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EX-95 - EXHIBIT 95 - W R GRACE & COexhibit95_20163q.htm
EX-32 - EXHIBIT 32 - W R GRACE & COexhibit32_20163q.htm
EX-31.(I).1 - EXHIBIT 31(I).1 - W R GRACE & COexhibit31i1_20163q.htm
EX-31.(I).2 - EXHIBIT 31(I).2 - W R GRACE & COexhibit31i2_20163q.htm
EX-15 - EXHIBIT 15 - W R GRACE & COexhibit15_20163q.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, 2016
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.
(Exact name of registrant as specified in its charter)
Delaware
(State of incorporation)
 
65-0773649
(I.R.S. Employer Identification No.)
7500 Grace Drive, Columbia, Maryland 21044-4098
(Address of principal executive offices) (Zip code)
(410) 531-4000
(Registrant's telephone number, including area code)
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 website, 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 by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ý    No o
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, 2016
Common Stock, $0.01 par value per share
 
70,095,605 shares
 



TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
_______________________________________________________________________________
Unless otherwise indicated, in this Report the terms "Grace," "we," "us," or "our" mean W. R. Grace & Co. and/or its consolidated subsidiaries and affiliates, and the term "the Company" means W. R. Grace & Co. 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.
The Financial Accounting Standards Board is referred to in this Report as the "FASB." The FASB issues, among other things, Accounting Standards Codifications (ASCs) and Accounting Standards Updates (ASUs).


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, 2016, 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 September 30, 2016, and the related consolidated statements of operations and comprehensive income (loss) for the three-month and nine-month periods ended September 30, 2016 and 2015 and the consolidated statements of cash flows and equity for the nine-month periods ended September 30, 2016 and 2015. 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, 2015, 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, 2016, which included a paragraph that described the change in classification of deferred taxes on the consolidated balance sheet, 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, 2015, 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
November 3, 2016


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)
2016
 
2015
 
2016
 
2015
Net sales
$
404.5

 
$
399.2

 
$
1,157.8

 
$
1,203.4

Cost of goods sold
236.3

 
233.1

 
663.7

 
722.5

Gross profit
168.2

 
166.1

 
494.1

 
480.9

Selling, general and administrative expenses
67.1

 
70.5

 
201.5

 
221.0

Research and development expenses
12.1

 
11.8

 
36.2

 
36.2

Provision for environmental remediation, net
11.9

 
4.2

 
19.4

 
1.6

Equity in earnings of unconsolidated affiliate
(8.5
)
 
(3.6
)
 
(18.0
)
 
(12.1
)
Restructuring and repositioning expenses
5.6

 
5.2

 
28.6

 
14.9

Interest expense and related financing costs
19.8

 
25.2

 
61.6

 
74.5

Other (income) expense, net
(0.5
)
 
1.5

 
13.3

 
(4.7
)
Total costs and expenses
107.5

 
114.8

 
342.6

 
331.4

Income from continuing operations before income taxes
60.7

 
51.3

 
151.5

 
149.5

Provision for income taxes
(19.4
)

(17.7
)
 
(62.1
)
 
(53.1
)
Income from continuing operations
41.3


33.6

 
89.4

 
96.4

(Loss) income from discontinued operations, net of income taxes
(1.6
)
 
(19.9
)
 
(10.9
)
 
27.4

Net income
39.7

 
13.7

 
78.5

 
123.8

Less: Net (income) loss attributable to noncontrolling interests
(0.1
)
 
0.1

 
0.3

 
0.1

Net income attributable to W. R. Grace & Co. shareholders
$
39.6

 
$
13.8

 
$
78.8

 
$
123.9

Amounts Attributable to W. R. Grace & Co. Shareholders:
 
 
 
 
 
 
 
Income from continuing operations attributable to W. R. Grace & Co. shareholders
$
41.2

 
$
33.7

 
$
89.7

 
$
96.5

(Loss) income from discontinued operations, net of income taxes
(1.6
)
 
(19.9
)
 
(10.9
)
 
27.4

Net income attributable to W. R. Grace & Co. shareholders
$
39.6

 
$
13.8

 
$
78.8

 
$
123.9

Earnings Per Share Attributable to W. R. Grace & Co. Shareholders
 
 
 
 
 
 
 
Basic earnings per share:
 
 
 
 
 
 
 
Income from continuing operations
$
0.59

 
$
0.47

 
$
1.27

 
$
1.33

(Loss) income from discontinued operations, net of income taxes
(0.03
)
 
(0.28
)
 
(0.15
)
 
0.38

Net income
$
0.56

 
$
0.19

 
$
1.12

 
$
1.71

Weighted average number of basic shares
70.3


72.1

 
70.5

 
72.5

Diluted earnings per share:
 
 
 
 
 
 
 
Income from continuing operations
$
0.58

 
$
0.46

 
$
1.27

 
$
1.32

(Loss) income from discontinued operations, net of income taxes
(0.02
)
 
(0.27
)
 
(0.16
)
 
0.37

Net income
$
0.56

 
$
0.19

 
$
1.11

 
$
1.69

Weighted average number of diluted shares
70.7

 
72.7

 
70.9

 
73.1

Dividends per common share
$
0.17

 
$

 
$
0.34

 
$


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 (Loss) (unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In millions)
2016
 
2015
 
2016
 
2015
Net income
$
39.7

 
$
13.7

 
$
78.5

 
$
123.8

Other comprehensive income (loss):
 
 
 
 
 
 
 
Defined benefit pension and other postretirement plans, net of income taxes
(0.3
)
 
(2.6
)
 
(1.0
)
 
(3.8
)
Currency translation adjustments
(2.3
)
 
(32.8
)
 
(6.4
)
 
(44.3
)
Gain (loss) from hedging activities, net of income taxes
0.6

 
(1.4
)
 
(2.7
)
 
(1.7
)
Total other comprehensive (loss) income attributable to noncontrolling interests

 
(0.6
)
 
2.6

 
0.1

Total other comprehensive loss
(2.0
)
 
(37.4
)
 
(7.5
)
 
(49.7
)
Comprehensive income (loss)
37.7

 
(23.7
)
 
71.0

 
74.1

Less: comprehensive (income) loss attributable to noncontrolling interests
(0.1
)
 
0.7

 
(2.3
)
 

Comprehensive income (loss) attributable to W. R. Grace & Co. shareholders
$
37.6

 
$
(23.0
)
 
$
68.7

 
$
74.1


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)
2016
 
2015
OPERATING ACTIVITIES
 
 
 
Net income
$
78.5

 
$
123.8

Less: loss (income) from discontinued operations
10.9

 
(27.4
)
Income from continuing operations
89.4

 
96.4

Reconciliation to net cash provided by (used for) operating activities from continuing operations:
 
 
 
Depreciation and amortization
73.8

 
74.8

Equity in earnings of unconsolidated affiliate
(18.0
)
 
(12.1
)
Dividends received from unconsolidated affiliate
24.8

 
11.8

Cash paid for Chapter 11, and legacy product and environmental
(17.3
)
 
(502.2
)
Provision for income taxes
62.1

 
53.1

Cash paid for income taxes, net of refunds
(40.1
)
 
(18.4
)
Loss on early extinguishment of debt
11.1

 

Cash paid for interest on credit arrangements
(45.5
)
 
(54.0
)
Defined benefit pension expense
8.2

 
19.6

Cash paid under defined benefit pension arrangements
(12.1
)
 
(11.5
)
Cash paid for restructuring
(13.6
)
 
(4.2
)
Changes in assets and liabilities, excluding effect of currency translation and acquisitions:
 
 
 
Trade accounts receivable
9.7

 
16.3

Inventories
(5.8
)
 
(3.3
)
Accounts payable
11.0

 
9.7

All other items, net
69.9

 
94.6

Net cash provided by (used for) operating activities from continuing operations
207.6

 
(229.4
)
INVESTING ACTIVITIES
 
 
 
Capital expenditures
(89.4
)
 
(86.2
)
Business acquired
(245.1
)
 

Proceeds from sale of product lines
11.3

 

Other investing activities
(1.4
)
 
(2.1
)
Net cash used for investing activities from continuing operations
(324.6
)
 
(88.3
)
FINANCING ACTIVITIES
 
 
 
Borrowings under credit arrangements
20.6

 
278.7

Repayments under credit arrangements
(614.9
)
 
(44.7
)
Cash paid for repurchases of common stock
(55.1
)
 
(220.1
)
Proceeds from exercise of stock options
13.3

 
24.9

Dividends paid
(24.1
)
 

Distribution from GCP
750.0

 

Other financing activities
(2.4
)
 
(2.9
)
Net cash provided by financing activities from continuing operations
87.4

 
35.9

Effect of currency exchange rate changes on cash and cash equivalents
2.7

 
(3.4
)
Decrease in cash and cash equivalents from continuing operations
(26.9
)
 
(285.2
)
Cash flows from discontinued operations
 
 
 
Net cash provided by operating activities
23.9

 
148.3

Net cash used for investing activities
(9.5
)
 
(25.8
)
Net cash provided by (used for) financing activities
31.4

 
(10.6
)
Effect of currency exchange rate changes on cash and cash equivalents
(1.0
)
 
(53.1
)
Increase in cash and cash equivalents from discontinued operations
44.8

 
58.8

Net increase (decrease) in cash and cash equivalents
17.9


(226.4
)
Less: cash and cash equivalents of discontinued operations
(143.4
)
 

Cash and cash equivalents, beginning of period
329.9

 
557.5

Cash and cash equivalents, end of period
$
204.4

 
$
331.1

 
 
 
 
Supplemental disclosure of cash flow information
 
 
 
Net share settled stock option exercises
$
10.4

 
$


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,
2016
 
December 31,
2015
ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
204.4

 
$
231.3

Restricted cash and cash equivalents
9.8

 
9.4

Trade accounts receivable, less allowance of $2.4 (2015—$1.4)
252.7

 
254.5

Inventories
236.1

 
198.8

Other current assets
45.3


44.1

Assets of discontinued operations

 
446.4

Total Current Assets
748.3

 
1,184.5

Properties and equipment, net of accumulated depreciation and amortization of $1,337.1 (2015—$1,287.4)
731.7

 
624.9

Goodwill
395.2

 
336.5

Technology and other intangible assets, net
270.3

 
227.5

Deferred income taxes
717.0

 
714.3

Investment in unconsolidated affiliate
107.5

 
103.2

Other assets
37.5


33.9

Assets of discontinued operations

 
420.9

Total Assets
$
3,007.5

 
$
3,645.7

LIABILITIES AND EQUITY
 
 
 
Current Liabilities
 
 
 
Debt payable within one year
$
77.1

 
$
58.8

Accounts payable
162.2

 
157.8

Other current liabilities
233.9

 
234.4

Liabilities of discontinued operations

 
256.4

Total Current Liabilities
473.2

 
707.4

Debt payable after one year
1,513.1

 
2,114.0

Deferred income taxes
2.4

 
1.2

Unrecognized tax benefits
9.6

 
9.8

Underfunded and unfunded defined benefit pension plans
379.0

 
377.5

Other liabilities
135.6

 
115.9

Liabilities of discontinued operations

 
107.4

Total Liabilities
2,512.9

 
3,433.2

Commitments and Contingencies—Note 8
 
 
 
Equity
 
 
 
Common stock issued, par value $0.01; 300,000,000 shares authorized; outstanding: 70,253,231 (2015—70,533,515)
0.7

 
0.7

Paid-in capital
489.7

 
496.0

Retained earnings
616.1

 
436.3

Treasury stock, at cost: shares: 7,203,394 (2015—6,923,110)
(673.6
)
 
(658.4
)
Accumulated other comprehensive income (loss)
58.4

 
(66.8
)
Total W. R. Grace & Co. Shareholders' Equity
491.3

 
207.8

Noncontrolling interests
3.3

 
4.7

Total Equity
494.6

 
212.5

Total Liabilities and Equity
$
3,007.5

 
$
3,645.7


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, 2014
$
526.8

 
$
292.1

 
$
(429.2
)
 
$
(23.8
)
 
$
3.1

 
$
369.0

Net income

 
123.9

 

 

 
0.5

 
124.4

Repurchase of common stock

 

 
(220.1
)
 

 

 
(220.1
)
Purchase of noncontrolling interest
(0.7
)
 

 

 

 
0.7

 

Stock based compensation
7.4

 

 

 

 

 
7.4

Exercise of stock options
(43.1
)
 

 
68.0

 

 

 
24.9

Tax benefit related to stock plans
0.5

 

 

 

 

 
0.5

Shares issued
1.0

 

 

 

 

 
1.0

Other comprehensive (loss) income

 

 

 
(49.8
)
 
0.1

 
(49.7
)
Balance, September 30, 2015
$
491.9

 
$
416.0

 
$
(581.3
)
 
$
(73.6
)
 
$
4.4

 
$
257.4

Balance, December 31, 2015
$
496.7

 
$
436.3

 
$
(658.4
)
 
$
(66.8
)
 
$
4.7

 
$
212.5

Net income (loss)

 
78.8

 

 

 
(0.3
)
 
78.5

Repurchase of common stock

 

 
(55.1
)
 

 

 
(55.1
)
Stock based compensation
9.2

 

 

 

 

 
9.2

Exercise of stock options
(16.2
)
 

 
39.9

 

 

 
23.7

Tax benefit related to stock plans

 
70.4

 

 

 

 
70.4

Shares issued
0.7

 

 

 

 

 
0.7

Other comprehensive (loss) income

 

 

 
(10.1
)
 
2.6

 
(7.5
)
Cash dividends declared

 
(24.1
)
 

 

 

 
(24.1
)
Distribution of GCP

 
54.7

 

 
135.3

 
(3.7
)
 
186.3

Balance, September 30, 2016
$
490.4

 
$
616.1

 
$
(673.6
)
 
$
58.4

 
$
3.3

 
$
494.6


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 two reportable segments: Grace Catalysts Technologies, which includes catalysts and related products and technologies used in refining, petrochemical and other chemical manufacturing applications; and Grace Materials Technologies, which includes specialty materials, including silica-based and silica-alumina-based materials, used in coatings, consumer, industrial, and pharmaceutical applications.
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.
Separation Transaction    On February 5, 2015, Grace announced a plan to separate into two independent, publicly traded companies, intended to improve Grace's strategic focus, simplify its operating structure, and allow for more efficient capital allocation. On January 27, 2016, Grace entered into a separation agreement with GCP Applied Technologies Inc., then a wholly-owned subsidiary of Grace ("GCP"), pursuant to which Grace agreed to transfer its Grace Construction Products operating segment and the packaging technologies business of its Grace Materials Technologies operating segment to GCP (the "Separation"). The Separation occurred on February 3, 2016 (the "Distribution Date"), by means of a pro rata distribution to the Company's stockholders of all of the outstanding shares of GCP common stock (the "Distribution"). Under the Distribution, one share of GCP common stock was distributed for each share of Company common stock held as of the close of business on January 27, 2016. As a result of the Distribution, GCP is now an independent public company and its common stock is listed under the symbol “GCP” on the New York Stock Exchange. GCP’s historical financial results through the Distribution Date are reflected in Grace’s Consolidated Financial Statements as discontinued operations.
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 2015 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, 2016, are not necessarily indicative of the results of operations for the year ending December 31, 2016.
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
Contingent liabilities, which depend on an assessment of the probability of loss and an estimate of ultimate obligation, such as litigation (see Note 8), income taxes (see Note 5), and environmental remediation (see Note 8).
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.

10




Notes to Consolidated Financial Statements (Continued)

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

Recently Issued Accounting Standards    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 were to be effective for fiscal years beginning after December 15, 2016, and for interim periods within those fiscal years, with early adoption not permitted. In August 2015, the FASB issued ASU 2015-14 "Revenue from Contracts with Customers—Deferral of the Effective Date," deferring the effective date by one year but permitting adoption as of the original effective date. The revised standard allows for two methods of adoption: (a) full retrospective adoption, meaning the standard is applied to all periods presented, or (b) modified retrospective adoption, meaning the cumulative effect of applying the new standard is recognized as an adjustment to the opening retained earnings balance. Grace does not intend to adopt the standard early and is in the process of determining the adoption method as well as the effects the adoption will have on the Consolidated Financial Statements.
In July 2015, the FASB issued ASU 2015-11 "Simplifying the Measurement of Inventory." This update is part of the FASB's Simplification Initiative and is also intended to enhance convergence with the International Accounting Standards Board's ("IASB") measurement of inventory. The update requires that inventory be measured at the lower of cost or net realizable value for entities using FIFO (first-in, first-out) or average cost methods. The new requirements are effective for fiscal years beginning after December 15, 2016, and for interim periods within those fiscal years, with early adoption permitted. Grace will adopt this standard when it becomes effective and does not expect it to have a material effect on the Consolidated Financial Statements.
In February 2016, the FASB issued ASU 2016-02 "Leases." This update is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term, including optional payments where they are reasonably certain to occur. The amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. Grace is currently evaluating its effect on the financial statements and the timing of adoption.
In August 2016, the FASB issued ASU 2016-15 "Classification of Certain Cash Receipts and Cash Payments." This update is intended to reduce diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. It addresses eight specific issues. The amendments in this update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted, including in an interim period, as of the beginning of the fiscal year. Grace is currently evaluating the timing of adoption and does not expect it to have a material effect on the Consolidated Financial Statements.
Recently Adopted 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 IASB reporting requirements for discontinued operations. Grace adopted this standard in the 2016 first quarter.
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. In August 2015, the FASB issued ASU 2015-15 "Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements." The update clarifies ASU 2015-03, allowing debt issuance costs related to line of credit arrangements to be deferred and presented as an asset and subsequently amortized ratably over the term of the line-of-credit arrangement, regardless of whether

11




Notes to Consolidated Financial Statements (Continued)

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

there are any outstanding borrowings on the line-of-credit arrangement. Grace adopted this standard in the 2016 first quarter and reclassified $30.3 million of capitalized financing fees from other assets to debt payable after one year in the Consolidated Balance Sheet as of December 31, 2015.
In September 2015, the FASB issued ASU 2015-16 "Simplifying the Accounting for Measurement-Period Adjustments," which is part of the FASB's Simplification Initiative. The update requires that adjustments to provisional amounts that are identified during the measurement period following a business combination be recognized in the reporting period in which the adjustment amounts are determined. Acquirers must also recognize, in the same period's financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects resulting from the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. Grace adopted this standard in the 2016 third quarter. See Note 16.
Accounting for Stock Compensation
In March 2016, the FASB issued ASU 2016-09 "Compensation—Stock Compensation," which is part of the FASB's Simplification Initiative. The update requires that excess tax benefits and deficiencies be recorded in the income statement when the awards vest or are settled. It also eliminates the requirement that excess tax benefits be realized (reduce cash taxes payable) before being recognized. Previously, an entity could not recognize excess tax benefits if the tax deduction increased a net operating loss ("NOL") or tax credit carryforward. The updated standard no longer requires cash flows related to excess tax benefits to be presented as a financing activity separate from other income tax cash flows. The update also allows Grace to repurchase more of an employee's shares for tax withholding purposes without triggering liability accounting, clarifies that all cash payments to taxing authorities made on an employee's behalf for withheld shares should be presented as a financing activity on the statement of cash flows, and provides for an accounting policy election to account for forfeitures as they occur.
Grace elected to early adopt this update in the 2016 second quarter, which requires any adjustments to be reflected as of January 1, 2016. This resulted in the recognition of excess tax benefits on the Consolidated Balance Sheet that were previously not recognized, as the benefits would have increased Grace's NOL or tax credit carryforwards. The recognition increased Grace's net deferred tax asset by $70.4 million ($90.9 million net of a $20.5 million valuation allowance) as of January 1, 2016. Previously reported amounts have been corrected for a $0.3 million increase in the gross amount of excess tax benefits and a $2.2 million increase in the valuation allowance on these excess tax benefits as of January 1, 2016, which Grace concluded were not material to the prior period.
In addition, Grace will recognize excess tax benefits in the provision for income taxes rather than paid-in capital for 2016 and future periods. Grace has elected to continue to estimate forfeitures expected to occur to determine the amount of compensation expense to be recognized each period.
2. 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, 2016, and December 31, 2015:
(In millions)
September 30,
2016
 
December 31,
2015
Raw materials
$
56.6

 
$
47.1

In process
35.2

 
33.4

Finished products
122.7

 
98.2

Other
21.6

 
20.1

 
$
236.1

 
$
198.8


12




Notes to Consolidated Financial Statements (Continued)

3. Debt

Components of Debt
(In millions)
September 30,
2016
 
December 31,
2015
5.125% senior notes due 2021, net of unamortized debt issuance costs of $7.8 at September 30, 2016 (2015—$8.9)
$
692.2

 
$
691.1

U.S. dollar term loan, net of unamortized debt issuance costs and discounts of $6.1 at September 30, 2016 (2015—$15.6)
402.3

 
919.3

5.625% senior notes due 2024, net of unamortized debt issuance costs of $4.1 at September 30, 2016 (2015—$4.5)
295.9

 
295.5

Euro term loan, net of unamortized debt issuance costs and discounts of $1.4 at September 30, 2016 (2015—$3.4)
88.2

 
158.7

Debt payable—unconsolidated affiliate
38.9

 
33.4

Deferred payment obligation
29.7

 
29.1

Other borrowings(1)
43.0

 
45.7

Total debt
1,590.2

 
2,172.8

Less debt payable within one year
77.1

 
58.8

Debt payable after one year
$
1,513.1

 
$
2,114.0

Weighted average interest rates on total debt
4.6
%
 
4.1
%
___________________________________________________________________________________________________________________
(1) 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 September 30, 2016, were as follows:
 
(In millions)
2016
$
42.5

2017
37.7

2018
7.7

2019
7.0

2020
5.8

Thereafter
1,489.5

Total debt
$
1,590.2

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 asbestos personal injury trust for $490 million. (See Note 8 for Chapter 11 information.)
Grace had no outstanding draws on its revolving credit facility as of September 30, 2016; however, the available credit under that facility was reduced to $253.8 million by outstanding letters of credit.
During the 2015 fourth quarter, to permit the Separation, Grace entered into an amendment to the credit agreement providing for the term loans. The amendment, which became effective upon completion of the Separation, revised certain covenants, reduced the revolving credit facility limit to $300 million and extended the facility's term to November 1, 2020. The Separation had no impact on payment or other terms of the senior notes, which remained obligations of Grace.
In connection with the Separation, GCP distributed $750 million to Grace. Grace used $600 million of those funds to repay $526.9 million of its U.S. dollar term loan and €67.3 million of its euro term loan. As a result, Grace recorded a loss on early extinguishment of debt of $11.1 million, which is included in "other (income) expense" in the Consolidated Statements of Operations.

13




Notes to Consolidated Financial Statements (Continued)

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. 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 September 30, 2016, the carrying amounts and fair values of Grace's debt were as follows:
 
September 30, 2016
 
December 31, 2015
(In millions)
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
5.125% senior notes due 2021(1)
$
692.2

 
$
738.9

 
$
691.1

 
$
701.5

U.S. dollar term loan(2)
402.3

 
402.8

 
919.3

 
907.2

5.625% senior notes due 2024(1)
295.9

 
324.8

 
295.5

 
298.1

Euro term loan(2)
88.2

 
87.7

 
158.7

 
157.3

Other borrowings
111.6

 
111.6

 
108.2

 
108.2

Total debt
$
1,590.2

 
$
1,665.8

 
$
2,172.8

 
$
2,172.3

___________________________________________________________________________________________________________________
(1)
Carrying amounts are net of unamortized debt issuance costs of $7.8 million and $4.1 million as of September 30, 2016, and $8.9 million and $4.5 million as of December 31, 2015, related to the 5.125% senior notes due 2021 and 5.625% senior notes due 2024, respectively.
(2)
Carrying amounts are net of unamortized debt issuance costs and discounts of $6.1 million and $1.4 million as of September 30, 2016, and $15.6 million and $3.4 million as of December 31, 2015, related to the U.S. dollar term loan and euro term loan, respectively.
At September 30, 2016, 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 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 15 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 (loss)" and reclassified into income in the same period or periods that the underlying commodity purchase affects income. At September 30, 2016, there were no open fixed-rate natural gas swaps.
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 15 months are used and designated as cash flow hedges of forecasted purchases of aluminum. Current open contracts hedge forecasted transactions until May 2017. The effective portion of the gain or loss on the commodity contracts is recorded in "accumulated other comprehensive income (loss)" and reclassified into income in the same period or periods that the underlying commodity purchase affects income. At

14




Notes to Consolidated Financial Statements (Continued)

4. Fair Value Measurements and Risk (Continued)

September 30, 2016, the contract volume, or notional amount, of the commodity contracts was 1.3 million pounds with a total contract value of $1.0 million.
Currency Derivatives    Because Grace conducts business in over 40 countries and in more than 30 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, swaps, or combinations thereof 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 and swaps 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 (loss)" 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 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 September 30, 2016, and December 31, 2015:
 
Fair Value Measurements at September 30, 2016, 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
$
2.9

 
$

 
$
2.9

 
$

Total Assets
$
2.9

 
$

 
$
2.9

 
$

Liabilities
 
 
 
 
 
 
 
Interest rate derivatives
$
10.6

 
$

 
$
10.6

 
$

Currency derivatives
6.0

 

 
6.0

 

Total Liabilities
$
16.6

 
$

 
$
16.6

 
$


15




Notes to Consolidated Financial Statements (Continued)

4. Fair Value Measurements and Risk (Continued)

 
Fair Value Measurements at December 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
$
1.0

 
$

 
$
1.0

 
$

Commodity derivatives
0.6

 

 
0.6

 

Total Assets
$
1.6

 
$

 
$
1.6

 
$

Liabilities
 
 
 
 
 
 
 
Interest rate derivatives
$
7.9

 
$

 
$
7.9

 
$

Commodity derivatives
0.1

 

 
0.1

 

Currency derivatives
0.5

 

 
0.5

 

Total Liabilities
$
8.5

 
$

 
$
8.5

 
$

The following tables present the location and fair values of derivative instruments included in the Consolidated Balance Sheets as of September 30, 2016, and December 31, 2015:
September 30, 2016
(In millions)
Asset Derivatives
 
Liability Derivatives
Balance Sheet
Location
 
Fair Value
 
Balance Sheet
Location
 
Fair Value
Derivatives designated as hedging instruments under ASC 815:
 
 
 
 
 
 
 
Currency contracts
Other current assets
 
$
2.8

 
Other current liabilities
 
$
0.4

Interest rate contracts
Other current assets
 

 
Other current liabilities
 
4.1

Currency contracts
Other assets
 

 
Other liabilities
 
5.4

Interest rate contracts
Other assets
 

 
Other liabilities
 
6.5

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

 
Other current liabilities
 
0.2

Total derivatives
 
 
$
2.9

 
 
 
$
16.6

December 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
 
$
0.6

 
Other current liabilities
 
$
0.1

Currency contracts
Other current assets
 
0.7

 
Other current liabilities
 
0.3

Interest rate contracts
Other current assets
 

 
Other current liabilities
 
4.1

Currency contracts
Other assets
 
0.2

 
Other liabilities
 

Interest rate contracts
Other assets
 

 
Other liabilities
 
3.8

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

 
Other current liabilities
 
0.2

Total derivatives
 
 
$
1.6

 
 
 
$
8.5


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 and nine months ended September 30, 2016 and 2015:
Three Months Ended September 30, 2016
(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
$
0.6

 
Interest expense
 
$
(1.0
)
Currency contracts
(0.4
)
 
Other expense
 
0.3

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

 
 
 
$
(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
 
$
0.1

Nine Months Ended September 30, 2016
(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
$
(5.8
)
 
Interest expense
 
$
(3.1
)
Currency contracts
(0.3
)
 
Other expense
 
0.7

Commodity contracts
(0.4
)
 
Cost of goods sold
 
0.1

Total derivatives
$
(6.5
)
 
 
 
$
(2.3
)
 
 
 
 
 
 
 
 
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
 
$
(0.7
)

17




Notes to Consolidated Financial Statements (Continued)

4. Fair Value Measurements and Risk (Continued)

Three Months Ended September 30, 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
$
(4.1
)
 
Interest expense
 
$
(1.1
)
Currency contracts
(0.6
)
 
Other expense
 
(1.0
)
Commodity contracts
(0.6
)
 
Cost of goods sold
 
(0.9
)
Total derivatives
$
(5.3
)
 
 
 
$
(3.0
)
 
 
 
 
 
 
 
 
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
 
$

Nine Months Ended September 30, 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
$
(7.0
)
 
Interest expense
 
$
(2.8
)
Currency contracts
0.6

 
Other expense
 
0.2

Commodity contracts
(1.6
)
 
Cost of goods sold
 
(3.0
)
Total derivatives
$
(8.0
)
 
 
 
$
(5.6
)
 
 
 
 
 
 
 
 
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
 
$
(0.2
)
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 (loss)." 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. At September 30, 2016, €80.1 million of Grace's term loan principal was designated as a hedging instrument of its net investment in European subsidiaries.
Grace also uses cross-currency swaps as derivative hedging instruments in certain net investment hedges of our non-U.S. subsidiaries. The effective portion of gains and losses attributable to these net investment hedges is recorded net of tax to "currency translation adjustments" within "accumulated other comprehensive income (loss)" to offset the change in the carrying value of the net investment being hedged. 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. At September 30, 2016, the notional amount of €170.0 million of Grace's cross-currency swaps was designated 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 and derivative instruments designated as net investment hedges for the three and nine months ended September 30, 2016 and

18




Notes to Consolidated Financial Statements (Continued)

4. Fair Value Measurements and Risk (Continued)

2015. 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.
Three Months Ended September 30, 2016
(In millions)
Amount of Gain (Loss) Recognized in OCI in Currency Translation Adjustments
(Effective Portion)
Derivatives in ASC 815 net investment hedging relationships:
 
Cross-currency swap
$
(1.8
)
Total derivatives
$
(1.8
)
Nonderivatives in ASC 815 net investment hedging relationships:
 
Foreign currency denominated debt
$
(0.8
)
Total nonderivatives
$
(0.8
)
Nine Months Ended September 30, 2016
(In millions)
Amount of Gain (Loss) Recognized in OCI in Currency Translation Adjustments
(Effective Portion)
Derivatives in ASC 815 net investment hedging relationships:
 
Cross-currency swap
$
(1.7
)
Total derivatives
$
(1.7
)
Nonderivatives in ASC 815 net investment hedging relationships:
 
Foreign currency denominated debt
$
(1.2
)
Total nonderivatives
$
(1.2
)
Three Months Ended September 30, 2015
(In millions)
Amount of Gain (Loss) Recognized in OCI in Currency Translation Adjustments
(Effective Portion)
Nonderivatives in ASC 815 net investment hedging relationships:
 
Foreign currency denominated debt
$
0.1

Total nonderivatives
$
0.1

Nine Months Ended September 30, 2015
(In millions)
Amount of Gain (Loss) Recognized in OCI in Currency Translation Adjustments
(Effective Portion)
Nonderivatives in ASC 815 net investment hedging relationships:
 
Foreign currency denominated debt
$
15.3

Total nonderivatives
$
15.3

Credit Risk    Grace is exposed to credit risk in its trade accounts receivable. Customers in the petroleum refining industry represent the greatest exposure. Grace's credit evaluation policies 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.

19




Notes to Consolidated Financial Statements (Continued)

4. Fair Value Measurements and Risk (Continued)

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 2016 forecasted income from continuing operations is estimated to be 38.0% as of September 30, 2016, compared with 36.0% for the year ended December 31, 2015. The 2016 tax rate includes a $12.8 million discrete charge for an increase in the valuation allowance associated with Grace's state NOL carryforwards, of which $8.8 million related to a Separation-related change in Grace's outlook for being able to use these NOLs and $4.0 million related to a Louisiana tax law change, partially offset by a discrete benefit of $6.3 million for share-based compensation deductions related to the early adoption of ASU 2016-09.
Grace generated approximately $1,800 million in U.S. federal tax deductions relating to its emergence from bankruptcy. These deductions generated a U.S. federal and state NOL in 2014, which Grace has carried forward and expects to utilize in subsequent years. Under U.S. federal income tax law, a corporation is generally permitted to carry forward NOLs for a 20-year period for deduction against future taxable income. Grace also expects to generate a U.S. federal tax deduction of $30 million upon payment of the ZAI PD deferred payment obligation in 2017. (See Note 8.)
The following table summarizes the balance of deferred tax assets, net of deferred tax liabilities, at September 30, 2016, of $714.6 million:
 
Deferred Tax Asset
(Net of Liabilities)
 
Valuation Allowance
 
Net Deferred Tax Asset
United States—Federal(1)
$
660.7

 
$
(20.8
)
 
$
639.9

United States—States(1)
55.2

 
(18.1
)
 
37.1

Germany
30.9

 

 
30.9

Other foreign
9.3

 
(2.6
)
 
6.7

Total
$
756.1

 
$
(41.5
)
 
$
714.6

___________________________________________________________________________________________________________________
(1)
The U.S. federal deductions generated relating to emergence of $1,800 million, plus the $30 million ZAI PD deferred payment obligation, account for a majority of the U.S. federal and state deferred tax assets.
Grace will need to generate approximately $1,800 million of U.S. federal taxable income by 2035 (or approximately $95 million per year during the carryforward period) to fully realize the U.S. federal net deferred tax assets.
As discussed in Notes 1 and 15, the Separation of Grace and GCP was completed on February 3, 2016. In conjunction with the Separation, approximately $85 million of Grace’s deferred tax assets were transferred to GCP. As a result of the early adoption of ASU 2016-09, Grace recognized excess tax benefits in the Consolidated Balance Sheets which were previously not recognized. This increased Grace's deferred tax assets as of January 1, 2016, by $70.4 million, which is net of a $20.5 million valuation allowance.
The following table summarizes expiration dates in jurisdictions where Grace has, or will have, material tax loss and credit carryforwards:
 
Expiration Dates
United States—Federal (NOLs)
2034 - 2035
United States—Federal (Credits)
2019 - 2025
United States—States (NOLs)
2016 - 2035

20




Notes to Consolidated Financial Statements (Continued)

5. Income Taxes (Continued)

In evaluating its 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. Through September 30, 2016, Grace increased its valuation allowance by $12.8 million related to state NOL carryforwards and $20.5 million primarily for foreign tax credits recognized upon the adoption of ASU 2016-09.
As of December 31, 2014, Grace had the intent and ability to indefinitely reinvest undistributed earnings of its foreign subsidiaries outside the United States. However, in connection with the Separation, Grace repatriated a total of $173.1 million of foreign earnings from foreign subsidiaries transferred to GCP pursuant to the Separation. Such amount was determined based on an analysis of each non-U.S. subsidiary's requirements for working capital, debt repayment and strategic initiatives. Grace also considered local country legal and regulatory restrictions. Grace included tax expense in discontinued operations of $19.0 million in 2015 for repatriation and $1.7 million in 2016 for deemed repatriation attributable to both current and prior years' earnings. The tax effect of the repatriation is determined by several variables including the tax rate applicable to the entity making the distribution, the cumulative earnings and associated foreign taxes of the entity and the extent to which those earnings may have already been taxed in the U.S.
Grace believes that the Separation was a one-time, non-recurring event and that recognition of deferred taxes on undistributed earnings would not have occurred if not for the Separation. Subsequent to separation, Grace expects undistributed prior-year earnings of its foreign subsidiaries to remain permanently reinvested except in certain instances where repatriation of such earnings would result in minimal or no tax. Grace bases this assertion on:
(1)
the expectation that it will satisfy its U.S. cash obligations in the foreseeable future without requiring the repatriation of prior-year foreign earnings;
(2)
plans for significant and continued reinvestment of foreign earnings in organic and inorganic growth initiatives outside the U.S.; and
(3)
remittance restrictions imposed by local governments.
Grace will continually analyze and evaluate its cash needs to determine the appropriateness of its indefinite reinvestment assertion.
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)
September 30,
2016
 
December 31,
2015
Overfunded defined benefit pension plans
$
0.4

 
$

Underfunded defined benefit pension plans
(70.3
)
 
(73.2
)
Unfunded defined benefit pension plans
(308.7
)
 
(304.3
)
Total underfunded and unfunded defined benefit pension plans
(379.0
)
 
(377.5
)
Pension liabilities included in other current liabilities
(14.3
)
 
(14.2
)
Net funded status
$
(392.9
)
 
$
(391.7
)

21




Notes to Consolidated Financial Statements (Continued)

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

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 $0.4 million as of September 30, 2016, and the overfunded status is included in "other assets" 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 $393.3 million as of September 30, 2016.
Components of Net Periodic Benefit Cost (Income)
 
Three Months Ended September 30,
 
2016
 
2015
 
Pension
 
Other Post
Retirement
 
Pension
 
Other Post
Retirement
(In millions)
U.S.
 
Non-U.S.
 
 
U.S.
 
Non-U.S.
 
Service cost
$
4.5

 
$
1.7

 
$

 
$
6.4

 
$
3.0

 
$

Interest cost
10.1

 
1.3

 

 
13.7

 
4.1

 

Expected return on plan assets
(14.2
)
 
(0.2
)
 

 
(17.6
)
 
(3.3
)
 

Amortization of prior service (credit) cost
(0.1
)
 

 
(0.5
)
 
0.1

 

 
(0.9
)
Amortization of net deferred actuarial loss

 

 
0.1

 

 

 
0.2

Curtailment gain

 
(0.2
)
 

 

 

 
(4.5
)
Net periodic benefit cost (income)
0.3

 
2.6

 
(0.4
)
 
2.6

 
3.8

 
(5.2
)
Less: discontinued operations

 

 

 
(0.7
)
 
(0.6
)
 
0.4

Net periodic benefit cost (income) from continuing operations
$
0.3

 
$
2.6

 
$
(0.4
)
 
$
1.9

 
$
3.2

 
$
(4.8
)
 
Nine Months Ended September 30,
 
2016
 
2015
 
Pension
 
Other Post
Retirement
 
Pension
 
Other Post
Retirement
(In millions)
U.S.
 
Non-U.S.
 
 
U.S.
 
Non-U.S.
 
Service cost
$
13.9

 
$
5.4

 
$

 
$
19.3

 
$
8.9

 
$

Interest cost
30.8

 
4.6

 

 
41.3

 
12.3

 
0.1

Expected return on plan assets
(43.0
)
 
(1.5
)
 

 
(52.8
)
 
(10.0
)
 

Amortization of prior service (credit) cost
(0.2
)
 

 
(1.7
)
 
0.2

 

 
(2.8
)
Amortization of net deferred actuarial loss

 

 
0.4

 

 

 
0.5

Curtailment gain

 
(0.9
)
 

 

 

 
(4.5
)
Net periodic benefit cost (income)
1.5

 
7.6

 
(1.3
)
 
8.0

 
11.2

 
(6.7
)
Less: discontinued operations
(0.5
)
 
(0.2
)
 

 
(2.2
)
 
(1.6
)
 
1.2

Net periodic benefit cost (income) from continuing operations
$
1.0

 
$
7.4

 
$
(1.3
)
 
$
5.8

 
$
9.6

 
$
(5.5
)
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

22




Notes to Consolidated Financial Statements (Continued)

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

wages. Grace's costs related to this benefit plan for the three and nine months ended September 30, 2016, were $2.9 million and $8.3 million compared with $2.5 million and $7.8 million for the corresponding prior-year periods.
7. Other Balance Sheet Accounts
(In millions)
September 30,
2016
 
December 31,
2015
Other Current Liabilities
 
 
 
Accrued compensation
$
48.7

 
$
53.5

Income taxes payable
31.6

 
25.8

Environmental contingencies
29.9

 
21.4

Accrued interest
29.4

 
18.9

Deferred revenue
24.4

 
24.7

Pension liabilities
14.3

 
14.2

Other accrued liabilities
55.6

 
75.9

 
$
233.9

 
$
234.4

Accrued compensation includes salaries and wages as well as estimated current amounts due under the annual and long-term incentive programs.
8. Commitments and Contingent Liabilities
Over the years, Grace operated numerous types of businesses that are no longer part of its business portfolio. As Grace divested or otherwise ceased operating these businesses, it retained certain liabilities and obligations, which we refer to as legacy liabilities. The principal legacy liabilities are product and environmental liabilities. Although the outcome of each of the matters discussed below cannot be predicted with certainty, Grace has assessed its risk and has made accounting estimates as required under U.S. GAAP.
Legacy Product and Environmental Liabilities
Legacy Product 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.
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 $29.7 million representing the present value of this amount in "debt payable within one year" in the accompanying Consolidated Balance 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 as 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

23




Notes to Consolidated Financial Statements (Continued)

8. Commitments and Contingent Liabilities (Continued)

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.
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.
Legacy Environmental Liabilities    Grace is subject to loss contingencies resulting from extensive and evolving federal, state, local and foreign environmental laws and regulations relating to its manufacturing operations. Grace has procedures in place to minimize such contingencies; nevertheless, it has liabilities associated with past operations and additional claims may arise in the future. To address its legacy liabilities, Grace accrues for anticipated costs of 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 regularly and adjusted when circumstances become better defined or response efforts and their costs can be better estimated. These liabilities are evaluated based on currently available information, relating to the nature and extent of contamination, risk assessments, feasibility of response actions, and apportionment amongst other potentially responsible parties, all evaluated in light of prior experience.
At September 30, 2016, Grace's estimated liability for legacy environmental response costs totaled $63.8 million, compared with $55.2 million at December 31, 2015, and was included in "other current liabilities" and "other liabilities" in the Consolidated Balance Sheets. These amounts are based on agreements in place or on Grace's estimate of costs where no formal remediation plan exists, yet there is sufficient information to estimate response costs. Net cash paid against previously established reserves for the nine months ended September 30, 2016 and 2015, was $11.4 million and $8.4 million, respectively.
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. Grace is engaged with the U.S. Environmental Protection Agency (the "EPA") and other federal, state and local governmental agencies in a remedial investigation and feasibility study of the Libby mine and the surrounding area. This investigation will determine the specific areas requiring remediation and will likely provide possible remedial action alternatives.
During 2010, the EPA began reinvestigating certain facilities on a list of 105 facilities where vermiculite concentrate from the Libby mine was thought to have been used, stored or processed. Grace is cooperating with the EPA on this reinvestigation and has remediated, or paid for remediation, at several of these facilities. Grace has specific reserves for each site where an assessment has indicated that a probable liability has been incurred and the cost can be reasonably estimated. The EPA may request additional remediation at other facilities; however, at this time Grace does not believe that additional remediation is probable at the majority of these sites.
In the 2016 third quarter Grace accrued $8.9 million for future costs related to vermiculite-related matters. Grace's total estimated liability for response costs that are currently estimable related to site assessment, investigation, and feasibility study at the former vermiculite mine in Libby and response efforts at vermiculite processing sites outside of Libby at September 30, 2016, and December 31, 2015, was $26.3 million and $18.7

24




Notes to Consolidated Financial Statements (Continued)

8. Commitments and Contingent Liabilities (Continued)

million, respectively. It is probable that Grace's ultimate liability for these vermiculite-related matters will exceed current estimates by material amounts. Grace is unable to estimate a range of probable additional losses for its vermiculite-related matters at this time because it is contingent on information not currently available to Grace, including: the content of the site assessment, investigation and feasibility studies; finalization of, or changes to, the remedial design; findings during remediation; changes in existing technologies; and other information that will allow Grace to create, refine, or adjust its estimated environmental liabilities.
Currently, Grace expects that additional information will become available over the 2017-2019 period to enable it to estimate further its remediation liabilities for the Libby mine site, the surrounding area, and other vermiculite processing sites outside of Libby.
Non-Vermiculite-Related Matters
At September 30, 2016, and December 31, 2015, Grace's estimated legacy environmental liability for response costs at sites not related to its former vermiculite mining and processing activities was $37.5 million and $36.5 million, respectively. This liability relates to Grace's former businesses or operations, including its share of liability at off-site disposal facilities. 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.
Commercial and Financial Commitments and Contingencies
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, 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 related to activities prior to the closing of the transaction, including environmental liabilities.
Contracts related to the Separation in which Grace has agreed to indemnify GCP against liabilities related to activities prior to the closing of the transaction, including tax, employee, and 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.
Financial Assurances    Financial assurances have been established for a variety of purposes, including insurance and environmental matters, trade-related commitments and other matters. At September 30, 2016, Grace had gross financial assurances issued and outstanding of $117.1 million, composed of $33.7 million of

25




Notes to Consolidated Financial Statements (Continued)

8. Commitments and Contingent Liabilities (Continued)

surety bonds issued by various insurance companies and $83.4 million of standby letters of credit and other financial assurances issued by various banks.
9. Restructuring Expenses and Repositioning Expenses
Restructuring Expenses    In the 2016 third quarter, Grace incurred costs from restructuring actions, primarily related to workforce reductions as a result of changes in the business environment and its business structure, which are included in "restructuring and repositioning expenses" in the Consolidated Statements of Operations.
The following table presents restructuring expenses by reportable segment for the three and nine months ended September 30, 2016.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In millions)
2016
 
2015
 
2016
 
2015
Catalysts Technologies
$
1.6

 
$
0.5

 
$
2.7

 
$
3.8

Materials Technologies
(0.1
)
 
0.2

 
15.1

 
0.8

Corporate
0.3

 
1.8

 
0.4

 
4.2

Total restructuring expenses
$
1.8

 
$
2.5

 
$
18.2

 
$
8.8

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, 2017.
Restructuring Liability
(In millions)
Total
Balance, December 31, 2015
$
7.6

Accruals for severance and other costs
11.8

Payments
(13.6
)
Currency translation adjustments and other
0.2

Balance, September 30, 2016
$
6.0

Repositioning Expenses    Pretax repositioning expenses included in continuing operations for the three and nine months ended September 30, 2016, were $3.8 million and $10.4 million, respectively, compared with $2.7 million and $6.1 million for the corresponding prior-year periods. These expenses primarily related to the Separation. Substantially all of these costs have been or are expected to be settled in cash.

26




Notes to Consolidated Financial Statements (Continued)

10. Other (Income) Expense, net

Components of other (income) expense, net are as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In millions)
2016
 
2015
 
2016
 
2015
Loss on early extinguishment of debt
$

 
$

 
$
11.1

 
$

Third-party acquisition-related costs

 

 
2.5

 

Chapter 11 expenses, net
0.4

 
1.1

 
2.4

 
4.3

Interest income
(0.4
)
 
(0.1
)
 
(1.0
)
 
(0.3
)
Currency transaction effects
(0.2
)
 
(0.4
)
 
0.1

 
(2.1
)
Net (gain) loss on sales of investments and disposals of assets
(0.1
)
 
0.3

 
0.1

 
0.7

Bankruptcy-related charges, net

 

 

 
(8.7
)
Other miscellaneous (income) expense
(0.2
)
 
0.6

 
(1.9
)
 
1.4

Total other (income) expense, net
$
(0.5
)
 
$
1.5

 
$
13.3

 
$
(4.7
)
See Note 3 for more information related to Grace's 2016 early extinguishment of debt.
In the 2015 first quarter, Grace finalized its accounting for emergence from bankruptcy and recorded a gain of $9.0 million reflecting the final resolution of certain 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 and nine months ended September 30, 2016 and 2015:
Three Months Ended September 30, 2016
(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
$
(0.6
)
 
$
0.2

 
$
(0.4
)
Amortization of net deferred actuarial loss included in net periodic benefit cost
0.1

 

 
0.1

Benefit plans, net
(0.5
)
 
0.2

 
(0.3
)
Currency translation adjustments