COLUMBIA, Md., Oct. 28, 2020 (GLOBE NEWSWIRE) -- W. R. Grace & Co. (NYSE: GRA) today announced financial results for the third quarter of 2020, summarized in the table below. Improving demand trends across many end markets were more than offset by the continued effects of COVID-19 on transportation fuel demand and the impact of Hurricane Laura on our Lake Charles, LA, refining catalysts manufacturing site.

“We are encouraged by improving demand trends in many of our end markets and are well positioned to capture growth as the recovery progresses,” said Hudson La Force, Grace’s President and Chief Executive Officer. “Our team is executing well and delivered solid financial results in the quarter despite the prolonged effects of the pandemic and Hurricane Laura. Adjusted Gross Margin improved 410 basis points sequentially with increased demand resulting in higher production rates. Also, our teams have produced strong results on the cash and cost actions taken to mitigate the financial effects of the pandemic. In total, we expect to deliver $125 million in cash flow improvements from these actions in 2020. As a result, year-to-date Adjusted Free Cash Flow was 4% higher than last year, even though Adjusted EBIT was 37% lower.”

“Looking forward, we expect continued improvement across our end markets, though the pace of the global recovery remains uncertain. We expect Specialty Catalysts and Materials Technologies end markets to continue their recovery and sales to return to 2019 levels on a run-rate basis during 2021. In Refining Technologies, the effects of the pandemic will remain a headwind until transportation fuel demand more fully recovers.”

• Third quarter sales of $419.4 million were down 10.9%, down 11.4% on constant currency, versus the prior year. Lower sales volumes in Catalysts Technologies (-15.4%), which reflect the ongoing negative economic impacts of the COVID-19 pandemic, more than offset higher sales volumes in Materials Technologies (+3.8%), which were driven primarily by growth in pharma/consumer end-markets. More than 90% of the year-over-year decline is attributable to lower refining catalysts sales volumes reflecting lower transportation fuel demand due to COVID-19, though demand has stabilized and we are encouraged by improving demand trends.
• Net income of $7.0 million was down $46.7 million, and Diluted EPS of $0.11 was down $0.69.
• Adjusted EBIT of $69.6 million was down $38.6 million and Adjusted EPS of $0.56 was down $0.42 versus the prior year, including hurricane-related costs of approximately $12 million, or $0.13 per share. Sequentially, Adjusted EBIT was up 9% versus the prior quarter. (See Other Developments - Hurricane Laura Update.)
• Sequentially, gross margin of 37.3% was up 880 bps and Adjusted Gross Margin of 38.2% was up 410 bps versus the prior quarter. Improvement in Adjusted Gross Margin was driven by higher production rates than in the prior quarter.
• Year-to-date, net cash from operations was $259.1 million and Adjusted Free Cash Flow was $170.0 million reflecting strong execution of cash and cost management actions in response to the pandemic. During the quarter, we continued to proactively mitigate the impact of the pandemic, and we remain focused on strong cash generation. The full-year expected cash flow benefit from these actions is $125 million, including improved working capital ($45-$50 million), lower capital spending (~$40 million), and reduced operating costs ($35-$40 million). We have achieved our targets for working capital and capital spending and are on track to deliver our operating cost reduction target.

Delivering on Our Strategic Initiatives

“We remain focused on executing our profitable growth strategy and managing our company for the long-term," continued La Force. “We have strong leadership positions in end-markets that are critical to consumers and the global economy and have continued to invest in these positions during the pandemic to ensure we capture growth as our end markets recover.”

“In recent years, we’ve taken meaningful steps to strengthen our portfolio and accelerate our growth by investing in our polyolefin catalyst, specialty silica and pharmaceutical end markets. These investments position Grace to grow sales mid-single digits with high profitability and strong cash flow following the pandemic.”

"I am confident our growth strategy and capital allocation discipline will create significant long-term value for shareholders. In addition, we have always pursued all opportunities to accelerate value creation and will continue to do so in the future when we believe they will create long-term value for our shareholders."

Grace's strategic framework for profitable growth includes four elements:

• Invest to accelerate growth and extend our competitive advantages
• Invest in great people to strengthen our high-performance culture
• Execute the Grace Value Model to drive operating excellence
• Acquire to build our technology and manufacturing capabilities for our customers

Third Quarter Segment Performance

Catalysts Technologies

Catalysts Technologies produces and sells catalysts and related products and technologies used in petrochemical, refining, and other chemical manufacturing applications.

• Third quarter sales of $305.7 million were down 15.4%, down 15.9% on constant currency, versus the prior year. Sales declined primarily due to lower sales volumes (-15.4%) and lower average price in the quarter (-0.5%) primarily due to certain Refining Technologies customers temporarily switching to a lower performance catalyst as a result of the pandemic.

— Specialty Catalysts sales were down 5.0% versus the prior year, primarily due to continued customer catalyst inventory draw downs resulting from the pandemic.— Refining Technologies sales were down 24.2% versus the prior year due to lower global demand for transportation fuels and refinery operating rates. In addition, some sales shifted from 3Q20 to 4Q20 as a result of Hurricane Laura. For the trailing twelve months, average FCC catalysts pricing improved approximately 150 bps.

• Gross margin of 39.2% decreased 280 bps versus the prior year, primarily due to lower production volumes, partially offset by lower raw materials and energy costs (+90 bps) and cost mitigation actions. Sequentially, gross margin improved 260 bps versus the prior quarter reflecting higher production rates.
• Operating income of $67.1 million was down $38.0 million, or 36.2%, primarily due to lower gross profit, the hurricane-related costs of approximately $12 million, and lower income from our ART joint venture (-$2.5 million), partially offset by lower operating expense. (See Other Developments - Hurricane Laura Update.)

Materials Technologies

Materials Technologies produces and sells specialty materials, which are either silica based or complex organic molecules, that can be used in pharma/consumer, coatings, and chemical process applications.

• Third quarter sales of $113.7 million were up 4.2%, up 3.8% on constant currency, versus the prior year, driven by continued strength in pharma/consumer end-markets (+23.7%). Sequentially, Materials Technologies sales were up 3.6% versus the prior quarter reflecting steady improvement in most end-markets and geographies.
• Gross margin of 35.7% decreased 290 bps versus the prior year primarily due to lower inventory levels partially offset by favorable mix, lower raw materials and energy costs (+50 bps), and cost mitigation actions. Sequentially, gross margin improved 880 bps versus the prior quarter as a result of higher sales and higher production rates than in the prior quarter.
• Operating income of $24.3 million was down $1.8 million, or 6.9%. Sequentially, operating income was up $11.7 million, or 92.9%.

Other Developments

Hurricane Laura Update

During the quarter, Hurricane Laura caused severe and widespread damage to Lake Charles and surrounding communities, including catastrophic damage to the regional power grid. To ensure continuity of supply for our customers, our Lake Charles refining catalysts manufacturing facility established a temporary on-site 20MW power generation capability. The site is now fully operational. During the power outage, customer demand was met from inventory in Lake Charles and by shifting FCC and hydroprocessing catalysts production to other manufacturing facilities which increased our operating costs. This created no significant impact to our customers. While this is an insured event, the total costs do not exceed our deductible and we do not expect any insurance recoveries.

• Event-related costs occurring in the quarter were approximately $12 million, or $0.13 per share. The costs, reported as "other expense" and impacting both net income and Adjusted EBIT, were primarily related to on-site power generation, higher manufacturing and logistics costs to supply customers during the outage, temporary housing and employee assistance, and property damage and clean-up.
• The total estimated hurricane-related costs for the full year are expected to be $18-$20 million.

Legacy Liabilities Update

Construction of the new dam spillway at the former Libby, MT, mine site is a key element of Grace’s overall site remediation strategy. The project includes both an upper spillway and a lower spillway that are being managed as two separate projects. In 2019, we contracted a third-party engineering and consulting firm to develop an initial range of cost estimates for the total project. Based on this work, we recorded a pre-tax liability of $68.0 million in 2019 for the estimated costs of the project. These costs were preliminary and subject to change as new information becomes available, including defining the final scope of the projects through the contract bidding process. During the third quarter, Grace completed a review of contractor bids for the replacement of the upper portion of the spillway. Based on a current assessment of the project requirements, we increased our cost estimate for this portion of the project by $27 million, bringing the estimate for the total project to $95 million. Regarding the lower spillway, final engineering will be completed and submitted to the State of Montana for design approval in 2021 after which we will seek contract bids for this portion of the project. Grace believes it is reasonably possible that the ultimate costs of this project could range between $80 million and $120 million. Construction of the spillways will begin in 2021 and is expected to take three to four years.

Capital Allocation

• Capital investments: Year-to-date, we invested $123.8 million to support growth, operating excellence and other priorities. Our forecast for capital spending in 2020 is approximately $155 million, reflecting a $40 million reduction from our original forecast of approximately $195 million in response to the pandemic.
• M&A: Strategic bolt-on acquisitions remain important to our long-term growth strategy. We will remain disciplined as we seek to strengthen our portfolio and accelerate growth in markets with compelling growth, profitability and cash flow characteristics. We will continue to evaluate potential future transactions in the context of the global economic recovery, our ability to mitigate business and integration risks presented by the COVID-19 pandemic, and our leverage profile.
• Dividend: Year-to-date, we paid $60.2 million in cash dividends to shareholders, including $19.8 million in 3Q20. We remain fully committed to maintaining our quarterly cash dividend.
• Share repurchase program: In 3Q20, we did not repurchase any shares of our common stock. We expect to resume our share repurchase program in 2021 while continuing to prioritize reinvestment and reducing temporarily higher net leverage.

2020 Financial Outlook

Full-Year 2020 Outlook and 2016-2021 Financial Framework

On April 30, 2020, we suspended our full-year 2020 financial outlook and our 2016-2021 Financial Framework due to the significant uncertainty associated with the COVID-19 pandemic. We expect to resume our practice of providing a financial outlook and long-term financial framework at the appropriate time.

4Q20 Planning Assumptions

Our primary planning assumptions for 4Q20 include:

— Sales up 10%-13% sequentially from 3Q20 to 4Q20;

— Continued sequential gross margin improvement of approximately 100 bps from 3Q20; and

— Adjusted EPS range of $0.84 to $0.88.

About Grace

Built on talent, technology, and trust, Grace is a leading global specialty chemical company. The company’s two industry-leading business segments—Catalysts Technologies and Materials Technologies—provide innovative products, technologies, and services that enhance the products and processes of our customers around the world. With approximately 4,000 employees, Grace operates and/or sells to customers in over 60 countries. More information about Grace is available at grace.com.