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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 March 31, 2015
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 April 30, 2015
Common Stock, $0.01 par value per share
 
72,765,831 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 trademarks, service marks or trade names used in the text of this Report are trademarks, service marks, or trade names of operating units of W. R. Grace & Co. or its affiliates and/or subsidiaries.

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 March 31, 2015, 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 (the “Company”) as of March 31, 2015, and the related consolidated statements of operations, comprehensive income, cash flows and equity for the three-month periods ended March 31, 2015 and 2014. 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, 2014, and the related consolidated statements of operations, comprehensive income, equity, and of cash flows for the year then ended (not presented herein), and in our report dated February 25, 2015, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2014, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.



/s/ PricewaterhouseCoopers LLP
Baltimore, Maryland
May 7, 2015


4


W. R. Grace & Co. and Subsidiaries
Consolidated Statements of Operations (unaudited)
 
Three Months Ended March 31,
(In millions, except per share amounts)
2015
 
2014
Net sales
$
720.6

 
$
744.5

Cost of goods sold
462.3

 
475.3

Gross profit
258.3

 
269.2

Selling, general and administrative expenses
137.2

 
136.8

Research and development expenses
17.9

 
20.5

Interest expense and related financing costs
24.8

 
11.2

Interest accretion on deferred payment obligations
0.2

 
8.2

Chapter 11 expenses, net
1.6

 
6.1

Equity in earnings of unconsolidated affiliate
(6.2
)
 
(3.7
)
Other expense, net
1.3

 
10.0

Total costs and expenses
176.8

 
189.1

Income before income taxes
81.5

 
80.1

Provision for income taxes
(28.7
)

(29.8
)
Net income
52.8

 
50.3

Less: Net income attributable to noncontrolling interests
(0.1
)
 
(0.2
)
Net income attributable to W. R. Grace & Co. shareholders
$
52.7

 
$
50.1

Earnings Per Share Attributable to W. R. Grace & Co. Shareholders
 
 
 
Basic earnings per share:
 
 
 
Net income attributable to W. R. Grace & Co. shareholders
$
0.72

 
$
0.65

Weighted average number of basic shares
72.8


77.0

Diluted earnings per share:
 
 
 
Net income attributable to W. R. Grace & Co. shareholders
$
0.72

 
$
0.64

Weighted average number of diluted shares
73.5

 
78.1


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 March 31,
(In millions)
2015
 
2014
Net income
$
52.8

 
$
50.3

Other comprehensive income (loss):
 
 
 
Defined benefit pension and other postretirement plans, net of income taxes
(0.4
)
 
(0.1
)
Currency translation adjustments
(10.8
)
 
(2.1
)
Gain (loss) from hedging activities, net of income taxes
(1.9
)
 
0.7

Gain on securities available for sale, net of income taxes

 
0.1

Total other comprehensive income attributable to noncontrolling interests
0.1

 
0.1

Total other comprehensive loss
(13.0
)
 
(1.3
)
Comprehensive income
39.8

 
49.0

Less: comprehensive income attributable to noncontrolling interests
(0.2
)
 
(0.3
)
Comprehensive income attributable to W. R. Grace & Co. shareholders
$
39.6

 
$
48.7


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)
 
Three Months Ended March 31,
(In millions)
2015
 
2014
OPERATING ACTIVITIES
 
 
 
Net income
$
52.8

 
$
50.3

Reconciliation to net cash used for operating activities:
 
 
 
Depreciation and amortization
33.5

 
34.0

Equity in earnings of unconsolidated affiliate
(6.2
)
 
(3.7
)
Chapter 11 expenses, net
1.6

 
6.1

Asbestos and bankruptcy related charges, net
(8.7
)
 
8.8

Cash paid for Chapter 11 and asbestos
(491.4
)
 
(1,323.9
)
Provision for income taxes
28.7

 
29.8

Cash paid for income taxes, net of refunds
(9.0
)
 
(16.1
)
Cash paid for interest on credit arrangements
(16.8
)
 
(1.6
)
Defined benefit pension expense
11.2

 
3.5

Cash paid under defined benefit pension arrangements
(4.6
)
 
(8.8
)
Cash paid for restructuring
(3.7
)
 
(1.9
)
Cash paid for repositioning
(3.1
)
 

Cash paid for environmental remediation
(4.2
)
 
(1.8
)
Changes in assets and liabilities, excluding effect of currency translation:
 
 
 
Trade accounts receivable
11.3

 
(21.1
)
Inventories
(2.5
)
 
(30.2
)
Accounts payable
19.2

 
13.5

All other items, net
18.3

 
9.8

Net cash used for operating activities
(373.6
)
 
(1,253.3
)
INVESTING ACTIVITIES
 
 
 
Capital expenditures
(40.7
)
 
(40.1
)
Transfer from restricted cash and cash equivalents

 
395.4

Other investing activities
0.1

 
(2.6
)
Net cash (used for) provided by investing activities
(40.6
)
 
352.7

FINANCING ACTIVITIES
 
 
 
Borrowings under credit arrangements
265.0

 
979.2

Repayments under credit arrangements
(24.1
)
 
(543.2
)
Cash paid for debt financing costs
(0.4
)
 
(23.7
)
Proceeds from exercise of stock options
13.7

 
7.7

Cash paid for repurchases of common stock
(55.6
)
 
(60.5
)
Other financing activities
0.2

 
1.3

Net cash provided by financing activities
198.8

 
360.8

Effect of currency exchange rate changes on cash and cash equivalents
(15.3
)
 
(2.1
)
Decrease in cash and cash equivalents
(230.7
)
 
(541.9
)
Cash and cash equivalents, beginning of period
557.5

 
964.8

Cash and cash equivalents, end of period
$
326.8

 
$
422.9


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)
March 31,
2015
 
December 31,
2014
ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
326.8

 
$
557.5

Trade accounts receivable, less allowance of $6.1 (2014—$5.8)
447.9

 
481.1

Inventories
325.1

 
332.8

Deferred income taxes
143.7

 
235.4

Other current assets
95.3


84.1

Total Current Assets
1,338.8

 
1,690.9

Properties and equipment, net of accumulated depreciation and amortization of $1,770.1 (2014—$1,818.4)
813.1

 
833.5

Goodwill
443.2

 
452.9

Technology and other intangible assets, net
278.3

 
288.0

Deferred income taxes
682.7

 
612.0

Overfunded defined benefit pension plans
43.1

 
44.1

Investment in unconsolidated affiliate
106.6

 
113.1

Other assets
62.3


60.7

Total Assets
$
3,768.1

 
$
4,095.2

LIABILITIES AND EQUITY
 
 
 
Current Liabilities
 
 
 
Debt payable within one year
$
88.8

 
$
96.8

Accounts payable
258.2

 
255.3

PI warrant liability

 
490.0

Other current liabilities
315.9

 
340.0

Total Current Liabilities
662.9

 
1,182.1

Debt payable after one year
2,143.8

 
1,919.0

Deferred income taxes
17.8

 
19.3

Income tax contingencies
23.1

 
24.0

Underfunded and unfunded defined benefit pension plans
428.9

 
457.5

Other liabilities
123.4

 
124.3

Total Liabilities
3,399.9

 
3,726.2

Commitments and Contingencies—Note 8

 

Equity
 
 
 
Common stock issued, par value $0.01; 300,000,000 shares authorized; outstanding: 72,766,606 (2014—72,922,565)
0.7

 
0.7

Paid-in capital
498.5

 
526.1

Retained earnings
344.8

 
292.1

Treasury stock, at cost: shares: 4,680,641 (2014—4,524,688)
(442.2
)
 
(429.2
)
Accumulated other comprehensive income
(36.9
)
 
(23.8
)
Total W. R. Grace & Co. Shareholders' Equity
364.9

 
365.9

Noncontrolling interests
3.3

 
3.1

Total Equity
368.2

 
369.0

Total Liabilities and Equity
$
3,768.1

 
$
4,095.2


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
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Noncontrolling
Interests
 
Total
Equity
Balance, December 31, 2013
$
534.2

 
$
15.8

 
$

 
$
10.6

 
$
10.6

 
$
571.2

Net income

 
50.1

 

 

 
0.2

 
50.3

Repurchase of common stock

 

 
(60.5
)
 

 

 
(60.5
)
Stock based compensation
2.8

 

 

 

 

 
2.8

Exercise of stock options
7.7

 

 

 

 

 
7.7

Shares issued
1.2

 

 

 

 

 
1.2

Other comprehensive income (loss)

 

 

 
(1.4
)
 
0.1

 
(1.3
)
Balance, March 31, 2014
$
545.9

 
$
65.9

 
$
(60.5
)
 
$
9.2

 
$
10.9

 
$
571.4

Balance, December 31, 2014
$
526.8

 
$
292.1

 
$
(429.2
)
 
$
(23.8
)
 
$
3.1

 
$
369.0

Net income

 
52.7

 

 

 
0.1

 
52.8

Repurchase of common stock

 

 
(55.6
)
 

 

 
(55.6
)
Stock based compensation
1.3

 

 

 

 

 
1.3

Exercise of stock options
(28.9
)
 

 
42.6

 

 

 
13.7

Other comprehensive income (loss)

 

 

 
(13.1
)
 
0.1

 
(13.0
)
Balance, March 31, 2015
$
499.2

 
$
344.8

 
$
(442.2
)
 
$
(36.9
)
 
$
3.3

 
$
368.2


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.
On February 5, 2015, Grace announced that the Board of Directors had approved a plan to separate Grace into two independent, publicly traded companies. The two companies, to be named prior to closing, will be "New Grace," consisting of the Catalysts Technologies and Materials Technologies business segments (excluding the packaging products product group), and “New GCP,” consisting of the Construction Products business segment and the packaging products product group. Grace intends that the separation transaction will be a tax-free spin-off to the Company's stockholders for U.S. federal income tax purposes and expects the transaction to be completed in the 2016 first quarter.
Chapter 11 Proceedings    On April 2, 2001, Grace and 61 of its United States subsidiaries and affiliates 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 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.
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 2014 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 three-month interim period ended March 31, 2015, are not necessarily indicative of the results of operations for the year ending December 31, 2015.
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:
Realization values of net deferred tax assets, which depend on projections of future taxable income (see Note 5);
Pension and postretirement liabilities that depend on assumptions regarding participant life spans, future inflation, discount rates and total returns on invested funds (see Note 6); and

10



Notes to Consolidated Financial Statements (Continued)

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

Contingent liabilities, which depend on an assessment of the probability of loss and an estimate of ultimate resolution cost, such as litigation (see Note 8), income taxes (see Note 5), and environmental remediation (see Note 8).
Licensing Revenue Recognition Certain customer arrangements, constituting less than 2% of our annual revenues, include licenses of technology combined with other deliverables. Generally, the licenses are non-exclusive, perpetual licenses that permit the licensee to use Grace proprietary technology to design, build, and maintain a polypropylene manufacturing plant, and to make and sell products from the plant. In these multiple-element arrangements, 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 accounted for as one unit of accounting and is recognized on a straight-line basis over the period of performance of the contract, which typically ranges from three to five years, except for contingent revenue associated with a final performance guarantee. Revenue associated with the performance guarantee is recognized when customer acceptance is obtained, which is typically at the time that the licensee’s plant is operational. Elements in the fixed price contract are not accounted for as separate units of accounting because they do not have standalone value. Each of the deliverables are necessary components to the successful construction and future operation of the manufacturing plants, and the elements have interdependencies such that there is minimal value in each deliverable without the other bundled elements. Other services and optional software that are sold in connection with license arrangements qualify as separate units of accounting, with revenue recognized when services are rendered and in the case of process control software, when installed and functional. Additional services that are not part of the fixed price contract are billed on a variable basis. The selling prices of the significant deliverables described above are based on Grace’s best estimate of selling price, determined using historical business information.
Reclassifications    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.
Effect of New Accounting Standards    In April 2014, the FASB issued ASU 2014-08 "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity." This update is intended to change the requirements for reporting discontinued operations and enhance convergence of the FASB’s and the International Accounting Standard Board’s ("IASB") reporting requirements for discontinued operations. The new requirements are effective for fiscal years beginning on or after December 15, 2014, and for interim periods within those fiscal years, with early adoption permitted. Grace adopted this standard in the 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.
In April 2015, the FASB issued ASU 2015-03 "Simplifying the Presentation of Debt Issuance Costs." This update is part of the FASB's Simplification Initiative and is also intended to enhance convergence with the IASB's treatment of debt issuance costs. The update requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The new requirements are effective for fiscal years beginning after December 15, 2015, and for interim periods within those fiscal years, with early adoption permitted. Grace is currently evaluating its effect on the Consolidated Financial Statements and the timing of adoption.

11



Notes to Consolidated Financial Statements (Continued)

2. Inventories

Inventories are stated at the lower of cost or market, and cost is determined using FIFO. Inventories consisted of the following at March 31, 2015, and December 31, 2014:
(In millions)
March 31,
2015
 
December 31,
2014
Raw materials
$
84.6

 
$
78.8

In process
47.1

 
47.2

Finished products
166.4

 
177.7

Other
27.0

 
29.1

 
$
325.1

 
$
332.8

3. Debt
Components of Debt
(In millions)
March 31,
2015
 
December 31,
2014
U.S. dollar term loan, net of unamortized discount of $2.0 at March 31, 2015, and $2.1 at December 31, 2014(1)
$
940.4

 
$
692.6

5.125% senior notes due 2021
700.0

 
700.0

5.625% senior notes due 2024
300.0

 
300.0

Euro term loan, net of unamortized discount of $0.4 at March 31, 2015, and $0.4 at December 31, 2014(2)
160.8

 
181.2

Debt payable—unconsolidated affiliate
31.2

 
31.5

Deferred payment obligation
28.4

 
28.2

Other borrowings(3)
71.8

 
82.3

Total debt
2,232.6

 
2,015.8

Less debt payable within one year
88.8

 
96.8

Debt payable after one year
$
2,143.8

 
$
1,919.0

Weighted average interest rates on total debt
4.1
%
 
4.3
%
___________________________________________________________________________________________________________________
(1)
Interest at LIBOR +200 bps with a 75 bps LIBOR floor at March 31, 2015, and LIBOR +225 bps with a 75 bps LIBOR floor at December 31, 2014
(2)
Interest at EURIBOR +225 bps with a 75 bps EURIBOR floor at March 31, 2015, and EURIBOR +250 bps with a 75 bps EURIBOR floor at December 31, 2014
(3)
Represents borrowings under various lines of credit and other borrowings, primarily by non-U.S. subsidiaries.
See Note 4 for a discussion of the fair value of Grace's debt.
The principal maturities of debt outstanding at March 31, 2015, were as follows:
 
(In millions)
2015
$
87.3

2016
16.8

2017
44.3

2018
15.5

2019
14.8

Thereafter
2,053.9

Total debt
$
2,232.6


12



Notes to Consolidated Financial Statements (Continued)

3. Debt (continued)

On January 30, 2015, Grace borrowed on its $250 million delayed draw term loan facility and used the funds, together with cash on hand, to repurchase the warrant issued to the PI Trust for $490 million. (See Note 8 for Chapter 11 information.)
Grace has reviewed the impact of the planned separation of Grace into "New Grace" and "New GCP" on the credit agreement entered into upon emergence from bankruptcy (the "Credit Agreement"). Grace anticipates that the Credit Agreement will remain with "New Grace" but at the time of the separation will require an amendment to permit the separation. Grace intends to seek such amendment as well as repay a substantial amount of the borrowings under the Credit Agreement in connection with the separation. If an amendment is not granted, Grace will be required to repay all term loan and revolver debt and enter into a new borrowing facility.
Grace has reviewed the senior notes for the impact of the separation of Grace into "New Grace" and "New GCP." The senior notes will remain with "New Grace" and Grace does not believe that the separation will have any impact on payment or other terms.
4. 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
Debt payable is recorded at carrying value as discussed in Note 3. Fair value is determined based on Level 2 inputs, including expected future cash flows (discounted at market interest rates), estimated current market prices and quotes from financial institutions.
At March 31, 2015, the carrying amounts and fair values of Grace's debt were as follows:
 
March 31, 2015
 
December 31, 2014
(In millions)
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
U.S. dollar term loan(1)
$
940.4

 
$
943.6

 
$
692.6

 
$
691.3

5.125% senior notes due 2021
700.0

 
733.3

 
700.0

 
720.9

5.625% senior notes due 2024
300.0

 
321.0

 
300.0

 
312.0

Euro term loan(1)
160.8

 
161.4

 
181.2

 
181.4

Other borrowings
131.4

 
131.4

 
142.0

 
142.0

Total debt
$
2,232.6

 
$
2,290.7

 
$
2,015.8

 
$
2,047.6

___________________________________________________________________________________________________________________
(1)
Carrying amounts are net of unamortized discounts of $2.0 million and $0.4 million as of March 31, 2015, and $2.1 million and $0.4 million as of December 31, 2014, related to the U.S. dollar term loan and euro term loan, respectively.
At March 31, 2015, 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.
Commodity 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

13



Notes to Consolidated Financial Statements (Continued)

4. Fair Value Measurements and Risk (Continued)

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. Current open contracts hedge forecasted transactions until December 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 March 31, 2015, the contract volume, or notional amount, of the commodity contracts was 3.7 million MMBtu (million British thermal units) with a total contract value of $12.9 million.
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 March 31, 2015, the contract volume, or notional amount, of the commodity option contracts was 0.2 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 February 2016. 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 March 31, 2015, the contract volume, or notional amount, of the commodity contracts was 1.4 million pounds with a total contract value of $1.2 million.
Currency Derivatives
Because Grace operates in over 40 countries and does business 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: (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.
Debt and Interest Rate Swap Agreements
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 hedged interest period.
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 LIBOR component of the interest on $250 million of Grace's

14



Notes to Consolidated Financial Statements (Continued)

4. Fair Value Measurements and Risk (Continued)

term debt at a rate of 2.393%. 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 March 31, 2015, and December 31, 2014:
 
Fair Value Measurements at March 31, 2015, 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
$
9.8

 
$

 
$
9.8

 
$

Total Assets
$
9.8

 
$

 
$
9.8

 
$

Liabilities
 
 
 
 
 
 
 
Currency derivatives
$
0.4

 
$

 
$
0.4

 
$

Interest rate derivatives
9.0

 

 
9.0

 

Commodity derivatives
2.7

 

 
2.7

 

Total Liabilities
$
12.1

 
$

 
$
12.1

 
$

 
Fair Value Measurements at December 31, 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
$
3.3

 
$

 
$
3.3

 
$

Total Assets
$
3.3

 
$

 
$
3.3

 
$

Liabilities
 
 
 
 
 
 
 
Currency derivatives
$
0.1

 
$

 
$
0.1

 
$

Interest rate derivatives
5.5

 

 
5.5

 

Commodity derivatives
2.6

 

 
2.6

 

Total Liabilities
$
8.2

 
$

 
$
8.2

 
$


15



Notes to Consolidated Financial Statements (Continued)

4. Fair Value Measurements and Risk (Continued)

The following tables present the location and fair values of derivative instruments included in the Consolidated Balance Sheets as of March 31, 2015, and December 31, 2014:

March 31, 2015
(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
 
$
2.7

Currency contracts
Other current assets
 
6.5

 
Other current liabilities
 

Interest rate contracts
Other current assets
 

 
Other current liabilities
 
3.9

Currency contracts
Other assets
 
3.1

 
Other liabilities
 

Interest rate contracts
Other assets
 

 
Other liabilities
 
5.1

Derivatives not designated as hedging instruments under ASC 815:
 
 
 
 
 
 
 
Currency contracts
Other current assets
 
0.2

 
Other current liabilities
 
0.4

Total derivatives
 
 
$
9.8

 
 
 
$
12.1


December 31, 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
 
$

 
Other current liabilities
 
$
2.6

Currency contracts
Other current assets
 
0.8

 
Other current liabilities
 

Interest rate contracts
Other current assets
 

 
Other current liabilities
 
2.5

Currency contracts
Other assets
 
0.9

 
Other liabilities
 

Interest rate contracts
Other assets
 

 
Other liabilities
 
3.0

Derivatives not designated as hedging instruments under ASC 815:
 
 
 
 
 
 
 
Currency contracts
Other current assets
 
1.6

 
Other current liabilities
 
0.1

Total derivatives
 
 
$
3.3

 
 
 
$
8.2


16



Notes to Consolidated Financial Statements (Continued)

4. 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 (loss) ("OCI") for the three months ended March 31, 2015 and 2014:
Three Months Ended March 31, 2015
(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
$
(3.5
)
 
Interest expense
 
$
(0.6
)
Currency contracts
6.4

 
Other expense
 
6.5

Currency contracts
0.1

 
Cost of goods sold
 

Commodity contracts
(1.0
)
 
Cost of goods sold
 
(1.0
)
Total derivatives
$
2.0

 
 
 
$
4.9

 
 
 
 
 
 
 
 
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
 
$
(0.5
)
Three Months Ended March 31, 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
$
1.0

 
Interest expense
 
$

Currency contracts
0.5

 
Other expense
 
0.5

Commodity contracts
0.4

 
Cost of goods sold
 
0.3

Total derivatives
$
1.9

 
 
 
$
0.8

 
 
 
 
 
 
 
 
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
 
$
4.5

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 €148.5 million term loan principal as a hedging instrument of its net investment in European subsidiaries.
The following table presents the location and amount of gains and losses on nonderivative instruments designated as net investment hedges as of March 31, 2015; there were no net investment hedges as of March

17



Notes to Consolidated Financial Statements (Continued)

4. Fair Value Measurements and Risk (Continued)

31, 2014. There were no reclassifications of the effective portion of net investment hedges out of OCI and into earnings for the period presented in the table below.
Three Months Ended March 31, 2015
(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
$
20.0

 
Not applicable
 
$

Total nonderivatives
$
20.0

 
 
 
$

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.
5. Income Taxes
The annualized effective tax rate on 2015 forecasted income is estimated to be 35.0% as of March 31, 2015, compared with 17.1% for the year ended December 31, 2014. The increase in the rate compared with the prior year primarily relates to a 2014 benefit for the release of reserves related to uncertain tax positions.
Grace generated approximately $1,300 million in U.S. federal tax deductions in 2014 relating to its emergence from bankruptcy, including approximately $670 million relating to payments made upon emergence and $632 million upon payment of the PI deferred payment obligation, as well as $490 million in U.S. federal tax deductions in February 2015 upon repurchase of the warrant held by the PI Trust. 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 2015 and future years. Grace also expects to generate U.S. federal tax deductions of $30 million upon payment of the ZAI PD deferred payment obligation in 2017. The present value of the expected settlement amount has already been recorded as a deferred tax asset for temporary differences. Grace expects to carryforward U.S. federal NOLs generated during 2014 and 2015. 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. (See Note 8 for Chapter 11 information.)

18



Notes to Consolidated Financial Statements (Continued)

5. Income Taxes (Continued)

The following table summarizes the balance of deferred tax assets, net of deferred tax liabilities, at March 31, 2015, of $807.0 million:
 
Deferred Tax Asset
(Net of Liabilities)(2)
 
Valuation Allowance
 
Net Deferred Tax Asset
United States—Federal(1)
$
717.1

 
$
(2.4
)
 
$
714.7

United States—States(1)
61.4

 
(5.9
)
 
55.5

Germany
35.5

 

 
35.5

Other Foreign
5.5

 
(4.2
)
 
1.3

Total
$
819.5

 
$
(12.5
)
 
$
807.0

___________________________________________________________________________________________________________________
(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, and the $490 million warrant repurchase on February 3, 2015, plus the $30 million ZAI PD deferred payment obligation, account for a significant portion of the U.S. federal and state deferred tax assets.
(2)
Deferred tax assets are net of $5.7 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
2015 - 2035
Brazil
Unlimited Carryforward
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 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 relies upon assumptions and estimates about future activities, including the amount of future federal, state and international pretax operating income that Grace will 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.
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 $3 million.

19



Notes to Consolidated Financial Statements (Continued)

6. 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)
March 31,
2015
 
December 31,
2014
Overfunded defined benefit pension plans
$
43.1

 
$
44.1

Underfunded defined benefit pension plans
(79.7
)
 
(79.5
)
Unfunded defined benefit pension plans
(349.2
)
 
(378.0
)
Total underfunded and unfunded defined benefit pension plans
(428.9
)
 
(457.5
)
Pension liabilities included in other current liabilities
(14.8
)
 
(15.6
)
Net funded status
$
(400.6
)
 
$
(429.0
)
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 $43.1 million as of March 31, 2015, 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 $443.7 million as of March 31, 2015.
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 provided various levels of benefits to employees hired before 1993 who retired 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 that it would discontinue its postretirement medical plan for all U.S. employees effective October 31, 2014, and 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 amortized $39.5 million from accumulated other comprehensive income into the Consolidated Statement of Operations during the five-month period from June to October 2014.
Components of Net Periodic Benefit Cost (Income)
 
Three Months Ended March 31,
 
2015
 
2014
 
Pension
 
Other Post
Retirement
 
Pension
 
Other Post
Retirement
(In millions)
U.S.
 
Non-U.S.
 
 
U.S.
 
Non-U.S.
 
Service cost
$
6.4

 
$
3.0

 
$

 
$
5.9

 
$
2.7

 
$

Interest cost
13.8

 
4.2

 
0.1

 
15.2

 
5.7

 
0.6

Expected return on plan assets
(17.6
)
 
(3.4
)
 

 
(17.5
)
 
(3.9
)
 

Amortization of prior service cost (credit)
0.1

 

 
(1.0
)
 
0.2

 

 
(0.1
)
Amortization of net deferred actuarial loss (gain)

 

 
0.2

 

 

 
(0.2
)
Mark-to-market adjustment

 

 

 
(3.1
)
 

 

Net periodic benefit cost (income)
$
2.7

 
$
3.8

 
$
(0.7
)
 
$
0.7

 
$
4.5

 
$
0.3


20



Notes to Consolidated Financial Statements (Continued)

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

At emergence, benefit payments of approximately $27 million were paid from a U.S. nonqualified pension plan in connection with Grace's emergence from bankruptcy. As a result, that plan was remeasured as of March 1, 2014, using a discount rate of 4.43%. The remeasurement resulted in a mark-to-market gain of $3.1 million.
Plan Contributions and Funding    Grace intends to satisfy its funding obligations under the U.S. qualified pension plans and to comply with all of the requirements of the Employee Retirement Income Security Act of 1974 ("ERISA"). For ERISA purposes, funded status is calculated on a different basis than under U.S. GAAP.
Grace intends to fund non-U.S. pension plans based on applicable legal requirements and actuarial and trustee recommendations.
Defined Contribution Retirement Plan    Grace sponsors a defined contribution retirement plan for its employees in the United States. This plan is qualified under section 401(k) of the U.S. tax code. Currently, Grace contributes an amount equal to 100% of employee contributions, up to 6% of an individual employee's salary or wages. Grace's costs related to this benefit plan for the three months ended March 31, 2015, were $4.1 million compared with $3.3 million for the prior-year quarter.
7. Other Balance Sheet Accounts
(In millions)
March 31,
2015
 
December 31,
2014
Other Current Liabilities
 
 
 
Accrued compensation
$
67.7

 
$
77.0

Income tax payable
34.8

 
34.1

Accrued interest
25.5

 
21.0

Customer volume rebates
24.9

 
37.8

Deferred revenue
19.3

 
19.4

Pension liabilities
14.8

 
15.6

Environmental contingencies
14.0

 
21.5

Deferred tax liability
1.6

 
1.5

Other accrued liabilities
113.3

 
112.1

 
$
315.9

 
$
340.0

Accrued compensation in the table above includes salaries and wages as well as estimated current amounts due under the annual and long-term incentive programs.
8. Commitments and Contingent Liabilities
Asbestos-Related Liabilities    Grace emerged from an asbestos-related Chapter 11 bankruptcy on February 3, 2014 (the “Effective Date”). Under its plan of reorganization, all pending and future asbestos-related claims are channeled for resolution to either a personal injury trust (the “PI Trust”) or a property damage trust (the “PD Trust”). The trusts are the sole recourse for holders of asbestos-related claims. The channeling injunctions issued by the bankruptcy court prohibit holders of asbestos-related claims from asserting such claims directly against Grace.
Following the repurchase of the warrant issued to the PI Trust in connection with emergence from bankruptcy, Grace has satisfied all of its financial obligations to the PI Trust.
Grace has fixed and contingent obligations remaining to the PD Trust. With respect to property damage claims related to Grace’s former attic insulation product installed in the U.S. ("ZAI PD Claims"), the PD Trust was funded with $34.4 million on the Effective Date. Grace is obligated to make a payment of $30 million to the PD Trust in respect of ZAI PD Claims on February 3, 2017, and has recorded a liability of $28.4 million representing the present value of this amount in "debt payable after one year" in the accompanying Consolidated Balance

21



Notes to Consolidated Financial Statements (Continued)

8. Commitments and Contingent Liabilities (Continued)

Sheets. Grace is also obligated to make up to 10 contingent deferred payments of $8 million per year to the PD Trust in respect of ZAI PD Claims 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 PD Trust in respect of ZAI PD Claims fall below $10 million during the preceding year. Grace has not accrued for the 10 additional payments since Grace does not currently believe they are probable. Grace is not obligated to make additional payments to the PD Trust in respect of ZAI PD Claims beyond the payments described above. Grace has satisfied all of its financial obligations with respect to Canadian ZAI PD Claims.
With respect to other asbestos property damage claims ("Other PD Claims"), claims unresolved as of the Effective Date are to be litigated in the bankruptcy court and any future claims are to be litigated in a federal district court, in each case pursuant to procedures to be approved by the bankruptcy court. To the extent any such Other PD Claims are determined to be allowed claims, they are to be paid in cash by the PD Trust. Grace is obligated to make a payment to the PD Trust every six months in the amount of any Other PD Claims allowed during the preceding six months plus interest (if applicable) and the amount of PD Trust expenses for the preceding six months (the "PD Obligation"). 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 Trust in respect of the PD Obligation. Grace has accrued for those unresolved Other PD Claims that it believes are probable and estimable. Grace has not accrued for other unresolved or unasserted Other PD Claims as it does not believe that payment is probable. As of March 31, 2015, Grace has accrued $0.4 million since the Effective Date related to two Other PD Claims that were filed in the bankruptcy but were not resolved until after 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 PD Trust in the event of default, subject to customary anti-dilution provisions.
This summary of the commitments and contingencies related to the Chapter 11 proceeding does not purport to be complete and is qualified in its entirety by reference to the plan of reorganization and the exhibits and documents related thereto, which have been filed with the SEC.
Environmental Remediation    Grace is subject to loss contingencies resulting from extensive and evolving federal, state, local and foreign environmental laws and regulations relating to the generation, storage, handling, discharge, disposition and stewardship of hazardous wastes and other materials. Grace accrues for anticipated costs associated with response efforts where an assessment has indicated that a probable liability has been incurred and the cost can be reasonably estimated. These accruals do not take into account any discounting for the time value of money.
Grace's environmental liabilities are reassessed whenever circumstances become better defined or response efforts and their costs can be better estimated. These liabilities are evaluated based on currently available information, including the progress of remedial investigation at each site, the current status of discussions with regulatory authorities regarding the method and extent of remediation at each site, existing technology, prior experience in contaminated site remediation and the apportionment of costs among potentially responsible parties.
Estimated Investigation and Remediation Costs
At March 31, 2015, Grace's estimated liability for environmental investigation and remediation costs totaled $54.2 million, compared with $61.7 million at December 31, 2014, and was included in "other current liabilities" and "other liabilities" in the Consolidated Balance Sheets. These amounts are based on funding and/or remediation agreements in place and Grace's estimate of costs for sites not subject to a formal remediation plan for which sufficient information is available to estimate response costs. These amounts do not include certain response costs for the Libby vermiculite mine area or certain vermiculite expansion facilities, which may be material but are not currently estimable. Due to these vermiculite-related matters, it is probable that Grace's actual response costs will exceed Grace's current estimates by material amounts. Net cash paid against previously established reserves for the three months ended March 31, 2015 and 2014, were $4.2 million and $1.8 million, respectively.

22



Notes to Consolidated Financial Statements (Continued)

8. Commitments and Contingent Liabilities (Continued)

Vermiculite-Related Matters
Grace purchased a vermiculite mine in Libby, Montana, in 1963 and operated it until 1990. Vermiculite concentrate from the Libby mine was used in the manufacture of attic insulation and other products. Some of the vermiculite ore contained naturally occurring asbestos. The U.S. Environmental Protection Agency (the "EPA") and Grace are engaged in a remedial investigation of the Libby mine and the surrounding area.
During 2010, the EPA began reinvestigating certain facilities on a list of 105 facilities where vermiculite concentrate from the Libby mine may have been used, stored or processed. Grace is cooperating with the EPA on this reinvestigation and has remediated several of these facilities. It is probable that the EPA will request additional remediation at other facilities.
Grace's total estimated liability for response costs that are currently estimable related to its former vermiculite operations in Libby and vermiculite processing sites outside of Libby at March 31, 2015, and December 31, 2014, was $13.4 million and $19.4 million, respectively, excluding interest where applicable. It is probable that Grace's ultimate liability for these vermiculite-related matters will exceed current estimates by material amounts. Grace's current recorded liability will be adjusted as Grace receives new information and amounts become reasonably estimable.
Non-Vermiculite-Related Matters
At March 31, 2015, and December 31, 2014, Grace's estimated liability for response costs at sites not related to its former vermiculite mining and processing activities was $40.8 million and $42.3 million, respectively. This liability relates to Grace's current and former operations, including its share of liability for off-site disposal at facilities where it has been identified as a potentially responsible party. Grace's estimated liability is based upon regulatory requirements and environmental conditions at each site. As Grace receives new information its estimated liability may change materially.
Purchase Commitments    Grace uses purchase commitments to ensure supply and to minimize the volatility of major components of direct manufacturing costs including natural gas, certain metals, rare earths, asphalt, amines and other materials. Such commitments are for quantities that Grace fully expects to use in its normal operations.
Guarantees and Indemnification Obligations    Grace is a party to many contracts containing guarantees and indemnification obligations. These contracts primarily consist of:
Product warranties with respect to certain products sold to customers in the ordinary course of business. These warranties typically provide that products will conform to specifications. Grace accrues a warranty liability on a transaction-specific basis depending on the individual facts and circumstances related to each sale. Both the liability and annual expense related to product warranties are immaterial to the Consolidated Financial Statements.
Performance guarantees offered to customers under certain licensing arrangements. Grace has not established a liability for these arrangements based on past performance.
Licenses of intellectual property by Grace to third parties in which Grace has agreed to indemnify the licensee against third party infringement claims.
Contracts providing for the sale of a former business unit or product line in which Grace has agreed to indemnify the buyer against liabilities arising prior to the closing of the transaction, including environmental liabilities.
Guarantees of real property lease obligations of third parties, typically arising out of (a) leases entered into by former subsidiaries of Grace, or (b) the assignment or sublease of a lease by Grace to a third party.

23



Notes to Consolidated Financial Statements (Continued)

8. Commitments and Contingent Liabilities (Continued)

Financial Assurances    Financial assurances have been established for a variety of purposes, including insurance and environmental matters, trade-related commitments and other matters. At March 31, 2015, Grace had gross financial assurances issued and outstanding of $134.4 million, composed of $34.2 million of surety bonds issued by various insurance companies and $100.2 million of standby letters of credit and other financial assurances issued by various banks.
Accounting for Contingencies    Although the outcome of each of the matters discussed above cannot be predicted with certainty, Grace has assessed its risk and has made accounting estimates as required under U.S. GAAP.
9. Restructuring Expenses
In the first quarter, Grace incurred costs from restructuring actions as a result of changes in the business environment and its business structure, which are included in "other expense, net" in the Consolidated Statements of Operations. Grace incurred $9.5 million ($2.6 million in Catalysts Technologies, $2.3 million in Construction Products, $0.6 million in Materials Technologies, and $4.0 million in Corporate) of restructuring expenses during the first quarter, compared with $0.7 million during the prior-year quarter. These costs are not included in segment operating income. Substantially all costs related to the restructuring programs are expected to be paid by December 31, 2015.
Restructuring Expenses
(In millions)
Three Months Ended March 31,
2015
 
2014
Restructuring expenses
$
9.5

 
$
0.7

Total restructuring expenses
$
9.5

 
$
0.7

Restructuring Liability
(In millions)
Total
Balance, December 31, 2014
$
4.5

Accruals for severance and other costs
9.5

Payments
(3.7
)
Currency translation adjustments and other
0.1

Balance, March 31, 2015
$
10.4


24



Notes to Consolidated Financial Statements (Continued)

10. Other Expense, net

Components of other expense, net are as follows:
 
Three Months Ended March 31,
(In millions)
2015
 
2014
Restructuring expenses
$
9.5

 
$
0.7

Asbestos and bankruptcy-related charges, net
(8.7
)
 
8.8

Repositioning expenses
6.9

 

Provision for environmental remediation, net
(3.3
)
 
1.2

Currency transaction effects
(2.8
)
 
0.3

Net loss on sales of investments and disposals of assets
0.4

 
0.7

Interest income
(0.1
)
 
(0.5
)
Other miscellaneous income
(0.6
)
 
(1.2
)
Total other expense, net
$
1.3

 
$
10.0

In the first quarter, Grace finalized its accounting for emergence from bankruptcy and recorded a gain of $9.0 million reflecting the final resolution of bankruptcy liabilities.
11. Other Comprehensive Loss
The following tables present the pre-tax, tax, and after-tax components of Grace's other comprehensive loss for the three months ended March 31, 2015 and 2014:
Three Months Ended March 31, 2015
(In millions)
Pre-Tax Amount
 
Tax Benefit/ (Expense)
 
After-Tax Amount
Defined benefit pension and other postretirement plans:
 
 
 
 
 
Amortization of net prior service credit included in net periodic benefit cost
$
(0.9
)
 
$
0.4

 
$
(0.5
)
Amortization of net deferred actuarial loss included in net periodic benefit cost
0.2

 
(0.1
)
 
0.1

Benefit plans, net
(0.7
)
 
0.3

 
(0.4
)
Currency translation adjustments
(10.8
)
 

 
(10.8
)
Loss from hedging activities
(2.9
)
 
1.0

 
(1.9
)
Other comprehensive loss attributable to W. R. Grace & Co. shareholders
$
(14.4
)
 
$
1.3

 
$
(13.1
)
Three Months Ended March 31, 2014
(In millions)
Pre-Tax Amount
 
Tax Benefit/ (Expense)
 
After-Tax Amount
Defined benefit pension and other postretirement plans:
 
 
 
 
 
Amortization of net prior service cost included in net periodic benefit cost
$
0.1

 
$

 
$
0.1

Amortization of net deferred actuarial gain included in net periodic benefit cost
(0.2
)
 

 
(0.2
)
Benefit plans, net
(0.1
)
 

 
(0.1
)
Currency translation adjustments
(2.1
)
 

 
(2.1
)
Gain from hedging activities
1.1

 
(0.4
)
 
0.7

Gain on securities available for sale
0.1

 

 
0.1

Other comprehensive loss attributable to W. R. Grace & Co. shareholders
$
(1.0
)
 
$
(0.4
)
 
$
(1.4
)

25



Notes to Consolidated Financial Statements (Continued)

11. Other Comprehensive Loss (Continued)

The following tables present the changes in accumulated other comprehensive income (loss), net of tax, for the three months ended March 31, 2015 and 2014:
Three Months Ended March 31, 2015
(In millions)
Defined Benefit Pension and Other Postretirement Plans
 
Currency Translation Adjustments
 
Gain (Loss) from Hedging Activities
 
Total
Beginning balance
$
4.0

 
$
(22.8
)
 
$
(5.0
)
 
$
(23.8
)
Other comprehensive income (loss) before reclassifications

 
(10.8
)
 
2.3

 
(8.5
)
Amounts reclassified from accumulated other comprehensive income
(0.4
)
 

 
(4.2
)
 
(4.6
)
Net current-period other comprehensive loss
(0.4
)
 
(10.8
)
 
(1.9
)
 
(13.1
)
Ending balance
$
3.6

 
$
(33.6
)
 
$
(6.9
)
 
$
(36.9
)
Three Months Ended March 31, 2014
(In millions)
Defined Benefit Pension and Other Postretirement Plans
 
Currency Translation Adjustments
 
Gain (Loss) from Hedging Activities
 
Unrealized Loss on Investment
 
Gain on Securities Available for Sale
 
Total
Beginning balance
$
6.6

 
$
5.2

 
$
(0.5
)
 
$
(0.8
)
 
$
0.1

 
$
10.6

Other comprehensive income (loss) before reclassifications

 
(2.1
)
 
1.2

 

 
0.1

 
(0.8
)
Amounts reclassified from accumulated other comprehensive income
(0.1
)
 

 
(0.5
)
 

 

 
(0.6
)
Net current-period other comprehensive income (loss)
(0.1
)
 
(2.1
)
 
0.7

 

 
0.1

 
(1.4
)
Ending balance
$
6.5

 
$
3.1

 
$
0.2

 
$
(0.8
)
 
$
0.2

 
$
9.2

Grace is a global enterprise operating in over 40 countries with local currency generally deemed to be the functional currency for accounting purposes. The currency translation amount represents the adjustments necessary to translate the balance sheets valued in local currencies to the U.S. dollar as of the end of each period presented, and to translate revenues and expenses at average exchange rates for each period presented.
See Note 4 for a discussion of hedging activities. See Note 6 for a discussion of pension plans and other postretirement benefit plans.

26



Notes to Consolidated Financial Statements (Continued)

12. Earnings Per Share

The following table shows a reconciliation of the numerators and denominators used in calculating basic and diluted earnings per share.
 
Three Months Ended March 31,
(In millions, except per share amounts)
2015
 
2014
Numerators
 
 
 
Net income attributable to W. R. Grace & Co. shareholders
$
52.7

 
$
50.1

Denominators
 
 
 
Weighted average common shares—basic calculation
72.8

 
77.0

Dilutive effect of employee stock options
0.7

 
1.1

Weighted average common shares—diluted calculation
73.5

 
78.1

Basic earnings per share
$
0.72

 
$
0.65

Diluted earnings per share
$
0.72

 
$
0.64

There were approximately 0.2 million anti-dilutive options outstanding for the three months ended March 31, 2015.
On February 4, 2014, Grace announced that the Grace Board of Directors had authorized a share repurchase program of up to $500 million expected to be completed over the following 12 to 24 months at the discretion of management. Grace completed this initial share repurchase program on January 15, 2015. On February 5, 2015, Grace announced that its Board of Directors has authorized an additional share repurchase program of up to $500 million. The timing of the repurchases and the actual amount repurchased will depend on a variety of factors, including the market price of Grace's shares, the strategic deployment of capital, and general market and economic conditions. During the three months ended March 31, 2015, Grace repurchased 581,204 shares of Company common stock for $55.6 million pursuant to the terms of its share repurchase programs.
13. Operating Segment Information
Grace is a global producer of specialty chemicals and specialty materials. Grace manages its business through three operating segments: Grace Catalysts Technologies, Grace Materials Technologies, and Grace Construction Products. Grace Catalysts Technologies includes catalysts and related products and technologies used in refining, petrochemical and other chemical manufacturing applications. Grace's Advanced Refining Technologies (ART) joint venture is managed in this segment. ART is an unconsolidated affiliate, and Grace accounts for ART using the equity method as discussed in Note 14. Grace Materials Technologies includes packaging products and engineered materials, coatings and sealants used in consumer, industrial, and pharmaceutical applications. Grace Construction Products includes specialty construction chemicals and specialty building materials used in commercial, infrastructure and residential construction. Intersegment sales are eliminated in consolidation. The table below presents information related to Grace's operating segments. Only those corporate expenses directly related to the operating segments are allocated for reporting purposes. All remaining corporate items are reported separately and labeled as such.
Grace excludes defined benefit pension expense from the calculation of segment operating income. Grace believes that the exclusion of defined benefit pension expense provides a better indicator of its operating segment performance as defined benefit pension expense is not managed at an operating segment level.
Grace defines Adjusted EBIT (a non-GAAP financial measure) to be net income adjusted for interest income and expense; income taxes; costs related to Chapter 11 and asbestos; restructuring and repositioning expenses and asset impairments; pension costs other than service and interest costs, expected returns on plan assets, and amortization of prior service costs/credits; income and expense items related to divested businesses, product lines, and certain other investments; gains and losses on sales of businesses, product lines, and certain other investments; and certain other unusual or infrequent items that are not representative of underlying trends.

27



Notes to Consolidated Financial Statements (Continued)

13. Operating Segment Information (Continued)

Operating Segment Data
 
Three Months Ended March 31,
(In millions)
2015
 
2014
Net Sales
 
 
 
Catalysts Technologies
$
281.0

 
$
284.5

Materials Technologies
200.3

 
219.8

Construction Products
239.3

 
240.2

Total
$
720.6

 
$
744.5

Adjusted EBIT
 
 
 
Catalysts Technologies segment operating income
$
73.7

 
$
71.2

Materials Technologies segment operating income
41.0

 
45.5

Construction Products segment operating income
29.4

 
25.4

Corporate costs
(20.6
)
 
(22.5
)
Certain pension costs
(6.5
)
 
(8.3
)
Total
$
117.0

 
$
111.3

Corporate costs include corporate support function costs and other corporate costs such as professional fees and insurance premiums.
Grace Adjusted EBIT for the three months ended March 31, 2015 and 2014, is reconciled below to income before income taxes presented in the accompanying Consolidated Statements of Operations.
Reconciliation of Operating Segment Data to Financial Statements
 
Three Months Ended March 31,
(In millions)
2015
 
2014
Grace Adjusted EBIT
$
117.0

 
$
111.3

Benefit (costs) related to Chapter 11 and asbestos, net
9.7

 
(15.5
)
Pension MTM adjustment and other related costs, net
(4.7
)
 
4.8

Restructuring expenses
(9.5
)
 
(0.7
)
Repositioning expenses
(6.9
)
 

Income and expense items related to divested businesses
0.7

 
(1.1
)
Interest expense, net
(24.9
)
 
(18.9
)
Net income attributable to noncontrolling interests
0.1

 
0.2

Income before income taxes
$
81.5

 
$
80.1


28



Notes to Consolidated Financial Statements (Continued)

13. Operating Segment Information (Continued)

The table below presents information related to the geographic areas in which Grace operates. Sales are attributed to geographic areas based on customer location.
Geographic Area Data
 
Three Months Ended March 31,
(In millions)
2015
 
2014
Net Sales
 
 
 
United States
$
214.6

 
$
206.0

Canada and Puerto Rico
17.8

 
16.6

Total North America
232.4

 
222.6

Europe Middle East Africa
235.2

 
274.9

Asia Pacific
176.6

 
164.9

Latin America
76.4

 
82.1

Total
$
720.6

 
$
744.5

14. Unconsolidated Affiliate
Grace accounts for its 50% ownership interest in ART using the equity method of accounting. Grace's investment in ART amounted to $106.6 million and $113.1 million as of March 31, 2015, and December 31, 2014, respectively, and the amount included in "equity in earnings of unconsolidated affiliate" in the accompanying Consolidated Statements of Operations totaled $6.2 million for the three months ended March 31, 2015, compared with $3.7 million for the three months ended March 31, 2014, respectively.
Grace and ART transact business on a regular basis and maintain several agreements in order to operate the joint venture. These agreements are treated as related party activities with an unconsolidated affiliate. The table below presents summary financial data related to transactions between Grace and ART.
 
Three Months Ended March 31,
(In millions)
2015
 
2014
Grace sales of catalysts to ART
$
54.2

 
$
65.5

Charges for fixed costs, research and development and selling, general and administrative services to ART
5.9

 
7.5

Grace and Chevron provide lines of credit in the amount of $15.0 million each at a commitment fee of 0.1% of the credit amount. These agreements expire on February 26, 2016. No amounts were outstanding at March 31, 2015, and December 31, 2014.

29


ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We generally refer to the quarter ended March 31, 2015, as the "first quarter" and the quarter ended March 31, 2014, as the "prior-year quarter." Our references to "advanced economies" and "emerging regions" refer to classifications established by the International Monetary Fund. See Analysis of Operations for a discussion of our non-GAAP performance measures.
Results of Operations
First Quarter Performance Summary
Following is a summary of our financial performance for the first quarter compared with the prior-year quarter.
Net sales decreased 3.2% to $720.6 million.
Adjusted EBIT increased 5.1% to $117.0 million.
Grace net income increased 5.2% to $52.7 million or $0.72 per diluted share. Adjusted EPS was $0.82 per diluted share.
Adjusted EBIT Return On Invested Capital was 32.2% on a trailing four quarters basis compared with 27.2% for the 2014 first quarter.
On February 5, 2015, we announced that the Grace Board of Directors had approved a plan to separate Grace into two independent, publicly traded companies. The two companies, to be named prior to closing, will be "New Grace," consisting of the Catalysts Technologies and Materials Technologies business segments (excluding the packaging products product group), and "New GCP," consisting of the Construction Products business segment and the packaging products product group. We intend that the separation transaction will be a tax-free spin-off to the Company's stockholders for U.S. federal income tax purposes, and we expect the transaction to be completed in the 2016 first quarter.
Summary Description of Business
We are engaged in specialty chemicals and specialty materials businesses on a worldwide basis through our three operating segments.
Grace Catalysts Technologies produces and sells catalysts and related products and technologies used in refining, petrochemical and other chemical manufacturing applications, as follows:
Fluid catalytic cracking catalysts, also called FCC catalysts, that help to "crack" the hydrocarbon chain in distilled crude oil to produce transportation fuels, such as gasoline and diesel fuels, and other petroleum-based products; and FCC additives used to reduce sulfur in gasoline, maximize propylene production from refinery FCC units, and reduce emissions of sulfur oxides, nitrogen oxides and carbon monoxide from refinery FCC units.
Hydroprocessing catalysts (HPC), most of which are marketed through our ART joint venture with Chevron Products Company in which we hold a 50% economic interest, that are used in process reactors to upgrade heavy oils into lighter, more useful products by removing impurities such as nitrogen, sulfur and heavy metals, allowing less expensive feedstocks to be used in the petroleum refining process (ART is not consolidated in our financial statements, so ART's sales are excluded from our sales).
Polyolefin catalysts and catalyst supports, also called specialty catalysts (SC), for the production of polypropylene and polyethylene thermoplastic resins, which can be customized to enhance the performance of a wide range of industrial and consumer end-use applications including high pressure pipe, geomembranes, food packaging, automotive parts, medical devices, and textiles; chemical catalysts used in a variety of industrial, environmental and consumer applications; and gas-phase polypropylene process technology, which provides our licensees with a reliable capability to manufacture polypropylene products for a broad array of end-use applications.

30


Grace Materials Technologies produces and sells specialty materials, coatings and sealants and related products used in coatings, consumer, industrial, pharmaceutical, and packaging applications, as follows:
Engineered materials, including silica-based and silica-alumina-based materials, used in:
Coatings and print media applications, including functional additives that provide matting effects and corrosion protection for industrial and consumer coatings and media and paper products to enhance quality in ink jet coatings.
Consumer applications, as a free-flow agent, carrier or processing aid in food and personal care products; as a toothpaste abrasive and thickener; and for the processing and stabilization of edible oils and beverages.
Industrial applications, such as tires and rubber, precision investment casting, refractory, insulating glass windows, adsorbents for use in petrochemical and natural gas processes and biofuels, various functions such as reinforcement, high temperature binding and moisture scavenging.
Pharmaceutical, life science and related applications including silica-based separation media, excipients and pharmaceutical intermediates; complementary purification products, chromatography consumables, and instruments; and CO2 absorbents used in anesthesiology and mine safety applications.
Packaging products, including can and closure sealants used to seal and enhance the shelf life of can and bottle contents; coatings for cans and closures that prevent metal corrosion, protect package contents from the influence of metal and ensure proper adhesion of sealing compounds; and scavenging technologies designed to reduce off-taste and extend the shelf-life of packaged products.
Grace Construction Products produces and sells construction chemicals and building materials, as follows:
Specialty construction chemicals (SCC) used to improve the performance of portland cement and materials based on portland cement including:
Concrete admixtures that are sold to ready-mix, precast, and sprayed concrete producers to improve the rheology, workability, quality, durability and other engineering properties of concrete, reduce production costs and provide differentiated product offerings. Certain of our concrete admixtures include polyolefin fibers which are used to improve the strength of concrete and enables the replacement of steel reinforcement, in certain cases.
Cement additives that are sold to manufacturers of portland cement to improve energy efficiency in cement milling operations and to enhance the characteristics of finished cement. Our additives are also used by cement manufacturers to meet national standards for cement quality at lower production cost and with a reduced environmental footprint, including lower CO2 emissions.
Specialty building materials (SBM) used in both new construction and renovation/repair projects including:
Sheet and liquid membrane systems that protect commercial buildings, residential buildings and infrastructure from above- and below-grade water penetration and above-grade vapor and air penetration and underlayments used to protect sloped roofs from wind and water penetration.
Global Scope
We operate our business on a global scale with approximately 71% of our annual 2014 sales and 70% of our three months sales outside the United States. We operate in over 40 countries and do business in more than 50 currencies. We manage our operating segments on a global basis, to serve global markets. Currency fluctuations affect our reported results of operations, cash flows, and financial position.

31


Analysis of Operations
We have set forth in the table below our key operating statistics with percentage changes for the first quarter compared with the prior-year quarter. Please refer to this Analysis of Operations when reviewing this Management's Discussion and Analysis of Financial Condition and Results of Operations.
We define Adjusted EBIT (a non-GAAP financial measure) to be net income adjusted for interest income and expense; income taxes; costs related to Chapter 11 and asbestos; restructuring and repositioning expenses and asset impairments; pension costs other than service and interest costs, expected returns on plan assets, and amortization of prior service costs/credits; income and expense items related to divested businesses, product lines, and certain other investments; gains and losses on sales of businesses, product lines, and certain other investments; and certain other unusual or infrequent items that are not representative of underlying trends.
We define Adjusted EBITDA (a non-GAAP financial measure) to be Adjusted EBIT adjusted for depreciation and amortization.
We define Adjusted Earnings Per Share (EPS) (a non-GAAP financial measure) to be diluted EPS adjusted for costs related to Chapter 11 and asbestos; restructuring and repositioning expenses and asset impairments; pension costs other than service and interest costs, expected returns on plan assets, and amortization of prior service costs/credits; income and expense items related to divested businesses, product lines and certain other investments; gains and losses on sales of businesses, product lines and certain other investments; certain other unusual or infrequent items that are not representative of underlying trends; and certain discrete tax items.
We define Adjusted EBIT Return On Invested Capital (a non-GAAP financial measure) to be Adjusted EBIT (on a trailing four quarters basis) divided by the sum of net working capital, properties and equipment and certain other assets and liabilities.
We define Segment Gross Margin (a non-GAAP financial measure) to be gross margin adjusted for pension-related costs included in cost of goods sold.
We use Adjusted EBIT as a performance measure in significant business decisions and in determining certain incentive compensation. We use Adjusted EBIT as a performance measure because it provides improved period-to-period comparability for decision making and compensation purposes, and because it better measures the ongoing earnings results of our strategic and operating decisions by excluding the earnings effects of our Chapter 11 proceedings, asbestos liabilities, restructuring and repositioning activities, and divested businesses.
Adjusted EBIT, Adjusted EBITDA, Adjusted EPS, Adjusted EBIT Return On Invested Capital and Segment Gross Margin do not purport to represent income measures as defined under U.S. GAAP, and should not be used as alternatives to such measures as an indicator of our performance. These measures are provided to investors and others to improve the period-to-period comparability and peer-to-peer comparability of our financial results, and to ensure that investors understand the information we use to evaluate the performance of our businesses. We have provided in the following tables a reconciliation of these non-GAAP measures to the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP.
Adjusted EBIT has material limitations as an operating performance measure because it excludes costs related to Chapter 11 and asbestos and may exclude income and expenses from restructuring and repositioning activities and divested businesses, which historically have been material components of our net income. Adjusted EBITDA also has material limitations as an operating performance measure because it excludes the impact of depreciation and amortization expense. Our business is substantially dependent on the successful deployment of capital, and depreciation and amortization expense is a necessary element of our costs. We compensate for the limitations of these measurements by using these indicators together with net income as measured under U.S. GAAP to present a complete analysis of our results of operations. Adjusted EBIT and Adjusted EBITDA should be evaluated together with net income measured under U.S. GAAP for a complete understanding of our results of operations.

32


Analysis of Operations
(In millions, except per share amounts)
Three Months Ended March 31,
2015
 
2014
 
% Change
Net sales:
 
 
 
 
 
Catalysts Technologies
$
281.0

 
$
284.5

 
(1.2
)%
Materials Technologies
200.3

 
219.8

 
(8.9
)%
Construction Products
239.3

 
240.2

 
(0.4
)%
Total Grace net sales
$
720.6

 
$
744.5

 
(3.2
)%
Net sales by region:
 
 
 
 
 
North America
$
232.4

 
$
222.6

 
4.4
 %
Europe Middle East Africa
235.2

 
274.9

 
(14.4
)%
Asia Pacific
176.6

 
164.9

 
7.1
 %
Latin America
76.4

 
82.1

 
(6.9
)%
Total net sales by region
$
720.6

 
$
744.5

 
(3.2
)%
Profitability performance measures:
 
 
 
 
 
Adjusted EBIT(A):
 
 
 
 
 
Catalysts Technologies segment operating income
$
73.7

 
$
71.2

 
3.5
 %
Materials Technologies segment operating income
41.0

 
45.5

 
(9.9
)%
Construction Products segment operating income
29.4

 
25.4

 
15.7
 %
Corporate costs
(20.6
)
 
(22.5
)
 
8.4
 %
Certain pension costs(B)
(6.5
)
 
(8.3
)
 
21.7
 %
Adjusted EBIT
117.0

 
111.3

 
5.1
 %
Benefit (costs) related to Chapter 11 and asbestos, net
9.7

 
(15.5
)
 
 
Pension MTM adjustment and other related costs, net
(4.7
)
 
4.8

 
 
Restructuring expenses
(9.5
)
 
(0.7
)
 
 
Repositioning expenses
(6.9
)
 

 
 
Income and expense items related to divested businesses
0.7

 
(1.1
)
 
 
Interest expense, net
(24.9
)
 
(18.9
)
 
(31.7
)%
Provision for income taxes
(28.7
)
 
(29.8
)
 
3.7
 %
Net income attributable to W. R. Grace & Co. shareholders
$
52.7

 
$
50.1

 
5.2
 %
Diluted EPS (GAAP)
$
0.72

 
$
0.64

 
12.5
 %
Adjusted EPS (non-GAAP)
$
0.82

 
$
0.77

 
6.5
 %

33


<
Analysis of Operations
(In millions)
Three Months Ended March 31,
2015
 
2014
 
% Change
Profitability performance measures:
 

 
 

 
 

Gross margin:
 

 
 

 
 

Catalysts Technologies
38.8
 %
 
39.0
 %
 
(0.2) pts

Materials Technologies
35.2
 %
 
34.9
 %
 
0.3 pts

Construction Products
35.8
 %
 
34.4
 %
 
1.4 pts

Segment Gross Margin
36.8
 %
 
36.3
 %
 
0.5 pts

Pension costs in cost of goods sold
(1.0
)%
 
(0.1