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Grace Reports Third Quarter 2013 Adjusted EPS of $1.07

Oct, 24 2013



W. R. Grace & Co. (NYSE: GRA) announced third quarter net income of $69.4 million, or $0.89 per diluted share. Net income for the prior-year quarter was $75.5 million, or $0.99 per diluted share. Adjusted EPS was $1.07 per diluted share compared with $1.04 per diluted share in the prior-year quarter.

"Our business segments demonstrated solid performance in the quarter," said Fred Festa, Grace's Chairman and Chief Executive Officer. "Materials Technologies and Construction Products delivered strong quarters with double-digit increases in operating income. Catalysts Technologies operating income was slightly better than we expected. Our new catalyst technologies have been well received by customers, and our investments in catalyst technologies, including the UNIPOL(TM) polypropylene catalyst acquisition, position us well for a stronger 2014."

Third Quarter Results

Third quarter net sales of $771.3 million decreased 0.7 percent compared with the prior-year quarter. The decrease was due to lower pricing (-1.2 percent) and unfavorable currency translation (-0.4 percent), partially offset by higher sales volumes (+0.9 percent). Base pricing increased 0.7 percent compared with the prior-year quarter, but was more than offset by lower rare earth surcharges.

Gross profit of $284.7 million was unchanged compared with the prior-year quarter as lower raw material and manufacturing costs offset lower sales. Gross margin was 36.9 percent compared with 36.7 percent in the prior-year quarter.

Adjusted EBIT of $130.7 million increased 1.2 percent compared with the prior-year quarter as higher earnings in Materials Technologies and Construction Products more than offset lower earnings in Catalysts Technologies. Adjusted EBIT margin of 16.9 percent increased 30 basis points compared with the prior-year quarter.

Adjusted EBIT Return On Invested Capital was 33.8 percent on a trailing four-quarter basis, a decrease of 80 basis points from the prior-year quarter, reflecting lower earnings in Catalysts Technologies for the trailing four-quarter period.

Nine Month Results

Sales for the nine months ended September 30, 2013, decreased 3.1 percent to $2.284 billion as lower pricing (-2.9 percent) and unfavorable currency translation (-0.9 percent) partially were offset by higher sales volumes (+0.7 percent). Base pricing increased 0.6 percent compared with the prior-year period, but was more than offset by lower rare earth surcharges.

Gross profit of $851.8 million decreased 1.6 percent compared with the prior-year period primarily due to lower sales and unfavorable currency translation partially offset by lower raw material and manufacturing costs. Gross margin of 37.3 percent increased 60 basis points compared with the prior-year period.

Adjusted EBIT was $377.7 million compared with $384.0 million in the prior-year period. The decline was due to lower gross profit, partially offset by lower operating expenses and higher earnings from the ART joint venture. Adjusted EBIT margin of 16.5 percent increased 20 basis points compared with the prior-year period.

Grace Catalysts Technologies

Sales down 8.4 percent; segment operating income down 15.9 percent

Third quarter sales for the Catalysts Technologies operating segment, which includes specialty catalysts and additives for refinery, plastics and other chemical process applications, were $273.7 million, a decrease of 8.4 percent compared with the prior-year quarter. The decrease primarily was due to lower pricing (-6.6 percent) and lower sales volumes (-3.6 percent), which more than offset favorable currency translation (+1.8 percent). The decrease in pricing was attributable to lower rare earth surcharges and lower refinery catalyst base pricing, which partially were offset by higher specialty catalyst pricing. Sales volumes in specialty catalysts increased approximately 12 percent compared with the prior-year quarter.

Segment gross margin was 39.2 percent, a decrease of 130 basis points compared with the prior-year quarter. The decrease in gross margin primarily was due to lower pricing and lower operating leverage.

Segment operating income was $77.4 million compared with $92.0 million in the prior-year quarter, a 15.9 percent decrease primarily due to lower gross profit and lower earnings from the ART joint venture, partially offset by lower operating expenses. Segment operating margin was 28.3 percent, a decrease of 250 basis points compared with the prior-year quarter.

On October 11, 2013, Grace announced that it signed a definitive agreement to acquire the assets of the UNIPOL(TM) polypropylene licensing and catalysts business of The Dow Chemical Company for a cash purchase price of $500 million. This acquisition is complementary to Grace's specialty catalysts business and significantly enhances the company's position as a leading supplier of polyolefin catalyst technologies. The transaction is expected to close by year end, pending regulatory approvals.

Grace Materials Technologies

Sales up 2.7 percent; segment operating income up 17.6 percent

Third quarter sales for the Materials Technologies operating segment, which includes engineered materials for consumer, industrial, coatings and pharmaceutical applications, and packaging technologies, were $220.1 million, an increase of 2.7 percent compared with the prior-year quarter. The increase was due to improved pricing (+2.2 percent) and higher sales volumes (+0.6 percent), partially offset by unfavorable currency translation (-0.2 percent).

Sales of silica-based engineered materials increased 5.2 percent compared with the prior-year quarter due to a 7.5 percent increase in emerging regions sales and a 4.2 percent increase in developed regions sales. Sales of packaging technologies products declined 0.5 percent due to globally weaker demand for canned products and unfavorable currency translation.

Segment gross margin was 34.8 percent, an increase of 200 basis points compared with the prior-year quarter. The increase in gross margin primarily was due to improved pricing.

Segment operating income was $46.8 million compared with $39.8 million in the prior-year quarter, a 17.6 percent increase primarily due to higher gross profit and operating expense control. Segment operating margin was 21.3 percent, an increase of 270 basis points compared with the prior-year quarter.

Grace Construction Products

Sales up 5.4 percent; segment operating income up 24.3 percent

Third quarter sales for the Construction Products operating segment, which includes Specialty Construction Chemicals (SCC) products and Specialty Building Materials (SBM) products used in commercial, infrastructure and residential construction, were $277.5 million compared with $263.3 million in the prior-year quarter. The sales increase was due to higher sales volumes (+6.2 percent) and improved pricing (+2.3 percent), partially offset by unfavorable currency translation (-3.1 percent).

Sales in North America, which represented approximately 41 percent of sales, increased 7.4 percent due to a 16.2 percent increase in SBM sales and a 3.3 percent increase in SCC sales. Sales in Western Europe, which represented approximately 15 percent of sales, increased 8.3 percent compared with the prior-year quarter due to a 26.4 percent increase in SBM sales and a 1.2 percent increase in SCC sales. Sales in the emerging regions, which represented approximately 34 percent of sales, increased 2.3 percent. The slower sales growth in emerging regions largely reflected the impact of unfavorable currency translation. Across all regions, sales of SBM products increased approximately 19.5 percent and sales of SCC products increased less than 1 percent.

Segment gross margin of 36.3 percent improved 90 basis points compared with the prior-year quarter. The increase in gross margin primarily was due to improved pricing and higher sales volumes, including the impact of a more profitable sales mix.

Segment operating income was $45.6 million compared with $36.7 million for the prior-year quarter, a 24.3 percent increase primarily due to higher gross profit and lower operating expenses. Segment operating margin improved to 16.4 percent, an increase of 250 basis points compared with the prior-year quarter.

Other Expenses

Total corporate expenses were $20.9 million for the third quarter, a decrease of approximately 4 percent compared with the prior year quarter primarily due to cost control initiatives.

Defined benefit pension expense for the third quarter was $18.2 million compared with $17.6 million for the prior-year quarter. As previously announced, Grace has elected to change its method of accounting for deferred actuarial gains and losses relating to its global defined benefit pension plans to a more preferable method under U.S. generally accepted accounting principles. This accounting method, referred to as mark-to-market accounting, will be adopted in the 2013 fourth quarter and will be retrospectively applied to the company's financial results for all periods to be presented in its annual report on Form 10-K for the year ended December 31, 2013.

Interest expense was $10.7 million for the third quarter compared with $11.5 million for the prior-year quarter. The annualized weighted average interest rate on pre-petition obligations for the third quarter was 3.5 percent.

Income Taxes

Income taxes were recorded at a global effective tax rate of approximately 33 percent before considering the effects of certain non-deductible Chapter 11 expenses, changes in uncertain tax positions and other discrete adjustments.

Grace generally has not had to pay U.S. Federal income taxes in cash in recent years since available tax deductions and credits have fully offset U.S. taxable income. Grace expects to generate significant U.S. Federal net operating losses upon emergence from bankruptcy. Grace generally does pay cash taxes in foreign jurisdictions and in a limited number of U.S. states. Income taxes paid in cash, net of refunds and excluding settlements of $12.2 million, were $53.4 million during the first nine months of 2013, or approximately 17 percent of income before income taxes.

Cash Flow

Net cash provided by operating activities for the first nine months of 2013 was $291.0 million compared with $292.4 million in the prior-year period.

Adjusted Free Cash Flow was $238.7 million for the first nine months of 2013 compared with $286.1 million in the prior-year period. Adjusted Free Cash Flow benefited from a significant improvement in working capital in 2012 due to lower rare earth costs, which benefit did not recur to the same extent in 2013. Grace expects Adjusted Free Cash Flow of approximately $400 million for the full year.

2013 Outlook

As of October 23, 2013, Grace affirmed its prior outlook for 2013 Adjusted EBIT in the range of $560 million to $570 million, and Adjusted EBITDA in the range of $685 million to $695 million. These respective ranges include lower pension expense of approximately $45 million resulting from the company's 2013 fourth quarter adoption of mark-to-market pension accounting, and exclude the closing costs and any earnings effects of the pending UNIPOL acquisition.

Chapter 11 Proceedings

On April 2, 2001, Grace and 61 of its United States subsidiaries and affiliates, including its primary U.S. operating subsidiary, W. R. Grace & Co.-Conn., filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware in order to resolve Grace's asbestos-related liabilities.

On January 31, 2011, the Bankruptcy Court issued an order confirming Grace's Joint Plan of Reorganization. On January 31, 2012, the United States District Court issued an order affirming the Joint Plan, which was reaffirmed on June 11, 2012, following a motion for reconsideration. Eight parties appealed to U.S. Court of Appeals for the Third Circuit, three of which subsequently withdrew their appeals. On June 17, 2013, oral argument was heard before a Third Circuit panel of judges on the five remaining appeals. In rulings issued in July and September 2013, the Third Circuit Court denied the four asbestos-related appeals. One appeal remains pending.

The timing of Grace's emergence from Chapter 11 will depend on the final resolution of all appeals by claimants and the satisfaction or waiver of the remaining conditions set forth in the Joint Plan. The Joint Plan sets forth how all pre-petition claims and demands against Grace will be resolved. See Grace's most recent periodic reports filed with the SEC for a detailed description of the Joint Plan.

Investor Call

Grace will discuss these results during an investor conference call and webcast today starting at 11:00 a.m. ET. To access the call and webcast, interested participants should go to the Investor Information - Investor Presentations portion of the company's web site, www.grace.com, and click on the webcast link.

Those without access to the Internet can listen to the investor call by dialing +1.866.318.8613 (U.S.) or +1.617.399.5132 (International) and entering participant passcode 48602075. Investors are advised to access the call at least ten minutes early in order to register.

An audio replay will be available at 3:00 p.m. ET on October 23. The replay will be accessible by dialing +1.888.286.8010 (U.S.) or +1.617.801.6888 (International) and entering the participant passcode 35665925. The replay will be available for one week.

About Grace

Grace is a leading global supplier of catalysts; engineered and packaging materials; and, specialty construction chemicals and building materials. The company's three industry-leading business segments-Grace Catalysts Technologies, Grace Materials Technologies and Grace Construction Products-provide innovative products, technologies and services that enhance the quality of life. Grace employs approximately 6,500 people in over 40 countries and had 2012 net sales of $3.2 billion. More information about Grace is available at www.grace.com.

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