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EX-10.1 - EXHIBIT 10.1 - W R GRACE & COexhibit101_20140930.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
ý
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2014
OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-13953
W. R. GRACE & CO.
Delaware
(State of Incorporation)
 
65-0773649
(I.R.S. Employer Identification No.)
7500 Grace Drive
Columbia, Maryland 21044
(410) 531-4000
(Address and phone number of principal executive offices)
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 ý    No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ý    No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý
 
Accelerated filer o
 
Non-accelerated filer o
 (Do not check if a
smaller reporting company)
 
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class
 
Outstanding at October 31, 2014
Common Stock, $0.01 par value per share
 
73,822,213 shares
 



TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
_______________________________________________________________________________
Unless the context otherwise indicates, in this Report the terms "Grace," "we," "us," "our" or "the Company" mean W. R. Grace & Co. and/or its consolidated subsidiaries and affiliates. Unless otherwise indicated, the contents of websites mentioned in this report are not incorporated by reference or otherwise made a part of this Report. GRACE®, the GRACE® logo and, except as otherwise indicated, the other product names used in the text of this Report are trademarks, service marks, and/or trade names of operating units of W. R. Grace & Co. or its affiliates and/or subsidiaries. UNIPOL® is a trademark of The Dow Chemical Company or an affiliated company of Dow. W. R. Grace & Co.-Conn., a subsidiary of the Company, and/or its affiliates are licensed to use the UNIPOL® trademark in the area of polypropylene.

2


PART I. FINANCIAL INFORMATION
Item 1.    Financial Statements
Review by Independent Registered Public Accounting Firm
With respect to the interim consolidated financial statements included in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, PricewaterhouseCoopers LLP, the company's independent registered public accounting firm, has applied limited procedures in accordance with professional standards for a review of such information. Their report on the interim consolidated financial statements, which follows, states that they did not audit and they do not express an opinion on the unaudited interim consolidated financial statements. Accordingly, the degree of reliance on their report on the unaudited interim consolidated financial statements should be restricted in light of the limited nature of the review procedures applied. This report is not considered a "report" within the meaning of Sections 7 and 11 of the Securities Act of 1933, and, therefore, the independent accountants' liability under Section 11 does not extend to it.

3


Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of W. R. Grace & Co.:

We have reviewed the accompanying consolidated balance sheet of W.R. Grace & Co. and its subsidiaries as of September 30, 2014, and the related consolidated statements of operations and comprehensive income for the three-month and nine-month periods ended September 30, 2014 and 2013 and the consolidated statements of cash flows and equity for the nine-month periods ended September 30, 2014 and 2013. These interim financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2013, and the related consolidated statements of operations, comprehensive income, equity (deficit), and of cash flows for the year then ended (not presented herein), and in our report dated February 27, 2014, we expressed an unqualified opinion on those consolidated financial statements with an explanatory paragraph relating to the Company's emergence from bankruptcy and change in the manner in which it accounts for defined benefit pension plans. In our opinion, the information set forth in the accompanying consolidated balance sheet information as of December 31, 2013, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.


/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Baltimore, Maryland
November 6, 2014


4


W. R. Grace & Co. and Subsidiaries
Consolidated Statements of Operations (unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In millions, except per share amounts)
2014
 
2013
 
2014
 
2013
Net sales
$
856.4

 
$
771.3

 
$
2,438.9

 
$
2,284.0

Cost of goods sold
528.6

 
488.9

 
1,521.0

 
1,441.7

Gross profit
327.8

 
282.4

 
917.9

 
842.3

Selling, general and administrative expenses
147.7

 
129.7

 
428.5

 
405.1

Research and development expenses
20.5

 
15.0

 
61.3

 
48.5

Interest expense and related financing costs
14.7

 
10.7

 
37.0

 
32.1

Interest accretion on deferred payment obligations
43.7

 

 
65.5

 

Gain on termination of postretirement plans
(23.7
)
 

 
(31.6
)
 

Chapter 11 expenses, net of interest income
1.7

 
2.9

 
10.8

 
11.0

Equity in earnings of unconsolidated affiliate
(6.4
)
 
(2.8
)
 
(13.2
)
 
(17.1
)
Other expense, net
10.0

 
6.0

 
30.9

 
17.8

Total costs and expenses
208.2

 
161.5

 
589.2

 
497.4

Income before income taxes
119.6

 
120.9

 
328.7

 
344.9

Provision for income taxes
(44.6
)

(43.6
)
 
(66.7
)
 
(117.4
)
Net income
75.0

 
77.3

 
262.0

 
227.5

Less: Net income attributable to noncontrolling interests
(0.5
)
 
(0.3
)
 
(1.2
)
 
(1.1
)
Net income attributable to W. R. Grace & Co. shareholders
$
74.5

 
$
77.0

 
$
260.8

 
$
226.4

Earnings Per Share Attributable to W. R. Grace & Co. Shareholders
 
 
 
 
 
 
 
Basic earnings per share:
 
 
 
 
 
 
 
Net income attributable to W. R. Grace & Co. shareholders
$
1.00

 
$
1.00

 
$
3.44

 
$
2.97

Weighted average number of basic shares
74.7


76.7

 
75.9

 
76.2

Diluted earnings per share:
 
 
 
 
 
 
 
Net income attributable to W. R. Grace & Co. shareholders
$
0.99

 
$
0.99

 
$
3.40

 
$
2.92

Weighted average number of diluted shares
75.6

 
77.9

 
76.8

 
77.6


The Notes to Consolidated Financial Statements are an integral part of these statements.

5


W. R. Grace & Co. and Subsidiaries
Consolidated Statements of Comprehensive Income (unaudited)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In millions)
2014
 
2013
 
2014
 
2013
Net income
$
75.0

 
$
77.3

 
$
262.0

 
$
227.5

Other comprehensive income (loss):
 
 
 
 
 
 
 
Defined benefit pension and other postretirement plans, net of income taxes
(18.6
)
 
0.2

 
3.2

 
3.4

Currency translation adjustments
(12.7
)
 
4.8

 
(7.5
)
 
(18.5
)
Gain (loss) from hedging activities, net of income taxes
0.7

 

 
(1.0
)
 
(0.4
)
Other than temporary impairment of investment
0.8

 

 
0.8

 

Gain (loss) on securities available for sale, net of income taxes
0.4

 

 
(0.1
)
 

Total other comprehensive income (loss) attributable to noncontrolling interests
0.7

 
(0.7
)
 
0.8

 
(0.9
)
Total other comprehensive income (loss)
(28.7
)
 
4.3

 
(3.8
)
 
(16.4
)
Comprehensive income
46.3

 
81.6

 
258.2

 
211.1

Less: comprehensive (income) loss attributable to noncontrolling interests
(1.2
)
 
0.4

 
(2.0
)
 
(0.2
)
Comprehensive income attributable to W. R. Grace & Co. shareholders
$
45.1

 
$
82.0

 
$
256.2

 
$
210.9


The Notes to Consolidated Financial Statements are an integral part of these statements.

6


W. R. Grace & Co. and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)
 
Nine Months Ended September 30,
(In millions)
2014
 
2013
OPERATING ACTIVITIES
 
 
 
Net income
$
262.0

 
$
227.5

Reconciliation to net cash (used for) provided by operating activities:
 
 
 
Depreciation and amortization
102.3

 
91.8

Equity in earnings of unconsolidated affiliate
(13.2
)
 
(17.1
)
Dividends received from unconsolidated affiliate
11.2

 
2.8

Chapter 11 expenses, net of interest income
10.8

 
11.0

Chapter 11 expenses paid
(29.0
)
 
(11.2
)
Asbestos and bankruptcy related charges, net
6.8

 

Cash paid to resolve liabilities subject to Chapter 11
(1,315.6
)
 

Cash paid to settle deferred payment obligation
(632.0
)
 

Provision for income taxes
66.7

 
117.4

Income taxes paid, net of refunds
(21.7
)
 
(65.6
)
Excess tax benefits from stock-based compensation
(0.7
)
 
33.7

Interest accretion on deferred payment obligations
65.5

 

Interest accrued on bonds
2.2

 

Interest accrued on credit arrangements
3.9

 

Interest accrued on pre-petition liabilities subject to compromise
3.4

 
28.1

Defined benefit pension expense
19.5

 
22.9

Payments under defined benefit pension arrangements
(94.1
)
 
(63.6
)
Expenditures for environmental remediation
(9.7
)
 
(11.2
)
Changes in assets and liabilities, excluding effect of currency translation:
 
 
 
Trade accounts receivable
(51.4
)
 
5.2

Inventories
(49.9
)
 
(35.2
)
Accounts payable
18.6

 
6.8

All other items, net
8.0

 
(0.7
)
Net cash (used for) provided by operating activities
(1,636.4
)
 
342.6

INVESTING ACTIVITIES
 
 
 
Capital expenditures
(121.7
)
 
(117.9
)
Businesses acquired, net of cash acquired

 
(15.8
)
Transfer to short-term investments

 
(500.0
)
Transfer from restricted cash and cash equivalents
395.4

 
12.4

Proceeds from sale of business

 
1.8

Other investing activities
5.7

 
4.2

Net cash provided by (used for) investing activities
279.4

 
(615.3
)
FINANCING ACTIVITIES
 
 
 
Borrowings under credit arrangements
1,114.4

 
43.0

Repayments under credit arrangements
(750.0
)
 
(46.0
)
Proceeds from issuance of bonds
1,000.0

 

Payments for debt financing costs
(38.6
)
 

Proceeds from exercise of stock options
17.6

 
30.9

Payments for repurchase of common stock
(334.4
)
 

Excess tax benefits from stock-based compensation
0.7

 
(33.7
)
Other financing activities
0.2

 
6.1

Net cash provided by financing activities
1,009.9

 
0.3

Effect of currency exchange rate changes on cash and cash equivalents
(9.7
)
 
(9.8
)
Decrease in cash and cash equivalents
(356.8
)
 
(282.2
)
Cash and cash equivalents, beginning of period
964.8

 
1,336.9

Cash and cash equivalents, end of period
$
608.0

 
$
1,054.7


The Notes to Consolidated Financial Statements are an integral part of these statements.

7


W. R. Grace & Co. and Subsidiaries
Consolidated Balance Sheets (unaudited)
(In millions, except par value and shares)
September 30,
2014
 
December 31,
2013
ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
608.0

 
$
964.8

Restricted cash and cash equivalents

 
395.4

Trade accounts receivable, less allowance of $6.2 (2013—$6.0)
527.3

 
481.8

Inventories
337.3

 
295.3

Deferred income taxes
227.3

 
58.1

Other current assets
100.0


99.0

Total Current Assets
1,799.9

 
2,294.4

Properties and equipment, net of accumulated depreciation and amortization of $1,897.4 (2013—$1,876.8)
826.4

 
829.9

Goodwill
460.2

 
457.5

Technology and other intangible assets, net
296.2

 
315.5

Deferred income taxes
587.9

 
845.9

Asbestos-related insurance

 
500.0

Overfunded defined benefit pension plans
44.0

 
16.7

Investment in unconsolidated affiliate
108.8

 
96.2

Other assets
57.0


40.0

Total Assets
$
4,180.4

 
$
5,396.1

LIABILITIES AND EQUITY
 
 
 
Liabilities Not Subject to Compromise
 
 
 
Current Liabilities
 
 
 
Debt payable within one year
$
97.7

 
$
81.1

Accounts payable
298.5

 
262.5

PI warrant liability
490.0

 

Other current liabilities
344.1

 
292.0

Total Current Liabilities
1,230.3

 
635.6

Debt payable after one year
1,929.3

 
29.6

Deferred income taxes
16.8

 
18.2

Income tax contingencies
18.9

 
5.0

Underfunded and unfunded defined benefit pension plans
328.9

 
299.6

Other liabilities
131.8

 
60.8

Total Liabilities Not Subject to Compromise
3,656.0

 
1,048.8

Liabilities Subject to Compromise—Note 2

 
3,776.1

Total Liabilities
3,656.0

 
4,824.9

Commitments and Contingencies—Note 9

 

Equity
 
 
 
Common stock issued, par value $0.01; 300,000,000 shares authorized; outstanding: 74,207,115 (2013—77,046,143)
0.7

 
0.8

Paid-in capital
538.8

 
533.4

Retained earnings
276.6

 
15.8

Treasury stock, at cost: shares: 3,240,132 (2013—0)
(309.6
)
 

Accumulated other comprehensive income
6.0

 
10.6

Total W. R. Grace & Co. Shareholders' Equity
512.5

 
560.6

Noncontrolling interests
11.9

 
10.6

Total Equity
524.4

 
571.2

Total Liabilities and Equity
$
4,180.4

 
$
5,396.1


The Notes to Consolidated Financial Statements are an integral part of these statements.

8


W. R. Grace & Co. and Subsidiaries
Consolidated Statements of Equity (unaudited)
(In millions)
Common
Stock
and
Paid-in
Capital
 
Retained
Earnings
(Accumulated Deficit)
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Income
 
Noncontrolling
Interests
 
Total
Equity
Balance, December 31, 2012
$
537.3

 
$
(240.3
)
 
$
(16.8
)
 
$
29.7

 
$
9.9

 
$
319.8

Net income

 
226.4

 

 

 
1.1

 
227.5

Stock based compensation
10.7

 

 

 

 

 
10.7

Exercise of stock options
15.8

 

 
15.1

 

 

 
30.9

Tax benefit related to stock plans
(33.7
)
 

 

 

 

 
(33.7
)
Shares issued
0.8

 

 

 

 

 
0.8

Other comprehensive loss

 

 

 
(15.5
)
 
(0.9
)
 
(16.4
)
Balance, September 30, 2013
$
530.9

 
$
(13.9
)
 
$
(1.7
)
 
$
14.2

 
$
10.1

 
$
539.6

Balance, December 31, 2013
$
534.2

 
$
15.8

 
$

 
$
10.6

 
$
10.6

 
$
571.2

Net income

 
260.8

 

 

 
1.2

 
262.0

Repurchase of common stock

 

 
(334.4
)
 

 

 
(334.4
)
Purchase of noncontrolling interest

 

 

 

 
(0.7
)
 
(0.7
)
Stock based compensation
9.9

 

 

 

 

 
9.9

Exercise of stock options
(7.2
)
 

 
24.8

 

 

 
17.6

Tax benefit related to stock plans
0.7

 

 

 

 

 
0.7

Shares issued
1.9

 

 

 

 

 
1.9

Other comprehensive income (loss)

 

 

 
(4.6
)
 
0.8

 
(3.8
)
Balance, September 30, 2014
$
539.5

 
$
276.6

 
$
(309.6
)
 
$
6.0

 
$
11.9

 
$
524.4


The Notes to Consolidated Financial Statements are an integral part of these statements.

9


Notes to Consolidated Financial Statements
1. Basis of Presentation and Summary of Significant Accounting and Financial Reporting Policies
W. R. Grace & Co., through its subsidiaries, is engaged in specialty chemicals and specialty materials businesses on a global basis through three operating segments: Grace Catalysts Technologies, which includes catalysts and related products and technologies used in refining, petrochemical and other chemical manufacturing applications; Grace Materials Technologies, which includes packaging technologies and engineered materials used in consumer, industrial, coatings, and pharmaceutical applications; and Grace Construction Products, which includes specialty construction chemicals and specialty building materials used in commercial, infrastructure and residential construction.
W. R. Grace & Co. conducts all of its business through a single wholly owned subsidiary, W. R. Grace & Co.—Conn. ("Grace—Conn."). Grace—Conn. owns all of the assets, properties and rights of W. R. Grace & Co. on a consolidated basis, either directly or through subsidiaries.
As used in these notes, the term "Company" refers to W. R. Grace & Co. The term "Grace" refers to the Company and/or one or more of its subsidiaries and, in certain cases, their respective predecessors.
Chapter 11 Proceedings    On April 2, 2001 (the "Filing Date"), Grace and 61 of its United States subsidiaries and affiliates filed voluntary petitions for reorganization (the "Filing") 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 outstanding asbestos personal injury and property damage claims, including class-action lawsuits alleging damages from Zonolite® Attic Insulation ("ZAI"), a former Grace attic insulation product. In 2008, Grace and other parties filed a joint plan of reorganization with the Bankruptcy Court (as subsequently amended, the "Joint Plan"). Following the confirmation of the Joint Plan in 2011 by the Bankruptcy Court and in 2012 by a U.S. District Court, and the resolution of all appeals, Grace emerged from bankruptcy on February 3, 2014. (See Note 2 for Chapter 11 information.)
Basis of Presentation    The interim Consolidated Financial Statements presented herein are unaudited and should be read in conjunction with the Consolidated Financial Statements presented in the Company's 2013 Annual Report on Form 10-K. Such interim Consolidated Financial Statements reflect all adjustments that, in the opinion of management, are necessary for a fair statement of the results of the interim periods presented; all such adjustments are of a normal recurring nature except for the impacts of adopting new accounting standards as discussed below. All significant intercompany accounts and transactions have been eliminated.
The results of operations for the nine-month interim period ended September 30, 2014, are not necessarily indicative of the results of operations for the year ending December 31, 2014.
Use of Estimates    The preparation of financial statements in conformity with U.S. generally accepted accounting principles (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements, and the reported amounts of revenues and expenses for the periods presented. Actual amounts could differ from those estimates, and the differences could be material. Changes in estimates are recorded in the period identified. Grace's accounting measurements that are most affected by management's estimates of future events are:
Contingent liabilities, which depend on an assessment of the probability of loss and an estimate of ultimate resolution cost, such as litigation (see Note 2), income taxes (see Note 6), and environmental remediation (see Note 9);
Pension and postretirement liabilities that depend on assumptions regarding participant life spans, future inflation, discount rates and total returns on invested funds (see Note 7); and
Realization values of net deferred tax assets, which depend on projections of future taxable income (see Note 6).
Currency Translation    On February 8, 2013, the Venezuelan government announced that, effective February 13, 2013, the official exchange rate of the bolivar to U.S. dollar would devalue from 4.3 to 6.3. As a

10



Notes to Consolidated Financial Statements (Continued)

1. Basis of Presentation and Summary of Significant Accounting and Financial Reporting Policies (Continued)

result of this currency devaluation, Grace incurred a charge to net income of $8.5 million in the 2013 first quarter. Of this amount, $1.6 million was included in segment operating income.
Licensing Revenue Recognition    Grace typically bundles the license, the basic process design package, and training and consulting-type services into one fixed price contract. The fixed price contract revenue is recognized on a straight-line basis over the period of performance of the contract, except for contingent revenue associated with a final performance guarantee. Revenue associated with the performance guarantee is considered contingent; therefore, revenue is recognized when customer acceptance is obtained. Other services that are sold in connection with license arrangements and billed on a variable basis, and process control software, generally qualify for separate accounting, with revenue recognized as earned.
Reclassifications and Revisions    Certain amounts in prior years' Consolidated Financial Statements have been reclassified to conform to the current year presentation. Such reclassifications have not materially affected previously reported amounts in the Consolidated Financial Statements.
Certain pension costs previously reported as a separate line item in the Consolidated Statements of Operations are now reported in "cost of goods sold" and in "selling, general and administrative expenses" based upon the functions of the employees to which the pension costs relate. Grace has revised its accounting such that a portion of the defined benefit pension expense has been and will continue to be capitalized into inventories prior to being reported in "cost of goods sold." Grace believes that the change in classification of defined benefit pension costs and the change to inventory capitalization are not material to all prior periods.
Certain prior period amounts related to borrowings and repayments under credit arrangements reported as financing activities on the Consolidated Statements of Cash Flows have been revised. These amounts were originally presented on a net basis and are now being presented on a gross basis. Grace concluded that these revisions were not material to the prior-year Consolidated Financial Statements.
Change in Accounting Principle Regarding Pension Benefits    During 2013, Grace changed its method of accounting for actuarial gains and losses relating to its global defined benefit pension plans to a more preferable method under U.S. GAAP. Grace's new method of accounting is referred to as "mark-to-market accounting" and includes immediate recognition of actuarial gains and losses in the period in which they occur. Under Grace's previous accounting method, such amounts were deferred and amortized. In addition, Grace will no longer update the balance sheet funded status of its pension plans each quarter for changes in discount rates and actual returns on assets, but rather will perform such update annually as of the end of each year. Should a significant event occur, Grace's pension obligation and plan assets would be remeasured at an interim period, and the gains or losses on remeasurement would be recognized in that period. This new accounting method was adopted in the 2013 fourth quarter and retrospectively applied to Grace's financial results for all periods presented.
Under mark-to-market accounting, Grace's pension costs consist of two elements: 1) ongoing costs recognized quarterly, which include service and interest costs, expected returns on plan assets, and amortization of prior service costs/credits; and 2) mark-to-market gains and losses recognized annually in the fourth quarter resulting from changes in actuarial assumptions, such as discount rates and the difference between actual and expected returns on plan assets.
In order to better reflect the nature of pension costs in Grace's operating results, Grace also retrospectively revised the classification of defined benefit pension expense. See "Reclassifications and Revisions" above for further discussion related to these revisions.
These changes have been reported through retrospective application of the new policies to all periods presented. The impacts of all adjustments made to the financial statements are summarized below:

11



Notes to Consolidated Financial Statements (Continued)

1. Basis of Presentation and Summary of Significant Accounting and Financial Reporting Policies (Continued)

Consolidated Statements of Operations
 
Three months ended
September 30, 2013
(In millions, except per share amounts)
Previously Reported
 
Revised
 
Effect of Change
Cost of goods sold
$
486.6

 
$
488.9

 
$
2.3

Gross profit
284.7

 
282.4

 
(2.3
)
Selling, general and administrative expenses
125.2

 
129.7

 
4.5

Defined benefit pension expense
18.2

 

 
(18.2
)
Total costs and expenses
175.2

 
161.5

 
(13.7
)
Income before income taxes
109.5

 
120.9

 
11.4

Provision for income taxes
(39.8
)
 
(43.6
)
 
(3.8
)
Net income
69.7

 
77.3

 
7.6

Net income attributable to W. R. Grace & Co. shareholders
69.4

 
77.0

 
7.6

Basic earnings per share
 
 
 
 
 
Net income attributable to W. R. Grace & Co. shareholders
0.90

 
1.00

 
0.10

Diluted earnings per share
 
 
 
 
 
Net income attributable to W. R. Grace & Co. shareholders
0.89

 
0.99

 
0.10

 
Nine months ended
September 30, 2013
(In millions, except per share amounts)
Previously Reported
 
Revised
 
Effect of Change
Cost of goods sold
$
1,432.2

 
$
1,441.7

 
$
9.5

Gross profit
851.8

 
842.3

 
(9.5
)
Selling, general and administrative expenses
391.7

 
405.1

 
13.4

Defined benefit pension expense
54.9

 

 
(54.9
)
Total costs and expenses
538.9

 
497.4

 
(41.5
)
Income before income taxes
312.9

 
344.9

 
32.0

Provision for income taxes
(106.7
)
 
(117.4
)
 
(10.7
)
Net income
206.2

 
227.5

 
21.3

Net income attributable to W. R. Grace & Co. shareholders
205.1

 
226.4

 
21.3

Basic earnings per share
 
 
 
 
 
Net income attributable to W. R. Grace & Co. shareholders
2.69

 
2.97

 
0.28

Diluted earnings per share
 
 
 
 
 
Net income attributable to W. R. Grace & Co. shareholders
2.64

 
2.92

 
0.28


12



Notes to Consolidated Financial Statements (Continued)

1. Basis of Presentation and Summary of Significant Accounting and Financial Reporting Policies (Continued)

Consolidated Statements of Cash Flows
 
Nine months ended
September 30, 2013
(In millions)
Previously Reported
 
Revised
 
Effect of Change
Cash flows from operating activities:
 

 
 

 
 

Net income
$
206.2

 
$
227.5

 
$
21.3

Provision for income taxes
106.7

 
117.4

 
10.7

Defined benefit pension expense
54.9

 
22.9

 
(32.0
)
Inventories
(37.7
)
 
(35.2
)
 
2.5

All other items, net(1)
(7.1
)
 
(9.6
)
 
(2.5
)
_______________________________________________________________________________
(1)
Includes only those items which relate to the change in accounting method to mark-to-market accounting.
Consolidated Statements of Equity
 
September 30, 2013
(In millions)
Previously Reported
 
Revised
 
Effect of Change
Retained earnings (Accumulated Deficit)
 

 
 

 
 

Beginning balance
$
395.2

 
$
(240.3
)
 
$
(635.5
)
Net income
205.1

 
226.4

 
21.3

Ending balance
600.3

 
(13.9
)
 
(614.2
)
 
 
 
 
 
 
Accumulated other comprehensive income (loss)
 
 
 
 
 
Beginning balance
$
(607.3
)
 
$
29.7

 
$
637.0

Other comprehensive income (loss)
79.6

 
(15.5
)
 
(95.1
)
Ending balance
(527.7
)
 
14.2

 
541.9

 
 
 
 
 
 
Total equity
$
611.9

 
$
539.6

 
$
(72.3
)
Consolidated Statements of Comprehensive Income
 
Three months ended
September 30, 2013
(In millions)
Previously Reported
 
Revised
 
Effect of Change
Net income
$
69.7

 
$
77.3

 
$
7.6

Defined benefit pension and other postretirement plans, net of income taxes
28.8

 
0.2

 
(28.6
)
Currency translation adjustments
5.0

 
4.8

 
(0.2
)
Total other comprehensive income (loss)
33.1

 
4.3

 
(28.8
)
Comprehensive income
102.8

 
81.6

 
(21.2
)
Comprehensive income attributable to W. R. Grace & Co. shareholders
103.2

 
82.0

 
(21.2
)

13



Notes to Consolidated Financial Statements (Continued)

1. Basis of Presentation and Summary of Significant Accounting and Financial Reporting Policies (Continued)

 
Nine months ended
September 30, 2013
(In millions)
Previously Reported
 
Revised
 
Effect of Change
Net income
$
206.2

 
$
227.5

 
$
21.3

Defined benefit pension and other postretirement plans, net of income taxes
98.3

 
3.4

 
(94.9
)
Currency translation adjustments
(18.3
)
 
(18.5
)
 
(0.2
)
Total other comprehensive income (loss)
78.7

 
(16.4
)
 
(95.1
)
Comprehensive income
284.9

 
211.1

 
(73.8
)
Comprehensive income attributable to W. R. Grace & Co. shareholders
284.7

 
210.9

 
(73.8
)
Effect of New Accounting Standards    In July 2013, the FASB issued ASU 2013-11 "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists." This update is intended to improve the consistency surrounding the presentation of an unrecognized tax benefit when a net operating loss carryforward exists, requiring the unrecognized tax benefit to` be presented as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. The new requirements are effective for fiscal years beginning after December 15, 2013, and for interim periods within those fiscal years, with early adoption permitted. Grace adopted this standard for the 2014 first quarter, and it did not have a material effect on the Consolidated Financial Statements.
In May 2014, the FASB issued ASU 2014-09 "Revenue from Contracts with Customers." This update is intended to remove inconsistencies and weaknesses in revenue requirements; provide a more robust framework for addressing revenue issues; improve comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets; provide more useful information to users of financial statements through improved disclosure requirements; and simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer. The new requirements are effective for fiscal years beginning after December 15, 2016, and for interim periods within those fiscal years, with early adoption not permitted. Grace is currently evaluating its effect on the Consolidated Financial Statements and will adopt this standard when it becomes applicable.
2. Chapter 11 and Joint Plan of Reorganization
On April 2, 2001, Grace and 61 of its United States subsidiaries and affiliates filed voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code. The cases were consolidated under case number 01-01139 (the "Chapter 11 Cases"). Grace's non-U.S. subsidiaries and certain of its U.S. subsidiaries were not included in the filing.
In September 2008, Grace and other parties filed the Joint Plan with the Bankruptcy Court to address all pending and future asbestos-related claims and all other pre-petition claims as outlined therein. On January 31, 2011, the Bankruptcy Court issued an order (the "Confirmation Order") confirming the Joint Plan. On January 31, 2012, the United States District Court for the District of Delaware (the "District Court") issued an order affirming the Confirmation Order and confirming the Joint Plan in its entirety. On February 3, 2014 (the "Effective Date"), the U.S. Court of Appeals for the Third Circuit (the "Third Circuit") dismissed the sole remaining appeal challenging the Confirmation Order and the Joint Plan became effective.
Under the Joint Plan, two asbestos trusts were established and funded under Section 524(g) of the Bankruptcy Code. The Confirmation Order contains a channeling injunction which provides that all pending and future asbestos-related personal injury claims and demands ("PI Claims") have been channeled for resolution to an asbestos personal injury trust (the "PI Trust") and all pending and future asbestos-related property damage claims and demands ("PD Claims"), including PD Claims related to Grace’s former attic insulation product ("ZAI PD Claims"), have been channeled to a separate asbestos property damage trust (the "PD Trust"). Canadian ZAI PD Claims have been channeled to a separate Canadian claims fund. The trusts are the sole recourse for holders

14



Notes to Consolidated Financial Statements (Continued)

2. Chapter 11 and Joint Plan of Reorganization (Continued)

of asbestos-related claims; the channeling injunctions prohibit holders of asbestos-related claims from asserting such claims directly against Grace.
Under the terms of the Joint Plan, claims under the Chapter 11 Cases were satisfied as follows:
Asbestos-Related Personal Injury Claims    Asbestos personal injury claimants allege adverse health effects from exposure to asbestos-containing products formerly manufactured by Grace.
As of the Filing Date, 129,191 PI Claims were pending against Grace. Grace believes that a substantial number of additional PI Claims would have been received between the Filing Date and the Effective Date had such PI Claims not been stayed by the Bankruptcy Court.
Under the Joint Plan, all PI Claims were channeled to the PI Trust for resolution. The PI Trust will use specified trust distribution procedures to satisfy allowed PI Claims.
On the Effective Date, the PI Trust was funded with:
$557.7 million in cash from Grace (includes $464.1 million of cash from Grace and $93.6 million of cash from insurance proceeds that were held in escrow);
A warrant to acquire 10 million shares of Company common stock at an exercise price of $17.00 per share, expiring one year after the Effective Date (the "PI Warrant") (this obligation is expected to be settled in cash with the PI Trust as discussed below);
Rights to all proceeds under all of Grace's insurance policies that are available for payment of PI Claims;
$42.1 million in cash from a subsidiary of Fresenius AG, pursuant to the terms of a settlement agreement resolving asbestos-related, successor liability and fraudulent transfer claims against Fresenius; and
$856.8 million in cash and 18 million shares of Sealed Air Corporation common stock paid by Cryovac, Inc., a wholly owned subsidiary of Sealed Air, pursuant to the terms of a settlement agreement resolving asbestos-related, successor liability and fraudulent transfer claims against Cryovac and Sealed Air.
Under the Joint Plan Grace was also obligated to make deferred payments to the PI Trust of $110 million per year for 5 years beginning in 2019, and $100 million per year for 10 years beginning in 2024, which obligation was secured by the Company's obligation to issue 77,372,257 shares of Company common stock to the asbestos trusts in the event of default, subject to customary anti-dilution provisions. However, in August 2014, Grace and the PI Trust entered into an agreement to settle the deferred payment obligation in exchange for a cash payment of $632 million. Grace made such payment on September 18, 2014, and has no further obligation to make any additional payments to the PI Trust in respect of the deferred payment obligation.
Asbestos-Related Property Damage Claims    The plaintiffs in asbestos property damage lawsuits generally seek to have the defendants pay for the cost of removing, containing or repairing the asbestos-containing materials in commercial and public buildings. Various factors can affect the merit and value of PD Claims, including legal defenses, product identification, the amount and type of product involved, the age, type, size and use of the building, the legal status of the claimant, the jurisdictional history of prior cases, the court in which the case is pending, and the difficulty of asbestos abatement, if necessary.
Several class action lawsuits also were filed on behalf of homeowners alleging damage from ZAI. Based on Grace's investigation of the claims described in these lawsuits, and testing and analysis of this product by Grace and others, Grace believes that ZAI was and continues to be safe for its intended purpose and poses little or no threat to human health. The plaintiffs in the ZAI lawsuits dispute Grace's position on the safety of ZAI. In December 2006 the Bankruptcy Court issued an opinion and order holding that, although ZAI is contaminated with asbestos and can release asbestos fibers when disturbed, there is no unreasonable risk of harm from ZAI.

15



Notes to Consolidated Financial Statements (Continued)

2. Chapter 11 and Joint Plan of Reorganization (Continued)

At Grace's request, in July 2008, the Bankruptcy Court established a claims bar date for U.S. ZAI PD Claims and approved a related notice program that required any person with a U.S. ZAI PD Claim to submit an individual proof of claim no later than October 31, 2008. Approximately 17,960 U.S. ZAI PD Claims were filed prior to the October 31, 2008, claims bar date and, as of the Effective Date, an additional 1,310 U.S. ZAI PD Claims were filed.
Under the Joint Plan, all PD Claims have been channeled to the PD Trust for resolution. The PD Trust contains two accounts, the PD Account and the ZAI PD Account. U.S. ZAI PD Claims are to be paid from the ZAI PD Account and non-ZAI PD Claims are to be paid from the PD Account. Canadian ZAI PD Claims are to be paid by a separate fund established in Canada. Each account has a separate trustee and the assets of the accounts may not be commingled.
PD Account
On the Effective Date, the PD Account of the PD Trust was funded with $39.9 million in cash from Grace and $111.4 million in cash from Cryovac and Fresenius to pay allowed non-ZAI PD Claims settled as of the Effective Date, and CDN$8.6 million in cash from Grace to fund the Canadian ZAI PD Claims fund.
Following the Effective Date, unresolved non-ZAI PD Claims are to be litigated in the Bankruptcy Court and any future non-ZAI PD Claims are to be litigated in a federal district court, in each case pursuant to procedures to be approved by the Bankruptcy Court. To the extent any such PD Claims are determined to be allowed claims, they are to be paid in cash by the PD Trust. Grace is obligated to make a payment to the PD Trust every six months in the amount of any non-ZAI PD Claims allowed during the preceding six months plus interest (if applicable) and, except for the first six months, the amount of PD Trust expenses for the preceding six months (the "PD Obligation"). The aggregate amount to be paid under the PD Obligation is not capped and Grace may be obligated to make additional payments to the PD Account in respect of the PD Obligation. Grace has accrued for those unresolved non-ZAI PD Claims that it believes are probable and estimable. Grace has not accrued for other unresolved or unasserted non-ZAI PD Claims, as it does not believe that payment on any such claims is probable. As of September 30, 2014, Grace paid $0.4 million to the PD Trust since the Effective Date to fund the payment of two non-ZAI PD Claims that were filed in the Chapter 11 Cases but not resolved until after the Effective Date.
On the Effective Date, the PD Trust contributed CDN$8.6 million to a separate Canadian ZAI PD Claims fund through which Canadian ZAI PD Claims are to be resolved. Grace has no continuing or contingent obligations to make additional payments into this fund.
ZAI PD Account
On the Effective Date, the ZAI PD Account was funded with $34.4 million in cash from Cryovac and Fresenius.
Grace is obligated to make a payment of $30 million in cash to the ZAI PD Account on the third anniversary of the Effective Date, and Grace is obligated to make up to 10 contingent deferred payments of $8 million per year to the ZAI PD Account during the 20-year period beginning on the fifth anniversary of the Effective Date, with each such payment due only if the assets of the ZAI PD Account fall below $10 million during the preceding year. The amounts that Grace will be obligated to pay to the ZAI PD Account under the Joint Plan are capped amounts. Grace is not obligated to make additional payments to the PD Trust in respect of the ZAI PD Account beyond the payments described above. Grace has accrued for the $30 million payment due on the third anniversary of the Effective Date, but has not accrued for the 10 additional payments since Grace does not currently believe they are probable.
The PD Trust is to resolve U.S. ZAI PD Claims that qualify for payment under specified trust distribution procedures by paying 55% of the claimed amount, but in no event is the PD Trust to pay more per claim than $4,125 (as adjusted for inflation each year after the fifth anniversary of the Effective Date).
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 asbestos trusts in the event of default, subject to

16



Notes to Consolidated Financial Statements (Continued)

2. Chapter 11 and Joint Plan of Reorganization (Continued)

customary anti-dilution provisions. Grace has the right to conduct annual audits of the books, records and claim processing procedures of the PD Trust.
Asbestos-Related Liability    The recorded asbestos-related liability as of December 31, 2013, was $2,092.4 million, and was included in "liabilities subject to compromise" in the accompanying Consolidated Balance Sheets. The asbestos-related liability was settled at the recorded amount on the Effective Date, including payment of cash of $499.5 million at the Effective Date, issuance of deferred payment obligations of $594.5 million and the warrant of $490.0 million, and transfer of all cash and rights with respect to Grace's insurance policies that provide coverage for asbestos-related claims.
The PI Trust deferred payment obligation of $110 million per year for 5 years beginning January 2, 2019, and of $100 million per year for 10 years beginning January 2, 2024, was recorded at fair value of $567 million on the Effective Date. The value of the deferred payment obligation was estimated based on (i) interest rates; (ii) the Company's credit standing and the payment period of the deferred payments; (iii) restrictive covenants and terms of the Company's other credit facilities; (iv) assessment of the risk of a default, which if default were to occur would require Grace to issue shares of Company common stock; and (v) the subordination provisions of the deferred payment agreement. In August 2014, Grace and the PI Trust entered into an agreement to settle the deferred payment obligation in exchange for a cash payment of $632 million. Grace made such payment on September 18, 2014, and has no further obligation to make any additional payments to the PI Trust in respect of the deferred payment obligation.
Grace also recorded a deferred payment obligation of $27.5 million representing the present value of the $30 million payment due to the ZAI PD Account on February 3, 2017. This amount is included in "debt payable after one year" in the accompanying September 30, 2014, Consolidated Balance Sheet.
The warrant to acquire 10 million shares of the Company's common stock for $17.00 per share was recorded at its estimated value of $490 million on the Effective Date based on the current trading range of Company common stock, other valuation factors, and the settlement described below.
PI Warrant Settlement    In October 2012, Grace entered into an agreement with interested parties to settle the PI Warrant in cash during the one-year period after the Effective Date. Under the terms of the settlement agreement, Grace will repurchase the PI Warrant for a price equal to the average of the daily closing prices of Company common stock during the period commencing one day after the Effective Date and ending on the day prior to the date the PI Trust elects to sell the PI Warrant back to Grace, multiplied by 10 million (the number of shares issuable under the PI Warrant), less $170 million (the aggregate exercise price of the PI Warrant), provided that if the average of the daily closing prices is less than $54.50 per share, then the repurchase price would be $375 million, and if the average of the daily closing prices exceeds $66.00 per share, then the repurchase price would be $490 million. The settlement agreement is terminable by the PI Trust in the event a tender offer, or other proposed transaction that would result in a change in control of the Company, is announced during the one-year period after the Effective Date. In such event, the PI Warrant would be settled in shares of Company common stock.
Other Claims    As provided for in the Joint Plan, Grace paid substantially all other allowed pre-petition claims in full on or within 10 days after the Effective Date. All allowed administrative claims and all allowed priority claims were paid in cash with interest as provided in the Joint Plan. Secured claims were paid in cash with interest or by reinstatement. Allowed general unsecured claims were paid in cash, including post-petition interest in accordance with the Joint Plan. The Joint Plan further provided that Grace, subject to certain non-bankruptcy limitations, satisfy all pension, retirement medical, and similar employee-related obligations and pay workers’ compensation claims.
Unresolved Claims    The Bankruptcy Court established a claims bar date of March 31, 2003, for claims of general unsecured creditors, PD Claims (other than ZAI PD Claims) and medical monitoring claims related to asbestos. The bar date did not apply to PI Claims or claims related to ZAI PD Claims. Unresolved claims are to be addressed through the claims objection process and the dispute resolution procedures approved by the Bankruptcy Court. Medical monitoring claims have been channeled to the PI Trust.

17



Notes to Consolidated Financial Statements (Continued)

2. Chapter 11 and Joint Plan of Reorganization (Continued)

Grace believes that its recorded liabilities for unresolved claims represent a reasonable estimate of the ultimate allowable amount for such claims, where sufficient information is available to determine whether liability is probable and estimable. If it is ultimately determined that any amounts are owed on these claims, they are to be paid in full, with interest as required. While the ultimate outcome of these claims cannot be predicted with certainty, Grace believes that the resolution of these matters will not have a material adverse effect on its consolidated financial position, results of operations, or cash flows.
After the Effective Date, all persons and entities generally are forever barred from asserting against Grace any claims or demands that are based upon any act or omission, transaction, or other activity, event or occurrence that occurred prior to the Effective Date, except as expressly provided in the Joint Plan.
Effect on Company Common Stock    Under the Joint Plan holders of Company common stock as of the Effective Date retained their shares, but the interests of shareholders are subject to dilution in the event of default with respect to the deferred payment obligation to the PD Trust under the Company's security obligation.
Debt Capital    As of December 31, 2013, all of the Debtors' pre-petition debt was in default due to the Filing. The accompanying December 31, 2013, Consolidated Balance Sheet reflects the classification of the Debtors' pre-petition debt within "liabilities subject to compromise." All debt subject to compromise was paid in full. See Note 4 for a discussion of Grace's emergence financing.
Accounting Impact    The accompanying Consolidated Financial Statements have been prepared in accordance with ASC 852 "Reorganizations." ASC 852 requires that financial statements of debtors-in-possession be prepared on a going concern basis, which contemplates continuity of operations and realization of assets and liquidation of liabilities in the ordinary course of business.
Pursuant to ASC 852, Grace's pre-petition and post-petition liabilities that were subject to compromise were required to be reported separately on the balance sheet at an estimate of the amount that would ultimately be allowed by the Bankruptcy Court. As of December 31, 2013, such pre-petition liabilities included fixed obligations (such as debt and contractual commitments), as well as estimates of costs related to contingent liabilities (such as asbestos-related litigation, environmental remediation and other claims). Obligations of Grace subsidiaries not covered by the Filing were required to be classified on the Consolidated Balance Sheets based upon maturity dates or the expected dates of payment. ASC 852 also requires separate reporting of certain expenses, realized gains and losses, and provisions for losses related to the Filing as reorganization items. Grace presents reorganization items as "Chapter 11 expenses, net of interest income," a separate caption in its Consolidated Statements of Operations.
Grace's December 31, 2013, Consolidated Balance Sheet separately identifies the liabilities that were "subject to compromise" as a result of the Chapter 11 proceedings. In Grace's case, "liabilities subject to compromise" represented both pre-petition and post-petition liabilities as determined under U.S. GAAP. Changes to pre-petition liabilities subsequent to the Filing Date reflect: (1) cash payments under approved court orders; (2) the terms of the Joint Plan, as discussed above, including the accrual of interest on pre-petition debt and other fixed obligations; (3) accruals for employee-related programs; and (4) changes in estimates related to other pre-petition contingent liabilities.

18



Notes to Consolidated Financial Statements (Continued)

2. Chapter 11 and Joint Plan of Reorganization (Continued)

The table below sets forth the components of liabilities subject to compromise as of December 31, 2013:
(In millions)
December 31,
2013
Asbestos-related contingencies
$
2,092.4

Pre-petition bank debt plus accrued interest
1,100.0

Environmental contingencies
134.5

Unfunded special pension arrangements
129.4

Income tax contingencies
76.6

Postretirement benefits other than pension
57.2

Drawn letters of credit plus accrued interest
37.8

Accounts payable
34.3

Retained obligations of divested businesses
29.9

Other accrued liabilities
94.3

Reclassification to current liabilities(1)
(10.3
)
Total Liabilities Subject to Compromise
$
3,776.1

_______________________________________________________________________________
(1)
As of December 31, 2013, $10.3 million of certain pension and postretirement benefit obligations subject to compromise have been presented in "other current liabilities" in the accompanying Consolidated Balance Sheets in accordance with ASC 715 "Compensation—Retirement Benefits."
The unfunded special pension arrangements reflected above exclude non-U.S. pension plans and qualified U.S. pension plans that became underfunded subsequent to the Filing.
Upon emergence from bankruptcy, Grace paid $1,340.6 million to settle certain liabilities subject to compromise. All other balances previously classified as liabilities subject to compromise have been reclassified as either current or long term liabilities based on maturity dates or expected dates of payment.
Chapter 11 Expenses
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In millions)
2014
 
2013
 
2014
 
2013
Legal and financial advisory fees
$
1.7

 
$
3.6

 
$
10.9

 
$
12.4

Interest income

 
(0.7
)
 
(0.1
)
 
(1.4
)
Chapter 11 expenses, net of interest income
$
1.7

 
$
2.9

 
$
10.8

 
$
11.0

Pursuant to ASC 852, interest income earned on the Debtors' cash balances while in bankruptcy was offset against Chapter 11 expenses.

19



Notes to Consolidated Financial Statements (Continued)

2. Chapter 11 and Joint Plan of Reorganization (Continued)

Condensed Financial Information of the Debtors
W. R. Grace & Co.—Chapter 11 Filing Entities
Debtor-in-Possession Statement of Operations
(In millions) (Unaudited)
Nine Months Ended
September 30,
2013
Net sales, including intercompany
$
1,077.1

Cost of goods sold, including intercompany, exclusive of depreciation and amortization shown separately below
668.4

Selling, general and administrative expenses
176.0

Depreciation and amortization
51.4

Chapter 11 expenses, net of interest income
11.0

Research and development expenses
27.8

Interest expense and related financing costs
28.1

Other income, net
(43.6
)
 
919.1

Income before income taxes and equity in net income of non-filing entities
158.0

Provision for income taxes
(63.4
)
Income before equity in net income of non-filing entities
94.6

Equity in net income of non-filing entities
131.8

Net income attributable to W. R. Grace & Co. shareholders
$
226.4


20



Notes to Consolidated Financial Statements (Continued)

2. Chapter 11 and Joint Plan of Reorganization (Continued)

W. R. Grace & Co.—Chapter 11 Filing Entities
Debtor-in-Possession Statement of Cash Flows
(In millions) (Unaudited)
Nine Months Ended
September 30,
2013
Operating Activities
 
Net income attributable to W. R. Grace & Co. shareholders
$
226.4

Reconciliation to net cash provided by operating activities:
 
Depreciation and amortization
51.4

Equity in net income of non-filing entities
(131.8
)
Provision for income taxes
63.4

Income taxes paid, net of refunds
(3.6
)
Excess tax benefits from stock-based compensation
33.7

Interest accrued on pre-petition liabilities subject to compromise
28.1

Defined benefit pension expense
9.9

Payments under defined benefit pension arrangements
(54.2
)
Changes in assets and liabilities, excluding the effect of foreign currency translation:
 
Trade accounts receivable
(7.5
)
Inventories
(34.2
)
Accounts payable
7.5

All other items, net
17.2

Net cash provided by operating activities
206.3

Investing Activities
 
Capital expenditures
(68.6
)
Transfer to short-term investments
(500.0
)
Transfer to restricted cash and cash equivalents
(11.2
)
Net cash used for investing activities
(579.8
)
Financing Activities
 
Borrowings under credit arrangements
0.3

Repayments under credit arrangements
(0.6
)
Proceeds from exercise of stock options
31.7

Excess tax benefits from stock-based compensation
(33.7
)
Net cash used for financing activities
(2.3
)
Net decrease in cash and cash equivalents
(375.8
)
Cash and cash equivalents, beginning of period
1,064.2

Cash and cash equivalents, end of period
$
688.4


21



Notes to Consolidated Financial Statements (Continued)

2. Chapter 11 and Joint Plan of Reorganization (Continued)

W. R. Grace & Co.—Chapter 11 Filing Entities
Debtor-in-Possession Balance Sheet
(In millions) (Unaudited)
December 31, 2013
ASSETS
 
Current Assets
 
Cash and cash equivalents
$
585.1

Restricted cash and cash equivalents
340.5

Trade accounts receivable, net
149.7

Receivables from non-filing entities, net
173.0

Inventories
138.9

Other current assets
69.3

Total Current Assets
1,456.5

Properties and equipment, net
484.5

Goodwill
279.9

Technology and other intangible assets, net
249.1

Deferred income taxes
817.3

Asbestos-related insurance
500.0

Loans receivable from non-filing entities, net
283.8

Investment in non-filing entities
531.3

Investment in unconsolidated affiliate
96.2

Other assets
16.5

Total Assets
$
4,715.1

LIABILITIES AND EQUITY
 
Liabilities Not Subject to Compromise
 
Current liabilities
$
247.4

Underfunded defined benefit pension plans
52.2

Other liabilities
78.7

Total Liabilities Not Subject to Compromise
378.3

Liabilities Subject to Compromise
3,776.1

Total Liabilities
4,154.4

Total W. R. Grace & Co. Shareholders' Equity
560.6

Noncontrolling interests in Chapter 11 filing entities
0.1

Total Equity
560.7

Total Liabilities and Equity
$
4,715.1

This summary of the terms of various agreements does not purport to be complete and is qualified in its entirety by reference to the Joint Plan, the Confirmation Order, the Asbestos Trust Agreements, the Asbestos Insurance Transfer Agreement, the Deferred Payment Agreements, the Guarantee Agreements, the Share Issuance Agreement, the Warrant Agreement, the Warrant Implementation Letter, the Warrant Registration Rights Agreement, and the PI Deferred Payment Obligation Termination Agreement, which have been filed with the SEC.

22



Notes to Consolidated Financial Statements (Continued)

3. Inventories

Inventories are stated at the lower of cost or market, and cost is determined using FIFO. Inventories consisted of the following at September 30, 2014, and December 31, 2013:
(In millions)
September 30,
2014
 
December 31,
2013
Raw materials
$
89.2

 
$
69.7

In process
50.8

 
41.8

Finished products
165.8

 
152.4

Other
31.5

 
31.4

 
$
337.3

 
$
295.3

4. Debt
Components of Debt
(In millions)
September 30,
2014
 
December 31,
2013
5.125% senior notes due 2021
$
700.0

 
$

U.S. dollar term loan, net of unamortized discount of $2.1 at September 30, 2014
694.4

 

5.625% senior notes due 2024
300.0

 

Euro term loan, net of unamortized discount of $0.5 at September 30, 2014
189.5

 

Debt payable—unconsolidated affiliate
31.0

 
28.8

Deferred payment obligation
28.0

 

Other borrowings
84.1

 
81.9

Total debt
2,027.0

 
110.7

Less debt payable within one year
97.7

 
81.1

Debt payable after one year
$
1,929.3

 
$
29.6

Debt Subject to Compromise
 
 
 
Bank borrowings
$

 
$
500.0

Accrued interest on bank borrowings

 
471.0

Default interest settlement

 
129.0

Drawn letters of credit

 
26.7

Accrued interest on drawn letters of credit

 
11.1

 
$

 
$
1,137.8

Weighted average interest rates on total debt
4.3
%
 
3.6
%
At September 30, 2014, the fair value of Grace's debt payable approximated the recorded value of $2,027.0 million. Fair value is determined based on Level 2 inputs, including expected future cash flows (discounted at market interest rates), quotes from financial institutions and other appropriate valuation methodologies. Grace's debt subject to compromise was paid in full.
Credit Agreement
On the Effective Date, Grace entered into a Credit Agreement (the "Credit Agreement") in connection with its exit financing. The Credit Agreement provides for:
(a)
$700 million term loan due in 2021, with interest at LIBOR +225 bps with a 75 bps floor;
(b)
€150 million term loan due in 2021, with interest at EURIBOR +250 bps with a 75 bps floor;

23



Notes to Consolidated Financial Statements (Continued)

4. Debt (Continued)

(c)
$400 million revolving credit facility due in 2019, with interest at LIBOR +175 bps; and
(d)
$250 million delayed draw term loan facility available for 12 months, with amounts drawn due in 2021, with interest at LIBOR +225 bps with a 75 bps floor.
The term loans will amortize in equal monthly installments in aggregate annual amounts equal to 1.00% of the original principal amount thereof.
The Credit Agreement contains customary negative and affirmative covenants and events of default. To secure its obligations under the Credit Agreement, the Company has granted security interests in the shares of its Grace—Conn. and Alltech Associates, Inc. subsidiaries, substantially all of its U.S. non-real estate assets and property, and certain U.S. real estate.
This summary of the Credit Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of such agreement, a copy of which has been filed with the SEC.
Senior Notes
On September 16, 2014, Grace—Conn. (the "Issuer") issued $1,000.0 million of senior unsecured notes (the "Notes") in two tranches:
(a)
$700 million in aggregate principal amount of Notes due 2021 at a coupon rate of 5.125%, and
(b)
$300 million in aggregate principal amount of Notes due 2024 at a coupon rate of 5.625%.
The Notes were priced at 100% of par and were offered and sold pursuant to exemptions from registration under the Securities Act of 1933, as amended, (the "Securities Act"). The net proceeds received from issuance were $985.5 million, a portion of which was used to terminate Grace's obligations under the deferred payment agreement with the PI Trust for $632.0 million and to repay amounts outstanding under Grace's revolving credit facility. The remaining proceeds from the Notes will be used to partially fund the settlement of the warrant issued to the PI Trust and for other general corporate purposes. Interest is payable on the Notes on each April 1 and October 1, commencing April 1, 2015.
Grace may redeem some or all of the Notes at any time at a price equal to the greater of (i) 100% of the principal amount of the Notes redeemed plus accrued and unpaid interest to, but excluding, the redemption date and (ii) the sum, as determined by an independent investment banker, of the present values of the remaining scheduled payments of principal and interest (exclusive of interest accrued to the date of redemption) discounted to the redemption date on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the treasury rate plus 50 basis points, in each case, accrued and unpaid interest to, but excluding, the date of redemption. In the event of a change in control, Grace will be required to offer to purchase the Notes at a price equal to 101% of the aggregate principal amount outstanding plus accrued and unpaid interest.
The Notes are jointly and severally guaranteed on a full and unconditional senior unsecured basis by the Company and Alltech Associates, Inc., a wholly-owned subsidiary of the Issuer (the "Guarantors"). The Notes and guarantees are senior obligations of the Issuer and the Guarantors, respectively, and will rank equally with all of the existing and future unsubordinated obligations of the Issuer and the Guarantors, respectively. The Notes are effectively subordinated to any secured indebtedness to the extent of the value of the assets securing such indebtedness and structurally subordinated to the debt and other liabilities of Grace’s non-guarantor subsidiaries.
The Notes were issued subject to customary negative covenants and events of default. Generally, if any event of default occurs, the trustee or the holders of at least 25% in aggregate principal amount of the then outstanding series of Notes may declare all the Notes of such series to be due and payable immediately.
This summary of the indentures and the Notes does not purport to be complete and is qualified in its entirety by reference to the full text of such agreements, copies of which have been filed with the SEC.

24



Notes to Consolidated Financial Statements (Continued)

5. Fair Value Measurements and Risk

Certain of Grace's assets and liabilities are reported at fair value on a gross basis. ASC 820 "Fair Value Measurements and Disclosures" defines fair value as the value that would be received at the measurement date in the principal or "most advantageous" market. Grace uses principal market data, whenever available, to value assets and liabilities that are required to be reported at fair value.
Grace has identified the following financial assets and liabilities that are subject to the fair value analysis required by ASC 820:
Fair Value of Debt and Other Financial Instruments
See Note 4 for a discussion of the fair value of Grace's debt. At September 30, 2014, the recorded values of other financial instruments such as cash equivalents and trade receivables and payables approximated their fair values, based on the short-term maturities and floating rate characteristics of these instruments.
Derivatives
From time to time, Grace enters into commodity derivatives such as fixed-rate swaps or options with financial institutions to mitigate the risk of volatility of prices of natural gas or other commodities. Under fixed-rate swaps, Grace locks in a fixed rate with a financial institution for future purchases, purchases its commodity from a supplier at the prevailing market rate, and then settles with the bank for any difference in the rates, thereby "swapping" a variable rate for a fixed rate.
The valuation of Grace's fixed-rate natural gas swaps was determined using a market approach, based on natural gas futures trading prices quoted on the New York Mercantile Exchange. Commodity fixed-rate swaps with maturities of not more than 12 months are used and designated as cash flow hedges of forecasted purchases of natural gas. The effective portion of the gain or loss on the commodity contracts is recorded in "accumulated other comprehensive income" and reclassified into income in the same period or periods that the underlying commodity purchase affects income. At September 30, 2014, there were no current open swap contracts.
The valuation of Grace's natural gas call options was determined using a market approach, based on the strike price of the options and the natural gas futures trading prices quoted on the New York Mercantile Exchange. Commodity option contracts with maturities of not more than 24 months are used and designated as cash flow hedges of forecasted purchases of natural gas. Current open option contracts hedge forecasted transactions until June 2015. The effective portion of the gain or loss on the commodity contracts is recorded in "accumulated other comprehensive income" and reclassified into income in the same period or periods that the underlying purchases affect income. At September 30, 2014, the contract volume, or notional amount, of the commodity option contracts was 3.3 million MMBtu and the natural gas futures trading price of option contracts was less than the strike price.
The valuation of Grace's fixed-rate aluminum swaps was determined using a market approach, based on aluminum futures trading prices quoted on the London Metal Exchange. Commodity fixed-rate swaps with maturities of not more than 12 months are used and designated as cash flow hedges of forecasted purchases of aluminum. Current open contracts hedge forecasted transactions until August 2015. The effective portion of the gain or loss on the commodity contracts is recorded in "accumulated other comprehensive income" and reclassified into income in the same period or periods that the underlying commodity purchase affects income. At September 30, 2014, the contract volume, or notional amount, of the commodity contracts was 1.4 million pounds with a total contract value of $1.2 million.
Because Grace does business in over 40 countries and in more than 50 currencies, results are exposed to fluctuations in currency exchange rates. Grace seeks to minimize exposure to these fluctuations by matching sales in volatile currencies with expenditures in the same currencies, but it is not always possible to do so. From time to time Grace will use financial instruments such as currency forward contracts, options, or combinations of the two to reduce the risk of certain specific transactions. However, Grace does not have a policy of hedging all exposures, because management does not believe that such a level of hedging would be cost-effective.
The valuation of Grace's currency exchange rate forward contracts is determined using both a market approach and an income approach. Inputs used to value currency exchange rate forward contracts consist of:

25



Notes to Consolidated Financial Statements (Continued)

5. Fair Value Measurements and Risk (Continued)

(1) spot rates, which are quoted by various financial institutions; (2) forward points, which are primarily affected by changes in interest rates; and (3) discount rates used to present value future cash flows, which are based on the London Interbank Offered Rate (LIBOR) curve or overnight indexed swap rates.
In November 2007, Grace purchased currency forward contracts to mitigate the effect of currency risk with respect to intercompany loans between its principal U.S. subsidiary and a German subsidiary. These derivatives were not designated as hedging instruments under ASC 815 "Derivatives and Hedging." These contracts were settled upon Grace's emergence from bankruptcy during the 2014 first quarter.
Grace uses interest rate swaps designated as cash flow hedges to manage fluctuations in interest rates on variable rate debt. The effective portion of gains and losses on these interest rate cash flow hedges is recorded in "accumulated other comprehensive income" and reclassified into "interest expense and related financing costs" during the period in which the underlying interest payments occur.
In connection with its emergence financing, Grace entered into an interest rate swap beginning on February 3, 2015, and maturing on February 3, 2020, fixing the interest on $250 million of Grace's term debt at a rate of 4.643%. The valuation of this interest rate swap is determined using both a market approach and an income approach, using prevailing market interest rates and discount rates to present value future cash flows based on the forward LIBOR yield curves.
The following tables present the fair value hierarchy for financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2014, and December 31, 2013:
 
Fair Value Measurements at September 30, 2014, Using

(In millions)
Total
 
Quoted Prices in Active Markets for Identical Assets or Liabilities
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
Assets
 
 
 
 
 
 
 
Currency derivatives
$
5.6

 
$

 
$
5.6

 
$

Interest rate derivatives
0.2

 

 
0.2

 

Commodity derivatives
0.1

 

 
0.1

 

Total Assets
$
5.9

 
$

 
$
5.9

 
$

Liabilities
 
 
 
 
 
 
 
Currency derivatives
$
0.8

 
$

 
$
0.8

 
$

Interest rate derivatives
2.1

 

 
2.1

 

Total Liabilities
$
2.9

 
$

 
$
2.9

 
$


26



Notes to Consolidated Financial Statements (Continued)

5. Fair Value Measurements and Risk (Continued)

 
Fair Value Measurements at December 31, 2013, Using

(In millions)
Total
 
Quoted Prices in Active Markets for Identical Assets or Liabilities
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
Assets
 
 
 
 
 
 
 
Currency derivatives
$
2.1

 
$

 
$
2.1

 
$

Total Assets
$
2.1

 
$

 
$
2.1

 
$

Liabilities
 
 
 
 
 
 
 
Currency derivatives
$
6.9

 
$

 
$
6.9

 
$

Commodity derivatives
0.1

 

 
0.1

 

Total Liabilities
$
7.0

 
$

 
$
7.0

 
$

The following tables present the location and fair values of derivative instruments included in the Consolidated Balance Sheets as of September 30, 2014, and December 31, 2013:

September 30, 2014
(In millions)
Asset Derivatives
 
Liability Derivatives
Balance Sheet
Location
 
Fair Value
 
Balance Sheet
Location
 
Fair Value
Derivatives designated as hedging instruments under ASC 815:
 
 
 
 
 
 
 
Commodity contracts
Other current assets
 
$
0.1

 
Other current liabilities
 
$

Currency contracts
Other current assets
 
0.7

 
Other current liabilities
 
0.1

Interest rate contracts
Other current assets
 

 
Other current liabilities
 
2.1

Currency contracts
Other assets
 
1.4

 
Other liabilities
 

Interest rate contracts
Other assets
 
0.2

 
Other liabilities
 

Derivatives not designated as hedging instruments under ASC 815:
 
 
 
 
 
 
 
Currency contracts
Other current assets
 
3.5

 
Other current liabilities
 
0.7

Total derivatives
 
 
$
5.9

 
 
 
$
2.9


December 31, 2013
(In millions)
Asset Derivatives
 
Liability Derivatives
Balance Sheet
Location
 
Fair Value
 
Balance Sheet
Location
 
Fair Value
Derivatives designated as hedging instruments under ASC 815:
 
 
 
 
 
 
 
Commodity contracts
Other current assets
 
$

 
Other current liabilities
 
$
0.1

Currency contracts
Other current assets
 
1.0

 
Other current liabilities
 

Currency contracts
Other assets
 
1.0

 
Other liabilities
 

Derivatives not designated as hedging instruments under ASC 815:
 
 
 
 
 
 
 
Currency contracts
Other current assets
 
0.1

 
Other current liabilities
 
6.9

Total derivatives
 
 
$
2.1

 
 
 
$
7.0


27



Notes to Consolidated Financial Statements (Continued)

5. Fair Value Measurements and Risk (Continued)

The following tables present the location and amount of gains and losses on derivative instruments included in the Consolidated Statements of Operations or, when applicable, gains and losses initially recognized in other comprehensive income ("OCI") for the three and nine months ended September 30, 2014 and 2013:
Three Months Ended September 30, 2014
(In millions)
Amount of Gain (Loss) Recognized in OCI on Derivatives
(Effective Portion)
 
Location of Gain (Loss) Reclassified from Accumulated OCI into Income
(Effective Portion)
 
Amount of Gain (Loss) Reclassified from OCI into Income
(Effective Portion)
Derivatives in ASC 815 cash flow hedging relationships:
 
 
 
 
Interest rate contracts
$
1.1

 
Interest expense
 
$

Currency contracts
0.2

 
Other expense
 
0.2

Total derivatives
$
1.3

 
 
 
$
0.2

 
 
 
 
 
 
 
 
Location of Gain (Loss) Recognized in Income on Derivatives
 
Amount of Gain (Loss) Recognized in Income on Derivatives
Derivatives not designated as hedging instruments under ASC 815:
 
 
 
 
Currency contracts
 
Other expense
 
$
2.6

Nine Months Ended September 30, 2014
(In millions)
Amount of Gain (Loss) Recognized in OCI on Derivatives
(Effective Portion)
 
Location of Gain (Loss) Reclassified from Accumulated OCI into Income
(Effective Portion)
 
Amount of Gain (Loss) Reclassified from OCI into Income
(Effective Portion)
Derivatives in ASC 815 cash flow hedging relationships:
 
 
 
 
Interest rate contracts
$
(1.8
)
 
Interest expense
 
$

Currency contracts
0.1

 
Other expense
 

Commodity contracts
0.4

 
Cost of goods sold
 
0.2

Total derivatives
$
(1.3
)
 
 
 
$
0.2

 
 
 
 
 
 
 
 
Location of Gain (Loss) Recognized in Income on Derivatives
 
Amount of Gain (Loss) Recognized in Income on Derivatives
Derivatives not designated as hedging instruments under ASC 815:
 
 
 
 
Currency contracts
 
Other expense
 
$
7.4


28



Notes to Consolidated Financial Statements (Continued)

5. Fair Value Measurements and Risk (Continued)

Three Months Ended September 30, 2013
(In millions)
Amount of Gain (Loss) Recognized in OCI on Derivatives
(Effective Portion)
 
Location of Gain (Loss) Reclassified from Accumulated OCI into Income
(Effective Portion)
 
Amount of Gain (Loss) Reclassified from OCI into Income
(Effective Portion)
Derivatives in ASC 815 cash flow hedging relationships:
 
 
 
 
Currency contracts
$
0.3

 
Other expense
 
$
0.5

Currency contracts

 
Cost of goods sold
 
(0.1
)
Commodity contracts
(0.1
)
 
Cost of goods sold
 
(0.3
)
Total derivatives
$
0.2

 
 
 
$
0.1

 
 
 
 
 
 
 
 
Location of Gain (Loss) Recognized in Income on Derivatives
 
Amount of Gain (Loss) Recognized in Income on Derivatives
Derivatives not designated as hedging instruments under ASC 815:
 
 
 
 
Currency contracts
 
Other expense
 
$
(9.9
)
Nine Months Ended September 30, 2013
(In millions)
Amount of Gain (Loss) Recognized in OCI on Derivatives
(Effective Portion)
 
Location of Gain (Loss) Reclassified from Accumulated OCI into Income
(Effective Portion)
 
Amount of Gain (Loss) Reclassified from OCI into Income
(Effective Portion)
Derivatives in ASC 815 cash flow hedging relationships:
 
 
 
 
Currency contracts
$
1.0

 
Other expense
 
$
1.3

Currency contracts
(0.2
)
 
Cost of goods sold
 
(0.2
)
Commodity contracts
(0.4
)
 
Cost of goods sold
 
(0.1
)
Total derivatives
$
0.4

 
 
 
$
1.0

 
 
 
 
 
 
 
 
Location of Gain (Loss) Recognized in Income on Derivatives
 
Amount of Gain (Loss) Recognized in Income on Derivatives
Derivatives not designated as hedging instruments under ASC 815:
 
 
 
 
Currency contracts
 
Other expense
 
$
(5.8
)
Net Investment Hedges
Grace uses foreign currency denominated debt as nonderivative hedging instruments in certain net investment hedges. The effective portion of gains and losses attributable to these net investment hedges is recorded to "currency translation adjustments" within "accumulated other comprehensive income." Recognition in earnings of amounts previously recorded to "currency translation adjustments" is limited to circumstances such as complete or substantially complete liquidation of the net investment in the hedged foreign operation. During 2014, Grace designated its €149.3 million term loan principal as a hedging instrument of its net investment in European subsidiaries.
The following tables present the location and amount of gains and losses on nonderivative instruments designated as net investment hedges. There were no reclassifications of the effective portion of net investment hedges out of OCI and into earnings for the periods presented in the tables below.

29



Notes to Consolidated Financial Statements (Continued)

5. Fair Value Measurements and Risk (Continued)

Three Months Ended September 30, 2014
(In millions)
Amount of Gain (Loss) Recognized in OCI in Currency Translation Adjustments
(Effective Portion)
 
Location of Gain (Loss) Reclassified from Accumulated OCI into Income
(Ineffective Portion)
 
Amount of Gain (Loss) Reclassified from Accumulated OCI into Income
(Ineffective Portion)
Nonderivatives in ASC 815 net investment hedging relationships:
 
 
 
 
 
Foreign currency denominated debt
$
13.0

 
Not applicable
 
$

Total nonderivatives
$
13.0

 
 
 
$

Nine Months Ended September 30, 2014
(In millions)
Amount of Gain or (Loss) Recognized in OCI in Currency Translation Adjustments
(Effective Portion)
 
Location of Gain or (Loss) Reclassified from Accumulated OCI into Income
(Ineffective Portion)
 
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income
(Ineffective Portion)
Nonderivatives in ASC 815 net investment hedging relationships:
 
 
 
 
 
Foreign currency denominated debt
$
14.8

 
Not applicable
 
$

Total nonderivatives
$
14.8

 
 
 
$

Credit Risk
Grace is exposed to credit risk in its trade accounts receivable. Customers in the petroleum refining and construction industries represent the greatest exposure. Grace's credit evaluation policies, relatively short collection terms and history of minimal credit losses mitigate credit risk exposures. Grace does not generally require collateral for its trade accounts receivable, but may require a bank letter of credit in certain instances, particularly when selling to customers in cash restricted countries.
Grace may also be exposed to credit risk in its derivatives contracts. Grace monitors counterparty credit risk and currently does not anticipate nonperformance by counterparties to its derivatives. Grace's derivative contracts are with internationally recognized commercial financial institutions.
6. Income Taxes
The annualized effective tax rate on 2014 forecasted income is estimated to be 24.6% as of September 30, 2014, compared with 28.5% for the year ended December 31, 2013. The decrease in the rate compared with the prior year primarily relates to higher discrete tax benefits in 2014, including a benefit for the release of reserves related to uncertain tax positions.
Grace has generally not paid U.S. Federal income taxes in cash in recent years since available tax deductions and credits have fully offset U.S. taxable income. Grace generated approximately $1,300 million in U.S. Federal net operating losses during 2014, including approximately $670 million upon emergence from bankruptcy and $632 million upon payment of the PI deferred payment obligation in the third quarter. These items, a significant portion of which were previously recorded as deferred tax assets for temporary differences, will be available to reduce U.S. Federal taxable income in 2014 and future years. In addition, Grace expects to receive U.S. Federal income tax deductions upon settlement of the warrant held by the PI Trust and upon payment of the PD deferred payment obligation. The expected settlement amounts have already been recorded as deferred tax assets for temporary differences. Grace expects to carryforward most of its NOLs. Under U.S. Federal income tax law, a corporation is generally permitted to carryforward NOLs for a 20-year period for deduction against future taxable income.

30



Notes to Consolidated Financial Statements (Continued)

6. Income Taxes (Continued)

The following table summarizes the balance of deferred tax assets, net of deferred tax liabilities, at September 30, 2014, of $803.4 million:
 
Deferred Tax Asset
(Net of Liabilities)
 
Valuation Allowance
 
Net Deferred Tax Asset(2)
United States—Federal(1)
$
705.4

 
$
(2.3
)
 
$
703.1

United States—States(1)
78.8

 
(10.0
)
 
68.8

Germany
24.3

 

 
24.3

Other Foreign
8.5

 
(1.3
)
 
7.2

Total
$
817.0

 
$
(13.6
)
 
$
803.4

_______________________________________________________________________________
(1)
The U.S. Federal deductions generated during 2014 relating to emergence of $670 million and settlement of the PI deferred payment obligation of $632 million, plus the future $490 million warrant settlement and $28 million PD deferred payment obligation, account for a significant portion of the U.S. Federal and State deferred tax assets.
(2)
The noncurrent deferred tax asset of $587.9 million reflected in the September 30, 2014, Consolidated Balance Sheet is net of $5.1 million of income tax contingencies related to these deferred tax assets.
Grace will need to generate approximately $2,000 million of U.S. Federal taxable income by 2035 (or approximately $100 million per year during the carryforward period) to fully realize the U.S. Federal and a majority of the U.S. State net deferred tax assets.
The following table summarizes expiration dates in jurisdictions where we have, or will have, material tax loss carryforwards:
 
Expiration Dates
United States—Federal
2034 - 2035
United States—States
2014 - 2035
Brazil
Unlimited Carryforward
Spain
2029 - 2030
India
2015 - 2021
In evaluating Grace's ability to realize its deferred tax assets, Grace considers all reasonably available positive and negative evidence, including recent earnings experience, expectations of future taxable income and the tax character of that income, the extended period of time over which the temporary differences become deductible and the carryforward and/or carryback periods available to Grace for tax reporting purposes in the related jurisdiction. In estimating future taxable income, Grace develops assumptions, including the amount of future federal, state and international pretax operating income that Grace can reasonably expect to generate, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. Grace records a valuation allowance to reduce deferred tax assets to the amount that it believes is more likely than not to be realized.
Based on the status of examinations in taxing jurisdictions and relevant statutes and regulatory guidance, in the 2014 second quarter Grace recognized $59.6 million of benefits associated with reserves related to uncertain tax positions. Grace believes it is reasonably possible that in the next 12 months the amount of the liability for unrecognized tax benefits could decrease by approximately $1 million.

31



Notes to Consolidated Financial Statements (Continued)

7. Pension Plans and Other Postretirement Benefit Plans

Pension Plans    The following table presents the funded status of Grace's fully-funded, underfunded, and unfunded pension plans:
(In millions)
September 30,
2014
 
December 31,
2013
Overfunded defined benefit pension plans
$
44.0

 
$
16.7

Underfunded defined benefit pension plans
(18.6
)
 
(66.2
)
Unfunded defined benefit pension plans(1)
(310.3
)
 
(233.4
)
Total underfunded and unfunded defined benefit pension plans
(328.9
)
 
(299.6
)
Unfunded defined benefit pension plans included in liabilities subject to compromise(1)

 
(123.6
)
Pension liabilities included in other current liabilities
(15.5
)
 
(15.0
)
Net funded status
$
(300.4
)
 
$
(421.5
)
_______________________________________________________________________________
(1)
At emergence, Grace paid approximately $27 million of the unfunded defined benefit pension plan liability included in liabilities subject to compromise and reclassified the remaining balance to unfunded defined benefit pension plans.
Fully-funded plans include several advance-funded plans where the fair value of the plan assets exceeds the projected benefit obligation ("PBO"). This group of plans was overfunded by $44.0 million as of September 30, 2014, and the overfunded status is reflected as "overfunded defined benefit pension plans" in the Consolidated Balance Sheets. Underfunded plans include a group of advance-funded plans that are underfunded on a PBO basis. Unfunded plans include several plans that are funded on a pay-as-you-go basis, and therefore, the entire PBO is unfunded. The combined balance of the underfunded and unfunded plans was $344.4 million as of September 30, 2014.
Postretirement Benefits Other Than Pensions    Grace has provided postretirement health care and life insurance benefits for retired employees of certain U.S. business units and certain divested business units. The postretirement medical plan provides various levels of benefits to employees hired before 1993 who retire from Grace after age 55 with at least 10 years of service. These plans are unfunded and Grace pays a portion of the costs of benefits under these plans as they are incurred. Grace applies ASC 715 to these plans, which requires that the future costs of postretirement health care and life insurance benefits be accrued over the employees' years of service. Actuarial gains and losses are recognized in the Consolidated Balance Sheets as a component of Shareholders' Equity, with amortization of the net actuarial gains and losses that exceed 10 percent of the accumulated postretirement benefit obligation recognized each quarter in the Consolidated Statements of Operations over the average future service period of active employees.
In June 2014, Grace announced plans to discontinue its postretirement medical plan for all U.S. employees effective October 31, 2014, and to eliminate certain postretirement life insurance benefits. As a result of these actions, Grace recognized a gain of $41.9 million in other comprehensive income in the 2014 second quarter. Grace will amortize $39.5 million from accumulated other comprehensive income into the Consolidated Statement of Operations during the five-month period from June to October 2014. The $31.6 million gain recognized during the nine months ended September 30, 2014, is reported as a separate line item in the Consolidated Statement of Operations.

32



Notes to Consolidated Financial Statements (Continued)

7. Pension Plans and Other Postretirement Benefit Plans (Continued)

Components of Net Periodic Benefit Cost (Income)
 
Three Months Ended September 30,
 
2014
 
2013
 
Pension
 
Other Post
Retirement
 
Pension
 
Other Post
Retirement
(In millions)
U.S.
 
Non-U.S.
 
 
U.S.
 
Non-U.S.