Grace Reports Second Quarter Results

W. R. Grace & Co. (NYSE: GRA) today announced its financial results for the second quarter ended June 30, 2010. Performance measures for the second quarter:

• Sales increased 4.1% overall and 15.1% in emerging regions compared with the prior year quarter, excluding sales of the ART joint venture from both periods. Sales in emerging regions were a record 33.4% of total Grace sales.
• As reported, sales for the second quarter were $685.0 million compared with $711.0 million in the prior year quarter, a 3.7% decrease. Sales for the prior year quarter include $53.0 million of sales of the ART joint venture deconsolidated in December 2009.
• Gross profit percentage increased to 35.7% from 34.2% in the prior year quarter and 34.8% in the 2010 first quarter.
• Adjusted EBIT increased 22.4% to $91.1 million from $74.4 million in the prior year quarter. Adjusted EPS was $0.75 compared with $0.53 in the prior year quarter.
• Grace net income increased to $51.0 million from $19.3 million in the prior year quarter. Grace’s diluted EPS was $0.69 compared with $0.26 in the prior year quarter.
• Adjusted Operating Cash Flow increased 20.5% to $101.3 million from $84.1 million in the prior year quarter.
• Adjusted EBIT Return on Invested Capital increased to 25.2% on a trailing four quarter basis from 17.9% on the same basis in the prior year quarter and 24.0% on the same basis in the first quarter of 2010.

“I am pleased with how our team is adapting to the dynamic conditions in our markets. Davison is executing well and has consistently improved its performance,” said Fred Festa, Grace’s Chairman, President and Chief Executive Officer. “We are rapidly refocusing our Construction Products business to capture growth in emerging regions and to improve profitability. Grace is well positioned to succeed in this challenging environment.”

Second Quarter Results

Sales increased 4.1% overall and 15.1% in emerging regions compared with the prior year quarter, excluding sales of the ART joint venture from both periods. The sales increase was due to higher sales volumes (4.5%) and improved pricing (0.1%), partially offset by unfavorable currency translation (0.5%). As reported, sales were $685.0 million compared with $711.0 million in the prior year quarter, a decrease of 3.7% reflecting the deconsolidation of ART in December 2009.

Gross profit percentage for the second quarter was 35.7% compared with 34.2% in the prior year quarter. The improvement was due primarily to better operating leverage, a decrease in certain raw materials and energy costs and lower factory overhead expenses. Gross profit percentage for the second quarter increased 0.9 percentage points compared with the 2010 first quarter due primarily to improved operating leverage in Grace Davison, partially offset by higher raw materials costs and lower prices in Grace Construction Products.

Adjusted EBIT (see note A to Chart 2) was $91.1 million in the second quarter, an increase of 22.4% compared with $74.4 million in the prior year quarter. The increase was due to the increase in sales volumes and the improvement in gross profit percentage from the prior year quarter. Adjusted EBIT margin was 13.3% compared with 10.5% in the prior year quarter and 10.5% in the 2010 first quarter.

Grace net income for the second quarter was $51.0 million, or $0.69 per diluted share, compared with $19.3 million, or $0.26 per diluted share, in the prior year quarter.

Adjusted Operating Cash Flow (see note A to Chart 2) was $101.3 million for the second quarter, an increase of 20.5% compared with $84.1 million in the prior year quarter. The increase is due primarily to increased Adjusted EBIT and improved working capital partially offset by increased capital expenditures.

On November 30, 2009, Grace completed the sale of a 5% interest in ART, its joint venture with Chevron Products Company. Grace deconsolidated ART’s results from its consolidated financial statements on a prospective basis effective December 1, 2009. As a result, Grace now reports its investment in ART and its portion of ART's income using the equity method of accounting. Grace’s second quarter 2009 sales and gross profit percentage excluding ART would have been $658.0 million and 35.2%, respectively. Adjusted EBIT is not affected by the deconsolidation of ART except for the effect of the reduction in Grace’s ownership from 55% to 50%.

Six Months Results

Sales increased 4.5% overall and 18.6% in emerging regions compared with the prior year period, excluding sales of the ART joint venture from both periods. The sales increase was due to higher sales volumes (3.1%), favorable currency translation (1.2%) and improved pricing (0.2%). As reported, sales were $1,299.9 million compared with $1,393.1 million in the prior year period, a decrease of 6.7% reflecting the deconsolidation of ART in December 2009.

Grace net income for the six months ended June 30, 2010 was $107.2 million, or $1.44 per diluted share, compared with a net loss of $19.6 million, or $0.27 per diluted share, in the prior year period.

Grace Davison

Segment Operating Income up 30.2%

Second quarter sales for the Grace Davison operating segment, which includes specialty catalysts and materials used in a wide range of industrial applications, increased 6.8% overall and 18.0% in emerging regions compared with the prior year quarter, excluding sales of the ART joint venture from both periods. The sales increase was due to higher sales volumes (7.7%) and improved pricing (0.6%), partially offset by unfavorable currency translation (1.5%). As reported, second quarter sales decreased 5.0% from $477.9 million in the prior year quarter.

Sales of this operating segment are reported by product group as follows:

• Refining Technologies – sales of catalysts and chemical additives used by petroleum refineries were $179.1 million in the second quarter, a decrease of 7.6% from the prior year quarter, excluding ART sales from both periods. Sales in this product group were unfavorably affected by lower sales volumes and unfavorable currency translation. As reported, second quarter sales decreased 27.5% from $246.9 million in the prior year quarter.

  
  Compared with the 2010 first quarter, refining utilization has increased, refining industry margins have improved and the difference between the cost of light and heavy crude oil has increased, all of which favorably impact the demand for refining catalysts. Sales in this product group increased $7.2 million, or 4.2%, from the 2010 first quarter.

• Materials Technologies – sales of engineered materials, coatings and sealants used in many industrial and packaging applications were $174.1 million in the second quarter, an increase of 18.5% from the prior year quarter. Sales in this product group were favorably impacted by improved customer demand for industrial and consumer goods in all regions, partially offset by unfavorable currency translation. Sales volumes grew strongest in emerging regions where sales increased 23.3% compared with the prior year quarter.
• Specialty Technologies – sales of highly specialized catalysts, materials and equipment used in unique or proprietary applications and markets were $100.7 million in the second quarter, an increase of 19.7% from the prior year quarter. The increase was due primarily to higher customer demand and the success of new polyolefin catalyst and discovery science products, partially offset by unfavorable currency translation. Sales in emerging regions, primarily the Middle East and China, increased 50.3% compared with the prior year quarter. Sales in the second quarter benefited from strong order patterns which are not expected to recur in the third quarter.

Segment operating income for the second quarter was $106.5 million compared with $81.8 million in the prior year quarter, a 30.2% increase due primarily to higher sales volumes, lower fixed and variable manufacturing costs, better operational productivity and higher income from ART. Gross profit percentage was 36.2% compared with 32.7% in the prior year quarter and 35.0% in the 2010 first quarter. Segment operating margin was 23.5% compared with 17.1% in the prior year quarter and 21.0% in the 2010 first quarter. Income from ART increased from the prior year quarter on strong sales volumes and improved gross profit percentage. Grace expects that ART sales and income will be significantly lower in the 2010 third quarter compared with the 2010 second quarter due to the uneven order pattern inherent in the hydroprocessing catalyst business.

Sales of the Grace Davison operating segment for the six months ended June 30, 2010 increased 8.2% compared with the prior year period, excluding sales of the ART joint venture from both periods. As reported, sales decreased 8.7% from $955.8 million in the prior year period. Gross profit percentage was 35.6% compared with 27.4% in the prior year period. Segment operating income of Grace Davison for the six months ended June 30, 2010 was $194.3 million, an increase of 59.5% compared with the prior year period. Segment operating margin was 22.3% compared with 12.7% in the prior year period. These results were due primarily to higher sales volumes, lower fixed and variable manufacturing costs, better operational productivity and higher income from ART.

Grace Construction Products

Sales down 0.9%; up 8.1% in emerging regions

Second quarter sales for the Grace Construction Products operating segment, which includes Specialty Construction Chemicals (SCC) products and Specialty Building Materials (SBM) products used in commercial, infrastructure and residential construction, were $231.1 million, down 0.9% from the prior year quarter due to lower sales volumes (1.3%) and lower prices (0.8%) partially offset by favorable currency translation (1.2%). The lower sales volumes were due primarily to lower SCC demand in North America and Europe, partially offset by higher global demand in specialty building materials. Sales in emerging regions increased 8.1% compared with the prior year quarter. Second quarter sales increased 17.5% compared with the 2010 first quarter due to higher sales volume (19.2%), partially offset by unfavorable currency translation (1.7%).

Construction spending continued to grow in the second quarter in emerging regions including Latin America, the Middle East, India, Southeast Asia, and China. In the United States and certain countries in Europe, however, overall construction spending decreased in the second quarter compared with the prior year quarter. Preliminary industry data indicates that second quarter commercial construction starts in the U.S. were down approximately 18% from the prior year quarter. U.S. Census Bureau data shows that second quarter residential housing starts decreased 6% from the prior year quarter.

Sales of this operating segment are reported by geographic region as follows:

• Americas - sales to customers in the Americas were $116.1 million in the second quarter, a decrease of 3.1% from the prior year quarter due primarily to weak customer demand in North America. Latin America sales increased due to improved pricing, new customer sales and better product penetration. Sales in the Americas increased $11.8 million, or 11.3%, from the 2010 first quarter.
• Europe – sales to customers in Western and Eastern Europe, the Middle East, Africa and India were $75.0 million in the second quarter, a decrease of 6.4% from the prior year quarter, due primarily to weak customer demand for SCC products. Sales in this region increased $15.7 million, or 26.5%, from the 2010 first quarter.
• Asia – sales to customers in Asia (excluding India), Australia and New Zealand were $40.0 million in the second quarter, an increase of 20.5% from the prior year quarter. Sales increased due primarily to higher sales volumes to new and existing customers. Sales in this region increased $6.9 million, or 20.8%, from the 2010 first quarter.

Gross profit percentage was 35.0% in the second quarter compared with 37.5% in the prior year quarter and 34.7% in the 2010 first quarter. The decrease in gross profit percentage compared with the prior year quarter is due primarily to higher raw materials and logistics costs, mix and lower prices, primarily in concrete admixtures. Segment operating income for the second quarter was $25.7 million compared with $34.0 million for the prior year quarter, a 24.4% decrease. The decrease was due primarily to lower sales volumes and the decrease in gross profit percentage. Segment operating margin was 11.1% compared with 14.6% in the prior year period.

The first quarter to second quarter seasonal growth in sales and earnings was less than the typical historical rate in North America and Europe due primarily to weaker customer demand. As a result, Grace has initiated a restructuring program that is expected to decrease operating expenses to a level more appropriate to a weaker customer demand environment. See Restructuring Expenses below.

As part of its emerging region growth strategy, Grace Construction Products is starting manufacturing operations in Saudi Arabia, and expects to begin operations at four additional sites this year.

Sales of the Grace Construction Products operating segment for the six months ended June 30, 2010 decreased 2.2% compared with the prior year period. Gross profit percentage was 34.9% compared with 35.0% in the prior year period. Segment operating income of Grace Construction Products was $41.3 million, a decrease of 11.0% compared with the prior year quarter. Segment operating margin was 9.7% compared with 10.6% in the prior year quarter. The lower sales and operating income were due primarily to continued weak demand for construction chemicals in North America and Europe, partially offset by increased sales in emerging regions.

Corporate Costs

Corporate costs increased $1.8 million in the second quarter compared with the prior year quarter.

Pension Expense

Defined benefit pension expense for the second quarter was $18.4 million compared with $20.5 million for the prior year quarter, a 10.2% decrease. The decrease in costs was due primarily to strong pension plan asset performance in the U.S. in 2009.

Restructuring Expenses

Grace recorded restructuring expenses of $1.2 million for severance and other costs related to restructuring actions implemented during the second quarter in Grace Construction Products. Grace expects to recognize approximately $5 million of additional restructuring expenses in the third and fourth quarters. Grace expects this restructuring program to result in more than $10 million of annualized cost savings by 2011.

Interest and Income Taxes

Interest expense was $11.0 million for the second quarter compared with $9.6 million for the prior year quarter. The annualized weighted average interest rate on pre-petition obligations for the second quarter was 3.7%.

Income taxes are recorded at a global effective rate of approximately 31% before considering the effects of certain non-deductible Chapter 11 expenses, changes in uncertain tax positions and other discrete adjustments. The global effective rate has increased compared with the 2009 rate of approximately 30% due to increased taxable income, especially in higher tax-rate jurisdictions.

Grace was not required to pay U.S. Federal income taxes in cash in 2009 since available tax deductions and credits fully offset U.S. taxable income. Available tax deductions and credits may not fully offset U.S. taxable income in 2010 and Grace may be required to pay U.S. Federal income taxes in cash, particularly if Grace does not emerge from Chapter 11 in 2010. Grace expects to generate significant net operating losses upon emergence that would fully offset U.S. taxable income in 2010. Income taxes in foreign jurisdictions are generally paid in cash. Taxes paid in cash for the six months ended June 30, 2010 were $13.6 million.

Cash Flow Performance Measure

Adjusted Operating Cash Flow (see note A to Chart 2) was $128.5 million for the six months ended June 30, 2010 compared with $151.9 million in the prior year period, which benefited from a significant reduction of net working capital. Capital expenditures were $42.2 million compared with $36.5 million for the prior year period. Grace is making strategic capital investments to add capacity for high-margin and high-growth products, including the previously announced polypropylene catalyst investment in Germany and the construction of multiple manufacturing sites for Grace Construction Products in emerging regions.

Chapter 11 Proceedings

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

On September 19, 2008, Grace filed a Joint Plan of Reorganization (as since amended, the “Plan”) as well as several associated documents, including a disclosure statement, with the Bankruptcy Court. See Grace’s most recent periodic reports filed with the SEC for a detailed description of the Plan.

Confirmation hearings on the Plan concluded in January 2010. Confirmation and consummation of the Plan are now subject to the findings of the Bankruptcy Court and the District Court for the District of Delaware and the satisfaction of other conditions set forth in the Plan, many of which are outside Grace’s control. Until such findings are made and the conditions to consummation of the Plan are satisfied or waived, the timing of Grace’s emergence from Chapter 11 will be uncertain. Grace is preparing to consummate the Plan as quickly as practicable following receipt of a confirmation order from the Bankruptcy Court and the District Court.

Grace’s asbestos-related litigation and environmental claims are subject to compromise under the Chapter 11 process. Grace has not adjusted its accounting for asbestos-related assets and liabilities to reflect the filing of the Plan. At this time, Grace is unable to determine a reasonable estimate of the value of certain consideration payable to the asbestos trusts under the Plan. These values will ultimately be determined on the effective date of the Plan. Grace expects to adjust its accounting for the Plan when the consideration can be measured and material conditions to the Plan are satisfied. Grace expects that such adjustments may be material to Grace’s consolidated financial position and results of operations.

2010 Outlook Update

Lower sales; Higher Adjusted EBIT

During the second quarter, the euro declined significantly in value compared with the U.S. dollar and on June 30, 2010 the euro was more than 10% below levels Grace expected at the beginning of 2010. A decline in the euro adversely affects Grace’s sales and Adjusted EBIT. Due to the significance of the euro decline to our results, Grace is updating its 2010 outlook.

As of July 22, 2010, Grace expects 2010 sales to be $2.60 to $2.65 billion, compared with $2.65 to $2.75 billion in our previous outlook, reflecting the decline in the euro and assuming a $1.23/euro exchange rate for the 2010 third and fourth quarters.

Grace expects 2010 Adjusted EBIT to be $300 to $315 million, compared with $284 to $314 million in our previous outlook. Grace expects 2010 Adjusted EBITDA to be $415 to $435 million, compared with $399 to $434 million in our previous outlook. Improved operating profitability is expected to more than offset the adverse affect of the weaker euro on earnings.

Grace is unable to make a reasonable estimate of the income effects of the consummation of the Plan because the value of certain consideration payable to the asbestos trusts under the Plan (primarily the deferred payments and the warrants) will not ultimately be determined until the effective date of the Plan. As a result, Grace is unable to make a complete estimate of Grace net income for 2010. When the Plan is consummated, Grace expects to record income from the reduction of asbestos related liabilities, interest expense on the initial payments to the asbestos trusts, expense relating to the costs of consummating the Plan (including exit financing costs) and the income tax effects of these items.

Investor Call

Grace will discuss these results during an investor conference call and webcast today starting at 12:00 p.m. ET. To access the call and webcast, interested participants should go to the Investor Information – Conference Calls portion of the company’s website, www.grace.com, and click on the webcast link.

Those without access to the Internet can participate by dialing +1.866.383.7989 (international callers dial +1.617.597.5328) and entering conference ID #41269186. Investors are advised to access the call at least ten minutes early for registration. An audio replay will be available from 3:00 p.m. ET on July 22 until 11:59 p.m. ET on July 29. The replay will be accessible by dialing +1.888.286.8010 (international callers dial +1.617.801.6888) and entering conference call ID #90278560.

Grace is a leading global supplier of catalysts and other products to petroleum refiners; catalysts for the manufacture of plastics; silica-based engineered and specialty materials for a wide range of industrial applications; sealants and coatings for food and beverage packaging, and specialty chemicals, additives and building materials for commercial and residential construction. Founded in 1854, Grace has operations in over 40 countries. For more information, visit Grace's web site at www.grace.com.

This announcement contains forward-looking statements, that is, information related to future, not past, events. Such information generally includes the words “believes,” “plans,” “intends,” “targets,” “will,” “expects,” “anticipates,” “continues”, “outlook” or similar expressions. For these statements, Grace claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Grace is subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements or that could cause other forward-looking information to prove incorrect.Factors that could cause actual results to materially differ from those contained in the forward-looking statements include: Grace's bankruptcy and proposed plan of reorganization, the availability of financing for Grace’s proposed plan of reorganization, Grace's legal proceedings (especially the environmental proceedings), the cost and availability of raw materials and energy, Grace’s unfunded pension liabilities, costs of environmental compliance, risks related to foreign operations, especially security, regulation and currency risks, and those factors set forth in Grace's most recent Annual Report on Form 10-K, quarterly report on Form 10-Q and current reports on Form 8-K, which have been filed with the Securities and Exchange Commission and are readily available on the Internet at www.sec.gov.Reported results should not be considered as an indication of future performance. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date thereof. Grace undertakes no obligation to publicly release any revisions to the forward-looking statements contained in this announcement, or to update them to reflect events or circumstances occurring after the date of this announcement.