GCP Applied Technologies Reports Second Quarter 2020 Results

GCP Applied Technologies Inc., a leading global provider of construction products technologies, today announced results for the second quarter of 2020.

For the three months ended June 30, 2020, GCP reported net sales of $195.4 million compared to $262.2 million in the prior year quarter. Net Sales Constant Currency Excluding Market Exits* were $200.0 million versus $258.3 million in the prior year quarter. Loss from continuing operations attributable to GCP shareholders was $1.3 million compared to income from continuing operations attributable to GCP shareholders of $3.1 million in the second quarter of 2019, while Adjusted EBITDA* totaled $25.0 million, down from $36.1 million in the prior year quarter. Adjusted EBIT* was $13.3 million compared to $25.1 million in the prior year quarter. Diluted loss per share from continuing operations attributable to GCP shareholders was $0.02 versus diluted earnings per share of $0.04 in the second quarter of 2019, while Adjusted EPS* was $0.09 compared to $0.19 in the prior year quarter.

Randy Dearth, GCP’s President and Chief Executive Officer, said, “Our organization performed well during the second quarter in the face of the ongoing global coronavirus pandemic. We continue to demonstrate our ability to deliver positive operating cash flow despite the drop in global construction demand. Our strong balance sheet, which features significant liquidity of approximately $670 million as of June 30, 2020 and no near-term debt maturities, is a competitive differentiator that provides substantial financial flexibility and positions us well to successfully manage through the ongoing economic challenges and uncertainty caused by the COVID-19 pandemic.” 

Dearth continued, “We remain committed to providing excellent service to our customers and advancing our operational improvements. I would like to thank all of our employees whose dedication and commitment continue to be instrumental as we navigate through this changing operating environment.”

“I am pleased to confirm that we completed the sale of GCP’s Cambridge headquarters on July 31, 2020.  Planning is underway to locate a fitting location for our headquarters. The transaction unlocks value for GCP shareholders and is consistent with the Company’s commitment to invigorating its focus on profitable growth and value creation.”

“With the addition of this cash to our strong balance sheet, we believe now is the right time to have the ability to allocate a portion of our capital to the repurchase of GCP stock through an authorized $100 million stock repurchase program”, concluded Randy Dearth.

Total GCP Applied Technologies
($ Millions)

Second Quarter 2020:

• Net sales decreased 25.5% primarily attributable to lower sales volumes in SCC and SBM due to lower construction and manufacturing activity resulting from COVID- 19 and unfavorable impact of foreign currency translation, partially offset by price increases in Latin America.
• Gross margin increased 130 basis points to 39.1% primarily due to lower raw materials, labor and freight costs which more than offset the unfavorable impact of lower sales volumes.
• Selling, general and administrative costs of $65.7 million decreased 8% for the second quarter primarily due to reduced discretionary spending, benefits from our productivity initiatives and lower employee costs resulting from restructuring programs. Favorable impacts were partially offset by increased shareholder activism and other related costs as well as increased expenses related to our growth initiatives.
• Loss from continuing operations attributable to GCP shareholders was $1.3 million compared to income from continuing operations attributable to GCP shareholders of $3.1 million for the prior year quarter. The change was primarily due to lower gross profit compared with the prior year quarter due to lower sales volumes, partially offset by reduced restructuring and repositioning costs, lower selling, general and administrative costs and lower tax expense.
• Adjusted EBIT* of $13.3 million decreased 47.0% compared to the prior year quarter primarily due to lower operating income in SCC and SBM, partially offset by lower corporate costs and certain pension costs.
• Adjusted EBITDA* decreased 30.7% to $25.0 million with a corresponding Adjusted EBITDA Margin* of 12.8%.The decrease was due to lower Adjusted EBIT*.

Second Quarter Segment Performance

Specialty Construction Chemicals
($ Millions)

• Net sales decreased 22.9% compared with the prior-year quarter due to lower volumes in all regions and the unfavorable impact of foreign currency translation, partially offset by increased pricing, principally in Latin America.
• Gross margin increased 350 basis points to 39.1% primarily due to raw material deflation, improved operations and logistics productivity, as well as favorable regional mix, which more than offset the unfavorable impact of lower volumes resulting in reduced operating leverage.
• Segment operating margin decreased 90 basis points primarily due to lower sales volumes impacting operating leverage, partially offset by higher gross margin.

Specialty Building Materials
($ Millions)

• Net sales decreased 28.9% due to lower construction and manufacturing activity in all regions resulting from COVID-19.
• Gross margin of 39.7% declined 140 basis points primarily due to unfavorable impact of lower volumes resulting in reduced operating leverage, partially offset by raw material deflation.
• Segment operating margin of 13.8% decreased 610 basis points primarily due to lower sales volumes negatively impacting operating leverage and lower gross margin, partially offset by lower operating costs.

Impact of COVID-19 Pandemic
The Company has been closely monitoring the impact of novel strain of coronavirus (“COVID-19”) and managing its effects on its business globally as the situation continues to evolve rapidly.

COVID-19 began emerging in the latter half of the first quarter resulting in temporary mandated closures of the Company’s manufacturing operations, primarily in China. During the second quarter, the pandemic spread and intensified throughout the world resulting in mandated and voluntary closures of some of the Company’s manufacturing operations and administrative offices. During this time, the Company focused on protecting the health, safety and well-being of its employees in accordance with guidelines issued by national and other health and safety authorities, while seeking to meet the needs of its global customers and suppliers. The Company activated its business continuity team which is comprised of commercial, procurement, supply chain, and operations professionals. These professionals work with all facets of the GCP organization to maintain health and safety while continuing to service its customers. Responsive measures the Company 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.

As construction was allowed to continue in a number of GCP’s geographic markets for a majority of the first quarter, COVID-19 did not have a material effect on the Company’s overall results of operations during the quarter, although temporary mandated closures of its manufacturing operations, primarily in China, began to negatively impact the Company’s revenue and profitability in the latter half of the first quarter. COVID-19 has negatively impacted the Company’s operating results during the second quarter due primarily to periodic closures of its facilities in all regions in which the Company operates, 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. The Company’s customers experienced similar disruptions as a result of the pandemic which resulted in reduced customer demand and orders for the Company’s products. The Company has taken actions to preserve its liquidity by reducing discretionary spending and certain planned capital expenditures.

It is difficult for GCP to predict at this time the duration and extent of the impact of COVID-19 on the global construction industry, the Company’s business, its financial position, results of operations, or liquidity. Factors the Company is monitoring to assess the potential duration and extent of the impact of COVID-19 on its operations include the health of the global economy and construction industry, specifically on demand drivers for its 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. Due to this uncertainty, the Company believes the impact of COVID-19 may continue to negatively impact its performance in future periods, and there can be no assurance that a continued or deepening impact of COVID-19 would not have a material adverse effect on its future results of operations or cash flows. The Company will continue to prioritize the health and safety of its employees and serving its customers while minimizing disruption to the extent possible. The Company will also continue to monitor the health of the construction industry in the geographic markets in which the Company operates and respond accordingly.

Capital Allocation and Liquidity
GCP remains committed to maintaining a disciplined approach to capital allocation and preserving the Company’s strong balance sheet. GCP’s cash balance at the end of the second quarter of 2020 was $318.2 million. The Company has reduced planned capital expenditures by approximately $25 million in 2020 to further support its cash position. GCP has access to additional liquidity in the form of a $350 million revolving credit facility maturing in 2023, which brings total liquidity sources to approximately $670 million as of June 30, 2020. The Company’s 5.5% Senior Notes with an aggregate principal amount of $350 million mature in 2026. GCP’s strong balance sheet, which features significant liquidity and no near-term debt maturities, is a competitive differentiator that provides substantial financial flexibility and positions the Company well to successfully manage through the ongoing economic challenges and uncertainty caused by the COVID-19 pandemic. 

Restructuring and Repositioning Plans
GCP’s restructuring and repositioning plans are focused on the Company’s SCC segment, its global supply chain, as well as its general administration and business support functions. The plans are designed to reduce the Company’s complexity, create a more efficient and effective organization, and generate approximately $80 million in expected savings from 2018 through 2022. These expected savings exclude savings that the Company achieved from the execution of its 2017 restructuring and repositioning plan. GCP will continue to evaluate opportunities to improve its operations and cost structure beyond its currently active initiatives.

Subsequent Events

Sale of Corporate Headquarters
On July 2, 2020, GCP entered into a Real Estate Purchase and Sale Agreement with IQHQ, L.P., for a sale and subsequent leaseback of its corporate headquarters located at 62 Whittemore Avenue, Cambridge, Massachusetts 02140 for total consideration of $125.0 million. The transaction closed on July 31, 2020. Pursuant to the sale of the property, the Company received cash proceeds of $122.5 million, net of related transaction costs and commissions. The initial rent-free lease term of eighteen months commenced on July 31, 2020 and can be extended for an additional six months at the Company’s option subject to monthly rental payments of $0.6 million. Under the terms of the lease, GCP is required to pay operating expenses, utilities, insurance, real estate taxes and assessments applicable to the property, as well as certain repairs and maintenance costs.

Stock 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 have been repurchased by the Company subsequent to July 30, 2020.

Investor Call
GCP has scheduled a conference call and webcast at 10:00 a.m. ET today to review its second quarter 2020 results. Those who wish to listen to the conference call webcast should visit the Investors section of the GCP website at www.gcpat.com. The live call can be accessed  by dialing +1 (888) 254-3590 in the U.S. or +1 (720) 543-0214 internationally prior to the start of the call. Participants should ask to join the GCP Applied Technologies call. An accompanying slide presentation will also be available on the website.

For those unable to participate in the live conference call, a playback will be available until May 13, 2020. To listen to the playback, please dial +1 (888) 203-1112 in the U.S. or +1 (719) 457-0820 internationally; the access code is 8265227.  An audio webcast replay will also be available in the “Events and Presentations” section of the Company’s website for approximately three months.

Non-GAAP Financial Measures
In this press release the Company refers to non-GAAP financial measures including: Net Sales Constant Currency, Net Sales Constant Currency Excluding Market Exits, Adjusted Gross Profit, Adjusted Gross Profit Margin, Adjusted EBIT, Adjusted EBIT Margin, Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Free Cash Flow, Adjusted EPS, and Adjusted EBIT Return On Invested Capital. These non-GAAP measures do not purport to represent income or liquidity measures as defined under United States generally accepted accounting principles (“GAAP”), and should not be considered as alternatives to such measures as an indicator of GCP’s performance. These measures are provided to investors and others to improve the period-to-period and peer-to-peer comparability of GCP’s financial results and to ensure that investors understand the information GCP uses to evaluate the performance of its businesses.

The Analysis of Operations pages included in this press release provide reconciliations of these non-GAAP financial measures to their most comparable GAAP measures, as well as definitions for each of these non-GAAP financial measures and explanations as to why management finds them useful and believes they are useful to investors, potential investors and others.