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

3 Months Ended

Mar. 31, 2019

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Basis of Presentation

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 2018 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, 2019, are not necessarily indicative of the results of operations to be attained for the year ending December 31, 2019.

Use of Estimates

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 amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements, and the reported amounts of revenues and expenses for the periods presented. Actual amounts could differ from those estimates, and the differences could be material. Changes in estimates are recorded in the period identified. Grace’s accounting measurements that are most affected by management’s estimates of future events are:

• Realization values of net deferred tax assets and the effective tax rate, which depend on projections of future taxable income;

• Pension and postretirement liabilities, which depend on assumptions regarding participant life spans, future inflation, discount rates and total returns on invested funds (see Note 6);

• Carrying values of goodwill and other intangible assets, which depend on assumptions of future earnings and cash flows; and

•

Contingent liabilities, which depend on an assessment of the probability of loss and an estimate of ultimate obligation, such as litigation, environmental remediation, and other legacy liabilities (see Note 8).

Reclassifications

Reclassifications    Certain amounts in prior years’ Consolidated Financial Statements have been reclassified to conform to the current year presentation. Such reclassifications have not materially affected previously reported amounts in the Consolidated Financial Statements.

Recently Issued and Adopted Accounting Standards

Recently Issued Accounting Standards    In August 2018, the FASB issued ASU 2018-14 “Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20).” This update revises disclosure requirements related to defined benefit pension and other postretirement plans. Grace is required to adopt the amendments in this update on January 1, 2021. Grace is currently evaluating the timing of adoption and does not expect the update to have a material effect on the Consolidated Financial Statements.

Recently Adopted Accounting Standards    In October 2018, the FASB issued ASU 2018-16 “Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes.” This update permits use of the OIS rate based on SOFR as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815. Grace currently carries debt and derivatives that rely on the London Interbank Offered Rate (“LIBOR”) as a benchmark rate. LIBOR is expected to be phased out as a benchmark rate by the end of 2021. Grace expects its debt and

financial instruments to continue to use LIBOR until the rate is no longer available. To the extent LIBOR ceases to exist, Grace may need to renegotiate any credit agreements and/or derivative contracts that utilize LIBOR as a factor in determining the interest rate. Grace adopted this update in the 2019 first quarter, and it had no effect on Grace’s Consolidated Financial Statements.

Leases (Topic 842)

In February 2016, the FASB issued ASU 2016-02 “Leases (Topic 842).” This update is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term, including payments to be made in optional periods where they are reasonably certain to occur. In July 2018, the FASB issued ASU 2018-11 “Leases (Topic 842): Targeted Improvements,” which provides an additional transition method that allows entities to initially apply the new standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.

Grace adopted these standards in the 2019 first quarter under the modified retrospective approach permitted by ASU 2018-11. Under this approach, the cumulative effect of the adoption of the standard is recorded at the effective date, with no changes to prior periods. The adoption did not result in an impact to retained earnings. Grace elected to utilize the package of transition practical expedients provided by the standard, which among other things, permit Grace not to reassess expired or existing contracts and leases. Additionally, Grace elected to use the practical expedient provided in ASU 2018-01 “Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842,” which permits Grace to elect not to evaluate under Topic 842 existing or expired land easements not previously accounted for as leases. Prior to the adoption of Topic 842, Grace typically had not evaluated easements for lease accounting.

Grace has elected not to recognize in the Consolidated Balance Sheets short-term leases, which are those with an initial term of 12 months or less. Grace has also elected not to separate lease and nonlease components. These elections apply to all asset classes.

Adoption of the standard resulted in the recognition of operating lease right-of-use assets, net of accumulated amortization, of $29.4 million and operating lease liabilities of $30.0 million as of March 31, 2019.

(in millions)	Amount		Balance Sheet Location
Operating lease right of use asset	$	29.4	Other assets
Operating lease liability—current	8.7		Other current liabilities
Operating lease liability—noncurrent	21.3		Other liabilities

Grace leases certain real estate, office space, vehicles, railcars, and office equipment. For leases with an initial term of 12 months or less, Grace recognizes lease expense on a straight-line basis over the lease term. Finance lease costs and sublease income are not material.

Many of Grace’s leases contain renewal options, which are exercisable at Grace’s discretion and may be included in lease terms when they are reasonably certain to be exercised. Grace’s lease agreements do not contain material restrictive covenants or material residual value guarantees.

Where available, Grace uses the interest rate implicit in the lease to calculate the estimated present value of lease payment obligations. Where such a rate is not available, Grace uses an incremental borrowing rate based on credit-adjusted and term-specific discount rates, using a third-party yield curve.

The following table presents Grace’s costs and cash flow information related to operating leases.

(In millions)	Three Months Ended March 31, 2019
Operating lease cost	$	3.0
Short-term and variable lease cost	3.4
Total lease cost	$	6.4
Cash payments related to operating leases	$	3.0
Right-of-use assets obtained in exchange for new operating lease liabilities	3.6

The following table presents the weighted average discount rate and weighted average remaining lease term related to Grace’s operating leases.

	March 31, 2019
Weighted average discount rate	6.8	%
Weighted average remaining lease term	7.4 years

The table below presents the maturities of operating lease liabilities at March 31, 2019.

	(In millions)
2019	$	8.0
2020	8.3
2021	5.4
2022	3.7
2023	2.2
Thereafter	11.2
Total undiscounted lease payments	38.8
Less: imputed interest	8.8
Present value of lease liabilities	$	30.0