WR Grace Earnings 2020-12-31
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________________________________________________________
FORM 10-K
For the fiscal year ended December 31, 2020
or
For the transition period from _____ to _____
Commission file number 1-13953
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
(Address of principal executive offices) (Zip Code)
(Registrant’s telephone number, including area code)
| Securities registered pursuant to Section 12(b) of the Act: | ||||||||||||||
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
| Securities registered pursuant to Section 12(g) of the Act: | ||||||||||||||
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☑ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑
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 ☑ No ☐
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 such files). Yes ☑ No ☐
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.
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| Non-accelerated filer | ☐ | Smaller reporting company | ||||||||||||
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report Yes ☑ No ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑
The aggregate market value of W. R. Grace & Co. voting and non-voting common equity held by non-affiliates as of June 30, 2020 (the last business day of the registrant’s most recently completed second fiscal quarter) was $2,844,898,340 .
At January 31, 2021, 66,191,426 shares of W. R. Grace & Co. Common Stock, $0.01 par value per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to our shareholders in connection with the registrant’s
2021 Annual Meeting of Shareholders, are incorporated by reference into Part III.
TABLE OF CONTENTS
| PART I | ||||||||
| PART II | ||||||||
| PART III | ||||||||
| PART IV | ||||||||
Notes on references that we use in this Report. Unless the context indicates otherwise, the terms “Grace,” the “Company,” “we,” “us,” or “our” mean (i) W. R. Grace & Co. itself, or (ii) W. R. Grace & Co. and/or one or more of its consolidated subsidiaries and affiliates and, in certain cases, their respective predecessors. Unless otherwise indicated, the contents of websites that we mention are not incorporated by reference or otherwise made a part of this Report.
We refer to the Financial Accounting Standards Board as the “FASB.” The FASB issues, among other things, Accounting Standards Codifications (which we refer to as “ASC”) and Accounting Standards Updates (which we refer to as “ASU”). We refer to the U.S. Internal Revenue Service as the “IRS.”
Trademarks and other intellectual property that we discuss in this Report. GRACE®, the GRACE® logo (and any other use of the term “Grace” as a tradename) as well as the other trademarks, service marks, or trade names used in this Report are trademarks, service marks, or trade names, registered in the United States and/or other countries, of Grace or its operating units, except as otherwise indicated. UNIPOL® and UNIPOL UNIPPAC® are trademarks of The Dow Chemical Company or an affiliated company of Dow. Grace and/or its affiliates are licensed to use the UNIPOL® and UNIPOL UNIPPAC® trademarks in the area of polypropylene. ART® and ADVANCED REFINING TECHNOLOGIES® are trademarks, registered in the United States and/or other countries, of Advanced Refining Technologies LLC. RESPONSIBLE CARE® and RESPONSIBLE CARE MANAGEMENT SYSTEM® are trademarks, registered in the United States and/or other countries, of the American Chemistry Council. †Sustainalytics, a leading independent provider of ESG and corporate governance ratings, research and analysis, has provided the ESG Risk Rating as set forth in the ESG Risk Rating Summary Report issued December 31, 2020.
FORWARD-LOOKING STATEMENTS
This Report contains, and our other public communications may contain, forward-looking statements, that is, information related to future, not past, events. Such statements generally include the words “believes,” “plans,” “intends,” “targets,” “will,” “expects,” “suggests,” “anticipates,” “outlook,” “continues,” or similar expressions. Forward-looking statements include, without limitation, statements regarding future: financial positions; results of operations; cash flows; financing plans; business strategy; operating plans; capital and other expenditures; impact of COVID-19 on our business; competitive positions; growth opportunities for existing products; benefits from new technology; benefits from cost reduction initiatives; succession planning; and markets for securities. For these statements, we claim the protections of the safe harbor for forward-looking statements contained in Section 27A of the Securities Act and Section 21E of the Exchange Act. We are subject to risks and uncertainties that could cause actual results or events to differ materially from our projections or that could cause other forward-looking statements to prove incorrect. Factors that could cause actual results or events to differ materially from those contained in the forward-looking statements include, without limitation: risks related to foreign operations, especially in areas of active conflicts and in emerging regions; the costs and availability of raw materials, energy and transportation; the effectiveness of our research and development and growth investments; acquisitions and divestitures of assets and businesses; developments affecting our outstanding indebtedness; developments affecting our pension obligations; legacy matters (including product, environmental, and other legacy liabilities) relating to past activities of Grace; our legal and environmental proceedings; environmental compliance costs (including existing and potential laws and regulations pertaining to climate change); the inability to establish or maintain certain business relationships; the inability to hire or retain key personnel; natural disasters such as storms and floods; fires and force majeure events; the economics of our customers’ industries, including the petroleum refining, petrochemicals, and plastics industries, and shifting consumer preferences; public health and safety concerns, including pandemics and quarantines; changes in tax laws and regulations; international trade disputes, tariffs, and sanctions; the potential effects of cyberattacks; and those additional factors set forth under Item 1A. “Risk Factors” and elsewhere in this Annual Report on Form 10-K. 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 dates those projections and statements are made. We undertake no obligation to release publicly any revisions to our projections and forward-looking statements, or to update them to reflect events or circumstances occurring after the dates those projections and statements are made.
PART I
Item 1. BUSINESS
BUSINESS OVERVIEW
W. R. Grace & Co., through its subsidiaries, is engaged in the production and sale of specialty chemicals and specialty materials on a global basis through two reportable business segments: Grace Catalysts Technologies (“Catalysts Technologies”), which includes catalysts and related products and technologies used in petrochemical, refining, and other chemical manufacturing applications; and Grace Materials Technologies (“Materials Technologies”), which includes specialty materials, including silica-based and silica-alumina-based materials, used in pharma/consumer, coatings, and chemical process applications.
Historical Perspective
Grace is the successor to a company that began in 1854 and originally became a public company in 1953. We entered the specialty chemicals and specialty materials industries in 1954, the year in which we acquired the Davison Chemical Company. W. R. Grace & Co. is a Delaware corporation.
W. R. Grace & Co. conducts all of its business through a single wholly owned subsidiary, W. R. Grace & Co.–Conn. (“Grace–Conn.”), a Connecticut corporation formed in 1899. Grace–Conn. owns all of the assets, properties and rights of W. R. Grace & Co. on a consolidated basis, either directly or through subsidiaries.
Recent Developments
Acquisitions
We discuss our approach to Mergers and Acquisitions below, under “Profitable Growth Strategy.” In line with that strategy, in recent years we have completed the following transactions:
We completed the acquisition of the business and assets of Rive Technology, Inc. (“Rive”) on June 17, 2019, for $22.8 million, with an additional $2.0 million holdback payment remitted in the three months ended September 30, 2020. The business is included in the Refining Technologies operating segment of our Catalysts Technologies reportable segment. The acquisition included Rive’s MOLECULAR HIGHWAY® zeolite technology for catalytic processes, which allows us to offer a broader spectrum of products for converting crude oil to petrochemical feedstocks.
On April 3, 2018, we acquired the assets of the polyolefin catalysts business of Albemarle Corporation for $418.0 million, net of cash acquired and including customary post-closing adjustments. The acquisition included production plants in Baton Rouge, Louisiana, and Yeosu, South Korea; research and development and pilot plant capabilities; and an extensive portfolio of intellectual property. The business is included in the Specialty Catalysts operating segment of our Catalysts Technologies reportable segment. The acquisition was complementary to our existing Specialty Catalysts business and has strengthened our commercial relationships, catalysts technology portfolio, and manufacturing network.
On June 30, 2016, we completed the acquisition of the assets of the BASF Polyolefin Catalysts business for a purchase price of $250.6 million. The acquisition included technologies, patents, trademarks, and production plants in Pasadena, Texas, and Tarragona, Spain. The acquisition added the following technologies to our catalysts portfolio: (1) LYNX® high-activity polyethylene (“PE”) catalyst technologies used commercially in slurry processes for the production of high-density PE resins such as bimodal film and pipe; and (2) LYNX® polypropylene (“PP”) catalyst technologies used commercially in all major PP process technologies including slurry, bulk loop, stirred gas, fluid gas, and stirred bulk. The acquisition also provided us with significant additional flexibility and capacity for our global polyolefin catalysts manufacturing network. These products became part of the Specialty Catalysts operating segment of our Catalysts Technologies reportable segment.
We completed the acquisition of the assets of the Polypropylene Licensing and Catalysts business of The Dow Chemical Company on December 2, 2013, for a cash purchase price of $510.4 million (which included post-closing adjustments). The acquisition included UNIPOL® Polypropylene Process Technology as well as CONSISTA® and SHAC® catalysts. The technology and products complemented our polyolefin catalyst
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businesses as part of the Specialty Catalysts operating segment of our Catalysts Technologies reportable segment. The acquisition also included our production plant in Norco, Louisiana.
Other Notable Developments
In 2016, Grace completed a separation transaction with respect to GCP Applied Technologies Inc., then a wholly-owned subsidiary of Grace (“GCP”), which included Grace’s former Construction Products operating segment and the packaging technologies business of its Materials Technologies operating segment (the “Separation”). The Separation was effected by means of a pro rata distribution to the Company’s stockholders of all of the outstanding shares of GCP common stock. As a result of the transaction, GCP became an independent public company.
On February 3, 2014, Grace concluded a voluntary reorganization under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware, when the joint plan of reorganization (the “Joint Plan”) filed by Grace and certain other parties became effective.
Global Scope
We operate our business on a global scale with approximately 73% of our 2020 consolidated sales outside the United States. We operate and/or sell to customers in over 60 countries and 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.
Profitable Growth Strategy
We create value for customers and investors by profitably growing our specialty chemicals and specialty materials businesses and achieving high levels of efficiency and cash flow. To meet these objectives, we:
•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; and
•Acquire to build our technology and manufacturing capabilities for our customers.
Our businesses are well-positioned to grow through our customer-driven innovation, commercial and operating excellence and thoughtful, disciplined merger and acquisition approach. Our businesses are interconnected through shared materials science and our highly integrated global manufacturing and supply chain operations.
Our organic growth drivers include: global demand for plastics and petrochemical feedstocks; global demand for cleaner fuels and heavy oil upgrading; rising living standards and growing middle class incomes; stricter environmental standards; and increased focus on health and wellness.
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The Grace Value Model (“GVM”)
The Grace Value Model is our framework for creating and delivering value to customers, investors and employees. At the company level, we create value through our focused portfolio, strong strategic position, and disciplined capital allocation. At the business level, we create value through customer-driven innovation, commercial excellence, and operating excellence. Linking and enabling all of these elements are great talent, high-performance culture, and integrated business management processes. Our ability to rigorously execute the Grace Value Model is a principal source of our competitive advantage in the global marketplace and our financial performance. The Grace Value Model is illustrated as follows:
Human Capital Management
Our great talent and high-performance culture are the most important sources of our competitive advantage and long-term ability to deliver value to customers and investors. We have invested heavily in our global talent and talent management system, which includes aligned goal setting, ongoing feedback and coaching, effective performance reviews, and a continuous cycle of professional development. We have also invested significantly in talent development and effectiveness, including over $6 million and 50,000 hours of commercial excellence investment and training for our commercial teams since 2016. In 2019 and 2020, we refreshed more than 10% of our global workforce, including upgrading talent where needed and adding key leadership roles throughout the organization. Our voluntary workforce turnover rate was 5.4% in 2020.
Our high-performance culture is based on our commitment to performance and our five Grace Leadership Behaviors: Deliver Results; Think Critically; Be Authentic; Communicate; and Engage and Include. We expect our colleagues to model these behaviors and our values in their daily business conduct and include behavior as a core element of our performance reviews.
We aspire to continually strengthen our talent and high-performance culture by welcoming and valuing the unique backgrounds, cultures, ethnicities, genders, experiences, perspectives, and contributions of our employees around the globe. We have a well-developed Diversity and Inclusion strategy and a multi-year action plan to improve the diversity of our global team and ensure every employee feels included and valued.
Our diversity and inclusion strategy starts at the top: on the Grace Board of Directors, 29% of our independent directors are women, and on the Grace Leadership Team, 50% of our executives are women or people of color, including three of four business unit leaders. Increasing the diversity of our global team, including greater representation of women and under-represented minorities, is a focus. Through diversity and inclusion, we strengthen our people and our business.
The COVID-19 pandemic had a significant impact on our human capital management strategies and priorities in 2020. Aligned with our strong safety culture, we developed clear and effective worksite safety protocols, updated policies to add flexibility, and provided personal protective equipment to protect our essential employees working onsite in our manufacturing plants, research laboratories, and quality control laboratories. In addition, we paid for COVID-19 testing globally and covered treatment in the U.S. Approximately 45% of our workforce worked from home for most of 2020, following a seamless transition to remote work in March, including implementation of new communication and collaboration technology. We reduced operating costs during the year,
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but were careful to protect our growth investments, maintain our focus on technology leadership, and continue our commercial excellence and operating excellence initiatives. We made no layoffs or salary reductions and continued employee development and hiring of critical talent. We experienced very high levels of engagement and productivity throughout the year.
As of December 31, 2020, we employed approximately 4,000 employees with 2,200 employed in the United States and 1,000 employed in Germany.
Approximately 2,300 employees are salaried, and 1,700 employees are hourly. Approximately 700 of our manufacturing employees at 5 manufacturing sites in the United States are represented by unions. We have operated without a labor work stoppage for more than 20 years. Outside the United States, we have works councils and unions serving approximately 1,400 employees, the majority of whom are located at our European sites.
Our Approach to Mergers & Acquisitions (“M&A”)
Our approach to M&A prioritizes strategic fit and financial returns. We seek investments that improve our technology, research and development and/or commercial capabilities; enhance and/or leverage our manufacturing capabilities; and include attractive growth and profitability opportunities. Our recent acquisitions have been very synergistic, with strong growth and returns driven by significant cost and capital synergies. We establish minimum return requirements for acquisitions, based on specific risk-adjusted hurdle rates, and expect all acquisitions to be accretive to earnings per share (“EPS”).
Our Reportable Business Segments
GRACE CATALYSTS TECHNOLOGIES
Catalysts Technologies uses our significant catalysts knowledge and applications expertise to design and manufacture products to create significant value for our customers. Our customers include plastics and chemicals manufacturers as well as oil refiners. We believe that our technological expertise and broad technology platform provide a competitive advantage, allowing us to quickly design products that help our customers create value in their operations and their end markets.
The following table sets forth Catalysts Technologies sales of similar products as a percentage of Grace total revenue.
| Year Ended December 31, | |||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||||||||||||||||||||
| (In millions) | Sales | % of Grace Revenue | Sales | % of Grace Revenue | Sales | % of Grace Revenue | |||||||||||||||||||||||||||||
Polyolefin and chemical catalysts | $ | 621.6 | 35.9 | % | $ | 705.3 | 36.0 | % | $ | 661.5 | 34.2 | % | |||||||||||||||||||||||
| Refining catalysts | 649.8 | 37.6 | % | 791.4 | 40.4 | % | 802.0 | 41.5 | % | ||||||||||||||||||||||||||
Total | $ | 1,271.4 | 73.5 | % | $ | 1,496.7 | 76.4 | % | $ | 1,463.5 | 75.7 | % | |||||||||||||||||||||||
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A description of our Catalysts Technologies products and services and their applications follows:
| Products and Services | Overview/Use | Key Brands | ||||||||||||
| Polyolefin and Chemical Catalysts (also referred to as Specialty Catalysts) | ||||||||||||||
| Polyethylene Catalysts/Polypropylene Catalysts/Catalyst Supports | Used in the production of polyethylene (PE) and polypropylene (PP) thermoplastic resins, which can be customized to enhance the performance of a wide range of industrial and consumer end-use applications including high pressure pipe, geomembranes, food packaging, automotive parts, medical devices, and textiles; non-phthalate catalysts allow customers to produce phthalate-free PP products and cleaner, clearer PP products; includes catalysts that allow for the lightweighting of automobiles by replacing steel parts with PP while meeting demanding performance standards of automakers | PE Brands - MAGNAPORE® • SYLOPOL® • LYNX® PP Brands - CONSISTA® • SHAC® • LYNX® • POLYTRAK® • HYAMPP® | ||||||||||||
| Gas-Phase Polypropylene Process Technology Licensing | Provides licensees with a cost-effective, flexible, and reliable capability to manufacture polypropylene products having a wide spectrum of performance attributes, enabling customers to manufacture products for a broad array of end-use applications | UNIPOL® Polypropylene Process Technology • UNIPOL UNIPPAC® Process Control Software | ||||||||||||
| Chemical Catalysts | Include hydrogenation and dehydrogenation catalyst products used in a variety of petrochemical chain conversions and fine chemical production | RANEY® • DAVICAT® | ||||||||||||
| Refining Technologies | ||||||||||||||
| FCC Catalysts | Crack the hydrocarbon chains in distilled crude oil to produce transportation fuels, such as gasoline and diesel fuels, and feeds for production of petrochemicals | MIDAS® • IMPACT® • NEKTOR™ • GENESIS® • ACHIEVE® • FUSION® • VIP‑R™ • RIVE TECHNOLOGY® • MOLECULAR HIGHWAY® | ||||||||||||
| FCC Additives | Used to reduce sulfur in gasoline, maximize propylene production from refinery FCC units, and reduce emissions of sulfur oxides, nitrogen oxides, and carbon monoxide from refinery FCC units | D-PRISM® • GSR® • SURCA® • ZAVANTI™ • OLEFINSULTRA® • DESOX® • DENOX® • CP® • OXYBURN® | ||||||||||||
| Hydroprocessing Catalysts (HPC) | Marketed through the ART joint venture with Chevron (discussed below), these catalysts are used in process reactors to upgrade heavy oils into lighter, more useful products, enabling less expensive feedstock usage in the petroleum refining process, and to produce products that meet more stringent environmental regulations; our catalysts and solutions allow our customers to improve their profitability in the production of cleaner petroleum-based fuels to meet regulatory and fuel quality standards | ICR® • HOP® • SmART Catalyst System® • APART® • LS™ Catalyst Platform • HSLS® Catalyst Platform • HCRC™ Catalyst Platform • DCS™ Catalyst Platform • ECAD™ Catalyst Platform • GR® • ENRICH® | ||||||||||||
Polyolefin and Chemical Catalysts (also referred to as Specialty Catalysts)
Grace Specialty Catalysts provides process technology for polypropylene and a broad range of high-performance catalysts and supports for specialized processes in the chemical value chain, from plastics to petrochemicals.
We are the only fully integrated supplier of polyolefin catalyst solutions across all process and catalyst technologies. Our strong strategic position is particularly evident in our worldwide polyolefin catalysts and process technology licensing business. After investing $1.2 billion in accretive, synergistic acquisitions over the past seven years, including five new plants on three continents, we offer customers the broadest and most technically advanced portfolio of polyolefin catalysts technologies that enable the production of high performance and differentiated resins. Polyolefin catalysts are used to produce plastics including HDPE (high density polyethylene), LLDPE (linear low density polyethylene) and PP (polypropylene). Applications include packaging, consumer/housewares, food packaging, construction, and automotive segments providing recyclable, lightweight, durable and versatile materials.
The business comprises four major segments, including UNIPOL® PP Process Licensing, PP Catalysts, PE Catalysts, and Chemical Catalysts.
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The UNIPOL® PP Process Licensing provides plant design and operational technology to polymer producers. We are the largest independent technology licensor, offering the advantages of a gas-phase process with low capital cost, mechanical simplicity, energy efficiency, and the demonstrated capability to produce differentiated resins. The UNIPOL® Polypropylene Process Technology provides polypropylene producers with the capability to innovate and succeed faster, as their business evolves to meet more sophisticated market needs. UNIPOL® PP licensees also have access to our tailored services, experienced technical team, and our Advanced Process Control software to improve their overall plant lifetime performance.
Our PP Catalysts serve multiple process technologies, including UNIPOL® PP, with optimized sizes, shapes, and composition tailored for each process requirement. We also offer unique external donor technologies that are combined with our catalysts, providing customers with resin product differentiation and production operability advantages.
Our PE Catalysts portfolio, with supporting R&D and technical service, offers existing producers the best choice of resin properties, operability and economics utilizing the three main types of Metallocene, Chromium, and Ziegler catalysts. Products include catalyst components and finished catalysts across all three systems and are offered as merchant products or custom developments.
Chemical Catalysts has two product lines: RANEY® and DAVICAT®. RANEY® catalyst products are used in a broad range of niche hydrogenation applications such as butanediol, sorbitol, and amines. DAVICAT® catalysts and catalyst carriers extend Grace-wide material science expertise in silicas, aluminas, and zeolites into a number of petrochemicals and fine chemicals applications.
Refining Technologies
FCC Catalysts and Additives
We are a global leader in developing and manufacturing fluid catalytic cracking, or FCC, catalysts and additives that are designed to enable petroleum refiners to increase profits by improving product yields, value and quality. Our FCC products also enable refiners to reduce emissions from their FCC units and reduce sulfur content in the transportation fuels they produce. Oil refining is a highly specialized discipline, and FCC catalysts must be tailored to meet local variations in crude oil feedstocks and a refinery’s desired product mix. We work regularly with our customers to identify the most appropriate catalyst and additive formulations for their changing needs.
FCC units are designed to produce a broad spectrum of refined product yields, including gasoline, middle distillates, and liquefied petroleum gas, or LPG. Traditionally, many FCC operators have focused on maximizing yields of transportation fuels. However, as demand for petrochemicals increases, a growing segment of refiners have transitioned their FCC operations with the primary objective of maximizing yields of petrochemical feedstocks, such as propylene. We maintain multiple industry leading technologies, including ZAVANTI™ and VIP-R™, that allow our customers to capture unique value from petrochemical feedstock driven operations.
Many countries and regions, including the U.S., European Union, Japan, Russia, India and China have imposed regulatory limitations on the sulfur content of gasoline and diesel fuel. We have developed a portfolio of products designed to assist refiners in meeting their gasoline sulfur-reduction targets, including our D-PRISM® and GSR® additives and our SURCA® catalyst family.
Also, many U.S. petroleum refiners have entered into consent decrees with the U.S. Environmental Protection Agency (the “EPA”) under which the refiners have agreed to reduce emissions of nitrogen oxides and sulfur oxides. The European Union has also imposed requirements on refineries with respect to nitrogen oxides and sulfur oxides emissions. Our additives are designed to assist refineries in meeting their obligations to reduce these pollutants. Our Super DESOX® additive reduces sulfur oxides emissions from commercial FCC units. Our DENOX® additives are designed to achieve reductions in nitrogen oxides emissions comparable to those obtained from capital intensive alternatives available to a refinery, while our non-platinum-based combustion promoter CP® P is designed to enable refiners to control carbon monoxide emissions without increasing nitrogen oxides. Our newly developed OXYBURN® additives are used in the reduction of oxygenates which are often a problem when co-processing renewable feedstocks in FCC units.
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Hydroprocessing Catalysts
We market most of our hydroprocessing catalysts through our Advanced Refining Technologies LLC (“ART”) joint venture with Chevron Products Company (“Chevron”). We hold a 50% economic interest in ART, which is not consolidated in our financial statements so ART’s sales are excluded from our sales. We established ART to combine our technology with that of Chevron and to develop, market, and sell hydroprocessing catalysts to customers in the petroleum refining industry worldwide.
We are a leading supplier of hydroprocessing catalysts designed for processing high resid content feedstocks. We offer products for fixed-bed resid hydrotreating, on-stream catalyst replacement, and ebullating-bed resid hydrocracking processes.
We also offer a full line of catalysts, customized for individual refiners, used in distillate hydrotreating to produce ultra-low sulfur content gasoline and diesel fuel, including our SmART CATALYST SYSTEM® and APART® Catalyst Systems. As discussed above, regulatory limitations on the sulfur content of gasoline and diesel fuel are becoming more common. These products are designed to help refiners to reduce the sulfur content of their products.
Our ENRICH® catalysts, which are marketed by Grace rather than ART, enable the coprocessing of bio-based feedstocks at refineries.
We have rights to sell hydrocracking and lubes hydroprocessing catalysts to licensees of Chevron Lummus Global (“CLG”) and other petroleum refiners for unit refills. These rights allow us to streamline hydroprocessing catalyst supply and improve technical service for refining customers by establishing ART as their single point of contact for all their hydroprocessing catalyst needs.
Manufacturing, Marketing and Raw Materials
Our Catalysts Technologies products are manufactured by a network of globally coordinated plants. Our integrated supply chain organization is responsible for the effective utilization of our manufacturing capabilities. For a discussion of our manufacturing plants for Catalysts Technologies, see Item 2, “Properties,” below.
We use a global organization of direct sales professionals to market our polyolefin catalysts, polypropylene process technology, and chemical catalysts, that seeks to maintain close working relationships with our customers. Our global direct sales force is complemented by a network of distributors and agents in Asia Pacific and, to a lesser extent, the Americas and Middle East. These relationships enable us to cooperate with major polymer and chemical producers to develop catalyst technologies that complement their process or application developments. We have geographically distributed our sales and technical service professionals to make them responsive to the needs of our geographically diverse customers. We typically operate under long-term contracts with our customers.
We use a global organization of technical professionals, including a direct sales force, with extensive experience in refining processes, catalyst development, and catalyst applications to market our refining catalysts and additives. These professionals work to tailor our technology to the needs of each specific customer. We generally negotiate prices for our refining catalysts because our formulations are specific to the needs of each customer and each customer receives individual attention and technical service. We sell a significant portion of our hydroprocessing catalysts through multiple-year supply agreements with our geographically diverse customer base.
The principal raw materials for Catalysts Technologies products include molybdenum oxide, specialty inorganics, caustic soda, alumina and derivatives, sodium silicate, nickel, rare earths, solvents, and titanium tetrachloride. Multiple suppliers are generally available for each of these materials; however, some of our raw materials may be provided by single sources of supply. We seek to mitigate the risk of using single source suppliers by identifying and qualifying alternative suppliers or, for unique materials, by using alternative formulations from other suppliers. In some instances, we produce our own raw materials and intermediates.
Prices for many of our raw materials, including metals, and energy can be volatile. In response to increases in raw materials and energy costs, we generally take actions to mitigate the effects of higher costs including developing alternative formulations for our products, increasing productivity, hedging purchases of certain raw materials, and increasing prices.
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As in many chemical businesses, we consume significant quantities of natural gas in the production of Catalysts Technologies products. World events and other economic factors cause volatility in the price of natural gas. Increases or decreases in the cost of natural gas and raw materials can have a significant impact on our operating margins. We have implemented a risk management program under which we hedge natural gas in a way that is designed to mitigate the effects of price volatility.
Seasonality
Seasonality does not have a significant overall effect on our Catalysts Technologies reportable segment. However, under traditional patterns, sales of FCC catalysts have tended to be lower in the first calendar quarter due to maintenance outages taken prior to the shift in production by refineries from home heating oil for the winter season to gasoline production for the summer season. FCC catalysts and ebullating-bed hydroprocessing catalysts are consumed at a relatively steady rate and are replaced regularly. Fixed-bed hydroprocessing catalysts are consumed over a period of years and are replaced in bulk in an irregular pattern. Since our customers periodically shut down their refining processes to replace fixed-bed hydroprocessing catalysts in bulk, our hydroprocessing catalyst sales to any customer can vary substantially over the course of a year and between years based on that customer’s catalyst replacement schedule.
Backlog of Orders; Working Capital
While at any given time there may be some backlog of orders, this backlog is not material in respect to our total annual sales for Catalysts Technologies, nor are the changes, from time to time, significant. Our working capital consists of inventory, accounts receivable, accounts payable, and deferred revenue. We closely manage these working capital accounts. We value inventory balances under the first-in, first-out (“FIFO”) method. Inventories have turned regularly, but balances typically increase during the first half of the year before declining as a result of increased sales in the second half. Accounts receivable and accounts payable are also affected by this business cycle, typically requiring us to have greater working capital needs during the second and third quarters.
Competition
Competition in the polyolefin catalyst, catalyst supports, and polypropylene process licensing industry is technology-intensive. Our competition in this industry includes Univation, LyondellBasell, PQ, and Lummus Novolen Technology. Most competitors sell their products and/or license their technology worldwide.
Competition in FCC catalysts and additives and hydroprocessing catalysts is based on value delivered to refiners, which is based on differentiated technology, catalyst performance, technical and customer service, and price. Our principal global FCC catalyst competitors are Albemarle, BASF, and SINOPEC. Our principal global competitors in FCC additives are Johnson Matthey, Albemarle, and BASF. Our principal global competitors in hydroprocessing catalysts are Shell Catalysts (formerly Criterion), Albemarle, Haldor Topsoe, UOP, and Axens. We also have multiple regional competitors.
GRACE MATERIALS TECHNOLOGIES
Materials Technologies uses our significant specialty silica, zeolite and fine chemical knowledge and applications expertise to design and manufacture products to create significant value for our customers. Our customers include pharmaceutical companies, consumer products manufacturers, coatings manufacturers, emission control system manufacturers, petrochemical and natural gas processors, and plastics manufacturers. We believe that our technological expertise and broad technology platform provide a competitive advantage, allowing us to tailor our products to specific customer requirements and help them create value in their operations and end markets.
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The following table sets forth Materials Technologies sales of similar products as a percentage of Grace total revenue.
| Year Ended December 31, | |||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||||||||||||||||||||
| (In millions) | Sales | % of Grace Revenue | Sales | % of Grace Revenue | Sales | % of Grace Revenue | |||||||||||||||||||||||||||||
| Pharma/Consumer | $ | 162.5 | 9.4 | % | $ | 144.6 | 7.4 | % | $ | 132.6 | 6.9 | % | |||||||||||||||||||||||
| Coatings | 137.5 | 8.0 | % | 139.8 | 7.1 | % | 155.4 | 8.1 | % | ||||||||||||||||||||||||||
| Chemical process | 140.6 | 8.1 | % | 156.1 | 8.0 | % | 157.3 | 8.1 | % | ||||||||||||||||||||||||||
| Other | 17.8 | 1.0 | % | 20.9 | 1.1 | % | 23.3 | 1.2 | % | ||||||||||||||||||||||||||
| Total | $ | 458.4 | 26.5 | % | $ | 461.4 | 23.6 | % | $ | 468.6 | 24.3 | % | |||||||||||||||||||||||
A description of our Materials Technologies products and services and their applications follows:
| Products and Services | Overview/Use | Key Brands | ||||||||||||
| Pharma/Consumer | Specialty materials used as additives, intermediates, and purification aids for pharmaceuticals, nutraceuticals, toothpaste, beer, food, and cosmetic segments, including: | |||||||||||||
| Pharmaceutical and nutraceutical excipients, carrier for oily APIs, and drug delivery | SYLOID® • LUDOX® • SYLOID® XDP • SILSOL® | |||||||||||||
| Fine chemicals, including regulatory starting materials and intermediates, especially peptide building blocks, specialty amino acids, chiral boronic acids, and esters | ||||||||||||||
| Toothpaste abrasives and thickening agents | SYLODENT® • SYLOBLANC® • SIDENT® | |||||||||||||
| Free-flow agents; anticaking agents; heating agents; tableting aids; cosmetic additives and carriers for flavor, fragrance, or other active ingredients; and desiccants for food and pharma packaging | PERKASIL® • SYLOID® • SYLOSIV® | |||||||||||||
| Edible oil and biofuel refining agents, stabilizers and clarification aids for beer, juices and other beverages | TRISYL® • DARACLAR® | |||||||||||||
| Chromatography purification products | DAVISIL® • VYDAC® • VYKING™ | |||||||||||||
| Coatings | Functional additives for wood, coil, general industrial, and architectural coatings that provide surface effects and corrosion protection for metal substrates, including: | |||||||||||||
| Matting agents, anticorrosion pigments, TiO2 extenders and moisture scavengers for paints and lacquers | SYLOID® • SHIELDEX® • SYLOSIV® • SYLOWHITE™ | |||||||||||||
| Additives for matte, semi-glossy and glossy ink receptive coatings on high performance ink jet papers, photo paper, and commercial wide-format print media | SYLOJET® • DURAFILL® • LUDOX® | |||||||||||||
| Paper retention aids, functional fillers, paper frictionizers | DURAFILL® • LUDOX® | |||||||||||||
| Defoamers actives | ZEOFLO® • ZEOFOAM™ | |||||||||||||
| Chemical Process | Functional materials for use in plastics, rubber, tire, and metal casting, and adsorbent products for petrochemical, natural gas, and more specialized applications, including: | |||||||||||||
| Reinforcing agents for rubber and tires | PERKASIL® | |||||||||||||
| Inorganic binders for precision investment casting and refractory applications and surface modification aids for metal and ceramic substrates | LUDOX® | |||||||||||||
| Static adsorbents for dual pane windows and refrigerant applications, moisture scavengers, and package desiccants | PHONOSORB® • SYLOSIV® • CRYOSIV® • PROTEKSORB® | |||||||||||||
| Chemical metal polishing aids and formulations for chemical mechanical planarization/electronics applications | POLIEDGE® • LUDOX® | |||||||||||||
| Antiblocking additives for plastic films to prevent adhesion of layers in manufacturing | SYLOBLOC® | |||||||||||||
| Process adsorbents used in petrochemical and natural gas processes for such applications as ethylene-cracked-gas-drying, natural gas drying and sulfur removal | SYLOBEAD® | |||||||||||||
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Silica-based Products
We globally manufacture functional additives and process aids, such as silica gel, colloidal silica, zeolitic adsorbents, precipitated silica and silica-aluminas, for a wide variety of applications and end-use industries. We also custom manufacture fine chemical intermediates and regulatory starting materials used primarily in the pharmaceutical and nutritional supplements industries.
Our materials are integrated into our customers’ manufacturing processes and when combined with our technical support, can increase the efficiency and performance of their operations and their products. By working closely with our customers, we seek to help them respond quickly to changing consumer demands.
In addition, we focus on developing and manufacturing products that differentiate our customers’ products and help them meet evolving regulatory and environmental requirements. For example, our SYLOID® coatings additives are designed to be used in more sustainable water-based and VOC-compliant coatings, and our SHIELDEX® silicas allow our customers to reformulate their anti-corrosive coating products to eliminate heavy metals. Our pharmaceutical excipients help improve bioavailability, extend shelf-life, and/or make drug manufacturing more efficient. Our dental silicas are engineered to provide high cleaning with gentle abrasivity. Our DARACLAR® and TRISYL® silicas allow our customers to reduce their environmental footprint: our beer stabilization silicas offer greater productivity to breweries while allowing them to use water more efficiently, and our edible oil and biofuel refining aids enable the processing of waste materials in refineries, reducing feedstock losses and solid waste sent to landfills. Our custom manufacturing of advanced intermediates supports pharmaceutical drug development processes, enabling commercialization of life-saving therapies. Our LUDOX® colloidal silicas enable our customers to produce automotive catalytic converters for automakers to meet emissions control regulations.
In 2020 we deepened our collaboration with customers to align some of our Materials Technologies product capabilities to support customers in addressing the global COVID-19 pandemic. Our silica-based technology provides separation capabilities found in the PCR (polymerase chain reaction) test kits. Similarly, our silica-based materials are used in purifying lipids that are required to hold together mRNA used in two of the leading approved COVID-19 vaccines.
Manufacturing, Marketing and Raw Materials
Our Materials Technologies products are manufactured by a network of globally integrated plants that are positioned to service our customers. Our integrated supply chain organization is responsible for the effective utilization of our manufacturing capabilities. Our global footprint allows us to partner effectively with both multinational and regional companies requiring multiple manufacturing facilities complemented by regional technical expertise in local languages. For a discussion of our manufacturing plants for Materials Technologies, see Item 2, “Properties,” below.
We use country-based direct sales forces and further support our customers with application-specific technical customer service teams to market our Materials Technologies products. Our sales force seeks to develop long-term relationships with our customers and focuses on consultative sales, technical support, and key account growth programs. To ensure full geographic coverage, our direct sales organization is further supplemented by a network of distributors.
The principal raw materials for Materials Technologies products include sodium silicate, zeolite, sand, soda ash, sulfuric acid, and caustic soda. Multiple suppliers are generally available for each of these materials; however, some of our raw materials may be provided by single sources of supply. We seek to mitigate the risk of using single source suppliers by identifying and qualifying alternative suppliers or, for unique materials, by using alternative formulations from other suppliers. In some instances, we produce our own raw materials and intermediates.
Prices for some of our raw materials and energy can be volatile. In response to increases in input costs, we generally take actions intended to mitigate the effects of higher costs including developing alternative formulations for our products, increasing productivity, and increasing prices.
As in many chemical businesses, we consume significant quantities of natural gas in the production of Materials Technologies products. World events and other economic factors can cause volatility in the price of natural gas. Increases or decreases in the cost of natural gas and raw materials can have a significant impact on
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our operating margins. We have implemented a risk management program under which we hedge natural gas in a way that is designed to mitigate the effects of price volatility.
Backlog of Orders; Working Capital
While at any given time there may be some backlog of orders, this backlog is not material in respect to our total annual sales for Materials Technologies, nor are the changes, from time to time, significant. Our working capital consists of inventory, accounts receivable and accounts payable. We closely manage these working capital accounts. We value inventory balances under the FIFO method. Inventories have turned regularly.
Competition
There are many manufacturers of engineered materials that market their products on a global basis including Evonik, PQ, and Nalco. Competition is generally based on product performance, technical service, quality and reliability, price, and other differentiated product features to address the needs of customers, end-users, and brand owners. Our products compete on the basis of distinct technology, product quality, and customer support. Competition for these products is highly fragmented, with a large number of companies that sell their products on a global or regional basis.
INTELLECTUAL PROPERTY; RESEARCH ACTIVITIES
Competition in the specialty chemicals and specialty materials industry is often based on technological superiority and innovation. Our ability to maintain our margins and effectively compete with other suppliers depends on our ability to introduce new products based on innovative technology, as well as our ability to obtain patent or other intellectual property protection. Our research and development programs emphasize development of new products and processes, improvement of existing products and processes, and application of existing products and processes to new industries and uses. We conduct most of our research activity in North America and Europe.
We file patents in order to protect our investments in innovation arising from research and product development in all our businesses, and as a result, numerous patents and patent applications protect our products, formulations, manufacturing processes, equipment, and improvements. For example, we selectively file and obtain patents in our Refining Technologies business, as well as in our chemical catalysts product line in our Specialty Catalysts business, for strategic new products or for significant business opportunities. We routinely file and obtain patents in a number of countries around the world that are significant to our polyolefin catalysts product line in our Specialty Catalysts business.
In our Materials Technologies business, we focus our research on the development and use of specialty materials products and formulations for diverse applications. We file patents and trademarks in various countries to protect our unique products, processes and expertise in strategic areas of our business, and to cover key product innovations in adjacent market segments.
We also benefit from the use of trade secret information, including know-how and other proprietary information relating to many of our products and processing technologies in all of our businesses, including, but not limited to, our business in licensing UNIPOL® Polypropylene Process Technology.
While we seek legal protection for our innovations, there can be no assurance, however, that our patents, patent applications and precautions to protect trade secrets and know-how will provide sufficient protection for our intellectual property. In addition, other companies may independently develop technology that could replicate, and thus diminish the advantage provided by, our trade secrets. Other companies may also develop alternative technology or design-arounds that could circumvent our patents or may acquire patent rights applicable to our business which might interpose a limitation on expansion of our business in the future.
ENVIRONMENT, HEALTH, SAFETY, AND SECURITY (or “EHSS”) MATTERS AND GOVERNMENTAL REGULATIONS
We are subject, along with other manufacturers of specialty chemicals, to stringent regulations under numerous regional, national, provincial, state and local EHSS laws and regulations relating to the manufacture, storage, handling, transportation, disposal and stewardship of chemicals and other materials. In addition to those laws and regulations, as we operate and/or sell to customers in over 60 countries, we must comply with important government regulations around the globe with respect to wide-ranging matters, including business and operating
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licenses, reporting requirements, registrations of intellectual property rights, human capital management, mine safety, and customs and taxes, among others. Cumulatively, the expenses of compliance with government regulations have a material effect on our earnings; however, as other manufacturers of specialty chemicals face similar regulations (provided they operate under similar regulatory frameworks), we do not see our compliance as creating a material competitive disadvantage to date, and our conscientious adherence to safety and other regulations has positive effects on our overall position as a global company. Nevertheless, changes in, or additions to, governmental regulations may lead to additional expenditures and negative effects on our operations.
Environmental laws require that certain responsible parties, as defined in the relevant statute, fund remediation actions regardless of legality of original disposal or ownership of a disposal site. We are involved in various response actions to address the presence of chemical substances as required by applicable laws.
We have expended substantial funds to comply with environmental laws and regulations and expect to continue to do so in the future. The following table sets forth our expenditures in the past three years, and our estimated expenditures in 2021 and 2022, for (i) the operation and maintenance of manufacturing facilities and the disposal of wastes; (ii) capital expenditures for environmental control facilities; and (iii) site remediation:
| (In millions) | Operation of Facilities and Waste Disposal | Capital Expenditures | Site Remediation | ||||||||||||||
| 2018 | $ | 56 | $ | 8 | $ | 18 | |||||||||||
| 2019 | 54 | 7 | 14 | ||||||||||||||
| 2020 | 56 | 13 | 8 | ||||||||||||||
| 2021(1) | 56 | 13 | 18 | ||||||||||||||
| 2022(1) | 58 | 23 | 10 | ||||||||||||||
(1)Amounts are based on environmental response matters for which sufficient information is available to estimate costs. We do not have sufficient information to estimate all of our possible future environmental response costs. As we receive new information, our estimate of such costs may change materially.
The table above does not include estimated expenditures related to the replacement of the dam spillway on the Libby, Montana, mine site. We are legally obligated to operate the dam and construct a new spillway in accordance with the conditions of the latest permit issued by the Montana Department of Natural Resources and Conservation. We have estimated the total cost of the project to be $95.0 million, with the timing of disbursements subject to a number of variables. Construction will begin in 2021 and is expected to take three to four years. Additional information about this matter and our environmental remediation activities is provided in this Report in Item 8 “Financial Statements and Supplementary Data” under Note 10, “Commitments and Contingent Liabilities,” to the Consolidated Financial Statements, which information is incorporated herein by reference.
EHSS Programs
We continuously seek to improve our environmental, health, safety, and security performance. To the extent applicable, we extend the basic elements of the American Chemistry Council’s RESPONSIBLE CARE® program to all our locations worldwide. Our Environment, Health, Safety, and Security Policy and RESPONSIBLE CARE MANAGEMENT SYSTEM® guide the company, our operating segments, and our facilities worldwide in systematically managing the environmental, health, safety, process safety, product safety, security, and sustainability aspects of our operations.
Sustainability
Overview
We succeed when we deliver value to our customers, and that success is increasingly based on how we help them meet their sustainability goals. Many of our products and technical services improve the efficiency of our customers’ products and processes, reduce energy or water use, cut harmful emissions, conserve material inputs, and/or reduce waste. Several of our technologies enable our customers to make products that meet the toughest environmental standards or to reformulate products to address rising consumer and regulatory expectations for sustainability, human health, and safety. As a leading manufacturer of process catalysts, we have become an active participant in the circular economy, with increasing business in assisting our customers with the recycling or
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reprocessing of spent catalysts. As part of our commitment to RESPONSIBLE CARE®, we systematically track safety and environmental performance through a comprehensive, global EHSS management system covering the environmental, health, safety (including process safety and product safety) and security aspects of our operations, and track progress through pertinent metrics.
In 2019, we began reporting to the Carbon Disclosure Project (“CDP”). This year, we made our CDP Climate and CDP Water disclosures public for the first time. We also published sustainability disclosures aligned with the Sustainability Accounting Standards Board (“SASB”) standard for the chemical industry. In addition, we strengthened the governance of our sustainability and environmental, social, and governance (“ESG”) related activities by naming a Chief Sustainability Officer (“CSO”) reporting directly to the CEO, and established a Sustainability Leadership Council composed of the CSO and leadership from Grace businesses and integrated supply chain. We also established targets to reduce scope 1 and scope 2 greenhouse gas (“GHG”) emissions by 22% from a baseline of 2019 by 2029, as well as 10-year reduction targets for water consumption and waste generation.
Product Portfolio
As part of a strategic review of our product portfolio, in 2019 we identified the products that directly contribute to our customers’ sustainability objectives, including:
•Products designed for use-phase efficiency — defined by the SASB as products that “through their use—can be shown to improve energy efficiency, eliminate or lower GHG emissions, reduce raw materials consumption, increase product longevity, and/or reduce water consumption,” either through:
◦Improved products — by increasing the efficiency of a product during its use phase, or
◦Improved processes — by increasing the efficiency of the manufacturing processes used to make products;
•Meeting the strictest environmental standards — products that directly enable customers to meet environmental regulatory/legal requirements applicable to their products or manufacturing processes; and
•Cleaner, safer products to meet consumer demands — products that enable customers to reformulate their products to avoid or reduce to de minimis levels substances of concern to their customers.
This year, we reviewed the requested disclosures from SASB and CDP as well as other ESG ratings organizations and expanded our product categories to include products that make a significant contribution to the move toward a more circular economy through:
•Enabling material recycling and bio-feeds – products that are tailored to enable customers to replace petroleum inputs with bio-based and recycled materials, and FCC catalyst sales (not counted above) where we take back spent FCC catalyst for recycling, or otherwise enable the reuse or recycling of spent catalysts.
Together, the products in our portfolio, including those of our ART joint venture, that address these sustainability endpoints accounted for approximately $1.1 billion, or 49% of our total revenue in 2020. Looking to the future, we estimate that 62% of our R&D projects are linked to at least one of these customer sustainability objectives. We expect to see further opportunities as we continue to develop technologies for advanced plastics recycling and renewable fuels.
ESG Rankings
For 2020, we again earned a Gold Rating from EcoVadis, this year placing us in the 95th percentile of all companies ranked by EcoVadis on their sustainability performance. EcoVadis is a leading third-party entity that evaluates suppliers on a complex scale of sustainability and ESG factors. CDP increased our 2020 Climate Disclosure score to a B-, above the average achieved by our chemical industry peers and above the North American average. Also in 2020, the ESG Risk Rating† from Sustainalytics placed us in the top quintile of both chemical and specialty companies. †Source Sustainalytics.
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Further Information
Shareholders and other interested persons can visit our website for additional sustainability information at www.grace.com/sustainability/en-us. That further information is not incorporated herein by reference and is not a part of this Annual Report on Form 10-K.
Security
We have implemented the RESPONSIBLE CARE® Security Code through a company-wide security program focused on the security of our people, processes, and systems. We have reviewed existing security (including cybersecurity) vulnerability and taken actions to enhance security systems where deemed necessary. In addition, we are complying with the Department of Homeland Security’s Chemical Facility Anti-Terrorism Standards, including identifying facilities subject to the standards, conducting security vulnerability assessments and developing and executing site security plans, as necessary.
OTHER INFORMATION, WEBSITE, AND AVAILABILITY OF REPORTS AND OTHER DOCUMENTS
Our principal executive offices are located at: W. R. Grace & Co., 7500 Grace Drive, Columbia, Maryland 21044. We maintain a website at www.grace.com. Our telephone number at our principal executive offices is +1 410.531.4000.
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available, free of charge, on our website as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the Securities and Exchange Commission, or SEC. These reports may be accessed through our website’s investor information page at http://investor.grace.com/. These reports as well as our proxy and information statements may also be accessed through the SEC’s website at www.sec.gov.
In addition, the charters for the Audit, Compensation, Nominating and Governance, and Corporate Responsibility Committees of our Board of Directors, our corporate governance principles and code of ethics are available, free of charge, on our website at www.grace.com/en-us/corporate-leadership/pages/governance.aspx. Printed copies of the charters, governance principles and code of ethics may be obtained free of charge by contacting Grace Shareholder Services at +1 410.531.4167.
The information on our website is not, and shall not be deemed to be, a part of this report or incorporated into any other filings we make with the SEC.
Our Principal Executive Officer and Principal Financial Officer have submitted certifications to the SEC pursuant to the Sarbanes Oxley Act of 2002 as exhibits to this Report.
Important information can be found throughout this Form 10-K and shareholders and potential investors are encouraged in particular to review Item 1A, “Risk Factors.”
EXECUTIVE OFFICERS
See “Information about our Executive Officers” following Part I, Item 4 of this Report for information about our Executive Officers.
Item 1A. RISK FACTORS
In addition to general economic, business and market conditions, we are subject to other risks and uncertainties, including, without limitation, the risks set forth below. For reference, we have divided the various significant risks to our business, financial condition, and results of operations into the following three categories: (i) key business risks; (ii) risks related to legacy matters; and (iii) risks related to financial matters, as set forth below.
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Key Business Risks
The global COVID-19 pandemic has had a significant negative effect on certain industries into which we supply products and services, and on our financial results. The pandemic is expected to continue to negatively impact our operations and businesses until successfully controlled.
The COVID-19 pandemic caused an economic slowdown that led to a global recession. If resulting recessionary trends again turn negative or exacerbate, or if there is a resurgence of COVID-19, including variants thereof, such events could have a negative effect on our business, financial condition, and future results. Resulting recessions may impact our share price, as well as our ability to access the capital markets and sources of liquidity on reasonable terms, or at all.
The COVID-19 pandemic has led to significantly lower transportation fuel demand and a reduction in refining activity, which has negatively affected demand for our refining catalysts. Manufacturing activity reduced as a result of the pandemic. Demand for certain manufactured products, including polyolefin resins and products made with our specialty silicas, declined and negatively affected demand for our polyolefin catalysts and specialty silicas.The pandemic continues to present us with significant uncertainty.
The COVID-19 pandemic has also heightened risks associated with our internal operations. An outbreak among our employee population could have a material adverse effect on our overall business and financial condition. Additionally, a large number of our employees are working remotely as a result of restrictions imposed to control the spread of the virus. This could result in increased cybersecurity risk, which could have a material adverse effect on our overall business and financial condition.
The global scope of our operations subjects us to the risks of doing business in foreign countries, which could adversely affect our business, financial condition and results of operations.
We operate our business on a global scale with approximately 73% of our 2020 consolidated sales outside the United States. We operate and/or sell to customers in over 60 countries and in over 30 currencies. We currently have many production facilities, research and development facilities, and administrative and sales offices located outside North America, including facilities and offices located in EMEA (Europe Middle East Africa), Asia Pacific and Latin America. We expect non-U.S. sales to continue to represent a substantial majority of our revenue. Accordingly, our business is subject to risks related to the differing legal, political, social and regulatory requirements and economic conditions of many jurisdictions. Risks inherent in non-U.S. operations include the following:
•commercial agreements may be more difficult to enforce and receivables more difficult to collect;
•intellectual property rights may be more difficult to enforce;
•increased shipping costs, disruptions in shipping or reduced availability of freight transportation;
•difficulty transferring our profits or capital from foreign operations to other countries where such funds could be more profitably deployed;
•unexpected adverse changes in export duties, quotas and tariffs, and difficulties in obtaining export licenses;
•differing regulatory responses to the COVID-19 pandemic in the jurisdictions in which we operate;
•additional withholding and other taxes or restrictions on foreign trade or investment, including import, currency exchange and capital controls, charges and limitations;
•foreign governments may nationalize private enterprises;
•political or economic repercussions on a domestic, country-specific or global level from terrorist activities and the response to such activities;
•unexpected adverse changes in foreign laws or regulatory requirements;
•the impact of the United Kingdom’s exit from the European Union on January 31, 2020, and the provisional application of the EU-UK Trade and Cooperation Agreement on January 1, 2021;
•increased cash taxes in the event of a change in tax laws, regulations or interpretations in one or more foreign jurisdictions, could adversely affect our business, financial condition, results of operations, or liquidity; and
•geopolitical risk, where unexpected changes in global, regional, or local political or social conditions could adversely affect our foreign operations.
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Our success as a global business will depend, in part, upon our ability to succeed in differing legal, regulatory, economic, social and political conditions by developing, implementing and maintaining policies and strategies that are effective in each location where we do business.
In addition to the risks and uncertainties that we discussed above, recent world events have increased the risks posed by international trade disputes, tariffs, and sanctions. We procure a wide spectrum of commodities globally to support our production. For materials sourced from nations that could be impacted by trade disputes, tariffs or sanctions, we could potentially face increased costs, supply disruptions and/or costs associated with securing alternative materials. Additionally, such disputes, tariffs, and sanctions could potentially lead to a reduction in our sales of products, technology, and services. We view geopolitical risk along with other potential supply chain and sales risks, and work actively to diversify and mitigate these potential impacts; however, such events could adversely affect our business, financial condition and results of operations.
As we operate worldwide in a competitive environment, global economic and financial market conditions may adversely affect our business, financial condition and results of operations.
We compete by selling value-added products, technologies and services. Increased levels and numbers of competitors, globally or regionally, could negatively impact our results of operations. Economic conditions around the world can have a direct impact on our revenues. A global or regional economic downturn or market uncertainty could reduce the demand for our products, technologies and services, which could negatively impact our results of operations. Since many of our customers are refiners, our fluid catalytic cracking (FCC) and hydroprocessing catalyst (HPC) businesses are highly dependent on the economics of the petroleum refining industry. Demand for our FCC and HPC products is affected by refinery throughput, the type and quality of refinery feedstocks, and the demand for transportation fuels and other refinery products, such as propylene. Also, disruptions in the financial markets could have an adverse effect on our ability to finance our operations and growth plans, and could negatively impact our suppliers and customers in similar manners.
We are exposed to currency exchange rate changes that impact our profitability.
We are exposed to currency exchange rate risk through our U.S. and non-U.S. operations. Changes in currency exchange rates may materially affect our operating results. For example, changes in currency exchange rates may affect the relative prices at which we and our competitors sell products in the same region and the cost of materials used in our operations. A substantial portion of our net sales and assets are denominated in currencies other than the U.S. dollar, particularly the euro. When the U.S. dollar strengthens against other currencies, at a constant level of business, our reported sales, earnings, assets and liabilities are reduced because the non-U.S. currencies translate into fewer U.S. dollars.
We incur a currency transaction risk whenever one of our operating subsidiaries enters into either a purchase or a sales transaction using a currency different from the operating subsidiary’s functional currency. Given the volatility of exchange rates, we may not be able to manage our currency transaction risks effectively, or volatility in currency exchange rates may expose our financial condition or results of operations to a significant additional risk.
Prices for certain raw materials and energy are volatile and can have a significant effect on our manufacturing and supply chain strategies as we seek to maximize our profitability. If we are unable to successfully adjust our strategies in response to volatile raw materials and energy prices, such volatility could have a negative effect on our earnings in future periods.
We use metals, natural gas, petroleum-based materials, and other materials in the manufacture of our products. We consume substantial amounts of energy in our manufacturing processes. Prices for these materials and energy are volatile and can have a significant effect on our pricing, sales, manufacturing and supply chain strategies as we seek to maximize our profitability. Our ability to adjust strategies successfully in response to volatile raw material and energy prices is a significant factor in maintaining or improving our profitability. If we are unable to successfully adjust our strategies in response to volatile prices, such volatility could have a negative effect on our sales and earnings in future periods.
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A substantial portion of our raw materials are commodities whose prices fluctuate as market supply and demand fundamentals change.
We attempt to manage exposure to price volatility of major commodities through:
•long-term supply contracts;
•contracts with customers that permit adjustments for changes in prices of commodity-based materials and energy;
•forward buying programs that layer in our expected requirements systematically over time; and
•limited use of financial instruments.
Although we regularly assess our exposure to raw material price volatility, we cannot always predict the prospects of volatility and we cannot always cover the risk in a cost effective manner.
Certain of our raw materials may be provided by single sources of supply. We may not be able to obtain sufficient raw materials due to unforeseen developments that would cause an interruption in supply. Even if we have multiple sources of supply for raw materials, these sources may not make up for the loss of a major supplier.
If we are not able to continue our technological innovation and successful introduction of new products, our customers may turn to other suppliers to meet their requirements.
The specialty chemicals and specialty materials industries and the end-use markets into which we sell our products experience ongoing technological change and product improvements. A key element of our business strategy is to invest in research and development activities with the goal of introducing new high-performance, technically-differentiated products. We may not be successful in developing new technology and products that effectively compete with products introduced by our competitors, and our customers may not accept, or may have lower demand for, our new products. If we fail to keep pace with evolving technological innovations or fail to improve our products in response to our customers’ needs, then our business, financial condition and results of operations could be adversely affected as a result of reduced sales of our products.
We may be subject to claims of infringement of the intellectual property rights of others, which could hurt our business.
From time to time, we face infringement claims from our competitors or others alleging that our processes or products infringe on their proprietary technologies. Any claims that our products or processes infringe the intellectual property rights of others, regardless of the merit or resolution of the claims, could cause us to incur significant costs in responding to, defending and resolving the claims, and may divert the efforts and attention of our management and technical personnel from our business. If we are found to be infringing on the proprietary technology of others, we may be liable for damages, and we may be required to change our processes, redesign our products, pay others to use the technology, or stop using the technology or producing the infringing product. Even if we ultimately prevail, the existence of the lawsuit could prompt our customers to switch to products that are not the subject of infringement suits.
Some of our employees are unionized, represented by works councils or employed subject to local laws that are less favorable to employers than the laws in the United States.
As of December 31, 2020, we had approximately 4,000 global employees. Approximately 700 of our approximately 2,200 U.S. employees are unionized at 5 manufacturing sites, and approximately 1,400 of our employees outside the U.S. are represented by works councils and unions. In addition, a large number of our employees are employed in countries in which employment laws provide greater bargaining or other rights to employees than the laws in the United States. Such employment rights require us to work collaboratively with the legal representatives of the employees to effect any changes to labor arrangements. For example, most of our employees in Europe are represented by works councils that have co-determination rights on any changes in conditions of employment, including certain salaries and benefits and staff changes, and may impede efforts to restructure our workforce. A strike, work stoppage or slowdown by our employees or significant dispute with our employees, whether or not related to these negotiations, could result in a significant disruption of our operations or higher ongoing labor costs.
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We intend to pursue acquisitions, joint ventures and other transactions that complement or expand our businesses. We may not be able to complete proposed transactions and even if completed, the transactions may involve a number of risks that may materially and adversely affect our business, financial condition and results of operations.
We intend to continue to pursue opportunities to buy other businesses or technologies that could complement, enhance or expand our current businesses or product lines or that might otherwise offer us growth opportunities. We may have difficulty identifying appropriate opportunities or, if we do identify opportunities, we may not be successful in completing transactions for a number of reasons. Any transactions that we are able to identify and complete may involve a number of risks, including:
•the diversion of management’s attention from our existing businesses to integrate the operations and personnel of the acquired or combined business or joint venture;
•possible adverse effects on our operating results during the integration process;
•failure of the acquired business to achieve expected financial, operational, and other objectives;
•possible assumption of unexpected liabilities; and
•inability to obtain indemnification from other parties to transactions.
In addition, we may not be able to successfully or profitably integrate, operate, maintain and manage any newly acquired operations or their employees. We may not be able to maintain uniform standards, controls, procedures and policies, which may lead to operational inefficiencies.
We spend large amounts of money for environmental compliance in connection with our current and former operations.
As a manufacturer of specialty chemicals and specialty materials, we are subject to stringent regulations under numerous U.S. federal, state, local and foreign environmental, health and safety laws and regulations relating to the generation, storage, handling, discharge, disposition and stewardship of chemicals and other materials. We have expended substantial funds to comply with such laws and regulations and have established a policy to minimize our emissions to the environment. Legislative, regulatory and economic uncertainties (including existing and potential laws and regulations pertaining to climate change) make it difficult for us to project future spending for these purposes, and if there is an acceleration in new regulatory requirements, we may be required to expend substantial additional funds to remain in compliance, which may be material.
Evolving energy consumption patterns; investor sentiment regarding fossil fuels and related matters; and risks related to climate change, may negatively affect our business, financial condition, and results of operations, and our stock price.
We are engaged in the production and sale of specialty chemicals and specialty materials used in petrochemical, refining, and other chemical manufacturing applications. These industries are facing challenges from ESG concerns of investors; the economic impacts of climate change developments; and regulation of GHGs, such as carbon dioxide, methane, and nitrous oxide, among others. In addition, the increasing availability of electric vehicles offers an alternative that could lead to reduced demand for liquid transportation fuels. Resulting reductions in refining and related activities could have a negative effect on our revenues and business.
Recently, there have been intensifying efforts directed at various members of the investment community to promote the divestment of shares of energy companies, as well as to pressure lenders and other financial services companies to limit or curtail activities with energy companies. As we provide products and services to energy companies, should these efforts be successful or expanded, there may be a negative impact on our revenues and business, and our stock price.
Potential effects of climate change include increased frequency, severity, and impact of weather-related events. Multiple Grace facilities globally are located in areas that may be at risk from hurricanes and other weather-related events that could cause production interruptions. Key suppliers and associated distribution routes for raw materials and finished goods are similarly at risk of interruptions from severe weather events. Multiple customers are likewise located in areas that could be impacted by extreme weather events. These circumstances present business continuity and related risks.
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We work with dangerous materials that can injure our employees, damage our facilities, disrupt our operations, and contaminate the environment.
Some of our operations involve the handling of hazardous materials that may pose the risk of fire, explosion, or the release of hazardous substances. Such events could result from natural disasters, operational failures or terrorist attacks, and might cause injury or loss of life to our employees and others, environmental contamination, and property damage. These events might cause a temporary shutdown of an affected plant, or portion thereof, and we could be subject to penalties or claims as a result of any of these events. A disruption of our operations caused by these or other events could have a material adverse effect on our results of operations.
We are subject to business continuity risks that may adversely affect our business, financial condition and results of operations.
We are subject to significant risks from both natural disasters and accidents such as fires, storms, and floods; public health concerns, including pandemics and quarantines; and disruptive events, such as war, insurrection, and terrorist actions; and other force majeure events. These types of occurrences can negatively affect our manufacturing, supply chain, logistics, information technology, and communications functions. Similarly, they can strike major suppliers and customers, thus restricting or delaying our supply of raw materials or energy as well as reducing or deferring demand for our products and services. In the event of a major disruption, we may not be able to replace this business in a timely manner or at similar margins. Also, we have centralized certain administrative functions, primarily in North America, Europe and Asia, to improve efficiency and reduce costs. To the extent that these central locations are disrupted or disabled, key business processes, such as invoicing, payments and general management operations, could be interrupted.
We insure against many of these risks by carrying property, general, liability, and other coverages with highly rated global insurers. Given the current insurance market as well as our recent claims experience, we may experience increased costs to purchase insurance coverage going forward. Our ability to obtain certain coverage, including contingent time element business interruption insurance, for losses related to our suppliers or customers may be limited or more costly in the future.
A failure of our information technology (“IT”) infrastructure could adversely impact our business and operations.
We increasingly rely upon the capacity, reliability and security of our IT infrastructure and our ability to expand and continually update this infrastructure in response to the changing needs of our business. Additionally, a large number of our employees are working remotely as a result of restrictions imposed to control the spread of the COVID-19 virus. If we experience a problem with the functioning of an important IT system, the resulting disruptions could have an adverse effect on our business. Our IT systems affect virtually every aspect of our business, including supply chain, manufacturing, logistics, finance and communications. We and certain of our third-party vendors receive and store personal information in connection with our human resources operations and other aspects of our business. Any IT system failure, natural disaster, accident, or intentional breach could result in disruptions to our operations.
Our ability to operate our businesses and our financial condition could be significantly undermined by cybersecurity breaches.
Our IT systems are subject to cyberattack and other similar disruptions. Breaches by hackers, the introduction of computer viruses, ransomware, and other cybersecurity incidents affecting our IT systems could result in disruptions to our operations. Also, such incidents could include theft of our trade secrets and other intellectual property, as well as confidential customer, employee and business information, which could be used by unauthorized parties and publicly disclosed. This could negatively affect our relationships with customers and our ability to compete effectively, and could ultimately harm our reputation, business, financial condition and results of operations. In addition, we may be required to incur significant costs to protect against damage caused by cybersecurity breaches in the future.
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Risks Related to Legacy Matters
We are subject to liabilities for Legacy Matters, which include (i) product, (ii) environmental, and (iii) other liabilities, relating to past activities of Grace.
In addition to the legacy product and legacy environmental liabilities discussed below in these Risk Factors, we are subject to other liabilities relating to past activities of Grace. Beginning in 1971, as part of implementing a wet milling process at the Libby, Montana, vermiculite mine, we constructed a dam at the mine property that now prevents vermiculite ore tailings from moving into nearby creeks and rivers. Ongoing operation of the dam is regulated by the Montana Department of Natural Resources and Conservation (“DNRC”). In April 2019, the DNRC renewed the permit necessary for operation of the dam. We are legally obligated to operate the dam and construct a new spillway in accordance with the latest permit conditions.
Construction of the new dam spillway at the former mine site is a key element of our overall remediation strategy. The project includes both an upper spillway and a lower spillway that are being managed as two separate projects with different engineering design and construction timelines. 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 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 three months ended September 30, 2020, we completed a review of contractor bids for the replacement of the upper spillway and increased our cost estimate for this portion of the project by $27.0 million, bringing the estimate for the total project to $95.0 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. We believe it is reasonably possible that the ultimate costs of the two spillway projects could range between $80 million and $120 million. As we receive new information, our estimated liability may change materially. Construction will begin in 2021 and is expected to take three to four years.
We are subject to environmental clean-up costs, fines, penalties and damage claims that have been and continue to be costly.
In the U.S., we are subject to lawsuits and regulatory actions, in connection with current and former operations (including some divested businesses and off-site disposal facilities), that seek clean-up or other remedies. We are also subject to similar risks outside of the U.S.
We purchased a vermiculite mine in Libby, Montana, in 1963 and operated it until 1990. Vermiculite concentrate from the Libby mine was used in the manufacture of attic insulation and other products. Some of the vermiculite ore contained naturally occurring asbestos. We are engaged with the U.S. Environmental Protection Agency (or the “EPA”) and other federal, state and local governmental agencies in a remedial investigation and feasibility study (or the “RI/FS”) of the Libby mine and the surrounding area, known as Operable Unit 3 (or “OU3”). The RI/FS will study the areas within OU3 requiring remediation and will identify possible remedial action alternatives. Possible remedial actions within OU3 are wide-ranging, from institutional controls such as land use restrictions, to more active measures involving soil removal, containment projects, or other protective measures. As part of the RI/FS process, we contracted an engineering and consulting firm to develop a range of possible remedial alternatives and associated cost estimates for OU3. Based on this work, we recorded a pre-tax charge of $70.0 million during the three months ended September 30, 2018, for the estimated costs of remediation of OU3. We believe that this amount should provide for a protective remedy meeting the statutory requirements of the Comprehensive Environmental Response, Compensation, and Liability Act.
The estimated costs of remediation are preliminary and consist of several components, each of which may vary significantly as the remedial alternatives are further developed. It is reasonably possible that the ultimate costs of remediation could range between $30 million and $170 million. We are working closely with the EPA, and the ultimate remedy will be determined by the EPA after the RI/FS is finalized. Such remedy will be set forth in a Record of Decision (or “ROD”) that is currently expected to be issued by the EPA no earlier than 2024. Costs associated with the more active remedial alternatives would be expected to be incurred over a decade or more. We will reevaluate our estimated liability as remedial alternatives evolve based on further work by the engineering and consulting firm and discussions with the EPA as the RI/FS process moves toward a ROD. Technical memoranda expected prior to the issuance of the ROD may provide insight into the likely remedial alternatives ultimately selected, allowing us to update our cost of remediation estimate. Depending on the remedial alternatives that the EPA selects in the ROD, the total cost of remediating OU3 may exceed our current estimate
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by material amounts. The amounts set forth above do not include possible liability for natural resources damage. Based on ecological studies conducted by the EPA, we do not believe that natural resources damage has occurred. However, if a party were to be successful in asserting a natural resources damage claim, liability related to such obligation could be material.
We have cooperated with the EPA in investigating and remediating a number of formerly owned or operated sites that processed Libby vermiculite into finished products. We have recorded a liability for remaining expected response costs, including costs for EPA oversight and potential future site remediation, where a review has indicated that liability is probable and the cost is estimable. The EPA may commence additional investigations in the future at other sites that processed Libby vermiculite. Liability for unaccrued additional investigation and remediation costs is probable but not yet estimable, and could be material.
We have recorded liabilities for all environmental matters for which a loss is considered to be probable and sufficient information is available to reasonably estimate the loss. We also face legacy environmental liability for response costs at sites not related to our former vermiculite mining and processing activities. This liability relates to our former businesses or operations, including our share of liability at off-site disposal facilities. Our estimated liability is based upon regulatory requirements and environmental conditions at each site. As we receive new information, our estimated liability may increase materially.
We may be required to make one or more contingent deferred payments to the trust for asbestos property damage claims, which we refer to as the “PD Trust,” in respect of claims related to our former Zonolite attic insulation (“ZAI”) product (“ZAI PD Claims”); we may also be obligated to make additional payments to the PD Trust in respect of “Other PD Claims” (those being asbestos property damage claims other than ZAI PD Claims); and our obligations to make payments to the PD Trust in respect of Other PD Claims is not capped.
Grace emerged from bankruptcy effective February 3, 2014 (the “Effective Date”). Under the Joint Plan, the PD Trust was established and funded under Section 524(g) of the Bankruptcy Code. The order of the Bankruptcy Court confirming the Joint Plan contains a channeling injunction, which provides that all pending and future asbestos-related property damage claims and demands (or “PD Claims”) can only be brought against the PD Trust. The PD Trust contains two accounts. One of these accounts is the “ZAI PD Account,” which is funded in respect of claims related to ZAI. The other account is the “PD Account,” which is funded solely in respect of Other PD Claims.
Under the Joint Plan, all pending and future asbestos-related personal injury claims are channeled for resolution to a personal injury trust (the “PI Trust”). We have satisfied all of our financial obligations to the PI Trust. We have contingent financial obligations remaining to the PD Trust. With respect to ZAI PD Claims, the PD Trust was funded with $49.4 million (net of $15 million of attorneys’ fees) to pay claims and expenses. We are also obligated to make up to 10 contingent deferred payments of $8 million per year to the PD Trust during the 20-year period beginning on February 3, 2019, with each such payment due only if the assets of the PD Trust fall below $10 million during the preceding year. As of December 31, 2020, the PD Trust has paid out approximately $38 million in ZAI PD Claims and expenses, leaving a balance of approximately $18 million, including the benefit of realized investment gains.
Due to the limited claims history, the unique nature of this product, and the uncertainty of future claims patterns, an actuarial analysis was completed to estimate the range of possible future payments. The analysis was conducted by a third-party actuarial firm directed by us and using historical claims data provided by the ZAI trustee. Certain key assumptions employed in the analysis were (1) projections of the future number of filed claims, assuming a percentage increase in claims during earlier years and annual decreases in later years; (2) application of historical percentages of claims closed with indemnity payment compared to total closed claims, applied on a regional basis; and (3) application of the average claim payout, which reflects the average indemnity cost per claim closing with payment. As a result of the analysis and taking into account the relative uncertainty of future claims activity, we determined that contingent funding obligations beyond 2025 are not reasonably estimable. We estimate that the reasonable range of payments over the period of 2021 to 2025 is expected to be between $16 million and $24 million and project that the first payment could be due as early as 2022. In the 2019 fourth quarter, we recorded a $24.0 million liability related to probable future obligations to fund the PD Trust for ZAI PD Claims. Our maximum financial obligation over the next 18 years is $80 million, and no single year’s payment can exceed $8 million.
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With respect to Other PD Claims, claims unresolved as of the Effective Date are to be litigated in the bankruptcy court and any future claims are to be litigated in a federal district court, in each case pursuant to procedures approved by the bankruptcy court. To the extent any such Other PD Claims are determined to be allowed claims, they are to be paid in cash by the PD Trust. We are obligated to make a payment to the PD Trust every six months in the amount of any Other PD Claims allowed during the preceding six months plus interest (if applicable) and the amount of PD Trust expenses for the preceding six months (the “PD Obligation”). We have not paid any Other PD Claims since emergence. Annual expenses have been approximately $0.2 million per year. The aggregate amount to be paid under the PD Obligation is not capped, and we may be obligated to make additional payments to the PD Trust in respect of the PD Obligation. We have accrued for those unresolved Other PD Claims that we believe are probable and estimable. We have not accrued for other unresolved or unasserted Other PD Claims as we do not believe that payment is probable.
All payments to the PD Trust required after the Effective Date are secured by the Company’s obligation to issue 77,372,257 shares of Company common stock to the PD Trust in the event of default, subject to customary anti-dilution provisions.
Risks Related to Financial Matters
Our indebtedness may materially affect our business, including our ability to fulfill our obligations, react to changes in our business and incur additional debt to fund future needs.
We have a substantial amount of debt. As of December 31, 2020, we had $1,063.6 million of unsecured indebtedness outstanding and $926.8 million of secured indebtedness outstanding. Our indebtedness may have material effects on our business, including to:
•require us to dedicate a substantial portion of our cash flow to principal and interest payments, thereby reducing funds available for working capital, capital expenditures, acquisitions, research and development, distributions to shareholders (which fall within the discretion of our Board of Directors taking into account financial, liquidity and other considerations), share repurchase programs and other purposes;
•restrict us from making strategic acquisitions or taking advantage of favorable business opportunities;
•limit our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate;
•increase our vulnerability to adverse economic, credit and industry conditions, including recessions;
•make it more difficult for us to satisfy our other obligations;
•place us at a competitive disadvantage compared to our competitors that have relatively less debt; and
•limit our ability to borrow additional funds, or to dispose of assets to raise funds, if needed, for working capital, capital expenditures, acquisitions, research and development and other purposes.
If we incur additional debt, the risks related to our indebtedness may intensify.
Restrictions imposed by agreements governing our indebtedness may limit our ability to operate our business, finance our future operations or capital needs, or engage in other business activities. If we fail to comply with certain restrictions under these agreements, our debt could be accelerated, and we may not have sufficient cash to pay our accelerated debt.
The agreements governing our indebtedness contain various covenants that limit, among other things, our ability, and the ability of certain of our subsidiaries, to:
•incur certain liens;
•enter into sale and leaseback transactions; and
•consolidate, merge or sell all or substantially all of our assets or the assets of our guarantors.
As a result of these covenants, we will be limited in the manner in which we can conduct our business, and may be unable to engage in favorable business activities or finance future operations or capital needs. Accordingly, these restrictions may limit our flexibility to operate our business. A failure to comply with the restrictions contained in these agreements, including maintaining the financial ratios required by our credit facilities, could lead to an event of default which could result in an acceleration of our indebtedness. We cannot guarantee that our future operating results will be sufficient to enable us to comply with the covenants contained in the agreements governing our indebtedness or to remedy any such default. In addition, in the event of an
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acceleration, we may not have or be able to obtain sufficient funds to make any accelerated payments. Additionally, in the event of a change in control, we will be required to offer to purchase our senior unsecured notes at a price equal to 101% of the aggregate principal amount outstanding plus accrued and unpaid interest.
Our indebtedness exposes us to interest expense increases if interest rates increase.
As of December 31, 2020, approximately $268.9 million of our borrowings were at variable interest rates and expose us to interest rate risk, excluding $586.5 million hedged by cross-currency swaps effective in November 2018, and $100.0 million hedged by interest rate swaps effective in April 2018. If interest rates increase, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed would remain the same, and our net income would decrease. An increase of 100 basis points in the interest rates payable on our variable rate indebtedness would increase our annual estimated debt-service requirements by $2.7 million, assuming our consolidated variable interest rate indebtedness outstanding as of December 31, 2020, remains the same.
The uncertainty regarding the potential phase-out of LIBOR may negatively impact our operating results.
We currently have term loan borrowings, a revolving credit facility and financial derivatives that rely on the London Interbank Offered Rate (“LIBOR”) as a benchmark rate. All of these financial instruments use a three-month U.S. dollar LIBOR for their benchmark rate. The Intercontinental Exchange (“ICE”) Benchmark Administration (“IBA”) announced that it intends to cease publication of three-month U.S. dollar LIBOR on June 30, 2023. No consensus exists as to what rate or rates will become accepted alternatives to LIBOR at this time, although the U.S. Federal Reserve, in connection with the Alternative Reference Rates Committee (“ARRC”), a steering committee composed of large U.S. financial institutions, has identified the Secured Overnight Financing Rate (“SOFR”) as the rate that represents the best practice for replacement of the U.S. dollar LIBOR. SOFR is a more generic measure than LIBOR and considers the cost of borrowing cash overnight, collateralized by U.S. Treasury securities.
Given the inherent differences between LIBOR and SOFR, or any other alternative benchmark rate that may be established, there are uncertainties regarding a transition from LIBOR. These uncertainties include, but are not limited to, the need to amend all contracts with LIBOR as the referenced rate and the impact on our cost of variable rate debt, including the use of certain financial derivatives. Based on guidance issued by the IBA and other regulatory bodies, we do not expect to issue any contracts that reference U.S. dollar LIBOR after 2021. We will need to consider new contracts issued before the end of 2021 to determine if they should reference an alternative benchmark rate and/or include suggested fallback language, as published by the ARRC. The consequences of these developments with respect to LIBOR cannot be entirely predicted and span multiple future periods; however, they could result in a change in the cost of our variable rate debt or derivative financial instruments, which may be detrimental to our financial position or operating results.
We have unfunded and underfunded pension plan liabilities. We will require future operating cash flow to fund these liabilities. We have no assurance that we will generate sufficient cash to satisfy these obligations.
We maintain U.S. and non-U.S. defined benefit pension plans covering current and former employees who meet or met age and service requirements. Our net pension liability and cost is materially affected by the discount rate used to measure pension obligations, the longevity and actuarial profile of our workforce, the level of plan assets available to fund those obligations and the actual and expected long-term rate of return on plan assets. Significant changes in investment performance or a change in the portfolio mix of invested assets can result in corresponding increases and decreases in the valuation of plan assets or in a change in the expected rate of return on plan assets. Assets available to fund the pension benefit obligation of the U.S. advance-funded pension plans at December 31, 2020, were approximately $1,001 million, or approximately 90% of the measured pension projected benefit obligation on a U.S. GAAP basis. In addition, any changes in the discount rate, as well as actual returns on plan assets, could result in a significant increase or decrease in the valuation of pension obligations, affecting the reported funded status of our pension plans as well as the net periodic pension cost in the following years. Similarly, changes in the expected return on plan assets can result in significant changes in the net periodic pension cost in the following years.
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Our ability to use tax credits and / or net operating losses to reduce future tax payments may be limited if there is a change in ownership of Grace or if Grace does not generate sufficient taxable income or foreign source income for U.S. tax purposes. Our ability to use these attributes is also subject to time limitations. Changes in tax laws and regulations may reduce their value and availability.
Our ability to utilize tax attributes including tax credits, future tax deductions, and net operating losses (“NOLs”), is dependent on our ability to generate sufficient taxable income and foreign source income for U.S. tax purposes. Under U.S. income tax law, federal tax credits may be carried forward for 10 years, and research and development tax credits may be carried forward for 20 years. State NOL carryforwards are generally available for deduction against future taxable income for up to 20 years, subject to state-specific regulations. Also, our ability to realize the benefits of these tax credits and/or NOLs and their value may be adversely affected by changes in tax laws and regulations. In addition, our ability to utilize U.S. federal tax credits as well as U.S. federal and state NOLs may be limited in the event of future changes in the ownership of outstanding Company common stock.
Our business and stock price could be negatively impacted as a result of actions by activist shareholders or others.
We value constructive input from investors and regularly engage in dialogue with our shareholders regarding strategy and performance. Our Board of Directors and management team are committed to acting in the best interests of all of our shareholders. Activist shareholders may from time to time engage in proxy solicitations, advance shareholder proposals, or otherwise attempt to effect changes or acquire control of Grace. Recently, we received a revised proposal from a shareholder to acquire Grace. Our Board of Directors responded that we are willing to discuss a sale of Grace in the context of our ongoing review of strategic alternatives and that any transaction would need to be at a price level that reflects the full value of Grace for its shareholders.
Actions of activist shareholders could affect our business because responding to such actions can be costly and time-consuming and disruptive to our operations, and may divert the attention of our Board of Directors, management and employees. Moreover, such actions may create perceived uncertainties among current and potential customers, suppliers, employees and other constituencies as to our future direction, which could result in lost sales and the loss of business opportunities and make it more difficult to attract and retain qualified directors, personnel, and business partners. In addition, actual or perceived actions of activist shareholders may cause significant fluctuations in our stock price that do not necessarily reflect the underlying fundamentals and value of our business.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
Item 2. PROPERTIES
We operate manufacturing plants and other facilities (including offices, warehouses, labs and other service facilities) throughout the world. Some of these plants and facilities are shared by our reportable segments. We consider our operating properties generally to be in good operating condition and suitable for their current use. We believe that the productive capacity of our plants and other facilities, supplemented by tolling arrangements, is
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generally adequate for current operations. The table below summarizes our manufacturing plants by reportable segment and region as of December 31, 2020:
| Number of Facilities(1) | |||||||||||||||||||||||||||||
| North America | Europe Middle East Africa (EMEA) | Asia Pacific | Latin America | Total | |||||||||||||||||||||||||
| Catalysts Technologies | 10 | 3 | 1 | — | 14 | ||||||||||||||||||||||||
| Owned | 8 | 1 | 1 | — | 10 | ||||||||||||||||||||||||
| Leased | 2 | 2 | — | — | 4 | ||||||||||||||||||||||||
| Materials Technologies | 4 | 2 | 1 | 1 | 8 | ||||||||||||||||||||||||
| Owned | 3 | 1 | 1 | 1 | 6 | ||||||||||||||||||||||||
| Leased | 1 | 1 | — | — | 2 | ||||||||||||||||||||||||
___________________________________________________________________________________________________________________
(1)Shared facilities are counted in both reportable segments. The total number of facilities included in the above table, without regard to sharing between reportable segments, is 19, of which we own 13 and lease 6.
Generally, we own the machinery and equipment at our manufacturing plants. We also own the land on which most of our largest manufacturing plants are situated; however, certain manufacturing plants are located on leased land, normally long-term. We own our Corporate Headquarters in Columbia, Maryland. We also lease and operate a shared services facility in Manila, Philippines.
The table below sets forth our manufacturing plants by reportable segment.
| Catalysts Technologies | Materials Technologies | |||||||
| Aiken, South Carolina | Dueren, Germany* | |||||||
| Baton Rouge, Louisiana* | East Chicago, Indiana* | |||||||
| Chattanooga, Tennessee | Hesperia, California | |||||||
| Chicago, Illinois | Kuantan, Malaysia | |||||||
| Lake Charles, Louisiana | Sorocaba, Brazil | |||||||
| Norco, Louisiana* | ||||||||
| Pasadena, Texas | ||||||||
| Stenungsund, Sweden* | Shared | |||||||
| Tarragona, Spain* | Albany, Oregon | |||||||
| Valleyfield, Quebec, Canada | Curtis Bay, Maryland | |||||||
| Yeosu, South Korea | Worms, Germany | |||||||
___________________________________________________________________________________________________________________
*Denotes leased site.
Our three largest manufacturing sites are: Worms, in Germany; and Curtis Bay, Maryland, and Lake Charles, Louisiana, in the United States. The unanticipated loss of any of our manufacturing, headquarters, or shared services facilities could have a material adverse effect upon our business, financial condition or results of operations.
For information on our properties and equipment by region and country, see disclosure set forth in Item 8 (Financial Statements and Supplementary Data) under Note 18 (Segment Information) to our Consolidated Financial Statements, which disclosure is incorporated herein by reference.
Item 3. LEGAL PROCEEDINGS
CHAPTER 11 PROCEEDINGS AND ASBESTOS CLAIMS
Disclosures provided in this Report in Item 1 (Business) and Item 8 (Financial Statements and Supplementary Data) under Note 10 (Commitments and Contingent Liabilities, under the caption “Legacy Liabilities”) to the Consolidated Financial Statements, are incorporated herein by reference.
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ENVIRONMENTAL INVESTIGATIONS AND CLAIMS
Disclosures provided in this Report in Item 1 (Business) under the caption “Environment, Health, Safety, and Security Matters” and Item 8 (Financial Statements and Supplementary Data) under Note 10 (Commitments and Contingent Liabilities, under the caption “Legacy Environmental Liabilities”) to the Consolidated Financial Statements, are incorporated herein by reference.
Item 4. MINE SAFETY DISCLOSURES
Information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K (17 CFR 229.104) is included in Exhibit 95 to this Report.
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INFORMATION ABOUT OUR EXECUTIVE OFFICERS
Pursuant to General Instruction G(3) of Form 10-K, the following list of executive officers of Grace as of February 15, 2021, is included as an unnumbered Item in Part I of this report in lieu of being included in the Grace Proxy Statement relating to the 2021 Annual Meeting of Shareholders. Our executive officers are elected annually.
| Name and Age | Office | First Elected | ||||||||||||
| Hudson La Force (56) | President and Chief Executive Officer Director | November 8, 2018 November 2, 2017 | ||||||||||||
| William C. Dockman (61) | Senior Vice President and Chief Financial Officer | May 8, 2019 | ||||||||||||
| Elizabeth C. Brown (57) | Senior Vice President and Chief Human Resources Officer | January 21, 2015 | ||||||||||||
| Keith N. Cole (62) | Senior Vice President, Public Affairs and Environment, Health, Safety, and Chief Sustainability Officer | February 10, 2014 | ||||||||||||
| Cherée H. Johnson (45) | Senior Vice President, General Counsel and Secretary | January 11, 2021 | ||||||||||||
Mr. La Force, Ms. Brown, and Mr. Cole have been actively engaged in Grace’s business as executive officers for the past five years. Mr. La Force is Grace’s Principal Executive Officer.
Mr. Dockman joined Grace in 1999. From 2012 until he became an executive officer, Mr. Dockman was Grace’s Vice President—Finance, Controller and Chief Accounting Officer. Mr. Dockman is Grace’s Principal Financial Officer and its Principal Accounting Officer.
Ms. Johnson joined Grace in 2021. From 2015 until Ms. Johnson became an executive officer of Grace, she was Deputy General Counsel and Assistant Corporate Secretary with McCormick & Company, Incorporated.
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PART II
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Except as provided below, the disclosure required by this Item appears in this Report in: Item 6 (Selected Financial Data) opposite the caption “Other Statistics—Common shareholders of record”; Item 8 (Financial Statements and Supplementary Information) in Note 14 (Shareholders’ Equity) and Note 21 (Quarterly Financial Information (Unaudited)) opposite the caption “Dividends declared per share” to the Consolidated Financial Statements; and Item 12 (Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters), and such disclosure is incorporated herein by reference.
COMPANY COMMON STOCK
The principal market for Company common stock is the New York Stock Exchange, under the symbol GRA.
DIVIDENDS ON COMPANY COMMON STOCK
On February 8, 2021, we announced that our Board of Directors had approved an increase to the annual cash dividend rate, from $1.20 to $1.32 per share of Company common stock. We expect to continue growing our dividend as part of our disciplined capital allocation strategy.
Although our credit agreement and indentures (as described in Item 8 (Financial Statements and Supplementary Data) under Note 5 (Debt) to the Consolidated Financial Statements and filed as an exhibit to this Report) contain certain restrictions on the payment of dividends on, and redemptions of, equity interests and other restricted payments, we believe that such restrictions do not currently materially limit our ability to pay dividends. Any determination to pay cash dividends in the future may be affected by business and market conditions, our views on potential future capital requirements, the restrictions noted above and those that may be imposed by applicable law, covenants contained in any agreements we may enter into in the future and changes in federal income tax law.
SHARE REPURCHASES
On February 8, 2017, we announced that our Board of Directors had authorized a share repurchase program of up to $250 million. On February 28, 2020, we announced that our Board of Directors had increased its share repurchase authorization to $250 million, including approximately $83 million remaining under the previously announced program. Repurchases under the programs may be made through one or more open market transactions at prevailing market prices; unsolicited or solicited privately negotiated transactions; accelerated share repurchase programs; or through any combination of the foregoing, or in such other manner as determined by management. The timing of the repurchases and the actual amount repurchased will depend on a variety of factors, including the market price of the Company’s shares, strategic priorities for the deployment of capital, and general market and economic conditions. We temporarily suspended our share repurchase program in early March 2020 in light of the COVID-19 pandemic. We expect to resume our share repurchase program in 2021.
During the three months ended December 31, 2020, there were no repurchases of Company common stock by or on behalf of Grace or any “affiliated purchaser,” as reflected in the following table:
| Total number of shares purchased (#) | Average price paid per share ($/share) | Total number of shares purchased as part of publicly announced plans or programs (#) | Approximate dollar value of shares that may yet be purchased under the plans or programs ($ in millions) | |||||||||||||||||||||||
| 10/1/2020 - 10/31/2020 | — | — | — | 235.0 | ||||||||||||||||||||||
| 11/1/2020 - 11/30/2020 | — | — | — | 235.0 | ||||||||||||||||||||||
| 12/1/2020 - 12/31/2020 | — | — | — | 235.0 | ||||||||||||||||||||||
| Total | — | — | — | |||||||||||||||||||||||
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STOCK PERFORMANCE GRAPH
The following information in Item 5 is not deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) or to the liabilities of Section 18 of the Exchange Act, and will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent Grace specifically incorporates it by reference into such a filing.
The line graph and table below compare the cumulative total shareholder return on Company common stock with the cumulative total return of companies on the Standard & Poor’s (“S&P”) 500 Stock Index, the S&P Composite 1500 Specialty Chemicals Index and S&P 1500 Diversified Chemicals Index. This graph and table assume the investment of $100 in Company common stock on December 31, 2015. Cash dividends paid in 2016 through 2020 are assumed reinvested for the graph and table below.
| 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | ||||||||||||||||||||||||||||||
| W. R. Grace & Co.(1) | $ | 100 | $ | 85 | $ | 89 | $ | 84 | $ | 92 | $ | 74 | |||||||||||||||||||||||
| S&P 500 Index | 100 | 112 | 136 | 130 | 171 | 203 | |||||||||||||||||||||||||||||
| S&P 1500 Specialty Chemicals | 100 | 112 | 140 | 132 | 156 | 181 | |||||||||||||||||||||||||||||
| S&P 1500 Diversified Chemicals | 100 | 115 | 150 | 114 | 101 | 136 | |||||||||||||||||||||||||||||
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(1)W. R. Grace & Co. stock value at December 31, 2015, reflects the adjusted post-Separation market value.
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Item 6. SELECTED FINANCIAL DATA
| (In millions, except per share amounts and shareholders) | 2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||||||||||
| Statement of Operations | |||||||||||||||||||||||||||||
| Net sales | $ | 1,729.8 | $ | 1,958.1 | $ | 1,932.1 | $ | 1,716.5 | $ | 1,598.6 | |||||||||||||||||||
Income (loss) from continuing operations(1)(2) | (1.7) | 126.7 | 166.8 | 10.4 | 107.0 | ||||||||||||||||||||||||
| Financial Position | |||||||||||||||||||||||||||||
| Total assets | 3,765.5 | 3,932.6 | 3,565.3 | 2,907.0 | 2,911.8 | ||||||||||||||||||||||||
| Debt payable after one year | 1,975.1 | 1,957.3 | 1,961.0 | 1,523.8 | 1,507.6 | ||||||||||||||||||||||||
| Shareholders’ equity | 234.5 | ||||||||||||||||||||||||||||