Fair Value Measurements and Risk | 3 Months Ended |
Mar. 31, 2015 |
Fair Value Disclosures [Abstract] | |
Fair Value Measurements and Risk | Certain of Grace's assets and liabilities are reported at fair value on a gross basis. ASC 820 "Fair Value Measurements and Disclosures" defines fair value as the value that would be received at the measurement date in the principal or "most advantageous" market. Grace uses principal market data, whenever available, to value assets and liabilities that are required to be reported at fair value. |
Grace has identified the following financial assets and liabilities that are subject to the fair value analysis required by ASC 820: |
Fair Value of Debt and Other Financial Instruments |
Debt payable is recorded at carrying value as discussed in Note 3. Fair value is determined based on Level 2 inputs, including expected future cash flows (discounted at market interest rates), estimated current market prices and quotes from financial institutions. |
At March 31, 2015, the carrying amounts and fair values of Grace's debt were as follows: |
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| 31-Mar-15 | | 31-Dec-14 |
(In millions) | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
U.S. dollar term loan(1) | $ | 940.4 | | | $ | 943.6 | | | $ | 692.6 | | | $ | 691.3 | |
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5.125% senior notes due 2021 | 700 | | | 733.3 | | | 700 | | | 720.9 | |
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5.625% senior notes due 2024 | 300 | | | 321 | | | 300 | | | 312 | |
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Euro term loan(1) | 160.8 | | | 161.4 | | | 181.2 | | | 181.4 | |
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Other borrowings | 131.4 | | | 131.4 | | | 142 | | | 142 | |
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Total debt | $ | 2,232.60 | | | $ | 2,290.70 | | | $ | 2,015.80 | | | $ | 2,047.60 | |
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-1 | Carrying amounts are net of unamortized discounts of $2.0 million and $0.4 million as of March 31, 2015, and $2.1 million and $0.4 million as of December 31, 2014, related to the U.S. dollar term loan and euro term loan, respectively. | | | | | | | | | | | | | | |
At March 31, 2015, the recorded values of other financial instruments such as cash equivalents and trade receivables and payables approximated their fair values, based on the short-term maturities and floating rate characteristics of these instruments. |
Commodity Derivatives |
From time to time, Grace enters into commodity derivatives such as fixed-rate swaps or options with financial institutions to mitigate the risk of volatility of prices of natural gas or other commodities. Under fixed-rate swaps, Grace locks in a fixed rate with a financial institution for future purchases, purchases its commodity from a supplier at the prevailing market rate, and then settles with the bank for any difference in the rates, thereby "swapping" a variable rate for a fixed rate. |
The valuation of Grace's fixed-rate natural gas swaps was determined using a market approach, based on natural gas futures trading prices quoted on the New York Mercantile Exchange. Commodity fixed-rate swaps with maturities of not more than 12 months are used and designated as cash flow hedges of forecasted purchases of natural gas. Current open contracts hedge forecasted transactions until December 2015. The effective portion of the gain or loss on the commodity contracts is recorded in "accumulated other comprehensive income" and reclassified into income in the same period or periods that the underlying commodity purchase affects income. At March 31, 2015, the contract volume, or notional amount, of the commodity contracts was 3.7 million MMBtu (million British thermal units) with a total contract value of $12.9 million. |
The valuation of Grace's natural gas call options was determined using a market approach, based on the strike price of the options and the natural gas futures trading prices quoted on the New York Mercantile Exchange. Commodity option contracts with maturities of not more than 24 months are used and designated as cash flow hedges of forecasted purchases of natural gas. Current open option contracts hedge forecasted transactions until June 2015. The effective portion of the gain or loss on the commodity contracts is recorded in "accumulated other comprehensive income" and reclassified into income in the same period or periods that the underlying purchases affect income. At March 31, 2015, the contract volume, or notional amount, of the commodity option contracts was 0.2 million MMBtu and the natural gas futures trading price of option contracts was less than the strike price. |
The valuation of Grace's fixed-rate aluminum swaps was determined using a market approach, based on aluminum futures trading prices quoted on the London Metal Exchange. Commodity fixed-rate swaps with maturities of not more than 12 months are used and designated as cash flow hedges of forecasted purchases of aluminum. Current open contracts hedge forecasted transactions until February 2016. The effective portion of the gain or loss on the commodity contracts is recorded in "accumulated other comprehensive income" and reclassified into income in the same period or periods that the underlying commodity purchase affects income. At March 31, 2015, the contract volume, or notional amount, of the commodity contracts was 1.4 million pounds with a total contract value of $1.2 million. |
Currency Derivatives |
Because Grace operates in over 40 countries and does business in more than 50 currencies, results are exposed to fluctuations in currency exchange rates. Grace seeks to minimize exposure to these fluctuations by matching sales in volatile currencies with expenditures in the same currencies, but it is not always possible to do so. From time to time Grace will use financial instruments such as currency forward contracts, options, or combinations of the two to reduce the risk of certain specific transactions. However, Grace does not have a policy of hedging all exposures, because management does not believe that such a level of hedging would be cost-effective. |
The valuation of Grace's currency exchange rate forward contracts is determined using both a market approach and an income approach. Inputs used to value currency exchange rate forward contracts consist of: (1) spot rates, which are quoted by various financial institutions; (2) forward points, which are primarily affected by changes in interest rates; and (3) discount rates used to present value future cash flows, which are based on the London Interbank Offered Rate (LIBOR) curve or overnight indexed swap rates. |
Debt and Interest Rate Swap Agreements |
Grace uses interest rate swaps designated as cash flow hedges to manage fluctuations in interest rates on variable rate debt. The effective portion of gains and losses on these interest rate cash flow hedges is recorded in "accumulated other comprehensive income" and reclassified into "interest expense and related financing costs" during the hedged interest period. |
In connection with its emergence financing, Grace entered into an interest rate swap beginning on February 3, 2015, and maturing on February 3, 2020, fixing the LIBOR component of the interest on $250 million of Grace's term debt at a rate of 2.393%. The valuation of this interest rate swap is determined using both a market approach and an income approach, using prevailing market interest rates and discount rates to present value future cash flows based on the forward LIBOR yield curves. |
The following tables present the fair value hierarchy for financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2015, and December 31, 2014: |
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| Fair Value Measurements at March 31, 2015, Using |
(In millions) | Total | | Quoted Prices in Active Markets for Identical Assets or Liabilities | | Significant Other Observable Inputs | | Significant Unobservable Inputs |
(Level 1) | (Level 2) | (Level 3) |
Assets | | | | | | | |
Currency derivatives | $ | 9.8 | | | $ | — | | | $ | 9.8 | | | $ | — | |
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Total Assets | $ | 9.8 | | | $ | — | | | $ | 9.8 | | | $ | — | |
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Liabilities | | | | | | | |
Currency derivatives | $ | 0.4 | | | $ | — | | | $ | 0.4 | | | $ | — | |
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Interest rate derivatives | 9 | | | — | | | 9 | | | — | |
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Commodity derivatives | 2.7 | | | — | | | 2.7 | | | — | |
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Total Liabilities | $ | 12.1 | | | $ | — | | | $ | 12.1 | | | $ | — | |
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| Fair Value Measurements at December 31, 2014, Using |
(In millions) | Total | | Quoted Prices in Active Markets for Identical Assets or Liabilities | | Significant Other Observable Inputs | | Significant Unobservable Inputs |
(Level 1) | (Level 2) | (Level 3) |
Assets | | | | | | | |
Currency derivatives | $ | 3.3 | | | $ | — | | | $ | 3.3 | | | $ | — | |
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Total Assets | $ | 3.3 | | | $ | — | | | $ | 3.3 | | | $ | — | |
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Liabilities | | | | | | | |
Currency derivatives | $ | 0.1 | | | $ | — | | | $ | 0.1 | | | $ | — | |
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Interest rate derivatives | 5.5 | | | — | | | 5.5 | | | — | |
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Commodity derivatives | 2.6 | | | — | | | 2.6 | | | — | |
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Total Liabilities | $ | 8.2 | | | $ | — | | | $ | 8.2 | | | $ | — | |
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The following tables present the location and fair values of derivative instruments included in the Consolidated Balance Sheets as of March 31, 2015, and December 31, 2014: |
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31-Mar-15 | Asset Derivatives | | Liability Derivatives | | | | |
(In millions) | Balance Sheet | | Fair Value | | Balance Sheet | | Fair Value | | | | |
| Location | Location | | | | |
Derivatives designated as hedging instruments under ASC 815: | | | | | | | | | | | |
Commodity contracts | Other current assets | | $ | — | | | Other current liabilities | | $ | 2.7 | | | | | |
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Currency contracts | Other current assets | | 6.5 | | | Other current liabilities | | — | | | | | |
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Interest rate contracts | Other current assets | | — | | | Other current liabilities | | 3.9 | | | | | |
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Currency contracts | Other assets | | 3.1 | | | Other liabilities | | — | | | | | |
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Interest rate contracts | Other assets | | — | | | Other liabilities | | 5.1 | | | | | |
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Derivatives not designated as hedging instruments under ASC 815: | | | | | | | | | | | |
Currency contracts | Other current assets | | 0.2 | | | Other current liabilities | | 0.4 | | | | | |
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Total derivatives | | | $ | 9.8 | | | | | $ | 12.1 | | | | | |
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December 31, 2014 | Asset Derivatives | | Liability Derivatives | | | | |
(In millions) | Balance Sheet | | Fair Value | | Balance Sheet | | Fair Value | | | | |
| Location | Location | | | | |
Derivatives designated as hedging instruments under ASC 815: | | | | | | | | | | | |
Commodity contracts | Other current assets | | $ | — | | | Other current liabilities | | $ | 2.6 | | | | | |
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Currency contracts | Other current assets | | 0.8 | | | Other current liabilities | | — | | | | | |
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Interest rate contracts | Other current assets | | — | | | Other current liabilities | | 2.5 | | | | | |
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Currency contracts | Other assets | | 0.9 | | | Other liabilities | | — | | | | | |
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Interest rate contracts | Other assets | | — | | | Other liabilities | | 3 | | | | | |
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Derivatives not designated as hedging instruments under ASC 815: | | | | | | | | | | | |
Currency contracts | Other current assets | | 1.6 | | | Other current liabilities | | 0.1 | | | | | |
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Total derivatives | | | $ | 3.3 | | | | | $ | 8.2 | | | | | |
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The following tables present the location and amount of gains and losses on derivative instruments included in the Consolidated Statements of Operations or, when applicable, gains and losses initially recognized in other comprehensive income (loss) ("OCI") for the three months ended March 31, 2015 and 2014: |
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Three Months Ended March 31, 2015 | 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 | | | | | | |
(In millions) | (Effective Portion) | (Effective Portion) | (Effective Portion) | | | | | | |
Derivatives in ASC 815 cash flow hedging relationships: | | | | | | | | | | |
Interest rate contracts | $ | (3.5 | ) | | Interest expense | | $ | (0.6 | ) | | | | | | |
Currency contracts | 6.4 | | | Other expense | | 6.5 | | | | | | | |
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Currency contracts | 0.1 | | | Cost of goods sold | | — | | | | | | | |
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Commodity contracts | (1.0 | ) | | Cost of goods sold | | (1.0 | ) | | | | | | |
Total derivatives | $ | 2 | | | | | $ | 4.9 | | | | | | | |
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| | Location of Gain (Loss) Recognized in Income on Derivatives | | Amount of Gain (Loss) Recognized in Income on Derivatives | | | | | | |
Derivatives not designated as hedging instruments under ASC 815: | | | | | | | | | | |
Currency contracts | | Other expense | | $ | (0.5 | ) | | | | | | |
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Three Months Ended March 31, 2014 | 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 | | | | | | |
(In millions) | (Effective Portion) | (Effective Portion) | (Effective Portion) | | | | | | |
Derivatives in ASC 815 cash flow hedging relationships: | | | | | | | | | | |
Interest rate contracts | $ | 1 | | | Interest expense | | $ | — | | | | | | | |
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Currency contracts | 0.5 | | | Other expense | | 0.5 | | | | | | | |
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Commodity contracts | 0.4 | | | Cost of goods sold | | 0.3 | | | | | | | |
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Total derivatives | $ | 1.9 | | | | | $ | 0.8 | | | | | | | |
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| | Location of Gain (Loss) Recognized in Income on Derivatives | | Amount of Gain (Loss) Recognized in Income on Derivatives | | | | | | |
Derivatives not designated as hedging instruments under ASC 815: | | | | | | | | | | |
Currency contracts | | Other expense | | $ | 4.5 | | | | | | | |
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Net Investment Hedges |
Grace uses foreign currency denominated debt as nonderivative hedging instruments in certain net investment hedges. The effective portion of gains and losses attributable to these net investment hedges is recorded to "currency translation adjustments" within "accumulated other comprehensive income." Recognition in earnings of amounts previously recorded to "currency translation adjustments" is limited to circumstances such as complete or substantially complete liquidation of the net investment in the hedged foreign operation. During 2014, Grace designated its €148.5 million term loan principal as a hedging instrument of its net investment in European subsidiaries. |
The following table presents the location and amount of gains and losses on nonderivative instruments designated as net investment hedges as of March 31, 2015; there were no net investment hedges as of March 31, 2014. There were no reclassifications of the effective portion of net investment hedges out of OCI and into earnings for the period presented in the table below. |
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Three Months Ended March 31, 2015 | Amount of Gain (Loss) Recognized in OCI in Currency Translation Adjustments | | Location of Gain (Loss) Reclassified from Accumulated OCI into Income | | Amount of Gain (Loss) Reclassified from Accumulated OCI into Income | | | | | | |
(In millions) | (Effective Portion) | (Ineffective Portion) | (Ineffective Portion) | | | | | | |
Nonderivatives in ASC 815 net investment hedging relationships: | | | | | | | | | | | |
Foreign currency denominated debt | $ | 20 | | | Not applicable | | $ | — | | | | | | | |
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Total nonderivatives | $ | 20 | | | | | $ | — | | | | | | | |
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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. |