Certain of Grace’s assets and liabilities are reported at fair value on a gross basis. ASC 820 “Fair Value Measurements and Disclosures” defines fair value as the value that would be received at the measurement date in the principal or “most advantageous” market. Grace uses principal market data, whenever available, to value assets and liabilities that are required to be reported at fair value.

Grace has identified the following financial assets and liabilities that are subject to the fair value analysis required by ASC 820:

Fair Value of Debt and Other Financial Instruments Debt payable is recorded at carrying value. Fair value is determined based on Level 2 inputs, including expected future cash flows (discounted at market interest rates), estimated current market prices and quotes from financial institutions.

At September 30, 2018, the carrying amounts and fair values of Grace’s debt were as follows:



	September 30, 2018				December 31, 2017
(In millions)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
2018 U.S. dollar term loan(1)	$	940.7	$	939.5	$	—	$	—
5.125% senior notes due 2021(2)	695.4		715.9		694.2		728.7
5.625% senior notes due 2024(2)	296.9		311.7		296.5		321.3
U.S. dollar term loan(3)	—		—		404.1		409.7
Euro term loan(3)	—		—		94.0		93.7
Other borrowings	53.5		53.5		55.1		55.1
Total debt	$	1,986.5	$	2,020.6	$	1,543.9	$	1,608.5

___________________________________________________________________________________________________________________


(1)	Carrying amounts are net of unamortized debt issuance costs and discounts of $9.3 million as of September 30, 2018.


(2)	Carrying amounts are net of unamortized debt issuance costs of $4.6 million and $3.1 million as of September 30, 2018, and $5.8 million and $3.5 million as of December 31, 2017, related to the 5.125% senior notes due 2021 and 5.625% senior notes due 2024, respectively.


(3)	Carrying amounts are net of unamortized debt issuance costs and discounts of $4.3 million and $1.0 million as of December 31, 2017, related to the U.S. dollar term loan and euro term loan, respectively.

At September 30, 2018, 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.

Currency Derivatives Because Grace operates and/or sells to customers in over 60 countries and in over 30 currencies, its 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 uses financial instruments such as currency forward contracts, options, swaps, or combinations thereof to reduce the risk of certain specific transactions. However, Grace does not have a policy of hedging all exposures, because management does not believe that such a level of hedging would be cost-effective. Forward contracts with maturities of not more than 36 months are used and designated as cash flow hedges of forecasted repayments of intercompany loans. The effective portion of gains and losses on these currency hedges is recorded in “accumulated other comprehensive income (loss)” and reclassified into “other (income) expense, net” to offset the remeasurement of the underlying hedged loans. Excluded components (forward points) on these hedges are amortized to income on a systematic basis.

Grace also enters into foreign currency forward contracts to hedge a portion of its net outstanding monetary assets and liabilities. These forward contracts are not designated as hedging instruments under applicable accounting guidance, and therefore all changes in the fair value of the forward contracts are recorded in “other (income) expense, net,” in the Consolidated Statements of Operations. These forward contracts are intended to offset the foreign currency gains or losses associated with the underlying monetary assets and liabilities.

The valuation of Grace’s currency exchange rate forward contracts and swaps is determined using 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. Total notional amounts for forward contracts outstanding as of September 30, 2018, were $115.3 million.

Cross-Currency Swap Agreements Grace uses cross-currency swaps designated as cash flow hedges to manage fluctuations in currency exchange rates and interest rates on variable rate debt. The effective portion of gains and losses on these cash flow hedges is recorded in “accumulated other comprehensive income (loss)” and reclassified into “other (income) expense, net” and “interest expense and related financing costs” during the hedged interest period.

In April 2018, in connection with the Credit Agreement (see Note 3), Grace entered into new cross-currency swaps beginning on April 3, 2018, and maturing on March 31, 2023, to synthetically convert $600.0 million of U.S. dollar-denominated floating rate debt into €490.1 million of euro-denominated debt fixed at 2.0231%. The valuation of these cross-currency swaps is determined using an income approach, using LIBOR and EURIBOR swap curves, currency basis spreads, and euro/U.S. dollar exchange rates.

Debt and Interest Rate Swap Agreements Grace uses interest rate swaps designated as cash flow hedges to manage fluctuations in interest rates on variable rate debt. The effective portion of gains and losses on these interest rate cash flow hedges is recorded in “accumulated other comprehensive income (loss)” and reclassified into “interest expense and related financing costs” during the hedged interest period.

In connection with its emergence financing, Grace entered into interest rate swaps beginning on February 3, 2015, and maturing on February 3, 2020, fixing the LIBOR component of the interest on $250.0 million of Grace’s term debt at a rate of 2.393%. These interest rate swaps were de-designated and terminated in April 2018 in connection with Grace’s entry into a new credit agreement.

In connection with the Credit Agreement (see Note 3), Grace entered into new interest rate swaps beginning on April 3, 2018, and maturing on March 31, 2023, fixing $100.0 million of term debt at 2.775%. The valuation of these interest rate swaps is determined using an income approach, using prevailing market interest rates and discount rates to present value future cash flows based on the forward LIBOR yield curves. Credit risk is also incorporated into derivative valuations.

The following tables present the fair value hierarchy for financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2018, and December 31, 2017:



	Fair Value Measurements at September 30, 2018, Using
(In millions)	Total		Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Currency derivatives	$	3.3	$	—	$	3.3	$	—
Interest rate derivatives	1.0		—		1.0		—
Variable-to-fixed cross-currency derivatives	17.4		—		17.4		—
Total Assets	$	21.7	$	—	$	21.7	$	—
Liabilities
Currency derivatives	$	22.8	$	—	$	22.8	$	—
Total Liabilities	$	22.8	$	—	$	22.8	$	—



	Fair Value Measurements at December 31, 2017, Using
(In millions)	Total		Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Currency derivatives	$	3.1	$	—	$	3.1	$	—
Total Assets	$	3.1	$	—	$	3.1	$	—
Liabilities
Interest rate derivatives	$	1.8	$	—	$	1.8	$	—
Currency derivatives	23.8		—		23.8		—
Total Liabilities	$	25.6	$	—	$	25.6	$	—

The following tables present the location and fair values of derivative instruments included in the Consolidated Balance Sheets as of September 30, 2018, and December 31, 2017:



September 30, 2018 (In millions)	Asset Derivatives			Liability Derivatives
September 30, 2018 (In millions)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments under ASC 815:
Currency contracts	Other current assets	$	3.1	Other current liabilities	$	—
Variable-to-fixed cross-currency swaps	Other current assets	15.1		Other current liabilities	—
Currency contracts	Other assets	—		Other liabilities	21.5
Interest rate contracts	Other assets	1.0		Other liabilities	—
Variable-to-fixed cross-currency swaps	Other assets	2.3		Other liabilities	—
Derivatives not designated as hedging instruments under ASC 815:
Currency contracts	Other current assets	0.2		Other current liabilities	1.3
Total derivatives		$	21.7		$	22.8



December 31, 2017 (In millions)	Asset Derivatives			Liability Derivatives
December 31, 2017 (In millions)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments under ASC 815:
Currency contracts	Other current assets	$	2.7	Other current liabilities	$	1.4
Interest rate contracts	Other current assets	—		Other current liabilities	1.3
Currency contracts	Other assets	—		Other liabilities	22.2
Interest rate contracts	Other assets	—		Other liabilities	0.5
Derivatives not designated as hedging instruments under ASC 815:
Currency contracts	Other current assets	0.4		Other current liabilities	0.2
Total derivatives		$	3.1		$	25.6

The following tables present the location and amount of gains and losses on derivative instruments included in the Consolidated Statements of Operations or, when applicable, gains and losses initially recognized in other comprehensive income (loss) (“OCI”) for the three and nine months ended September 30, 2018 and 2017:



Three Months Ended September 30, 2018 (In millions)	Amount of Gain (Loss) Recognized in OCI on Derivatives			Location of Gain (Loss) Reclassified from Accumulated OCI into Income	Amount of Gain (Loss) Reclassified from OCI into Income
Derivatives in ASC 815 cash flow hedging relationships:
Interest rate contracts	$	0.8		Interest expense	$	0.1
Currency contracts(1)	(0.6		)	Other expense	(0.6		)
Variable-to-fixed cross-currency swaps	3.3			Interest expense	3.3
Variable-to-fixed cross-currency swaps	(4.1		)	Other expense	(6.1		)
Total derivatives	$	(0.6	)		$	(3.3	)

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(1)	Amount of gain (loss) recognized in OCI includes $0.7 million excluded from the assessment of effectiveness for which the difference between changes in fair value and periodic amortization is recorded in OCI.



Nine Months Ended September 30, 2018 (In millions)	Amount of Gain (Loss) Recognized in OCI on Derivatives		Location of Gain (Loss) Reclassified from Accumulated OCI into Income	Amount of Gain (Loss) Reclassified from OCI into Income
Derivatives in ASC 815 cash flow hedging relationships:
Interest rate contracts	$	2.8	Interest expense	$	—
Currency contracts(1)	2.5		Other expense	2.9
Variable-to-fixed cross-currency swaps	6.4		Interest expense	6.4
Variable-to-fixed cross-currency swaps	17.3		Other expense	23.2
Total derivatives	$	29.0		$	32.5

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(1)	Amount of gain (loss) recognized in OCI includes $1.1 million excluded from the assessment of effectiveness for which the difference between changes in fair value and periodic amortization is recorded in OCI.



Three Months Ended September 30, 2017 (In millions)	Amount of Gain (Loss) Recognized in OCI on Derivatives			Location of Gain (Loss) Reclassified from Accumulated OCI into Income	Amount of Gain (Loss) Reclassified from OCI into Income
Derivatives in ASC 815 cash flow hedging relationships:
Interest rate contracts	$	0.2		Interest expense	$	(0.7	)
Currency contracts	(0.1		)	Other expense	0.1
Total derivatives	$	0.1			$	(0.6	)



Nine Months Ended September 30, 2017 (In millions)	Amount of Gain (Loss) Recognized in OCI on Derivatives			Location of Gain (Loss) Reclassified from Accumulated OCI into Income	Amount of Gain (Loss) Reclassified from OCI into Income
Derivatives in ASC 815 cash flow hedging relationships:
Interest rate contracts	$	(0.8	)	Interest expense	$	(2.4	)
Currency contracts	(0.2		)	Other expense	—
Total derivatives	$	(1.0	)		$	(2.4	)

The following tables present the total amounts of income and expense line items presented in the Consolidated Statements of Operations in which the effects of cash flow hedges are reported.



	Three Months Ended September 30,
	2018						2017
(In millions)	Interest expense			Other income (expense)			Interest expense			Other income (expense)
Total amounts of income and expense line items in the Consolidated Statements of Operations in which the effects of cash flow hedges are recorded	$	(20.4	)	$	1.3		$	(20.1	)	$	1.7
Gain (loss) on cash flow hedging relationships in ASC 815
Interest rate contracts
Amount of gain (loss) reclassified from accumulated OCI into income	$	0.1		$	—		$	(0.7	)	$	—
Variable-to-fixed cross-currency swaps
Amount of gain (loss) reclassified from accumulated OCI into income	3.3			(6.1		)	—			—
Currency contracts
Amount of gain (loss) reclassified from accumulated OCI into income	—			(0.6		)	—			0.1
Amount excluded from effectiveness testing recognized in earnings based on amortization approach (included in above)	—			0.6			—			—



	Nine Months Ended September 30,
	2018						2017
(In millions)	Interest expense			Other income (expense)			Interest expense			Other income (expense)
Total amounts of income and expense line items in the Consolidated Statements of Operations in which the effects of cash flow hedges are recorded	$	(59.6	)	$	(2.2	)	$	(59.7	)	$	15.0
Gain (loss) on cash flow hedging relationships in ASC 815
Interest rate contracts
Amount of gain (loss) reclassified from accumulated OCI into income	$	—		$	—		$	(2.4	)	$	—
Variable-to-fixed cross-currency swaps
Amount of gain (loss) reclassified from accumulated OCI into income	6.4			23.2			—			—
Currency contracts
Amount of gain (loss) reclassified from accumulated OCI into income	—			2.9			—			—
Amount excluded from effectiveness testing recognized in earnings based on amortization approach (included in above)	—			2.3			—			—

Net Investment Hedges Grace uses cross-currency swaps as derivative hedging instruments in certain net investment hedges of its non-U.S. subsidiaries. The gains and losses attributable to these net investment hedges, adjusted for the impact of excluded components, are recorded net of tax to “currency translation adjustments” within “accumulated other comprehensive income (loss)” to offset the change in the carrying value of the net investment being hedged. Recognition in earnings of amounts previously recorded to “currency translation adjustments” is limited to circumstances such as complete or substantially complete liquidation of the net investment in the hedged foreign operation. Changes in the fair value of the hedging instrument related to time value, which are excluded from the assessment of hedge effectiveness, are recorded directly to interest expense on a systematic basis. These gains were $0.7 million and $1.4 million for the three and nine months ended September 30, 2018, respectively. At September 30, 2018, the notional amount of €170.0 million of Grace’s cross-currency swaps was designated as a hedging instrument of its net investment in its European subsidiaries.

Grace also uses foreign currency-denominated debt and deferred intercompany royalties as non-derivative hedging instruments in certain net investment hedges. At September 30, 2018, €16.9 million of Grace’s deferred intercompany royalties was designated as a hedging instrument of its net investment in its European subsidiaries. In April 2018, in connection with the Credit Agreement, Grace de-designated and repaid its euro-denominated term loan principal that had been designated as a hedge of its net investment in its European subsidiaries.

The following table presents the amount of gains and losses on derivative and non-derivative instruments designated as net investment hedges, recorded to “currency translation adjustments” within “accumulated other comprehensive income (loss)” for the three and nine months ended September 30, 2018 and 2017. There were no reclassifications of net investment hedges out of OCI and into earnings for the periods presented in the tables below.



	Three Months Ended September 30,						Nine Months Ended September 30,
(In millions)	2018			2017			2018			2017
Derivatives in ASC 815 net investment hedging relationships:
Cross-currency swap	$	(2.9	)	$	(7.3	)	$	(0.9	)	$	(20.5	)
Non-derivatives in ASC 815 net investment hedging relationships:
Foreign currency denominated debt	$	—		$	(3.1	)	$	(4.4	)	$	(10.3	)
Foreign currency denominated deferred intercompany royalties	(0.2		)	(1.7		)	—			(6.1		)
	$	(0.2	)	$	(4.8	)	$	(4.4	)	$	(16.4	)

Credit Risk Grace is exposed to credit risk in its trade accounts receivable. Customers in the petroleum refining industry represent the greatest exposure. Grace’s credit evaluation policies mitigate credit risk exposures, and it has a history of minimal credit losses. 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.