 346.5 | |||||||
| Weighted average interest rates on total debt obligations | 5.5 | % | 5.5 | % | |||||||
__________________________
(1)Represents borrowings under the Revolving Credit Facility with an aggregate available principal amount of $350.0 million as of September 30, 2020 and December 31, 2019.
(2)Represents borrowings of $3.5 million and $1.8 million, respectively, at September 30, 2020 and December 31, 2019, under various lines of credit and other borrowings, primarily by non-U.S. subsidiaries, as well as $2.9 million and $1.3 million, respectively, of finance lease obligations.
The principal maturities of debt obligations outstanding, net of debt issuance costs, were as follows at September 30, 2020:
| (In millions) | Amount | |||||||
| Remainder of 2020 | $ | 3.7 | ||||||
| 2021 | 0.7 | |||||||
| 2022 | 0.7 | |||||||
| 2023 | 0.7 | |||||||
| 2024 | 0.5 | |||||||
| Thereafter | 346.6 | |||||||
| Total debt | $ | 352.9 | ||||||
5.5% Senior Notes
GCP's outstanding 5.5% Senior Notes have an aggregate principal amount of $350.0 million maturing on April 15, 2026. Interest on the 5.5% Senior Notes is payable semi-annually in arrears on April 15 and October 15 of each year. The Company made an interest payment of $9.6 million on April 15, 2020 and October 15, 2020.
The Indenture contains certain customary affirmative and negative covenants and events of default, as described in Note 8, "Debt and Other Borrowings," to the Company's Consolidated Financial Statements included in the 2019 Annual Report in the Form 10-K. The Company was in compliance with all covenants and conditions under the Indenture as of September 30, 2020. There are no events of default under the Indenture as of September 30, 2020.
17
Notes to Consolidated Financial Statements (unaudited) - Continued
Credit Agreement
As of September 30, 2020 and December 31, 2019, there were no outstanding borrowings on the Revolving Credit Facility. There were $2.6 million and $5.9 million, respectively, in outstanding letters of credit which resulted in available credit of $347.4 million and $344.1 million, respectively. There were no interest payments on the Revolving Credit Facility during the three and nine months ended September 30, 2020. The interest rate per annum applicable to the Revolving Credit Facility is equal to, at GCP’s option, either: (i) a base rate plus a margin ranging from 0.5% to 1.0%, or (ii) LIBOR plus a margin ranging from 1.5% to 2.0%, based upon the total leverage ratio of GCP and its restricted subsidiaries in both scenarios.
The Credit Agreement contains conditions that would require mandatory principal payments in advance of the maturity date of the Revolving Credit Facility, as well as certain customary affirmative and negative covenants and events of default, as described in Note 8, "Debt and Other Borrowings," to the Company's Consolidated Financial Statements included in the 2019 Annual Report in the Form 10-K. The Company was in compliance with all covenant terms as of September 30, 2020. There are no events of default as of September 30, 2020.
Debt Issuance Costs
GCP recognizes expenses directly associated with obtaining the Revolving Credit Facility as debt issuance costs which are presented within "Other assets" in the accompanying unaudited Consolidated Balance Sheets. Such costs are amortized over the term of the Revolving Credit Facility and included in “Interest expense and related financing costs” in the accompanying unaudited Consolidated Statements of Operations. As of September 30, 2020 and December 31, 2019, the remaining unamortized debt issuance costs related to the Revolving Credit Facility were $2.4 million and $3.1 million, respectively.
Debt Fair Value
The carrying amount and fair value of GCP's debt and other borrowings were as follows:
| September 30, 2020 | December 31, 2019 | ||||||||||||||||||||||
| (In millions) | Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||||||||
5.5% Senior Notes due in 2026 | $ | 346.5 | $ | 357.5 | $ | 346.1 | $ | 366.3 | |||||||||||||||
| Other borrowings | 6.4 | 6.4 | 3.1 | 3.1 | |||||||||||||||||||
| Total debt | $ | 352.9 | $ | 363.9 | $ | 349.2 | $ | 369.4 | |||||||||||||||
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. As of September 30, 2020, the fair value was higher than the carrying amount due to higher bond market prices. The carrying amount represents the aggregate principal amount at maturity reduced by the unamortized debt issuance costs.
18
Notes to Consolidated Financial Statements (unaudited) - Continued
7. Lessee Arrangements
The Company leases manufacturing and office facilities, as well as certain vehicles and equipment under operating leases.
The following table summarizes components of lease expense for the three and nine months ended September 30, 2020 and 2019:
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| (In millions) | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
| Operating lease expense | $ | 3.7 | $ | 2.9 | $ | 9.9 | $ | 9.3 | |||||||||||||||
| Variable lease expense | 1.9 | 1.0 | 4.3 | 3.5 | |||||||||||||||||||
| Short-term lease expense | 0.7 | 0.7 | 2.1 | 1.6 | |||||||||||||||||||
| Total lease expense | $ | 6.3 | $ | 4.6 | $ | 16.3 | $ | 14.4 | |||||||||||||||
The following table summarizes supplemental cash flow information related to leases during the nine months ended September 30, 2020 and 2019:
| Nine months ended September 30, | |||||||||||
| (In millions) | 2020 | 2019 | |||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||
| Operating cash flows from operating leases | $ | 8.8 | $ | 9.4 | |||||||
| Operating lease right of use assets obtained in exchange for new lease obligations: | |||||||||||
Upon adoption of | $ | — | $ | 40.8 | |||||||
| During the current period | 12.9 | 3.7 | |||||||||
| Total | $ | 12.9 | $ | 44.5 | |||||||
On July 31, 2020, GCP sold its corporate headquarters located at 62 Whittemore Avenue, Cambridge, Massachusetts to IQHQ, L.P and entered into a leaseback transaction with the buyer in conjunction with the sale. The lease of GCP's corporate headquarters is classified as an operating lease and has an initial rent-free term of eighteen months. Fair value of free rent of $8.6 million was recognized as an Operating Lease Right-of-Use Asset as a result of a non-cash transaction. Please refer to Note 10, "Other Balance Sheet Information" for further information.
8. Income Taxes
Income taxes attributable to continuing operations during the three months ended September 30, 2020 and 2019 was an income tax expense of $30.6 million and $5.5 million, respectively, representing effective tax rates of 23.5% and 24.3%, respectively. The difference between the U.S. federal income tax rate of 21.0% and GCP’s overall income tax rate for the three months ended September 30, 2020 was primarily due to state income tax expense from the sale of the Cambridge site of $5.1 million, tax expense due to non-deductible expenses and the effect of tax rates in foreign jurisdictions of $3.7 million, partially offset by tax benefits related to the 2017 Tax Act final regulations and the CARES Act of $5.8 million. The difference between the U.S. federal income tax rate of 21.0% and GCP's overall income tax rate for the three months ended September 30, 2019 was primarily due to tax expenses for non-deductible expenses and the effect of tax rates in foreign jurisdictions, partially offset by a benefit from Brazilian income tax refunds.
19
Notes to Consolidated Financial Statements (unaudited) - Continued
Income taxes attributable to continuing operations during the nine months ended September 30, 2020 and 2019 was an income tax expense of $33.2 million and an income tax benefit of $5.2 million, respectively, representing effective tax rates of 24.9% and 17.4%, respectively. The difference between the U.S. federal income tax rate of 21.0% and GCP’s overall income tax rate for the nine months ended September 30, 2020 was primarily due to state income tax expense from the sale of the Cambridge site of $5.1 million, tax expenses for non-deductible expenses and the effect of tax rates in foreign jurisdictions of $4.2 million, partially offset by tax benefits related to the 2017 Tax Act final regulations and the CARES Act of $6.3 million. The difference between the U.S. federal income tax rate of 21.0% and GCP's overall income tax rate for the nine months ended September 30, 2019 was primarily due to the finalization of the Transition Tax regulations issued in January 2019, resulting in a tax benefit from the reversal of unrecognized tax benefits in the amount of $20.2 million, an income tax benefit of $3.0 million relating to Brazilian income tax refunds, partially offset by a tax expense of $3.6 million on changes to GCP’s 2017 income tax liability and Transition Tax.
Tax Reform
As a result of the additional deductions and net operating loss carryback allowable to GCP under the CARES Act, GCP decreased its outstanding Transition Tax liability by $13.0 million during the nine months ended September 30, 2020. GCP had previously elected to pay the Transition Tax over the eight-year period as provided in the 2017 Tax Act. As of September 30, 2020, the unpaid balance of the Transition Tax obligation is $28.4 million, net of overpayments and foreign tax credits. After considering overpayments, the outstanding payable is due between April 2023 and April 2025.
During the year ended December 31, 2018, GCP recorded a $20.2 million liability for an unrecognized tax benefits related to certain capital gains recognized as a result of the application of the Transition Tax. As a result of clarifications contained in final regulations issued by the IRS in January 2019, GCP decreased its liability for unrecognized tax benefits by $20.2 million during the three months ended March 31, 2019. For additional information related to the 2017 Tax Act, please refer to Note 9, "Income Taxes," to the Company's Consolidated Financial Statements included in the 2019 Annual Report on Form 10-K.
Repatriation
In general, it is GCP's practice and intention to permanently reinvest the earnings of its foreign subsidiaries and repatriate earnings only when the tax impact is efficient.
Valuation Allowance
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 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.
Income tax expense for valuation allowances was $0.1 million for the three months ended September 30, 2020 and an income tax benefit of $0.1 million for the three months ended September 30, 2019. During the nine months ended September 30, 2020 and 2019, GCP incurred income tax expense for valuation allowances of $1.0 million and $0.4 million, respectively, recorded against deferred tax assets for net operating losses incurred primarily in Argentina, Australia and India.
Tax Sharing Agreement
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, GCP and Grace will indemnify and hold each other harmless in accordance with the principles outlined therein. Please refer to Note 17, "Related Party Transactions and Transactions with Grace" for further information on the Tax Sharing Agreement.
20
Notes to Consolidated Financial Statements (unaudited) - Continued
9. Pension Plans and Other Postretirement Benefit Plans
Pension Plans
GCP sponsors defined benefit pension plans, primarily in the U.S. and the U.K., in which GCP employees and former employees participate. GCP records an asset or a liability to recognize the funded status of these pension plans in its accompanying unaudited Consolidated Balance Sheets.
The following table presents the funded status of GCP's overfunded, underfunded and unfunded defined pension plans:
| (In millions) | September 30, 2020 | December 31, 2019 | |||||||||
| Overfunded defined benefit pension plans | $ | 26.1 | $ | 25.0 | |||||||
| Underfunded defined benefit pension plans | (30.1) | (40.8) | |||||||||
| Unfunded defined benefit pension plans | (26.9) | (26.7) | |||||||||
| Total underfunded and unfunded defined benefit pension plans | (57.0) | (67.5) | |||||||||
| Pension liabilities included in other current liabilities | (0.7) | (1.2) | |||||||||
| Net funded status | $ | (31.6) | $ | (43.7) | |||||||
Components of Net Periodic Benefit Cost
The components of GCP's net periodic benefit cost for the three and nine months ended September 30, 2020 and 2019 are as follows:
| Three Months Ended September 30, | |||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||
| Pension | Pension | ||||||||||||||||||||||
| (In millions) | U.S. | Non-U.S. | U.S. | Non-U.S. | |||||||||||||||||||
| Service cost | $ | 1.5 | $ | 0.3 | $ | 1.6 | $ | 0.7 | |||||||||||||||
| Interest cost | 1.3 | 1.0 | 1.4 | 1.4 | |||||||||||||||||||
| Expected return on plan assets | (1.6) | (1.2) | (1.6) | (1.5) | |||||||||||||||||||
Net periodic benefit cost (1) | $ | 1.2 | $ | 0.1 | $ | 1.4 | $ | 0.6 | |||||||||||||||
21
Notes to Consolidated Financial Statements (unaudited) - Continued
| Nine Months Ended September 30, | |||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||
| Pension | Pension | ||||||||||||||||||||||
| (In millions) | U.S. | Non-U.S. | U.S. | Non-U.S. | |||||||||||||||||||
| Service cost | $ | 4.6 | $ | 0.7 | $ | 4.8 | $ | 2.0 | |||||||||||||||
| Interest cost | 3.8 | 3.1 | 4.3 | 4.1 | |||||||||||||||||||
| Expected return on plan assets | (4.9) | (3.5) | (4.8) | (4.5) | |||||||||||||||||||
| Amortization of prior service cost | — | 0.1 | — | — | |||||||||||||||||||
Net periodic benefit cost (1) | $ | 3.5 | $ | 0.4 | $ | 4.3 | $ | 1.6 | |||||||||||||||
________________________________
(1)Service cost component of net periodic benefit cost is included in "Selling, general and administrative expenses" and "Cost of goods sold" in the accompanying unaudited Consolidated Statements of Operations. All other components of net periodic benefit costs are presented in "Other income, net," within the accompanying unaudited Consolidated Statements of Operations.
Other Postretirement Benefit (OPEB) Plans
GCP provides postretirement health care benefits for certain qualifying retired employees. As of September 30, 2020 and December 31, 2019, the related long-term liability was $2.2 million. As of September 30, 2020 and December 31, 2019, accumulated other comprehensive income was $0.6 million and $0.7 million, respectively, net of related tax impact of $0.2 million as of the end of each period. The net periodic postretirement benefit cost for the nine months ended September 30, 2020 and 2019 was $0.2 million and $0.1 million respectively.
Pension 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 made contributions of $15.0 million and $15.7 million, respectively, to the U.S. pension plans during the three and nine months ended September 30, 2020. There were no contributions made to these plans during the three and nine months ended September 30, 2019.
GCP intends to fund non-U.S. pension plans based on applicable legal requirements, as well as actuarial and trustee recommendations. During the three and nine months ended September 30, 2020, GCP contributed $0.3 million and $1.1 million, respectively, to these non-U.S. plans. During the three and nine months ended September 30, 2019, GCP contributed $0.6 million and $1.8 million, respectively, to these non-U.S. plans.
Defined Contribution Retirement Plan
GCP sponsors a defined contribution retirement plan for its employees in the U.S. which is a qualified plan under section 401(k) of the U.S. tax code. Under this plan, GCP contributes an amount equal to 100% of employee contributions, up to 6% of an individual employee's salary or wages. Effective January 1, 2018, GCP amended the defined contribution plan whereby GCP contributes up to an additional 2% of 100% of applicable employee compensation subject to a three year vesting requirement for eligible employees. Applicable employees include those beginning employment with GCP on or after January 1, 2018 who are not eligible to participate in the GCP Applied Technologies Inc. Retirement Plan for Salaried Employees, which was closed to new hires effective January 1, 2018. GCP's costs related to this benefit plan amounted to $1.3 million and $3.5 million, respectively, during the three and nine months ended September 30, 2020 and $1.1 million and $3.5 million, respectively, during the three and nine months ended September 30, 2019. These costs are included in "Selling, general and administrative expenses" and "Cost of goods sold" in the accompanying unaudited Consolidated Statements of Operations.
22
Notes to Consolidated Financial Statements (unaudited) - Continued
10. Other Balance Sheet Information
The following is a summary of other current assets at September 30, 2020 and December 31, 2019:
| (In millions) | September 30, 2020 | December 31, 2019 | |||||||||
| Other Current Assets: | |||||||||||
| Non-trade receivables | $ | 19.3 | $ | 22.1 | |||||||
| Prepaid expenses and other current assets | 11.6 | 13.4 | |||||||||
| Income taxes receivable | 8.8 | 8.2 | |||||||||
| Total other current assets | $ | 39.7 | $ | 43.7 | |||||||
The following is a summary of other current liabilities at September 30, 2020 and December 31, 2019:
| (In millions) | September 30, 2020 | December 31, 2019 | |||||||||
| Other Current Liabilities: | |||||||||||
| Accrued customer volume rebates | $ | 22.5 | $ | 28.4 | |||||||
Accrued compensation(1) | 21.5 | 16.0 | |||||||||
| Income taxes payable | 25.0 | 10.4 | |||||||||
| Accrued interest | 8.8 | 4.2 | |||||||||
| Pension liabilities | 0.7 | 1.2 | |||||||||
| Restructuring liability | 8.4 | 2.7 | |||||||||
| Other accrued liabilities | 47.8 | 50.7 | |||||||||
| Total other current liabilities | $ | 134.7 | $ | 113.6 | |||||||
________________________________
(1)Accrued compensation presented in the table above includes salaries and wages, as well as estimated amounts due under the annual employee incentive programs.
Sale of Corporate Headquarters
On July 31, 2020, GCP sold its corporate headquarters located at 62 Whittemore Avenue, Cambridge, Massachusetts to IQHQ, L.P, entered into a leaseback transaction with the buyer, and received from the buyer cash proceeds of $122.5 million, net of the related transaction costs and commissions of $2.5 million, pursuant to the sale of the property. The gain on sale of the corporate headquarters of $110.2 million was recognized based on the assets' fair value of $133.6 million and carrying value of $20.9 million, net of related transaction costs of $2.5 million, upon transfer of control to the buyer at the time of the sale.
The lease of GCP's corporate headquarters is classified as an operating lease and has an initial rent-free term of eighteen months. The lease commenced on July 31, 2020 and can be extended for an additional six months at GCP's option, subject to monthly rental payments of $0.6 million. The exercise of the extension option was not reasonably certain as of September 30, 2020. Pursuant to the terms of the lease, GCP is required to make certain payments for real estate taxes and other operating expenses related to the leased property which are recognized as variable lease expenses over the lease term. The initial eighteen month rent-free lease term fair value of $8.6 million was recognized as an Operating lease right-of-use asset in the accompanying unaudited Consolidated Balance Sheets as of the lease commencement date and is being amortized as operating lease expense on a straight-line basis over the lease term.
The fair value of assets sold and the fair value of the Operating lease right-of-use asset related to free rent were determined based on Level 3 inputs. In determining fair value, the highest and best use of the assets sold differs from GCP’s current use of the assets as its’ corporate headquarters due to higher lease income that could potentially be generated by market participants based on the highest and best use of the premise.
23
Notes to Consolidated Financial Statements (unaudited) - Continued
Acquisitions
On May 4, 2018, GCP acquired 100% of the outstanding capital stock of Clydebridge Holdings Limited which owns 100% of RIW Limited ("RIW"), a U.K.-based supplier of waterproofing solutions for commercial and residential construction applications. The aggregate purchase price of $29.5 million, net of cash acquired of $10.0 million, consisted of a net cash payment of $29.8 million, which was reduced by working capital adjustments of $0.3 million. At the closing of the acquisition of RIW, $2.8 million was placed into escrow which was ascribed to the purchase price and will be released to the sellers no later than December 30, 2020. The escrow was related to the sellers’ satisfaction of indemnity claims and general representations and warranties. As of September 30, 2020, $1.3 million of consideration was released from the escrow to the sellers based on the provisions of the related agreement. Please refer to Note 20, "Acquisitions and Dispositions" to the Company's Consolidated Financial Statements included in the 2019 Annual Report in the Form 10-K for further information on this transaction.
11. Commitments and Contingencies
GCP enters into certain purchase commitments and is a party to many contracts containing guarantees and indemnification obligations, as described in Note 12, "Commitments and Contingencies" to the Company's Consolidated Financial Statements included in the 2019 Annual Report in the Form 10-K. There have been no material changes to these commitments and obligations during the nine months ended September 30, 2020. Although the outcome of each of the matters related to loss contingencies and obligations discussed below cannot be predicted with certainty, GCP has assessed the risk and has made accounting estimates and disclosures as required under GAAP.
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 recognizes accrued liabilities for anticipated costs associated with response efforts if, based on the results of the assessment, it concluded that a probable liability has been incurred and the cost can be reasonably estimated. As of September 30, 2020 and December 31, 2019, 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, environmental matters and other matters. At September 30, 2020 and December 31, 2019, GCP had gross financial assurances issued and outstanding of $5.7 million and $5.9 million, respectively, which were composed of standby letters of credit. The letters of credit are related primarily to customer advances and other performance obligations as of September 30, 2020 and December 31, 2019. These arrangements guarantee the refund of advance payments received from customers in the event that the product is not delivered or warranty obligations are not fulfilled in accordance with the contract terms. These obligations could be called by the beneficiaries at any time before the expiration date of the particular letter of credit if the Company fails to meet certain contractual requirements.
Lawsuits and Investigations
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 for the three and nine months ended September 30, 2020.
24
Notes to Consolidated Financial Statements (unaudited) - Continued
GCP Brazil Indirect Tax Claim
During the year ended December 31, 2019, the Superior Judicial Court of Brazil (the "Court") filed its final ruling in favor of GCP Brazil related to a claim whether a certain state value-added tax should be included in the calculation of federal gross receipts taxes. The Court decision is final and not subject to any appeals. The ruling allows the Company the right to recover, through offset of federal tax liabilities, amounts collected by the government from May 2012 to September 2017, including interest. Timing of the realization of these tax credits is dependent upon the generation of federal tax liabilities eligible for the offset. The Brazilian tax authorities have sought before the Court clarification of certain matters, including whether these credits should be recognized on a gross or net basis, and certain other matters that could affect the rights of Brazilian taxpayers regarding these credits. During the three months ended September 30, 2019, the Company recorded in "Other income, net" a pre-tax gain of $1.3 million, net of $0.4 million of legal fees and other charges, as a result of the favorable Court decision. No amounts have been recognized in GCP's results of operations for the credits calculated based on the higher gross basis due to uncertainty related to the recoverability of such amounts and the timing of the recovery. As of September 30, 2020, GCP has fully utilized the tax credits previously recognized on a net basis.
25
Notes to Consolidated Financial Statements (unaudited) - Continued
12. Stockholders' Equity
Stockholder Rights Plan
On March 15, 2019, the Board of Directors (the "Board") declared a dividend of one preferred share purchase right (a “Right”) for each outstanding share of GCP common stock with par value $0.01 per share and adopted a stockholder rights plan (the “Rights Agreement”), as described in Note 13, "Stockholders' Equity," to the Company's Consolidated Financial Statements included in the 2019 Annual Report in the Form 10-K. The Rights were not becoming exercisable until 10 days after the public announcement that a person or group has become an “Acquiring Person” (as defined in the Rights Agreement) by obtaining beneficial ownership of 15% or more of the Company’s outstanding shares of common stock. If a stockholder’s beneficial ownership as of March 15, 2019 was at or above 15%, that stockholder’s existing ownership percentage would be grandfathered, but the Rights would become exercisable if at any time after an announcement that the stockholder increases its ownership percentage by 0.001% or more. The Rights were initially set to expire on March 14, 2020.
On March 13, 2020, the Board approved an amendment to the Rights Agreement which raised the level of beneficial ownership for an Acquiring Person to 20% of the Company's outstanding shares of common stock and extended the final expiration date of the Rights Agreement to March 14, 2023, subject to stockholders' approval at GCP's 2020 Annual Meeting of Shareholders (the “Annual Meeting”). If a stockholder's beneficial ownership on March 15, 2019 was at or above 20%, that stockholder's existing ownership percentage would be grandfathered, but the Rights would become exercisable if the stockholder increases its ownership percentage by 0.001% or more. The amendment to the Rights Agreement was approved at the Annual Meeting held on May 28, 2020.
Preferred Stock
The Company is authorized to issue up to 50,000,000 shares of Preferred Stock with a par value of $0.01 per share. On March 15, 2019, GCP designated 10,000,000 shares of its Preferred Stock with a par value of $0.01 per share as Series A Junior Participating Preferred Stock.
Share Repurchase Program
On July 30, 2020, the Board of Directors (the “Board”) of GCP authorized a program to repurchase up to $100 million of the Company’s common stock which is effective through July 30, 2022. Share repurchases under the program may be made from time to time at the Board's discretion through open market purchases or privately negotiated transactions in accordance with applicable federal securities laws, including Rule 10b-18 of the Exchange Act. The share repurchase program is subject to a periodic review by the Board and may be suspended periodically or discontinued at any time. The Company plans to fund repurchases from its existing cash balance. No shares were repurchased by the Company during the three months ended September 30, 2020.
26
Notes to Consolidated Financial Statements (unaudited) - Continued
Stockholders' Equity Activity
The following table summarizes the Company’s stockholders' equity activity during the three months ended September 30, 2020 and 2019.
| Common Stock | Treasury Stock | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| (In millions) | Number of Shares(2) | Par Value | Number of Shares(2) | Cost | Additional Paid-in Capital | Accumulated Earnings | Accumulated Other Comprehensive Loss | Noncontrolling Interests | Total Stockholders' Equity | ||||||||||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2019 | 73.0 | $ | 0.7 | 0.3 | $ | (8.0) | $ | 50.2 | $ | 587.9 | $ | (120.7) | $ | 2.2 | $ | 512.3 | |||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 16.6 | — | 0.1 | 16.7 | ||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | 1.9 | — | — | — | 1.9 | ||||||||||||||||||||||||||||||||||||||||||||
Exercise of stock options(2) | — | — | — | — | 0.1 | — | — | — | 0.1 | ||||||||||||||||||||||||||||||||||||||||||||
Share repurchases(1) | — | — | — | (0.1) | — | — | — | — | (0.1) | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | (14.8) | — | (14.8) | ||||||||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2019 | 73.0 | $ | 0.7 | 0.3 | $ | (8.1) | $ | 52.2 | $ | 604.5 | $ | (135.5) | $ | 2.3 | $ | 516.1 | |||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2020 | 73.3 | $ | 0.7 | 0.4 | $ | (8.9) | $ | 56.9 | $ | 610.0 | $ | (145.7) | $ | 2.2 | $ | 515.2 | |||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 99.4 | — | 0.2 | 99.6 | ||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock in connection with stock plans(2) | 0.1 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
Share-based compensation(3) | — | — | — | — | 3.1 | — | — | — | 3.1 | ||||||||||||||||||||||||||||||||||||||||||||
Exercise of stock options(2) | — | — | — | — | 0.4 | — | — | — | 0.4 | ||||||||||||||||||||||||||||||||||||||||||||
Share repurchases(1) | — | — | — | (1.1) | — | — | — | — | (1.1) | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | 10.8 | — | 10.8 | ||||||||||||||||||||||||||||||||||||||||||||
| Dividends and other changes in noncontrolling interest | — | — | — | — | — | — | — | (0.1) | (0.1) | ||||||||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2020 | 73.5 | $ | 0.7 | 0.4 | $ | (10.0) | $ | 60.4 | $ | 709.4 | $ | (134.9) | $ | 2.3 | $ | 627.9 | |||||||||||||||||||||||||||||||||||||
.________________________________
(1)Refer to Note 15, “Stock Incentive Plans”, for further information.
(2)The par value of common shares issued may not be included in the table due to rounding. Total share amounts for common stock and treasury stock may not sum due to rounding.
(3)During the three months ended September 30, 2020, $1.8 million of the stock-based compensation expense is included in "Restructuring expenses and asset impairments" related to accelerated vesting of stock options and RSUs due to the CEO's departure from the Company effective September 11, 2020 following Board approval.
27
Notes to Consolidated Financial Statements (unaudited) - Continued
13. Restructuring and Repositioning Expenses, Asset Impairments
GCP's Board of Directors approves all major restructuring and repositioning programs. Major restructuring programs may involve reorganizations, the discontinuation of significant product lines, the shutdown of significant facilities, or other major strategic initiatives. From time to time, GCP takes additional restructuring actions, including involuntary employee terminations that are not a part of a major program. Repositioning activities generally represent major strategic or transformational actions to enhance the value and performance of the Company, improve business efficiency or optimize the Company’s footprint.
Repositioning expenses associated with the Plans discussed below, as well as a review of strategic, financial and operational alternatives, are primarily related to consulting, professional services, and other employee-related costs associated with the Company’s organizational realignment and advancing its technology strategy. Due to the scope and complexity of the Company’s repositioning activities, the range of estimated repositioning expenses and capital expenditures could increase or decrease and the timing of incurrence could change.
2019 Restructuring and Repositioning Plan (the “2019 Plan”)
On February 22, 2019, the Board of Directors approved a business restructuring and repositioning plan (the “2019 Plan”). The 2019 Plan is focused on GCP’s global supply chain strategy, processes and execution, including its manufacturing, purchasing, logistics, and warehousing operations. The plan also addresses GCP’s service delivery model, primarily in North America, to streamline the Company’s pursuit of combined admixture and VERIFI® opportunities. The program is expected to be completed by December 31, 2020.
2019 Phase 2 Restructuring and Repositioning Plan (the “2019 Phase 2 Plan")
On July 31, 2019, the Board approved a business restructuring and repositioning plan to further optimize the design and footprint of the Company's global organization, primarily with respect to its general administration and business support functions, and streamline cross-functional activities (the “2019 Phase 2 Plan”). The 2019 Phase 2 Plan is expected to result in the net reduction of approximately 8%-10% of the Company's workforce. The program is expected to be completed by December 31, 2021.
Strategic Alternatives Plan
On February 27, 2019, the Company announced a comprehensive review of strategic alternatives to enhance shareholder value. Over the course of this review, GCP contacted and engaged with both strategic industry and private equity investors. This process did not result in a transaction that would provide adequate value to the Company's shareholders, and as a result, GCP determined that it will pursue its standalone strategic and financial plan (the "Strategic Alternatives Plan").
The following table illustrates a summary of the charges incurred and planned in connection with restructuring and repositioning plans discussed above:
| (In millions) | Severance/employee costs | Asset Impairments/ Write Offs | Other Associated Costs | Total Restructuring | Repositioning | Total Costs | Capital Expenditures | ||||||||||||||||||||||||||||||||||
2019 Plan: (1) | |||||||||||||||||||||||||||||||||||||||||
| Estimated Total Costs | $1-2 | $1 | $0-1 | $2-4 | $11 | $13-15 | $2-3 | ||||||||||||||||||||||||||||||||||
| Cumulative Costs incurred to Date | $0.9 | $0.9 | $0.3 | $2.1 | $10.5 | $12.6 | $2.0 | ||||||||||||||||||||||||||||||||||
2019 Phase 2 Plan: (2) | |||||||||||||||||||||||||||||||||||||||||
| Estimated Total Costs | $19-22 | $1 | $3-4 | $23-27 | $7-8 | $30-35 | $2 | ||||||||||||||||||||||||||||||||||
| Cumulative Costs incurred to Date | $12.5 | $0.3 | $— | $12.8 | $4.3 | $17.1 | $0.6 | ||||||||||||||||||||||||||||||||||
28
Notes to Consolidated Financial Statements (unaudited) - Continued
(1)As of September 30, 2020, the cumulative restructuring costs incurred under the 2019 Plan since its inception were $2.1 million, of which $1.7 million was related to the SCC segment and $0.4 million was related to the SBM segment. Estimated total pre-tax costs expected to be incurred in connection with the 2019 Plan decreased by $2.0 million due to lower severance and facilities consolidation costs.
(2)As of September 30, 2020, the cumulative restructuring costs recognized under the 2019 Phase 2 Plan since its inception were $12.8 million, of which $3.6 million was attributable to the SCC segment, $2.3 million was attributable to the SBM segment, and $6.9 million was attributable to the Corporate. Estimated total pre-tax costs expected to be incurred in connection with the 2019 Phase 2 Plan increased by approximately $7.0 million from the prior estimate due to higher severance and other employee-related costs associated with the departure from the Company and resignation from the Board of the President and Chief Executive Officer's ("CEO") effective September 11, 2020 following Board approval. During the three months ended September 30, 2020, the Company incurred $6.9 million of severance and employee-related costs in connection with such separation, including $1.8 million associated with accelerated vesting of stock options and RSUs. Additional increases of estimated total pre-tax costs include asset impairments/write offs of $1.0 million resulting from the sale and relocation of the corporate headquarters to further optimize the footprint of GCP's global organization (please refer to Note 10, "Other Balance Sheet Information" for further information).
The following tables represent the repositioning expenses incurred and cash payments made under the plans discussed above and other plans during each period:
| Three Months Ended September 30, 2020 | |||||||||||||||||||||||||||||||||||
| (In millions) | 2019 Plan | 2019 Plan Phase 2 | Strategic Alternatives Plan | 2018 Plan | 2017 Plan | Total | |||||||||||||||||||||||||||||
| Repositioning Expenses | $ | 0.1 | $ | — | $ | — | $ | — | $ | — | $ | 0.1 | |||||||||||||||||||||||
| Cash Paid for Repositioning Expenses | 0.3 | 0.4 | 0.1 | — | — | 0.8 | |||||||||||||||||||||||||||||
| Capital Expenditures | 0.3 | 0.2 | — | 0.1 | 0.2 | 0.8 | |||||||||||||||||||||||||||||
| Cash Paid for Capital Expenditures | 0.5 | 0.2 | — | 0.3 | 0.4 | 1.4 | |||||||||||||||||||||||||||||
| Nine Months Ended September 30, 2020 | |||||||||||||||||||||||||||||||||||
| (In millions) | 2019 Plan | 2019 Plan Phase 2 | Strategic Alternatives Plan | 2018 Plan | 2017 Plan | Total | |||||||||||||||||||||||||||||
| Repositioning Expenses | $ | 1.7 | $ | 1.9 | $ | — | $ | 0.1 | $ | 0.1 | $ | 3.8 | |||||||||||||||||||||||
| Cash Paid for Repositioning Expenses | 4.8 | 3.2 | 1.1 | — | 0.2 | 9.3 | |||||||||||||||||||||||||||||
| Capital Expenditures | 1.2 | 0.5 | — | 0.6 | 1.1 | 3.4 | |||||||||||||||||||||||||||||
| Cash Paid for Capital Expenditures | 1.3 | 0.4 | — | 0.7 | 1.6 | 4.0 | |||||||||||||||||||||||||||||
| Three Months Ended September 30, 2019 | |||||||||||||||||||||||||||||||||||
| (In millions) | 2019 Plan | 2019 Plan Phase 2 | Strategic Alternatives Plan | 2018 Plan | 2017 Plan | Total | |||||||||||||||||||||||||||||
| Repositioning Expenses | $ | 3.1 | $ | 0.4 | $ | 0.3 | $ | 0.2 | $ | 0.4 | $ | 4.4 | |||||||||||||||||||||||
| Cash Paid for Repositioning Expenses | 1.3 | — | 0.5 | 0.2 | 0.2 | 2.2 | |||||||||||||||||||||||||||||
| Capital Expenditures | 0.1 | — | — | 0.1 | 2.0 | 2.2 | |||||||||||||||||||||||||||||
| Cash Paid for Capital Expenditures | 0.1 | — | — | 0.8 | 0.9 | 1.8 | |||||||||||||||||||||||||||||
29
Notes to Consolidated Financial Statements (unaudited) - Continued
| Nine Months Ended September 30, 2019 | |||||||||||||||||||||||||||||||||||
| (In millions) | 2019 Plan | 2019 Plan Phase 2 | Strategic Alternatives Plan | 2018 Plan | 2017 Plan | Total | |||||||||||||||||||||||||||||
| Repositioning Expenses | $ | 6.4 | $ | 0.4 | $ | 2.8 | $ | 5.3 | $ | 0.7 | $ | 15.6 | |||||||||||||||||||||||
| Cash Paid for Repositioning Expenses | 3.4 | — | 0.5 | 7.9 | 1.7 | 13.5 | |||||||||||||||||||||||||||||
| Capital Expenditures | 0.4 | — | — | 0.8 | 3.9 | 5.1 | |||||||||||||||||||||||||||||
| Cash Paid for Capital Expenditures | 0.3 | — | — | 0.8 | 2.0 | 3.1 | |||||||||||||||||||||||||||||
| As of September 30, 2020 | |||||||||||||||||||||||||||||
| (In millions) | 2019 Plan | 2019 Plan Phase 2 | Strategic Alternatives Plan | 2018 Plan | 2017 Plan | ||||||||||||||||||||||||
| Cumulative Repositioning Expenses | $ | 10.5 | $ | 4.3 | $ | 3.1 | $ | 10.7 | $ | 9.7 | |||||||||||||||||||
| Cumulative Cash Paid for Repositioning Expenses | 10.4 | 4.2 | 3.1 | 10.7 | 9.6 | ||||||||||||||||||||||||
| Cumulative Capital Expenditure | 2.0 | 0.6 | — | 1.5 | 13.5 | ||||||||||||||||||||||||
| Cumulative Cash Paid for Capital Expenditures | 1.9 | 0.4 | — | 1.5 | 12.9 | ||||||||||||||||||||||||
Restructuring Expenses and Asset Impairments
The following restructuring expenses and asset impairment charges were incurred under the plans discussed above and other plans during each period:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (In millions) | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
| Severance and other employee costs | $ | 7.7 | $ | 3.6 | $ | 9.6 | $ | 4.1 | |||||||||||||||
| Asset impairments | — | 0.1 | 1.2 | 4.1 | |||||||||||||||||||
| Other associated costs | — | 0.2 | 0.4 | 0.9 | |||||||||||||||||||
| Total restructuring expenses and asset impairments | $ | 7.7 | $ | 3.9 | $ | 11.2 | $ | 9.1 | |||||||||||||||
| Less: restructuring expenses and asset impairments reflected in discontinued operations | — | 0.1 | — | 0.3 | |||||||||||||||||||
| Total restructuring expenses and asset impairments from continuing operations | $ | 7.7 | $ | 3.8 | $ | 11.2 | $ | 8.8 | |||||||||||||||
GCP incurred restructuring expenses and asset impairment charges related to its two operating segments and Corporate function as follows:
30
Notes to Consolidated Financial Statements (unaudited) - Continued
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (In millions) | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
| SCC | $ | 0.6 | $ | 1.5 | $ | 3.2 | $ | 3.4 | |||||||||||||||
| SBM | 0.2 | 0.7 | 1.1 | 3.9 | |||||||||||||||||||
| Corporate | 6.9 | 1.6 | 6.9 | 1.5 | |||||||||||||||||||
| Total restructuring expenses and asset impairments from continuing operations | $ | 7.7 | $ | 3.8 | $ | 11.2 | $ | 8.8 | |||||||||||||||
| Restructuring expenses and asset impairments reflected in discontinued operations | — | 0.1 | — | 0.3 | |||||||||||||||||||
| Total restructuring expenses and asset impairments | $ | 7.7 | $ | 3.9 | $ | 11.2 | $ | 9.1 | |||||||||||||||
Restructuring liabilities were $8.4 million and $2.7 million, respectively, as of September 30, 2020 and December 31, 2019. These liabilities are included within “Other current liabilities” in the accompanying unaudited Consolidated Balance Sheets. GCP settled in cash substantially all of the remaining liabilities related to the 2017 Plan during the nine months ended September 30, 2020.
The following table summarizes the Company’s restructuring liability activity:
| 2019 Plan | 2019 Phase 2 Plan | 2018 Plan | 2017 Plan | ||||||||||||||||||||||||||||||||||||||
(In millions) | Severance and other employee costs | Other Costs | Severance and other employee costs | Severance and other employee costs | Other Costs | Severance and other employee costs | Total | ||||||||||||||||||||||||||||||||||
| Balance, December 31, 2019 | $ | 0.2 | $ | — | $ | 0.9 | $ | 1.0 | $ | 0.4 | $ | 0.2 | $ | 2.7 | |||||||||||||||||||||||||||
Expense(1) | 0.2 | 0.2 | 1.7 | — | — | — | 2.1 | ||||||||||||||||||||||||||||||||||
| Payments | (0.1) | — | (0.6) | (0.2) | (0.3) | (0.1) | (1.3) | ||||||||||||||||||||||||||||||||||
| Impact of foreign currency and other | — | — | — | (0.1) | (0.1) | — | (0.2) | ||||||||||||||||||||||||||||||||||
| Balance, March 31, 2020 | $ | 0.3 | $ | 0.2 | $ | 2.0 | $ | 0.7 | $ | — | $ | 0.1 | $ | 3.3 | |||||||||||||||||||||||||||
Expense(1) | — | 0.1 | — | — | 0.1 | — | 0.2 | ||||||||||||||||||||||||||||||||||
| Payments | (0.1) | (0.1) | (0.3) | (0.1) | (0.1) | — | (0.7) | ||||||||||||||||||||||||||||||||||
| Balance, June 30, 2020 | $ | 0.2 | $ | 0.2 | $ | 1.7 | $ | 0.6 | $ | — | $ | 0.1 | $ | 2.8 | |||||||||||||||||||||||||||
Expense(2) | — | — | 5.9 | — | — | — | 5.9 | ||||||||||||||||||||||||||||||||||
| Payments | (0.1) | (0.1) | — | (0.1) | — | — | (0.3) | ||||||||||||||||||||||||||||||||||
| Balance, September 30, 2020 | $ | 0.1 | $ | 0.1 | $ | 7.6 | $ | 0.5 | $ | — | $ | 0.1 | $ | 8.4 | |||||||||||||||||||||||||||
________________________________
(1)There were no asset impairment charges that occurred during the three months ended September 30, 2020. GCP incurred $1.1 million of asset impairment charges attributable to the SCC segment as a part of the 2019 Plan and 2019 Phase 2 Plan during the nine months ended September 30, 2020. The Company incurred $0.1 million of asset impairment charges attributable to the SBM segment as a part of the 2019 Phase 2 Plan during the nine months ended September 30, 2020. These asset impairments are recorded with a corresponding reduction to "Properties and equipment, net" in the accompanying unaudited Consolidated Balance Sheets. These expenses are not recorded with a corresponding adjustment to the restructuring liability and therefore, are not included in the table above.
(2)Stock-based compensation expense of $1.8 million related to accelerated vesting of stock options and RSUs resulting from the CEO departure during the three months ended September 30, 2020 is attributable to Corporate function under the 2019 Phase 2 Plan. Such expense is not recognized as a corresponding adjustment to the restructuring liability and therefore, is not included in the table above.
31
Notes to Consolidated Financial Statements (unaudited) - Continued
14. Other Comprehensive Income (Loss)
The following tables present the pre-tax, tax benefit (expense), and after-tax components of GCP's other comprehensive income (loss) for the three and nine months ended September 30, 2020 and 2019:
| Three Months Ended September 30, 2020 | |||||||||||||||||
| (In millions) | Pre-Tax Amount | Tax Benefit | After-Tax Amount | ||||||||||||||
| Defined benefit pension and other postretirement plans | $ | 0.1 | $ | — | $ | 0.1 | |||||||||||
Currency translation adjustments (1) | 10.3 | 0.5 | 10.8 | ||||||||||||||
| Loss from hedging activities | (0.1) | — | (0.1) | ||||||||||||||
Other comprehensive income attributable to GCP shareholders | $ | 10.3 | $ | 0.5 | $ | 10.8 | |||||||||||
| Nine Months Ended September 30, 2020 | |||||||||||||||||
| (In millions) | Pre-Tax Amount | Tax Benefit | After-Tax Amount | ||||||||||||||
| Defined benefit pension and other postretirement plans | $ | 0.2 | $ | — | $ | 0.2 | |||||||||||
Currency translation adjustments(1) | (18.4) | 0.3 | (18.1) | ||||||||||||||
Other comprehensive loss attributable to GCP shareholders | $ | (18.2) | $ | 0.3 | $ | (17.9) | |||||||||||
| Three Months Ended September 30, 2019 | |||||||||||||||||
| (In millions) | Pre-Tax Amount | Tax Expense | After-Tax Amount | ||||||||||||||
Currency translation adjustments(1) | $ | (14.4) | $ | (0.5) | $ | (14.9) | |||||||||||
| Gain from hedging activities | 0.1 | — | 0.1 | ||||||||||||||
Other comprehensive loss attributable to GCP shareholders | $ | (14.3) | $ | (0.5) | $ | (14.8) | |||||||||||
| Nine Months Ended September 30, 2019 | |||||||||||||||||
| (In millions) | Pre-Tax Amount | Tax Expense | After-Tax Amount | ||||||||||||||
Currency translation adjustments(1) | $ | (15.1) | (0.4) | $ | (15.5) | ||||||||||||
Other comprehensive loss attributable to GCP shareholders | $ | (15.1) | $ | (0.4) | $ | (15.5) | |||||||||||
_____________________
(1)Currency translation adjustments related to the net investment hedge are presented net of income taxes, as discussed in Note 5, "Derivative Instruments."
The following tables present the changes in accumulated other comprehensive loss, net of tax, for the nine months ended September 30, 2020 and 2019:
32
Notes to Consolidated Financial Statements (unaudited) - Continued
| (In millions) | Defined Benefit Pension and Other Postretirement Plans | Currency Translation Adjustments | Hedging Activities | Total | |||||||||||||||||||
| Balance, December 31, 2019 | $ | (2.7) | $ | (114.2) | $ | (0.1) | $ | (117.0) | |||||||||||||||
| Other comprehensive income (loss) before reclassifications | 0.2 | (18.1) | 0.1 | (17.8) | |||||||||||||||||||
Amounts reclassified from accumulated other comprehensive loss | — | — | (0.1) | (0.1) | |||||||||||||||||||
| Current-period other comprehensive income (loss) | 0.2 | (18.1) | — | (17.9) | |||||||||||||||||||
| Balance, September 30, 2020 | $ | (2.5) | $ | (132.3) | $ | (0.1) | $ | (134.9) | |||||||||||||||
| (In millions) | Defined Benefit Pension and Other Postretirement Plans | Currency Translation Adjustments | Hedging Activities | Total | |||||||||||||||||||
| Balance, December 31, 2018 | $ | (2.2) | $ | (117.8) | $ | — | $ | (120.0) | |||||||||||||||
| Other comprehensive loss before reclassifications | — | (15.5) | (0.1) | (15.6) | |||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | — | — | 0.1 | 0.1 | |||||||||||||||||||
| Current period other comprehensive loss | — | (15.5) | — | (15.5) | |||||||||||||||||||
| Balance, September 30, 2019 | $ | (2.2) | $ | (133.3) | $ | — | $ | (135.5) | |||||||||||||||
Please refer to Note 9, "Pension Plans and Other Postretirement Benefit Plans," for a discussion of pension plans and other postretirement benefit plans.
15. Stock Incentive Plans
On October 1, 2020, GCP's Board of Directors adopted the GCP Applied Technologies Inc. 2020 Inducement Plan (the “Inducement Plan”) to reserve 1,000,000 shares of its common stock to be used exclusively for grants of awards to induce highly-qualified prospective employees to accept employment and to provide them with a proprietary interest in the Company. Awards that could be granted under the Inducement Plan consist of stock options, stock appreciation rights, restricted units, restricted stock, or deferred stock units. In accordance with Section 303A.08 of the New York Stock Exchange Listed Company Manual, the Company did not seek approval of the Inducement Plan by its stockholders. On October 1, 2020, the Company awarded to the new GCP CEO upon joining the Company, a grant with a value of approximately $5.0 million that consisted of 143,128 shares of restricted stock and 388,348 of stock options pursuant to the terms and conditions of the Inducement Plan.
Stock-Based Compensation Accounting
GCP grants stock options, restricted stock units (the "RSUs") and performance-based units (the "PBUs") with or without market conditions which vest upon the satisfaction of a performance condition and/or a service condition. Please refer to Note 17, "Stock Incentive Plans" to the Company's Consolidated Financial Statements included in the 2019 Annual Report in the Form 10-K for further information on these awards. Total stock-based compensation expense is included in "Income from continuing operations before income taxes" in the accompanying unaudited Consolidated Statements of Operations and was $3.3 million and $5.6 million, respectively, during the three and nine months ended September 30, 2020, and $2.3 million and $7.3 million, respectively, during the three and nine months ended September 30, 2019. During the three months ended September 30, 2020, $1.8 million of the stock-based compensation expense is included in "Restructuring expenses and asset impairments" related to accelerated vesting of stock options and RSUs due to the CEO's departure from the Company effective September 11, 2020 following Board approval.
33
Notes to Consolidated Financial Statements (unaudited) - Continued
The Company issues new shares of common stock upon exercise of stock options and vesting of RSUs. In accordance with certain provisions of the GCP Equity and Incentive Plan (the "Plan"), GCP withholds and retains shares issued to certain holders of GCP awards in order to fulfill statutory tax withholding requirements for the employees. During the nine months ended September 30, 2020 and 2019, GCP withheld and retained approximately 62,200 shares and 130,900 shares, respectively, in a non-cash transaction with a cost of $1.4 million and $3.3 million, respectively, which were reflected as "Share Repurchases" in the accompanying unaudited Consolidated Statements of Stockholders' Equity. During the nine months ended September 30, 2020 and 2019, cash payments for such tax withholding obligations were $0.4 million and $3.3 million, respectively.
As of September 30, 2020, approximately 7.6 million shares and 0.5 million shares of common stock, respectively, were reserved and available for future grant under the Plan and the Inducement Plan, respectively.
Stock Options
There were no stock options granted during the three and nine months ended September 30, 2020.
The following assumptions were utilized in the Black-Scholes option pricing model for estimating the fair value of GCP's stock options granted during the nine months ended September 30, 2019:
| Nine Months Ended September 30, | |||||
| Assumptions used to calculate expense for stock options: | 2019 | ||||
| Risk-free interest rate | 1.70 - 2.64% | ||||
| Average life of options (years) | 5.5 - 6.5 | ||||
| Volatility | 28.02 - 28.59% | ||||
| Dividend yield | — | ||||
| Weighted average fair value per stock option | $8.66 | ||||
The following table sets forth information relating to stock options denominated in GCP stock during the nine months ended September 30, 2020:
| 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, 2019 | 1,284 | $ | 22.66 | 3.18 | $ | 3,171 | |||||||||||||||||
| Options exercised | (64) | 17.80 | |||||||||||||||||||||
| Options forfeited/expired/canceled | (289) | 19.98 | |||||||||||||||||||||
| Outstanding, September 30, 2020 | 931 | $ | 23.82 | 3.39 | $ | 1,316 | |||||||||||||||||
| Exercisable, September 30, 2020 | 827 | $ | 23.23 | 3.17 | $ | 1,316 | |||||||||||||||||
| Vested and expected to vest, September 30, 2020 | 927 | $ | 23.80 | 3.38 | $ | 1,316 | |||||||||||||||||
The weighted average grant date fair value of options granted during the three months ended September 30, 2019 was $6.66. The aggregate intrinsic values in the table above represent the total pre-tax intrinsic value, determined as the difference between GCP's closing stock price on the last trading day of September 30, 2020 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. Total intrinsic value of all options exercised during the three months ended September 30, 2020 was $0.2 million. Total intrinsic value of all options exercised during the nine months ended September 30, 2020 and 2019 was $0.3 million and $2.5 million, respectively.
At September 30, 2020, total unrecognized stock-based compensation expense for stock options outstanding was $0.1 million and is expected to be recognized over the weighted-average period of approximately 0.7 years.
34
Notes to Consolidated Financial Statements (unaudited) - Continued
Restricted Stock Units and Performance Based Units
RSUs and PBUs are granted with the exercise price equal to zero and are converted to shares immediately upon vesting.
As of September 30, 2020, $4.4 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 approximately 1.7 years.
RSUs
The following table sets forth the RSU activity for the nine months ended September 30, 2020:
| RSU Activity | Number Of Shares (in thousands) | Weighted Average Grant Date Fair Value | |||||||||
| Outstanding, December 31, 2019 | 156 | $ | 27.33 | ||||||||
| RSUs settled | (151) | 24.69 | |||||||||
| RSUs forfeited | (2) | 22.83 | |||||||||
| RSUs granted | 191 | 21.13 | |||||||||
| RSUs outstanding, September 30, 2020 | 194 | $ | 23.21 | ||||||||
| Expected to vest as of September 30, 2020 | 181 | $ | 23.29 | ||||||||
The weighted average grant date fair value of RSUs granted during the three months ended September 30, 2020 and 2019 was $22.82 and $21.52 per share. The weighted average grant date fair value of RSUs granted during the nine months ended September 30, 2020 and 2019 was $21.13 and $26.77 per share, respectively. During the nine months ended September 30, 2020 and 2019, GCP distributed 151,000 shares and 255,000 shares, respectively, to settle RSUs upon vesting. The fair value of RSUs vested during the nine months ended September 30, 2020 and 2019 was $3.4 million and $6.4 million, respectively.
PBUs
PBUs are performance-based units which are granted by the Company either with or without market conditions and recorded at fair value on the grant date. The performance criteria for PBUs granted in 2020 and 2019 include a 3-year cumulative adjusted diluted earnings per share metric that is modified, up or down, based on the Company's total shareholder return ("TSR") relative to the performance of the Russell 3000 Specialty Chemicals and Building Materials Indices. For PBUs granted in 2018, such metric is modified, up or down, based on the Company's TSR relative to the performance of the Russell 3000 Index. The number of shares that ultimately vest, if any, is based on Company performance against these metrics, and can range from 0% to 200% of the target number of shares granted to employees. The 2020, 2019 and 2018 awards will become vested, if at all, three years from the grant date once actual performance is certified by the Board's Compensation Committee. Vesting is also subject to the employees' continued employment through the vesting date.
35
Notes to Consolidated Financial Statements (unaudited) - Continued
The following table summarizes the assumptions used in the Monte Carlo simulations for estimating the grant date fair values of PBUs granted during the nine months ended September 30, 2020 and 2019:
| Nine Months Ended September 30, | |||||||||||
| Assumptions used to calculate expense for PBUs: | 2020 | 2019 | |||||||||
| Expected Term (Remaining Performance Period) | 2.85 | 2.86 | |||||||||
| Expected volatility | 29.85% | 28.46% | |||||||||
| Risk-free interest rate | 1.21% | 2.48% | |||||||||
| Expected dividends | — | — | |||||||||
| Correlation coefficient | 53.43% | 54.81% | |||||||||
| Median correlation coefficient of constituents | 54.01% | 57.09% | |||||||||
The following table sets forth the PBU activity for the nine months ended September 30, 2020:
| PBU Activity | Number Of Shares (in thousands) | Weighted Average Grant Date Fair Value | |||||||||
| Outstanding, December 31, 2019 | 382 | $ | 29.51 | ||||||||
| PBU's settled | — | — | |||||||||
| PBU's forfeited | (167) | 26.71 | |||||||||
| PBU's granted | 147 | 22.43 | |||||||||
| Outstanding, September 30, 2020 | 362 | $ | 27.91 | ||||||||
The weighted average grant date fair value of PBUs granted during the nine months ended September 30, 2020 and 2019 was $22.43 and $27.19 per share, respectively. During the nine months ended September 30, 2019, GCP distributed 76461 shares to settle PBUs upon vesting. GCP expects to settle in stock all future PBU vestings. The fair value of PBUs vested during the nine months ended September 30, 2019 was $2.0 million.
36
Notes to Consolidated Financial Statements (unaudited) - Continued
16. Earnings Per Share
The following table sets forth a reconciliation of the numerators and denominators used in calculating basic and diluted earnings (loss) per share:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (In millions, except per share amounts) | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
| Numerators | |||||||||||||||||||||||
| Income from continuing operations attributable to GCP shareholders | $ | 99.5 | $ | 17.0 | $ | 99.6 | $ | 34.7 | |||||||||||||||
| (Loss) income from discontinued operations, net of income taxes | (0.1) | (0.4) | (0.4) | 5.9 | |||||||||||||||||||
| Net income attributable to GCP shareholders | $ | 99.4 | $ | 16.6 | $ | 99.2 | $ | 40.6 | |||||||||||||||
| Denominators | |||||||||||||||||||||||
| Weighted average common shares—basic calculation | 73.0 | 72.7 | 72.9 | 72.5 | |||||||||||||||||||
Dilutive effect of employee stock awards(2) | 0.2 | 0.1 | 0.2 | 0.4 | |||||||||||||||||||
| Weighted average common shares—diluted calculation | 73.2 | 72.8 | 73.1 | 72.9 | |||||||||||||||||||
Basic earnings (loss) per share:(2) | |||||||||||||||||||||||
| Income from continuing operations attributable to GCP shareholders | $ | 1.36 | $ | 0.23 | $ | 1.37 | $ | 0.48 | |||||||||||||||
| (Loss) income from discontinued operations, net of income taxes | $ | — | $ | (0.01) | $ | (0.01) | $ | 0.08 | |||||||||||||||
Net income attributable to GCP shareholders(1) | $ | 1.36 | $ | 0.23 | $ | 1.36 | $ | 0.56 | |||||||||||||||
Diluted earnings (loss) per share:(2) | |||||||||||||||||||||||
| Income from continuing operations attributable to GCP shareholders | $ | 1.36 | $ | 0.23 | $ | 1.36 | $ | 0.48 | |||||||||||||||
| (Loss) income from discontinued operations, net of income taxes | $ | — | $ | (0.01) | $ | (0.01) | $ | 0.08 | |||||||||||||||
Net income attributable to GCP shareholders(1) | $ | 1.36 | $ | 0.23 | $ | 1.36 | $ | 0.56 | |||||||||||||||
________________________________
(1)Amounts may not sum due to rounding.
(2)Dilutive effect is only applicable to the periods during which GCP generated net income from continuing operations.
GCP uses the treasury stock method to compute diluted earnings (loss) per share. During the three and nine months ended September 30, 2020, 0.6 million of anti-dilutive stock awards were excluded from the computation of diluted earnings per share during each period based on the treasury stock method as a result of income from continuing operations generated during the periods then ended. During the three and nine months ended September 30, 2019, 0.8 million and 0.6 million, respectively, of such anti-dilutive stock awards were excluded from the computation of diluted earnings per share.
37
Notes to Consolidated Financial Statements (unaudited) - Continued
17. Related Party Transactions and Transactions with Grace
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.
Related Party Transaction
During the three months ended June 30, 2020, Starboard Value LP and certain of its affiliates ('Starboard") with an ownership interest of approximately 9% of the Company's outstanding common shares, filed a proxy statement with the SEC seeking an election of eight of its nominees to the GCP Board of Directors at the Company’s 2020 Annual Meeting of Shareholders (the “Annual Meeting”). At the Annual Meeting held on May 28, 2020, GCP stockholders voted to elect all eight nominees designated by Starboard to serve on GCP's Board of Directors. On July 2, 2020, the Company agreed to reimburse Starboard up to an amount of approximately $2.0 million for fees and expenses it incurred in connection with the election of its nominees. The Company paid $2.0 million of such costs to Starboard on July 16, 2020.
Tax Sharing Agreement
In connection with the Separation, the Company and Grace entered into a Tax Sharing Agreement which 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, as well as 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 including 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). Grace is responsible for all U.S. federal, state and foreign income taxes including 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 September 30, 2020 and December 31, 2019, GCP has recorded $3.7 million and $3.5 million, respectively, of indemnified receivables in "Other assets" and $0.9 million and $1.0 million, respectively, of indemnified payables in "Other current liabilities" in the accompanying unaudited Consolidated Balance Sheets.
18. Operating Segment and Geographic Information
GCP is engaged in the production and sale of specialty construction chemicals and specialty building materials through two operating segments. Specialty Construction Chemicals ("SCC") operating segment manufactures and markets concrete admixtures and cement additives and supplies in-transit monitoring systems for concrete producers. Specialty Building Materials ("SBM") operating segment manufactures and markets sheet and liquid membrane systems that protect structures from water, air and vapor penetration, as well as fireproofing and other products designed to protect the building envelope.
Operating Segment Data
The following table presents information related to GCP's operating segments:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (In millions) | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
| Net Sales | |||||||||||||||||||||||
| Specialty Construction Chemicals | $ | 138.3 | $ | 151.8 | $ | 379.6 | $ | 433.9 | |||||||||||||||
| Specialty Building Materials | 110.1 | 115.1 | 280.9 | 321.3 | |||||||||||||||||||
| Total net sales | $ | 248.4 | $ | 266.9 | $ | 660.5 | $ | 755.2 | |||||||||||||||
| Segment Operating Income | |||||||||||||||||||||||
| Specialty Construction Chemicals segment operating income | $ | 18.6 | $ | 19.8 | $ | 36.4 | $ | 41.9 | |||||||||||||||
| Specialty Building Materials segment operating income | 25.4 | 25.9 | 50.1 | 64.1 | |||||||||||||||||||
| Total segment operating income | $ | 44.0 | $ | 45.7 | $ | 86.5 | $ | 106.0 | |||||||||||||||
38
Notes to Consolidated Financial Statements (unaudited) - Continued
Reconciliation of Operating Segment Data to Financial Statements
Corporate expenses directly related to the operating segments are allocated to the segment's operating income. GCP excludes from the segments' operating income certain functional costs, certain impacts of foreign currency exchange, as well as certain corporate costs and other costs included in the table below. GCP also excludes from the segment's operating income certain ongoing defined benefit pension costs recognized during each reporting period, which include service and interest costs, the effect of expected returns on plan assets and amortization of prior service costs/credits. GCP believes that the exclusion of certain corporate costs and pension costs provides a better indicator of its operating segment performance since such costs are not managed at an operating segment level.
Total segment operating income for the three and nine months ended September 30, 2020 and 2019 is reconciled below to "Income from continuing operations before income taxes" presented in the accompanying unaudited Consolidated Statements of Operations:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (In millions) | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
Total segment operating income(1) | $ | 44.0 | $ | 45.7 | $ | 86.5 | $ | 106.0 | |||||||||||||||
| Corporate costs | (7.6) | (8.9) | (19.7) | (28.2) | |||||||||||||||||||
| Certain pension costs | (1.3) | (2.0) | (3.9) | (5.9) | |||||||||||||||||||
Shareholder activism and other related costs(2) | (2.1) | (0.1) | (9.5) | (3.7) | |||||||||||||||||||
| Gain on sale of corporate headquarters | 110.2 | — | 110.2 | — | |||||||||||||||||||
Gain on Brazil tax recoveries, net(3) | — | 0.9 | — | 0.9 | |||||||||||||||||||
Repositioning expenses | (0.1) | (4.4) | (3.8) | (15.6) | |||||||||||||||||||
Restructuring expenses and asset impairments | (7.7) | (3.8) | (11.2) | (8.8) | |||||||||||||||||||
Third-party and other acquisition-related costs | — | — | (0.7) | (0.1) | |||||||||||||||||||
Legacy product, environmental and other claims | — | — | — | (0.1) | |||||||||||||||||||
| Net income attributable to noncontrolling interests | 0.2 | 0.1 | 0.4 | 0.3 | |||||||||||||||||||
| Interest expense, net | (5.3) | (4.9) | (15.1) | (15.0) | |||||||||||||||||||
| Income from continuing operations before income taxes | $ | 130.3 | $ | 22.6 | $ | 133.2 | $ | 29.8 | |||||||||||||||
__________________________
(1)Certain amounts related to COVID-19 costs have been reclassified between segments' operating income and corporate expenses that do not get allocated directly to the segments. Such reclassifications have not materially affected previously reported amounts.
(2)Shareholder activism and other related costs consist primarily of professional fees incurred in connection with the actions by certain of GCP shareholders seeking changes in the composition of the Company's Board of Directors and nomination of candidates to stand for election at the 2019 and 2020 Annual Shareholders' Meetings, as well as other related matters.
(3)Gain on Brazil tax recoveries, net primarily consists of a $1.7 million pre-tax gain related to indirect tax recoveries, and $0.8 million of legal fees and other charges relating to indirect and income tax recoveries. Please refer to Note 8, "Income Taxes" and Note 11, "Commitments and Contingencies" for further information.
Disaggregation of Total Net Sales
The Company disaggregates its revenue from contracts with customers by operating segments, which it believes best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
Geographic Area Data
The table below presents information related to the geographic areas in which GCP operates.
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Notes to Consolidated Financial Statements (unaudited) - Continued
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (In millions) | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
| Net Sales | |||||||||||||||||||||||
| United States | $ | 132.5 | $ | 134.8 | $ | 351.8 | $ | 369.2 | |||||||||||||||
| Canada and Other | 8.7 | 9.1 | 20.9 | 24.0 | |||||||||||||||||||
| Total North America | 141.2 | 143.9 | 372.7 | 393.2 | |||||||||||||||||||
| Europe Middle East Africa | 47.4 | 50.7 | 126.3 | 149.4 | |||||||||||||||||||
| Asia Pacific | 47.4 | 56.8 | 127.4 | 166.4 | |||||||||||||||||||
| Latin America | 12.4 | 15.5 | 34.1 | 46.2 | |||||||||||||||||||
| Total | $ | 248.4 | $ | 266.9 | $ | 660.5 | $ | 755.2 | |||||||||||||||
Sales are attributed to geographic areas based on customer location. With the exception of the U.S. presented in the table above, there were no individually significant countries with sales exceeding 10% of total sales during the three and nine months ended September 30, 2020 and 2019. There were no customers that individually accounted for 10% or more of the Company's accounts receivable balance as of September 30, 2020 and December 31, 2019.
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Notes to Consolidated Financial Statements (unaudited) - Continued
19. Discontinued Operations
On July 3, 2017, the Company completed the sale of Darex to Henkel for $1.06 billion in cash (the “Disposition”). The agreement with Henkel governing the Disposition (the “Amended Purchase Agreement”) provides for a series of delayed closings in certain non-U.S. jurisdictions for which sale proceeds were received on the July 3, 2017 closing date. The delayed closings implement the legal transfer of the Darex business in the delayed closing jurisdictions in accordance with local law. In January 2020, the final remaining delayed closing in Venezuela was completed which did not result in a gain or a loss recognized during the nine months ended September 30, 2020. During the nine months ended September 30, 2019, the Company completed the delayed closing in Indonesia and recorded an after-tax gain on sale of $7.2 million. Up to the time of the delayed closings, the results of the operations of the Darex business within the delayed close countries are reported as “(Loss) income from discontinued operations, net of income taxes” in the accompanying unaudited Consolidated Statements of Operations, with the exception of operations in Venezuela which were deconsolidated during 2017.
As of December 31, 2019, an asset of $0.5 million related to operations in Venezuela and a liability of $0.5 million related to the deferred sale proceeds received on July 3, 2017 were recognized in "Non-current assets held for sale" and “Other current liabilities” in the Consolidated Balance Sheets. During the nine months ended September 30, 2020, GCP derecognized the entire asset and liability amounts due to completing the delayed closing in Venezuela and recognizing the related sale proceeds. As of September 30, 2020, there were no remaining assets held for sale and no remaining liabilities for the consideration received on July 3, 2017 related to the delayed closings in connection with the sale of Darex.
The following table includes a reconciliation of the gain on the sale of the Darex business related to delayed close entities recorded during the nine months ended September 30, 2019:
| Nine Months Ended September 30, | |||||
| (In millions) | 2019 | ||||
| Net proceeds included in gain | $ | 12.7 | |||
| Net assets derecognized | (3.1) | ||||
| Gain recognized before income taxes | 9.6 | ||||
| Tax effect of gain recognized | (2.4) | ||||
| Gain recognized after income taxes | $ | 7.2 | |||
In connection with the Disposition and related gain, as noted above, the Company recorded tax expense of $2.4 million within discontinued operations during the nine months ended September 30, 2019.
In connection with the Disposition, GCP and Henkel entered into a Master Tolling Agreement, whereby Henkel will operate certain equipment at facilities being sold in order to manufacture and prepare for shipping certain products related to product lines that the Company continues to own. The agreement expires in June 2024.
Under the Amended Purchase Agreement, GCP is required to indemnify Henkel for certain possible future tax liabilities. As of September 30, 2020 and December 31, 2019, GCP has recorded an indemnification payable of $1.0 million and $0.9 million, respectively, as a result of the Disposition.
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Notes to Consolidated Financial Statements (unaudited) - Continued
The following table sets forth the components of "(Loss) income from discontinued operations, net of income taxes" in the accompanying unaudited Consolidated Statements of Operations(1):
| Three Months Ended September 30 | Nine Months Ended September 30, | ||||||||||||||||
| (In millions) | 2019 | 2020 | 2019 | ||||||||||||||
| Net sales | $ | — | $ | — | $ | — | |||||||||||
| Cost of goods sold | — | — | — | ||||||||||||||
| Gross profit | — | — | — | ||||||||||||||
| Selling, general and administrative expenses | 0.2 | 0.2 | 1.1 | ||||||||||||||
| Restructuring expenses and asset impairments | 0.1 | — | 0.3 | ||||||||||||||
| Gain on sale of business | — | — | (9.6) | ||||||||||||||
| Other expenses, net | 0.1 | 0.2 | 0.1 | ||||||||||||||
| (Loss) income from discontinued operations before income taxes | (0.4) | (0.4) | 8.1 | ||||||||||||||
| Provision for income taxes | — | — | (2.2) | ||||||||||||||
| (Loss) income from discontinued operations, net of income taxes | $ | (0.4) | $ | (0.4) | $ | 5.9 | |||||||||||
_____________________
(1) There was no material activity during the three months ended September 30, 2020.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We generally refer to the quarter ended September 30, 2020 as the "third quarter", the quarter ended September 30, 2019 as the "prior-year quarter", the quarter ended March 31, 2020 as the "first quarter", and the quarter ended June 30, 2020 as the "second quarter". Additionally, we generally refer to the nine months ended September 30, 2020 as the "nine months", and the nine months ended September 30, 2019 as the "prior-year period." See Analysis of Operations for a discussion of our non-GAAP performance measures.
Information Related to Forward-Looking Statements
This document contains, and our other public communications may contain, forward-looking statements, that is, information related to future, not historical events. Such statements generally include the words "believes," "plans," "intends," "targets," "will," "expects," "suggests," "anticipates," "outlook," "continues" or similar expressions. Forward-looking statements include, without limitation, statements about expected financial positions; results of operations; cash flows; financing plans; business strategy; operating plans; strategic alternatives; capital and other expenditures; competitive positions; growth opportunities for existing products; benefits from new technology and cost reduction initiatives, plans and objectives; and markets for securities. Like other businesses, we are subject to risks and uncertainties that could cause our actual results to differ materially from our projections or that could cause other forward-looking statements to prove incorrect. Factors that could cause actual results to materially differ from those contained in the forward-looking statements, or that could cause other forward-looking statements to prove incorrect, include, without limitation, risks related to: the cyclical and seasonal nature of the industries that GCP serves; foreign operations, especially in emerging regions; changes in currency exchange rates; business disruptions due to public health or safety emergencies, such as the novel strain of coronavirus ("COVID-19") pandemic; the cost and availability of raw materials and energy; the effectiveness of GCP’s research and development, new product introductions and growth investments; acquisitions and divestitures of assets and gains and losses from dispositions; developments affecting GCP’s outstanding liquidity and indebtedness, including debt covenants and interest rate exposure; developments affecting GCP’s funded and unfunded pension obligations; warranty and product liability claims; legal proceedings; the inability to establish or maintain certain business relationships and relationships with customers and suppliers or the inability to retain key personnel; the handling of hazardous materials and the costs of compliance with environmental regulation, and those factors set forth in our most recent Annual Report on Form 10-K, this Quarterly Report on Form 10-Q and Current Reports on Form 8-K, which have been filed with 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.
RESULTS OF OPERATIONS
Business Description Summary
We are engaged in the production and sale of specialty construction chemicals and specialty building materials through two global operating segments:
•Specialty Construction Chemicals. Our Specialty Construction Chemicals ("SCC") operating segment provides products, services and technologies, such as in-transit monitoring systems, that reduce the cost and improve the performance and quality of cement, concrete, mortar, masonry and other cementitious-based construction materials.
•Specialty Building Materials. Our Specialty Building Materials ("SBM") operating segment produces and sells sheet and liquid membrane systems and other products that protect both new and existing structures from water, air, and vapor penetration, as well as from fire damage. We also manufacture and sell specialized cementitious and chemical grouts used for soil consolidation and leak-sealing applications in addition to a moisture barrier system and installation tools for the flooring industry.
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We operate our business on a global scale. During the nine months, approximately 47% of our sales were generated outside of the U.S. We operate in over 30 countries and conduct business in over 30 currencies. We manage our operating segments on a global basis to serve global markets. Currency fluctuations affect our reported results of operations, cash flows, and financial position.
Impact of COVID-19 Pandemic
We have been closely monitoring the impact of COVID-19 and managing its effects on our business globally as the situation continues to evolve.
COVID-19 began emerging in the latter half of the first quarter resulting in temporary mandated closures of our manufacturing operations, primarily in China. During the first half of the year, the pandemic spread and intensified throughout the world resulting in mandated and voluntary closures of some of our manufacturing operations and administrative offices, which continued, to a lesser extent, during the third quarter. During this time, we focused on protecting the health, safety and well-being of our employees in accordance with guidelines issued by national and other health and safety authorities, while seeking to meet the needs of our global customers and suppliers. Responsive measures we adopted include working remotely when possible, establishing procedures for deep cleaning of facilities, restricting business travel, providing personal protective equipment, using appropriate social distancing practices, and restricting visitor access to facilities.
COVID-19 has negatively impacted our operating results during the first half of the year and, to a lesser extent during the third quarter, primarily due to periodic closures of our facilities in all regions in which we operate, and periodic mandatory halts of construction activity in specific cities and countries around the world by government authorities or voluntary closures due to safety concerns. Some of our customers have experienced similar disruptions as a result of the pandemic. During the third quarter, while construction activity levels remained below those that existed prior to COVID-19, we saw business conditions and construction market activity improve as global economies began to slowly reopen. As a result, our revenue volumes in the third quarter increased compared to the second quarter. The impact of COVID-19 on our business varied across different geographies and product lines during the third quarter. We have taken actions to preserve our liquidity by reducing discretionary spending and certain planned capital expenditures.
It is difficult for us to predict at this time the duration and extent of the impact of COVID-19 on the global construction industry and our business, financial position, results of operations, and liquidity although we expect that managing the impacts of the pandemic will be a part of our ongoing operations for the foreseeable future. Factors we are monitoring to assess the potential duration and extent of the impact of COVID-19 on our operations include the health of the global economy and construction industry, specifically on demand drivers for our construction products, as well as operational disruptions including those resulting from government actions, such as mandatory halts of construction activity, travel restrictions, as well as facility and work site closures. We will continue to prioritize the health and safety of our employees and serving our customers while minimizing disruption to the extent possible. We will also continue to monitor the health of the construction industry in the geographic markets in which we operate and respond accordingly.
The following is an overview of our financial performance for the third quarter and nine months compared with the prior-year periods.
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(In millions, except per share amounts) | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||
| 2020 | 2019 | % Change | 2020 | 2019 | % Change | ||||||||||||||||||||||||||||||
| Net sales | $248.4 | $266.9 | (6.9)% | $660.5 | $755.2 | (12.5)% | |||||||||||||||||||||||||||||
| Cost of goods sold | 147.0 | 161.8 | (9.1)% | 400.8 | 468.9 | (14.5)% | |||||||||||||||||||||||||||||
| Gross profit | 101.4 | 105.1 | (3.5)% | 259.7 | 286.3 | (9.3)% | |||||||||||||||||||||||||||||
| Gross margin | 40.8% | 39.4% | 1.4 pts | 39.3% | 37.9% | 1.4 pts | |||||||||||||||||||||||||||||
| Selling, general and administrative expenses | 65.2 | 66.3 | (1.7)% | 199.0 | 206.7 | (3.7)% | |||||||||||||||||||||||||||||
| Research and development expenses | 4.5 | 4.5 | —% | 13.1 | 13.8 | (5.1)% | |||||||||||||||||||||||||||||
| Interest expense and related financing costs | 5.6 | 5.7 | (1.8)% | 16.3 | 17.3 | (5.8)% | |||||||||||||||||||||||||||||
| Repositioning expenses | 0.1 | 4.4 | (97.7)% | 3.8 | 15.6 | (75.6)% | |||||||||||||||||||||||||||||
| Restructuring expenses and asset impairments | 7.7 | 3.8 | NM | 11.2 | 8.8 | 27.3% | |||||||||||||||||||||||||||||
| Gain on sale of corporate headquarters | (110.2) | — | (100.0)% | (110.2) | — | (100.0)% | |||||||||||||||||||||||||||||
| Other income, net | (1.8) | (2.2) | (18.2)% | (6.7) | (5.7) | 17.5% | |||||||||||||||||||||||||||||
| Total costs and expenses | (28.9) | 82.5 | NM | 126.5 | 256.5 | (50.7)% | |||||||||||||||||||||||||||||
| Income from continuing operations before income taxes | 130.3 | 22.6 | NM | 133.2 | 29.8 | NM | |||||||||||||||||||||||||||||
| (Provision for) benefit from income taxes | (30.6) | (5.5) | NM | (33.2) | 5.2 | NM | |||||||||||||||||||||||||||||
| Income from continuing operations | 99.7 | 17.1 | NM | 100.0 | 35.0 | NM | |||||||||||||||||||||||||||||
| (Loss) income from discontinued operations, net of income taxes | (0.1) | (0.4) | (75.0)% | (0.4) | 5.9 | NM | |||||||||||||||||||||||||||||
| Net income | 99.6 | 16.7 | NM | 99.6 | 40.9 | NM | |||||||||||||||||||||||||||||
| Less: Net income attributable to noncontrolling interests | (0.2) | (0.1) | 100.0% | (0.4) | (0.3) | 33.3% | |||||||||||||||||||||||||||||
| Net income attributable to GCP shareholders | $99.4 | $16.6 | NM | $99.2 | $40.6 | NM | |||||||||||||||||||||||||||||
| Income from continuing operations attributable to GCP shareholders | $99.5 | $17.0 | NM | $99.6 | $34.7 | NM | |||||||||||||||||||||||||||||
| Diluted EPS from continuing operations attributable to GCP shareholders | $1.36 | $0.23 | NM | $1.36 | $0.48 | NM | |||||||||||||||||||||||||||||
| Net sales: | |||||||||||||||||||||||||||||||||||
| Specialty Construction Chemicals | $138.3 | $151.8 | (8.9)% | $379.6 | $433.9 | (12.5)% | |||||||||||||||||||||||||||||
| Specialty Building Materials | 110.1 | 115.1 | (4.3)% | 280.9 | 321.3 | (12.6)% | |||||||||||||||||||||||||||||
| Total GCP net sales | $248.4 | $266.9 | (6.9)% | $660.5 | $755.2 | (12.5)% | |||||||||||||||||||||||||||||
| Net sales by region: | |||||||||||||||||||||||||||||||||||
| North America | $141.2 | $143.9 | (1.9)% | $372.7 | $393.2 | (5.2)% | |||||||||||||||||||||||||||||
| Europe Middle East Africa (EMEA) | 47.4 | 50.7 | (6.5)% | 126.3 | 149.4 | (15.5)% | |||||||||||||||||||||||||||||
| Asia Pacific | 47.4 | 56.8 | (16.5)% | 127.4 | 166.4 | (23.4)% | |||||||||||||||||||||||||||||
| Latin America | 12.4 | 15.5 | (20.0)% | 34.1 | 46.2 | (26.2)% | |||||||||||||||||||||||||||||
| Total net sales by region | $248.4 | $266.9 | (6.9)% | $660.5 | $755.2 | (12.5)% | |||||||||||||||||||||||||||||
Third Quarter Performance Summary
Following is a summary of our financial performance for the third quarter compared with the prior-year quarter.
•Net sales decreased 6.9% to $248.4 million.
•Gross profit decreased 3.5% to $101.4 million; gross margin increased approximately 140 basis points to 40.8%.
•Selling, general, and administrative expenses decreased 1.7% to $65.2 million.
•Income from continuing operations attributable to GCP shareholders was $99.5 million, or $1.36 per diluted share, compared to $17.0 million, or $0.23 per diluted share, for the prior-year quarter. The increase of $82.5 million was primarily attributable to a gain on sale of corporate headquarters.
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GCP Overview
Net Sales and Gross Margin
The following table identifies the period-over-period increase or decrease in sales attributable to changes in volume and/or mix, product price, and the impact of currency translation for the period.
| Three Months Ended September 30, 2020 as a Percentage Increase (Decrease) from September 30, 2019 | |||||||||||||||||||||||
| Net Sales Variance Analysis | Volume | Price | Currency Translation | Total Change | |||||||||||||||||||
| Specialty Construction Chemicals | (7.2) | % | (0.1) | % | (1.6) | % | (8.9) | % | |||||||||||||||
| Specialty Building Materials | (4.1) | % | (0.8) | % | 0.6 | % | (4.3) | % | |||||||||||||||
| Net sales | (5.9) | % | (0.4) | % | (0.6) | % | (6.9) | % | |||||||||||||||
| By Region: | |||||||||||||||||||||||
| North America | (0.7) | % | (1.1) | % | (0.1) | % | (1.9) | % | |||||||||||||||
| Europe Middle East Africa | (9.3) | % | (0.3) | % | 3.1 | % | (6.5) | % | |||||||||||||||
| Asia Pacific | (16.0) | % | (0.6) | % | 0.1 | % | (16.5) | % | |||||||||||||||
| Latin America | (5.2) | % | 5.7 | % | (20.5) | % | (20.0) | % | |||||||||||||||
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| Nine Months Ended September 30, 2020 as a Percentage Increase (Decrease) from September 30, 2019 | |||||||||||||||||||||||
| Net Sales Variance Analysis | Volume | Price | Currency Translation | Total Change | |||||||||||||||||||
| Specialty Construction Chemicals | (10.8) | % | 0.2 | % | (1.9) | % | (12.5) | % | |||||||||||||||
| Specialty Building Materials | (12.0) | % | (0.3) | % | (0.3) | % | (12.6) | % | |||||||||||||||
| Net sales | (11.4) | % | — | % | (1.1) | % | (12.5) | % | |||||||||||||||
| By Region: | |||||||||||||||||||||||
| North America | (4.5) | % | (0.7) | % | — | % | (5.2) | % | |||||||||||||||
| Europe Middle East Africa | (15.6) | % | 0.2 | % | (0.1) | % | (15.5) | % | |||||||||||||||
| Asia Pacific | (22.1) | % | (0.3) | % | (1.0) | % | (23.4) | % | |||||||||||||||
| Latin America | (17.6) | % | 6.1 | % | (14.7) | % | (26.2) | % | |||||||||||||||
Net sales of $248.4 million for the third quarter decreased $18.5 million, or 6.9%, from the prior-year quarter primarily due to lower sales volumes. Sales volumes in SCC and SBM were lower in all regions, primarily due to lower overall demand for products in certain countries and construction segments impacted by COVID-19 and its impact on the global economy.
Gross profit of $101.4 million for the third quarter decreased $3.7 million, or 3.5%, from the prior-year quarter primarily due to lower sales volumes in SCC and SBM. Gross margin increased 140 basis points to 40.8% primarily due to lower logistic costs and improved operational productivity which more than offset the unfavorable impact of lower volumes.
Net sales of $660.5 million for the nine months decreased $94.7 million, or 12.5%, compared with the prior-year period primarily due to lower sales volumes in SCC and SBM and the unfavorable impact of foreign currency translation. Sales volumes decreased within SCC and SBM in all regions resulting primarily from lower construction activity in certain countries and construction segments due to COVID-19 and its impact on the global economy.
Gross profit of $259.7 million for the nine months decreased $26.6 million, or 9.3%, compared with the prior-year period, primarily due to lower sales volumes in SCC and SBM. Gross margin increased 140 basis points to 39.3% primarily due to lower raw material and logistics costs and improved operational productivity which more than offset the unfavorable impact of lower volumes. The unfavorable impact of lower volumes resulted from the lower absorption of fixed manufacturing costs and idle direct labor incurred during temporary closure of our manufacturing facilities in certain countries.
Selling, General, and Administration Expenses
Selling, general and administrative costs of $65.2 million decreased $1.1 million, or 1.7%, for the third quarter compared to the prior-year quarter primarily due to reduced discretionary spending, benefits from our productivity initiatives and lower employee-related costs resulting from restructuring programs. These favorable impacts of $5.4 million were partially offset by increased expenses of $4.3 million related to shareholder activism and other related costs and our growth initiatives. We incurred shareholder activism and other related costs of $2.1 million and $0.1 million, respectively, during the third quarter and prior-year quarter in connection with the actions by certain of our shareholders seeking changes in the composition of our Board of Directors and nomination of candidates to stand for election at the 2019 and 2020 Annual Shareholders' Meetings, as well as other related matters.
Selling, general and administrative costs of $199.0 million decreased $7.7 million, or 3.7%, for the nine months compared to the prior-year period primarily due to reduced discretionary spending, lower employee-related costs resulting from restructuring programs, benefits from our productivity initiatives, and lower pension costs. These favorable impacts of $18.4 million were partially offset by increased expenses of $10.7 million related to shareholder activism and other related costs and our growth initiatives. We incurred shareholder activism and other related costs of $9.5 million and $3.7 million, respectively, during the nine months and prior-year period.
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Restructuring and Repositioning Expenses
2019 Restructuring and Repositioning Plan (the “2019 Plan”)
On February 22, 2019, our Board of Directors (the "Board") approved a business restructuring and repositioning plan (the “2019 Plan”). The 2019 Plan is focused on our global supply chain strategy, processes and execution, including our manufacturing, purchasing, logistics, and warehousing operations. The plan also addresses our service delivery model, primarily in North America, to streamline the Company’s pursuit of combined admixture and VERIFI® opportunities.
We reduced our previously estimated total costs of the 2019 Plan by $2 million to $3 million to approximately $14 million. Additionally, we reduced our estimated annualized pre-tax cost savings from $22 to $28 million by the end of 2021 to $20 million by the end of 2020. As of September 30, 2020, we have achieved annualized pre-tax cost savings of approximately $14.5 million through a reduction in cost of goods sold as a result of supply chain, warehouse operations, and logistical enhancements that benefited both the SCC and SBM operating segments. Substantially all of the activities under the 2019 Plan are expected to be completed by December 31, 2020.
2019 Phase 2 Restructuring and Repositioning Plan (the “2019 Phase 2 Plan")
On July 31, 2019, the Board approved a business restructuring and repositioning plan to further optimize the design and footprint of the Company's global organization, primarily with respect to its general administration and business support functions, and streamline cross-functional activities.
We expect to realize total annualized pre-tax cost savings associated with the 2019 Phase 2 Plan of approximately $30 million to $35 million by the end of 2021, which are expected to benefit SCC, SBM and Corporate. During the third quarter, we achieved total pre-tax cost savings of approximately $2.9 million, or approximately $11.6 million on an annualized basis, through a reduction in general and administrative expenses. With the exception of asset impairments, substantially all of the restructuring and repositioning activities are expected to be settled in cash and the program is expected to be completed by December 31, 2021.
For further information on our restructuring expenses, please refer to Note 13, "Restructuring and Repositioning Expenses, Asset Impairments" in the Notes to the unaudited Consolidated Financial Statements included in Item 1, "Financial Statements" on this Quarterly Report on Form 10-Q, and Note 14, "Restructuring and Repositioning Expenses, Asset Impairments" to the Company's Consolidated Financial Statements included in the 2019 Annual Report in the Form 10-K.
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Pension Expense
Defined benefit expense includes costs relating to U.S. and non-U.S. defined benefit pension and other postretirement benefit (the "OPEB") plans that provide benefits for retirees and former employees of divested businesses where we retained these obligations.
"Certain pension costs" represent ongoing costs recognized quarterly, including service and interest costs, expected return on plan assets and amortization of prior service costs/credits. Certain pension costs during the third quarter and nine months were $1.3 million and $3.9 million, respectively, compared with $2.0 million and $5.9 million, respectively, for the corresponding prior-year periods. The decreases were primarily due to lower interest cost for the U.S plans resulting from lower discount rates and the amendment of the GCP Applied Technologies Inc. UK Retirement Plan to freeze plan benefit accruals effective December 31, 2019. We did not incur any "pension market-to-market adjustment and other related costs" in the third quarter and nine months or the corresponding prior-year periods.
We sponsor a defined contribution retirement plan for our employees in the U.S., which is a qualified plan under section 401(k) of the U.S. tax code. Costs related to this plan totaled $1.3 million and $3.5 million, respectively, for the third quarter and nine months and $1.1 million and $3.5 million, respectively, for the corresponding prior-year periods.
Other Income, Net
Other income, net consists primarily of interest income, foreign currency exchange gains (losses), defined benefit pension expenses exclusive of service costs, income from our Transition Services Agreement related to the sale of Darex, and other items.
Other income, net was $1.8 million and $2.2 million, respectively, during the third quarter and the prior-year quarter. The decrease of $0.4 million was primarily due to lower interest income, partially offset by foreign currency exchange gains compared to foreign currency exchange losses in the prior-year quarter. Additionally, we recognized a gain related to indirect tax recovery in Brazil during the prior-year quarter.
Other income, net was $6.7 million and $5.7 million, respectively, during the nine months and the prior-year period. The increase of $1.0 million was primarily due to foreign currency exchange gains compared to foreign currency exchange losses in the prior-year quarter. The impact of these items was partially offset by lower interest income and a gain related to indirect tax recovery in Brazil recognized during the prior-year period.
Income Taxes
Income taxes attributable to continuing operations during the third quarter and the prior-year quarter was income tax expense of $30.6 million and $5.5 million, respectively, representing effective tax rates of 23.5% and 24.3%, respectively. The difference between the U.S. federal income tax rate of 21.0% and our overall income tax rate for the for the third quarter was primarily due to state income tax expense from the sale of the Cambridge site of $5.1 million, tax expenses for non-deductible expenses and the effect of tax rates in foreign jurisdictions of $3.7 million, partially offset by tax benefits related to the 2017 Tax Act final regulations and the CARES Act of $5.8 million. The difference between the U.S. federal income tax rate of 21.0% and our overall income tax rate during the prior-year quarter was primarily due to $3.0 million of tax benefit related to Brazilian income tax refunds, partially offset by tax expense on non-deductible expenses and the effect of tax rates in foreign jurisdictions.
Income tax attributable to continuing operations during the nine months and the prior-year period was an income tax expense of $33.2 million and an income tax benefit of $5.2 million, respectively, representing effective tax rates of 24.9% and17.4%, respectively. The difference between the U.S. federal income tax rate of 21.0% and our overall income tax rate for the nine months was primarily due to state income tax expense from the sale of the Cambridge site of $5.1 million, tax expenses for non-deductible expenses and the effect of tax rates in foreign jurisdictions of $4.2 million, partially offset by tax benefits related to the 2017 Tax Act final regulations and the CARES Act of $6.3 million. The difference between the U.S. federal income tax rate of 21.0% and our overall income tax rate for the prior-year period was primarily attributable to the finalization of the Transition Tax regulations issued in January 2019 resulting in a tax benefit from the release of unrecognized tax benefits in the amount of $20.2 million, a $3.0 benefit due to Brazilian income tax refunds, partially offset by a tax expense of $3.6 million resulting from changes to our 2017 income tax liability and Transition Tax.
In general, it is our practice and intention to permanently reinvest the earnings of our foreign subsidiaries and repatriate earnings only when tax efficient.
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Income from Continuing Operations Attributable to GCP Shareholders
Income from continuing operations attributable to GCP shareholders was $99.5 million for the third quarter compared to $17.0 million for the prior-year quarter. The increase was primarily attributable to a gain on sale of corporate headquarters, partially offset by higher income tax expense resulting primarily from the sale. For further information on the sale of the corporate headquarters, please refer to Note 10, "Other Balance Sheet Information" in the Notes to the unaudited Consolidated Financial Statements included in Item 1, "Financial Statements" on this Quarterly Report on Form 10-Q.
Income from continuing operations attributable to GCP shareholders was $99.6 million for the nine months compared to $34.7 million for the prior-year period. The increase was primarily attributable to a gain on sale of corporate headquarters, reduced restructuring and repositioning costs, as well as lower selling, general and administrative expenses, partially offset by higher income tax expense resulting primarily from the sale of the corporate headquarters and lower gross profit.
On July 3, 2017, we completed the sale of our Darex business to Henkel AG & Co. KGaA ("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 discussion and analysis pertains only to our continuing operations.
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Operating Segment Overview
The following is an overview of the financial performance of the SCC and SBM operating segments for the third quarter and nine months compared with the prior-year periods. For further information on our accounting policies related to allocating certain functional and corporate costs and measuring segment operating income, please refer to Note 18, “Operating Segment and Geographic Information” in the Notes to the unaudited Consolidated Financial Statements included in Item 1, "Financial Statements" on this Quarterly Report on Form 10-Q. Refer to the table in the “Analysis of Operations” section below for the related segment financial performance information.
Segment operating margin is defined as segment operating income divided by segment net sales. It represents an operating performance measure related to ongoing earnings and trends in our operating segments that are engaged in revenue generation and other core business activities. We use this metric to allocate resources between the segments and assess our strategic and operating decisions related to core operations of our business.
Specialty Construction Chemicals (SCC)
Net Sales and Gross Margin
Net sales were $138.3 million for the third quarter, a decrease of $13.5 million, or 8.9%, compared with the prior-year quarter. The decrease was primarily due to lower sales volumes in all regions and the unfavorable impact of foreign currency translation.
Sales volumes decreased 7.2% in the third quarter compared with the prior-year quarter resulting primarily from lower construction and manufacturing activity. Concrete and Cement volumes decreased 6.0% and 10.5%, respectively.
Gross profit was $55.1 million for the third quarter, a decrease of $1.7 million, or 3.0%, compared with the prior-year quarter, primarily due to lower sales volumes. Gross margin increased 240 basis points to 39.8% compared with the prior-year quarter primarily due to lower cost resulting from improved operational and logistics productivity which more than offset the unfavorable impact of lower volumes resulting in reduced operating leverage.
Net sales were $379.6 million for the nine months, a decrease of $54.3 million, or 12.5%, compared with the prior-year period. The decrease was primarily due to lower sales volumes in all regions, lower pricing in North America and Asia Pacific, as well as the unfavorable impact of foreign currency translation.
Sales volumes decreased 10.8% for the nine months compared with the prior-year period due to lower construction and manufacturing activity resulting from COVID-19 and its impact on the global economy. Concrete and Cement volumes decreased 10.2% and 12.8%, respectively, for the nine months compared with the prior-year period.
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Gross profit was $147.5 million for the nine months, a decrease of $7.2 million, or 4.7%, compared with the prior-year period, primarily due to lower sales volumes. Gross margin increased 320 basis points to 38.9% compared with the prior-year period primarily due to raw materials deflation, improved operational and logistics productivity, as well as favorable regional sales mix, which more than offset the unfavorable impact of lower volumes negatively impacting operating leverage.
Segment Operating Income and Operating Margin
Segment operating income of $18.6 million for the third quarter decreased $1.2 million, or 6.1%, compared with the prior-year quarter primarily due to lower gross profit, partially offset by lower operating expenses due to reduced discretionary spending. Operating expense reductions were partially offset by higher depreciation and amortization costs and increased expenses related to our growth initiatives. Segment operating margin of 13.4% increased 40 basis points compared with the prior-year quarter primarily due to higher gross margin.
Segment operating income of $36.4 million for the nine months decreased $5.5 million, or 13.1%, compared with the prior-year period primarily due to lower gross profit, partially offset by lower operating expenses due to reduced discretionary spending. Operating expense reductions were partially offset by higher depreciation and amortization costs and increased expenses related to our growth initiatives. Segment operating margin of 9.6% was consistent with the prior-year period as higher gross margin was partially offset by lower sales volumes negatively impacting operating leverage.
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Specialty Building Materials (SBM)
Net Sales and Gross Margin
Net sales were $110.1 million for the third quarter, a decrease of $5.0 million, or 4.3%, compared with the prior-year quarter primarily due to lower sales volumes in EMEA and Asia Pacific and lower pricing in North America. The decreases were partially offset by higher sales volumes in North America and the favorable impact of foreign currency translation. Building Envelope and Specialty Construction Products volumes declined 12.6% and 2.9%, respectively, in the third quarter compared with the prior-year quarter primarily due to lower construction activity. Residential volumes increased 18.9% driven by the strong demand in North America for roofing materials.
Gross profit was $46.6 million for the third quarter, a decrease of $2.0 million, or 4.1%, primarily due to lower sales volumes. Gross margin increased 10 basis points to 42.3% from the prior-year quarter primarily due to improved logistics productivity, partially offset by lower pricing.
Net sales were $280.9 million for the nine months, a decrease of $40.4 million, or 12.6%, compared with the prior-year period primarily due to lower sales volumes in all regions.
Sales volumes decreased 12.0% in the nine months compared with the prior-year period due to lower construction and manufacturing activity in all regions resulting primarily from COVID-19 and its impact on the global economy. Building Envelope, Specialty Construction Products and Residential volumes declined 17.6%, 5.6% and 3.2%, respectively, for the nine months compared with the prior-year period.
Gross profit was $113.4 million for the nine months, a decrease of $19.4 million, or 14.6%, primarily due to lower sales volumes. Gross margin decreased 90 basis points to 40.4% from the prior-year period primarily due to the unfavorable impact of lower volumes resulting in reduced operating leverage.
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Segment Operating Income and Operating Margin
Segment operating income of $25.4 million for the third quarter decreased by $0.5 million, or 1.9%, compared with the prior-year quarter primarily due to lower gross profit and increased expenses related to our growth initiatives in certain product lines, partially offset by lower operating expenses due to reduced discretionary spending and lower employee-related costs resulting from restructuring programs. Segment operating margin increased 60 basis points to 23.1% primarily due to lower operating expenses, partially offset by the unfavorable impact of lower sales volumes resulting in reduced operating leverage.
Segment operating income of $50.1 million for the nine months decreased by $14.0 million, or 21.8%, compared with the prior-year period primarily due to lower gross profit, partially offset by lower operating expenses due to reduced discretionary spending and lower employee-related costs resulting from restructuring programs. Segment operating margin decreased 220 basis points to 17.8% primarily due to lower sales volumes negatively impacting operating leverage and lower gross margin, partially offset by lower operating expenses.
Analysis of Operations
We have set forth in the table below our key operating statistics with percentage changes for the third quarter compared to the corresponding prior-year quarter. In the Analysis of Operations (the "table"), we present financial information in accordance with U.S. GAAP, as well as certain non-GAAP financial measures, which we describe below in further detail.
We believe that the non-GAAP financial information supplements our discussions about the performance of our businesses, improves quarter-to-quarter and year-over-year comparability, and provides insight into the information that our management uses to evaluate the performance of our businesses. Our management uses non-GAAP measures in financial and operational decision-making processes, for internal reporting, and as part of forecasting and budgeting processes since these measures provide additional transparency into our core operations.
In the table, we have provided reconciliations of these non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with U.S. GAAP. These non-GAAP financial measures should not be considered substitutes for financial measures calculated in accordance with U.S. GAAP, and the financial results that we calculate and present in the table in accordance with U.S. GAAP, as well as the corresponding reconciliations from those results, should be carefully evaluated as part of this Quarterly Report on Form 10-Q.
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The following are the non-GAAP financial measures presented in the table:
•Adjusted EBIT (a non-GAAP financial measure)- is defined as net income (loss) from continuing operations attributable to GCP shareholders adjusted for: (i) gains and losses on sales of businesses, product lines and certain other investments; (ii) currency and other financial losses in Venezuela; (iii) costs related to legacy product, environmental and other claims; (iv) restructuring and repositioning expenses, and asset impairments; (v) defined benefit plan costs other than service and interest costs, expected returns on plan assets and amortization of prior service costs/credits; (vi) third-party and other acquisition-related costs; (vii) other financing costs associated with the modification or extinguishment of debt; (viii) amortization of acquired inventory fair value adjustments; (ix) tax indemnification adjustments; (x) interest income, interest expense and related financing costs; (xi) income taxes; (xii) shareholder activism and other related costs; (xiii) gain on sale of corporate headquarters, net of related costs; and (xiv) certain other items that are not representative of underlying trends. Adjusted EBIT Margin is defined as Adjusted EBIT divided by net sales. We use Adjusted EBIT to assess and measure our operating performance and determine performance-based employee compensation. We use Adjusted EBIT as a performance measure because it provides improved quarter-to-quarter and year-over-year comparability for decision-making and compensation purposes and allows management to measure the ongoing earnings results of our strategic and operating decisions.
•Adjusted EBITDA (a non-GAAP financial measure)- is defined as Adjusted EBIT adjusted for depreciation and amortization. Adjusted EBITDA Margin is defined as Adjusted EBITDA divided by net sales. We use Adjusted EBITDA as a performance measure in making significant business decisions.
•Adjusted Earnings Per Share (a non-GAAP financial measure)- is defined as earnings per share ("EPS") from continuing operations on a diluted basis adjusted for: (i) gains and losses on sales of businesses, product lines and certain other investments; (ii) currency and other financial losses in Venezuela; (iii) costs related to legacy product, environmental and other claims; (iv) restructuring and repositioning expenses and asset impairments; (v) defined benefit plan costs other than service and interest costs, expected returns on plan assets and amortization of prior service costs/credits; (vi) third-party and other acquisition-related costs; (vii) other financing costs associated with the modification or extinguishment of debt; (viii) amortization of acquired inventory fair value adjustments; (ix) tax indemnification adjustments; (x) shareholder activism and other related costs; (xi) certain discrete tax items; (xii) gain on sale of corporate headquarters, net of related costs; and (xiii) certain other items that are not representative of underlying trends. We use Adjusted EPS as a performance measure to review our diluted earnings per share results on a consistent basis and in determining certain performance-based employee compensation.
•Adjusted Gross Profit (a non-GAAP financial measure)- is defined as gross profit adjusted for: (i) corporate and pension-related costs included in cost of goods sold; (ii) loss in Venezuela included in cost of goods sold; (iii) amortization of acquired inventory fair value adjustment; and (iv) certain other items that are not representative of underlying trends. Adjusted Gross Margin means Adjusted Gross Profit divided by net sales. We use this performance measure to understand trends and changes and to make business decisions regarding core operations.
Adjusted EBIT, Adjusted EBIT Margin, Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted EPS, Adjusted Gross Profit and Adjusted Gross Margin do not purport to represent income measures as defined in accordance with U.S. GAAP. These measures are provided to investors and others to improve the quarter-to-quarter, year-to-year, and peer-to-peer comparability of our financial results and to ensure that investors understand the information we use to evaluate the performance of our businesses.
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Adjusted EBIT has material limitations as an operating performance measure because it excludes costs related to income and expenses from restructuring and repositioning activities which historically has been a material component of our net income (loss) from continuing operations attributable to GCP shareholders. Adjusted EBITDA also has material limitations as an operating performance measure because it excludes the impact of depreciation and amortization expense. Our business is substantially dependent on the successful deployment of capital, and depreciation and amortization expense is a necessary element of our costs. We compensate for the limitations of these measurements by using these indicators together with net income (loss) measured in accordance with GAAP to present a complete analysis of our results of operations. Adjusted EBIT and Adjusted EBITDA should be evaluated together with net income (loss) from continuing operations attributable to GCP shareholders measured in accordance with GAAP for a complete understanding of our results of operations.
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We have provided in the following tables a reconciliation of these non-GAAP measures to the most directly comparable financial measures calculated and presented in accordance with U.S. GAAP.
| Analysis of Operations (In millions, except per share amounts) | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||
| 2020 | 2019 | % Change | 2020 | 2019 | % Change | ||||||||||||||||||||||||||||||
| Net sales: | |||||||||||||||||||||||||||||||||||
| Specialty Construction Chemicals | $ | 138.3 | $ | 151.8 | (8.9) | % | $ | 379.6 | $ | 433.9 | (12.5) | % | |||||||||||||||||||||||
| Specialty Building Materials | 110.1 | 115.1 | (4.3) | % | 280.9 | 321.3 | (12.6) | % | |||||||||||||||||||||||||||
| Total GCP net sales | $ | 248.4 | $ | 266.9 | (6.9) | % | $ | 660.5 | $ | 755.2 | (12.5) | % | |||||||||||||||||||||||
| Net sales by region: | |||||||||||||||||||||||||||||||||||
| North America | $ | 141.2 | $ | 143.9 | (1.9) | % | $ | 372.7 | $ | 393.2 | (5.2) | % | |||||||||||||||||||||||
| Europe Middle East Africa (EMEA) | 47.4 | 50.7 | (6.5) | % | 126.3 | 149.4 | (15.5) | % | |||||||||||||||||||||||||||
| Asia Pacific | 47.4 | 56.8 | (16.5) | % | 127.4 | 166.4 | (23.4) | % | |||||||||||||||||||||||||||
| Latin America | 12.4 | 15.5 | (20.0) | % | 34.1 | 46.2 | (26.2) | % | |||||||||||||||||||||||||||
| Total net sales by region | $ | 248.4 | $ | 266.9 | (6.9) | % | $ | 660.5 | $ | 755.2 | (12.5) | % | |||||||||||||||||||||||
| Profitability performance measures: | |||||||||||||||||||||||||||||||||||
| Adjusted EBIT (A): | |||||||||||||||||||||||||||||||||||
Specialty Construction Chemicals segment operating income | $ | 18.6 | $ | 19.8 | (6.1) | % | $ | 36.4 | $ | 41.9 | (13.1) | % | |||||||||||||||||||||||
Specialty Building Materials segment operating income | 25.4 | 25.9 | (1.9) | % | 50.1 | 64.1 | (21.8) | % | |||||||||||||||||||||||||||
| Corporate costs (B) | (7.6) | (8.9) | (14.6) | % | (19.7) | (28.2) | (30.1) | % | |||||||||||||||||||||||||||
| Certain pension costs (C) | (1.3) | (2.0) | (35.0) | % | (3.9) | (5.9) | (33.9) | % | |||||||||||||||||||||||||||
| Adjusted EBIT (non-GAAP) | $ | 35.1 | $ | 34.8 | 0.9 | % | $ | 62.9 | $ | 71.9 | (12.5) | % | |||||||||||||||||||||||
Legacy product, environmental and other claims | — | — | — | % | — | (0.1) | 100.0 | % | |||||||||||||||||||||||||||
Repositioning expenses | (0.1) | (4.4) | (97.7) | % | (3.8) | (15.6) | (75.6) | % | |||||||||||||||||||||||||||
Restructuring expenses and asset impairments | (7.7) | (3.8) | NM | (11.2) | (8.8) | 27.3 | % | ||||||||||||||||||||||||||||
| Gain on Brazil tax recoveries, net (E) | — | 0.9 | (100.0) | % | — | 0.9 | (100.0) | % | |||||||||||||||||||||||||||
| Shareholder activism and other related costs (D) | (2.1) | (0.1) | NM | (9.5) | (3.7) | NM | |||||||||||||||||||||||||||||
| Gain on sale of corporate headquarters | 110.2 | — | 100.0 | % | 110.2 | — | 100.0 | % | |||||||||||||||||||||||||||
Third-party and other acquisition-related costs | — | — | — | % | (0.7) | (0.1) | NM | ||||||||||||||||||||||||||||
Interest expense, net | (5.3) | (4.9) | 8.2 | % | (15.1) | (15.0) | 0.7 | % | |||||||||||||||||||||||||||
Income tax (provision) benefit | (30.6) | (5.5) | NM | (33.2) | 5.2 | NM | |||||||||||||||||||||||||||||
| Income from continuing operations attributable to GCP shareholders | $ | 99.5 | $ | 17.0 | NM | $ | 99.6 | $ | 34.7 | NM | |||||||||||||||||||||||||
| Income from continuing operations attributable to GCP shareholders as a percentage of net sales | 40.1 | % | 6.4 | % | 33.7 pts | 15.1 | % | 4.6 | % | 10.5 pts | |||||||||||||||||||||||||
| Diluted EPS from continuing operations (GAAP) | $ | 1.36 | $ | 0.23 | NM | $ | 1.36 | $ | 0.48 | NM | |||||||||||||||||||||||||
| Adjusted EPS (non-GAAP) | $ | 0.30 | $ | 0.28 | 7.1 | % | $ | 0.48 | $ | 0.54 | (11.1) | % | |||||||||||||||||||||||
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| Analysis of Operations (In millions) | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||
| 2020 | 2019 | % Change | 2020 | 2019 | % Change | ||||||||||||||||||||||||||||||
| Gross Profit: | |||||||||||||||||||||||||||||||||||
| Specialty Construction Chemicals | $ | 55.1 | $ | 56.8 | (3.0) | % | $ | 147.5 | $ | 154.7 | (4.7) | % | |||||||||||||||||||||||
| Specialty Building Materials | 46.6 | 48.6 | (4.1) | % | 113.4 | 132.8 | (14.6) | % | |||||||||||||||||||||||||||
| Adjusted Gross Profit (non-GAAP) | 101.7 | 105.4 | (3.5) | % | 260.9 | 287.5 | (9.3) | % | |||||||||||||||||||||||||||
Corporate costs and pension costs in cost of goods sold (C) | (0.3) | (0.3) | — | % | (1.2) | (1.2) | — | % | |||||||||||||||||||||||||||
| Total GCP Gross Profit (GAAP) | $ | 101.4 | $ | 105.1 | (3.5) | % | $ | 259.7 | $ | 286.3 | (9.3) | % | |||||||||||||||||||||||
| Gross Margin: | |||||||||||||||||||||||||||||||||||
| Specialty Construction Chemicals | 39.8 | % | 37.4 | % | 2.4 pts | 38.9 | % | 35.7 | % | 3.2 pts | |||||||||||||||||||||||||
| Specialty Building Materials | 42.3 | % | 42.2 | % | 0.1 pts | 40.4 | % | 41.3 | % | (0.9) pts | |||||||||||||||||||||||||
| Adjusted Gross Margin (non-GAAP) | 40.9 | % | 39.5 | % | 1.4 pts | 39.5 | % | 38.1 | % | 1.4 pts | |||||||||||||||||||||||||
Corporate costs and pension costs in cost of goods sold | (0.1) | % | (0.1) | % | — pts | (0.2) | % | (0.2) | % | — pts | |||||||||||||||||||||||||
| Total GCP Gross Margin (GAAP) | 40.8 | % | 39.4 | % | 1.4 pts | 39.3 | % | 37.9 | % | 1.4 pts | |||||||||||||||||||||||||
| Adjusted EBIT (A)(B)(C): | |||||||||||||||||||||||||||||||||||
| Specialty Construction Chemicals segment operating income | $ | 18.6 | $ | 19.8 | (6.1) | % | $ | 36.4 | $ | 41.9 | (13.1) | % | |||||||||||||||||||||||
| Specialty Building Materials segment operating income | 25.4 | 25.9 | (1.9) | % | 50.1 | 64.1 | (21.8) | % | |||||||||||||||||||||||||||
| Corporate and certain pension costs | (8.9) | (10.9) | (18.3) | % | (23.6) | (34.1) | (30.8) | % | |||||||||||||||||||||||||||
| Total GCP Adjusted EBIT (non-GAAP) | $ | 35.1 | $ | 34.8 | 0.9 | % | $ | 62.9 | $ | 71.9 | (12.5) | % | |||||||||||||||||||||||
| Depreciation and amortization: | |||||||||||||||||||||||||||||||||||
| Specialty Construction Chemicals | $ | 7.0 | $ | 5.9 | 18.6 | % | $ | 20.2 | $ | 17.5 | 15.4 | % | |||||||||||||||||||||||
| Specialty Building Materials | 3.8 | 3.6 | 5.6 | % | 11.0 | 11.2 | (1.8) | % | |||||||||||||||||||||||||||
| Corporate | 1.1 | 1.0 | 10.0 | % | 3.4 | 2.9 | 17.2 | % | |||||||||||||||||||||||||||
| Total GCP depreciation and amortization | $ | 11.9 | $ | 10.5 | 13.3 | % | $ | 34.6 | $ | 31.6 | 9.5 | % | |||||||||||||||||||||||
| Adjusted EBITDA: | |||||||||||||||||||||||||||||||||||
| Specialty Construction Chemicals | $ | 25.6 | $ | 25.7 | (0.4) | % | $ | 56.6 | $ | 59.4 | (4.7) | % | |||||||||||||||||||||||
| Specialty Building Materials | 29.2 | 29.5 | (1.0) | % | 61.1 | 75.3 | (18.9) | % | |||||||||||||||||||||||||||
| Corporate and certain pension costs | (7.8) | (9.9) | (21.2) | % | (20.2) | (31.2) | (35.3) | % | |||||||||||||||||||||||||||
| Total GCP Adjusted EBITDA (non-GAAP) | $ | 47.0 | $ | 45.3 | 3.8 | % | $ | 97.5 | $ | 103.5 | (5.8) | % | |||||||||||||||||||||||
| Adjusted EBIT Margin: | |||||||||||||||||||||||||||||||||||
| Specialty Construction Chemicals | 13.4 | % | 13.0 | % | 0.4 pts | 9.6 | % | 9.7 | % | (0.1) pts | |||||||||||||||||||||||||
| Specialty Building Materials | 23.1 | % | 22.5 | % | 0.6 pts | 17.8 | % | 20.0 | % | (2.2) pts | |||||||||||||||||||||||||
| Total GCP Adjusted EBIT Margin (non-GAAP) | 14.1 | % | 13.0 | % | 1.1 pts | 9.5 | % | 9.5 | % | — pts | |||||||||||||||||||||||||
| Adjusted EBITDA Margin: | |||||||||||||||||||||||||||||||||||
| Specialty Construction Chemicals | 18.5 | % | 16.9 | % | 1.6 pts | 14.9 | % | 13.7 | % | 1.2 pts | |||||||||||||||||||||||||
| Specialty Building Materials | 26.5 | % | 25.6 | % | 0.9 pts | 21.8 | % | 23.4 | % | (1.6) pts | |||||||||||||||||||||||||
| Total GCP Adjusted EBITDA Margin (non-GAAP) | 18.9 | % | 17.0 | % | 1.9 pts | 14.8 | % | 13.7 | % | 1.1 pts | |||||||||||||||||||||||||
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(A)Our segment operating income includes only our share of income of consolidated joint ventures.
(B)Management allocates certain corporate costs to each operating segment to the extent such costs are directly attributable to the segments.
(C)Certain pension costs include only ongoing costs, recognized quarterly, which include service and interest costs, expected returns on plan assets and amortization of prior service costs/credits. “Corporate costs and pension costs in cost of goods sold" represent service costs related to our manufacturing employees. Corporate costs do not include any amounts for pension expense. Other pension-related costs, including annual mark-to-market adjustments, gains or losses from curtailments and terminations, as well as other related costs, are excluded from Adjusted EBIT. These amounts are not used by management to evaluate the performance of our businesses and significantly affect the peer-to-peer and period-to-period comparability of our financial results. Mark-to-market adjustments and other related costs are primarily attributable to changes in financial market values and actuarial assumptions and are not directly related to the operation of our businesses.
(D)Shareholder activism and other related costs consist primarily of professional fees incurred in connection with the actions by certain of our shareholders seeking changes in the composition of our Board of Directors and nomination of candidates to stand for election at the 2019 and 2020 Annual Shareholders' Meetings, as well as other related matters. For further information, please refer to Note 17, "Related Party Transactions and Transactions with Grace" in the Notes to the unaudited Consolidated Financial Statements included in Item 1, "Financial Statements" on this Quarterly Report on Form 10-Q.
(E)Gain on Brazil tax recoveries, net primarily consists of a $1.7 million pre-tax gain related to indirect tax recoveries, and $0.8 million of legal fees and other charges relating to indirect and income tax recoveries.
*Consists of current and non-current components.
NM•Not meaningful.
Corporate Costs
Corporate costs include certain functional support costs, the impacts of foreign exchange, certain performance-based employee incentive compensation, public company costs, and other costs that are not allocated or directly attributable to our operating segments.
Corporate costs were $7.6 million for the third quarter, a decrease of $1.3 million, or 14.6%, compared with the prior-year quarter. The decrease was primarily related to cost savings attributable to our restructuring programs and organization realignment resulting in certain direct costs being allocated directly to operating segments, favorable impact related to foreign currency exchange gains compared to losses in the prior-year quarter, and lower executive and stock-based compensation.
Corporate costs were $19.7 million for the nine months, a decrease of $8.5 million, or 30.1%, compared with the prior-year period. The decrease was primarily due to lower executive and stock-based compensation, lower costs resulting from our restructuring programs and organization realignment resulting in certain direct costs being allocated directly to operating segments, and favorable impact related to foreign currency exchange gains compared to losses in the prior-year period.
Adjusted EBIT
Adjusted EBIT was $35.1 million for the third quarter, an increase of 0.9% compared with the prior-year quarter primarily due to lower corporate costs, partially offset by lower SCC and SBM operating income.
Adjusted EBIT margin was 14.1% for the third quarter, an increase of 110 basis points, primarily due to higher gross margin, partially offset by lower sales volumes negatively impacting operating leverage.
Adjusted EBIT was $62.9 million for the nine months, a decrease of 12.5% compared with the prior-year period primarily due to lower SCC and SBM operating income, partially offset by lower corporate costs.
Adjusted EBIT margin was 9.5% for the nine months, consistent with the prior-year period, primarily due to higher gross margin, partially offset by lower sales volumes negatively impacting operating leverage.
Adjusted EBITDA
Adjusted EBITDA was $47.0 million for the third quarter, an increase of 3.8% compared with the prior-year quarter, primarily due to lower corporate costs and improved SCC operating income after adjusting for depreciation and amortization. Adjusted EBITDA Margin was 18.9% for the third quarter, an increase of 190 basis points compared to the prior-year quarter, primarily due to higher gross margin, partially offset by lower sales volumes negatively impacting operating leverage.
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Adjusted EBITDA was $97.5 million for the nine months, a decrease of 5.8% compared with the prior-year period, primarily due to lower segment operating income, partially offset by lower corporate costs. Adjusted EBITDA Margin was 14.8% for the nine months, an increase of 110 basis points compared to the prior-year period, primarily due to higher gross margin, partially offset by lower sales volumes impacting operating leverage.
Adjusted EPS
Adjusted EPS was $0.30 per diluted share in the third quarter compared to $0.28 in the prior-year quarter. Adjusted EPS was $0.48 per diluted share in the nine months compared to $0.54 in the prior-year period.
The following table reconciles Diluted EPS (GAAP) to Adjusted EPS (non-GAAP):
| Three Months Ended September 30, | |||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||||||||||||||||||||||||||
| (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) | $ | 1.36 | $ | 0.23 | |||||||||||||||||||||||||||||||||||||||||||
| Repositioning expenses | $ | 0.1 | $ | — | $ | 0.1 | — | $ | 4.4 | $ | 1.1 | $ | 3.3 | 0.05 | |||||||||||||||||||||||||||||||||
| Restructuring expenses and asset impairments | 7.7 | 1.9 | 5.8 | 0.08 | 3.8 | 0.8 | 3.0 | 0.04 | |||||||||||||||||||||||||||||||||||||||
| Shareholder activism and other related costs | 2.1 | 0.5 | 1.6 | 0.02 | 0.1 | — | 0.1 | — | |||||||||||||||||||||||||||||||||||||||
| Gain on sale of corporate headquarters | (110.2) | (27.7) | (82.5) | (1.13) | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
Gain on Brazil tax recoveries, net | — | — | — | — | (0.9) | (0.4) | (0.5) | (0.01) | |||||||||||||||||||||||||||||||||||||||
Discrete tax items, including adjustments to uncertain tax positions | — | 1.9 | (1.9) | (0.03) | — | 2.2 | (2.2) | (0.03) | |||||||||||||||||||||||||||||||||||||||
| Adjusted EPS (non-GAAP) | $ | 0.30 | $ | 0.28 | |||||||||||||||||||||||||||||||||||||||||||
| Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||||||||||||||||||||||||||
| (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) | $ | 1.36 | $ | 0.48 | |||||||||||||||||||||||||||||||||||||||||||
| Repositioning expenses | $ | 3.8 | $ | 1.0 | $ | 2.8 | 0.04 | $ | 15.6 | $ | 3.9 | $ | 11.7 | 0.16 | |||||||||||||||||||||||||||||||||
| Restructuring expenses and asset impairments | 11.2 | 2.8 | 8.4 | 0.11 | 8.8 | 1.0 | 7.8 | 0.11 | |||||||||||||||||||||||||||||||||||||||
Third-party and other acquisition-related costs | 0.7 | 0.2 | 0.5 | 0.01 | 0.1 | — | 0.1 | — | |||||||||||||||||||||||||||||||||||||||
| Legacy product, environmental and other claims | — | — | — | — | 0.1 | — | 0.1 | — | |||||||||||||||||||||||||||||||||||||||
| Gain on sale of corporate headquarters | (110.2) | (27.7) | (82.5) | (1.13) | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Shareholder activism and other related costs | 9.5 | 2.4 | 7.1 | 0.10 | 3.7 | 0.9 | 2.8 | 0.04 | |||||||||||||||||||||||||||||||||||||||
Gain on Brazil tax recoveries, net | — | — | — | — | (0.9) | (0.4) | (0.5) | (0.01) | |||||||||||||||||||||||||||||||||||||||
Discrete tax items, including adjustments to uncertain tax positions | — | 0.4 | (0.4) | (0.01) | — | 17.2 | (17.2) | (0.24) | |||||||||||||||||||||||||||||||||||||||
| Adjusted EPS (non-GAAP) | $ | 0.48 | $ | 0.54 | |||||||||||||||||||||||||||||||||||||||||||
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FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The following is an analysis of our financial condition, liquidity and capital resources at September 30, 2020.
Our principal uses of cash generally consist of capital investments, acquisitions and working capital investments. It is difficult for us to predict at this time the duration and extent of the impact of COVID-19 on our business, financial position, results of operations, or liquidity. Due to this uncertainty, we believe our results of operations and cash flows may be significantly impacted in future periods. We have significant liquidity and capital resources, and we are actively managing our cash flow by reducing planned capital expenditures and managing operating expenses and discretionary spending. We believe our liquidity and capital resources, including cash on hand and cash we expect to generate during 2020 and thereafter, future borrowings, if any, as well as other available liquidity and capital resources discussed further below, are sufficient to finance our operations and growth strategy and to meet our debt obligations.
Divestiture of Darex
Upon the closing of the sale of Darex on July 3, 2017, we received pre-tax proceeds of approximately $1.06 billion before deal and other one-time costs. We have used a portion of these proceeds primarily to repay indebtedness, for acquisitions and general corporate purposes.
The agreement governing our sale of Darex provides for a series of delayed closings in certain non-U.S. jurisdictions for which sales proceeds were received on the July 3, 2017 closing date. The delayed closings implement the legal transfer of the Darex business in the delayed closing jurisdictions in accordance with local law. During the nine months, we completed the final remaining delayed closing in Venezuela which did not result in a gain or a loss recognized based on $0.5 million of proceeds received. During the prior-year period, we completed the delayed closing in Indonesia and recognized a gain of $9.6 million on a pre-tax basis and $7.2 million on an after-tax basis based on $12.7 million of proceeds received.
Sale of Corporate Headquarters
On July 31, 2020, we sold our corporate headquarters located at 62 Whittemore Avenue, Cambridge, Massachusetts 02140 to IQHQ, L.P, entered into a leaseback transaction with the buyer, and received from the buyer cash proceeds of $122.5 million, net of the related transaction costs and commissions of $2.5 million, pursuant to the sale of the property. The lease commenced on July 31, 2020 and can be extended for an additional six months at our option, subject to monthly rental payments of $0.6 million. The exercise of the extension option was not reasonably certain as of September 30, 2020. Pursuant to the terms of the lease, we are required to make certain payments for real estate taxes and other operating expenses related to the property.
Share Repurchase Program
On July 30, 2020, our Board of Directors (the “Board”) authorized a program to repurchase up to $100 million of our common stock which is effective through July 30, 2022. Share repurchases under the program may be made from time to time at Board's discretion through open market purchases or privately negotiated transactions in accordance with applicable federal securities laws, including Rule 10b-18 of the Exchange Act. The share repurchase program is subject to a periodic review by the Board and may be suspended periodically or discontinued at any time. We plan to fund repurchases from our existing cash balance. We did not repurchase any shares during the third quarter.
Cash Resources and Available Credit Facilities
At September 30, 2020, we had available liquidity of $860.1 million, consisting of $473.4 million in cash and cash equivalents, of which $335.0 million was held in the U.S., $347.4 million available under our revolving credit facility, and $39.3 million available under various non-U.S. credit facilities.
Our non-U.S. credit facilities are extended to various subsidiaries that use them primarily to issue bank guarantees supporting trade activity and provide working capital during occasional cash shortfalls in certain foreign entities. We generally renew these credit facilities as they expire.
We expect to meet our U.S. cash and liquidity requirements with cash on hand, cash we expect to generate during 2020 and thereafter, future borrowings, if any, and other available liquidity, including royalties and service fees from our foreign subsidiaries. We may also repatriate future earnings from foreign subsidiaries if such action results in minimal or no U.S. tax consequences. We expect to have sufficient cash and liquidity to finance our U.S.
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operations and growth strategy and meet our debt obligations in the U.S. Please refer to Note 1, "Basis of Presentation and Summary of Significant Accounting and Financial Reporting Policies," to the Company's Consolidated Financial Statements included in the 2019 Annual Report in the Form 10-K for a discussion of our cash and cash equivalents.
The following table summarizes our non-U.S. credit facilities as of September 30, 2020:
(In millions) | Maximum Borrowing Amount | Available Liquidity | Maturity Date | ||||||||||||||
| Singapore | $ | 6.0 | $ | 6.0 | 2/3/2021 | ||||||||||||
| China | 6.0 | 4.6 | 2/3/2021 | ||||||||||||||
| Australia | 5.5 | 4.0 | 2/3/2021 | ||||||||||||||
| Canada | 5.6 | 5.6 | 2/3/2021 | ||||||||||||||
| India | 5.0 | 2.5 | 2/3/2021 | ||||||||||||||
| Korea | 4.0 | 4.0 | 2/3/2021 | ||||||||||||||
| Hong Kong | 3.0 | 3.0 | 2/3/2021 | ||||||||||||||
| Other countries | 9.8 | 9.6 | Open ended | ||||||||||||||
| Total | $ | 44.9 | $ | 39.3 | |||||||||||||
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Analysis of Cash Flows
The following table summarizes our cash flows for the nine months and prior-year period:
| Nine Months Ended September 30, | |||||||||||
| (In millions) | 2020 | 2019 | |||||||||
| Net cash provided by operating activities from continuing operations | $ | 59.3 | $ | 46.5 | |||||||
| Net cash provided by (used in) investing activities from continuing operations | 94.9 | (45.6) | |||||||||
| Net cash provided by (used in) financing activities from continuing operations | 0.7 | (6.8) | |||||||||
Net cash provided by operating activities from continuing operations during the nine months was $59.3 million compared to $46.5 million for the prior-year period. The period-over-period change was primarily due to lower cash paid for restructuring and repositioning, and the change in accounts payable, partially offset by higher pension contributions and higher tax payments. During the nine months and the prior-year period, restructuring payments were $2.3 million and $8.8 million, respectively, and repositioning payments were $9.3 million and $13.5 million, respectively.
Net cash provided by investing activities from continuing operations during the nine months was $94.9 million compared to $45.6 million of cash used during the prior-year period. The period-over-period change was primarily due to proceeds received from the sale of the corporate headquarters.
Net cash provided by financing activities from continuing operations during the nine months was $0.7 million compared to $6.8 million of cash used during the prior-year period. The period-over-period change was primarily due to lower payments under credit arrangements.
Debt and Other Contractual Obligations
Debt
Total debt outstanding at September 30, 2020 and December 31, 2019 was $352.9 million and $349.2 million, respectively.
5.5% Senior Notes
Interest is payable semi-annually in arrears on April 15 and October 15 of each year. An interest payment of $9.6 million was due and paid on April 15, 2020 and October 15, 2020. Our debt service requirements are expected to be funded through our existing sources of liquidity and operating cash flows.
Subject to certain conditions stated in the Indenture, we may, at our option and at any time and from time to time, redeem the 5.5% Senior Notes prior to their maturity date in whole or in part at certain redemption prices, as discussed in Note 8, "Debt and Other Borrowings", in the Notes to the Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data" of the 2019 Annual Report on Form 10-K.
The Indenture contains certain covenants and provides for customary events of default subject to customary grace periods in certain cases. Please refer to Note 6, "Debt and Other Borrowings", in the Notes to the unaudited Consolidated Financial Statements included in Item 1, "Financial Statements" of this Quarterly Report on Form 10-Q for additional information regarding our debt. As of September 30, 2020, we were in compliance with all covenants and conditions under the Indenture. There are no events of default under the Indenture as of September 30, 2020.
Credit Agreement
As of September 30, 2020, there were no outstanding borrowings on the Revolving Credit Facility and $2.6 million in outstanding letters of credit, which resulted in available credit of $347.4 million under the Revolving Credit Facility. The Credit Agreement contains conditions that would require mandatory principal payments in advance of the maturity date of the Revolving Credit Facility, as well as certain customary affirmative and negative covenants and events of default, as described in Note 8, "Debt and Other Borrowings," to our Consolidated Financial Statements included in the 2019 Annual Report in the Form 10-K. We were in compliance with all covenant terms as of September 30, 2020 and December 31, 2019. There were no events of default as of September 30, 2020 or December 31, 2019.
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Other Contractual Obligations and Contingencies
We have various future contractual obligations, including those for debt and related interest payments, pension funding requirements, operating leases and other operating commitments. During the nine months, there were no material changes to our contractual obligations as previously reported in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition, Liquidity and Capital Resources” in the Annual Report on Form 10-K for the year ended December 31, 2019.
Please refer to Note 11, "Commitments and Contingencies", in the Notes to the unaudited Consolidated Financial Statements included in Item 1, "Financial Statements" of this Quarterly Report on Form 10-Q for a discussion of financial assurances and other contingencies.
Defined Benefit Pension Plans
Based on the U.S. advance-funded plans' status during the nine months and the prior-year period, there were no minimum required payments under ERISA. We made contributions of $15.0 million and $15.7 million, respectively, to the U.S. pension plans during the third quarter and nine months. There were no contributions made to these plans during the corresponding prior-year periods. The increase is primarily due to a $15.0 million voluntary contribution to the U.S. qualified pension plans during the third quarter. We intend to fund non-U.S. pension plans based upon applicable legal requirements, as well as actuarial and trustee recommendations. During the third quarter and the nine months, we contributed $0.3 million and $1.1 million, respectively, to the non-U.S. plans. During the prior-year quarter and the prior-year period, we contributed $0.6 million and $1.8 million, respectively, to the non-U.S. plans. Please refer to Note 9, "Pension Plans and Other Postretirement Benefit Plans," in the Notes to the unaudited Consolidated Financial Statements included in Item 1, "Financial Statements" of this Quarterly Report on Form 10-Q for further discussion on our pension and other postretirement benefit plans.
Inflation
We recognize that inflationary pressures may have an adverse effect on our operations through higher asset replacement costs and higher raw material and other operating costs. We try to minimize these impacts through effective control of our 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.
We continue to account for our operations in Argentina as a highly inflationary economy. Losses related to the remeasurement of monetary net assets are included in "Other income, net" in the unaudited Consolidated Statements of Operations and were immaterial during the third quarter and the nine months. Losses incurred during the prior-year quarter and the prior-year period were $0.6 million and $0.9 million, respectively. Our Argentina subsidiary's net sales were not material to our consolidated net sales during the third quarter, the nine months and the corresponding prior-year periods, and its monetary net assets denominated in local currency were not material to our consolidated total assets as of September 30, 2020 and December 31, 2019.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
For information on our significant accounting policies and estimates, please refer to Note 1, "Basis of Presentation and Summary of Significant Accounting and Financial Reporting Policies" in the Notes to the unaudited Consolidated Financial Statements included in Item 1, "Consolidated Financial Statements" of this Quarterly Report on Form 10-Q and in the Notes to our audited Consolidated Financial Statements included in Item 8, “Financial Statements and Supplementary Data” of our 2019 Annual Report on Form 10-K for the year ended December 31, 2019.
Recent Accounting Pronouncements
Effective January 1, 2020, we adopted Accounting Standard Update (the "ASU") ASU 2016-13, Financial Instruments- Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The impact of this adoption was deemed immaterial to our income from continuing operations before income taxes, income from continuing operations, and net income during the three and nine months ended September 30, 2020. For a summary of recently issued accounting pronouncements applicable to our Consolidated Financial Statements which is incorporated here by reference, please refer to Note 1, "Basis of Presentation and Summary of Significant Accounting and Financial Reporting Policies" in the Notes to the Consolidated Financial Statements included in Item 1, "Consolidated Financial Statements" of this Quarterly Report on Form 10-Q.
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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, 2019 ("2019 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 2019 Annual Report are incorporated herein by reference.
Item 4. CONTROLS AND PROCEDURES
Management’s Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the "Exchange Act"). Disclosure controls and procedures 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. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on their evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended September 30, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. As a result of the COVID-19 pandemic, since March 2020, most of our employees have been working remotely. We have not identified any material changes in our internal control over financial reporting as a result of these changes to the working environment. We are continually monitoring and assessing the COVID-19 situation to determine any potential impacts on the design and operating effectiveness of our internal controls over financial reporting.
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PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Information with respect to this Item may be found in Note 11, "Commitments and Contingencies" in the Notes to the unaudited Consolidated Financial Statements included in Item 1, "Consolidated Financial Statements" of 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, 2019.
Item 1A. RISK FACTORS
There are no material changes from the risk factors as previously disclosed in Part I, Item 1A, "Risk Factors" contained in our Annual Report on Form 10-K for the year ended December 31, 2019, except for the addition of the following risk factor:
The COVID-19 pandemic has adversely affected, and may in the future continue to adversely affect, our results of operations, financial condition and liquidity
In December 2019, the COVID-19 virus was first identified in China and has since spread to a number of countries in which we conduct our business operations, including countries in North America, Asia Pacific, EMEA and Latin America. In March 2020, the World Health Organization declared COVID-19 a global pandemic.
The global spread of COVID-19 has created significant worldwide economic uncertainty which has adversely affected, and may in the future continue to adversely affect, demand for our products due to delays in construction projects and reduced construction activity. We may also be negatively impacted by reductions in accounts receivable collections, customer and vendor bankruptcies, increased raw material and transportation costs, as well as significant delays or interruptions in the supply or transportation of raw materials which could negatively impact our ability to sell our products and have a material adverse effect on our financial condition, results of operations and cash flows.
We operate facilities around the world which have been and may continue to be adversely affected by the pandemic as a result of disruptions to our supplies of raw materials, as well as the production, transportation and delivery of our products. We may not be able to supply products or services to our customers in a timely manner due to travel and transportation restrictions, as well as temporary closures of our facilities or those of our suppliers or customers as a result of regulations imposed by local governments to contain COVID-19 . We may also experience difficulties with certain supplier or vendor supply chains, and our business could be adversely impacted if we become unable to procure essential materials or services in adequate quantities and at acceptable prices. Our ability to adequately staff our operations may be adversely impacted by certain temporary restrictions, such as mandatory facility closures imposed by government authorities in certain countries where we operate, as well as voluntary facility closures or other measures, such as work-from-home orders and social distancing protocols, imposed for the safety of our employees or in response to potential positive diagnoses for COVID-19. Despite our best efforts to protect the health, safety and well-being of our employees in accordance with guidelines issued by national and other health and safety authorities, there can be no assurance that employees will not become infected with the COVID-19 virus, or that such infections, would not have a material adverse impact on our operations.
The extent of the impact of COVID-19 on our future operational and financial performance is uncertain and will depend on future developments and numerous evolving factors, including the severity, duration and resurgence of the pandemic, the related impact on travel and transportation restrictions, facility closures, global economic activity, as well as the timing of development of an antiviral vaccine or a medical treatment to prevent further spread of the virus and facilitate recovery, all of which cannot be predicted with reasonable certainty at this time.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On July 30, 2020, our Board of Directors authorized a program to repurchase up to $100 million of our common stock which is effective through July 30, 2022. We did not repurchase any shares during the third quarter.
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Item 6. EXHIBITS
| Exhibit No. | Description of Exhibit | |||||||
| 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 | |||||||
| 104* | The cover page from this Quarterly Report on Form 10-Q for the quarter ended September 30, 2020 (formatted as Inline XBRL and contained in Exhibit 101) | |||||||
* Filed herewith.
** Furnished herewith.
# Indicates a management contract or any compensatory plan, contract or arrangement.
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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: November 6, 2020 | By: | /s/ SIMON M. BATES | ||||||
Simon M. Bates President and Chief Executive Officer (Principal Executive Officer) | ||||||||
| Date: November 6, 2020 | By: | /s/ CRAIG A. MERRILL | ||||||
Craig A. Merrill Vice President and Chief Financial Officer (Principal Financial Officer) | ||||||||
| Date: November 6, 2020 | By: | /s/ KENNETH S. KOROTKIN | ||||||
Kenneth S. Korotkin Vice President, Controller and Chief Accounting Officer (Principal Accounting Officer) | ||||||||
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