GRA-2014 1Q 10-Q
Table of Contents

 
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, 2014
 
OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-13953
W. R. GRACE & CO.
Delaware
(State of Incorporation)
 
65-0773649
(I.R.S. Employer Identification No.)
7500 Grace Drive
Columbia, Maryland 21044
(410) 531-4000
(Address and phone number of principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý
 
Accelerated filer o
 
Non-accelerated filer o
 (Do not check if a
smaller reporting company)
 
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class
 
Outstanding at April 30, 2014
Common Stock, $0.01 par value per share
 
76,298,454 shares
 


Table of Contents

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


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Table of Contents

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, 2014, PricewaterhouseCoopers LLP, the company's independent registered public accounting firm, has applied limited procedures in accordance with professional standards for a review of such information. Their report on the interim consolidated financial statements, which follows, states that they did not audit and they do not express an opinion on the unaudited interim consolidated financial statements. Accordingly, the degree of reliance on their report on the unaudited interim consolidated financial statements should be restricted in light of the limited nature of the review procedures applied. This report is not considered a "report" within the meaning of Sections 7 and 11 of the Securities Act of 1933, and, therefore, the independent accountants' liability under Section 11 does not extend to it.

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Table of Contents

Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of W. R. Grace & Co.:
We have reviewed the accompanying consolidated balance sheet of W. R. Grace & Co. and its subsidiaries as of March 31, 2014, and the related consolidated statements of operations, comprehensive income, cash flows and equity for the three-month periods ended March 31, 2014 and 2013. These interim financial statements are the responsibility of the Company’s management.

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

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

As discussed in Note 2 to the consolidated financial statements, the Company emerged from bankruptcy on February 3, 2014.

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

/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Baltimore, Maryland
May 8, 2014


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Table of Contents

W. R. Grace & Co. and Subsidiaries
Consolidated Statements of Operations (unaudited)
 
Three Months Ended March 31,
(In millions, except per share amounts)
2014
 
2013
Net sales
$
744.5

 
$
709.9

Cost of goods sold
475.3

 
450.9

Gross profit
269.2

 
259.0

Selling, general and administrative expenses
136.8

 
133.3

Research and development expenses
20.5

 
16.9

Interest expense and related financing costs
11.2

 
10.5

Interest accretion on deferred payment obligations
8.2

 

Chapter 11 expenses, net of interest income
6.1

 
4.8

Equity in earnings of unconsolidated affiliate
(3.7
)
 
(5.1
)
Other expense, net
10.0

 
7.9

Total costs and expenses
189.1

 
168.3

Income before income taxes
80.1

 
90.7

Provision for income taxes
(29.8
)

(31.3
)
Net income
50.3

 
59.4

Less: Net income attributable to noncontrolling interests
(0.2
)
 
(0.3
)
Net income attributable to W. R. Grace & Co. shareholders
$
50.1

 
$
59.1

Earnings Per Share Attributable to W. R. Grace & Co. Shareholders
 
 
 
Basic earnings per share:
 
 
 
Net income attributable to W. R. Grace & Co. shareholders
$
0.65

 
$
0.78

Weighted average number of basic shares
77.0


75.7

Diluted earnings per share:
 
 
 
Net income attributable to W. R. Grace & Co. shareholders
$
0.64

 
$
0.77

Weighted average number of diluted shares
78.1

 
77.2


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

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Table of Contents

W. R. Grace & Co. and Subsidiaries
Consolidated Statements of Comprehensive Income (unaudited)
 
Three Months Ended March 31,
(In millions)
2014
 
2013
Net income
$
50.3

 
$
59.4

Other comprehensive income (loss):
 
 
 
Defined benefit pension and other postretirement plans, net of income taxes
(0.1
)
 
0.1

Currency translation adjustments
(2.1
)
 
(6.4
)
Gain from hedging activities, net of income taxes
0.7

 
0.4

Gain on securities available for sale, net of income taxes
0.1

 

Total other comprehensive income attributable to noncontrolling interests
0.1

 
0.2

Total other comprehensive loss
(1.3
)
 
(5.7
)
Comprehensive income
49.0

 
53.7

Less: comprehensive income attributable to noncontrolling interests
(0.3
)
 
(0.5
)
Comprehensive income attributable to W. R. Grace & Co. shareholders
$
48.7

 
$
53.2


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

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Table of Contents

W. R. Grace & Co. and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)
 
Three Months Ended March 31,
(In millions)
2014
 
2013
OPERATING ACTIVITIES
 
 
 
Net income
$
50.3

 
$
59.4

Reconciliation to net cash (used for) provided by operating activities:
 
 
 
Depreciation and amortization
34.0

 
31.1

Equity in earnings of unconsolidated affiliate
(3.7
)
 
(5.1
)
Chapter 11 expenses, net of interest income
6.1

 
4.8

Chapter 11 expenses paid
(15.5
)
 
(3.2
)
Asbestos and bankruptcy related charges, net
8.8

 

Cash paid to resolve liabilities subject to Chapter 11
(1,308.4
)
 

Provision for income taxes
29.8

 
31.3

Income taxes paid, net of refunds
(16.1
)
 
(11.6
)
Interest accretion on deferred payment obligations
8.2

 

Interest accrued on credit arrangements
4.3

 

Interest accrued on pre-petition liabilities subject to compromise
3.4

 
9.0

Defined benefit pension expense
3.5

 
9.2

Payments under defined benefit pension arrangements
(8.8
)
 
(53.9
)
Expenditures for environmental remediation
(1.8
)
 
(2.6
)
Changes in assets and liabilities, excluding effect of currency translation:
 
 
 
Trade accounts receivable
(21.1
)
 
39.6

Inventories
(30.2
)
 
(40.3
)
Accounts payable
13.5

 
48.3

All other items, net
(9.6
)
 
(65.9
)
Net cash (used for) provided by operating activities
(1,253.3
)
 
50.1

INVESTING ACTIVITIES
 
 
 
Capital expenditures
(40.1
)
 
(38.3
)
Transfer from (to) restricted cash and cash equivalents
395.4

 
(4.0
)
Other investing activities
(2.6
)
 

Net cash provided by (used for) investing activities
352.7

 
(42.3
)
FINANCING ACTIVITIES
 
 
 
Borrowings under credit arrangements
979.2

 
3.1

Repayments under credit arrangements
(543.2
)
 
(20.8
)
Payments for debt financing costs
(23.7
)
 

Proceeds from exercise of stock options
7.7

 
6.3

Payments for repurchase of common stock
(60.5
)
 

Other financing activities
1.3

 
0.8

Net cash provided by (used for) financing activities
360.8

 
(10.6
)
Effect of currency exchange rate changes on cash and cash equivalents
(2.1
)
 
(14.3
)
Decrease in cash and cash equivalents
(541.9
)
 
(17.1
)
Cash and cash equivalents, beginning of period
964.8

 
1,336.9

Cash and cash equivalents, end of period
$
422.9

 
$
1,319.8


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

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Table of Contents

W. R. Grace & Co. and Subsidiaries
Consolidated Balance Sheets (unaudited)
(In millions, except par value and shares)
March 31,
2014
 
December 31,
2013
ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
422.9

 
$
964.8

Restricted cash and cash equivalents

 
395.4

Trade accounts receivable, less allowance of $5.7 (2013—$6.0)
504.7

 
481.8

Inventories
324.8

 
295.3

Deferred income taxes
231.3

 
58.1

Other current assets
113.9

 
99.0

Total Current Assets
1,597.6

 
2,294.4

Properties and equipment, net of accumulated depreciation and amortization of $1,894.6 (2013—$1,876.8)
832.7

 
829.9

Goodwill
455.7

 
457.5

Technology and other intangible assets, net
310.1

 
315.5

Deferred income taxes
661.6

 
845.9

Asbestos-related insurance

 
500.0

Overfunded defined benefit pension plans
18.1

 
16.7

Investment in unconsolidated affiliate
99.7

 
96.2

Other assets
63.2

 
40.0

Total Assets
$
4,038.7

 
$
5,396.1

LIABILITIES AND EQUITY
 
 
 
Liabilities Not Subject to Compromise
 
 
 
Current Liabilities
 
 
 
Debt payable within one year
$
149.0

 
$
81.1

Accounts payable
305.4

 
262.5

PI warrant liability
490.0

 

Other current liabilities
325.3

 
292.0

Total Current Liabilities
1,269.7

 
635.6

Debt payable after one year
921.5

 
29.6

Deferred payment obligations
602.7

 

Deferred income taxes
18.2

 
18.2

Income tax contingencies
80.2

 
5.0

Underfunded and unfunded defined benefit pension plans
392.0

 
299.6

Other liabilities
183.0

 
60.8

Total Liabilities Not Subject to Compromise
3,467.3

 
1,048.8

Liabilities Subject to Compromise—Note 2

 
3,776.1

Total Liabilities
3,467.3

 
4,824.9

Commitments and Contingencies—Note 9

 

Equity
 
 
 
Common stock issued, par value $0.01; 300,000,000 shares authorized; outstanding: 76,824,093 (2013—77,046,143)
0.8

 
0.8

Paid-in capital
545.1

 
533.4

Retained earnings
65.9

 
15.8

Treasury stock, at cost: shares: 601,200 (2013—0)
(60.5
)
 

Accumulated other comprehensive income
9.2

 
10.6

Total W. R. Grace & Co. Shareholders' Equity
560.5

 
560.6

Noncontrolling interests
10.9

 
10.6

Total Equity
571.4

 
571.2

Total Liabilities and Equity
$
4,038.7

 
$
5,396.1


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

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Table of Contents

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, 2012
$
537.3

 
$
(240.3
)
 
$
(16.8
)
 
$
29.7

 
$
9.9

 
$
319.8

Net income

 
59.1

 

 

 
0.3

 
59.4

Stock based compensation
3.5

 

 

 

 

 
3.5

Exercise of stock options
2.7

 

 
3.6

 

 

 
6.3

Other comprehensive income (loss)

 

 

 
(5.9
)
 
0.2

 
(5.7
)
Balance, March 31, 2013
$
543.5

 
$
(181.2
)
 
$
(13.2
)
 
$
23.8

 
$
10.4

 
$
383.3

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


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

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Table of Contents

Notes to Consolidated Financial Statements
1. Basis of Presentation and Summary of Significant Accounting and Financial Reporting Policies
W. R. Grace & Co., through its subsidiaries, is engaged in specialty chemicals and specialty materials businesses on a global basis through three operating segments: Grace Catalysts Technologies, which includes catalysts and related products and technologies used in refining, petrochemical and other chemical manufacturing applications; Grace Materials Technologies, which includes packaging technologies and engineered materials used in consumer, industrial, coatings, and pharmaceutical applications; and Grace Construction Products, which includes specialty construction chemicals and specialty building materials used in commercial, infrastructure and residential construction.
W. R. Grace & Co. conducts all of its business through a single wholly owned subsidiary, W. R. Grace & Co.-Conn. ("Grace-Conn."). Grace-Conn. owns all of the assets, properties and rights of W. R. Grace & Co. on a consolidated basis, either directly or through subsidiaries.
As used in these notes, the term "Company" refers to W. R. Grace & Co. The term "Grace" refers to the Company and/or one or more of its subsidiaries and, in certain cases, their respective predecessors.
Chapter 11 Proceedings    During 2000 and the first quarter of 2001, Grace experienced several adverse developments in its asbestos-related litigation, including: a significant increase in personal injury claims, higher than expected costs to resolve personal injury and certain property damage claims, and class action lawsuits alleging damages from Zonolite® Attic Insulation ("ZAI"), a former Grace attic insulation product.
After a thorough review of these developments, Grace's Board of Directors concluded that a federal court-supervised bankruptcy process provided the best forum available to achieve fairness in resolving these claims and on April 2, 2001 (the "Filing Date"), Grace and 61 of its United States subsidiaries and affiliates filed voluntary petitions for reorganization (the "Filing") under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court").
Under Chapter 11, Grace operated its businesses under court supervision while using the Chapter 11 process to develop and implement a plan for addressing the asbestos-related claims.
In September 2008, Grace and other parties filed a joint plan of reorganization with the Bankruptcy Court to address all pending and future asbestos-related claims and all other pre-petition claims as outlined therein (as subsequently amended, the "Joint Plan"). Following the confirmation of the Joint Plan in 2011 by the Bankruptcy Court and in 2012 by a U.S. District Court, and the resolution of all appeals, Grace emerged from bankruptcy on February 3, 2014. (See Note 2 for Chapter 11 information.)
Basis of Presentation    The interim Consolidated Financial Statements presented herein are unaudited and should be read in conjunction with the Consolidated Financial Statements presented in the Company's 2013 Annual Report on Form 10-K. Such interim Consolidated Financial Statements reflect all adjustments that, in the opinion of management, are necessary for a fair statement of the results of the interim periods presented; all such adjustments are of a normal recurring nature except for the impacts of adopting new accounting standards as discussed below. All significant intercompany accounts and transactions have been eliminated.
The results of operations for the three-month interim period ended March 31, 2014, are not necessarily indicative of the results of operations for the year ending December 31, 2014.
Use of Estimates    The preparation of financial statements in conformity with U.S. generally accepted accounting principles (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements, and the reported amounts of revenues and expenses for the periods presented. Actual amounts could differ from those estimates, and the differences could be material. Changes in estimates are recorded in the period identified. Grace's accounting measurements that are most affected by management's estimates of future events are:
Contingent liabilities, which depend on an assessment of the probability of loss and an estimate of ultimate resolution cost, such as asbestos-related matters and litigation (see Note 2), income taxes (see Note 6), and environmental remediation (see Note 9);

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Table of Contents


Notes to Consolidated Financial Statements (Continued)

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

Pension and postretirement liabilities that depend on assumptions regarding participant life spans, future inflation, discount rates and total returns on invested funds (see Note 7); and
Realization values of net deferred tax assets, which depend on projections of future taxable income.
Currency Translation    On February 8, 2013, the Venezuelan government announced that, effective February 13, 2013, the official exchange rate of the bolivar to U.S. dollar would devalue from 4.3 to 6.3. As a result of this currency devaluation, Grace incurred a charge to net income of $8.5 million in the 2013 first quarter. Of this amount, $1.6 million was included in segment operating income.
Licensing Revenue Recognition    In December 2013, Grace acquired the assets of the UNIPOL® Polypropylene Process Technology Licensing and Catalysts business of The Dow Chemical Company. Grace typically bundles the license, the basic process design package, training, and software into one fixed price contract. The fixed price contract revenue is recognized on a straight-line basis over the period of performance of the contract, except for contingent revenue associated with a final performance guarantee. Revenue associated with the performance guarantee is considered contingent and therefore revenue is recognized when customer acceptance is obtained. Other services that are sold in connection with license arrangements generally qualify for separate accounting, with revenue recognized as earned.
Reclassifications and Revisions    Certain amounts in prior years' Consolidated Financial Statements have been reclassified to conform to the current year presentation. Such reclassifications have not materially affected previously reported amounts in the Consolidated Financial Statements.
Certain pension costs previously reported as a separate line item in the Consolidated Statements of Operations are now reported in "cost of goods sold" and in "selling, general and administrative expenses" based upon the functions of the employees to which the pension costs relate. Grace has revised its accounting such that a portion of the defined benefit pension expense has been and will continue to be capitalized into inventories prior to being reported in "cost of goods sold." Grace believes that the change in classification of defined benefit pension costs and the change to inventory capitalization are not material to all prior periods.
Certain prior period amounts related to borrowings and repayments under credit arrangements reported as financing activities on the Consolidated Statements of Cash Flows have been revised. These amounts were originally presented on a net basis and are now being presented on a gross basis. Grace concluded that these revisions were not material to the prior-year Consolidated Financial Statements.
Change in Accounting Principle Regarding Pension Benefits    During 2013, Grace changed its method of accounting for actuarial gains and losses relating to its global defined benefit pension plans to a more preferable method under U.S. GAAP. Grace's new method of accounting is referred to as "mark-to-market accounting" and includes immediate recognition of actuarial gains and losses in the period in which they occur. Under Grace's previous accounting method, such amounts were deferred and amortized. In addition, Grace will no longer update the balance sheet funded status of its pension plans each quarter for changes in discount rates and actual returns on assets, but rather will perform such update annually as of the end of each year. Should a significant event occur, Grace's pension obligation and plan assets would be remeasured at an interim period, and the gains or losses on remeasurement would be recognized in that period. This new accounting method was adopted in the 2013 fourth quarter, and retrospectively applied to Grace's financial results for all periods presented.
Under mark-to-market accounting, Grace's pension costs consist of two elements: 1) ongoing costs recognized quarterly, which include service and interest costs, expected returns on plan assets, and amortization of prior service costs/credits; and 2) mark-to-market gains and losses recognized annually in the fourth quarter resulting from changes in actuarial assumptions, such as discount rates and the difference between actual and expected returns on plan assets.

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Notes to Consolidated Financial Statements (Continued)

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

In order to better reflect the nature of pension costs in Grace's operating results, Grace also retrospectively revised the classification of defined benefit pension expense. See "Reclassifications and Revisions" above for further discussion related to these revisions.
These changes have been reported through retrospective application of the new policies to all periods presented. The impacts of all adjustments made to the financial statements are summarized below:
Consolidated Statements of Operations
 
Three months ended March 31, 2013
(In millions, except per share amounts)
Previously Reported
 
Revised
 
Effect of Change
Cost of goods sold
$
446.1

 
$
450.9

 
$
4.8

Gross profit
263.8

 
259.0

 
(4.8
)
Selling, general and administrative expenses
128.9

 
133.3

 
4.4

Defined benefit pension expense
18.6

 

 
(18.6
)
Total costs and expenses
182.5

 
168.3

 
(14.2
)
Income before income taxes
81.3

 
90.7

 
9.4

Provision for income taxes
(28.1
)
 
(31.3
)
 
(3.2
)
Net income
53.2

 
59.4

 
6.2

Net income attributable to W. R. Grace & Co. shareholders
52.9

 
59.1

 
6.2

Basic earnings per share
 
 
 
 
 
Net income attributable to W. R. Grace & Co. shareholders
0.70

 
0.78

 
0.08

Diluted earnings per share
 
 
 
 
 
Net income attributable to W. R. Grace & Co. shareholders
0.69

 
0.77

 
0.08

Consolidated Statements of Cash Flows
 
Three months ended March 31, 2013
(In millions)
Previously Reported
 
Revised
 
Effect of Change
Cash flows from operating activities:
 

 
 

 
 

Net income
$
53.2

 
$
59.4

 
$
6.2

Provision for income taxes
28.1

 
31.3

 
3.2

Defined benefit pension expense
18.6

 
9.2

 
(9.4
)
Inventories
(42.8
)
 
(40.3
)
 
2.5

All other items, net(1)
(66.8
)
 
(69.3
)
 
(2.5
)
_______________________________________________________________________________
(1)
Includes only those items which relate to the change in accounting method to mark-to-market accounting.

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Notes to Consolidated Financial Statements (Continued)

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

Consolidated Statements of Equity and Comprehensive Income
 
March 31, 2013
(In millions)
Previously Reported
 
Revised
 
Effect of Change
Retained earnings
 

 
 

 
 

Beginning balance
$
395.2

 
$
(240.3
)
 
$
(635.5
)
Net income
52.9

 
59.1

 
6.2

Ending balance
448.1

 
(181.2
)
 
(629.3
)
 
 
 
 
 
 
Accumulated other comprehensive income (loss)
 
 
 
 
 
Beginning balance
$
(607.3
)
 
$
29.7

 
$
637.0

Other comprehensive income (loss)
30.1

 
(5.9
)
 
(36.0
)
Ending balance
(577.2
)
 
23.8

 
601.0

 
 
 
 
 
 
Total equity
$
411.6

 
$
383.3

 
$
(28.3
)
 
 
 
 
 
 
Comprehensive income
 
 
 
 
 
Net income
$
53.2

 
$
59.4

 
$
6.2

Defined benefit pension and other postretirement plans, net of income taxes
36.2

 
0.1

 
(36.1
)
Currency translation adjustments
(6.5
)
 
(6.4
)
 
0.1

Total other comprehensive income (loss)
30.3

 
(5.7
)
 
(36.0
)
Comprehensive income
83.5

 
53.7

 
(29.8
)
Comprehensive income attributable to W. R. Grace & Co. shareholders
83.0

 
53.2

 
(29.8
)
Effect of New Accounting Standards    In July 2013, the FASB issued ASU 2013-11 "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists." This update is intended to improve the consistency surrounding the presentation of an unrecognized tax benefit when a net operating loss carryforward exists, requiring the unrecognized tax benefit to be presented as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. The new requirements are effective for fiscal years beginning after December 15, 2013, and for interim periods within those fiscal years, with early adoption permitted. Grace adopted this update for the 2014 first quarter, and it did not have a material effect on the Consolidated Financial Statements.
2. Chapter 11 and Joint Plan of Reorganization
On April 2, 2001, Grace and 61 of its United States subsidiaries and affiliates filed voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code. The cases were consolidated under case number 01-01139 (the "Chapter 11 Cases"). Grace's non-U.S. subsidiaries and certain of its U.S. subsidiaries were not included in the filing.
In September 2008, Grace and other parties filed the Joint Plan with the Bankruptcy Court to address all pending and future asbestos-related claims and all other pre-petition claims as outlined therein. On January 31, 2011, the Bankruptcy Court issued an order (the "Confirmation Order") confirming the Joint Plan. On January 31, 2012, the United States District Court for the District of Delaware (the "District Court") issued an order affirming the Confirmation Order and confirming the Joint Plan in its entirety. On February 3, 2014 (the "Effective Date"), the U.S. Court of Appeals for the Third Circuit (the "Third Circuit") dismissed the sole remaining appeal challenging the Confirmation Order and the Joint Plan became effective.

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Notes to Consolidated Financial Statements (Continued)

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

Under the Joint Plan, two asbestos trusts were established and funded under Section 524(g) of the Bankruptcy Code. The Confirmation Order contains a channeling injunction which provides that all pending and future asbestos-related personal injury claims and demands ("PI Claims") have been channeled for resolution to an asbestos personal injury trust (the "PI Trust") and all pending and future asbestos-related property damage claims and demands ("PD Claims"), including PD Claims related to Grace’s former attic insulation product ("ZAI PD Claims"), have been channeled to a separate asbestos property damage trust (the "PD Trust"). Canadian ZAI PD Claims have been channeled to a separate Canadian claims fund. The trusts are the sole recourse for holders of asbestos-related claims; the channeling injunctions prohibit holders of asbestos-related claims from asserting such claims directly against Grace.
Under the terms of the Joint Plan, claims under the Chapter 11 Cases were satisfied as follows:
Asbestos-Related Personal Injury Claims    Asbestos personal injury claimants allege adverse health effects from exposure to asbestos-containing products formerly manufactured by Grace. Historically, Grace's cost to resolve such claims was influenced by numerous variables, including the nature of the disease alleged, product identification, proof of exposure to a Grace product, negotiation factors, the solvency of other former producers of asbestos-containing products, cross-claims by co-defendants, the rate at which new claims were filed, the jurisdiction in which the claims were filed, and the defense and disposition costs associated with these claims.
As of the Filing Date, 129,191 PI Claims were pending against Grace. Grace believes that a substantial number of additional PI Claims would have been received between the Filing Date and the Effective Date had such PI Claims not been stayed by the Bankruptcy Court.
Under the Joint Plan, all PI Claims were channeled to the PI Trust for resolution. The PI Trust will use specified trust distribution procedures to satisfy allowed PI Claims.
On the Effective Date, the PI Trust was funded with:
$557.7 million in cash from Grace (includes $464.1 million of cash from Grace and $93.6 million of cash from insurance proceeds that were held in escrow);
A warrant to acquire 10 million shares of Company common stock at an exercise price of $17.00 per share, expiring one year after the Effective Date (the "PI Warrant") (this obligation is expected to be settled in cash with the PI Trust as discussed below);
Rights to all proceeds under all of Grace's insurance policies that are available for payment of PI Claims;
$42.1 million in cash from a subsidiary of Fresenius AG, pursuant to the terms of a settlement agreement resolving asbestos-related, successor liability and fraudulent transfer claims against Fresenius; and
$856.8 million in cash and 18 million shares of Sealed Air Corporation common stock paid by Cryovac, Inc., a wholly owned subsidiary of Sealed Air, pursuant to the terms of a settlement agreement resolving asbestos-related, successor liability and fraudulent transfer claims against Cryovac and Sealed Air.
Grace is obligated to make deferred payments to the PI Trust of $110 million per year for 5 years beginning in 2019, and $100 million per year for 10 years beginning in 2024, which obligation is secured by the Company's obligation to issue 77,372,257 shares of Company common stock to the asbestos trusts in the event of default, subject to customary anti-dilution provisions.
The amounts that Grace will be obligated to pay to the PI Trust under the Joint Plan are fixed amounts. Grace is not obligated to make additional payments to the PI Trust beyond the payments described above.
Asbestos-Related Property Damage Claims    The plaintiffs in asbestos property damage lawsuits generally seek to have the defendants pay for the cost of removing, containing or repairing the asbestos-

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Notes to Consolidated Financial Statements (Continued)

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

containing materials in commercial and public buildings. Various factors can affect the merit and value of PD Claims, including legal defenses, product identification, the amount and type of product involved, the age, type, size and use of the building, the legal status of the claimant, the jurisdictional history of prior cases, the court in which the case is pending, and the difficulty of asbestos abatement, if necessary.
Several class action lawsuits also were filed on behalf of homeowners alleging damage from ZAI. Based on Grace's investigation of the claims described in these lawsuits, and testing and analysis of this product by Grace and others, Grace believes that ZAI was and continues to be safe for its intended purpose and poses little or no threat to human health. The plaintiffs in the ZAI lawsuits dispute Grace's position on the safety of ZAI. In December 2006 the Bankruptcy Court issued an opinion and order holding that, although ZAI is contaminated with asbestos and can release asbestos fibers when disturbed, there is no unreasonable risk of harm from ZAI.
At Grace's request, in July 2008, the Bankruptcy Court established a claims bar date for U.S. ZAI PD Claims and approved a related notice program that required any person with a U.S. ZAI PD Claim to submit an individual proof of claim no later than October 31, 2008. Approximately 17,960 U.S. ZAI PD Claims were filed prior to the October 31, 2008, claims bar date and, as of the Effective Date, an additional 1,310 U.S. ZAI PD Claims were filed.
Under the Joint Plan, all PD Claims have been channeled to the PD Trust for resolution. The PD Trust contains two accounts, the PD Account and the ZAI PD Account. U.S. ZAI PD Claims are to be paid from the ZAI PD Account and non-ZAI PD Claims are to be paid from the PD Account. Canadian ZAI PD Claims are to be paid by a separate fund established in Canada. Each account has a separate trustee and the assets of the accounts may not be commingled.
PD Account
On the Effective Date, the PD Account of the PD Trust was funded with $39.9 million in cash from Grace and $111.4 million in cash from Cryovac and Fresenius to pay allowed non-ZAI PD Claims settled as of the Effective Date, and CDN$8.6 million in cash from Grace to fund the Canadian ZAI PD Claims fund.
Following the Effective Date, unresolved non-ZAI PD Claims are to be litigated in the Bankruptcy Court and any future non-ZAI PD Claims are to be litigated in a federal district court, in each case pursuant to procedures to be approved by the Bankruptcy Court. To the extent any such PD Claims are determined to be allowed claims, they are to be paid in cash by the PD Trust. Grace is obligated to make a payment to the PD Trust every six months in the amount of any non-ZAI PD Claims allowed during the preceding six months plus interest (if applicable) and, except for the first six months, the amount of PD Trust expenses for the preceding six months (the "PD Obligation"). The aggregate amount to be paid under the PD Obligation is not capped and Grace may be obligated to make additional payments to the PD Account in respect of the PD Obligation. Grace has accrued for those unresolved non-ZAI PD Claims that it believes are probable and estimable. Grace has not accrued for other unresolved or unasserted non-ZAI PD Claims, as it does not believe that payment on any such claims is probable. As of March 31, 2014, Grace had made no other payments to the PD Trust since the Effective Date.
On the Effective Date, the PD Trust contributed CDN$8.6 million to a separate Canadian ZAI PD Claims fund through which Canadian ZAI PD Claims are to be resolved. Grace has no continuing or contingent obligations to make additional payments into this fund.
ZAI PD Account
On the Effective Date, the ZAI PD Account was funded with approximately $34.4 million in cash from Cryovac and Fresenius.
Grace is obligated to make a payment of $30 million in cash to the ZAI PD Account on the third anniversary of the Effective Date, and Grace is obligated to make up to 10 contingent deferred payments of $8 million per year to the ZAI PD Account during the 20-year period beginning on the fifth anniversary of the Effective Date, with each such payment due only if the assets of the ZAI PD Account fall below $10 million during the preceding year. The amounts that Grace will be obligated to pay to the ZAI PD Account under the Joint Plan are capped amounts.

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Notes to Consolidated Financial Statements (Continued)

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

Grace is not obligated to make additional payments to the PD Trust in respect of the ZAI PD Account beyond the payments described above. Grace has accrued for the $30 million payment due on the third anniversary of the Effective Date, but has not accrued for the 10 additional payments since Grace does not currently believe they are probable.
The PD Trust is to resolve U.S. ZAI PD Claims that qualify for payment under specified trust distribution procedures by paying 55% of the claimed amount, but in no event is the PD Trust to pay more per claim than $4,125 (as adjusted for inflation each year after the fifth anniversary of the Effective Date).
All payments to the PD Trust required after the Effective Date are secured by the Company's obligation to issue 77,372,257 shares of Company common stock to the asbestos trusts in the event of default, subject to customary anti-dilution provisions. Grace has the right to conduct annual audits of the books, records and claim processing procedures of the PD Trust.
Asbestos-Related Liability    The recorded asbestos-related liability as of December 31, 2013, was $2,092.4 million, and was included in "liabilities subject to compromise" in the accompanying Consolidated Balance Sheets. The asbestos-related liability was settled at the recorded amount on the Effective Date, including payment of cash of $499.5 million at the Effective Date, issuance of deferred payment obligations of $594.5 million and the warrant of $490.0 million, and transfer of all cash and rights with respect to Grace's insurance policies that provide coverage for asbestos-related claims.
The PI Trust deferred payment obligation of $110 million per year for 5 years beginning January 2, 2019, and of $100 million per year for 10 years beginning January 2, 2024, was recorded at fair value of $567 million on the Effective Date. The value of the deferred payment obligation has been estimated based on (i) interest rates; (ii) the Company's credit standing and the payment period of the deferred payments; (iii) restrictive covenants and terms of the Company's other credit facilities; (iv) assessment of the risk of a default, which if default were to occur would require Grace to issue shares of Company common stock; and (v) the subordination provisions of the deferred payment agreement.
Grace also recorded a deferred payment obligation of $27.5 million representing the present value of the $30 million payment due to the ZAI PD Account on February 3, 2017.
The warrant to acquire 10 million shares of the Company's common stock for $17.00 per share was recorded at its estimated value of $490 million on the Effective Date based on the current trading range of Company common stock and other valuation factors.
Insurance Rights    The insurance rights transferred by Grace to the PI Trust under the Joint Plan relate to insurance policies that provide coverage for 1962 to 1985 with respect to asbestos-related lawsuits and claims. For the most part, coverage for years 1962 through 1972 has been exhausted, leaving coverage for years 1973 through 1985 available for pending and future asbestos claims. Since 1985, insurance coverage for asbestos-related liabilities has not been commercially available to Grace. As discussed above, pursuant to the Joint Plan, proceeds with respect to all of Grace's insurance policies that provide coverage for asbestos-related claims were transferred to the PI Trust at emergence.
Grace has entered into settlement agreements with underwriters of a portion of Grace's insurance coverage. Under most of these agreements, the insurers have agreed, subject to certain conditions, to pay to the PI Trust (directly or through an escrow arrangement) an aggregate of $396.1 million in respect of coverage under the affected policies. Under the remaining agreements, the insurers have agreed to reimburse the PI Trust for a portion of the claims actually paid by the PI Trust.
PI Warrant Settlement    In October 2012, Grace entered into an agreement with interested parties to settle the PI Warrant in cash during the one-year period after the Effective Date. Under the terms of the settlement agreement, Grace will repurchase the PI Warrant for a price equal to the average of the daily closing prices of Company common stock during the period commencing one day after the Effective Date and ending on the day prior to the date the PI Trust elects to sell the PI Warrant back to Grace, multiplied by 10 million (the number of shares issuable under the PI Warrant), less $170 million (the aggregate exercise price of the PI Warrant), provided that if the average of the daily closing prices is less than $54.50 per share, then the repurchase price

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Notes to Consolidated Financial Statements (Continued)

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

would be $375 million, and if the average of the daily closing prices exceeds $66.00 per share, then the repurchase price would be $490 million. The settlement agreement is terminable by the PI Trust in the event a tender offer, or other proposed transaction that would result in a change in control of the Company, is announced during the one-year period after the Effective Date. In such event, the PI Warrant would be settled in shares of Company common stock.
Other Claims    The Joint Plan also provided that all other allowed pre-petition claims were paid in full on or within 10 days after the Effective Date, or when they otherwise become due. All allowed administrative claims were to be paid in cash and all allowed priority claims are to be paid in cash with interest as provided in the Joint Plan. Secured claims are to be paid in cash with interest or by reinstatement. Allowed general unsecured claims were paid in cash, including post-petition interest in accordance with the Joint Plan. The Joint Plan further provided that Grace, subject to certain non-bankruptcy limitations, satisfy all pension, retirement medical, and similar employee-related obligations and pay workers’ compensation claims. Grace has paid or expects to pay $1,361.6 million in respect of other allowed pre-petition or other claims, including $1,103.5 million in respect of Grace's pre-petition credit facilities.
Unresolved Claims    The Bankruptcy Court established a claims bar date of March 31, 2003, for claims of general unsecured creditors, PD Claims (other than ZAI PD Claims) and medical monitoring claims related to asbestos. The bar date did not apply to PI Claims or claims related to ZAI PD Claims.
Unresolved claims are to be addressed through the claims objection process and the dispute resolution procedures approved by the Bankruptcy Court. As of March 31, 2014, 142 employee claims and 63 non-employee claims (other than asbestos-related claims) remain unresolved.
Grace believes that its recorded liabilities for unresolved claims represent a reasonable estimate of the ultimate allowable amount for such claims, where sufficient information is available to determine whether liability is probable and estimable. If it is ultimately determined that any amounts are owed on these claims, they are to be paid in full, with interest as required. While the ultimate outcome of these claims cannot be predicted with certainty, Grace believes that the resolution of these matters will not have a material adverse effect on its consolidated financial position, results of operations, or cash flows.
After the Effective Date, all persons and entities generally are forever barred from asserting against Grace any claims or demands that are based upon any act or omission, transaction, or other activity, event or occurrence that occurred prior to the Effective Date, except as expressly provided in the Joint Plan.
Committees and Representatives    As a result of confirmation and effectiveness of the Joint Plan, the four official committees appointed in the Chapter 11 Cases have been disbanded. The legal representative for future asbestos personal injury claimants will continue to act in the same capacity with respect to the PI Trust and the legal representative for future asbestos property damage claimants will continue to act in the same capacity with respect to the PD Trust.
Effect on Company Common Stock    Under the Joint Plan holders of Company common stock as of the Effective Date retained their shares, but the interests of shareholders are subject to dilution in the event of default with respect to the deferred payment obligations to the PI Trust or the PD Trust under the Company's security obligation.
Debt Capital    As of December 31, 2013, all of the Debtors' pre-petition debt was in default due to the Filing. The accompanying December 31, 2013, Consolidated Balance Sheet reflects the classification of the Debtors' pre-petition debt within "liabilities subject to compromise." All debt subject to compromise was paid in full on the Effective Date.
As of December 31, 2013, Grace maintained a $100 million cash-collateralized letter of credit facility with a commercial bank to support existing and new financial assurances. At emergence, the cash-collateralized letter of credit facility was replaced with a $400 million revolving credit facility with a $150 million sublimit for letters of credit. See Note 4 for a discussion of Grace's exit financing.

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Notes to Consolidated Financial Statements (Continued)

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

Accounting Impact    The accompanying Consolidated Financial Statements have been prepared in accordance with ASC 852 "Reorganizations." ASC 852 requires that financial statements of debtors-in-possession be prepared on a going concern basis, which contemplates continuity of operations and realization of assets and liquidation of liabilities in the ordinary course of business.
Pursuant to ASC 852, Grace's pre-petition and post-petition liabilities that were subject to compromise were required to be reported separately on the balance sheet at an estimate of the amount that would ultimately be allowed by the Bankruptcy Court. As of December 31, 2013, such pre-petition liabilities included fixed obligations (such as debt and contractual commitments), as well as estimates of costs related to contingent liabilities (such as asbestos-related litigation, environmental remediation and other claims). Obligations of Grace subsidiaries not covered by the Filing were required to be classified on the Consolidated Balance Sheets based upon maturity dates or the expected dates of payment. ASC 852 also requires separate reporting of certain expenses, realized gains and losses, and provisions for losses related to the Filing as reorganization items. Grace presents reorganization items as "Chapter 11 expenses, net of interest income," a separate caption in its Consolidated Statements of Operations.
Grace's December 31, 2013, Consolidated Balance Sheet separately identifies the liabilities that were "subject to compromise" as a result of the Chapter 11 proceedings. In Grace's case, "liabilities subject to compromise" represented both pre-petition and post-petition liabilities as determined under U.S. GAAP. Changes to pre-petition liabilities subsequent to the Filing Date reflect: (1) cash payments under approved court orders; (2) the terms of the Joint Plan, as discussed above, including the accrual of interest on pre-petition debt and other fixed obligations; (3) accruals for employee-related programs; and (4) changes in estimates related to other pre-petition contingent liabilities.
The table below sets forth the components of liabilities subject to compromise as of December 31, 2013:
(In millions)
December 31,
2013
Asbestos-related contingencies
$
2,092.4

Pre-petition bank debt plus accrued interest
1,100.0

Environmental contingencies
134.5

Unfunded special pension arrangements
129.4

Income tax contingencies
76.6

Postretirement benefits other than pension
57.2

Drawn letters of credit plus accrued interest
37.8

Accounts payable
34.3

Retained obligations of divested businesses
29.9

Other accrued liabilities
94.3

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

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

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Notes to Consolidated Financial Statements (Continued)

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

Chapter 11 Expenses
 
Three Months Ended March 31,
(In millions)
2014
 
2013
Legal and financial advisory fees
$
6.2

 
$
5.0

Interest income
(0.1
)
 
(0.2
)
Chapter 11 expenses, net of interest income
$
6.1

 
$
4.8

Pursuant to ASC 852, interest income earned on the Debtors' cash balances must be offset against Chapter 11 expenses.
Condensed Financial Information of the Debtors
W. R. Grace & Co.—Chapter 11 Filing Entities
Debtor-in-Possession Statements of Operations
(In millions) (Unaudited)
Three Months Ended March 31, 2013
Net sales, including intercompany
$
347.1

Cost of goods sold, including intercompany, exclusive of depreciation and amortization shown separately below
224.6

Selling, general and administrative expenses
57.7

Depreciation and amortization
17.3

Chapter 11 expenses, net of interest income
4.8

Research and development expenses
9.5

Interest expense and related financing costs
9.2

Other income, net
(12.2
)
 
310.9

Income before income taxes and equity in net income of non-filing entities
36.2

Provision for income taxes
(14.8
)
Income before equity in net income of non-filing entities
21.4

Equity in net income of non-filing entities
37.7

Net income attributable to W. R. Grace & Co. shareholders
$
59.1



19

Table of Contents


Notes to Consolidated Financial Statements (Continued)

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

W. R. Grace & Co.—Chapter 11 Filing Entities
Debtor-in-Possession Statements of Cash Flows
(In millions) (Unaudited)
Three Months Ended March 31, 2013
Operating Activities
 
Net income attributable to W. R. Grace & Co. shareholders
$
59.1

Reconciliation to net cash provided by operating activities:
 
Depreciation and amortization
17.3

Equity in net income of non-filing entities
(37.7
)
Provision for income taxes
14.8

Income taxes paid, net of refunds
(1.0
)
Defined benefit pension expense
5.0

Payments under defined benefit pension arrangements
(51.4
)
Changes in assets and liabilities, excluding the effect of foreign currency translation:
 
Trade accounts receivable
11.3

Inventories
(13.2
)
Accounts payable
23.9

All other items, net
(19.4
)
Net cash provided by operating activities
8.7

Investing Activities
 
Capital expenditures
(19.4
)
Transfer to restricted cash and cash equivalents
(1.6
)
Net cash used for investing activities
(21.0
)
Financing Activities
 
Borrowings under credit arrangements
0.2

Repayments under credit arrangements

Proceeds from exercise of stock options
6.3

Net cash (used for) provided by financing activities
6.5

Net (decrease) increase in cash and cash equivalents
(5.8
)
Cash and cash equivalents, beginning of period
1,064.2

Cash and cash equivalents, end of period
$
1,058.4



20

Table of Contents


Notes to Consolidated Financial Statements (Continued)

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

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

Restricted cash and cash equivalents
340.5

Trade accounts receivable, net
138.8

Accounts receivable—unconsolidated affiliate
10.9

Receivables from non-filing entities, net
173.0

Inventories
138.9

Other current assets
69.3

Total Current Assets
1,456.5

Properties and equipment, net
484.5

Goodwill
279.9

Technology and other intangible assets, net
249.1

Deferred income taxes
817.3

Asbestos-related insurance
500.0

Loans receivable from non-filing entities, net
283.8

Investment in non-filing entities
531.3

Investment in unconsolidated affiliate
96.2

Other assets
16.5

Total Assets
$
4,715.1

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

Underfunded defined benefit pension plans
52.2

Other liabilities
78.7

Total Liabilities Not Subject to Compromise
378.3

Liabilities Subject to Compromise
3,776.1

Total Liabilities
4,154.4

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

Noncontrolling interests in Chapter 11 filing entities
0.1

Total Equity
560.7

Total Liabilities and Equity
$
4,715.1

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

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Notes to Consolidated Financial Statements (Continued)

3. Inventories

Inventories are stated at the lower of cost or market, and cost is determined using FIFO. Inventories consisted of the following at March 31, 2014, and December 31, 2013:
(In millions)
March 31,
2014
 
December 31, 2013
Raw materials
$
84.3

 
$
69.7

In process
43.9

 
41.8

Finished products
164.8

 
152.4

Other
31.8

 
31.4

 
$
324.8

 
$
295.3

4. Debt
Components of Debt
(In millions)
March 31,
2014
 
December 31, 2013
U.S. dollar term loan, net of unamortized discount of $2.3 at March 31, 2014
$
697.7

 
$

Euro term loan, net of unamortized discount of $0.5 at March 31, 2014
205.8

 

Revolving credit facility
50.0

 

Debt payable—unconsolidated affiliate
28.5

 
28.8

Other borrowings
88.5

 
81.9

Total debt
1,070.5

 
110.7

Less debt payable within one year
149.0

 
81.1

Debt payable after one year
$
921.5

 
$
29.6

Debt Subject to Compromise
 
 
 
Bank borrowings
$

 
$
500.0

Accrued interest on bank borrowings

 
471.0

Default interest settlement

 
129.0

Drawn letters of credit

 
26.7

Accrued interest on drawn letters of credit

 
11.1

 
$

 
$
1,137.8

Weighted average interest rates on total debt
3.3
%
 
3.6
%
At March 31, 2014, the fair value of Grace's debt payable approximated the recorded value of $1,070.5 million. Fair value is determined based on Level 2 inputs, including expected future cash flows (discounted at market interest rates), quotes from financial institutions and other appropriate valuation methodologies. Grace's debt subject to compromise was paid in full on the Effective Date.
On the Effective Date, Grace entered into a Credit Agreement (the "Credit Agreement") in connection with its exit financing. The Credit Agreement provides for:
(a)
a $700 million term loan due in 2021, with interest at LIBOR +225 bps with a 75 bps floor;
(b)
a €150 million term loan due in 2021, with interest at EURIBOR +250 bps with a 75 bps floor;
(c)
a $400 million revolving credit facility due in 2019, with interest at LIBOR +175 bps; and
(d)
a $250 million delayed draw term loan facility available for 12 months, with amounts drawn due in 2021, with interest at LIBOR +225 bps with a 75 bps floor.

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Notes to Consolidated Financial Statements (Continued)

4. Debt (Continued)

The term loans will amortize in equal monthly installments in aggregate annual amounts equal to 1.00% of the original principal amount thereof.
The Credit Agreement contains customary negative and affirmative covenants and events of default. To secure its obligations under the Credit Agreement, the Company has granted security interests in the shares of its Grace-Conn. and Alltech Associates subsidiaries, substantially all of its U.S. non-real estate assets and property, and certain U.S. real estate.
This summary of the Credit Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of such agreement, a copy of which has been filed with the SEC.
5. Fair Value Measurements and Risk
Certain of Grace's assets and liabilities are reported at fair value on a gross basis. ASC 820 "Fair Value Measurements and Disclosures" defines fair value as the value that would be received at the measurement date in the principal or "most advantageous" market. Grace uses principal market data, whenever available, to value assets and liabilities that are required to be reported at fair value.
Grace has identified the following financial assets and liabilities that are subject to the fair value analysis required by ASC 820:
Fair Value of Debt and Other Financial Instruments
See Note 4 for a discussion of the fair value of Grace's debt. At March 31, 2014, the recorded values of other financial instruments such as cash equivalents and trade receivables and payables approximated their fair values, based on the short-term maturities and floating rate characteristics of these instruments.
Derivatives
From time to time, Grace enters into commodity derivatives such as fixed-rate swaps or options with financial institutions to mitigate the risk of volatility of prices of natural gas or other commodities. Under fixed-rate swaps, Grace locks in a fixed rate with a financial institution for future purchases, purchases its commodity from a supplier at the prevailing market rate, and then settles with the bank for any difference in the rates, thereby "swapping" a variable rate for a fixed rate.
The valuation of Grace's fixed-rate natural gas swaps was determined using a market approach, based on natural gas futures trading prices quoted on the New York Mercantile Exchange. Commodity fixed-rate swaps with maturities of not more than 12 months are used and designated as cash flow hedges of forecasted purchases of natural gas. The effective portion of the gain or loss on the commodity contracts is recorded in "accumulated other comprehensive income" and reclassified into income in the same period or periods that the underlying commodity purchase affects income. At March 31, 2014, there are no current open swap contracts.
The valuation of Grace's natural gas call options was determined using a market approach, based on the strike price of the options and the natural gas futures trading prices quoted on the New York Mercantile Exchange. Commodity option contracts with maturities of not more than 24 months are used and designated as cash flow hedges of forecasted purchases of natural gas. Current open option contracts hedge forecasted transactions until June 2015. The effective portion of the gain or loss on the commodity contracts is recorded in "accumulated other comprehensive income" and reclassified into income in the same period or periods that the underlying purchases affect income. At March 31, 2014, the contract volume, or notional amount, of the commodity option contracts was 5.7 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 March 2015. The effective portion of the gain or loss on the commodity contracts is recorded in "accumulated other comprehensive income" and

23

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Notes to Consolidated Financial Statements (Continued)

5. Fair Value Measurements and Risk (Continued)

reclassified into income in the same period or periods that the underlying commodity purchase affects income. At March 31, 2014, the contract volume, or notional amount, of the commodity contracts was 1.8 million pounds with a total contract value of $1.5 million.
Because Grace does business in over 40 countries and in more than 50 currencies, results are exposed to fluctuations in currency exchange rates. Grace seeks to minimize exposure to these fluctuations by matching sales in volatile currencies with expenditures in the same currencies, but it is not always possible to do so. From time to time Grace will use financial instruments such as currency forward contracts, options, or combinations of the two to reduce the risk of certain specific transactions. However, Grace does not have a policy of hedging all exposures, because management does not believe that such a level of hedging would be cost-effective.
The valuation of Grace's currency exchange rate forward contracts is determined using both a market approach and an income approach. Inputs used to value currency exchange rate forward contracts consist of: (1) spot rates, which are quoted by various financial institutions; (2) forward points, which are primarily affected by changes in interest rates; and (3) discount rates used to present value future cash flows, which are based on the London Interbank Offered Rate (LIBOR) curve or overnight indexed swap rates.
In November 2007, Grace purchased currency forward contracts to mitigate the effect of currency risk with respect to intercompany loans between its principal U.S. subsidiary and a German subsidiary. These derivatives were not designated as hedging instruments under ASC 815 "Derivatives and Hedging." These contracts were settled upon Grace's emergence from bankruptcy during the 2014 first quarter.
Grace uses interest rate swaps designated as cash flow hedges to manage fluctuations in interest on variable rate debt. The effective portion of gains and losses on these interest rate cash flow hedges is recorded in "accumulated other comprehensive income" and reclassified into "interest expense and related financing costs" during the period in which the underlying interest payments occur.
In connection with its emergence financing, Grace entered into an interest rate swap beginning on February 3, 2015, and maturing on February 3, 2020, fixing the interest on $250 million of Grace's term debt at a rate of 4.643%. The valuation of this interest rate swap is determined using both a market approach and an income approach, using prevailing market interest rates and discount rates to present value future cash flows based on the forward LIBOR yield curves.
The following tables present the fair value hierarchy for financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2014, and December 31, 2013:
 
Fair Value Measurements at
March 31, 2014, Using
Items Measured at Fair Value on a Recurring Basis
(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
$
2.6

 
$

 
$
2.6

 
$

Interest rate derivatives
1.0

 

 
1.0

 

Total Assets
$
3.6

 
$

 
$
3.6

 
$

Liabilities
 
 
 
 
 
 
 
Commodity derivatives
$
0.1

 
$

 
$
0.1

 
$

Total Liabilities
$
0.1

 
$

 
$
0.1

 
$


24

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Notes to Consolidated Financial Statements (Continued)

5. Fair Value Measurements and Risk (Continued)

 
Fair Value Measurements at
December 31, 2013, Using
Items Measured at Fair Value on a Recurring Basis
(In millions)
Total
 
Quoted Prices in Active Markets for Identical Assets or Liabilities
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
Assets
 
 
 
 
 
 
 
Currency derivatives
$
2.1

 
$

 
$
2.1

 
$

Total Assets
$
2.1

 
$

 
$
2.1

 
$

Liabilities
 
 
 
 
 
 
 
Currency derivatives
$
6.9

 
$

 
$
6.9

 
$

Commodity derivatives
0.1

 

 
0.1

 

Total Liabilities
$
7.0

 
$

 
$
7.0

 
$

The following tables present the location and fair values of derivative instruments included in the Consolidated Balance Sheets as of March 31, 2014, and December 31, 2013:
Fair Values of Derivative Instruments at
March 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
 
$
0.1

Currency contracts
Other current assets
 
1.3

 
Other current liabilities
 

Currency contracts
Other assets
 
1.2

 
Other liabilities
 

Interest rate contracts
Other assets
 
1.0

 
Other liabilities
 

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

 
Other current liabilities
 

Total derivatives
 
 
$
3.6

 
 
 
$
0.1

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

 
Other current liabilities
 
$
0.1

Currency contracts
Other current assets
 
1.0

 
Other current liabilities
 

Currency contracts
Other assets
 
1.0

 
Other liabilities
 

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

 
Other current liabilities
 
6.9

Total derivatives
 
 
$
2.1

 
 
 
$
7.0


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Notes to Consolidated Financial Statements (Continued)

5. Fair Value Measurements and Risk (Continued)

The following tables present the location and amount of gains and losses on derivative instruments included in the Consolidated Statements of Operations or, when applicable, gains and losses initially recognized in other comprehensive income ("OCI") for the three months ended March 31, 2014 and 2013:
The Effect of Derivative Instruments on the Consolidated Statement of Operations for the Three Months Ended
March 31, 2014
(In millions)
Amount of Gain or (Loss) Recognized in OCI on Derivatives (Effective Portion)
 
Location of Gain or (Loss) Reclassified from Accumulated OCI into Income
(Effective Portion)
 
Amount of Gain or (Loss) Reclassified from Accumulated 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 or (Loss) Recognized in Income on Derivatives
 
Amount of Gain or (Loss) Recognized in Income on Derivatives
Derivatives not designated as hedging instruments under ASC 815:
 
 
 
 
Currency contracts
 
Other expense
 
$
4.5

The Effect of Derivative Instruments on the Consolidated Statement of Operations for the Three Months Ended
March 31, 2013
(In millions)
Amount of Gain or (Loss) Recognized in OCI on Derivatives (Effective Portion)
 
Location of Gain or (Loss) Reclassified from Accumulated OCI into Income
(Effective Portion)
 
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income
(Effective Portion)
Derivatives in ASC 815 cash flow hedging relationships:
 
 
 
 
Currency contracts
$
(0.3
)
 
Other expense
 
$
(0.2
)
Currency contracts
(0.2
)
 
Cost of goods sold
 
0.1

Commodity contracts
0.7

 
Cost of goods sold
 
(0.3
)
Total derivatives
$
0.2

 
 
 
$
(0.4
)
 
 
 
 
 
 
 
 
Location of Gain or (Loss) Recognized in Income on Derivatives
 
Amount of Gain or (Loss) Recognized in Income on Derivatives
Derivatives not designated as hedging instruments under ASC 815:
 
 
 
 
Currency contracts
 
Other expense
 
$
7.7

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.

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Notes to Consolidated Financial Statements (Continued)

6. Income Taxes

The income tax provision on 2014 forecasted annual income is estimated to be 35.0% as of March 31, 2014, compared with 28.5% for the year ended December 31, 2013. The increase in the rate compared with the prior year is primarily due to changes in taxable income between taxing jurisdictions with different statutory rates, the expiration of favorable U.S. tax benefits, and discrete adjustments, including the partial release of the valuation allowance on state deferred tax assets in the 2013 fourth quarter.
Grace has generally not paid U.S. Federal income taxes in cash in recent years since available tax deductions and credits have fully offset U.S. taxable income. At emergence from bankruptcy, Grace generated approximately $670 million in U.S. Federal net operating losses (NOLs), which were previously recorded as deferred tax assets for temporary differences, that will be available to reduce U.S. Federal taxable income in 2014 and future years. In addition, Grace expects to receive a U.S. Federal income tax deduction of $490 million upon settlement of the warrant held by one of the asbestos trusts and $1,580 million upon payment of deferred payment obligations. Grace expects to carryforward most of its NOLs. Under U.S. Federal income tax law, a corporation is generally permitted to carryforward NOLs for a 20-year period for deduction against future taxable income. Grace believes that it will generate sufficient domestic taxable income to use all available future tax deductions prior to expiration.
Based on the status of current examinations in various taxing jurisdictions and applicable judicial decisions applied to Grace's fact pattern, Grace believes it is reasonably possible that in the next 12 months, the amount of the liability for unrecognized tax benefits could decrease by as much as $68 million.
7. Pension Plans and Other Postretirement Benefit Plans
Pension Plans    The following table presents the funded status of Grace's fully-funded, underfunded, and unfunded pension plans:
(In millions)
March 31,
2014
 
December 31, 2013
Overfunded defined benefit pension plans
$
18.1

 
$
16.7

Underfunded defined benefit pension plans
(64.9
)
 
(66.2
)
Unfunded defined benefit pension plans
(327.1
)
 
(233.4
)
Total underfunded and unfunded defined benefit pension plans
(392.0
)
 
(299.6
)
Unfunded defined benefit pension plans included in liabilities subject to compromise

 
(123.6
)
Pension liabilities included in other current liabilities
(15.3
)
 
(15.0
)
Net funded status
$
(389.2
)
 
$
(421.5
)
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 $18.1 million as of March 31, 2014, and the overfunded status is reflected as "overfunded defined benefit pension plans" in the Consolidated Balance Sheets. Underfunded plans include a group of advance-funded plans that are underfunded on a PBO basis. Unfunded plans include several plans that are funded on a pay-as-you-go basis, and therefore, the entire PBO is unfunded. The combined balance of the underfunded and unfunded plans was $407.3 million as of March 31, 2014.
Postretirement Benefits Other Than Pensions    Grace provides postretirement health care and life insurance benefits for retired employees of certain U.S. business units and certain divested business units. The postretirement medical plan provides various levels of benefits to employees hired before 1993 who retire from Grace after age 55 with at least 10 years of service. These plans are unfunded and Grace pays a portion of the costs of benefits under these plans as they are incurred. Grace applies ASC 715 to these plans, which requires that the future costs of postretirement health care and life insurance benefits be accrued over the employees' years of service. Actuarial gains and losses are recognized in the Consolidated Balance Sheets as a component of Shareholders’ Equity, with amortization of the net actuarial gains and losses that exceed 10 percent of the

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Notes to Consolidated Financial Statements (Continued)

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

accumulated postretirement benefit obligation recognized each quarter in the Consolidated Statements of Operations over the average future service period of active employees.
Retirees and beneficiaries covered by the postretirement medical plan are required to contribute a minimum of 40% of the calculated premium for that coverage. During 2002, per capita costs under the retiree medical plans exceeded caps on the amount Grace was required to contribute under a 1993 amendment to the plan. As a result, for 2003 and future years, retirees will bear 100% of any increase in premium costs.
For 2014 measurement purposes, per capita costs, before retiree contributions, were assumed to initially increase at a rate of 8.00%. The rate of increase is assumed to decrease gradually to 5% through 2020 and remain at that level thereafter. A one percentage point increase or decrease in assumed health care medical cost trend rates would not materially change Grace's postretirement benefit obligations (impact of less than $1 million) and would have a negligible impact on the aggregate of the service and interest cost components of net periodic benefit cost.
Components of Net Periodic Benefit Cost
 
Three Months Ended March 31,
 
2014
 
2013
 
Pension
 
Other Post
Retirement
 
Pension
 
Other Post
Retirement
(In millions)
U.S.
 
Non-U.S.
 
 
U.S.
 
Non-U.S.
 
Service cost
$
5.9

 
$
2.7

 
$

 
$
6.3

 
$
2.7

 
$
0.1

Interest cost
15.2

 
5.7

 
0.6

 
12.9

 
5.1

 
0.5

Expected return on plan assets
(17.5
)
 
(3.9
)
 

 
(17.0
)
 
(3.5
)
 

Amortization of prior service cost (credit)
0.2

 

 
(0.1
)
 
0.2

 

 

Amortization of net deferred actuarial (gain) loss

 

 
(0.2
)
 

 

 
0.1

Annual mark-to-market adjustment
(3.1
)
 

 

 

 

 

Net periodic benefit cost
$
0.7

 
$
4.5

 
$
0.3

 
$
2.4

 
$
4.3

 
$
0.7

In the 2014 first quarter, 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.
Grace plans to pay benefits as they become due under the pay-as-you-go plans and to maintain compliance with federal funding laws for its U.S. qualified pension plans.
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, 2014 and 2013, were $3.3 million.

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Notes to Consolidated Financial Statements (Continued)

8. Other Balance Sheet Accounts

(In millions)
March 31,
2014
 
December 31,
2013
Other Current Liabilities
 
 
 
Accrued compensation
$
52.7

 
$
62.4

Income tax payable
30.6

 
32.0

Customer volume rebates
26.8

 
33.3

Environmental contingencies
22.5

 
1.3

Deferred revenue
15.8

 
14.3

Pension liabilities
15.3

 
15.0

Deferred tax liability
0.1

 
0.1

Other accrued liabilities
161.5

 
133.6

 
$
325.3

 
$
292.0

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. Environmental contingencies and other accrued liabilities in the table above include certain amounts reclassified at emergence from liabilities subject to compromise.
9. Commitments and Contingent Liabilities
Asbestos-Related Liability    See Note 2 for a discussion of Grace's asbestos-related liability and future obligations and contingencies following the effectiveness of the Joint Plan.
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 investigative and remediation 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 remediation 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, 2014, Grace's estimated liability for environmental investigation and remediation costs (non-asbestos and asbestos-related) totaled $59.7 million, compared with $135.9 million at December 31, 2013. 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 investigation and remediation costs. These amounts do not include environmental 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 investigation and remediation costs will exceed Grace's current estimates by material amounts. During the 2014 first quarter, claim payments of $75.7 million were made in connection with Grace's emergence from Chapter 11, including payments contemplated by the Multi-Site Agreement described below. Net cash paid against previously established reserves for the three months ended March 31, 2014 and 2013, were $1.8 million and $2.6 million, respectively.

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Notes to Consolidated Financial Statements (Continued)

9. 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 that was mined at the Libby mine contained naturally occurring asbestos. EPA has investigated sites, including some owned by Grace, which used, stored or processed vermiculite concentrate from the Libby mine. EPA, Grace and/or other potentially responsible parties have conducted investigations and/or remedial actions at those sites identified by EPA as requiring remedial action.
During 2010, EPA began reinvestigating certain facilities on a list of 105 facilities where vermiculite concentrate from the Libby mine may have been processed. Grace is cooperating with EPA on this reinvestigation. EPA has requested that Grace perform remediation at eight of these facilities. In 2011, Grace performed preliminary evaluations to estimate the cost of remediating these sites based on the revised criteria and recorded an aggregate charge of $16.0 million. It is probable that EPA will request additional remediation at other facilities. Grace does not have sufficient information to identify either the sites that might require additional remediation or the cost of any additional remediation. Grace will continue to monitor EPA's reinvestigation of the remaining sites and assess any information received from EPA. A liability will be recorded in the future should Grace determine that an obligation is probable and reasonably estimable.
Grace's total estimated liability for asbestos remediation studies and other estimable matters related to its former vermiculite operations in Libby, as well as the cost of remediation at vermiculite processing sites outside of Libby, at March 31, 2014, and December 31, 2013, was $16.9 million and $60.4 million, respectively, excluding interest where applicable. It is probable that Grace's ultimate liability 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, 2014, and December 31, 2013, Grace's estimated liability for remediation of sites not related to its former vermiculite mining and processing activities was $42.8 million and $75.5 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.
Settlement of Environmental Claims in Chapter 11
EPA filed proofs of claim with respect to potential contamination at 38 sites, including vermiculite-related claims and non-vermiculite-related claims. In June 2008, Grace entered into a settlement agreement (the "Multi-Site Agreement") with the U.S. Government, on behalf of EPA and other federal agencies. Under the Multi-Site Agreement, Grace agreed to pay approximately $44 million, which was included in the liabilities described above as of December 31, 2013, to the U.S. Government and other parties in settlement of 35 of these outstanding claims, and the U.S. Government has agreed not to take action against Grace under the Comprehensive Environmental Response, Compensation, and Liability Act with respect to these sites. The settlement amount under the Multi-Site Agreement was paid, with interest, following the Effective Date. Grace is implementing remediation at two of the remaining sites. With respect to the third remaining site, Libby, Montana, EPA's claims have been resolved except for claims related to the Grace-owned Libby vermiculite mine and the surrounding area. EPA is engaged in a remedial investigation of these areas to determine an appropriate cleanup standard. Grace is cooperating with EPA in this investigation.
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.

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Notes to Consolidated Financial Statements (Continued)

9. Commitments and Contingent Liabilities (Continued)

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 generally does not establish a liability for product warranty based on a percentage of sales or other formula. 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.
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.
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, 2014, Grace had gross financial assurances issued and outstanding of $190.4 million, composed of $65.1 million of surety bonds issued by various insurance companies and $125.3 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. Claims related to certain of the items discussed above were addressed as part of Grace's Chapter 11 proceedings. Accruals for such contingencies were included in "liabilities subject to compromise" in the accompanying December 31, 2013, Consolidated Balance Sheet.
10. Restructuring Expenses and Related Costs
In the first quarter of 2014, Grace incurred costs from restructuring actions as a result of changes in the business environment and business structure. Grace incurred $0.7 million ($0.6 million in Construction Products and $0.1 million in Materials Technologies) of restructuring expenses and related costs during the first quarter, compared with $0.8 million during the prior-year quarter. Substantially all costs related to the restructuring programs are expected to be paid by December 31, 2014.
Restructuring Expenses and Related Costs
(In millions)
Three Months Ended March 31,
2014
 
2013
Severance and other employee-related costs
$
0.7

 
$
0.6

Other related costs

 
0.2

Total restructuring expenses and related costs
$
0.7

 
$
0.8


31

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Notes to Consolidated Financial Statements (Continued)

10. Restructuring Expenses and Related Costs (Continued)

Restructuring Liability
(In millions)
Total
Balance, December 31, 2013
$
4.4

Accruals for severance and other costs
0.4

Payments
(1.9
)
Balance, March 31, 2014
$
2.9

11. Other Expense, net
Components of other expense, net are as follows:
 
Three Months Ended March 31,
(In millions)
2014
 
2013
Asbestos and bankruptcy-related charges, net
$
8.8

 
$

Value of currency forward contracts—intercompany loans
4.6

 
(7.7
)
Translation effects—intercompany loans
(4.5
)
 
7.4

Provision for environmental remediation
1.2

 
1.0

Restructuring expenses and related costs
0.7

 
0.8

Net loss on sales of investments and disposals of assets
0.7

 
0.1

Interest income of non-Debtor subsidiaries
(0.5
)
 
(0.2
)
Other currency transaction effects
0.2

 
(0.1
)
Currency transaction loss in Venezuela

 
8.5

Other miscellaneous income
(1.2
)
 
(1.9
)
Total other expense, net
$
10.0

 
$
7.9

12. 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, 2014 and 2013:
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
)

32

Table of Contents


Notes to Consolidated Financial Statements (Continued)

12. Other Comprehensive Loss (Continued)

Three Months Ended March 31, 2013
(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
$
0.2

 
$
(0.1
)
 
$
0.1

Amortization of net deferred actuarial loss included in net periodic benefit cost
0.1

 
(0.1
)
 

Benefit plans, net
0.3

 
(0.2
)
 
0.1

Currency translation adjustments
(6.4
)
 

 
(6.4
)
Gain from hedging activities
0.6

 
(0.2
)
 
0.4

Other comprehensive loss attributable to W. R. Grace & Co. shareholders
$
(5.5
)
 
$
(0.4
)
 
$
(5.9
)
The following tables present the changes in accumulated other comprehensive income, net of tax, for the three months ended March 31, 2014 and 2013:
Three Months Ended March 31, 2014
(In millions)
Defined Benefit Pension and Other Postretirement Plans
 
Currency Translation Adjustments
 
Gains and Losses 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

Three Months Ended March 31, 2013
(In millions)
Defined Benefit Pension and Other Postretirement Plans
 
Currency Translation Adjustments
 
Gains and Losses from Hedging Activities
 
Unrealized Loss on Investment
 
Total
Beginning balance
$
2.0

 
$
28.8

 
$
(0.3
)
 
$
(0.8
)
 
$
29.7

Other comprehensive income (loss) before reclassifications

 
(6.4
)
 
0.1

 

 
(6.3
)
Amounts reclassified from accumulated other comprehensive income
0.1

 

 
0.3

 

 
0.4

Net current-period other comprehensive income (loss)
0.1

 
(6.4
)
 
0.4

 

 
(5.9
)
Ending balance
$
2.1

 
$
22.4

 
$
0.1

 
$
(0.8
)
 
$
23.8

Accumulated other comprehensive income related to the defined benefit pension and other postretirement plans at March 31, 2014, and December 31, 2013, respectively, represents the accumulation of net deferred actuarial gains of $6.1 million and $6.3 million as well as net prior service credits of $0.4 million and $0.3 million. These amounts are net of tax and are amortized as a component of net periodic benefit cost.
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 5 for a discussion of hedging activities.

33

Table of Contents


Notes to Consolidated Financial Statements (Continued)

13. 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)
2014
 
2013
Numerators
 
 
 
Net income attributable to W. R. Grace & Co. shareholders
$
50.1

 
$
59.1

Denominators
 
 
 
Weighted average common shares—basic calculation
77.0

 
75.7

Dilutive effect of employee stock options
1.1

 
1.5

Weighted average common shares—diluted calculation
78.1

 
77.2

Basic earnings per share
$
0.65

 
$
0.78

Diluted earnings per share
$
0.64

 
$
0.77

There were no anti-dilutive options outstanding for the three months ended March 31, 2014 and 2013. The effect of the warrant for 10 million shares issued under the Joint Plan, as discussed in Note 2, is not included in diluted earnings per share.
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. During the three months ended March 31, 2014, Grace repurchased 601,200 shares of Company common stock for $60.5 million pursuant to the terms of the share repurchase program.
14. 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 15. Grace Materials Technologies includes packaging technologies 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, asbestos-related costs, restructuring expenses and related costs, pension costs other than service and interest costs, expected returns on plan assets, and amortization of prior service costs/credits, certain income and expense items related to divested businesses, product lines, and certain other investments and gains and losses on sales of businesses, product lines, and certain other investments. In the 2013 first quarter, Grace also adjusted for the currency transaction loss incurred on its Venezuelan cash balances of $6.9 million before taxes.

34

Table of Contents


Notes to Consolidated Financial Statements (Continued)

14. Operating Segment Information (Continued)

Operating Segment Data
 
Three Months Ended March 31,
(In millions)
2014
 
2013
Net Sales
 
 
 
Catalysts Technologies
$
284.5

 
$
266.5

Materials Technologies
219.8

 
214.9

Construction Products
240.2

 
228.5

Total
$
744.5

 
$
709.9

Adjusted EBIT
 
 
 
Catalysts Technologies segment operating income
$
71.2

 
$
77.2

Materials Technologies segment operating income
45.5

 
44.3

Construction Products segment operating income
25.4

 
22.8

Corporate costs
(22.5
)
 
(20.8
)
Certain pension costs
(8.3
)
 
(6.7
)
Total
$
111.3

 
$
116.8

Corporate costs include corporate support function costs and other corporate costs such as professional fees, insurance premiums, and non-asbestos environmental remediation.
Grace Adjusted EBIT for the three months ended March 31, 2014 and 2013, 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)
2014
 
2013
Grace Adjusted EBIT
$
111.3

 
$
116.8

Costs related to Chapter 11
(6.3
)
 
(3.8
)
Asbestos-related costs
(1.5
)
 
(2.1
)
Asbestos and bankruptcy-related charges, net
(8.8
)
 

Pension MTM adjustment and other related costs, net