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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2021
or
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 1-13953
W. R. GRACE & CO.
(Exact name of registrant as specified in its charter)
Delaware 65-0773649
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
7500 Grace Drive, Columbia, Maryland 21044-4098
(Address of principal executive offices) (Zip Code)
(410) 531-4000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, $0.01 par value per share GRA New York Stock Exchange
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     No 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes     No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes     No 
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, 2021
Common Stock, $0.01 par value per share
66,251,602 shares



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Notes on references that we use in our disclosure. Unless the context indicates otherwise, the terms “Grace,” the “Company,” “we,” “us,” or “our” mean (i) W. R. Grace & Co. itself, or (ii) W. R. Grace & Co. and/or one or more of its consolidated subsidiaries and affiliates and, in certain cases, their respective predecessors. Unless otherwise indicated, the contents of websites that we mention are not incorporated by reference or otherwise made a part of this Report.
We refer to the U.S. Securities and Exchange Commission as the “SEC.” We refer to the Financial Accounting Standards Board as the “FASB.” The FASB issues, among other things, the Accounting Standards Codification (which we refer to as “ASC”) and Accounting Standards Updates (which we refer to as “ASU”). We refer to the U.S. Internal Revenue Service as the “IRS.”
Trademarks and other intellectual property that we discuss in this Report. GRACE®, the GRACE® logo (and any other use of the term “Grace” as a trade name) as well as the other trademarks, service marks, or trade names used in this Report are trademarks, service marks, or trade names of Grace or its operating units, except as otherwise indicated. ART® and ADVANCED REFINING TECHNOLOGIES® are trademarks, registered in the United States and/or other countries, of Advanced Refining Technologies LLC, a Delaware limited liability company, 50% owned by Grace and 50% owned by Chevron U.S.A. Inc.
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FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements, that is, information related to future, not past, events. Such statements generally include the words “believes,” “plans,” “intends,” “targets,” “will,” “expects,” “suggests,” “anticipates,” “outlook,” “continues,” or similar expressions. Forward-looking statements include, without limitation, statements regarding: financial positions; results of operations; cash flows; financing plans; business strategy; operating plans; capital and other expenditures; impact of COVID-19 on Grace’s business; competitive positions; growth opportunities for existing products; benefits from new technology; benefits from cost reduction initiatives; succession planning; markets for securities; the anticipated timing of closing of the proposed transaction between Grace and affiliates of Standard Industries Holdings Inc. and the potential benefits of the proposed transaction. For these statements, Grace claims the protections of the safe harbor for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Grace is subject to risks and uncertainties that could cause actual results or events to differ materially from its projections or that could cause forward-looking statements to prove incorrect. Factors that could cause actual results or events to differ materially from those contained in the forward-looking statements include, without limitation: risks related to foreign operations, especially in areas of active conflicts and in emerging regions; the costs and availability of raw materials, energy, and transportation; the effectiveness of Grace’s research and development and growth investments; acquisitions and divestitures of assets and businesses; developments affecting Grace’s outstanding indebtedness; developments affecting Grace’s pension obligations; legacy matters (including product, environmental, and other legacy liabilities) relating to past activities of Grace; its legal and environmental proceedings; environmental compliance costs (including existing and potential laws and regulations pertaining to climate change); the inability to establish or maintain certain business relationships; the inability to hire or retain key personnel; natural disasters such as storms and floods; fires and force majeure events; the economics of our customers’ industries, including the petroleum refining, petrochemicals, and plastics industries, and shifting consumer preferences; public health and safety concerns, including pandemics and quarantines; changes in tax laws and regulations; international trade disputes, tariffs, and sanctions; the potential effects of cyberattacks; the occurrence of any event, change or other circumstance that could give rise to the termination of the merger agreement between Grace and Standard Industries Holdings Inc.’s affiliates; the failure to obtain Grace stockholder approval of the transaction or the failure to satisfy any of the other conditions to the completion of the transaction; risks relating to the financing required to complete the transaction; the effect of the announcement of the transaction on the ability of Grace to retain and hire key personnel and maintain relationships with its customers, vendors and others with whom it does business, or on its operating results and businesses generally; risks associated with the disruption of management’s attention from ongoing business operations due to the transaction; the ability to meet expectations regarding the timing and completion of the transaction; significant transaction costs, fees, expenses and charges; the risk of litigation and/or regulatory actions related to the transaction; the effects of the transaction on the previously announced fine chemicals business acquisition, which is pending as of the date of this filing, and the integration thereof; other business effects, including the effects of industry, market, economic, political, regulatory or world health conditions (including new or ongoing effects of the COVID-19 pandemic), and other factors detailed in Grace’s Annual Report on Form 10-K filed with the SEC for the fiscal year ended December 31, 2020, and Grace’s other filings with the SEC, which are available at http://www.sec.gov and on Grace’s website at www.grace.com. Our reported results should not be considered as an indication of our future performance. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Grace undertakes no obligation to release publicly any revisions to its forward-looking statements, or to update them to reflect events or circumstances occurring after the dates those statements are made.
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PART I. FINANCIAL INFORMATION
Item 1.    Financial Statements
W. R. Grace & Co. and Subsidiaries
Consolidated Statements of Operations (unaudited)
  Three Months Ended March 31,
(In millions, except per share amounts) 2021 2020
Net sales $ 456.7  $ 421.5 
Cost of goods sold 286.7  261.9 
Gross profit 170.0  159.6 
Selling, general and administrative expenses 74.6  71.1 
Research and development expenses 17.4  17.0 
Costs related to legacy matters 4.6  2.7 
Equity in earnings of unconsolidated affiliate (3.2) (1.2)
Restructuring and repositioning expenses 12.8  2.7 
Interest expense and related financing costs 19.0  18.3 
Other (income) expense, net (42.1) (8.8)
Total costs and expenses 83.1  101.8 
Income (loss) before income taxes 86.9  57.8 
(Provision for) benefit from income taxes (18.3) (15.7)
Net income (loss) 68.6  42.1 
Less: Net (income) loss attributable to noncontrolling interests (0.2) (0.1)
Net income (loss) attributable to W. R. Grace & Co. shareholders $ 68.4  $ 42.0 
Earnings Per Share Attributable to W. R. Grace & Co. Shareholders
Basic earnings per share:
Net income (loss) $ 1.03  $ 0.63 
Weighted average number of basic shares 66.2  66.5 
Diluted earnings per share:
Net income (loss) $ 1.03  $ 0.63 
Weighted average number of diluted shares 66.3  66.5 
Dividends per common share $ 0.33  $ 0.30 

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

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W. R. Grace & Co. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss) (unaudited)
  Three Months Ended March 31,
(In millions) 2021 2020
Net income (loss) $ 68.6  $ 42.1 
Other comprehensive income (loss), net of income taxes:
Defined benefit pension and other postretirement plans
(0.1) (0.1)
Currency translation adjustments 25.1  2.5 
Gain (loss) from hedging activities 2.0  (1.0)
Total other comprehensive income (loss) 27.0  1.4 
Comprehensive income (loss) 95.6  43.5 
Less: comprehensive (income) loss attributable to noncontrolling interests
(0.2) (0.1)
Comprehensive income (loss) attributable to W. R. Grace & Co. shareholders
$ 95.4  $ 43.4 

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

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W. R. Grace & Co. and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)
Three Months Ended March 31,
(In millions) 2021 2020
OPERATING ACTIVITIES
Net income (loss) $ 68.6  $ 42.1 
Reconciliation to net cash provided by (used for) operating activities:
   
Depreciation and amortization 28.1  25.5 
Equity in earnings of unconsolidated affiliate (3.2) (1.2)
Costs related to legacy matters 4.6  2.7 
Cash paid for legacy matters (3.5) (7.6)
Provision for (benefit from) income taxes 18.3  15.7 
Cash paid for income taxes (11.7) (14.4)
Income tax refunds received 0.1  0.8 
Defined benefit pension (income) expense (11.7) 3.1 
Gain on curtailment of U.S. salaried pension plan (25.6) — 
Cash paid under defined benefit pension arrangements (4.2) (4.4)
Changes in assets and liabilities, excluding effect of currency translation and acquisitions:    
Trade accounts receivable (14.9) 47.3 
Inventories (21.6) (31.7)
Accounts payable 36.3  (3.8)
All other items, net 9.4  (19.5)
Net cash provided by (used for) operating activities 69.0  54.6 
INVESTING ACTIVITIES    
Cash paid for capital expenditures (55.0) (57.1)
Other investing activities, net 2.6  (16.6)
Net cash provided by (used for) investing activities (52.4) (73.7)
FINANCING ACTIVITIES    
Borrowings under credit arrangements 2.7  4.2 
Repayments under credit arrangements (4.7) (6.1)
Cash paid for repurchases of common stock   (40.4)
Dividends paid to shareholders (22.0) (20.5)
Other financing activities, net (2.2) (4.2)
Net cash provided by (used for) financing activities (26.2) (67.0)
Effect of currency exchange rate changes on cash, cash equivalents, and restricted cash (4.1) (3.1)
Net increase (decrease) in cash, cash equivalents, and restricted cash (13.7) (89.2)
Cash, cash equivalents, and restricted cash, beginning of period 306.2  282.9 
Cash, cash equivalents, and restricted cash, end of period $ 292.5  $ 193.7 
Supplemental disclosure of cash flow information
Cash paid for interest, net of amounts capitalized $ 4.3  $ 4.0 
Capital expenditures in accounts payable 16.6  29.7 
Expenditures for other investing activities included in accounts payable   10.4 

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

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W. R. Grace & Co. and Subsidiaries
Consolidated Balance Sheets (unaudited)
(In millions, except par value and shares) March 31,
2021
December 31,
2020
ASSETS    
Current Assets    
Cash and cash equivalents $ 290.8  $ 304.5 
Restricted cash and cash equivalents 1.7  1.7 
Trade accounts receivable, less allowance of $2.2 (2020—$2.2)
267.1  264.1 
Inventories 273.6  253.8 
Other current assets 53.2  51.2 
Total Current Assets 886.4  875.3 
Properties and equipment, net of accumulated depreciation and amortization of $1,554.6 (2020—$1,550.1)
1,193.1  1,208.8 
Goodwill 560.3  562.7 
Technology and other intangible assets, net 315.3  320.8 
Deferred income taxes 557.6  567.1 
Investment in unconsolidated affiliate 177.4  175.5 
Other assets 68.3  55.3 
Total Assets $ 3,758.4  $ 3,765.5 
LIABILITIES AND EQUITY    
Current Liabilities    
Debt payable within one year $ 14.4  $ 15.3 
Accounts payable 262.0  262.1 
Other current liabilities 282.7  281.9 
Total Current Liabilities 559.1  559.3 
Debt payable after one year 1,974.8  1,975.1 
Unfunded defined benefit pension plans 501.6  520.7 
Underfunded defined benefit pension plans 91.2  128.3 
Other liabilities 323.4  347.6 
Total Liabilities 3,450.1  3,531.0 
Commitments and Contingencies—Note 8
Equity    
Common stock issued, par value $0.01; 300,000,000 shares authorized; outstanding: 66,248,119 (2020—66,190,410)
0.7  0.7 
Paid-in capital 467.7  473.2 
Retained earnings 695.4  648.8 
Treasury stock, at cost: shares: 11,208,514 (2020—11,266,223)
(915.1) (920.6)
Accumulated other comprehensive income (loss) 56.3  29.3 
Total W. R. Grace & Co. Shareholders’ Equity 305.0  231.4 
Noncontrolling interests 3.3  3.1 
Total Equity 308.3  234.5 
Total Liabilities and Equity $ 3,758.4  $ 3,765.5 

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

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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, 2020 $ 473.9  $ 648.8  $ (920.6) $ 29.3  $ 3.1  $ 234.5 
Net income (loss) —  68.4  —  —  0.2  68.6 
Payments in consideration of employee tax obligations related to stock-based compensation
(2.2) —  —  —  —  (2.2)
Stock-based compensation
2.1  —  —  —  —  2.1 
Exercise of stock options
(0.1) —  0.1  —  —  — 
Shares issued
(5.3) —  5.4  —  —  0.1 
Dividends declared
—  (21.8) —  —  —  (21.8)
Other comprehensive (loss) income
—  —  —  27.0  —  27.0 
Balance, March 31, 2021 $ 468.4  $ 695.4  $ (915.1) $ 56.3  $ 3.3  $ 308.3 
(In millions) Common Stock and Paid-in Capital Retained Earnings Treasury Stock Accumulated Other Comprehensive Income (Loss) Noncontrolling Interests Total Equity
Balance, December 31, 2019 $ 478.6  $ 730.5  $ (892.2) $ 78.8  $ 6.5  $ 402.2 
Net income (loss) —  42.0  —  —  0.1  42.1 
Repurchase of common stock —  —  (40.4) —  —  (40.4)
Payments in consideration of employee tax obligations related to stock-based compensation
(4.1) —  —  —  —  (4.1)
Stock-based compensation
2.9  —  —  —  —  2.9 
Shares issued
(10.3) —  10.3  —  —  — 
Dividends declared
—  (20.2) —  —  —  (20.2)
Other comprehensive (loss) income
—  —  —  1.4  —  1.4 
Balance, March 31, 2020 $ 467.1  $ 752.3  $ (922.3) $ 80.2  $ 6.6  $ 383.9 
The Notes to Consolidated Financial Statements are an integral part of these statements.

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W. R. Grace & Co. and Subsidiaries
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 the production and sale of specialty chemicals and specialty materials on a global basis through two reportable segments: Grace Catalysts Technologies, which includes catalysts and related products and technologies used in petrochemical, refining, and other chemical manufacturing applications; and Grace Materials Technologies, which includes specialty materials, including silica-based and complex organic molecules, used in pharma & consumer, coatings, and chemical process applications.
W. R. Grace & Co. conducts all of its business through a single wholly owned subsidiary, W. R. Grace & Co.–Conn. (“Grace–Conn.”). Grace–Conn. owns all of the assets, properties and rights of W. R. Grace & Co. on a consolidated basis, either directly or through subsidiaries.
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 2020 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, 2021, are not necessarily indicative of the results of operations to be attained for the year ending December 31, 2021.
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:
The effective tax rate and realization values of net deferred tax assets, 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 and arbitration; and product, environmental, and other legacy liabilities (see Note 8).
Reclassifications    Certain amounts in the prior year’s 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 Adopted Accounting Standards    In December 2019, the FASB issued ASU 2019-12 “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” This update clarifies and amends existing guidance, including removing certain exceptions to the general principles in Topic 740, and improves consistent application of and simplifies U.S. GAAP for other areas of Topic 740. Grace adopted this update on January 1, 2021, and it did not have a material impact on the Consolidated Financial Statements.
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Notes to Consolidated Financial Statements (Continued)

2. Inventories
Inventories are stated at the lower of cost or net realizable value, and cost is determined using FIFO. Inventories consisted of the following at March 31, 2021, and December 31, 2020:
(In millions) March 31,
2021
December 31,
2020
Raw materials $ 57.7  $ 57.0 
In process 42.9  38.2 
Finished products 141.6  126.6 
Other 31.4  32.0 
Total inventory $ 273.6  $ 253.8 
3. Debt
Components of Debt
(In millions) March 31,
2021
December 31,
2020
2018 U.S. dollar term loan, net of unamortized debt issuance costs of $5.8 (2020—$6.0)
$ 920.5  $ 922.6 
Senior notes due 2027, net of unamortized debt issuance costs of $9.7 (2020—$10.1)
740.3  739.9 
Senior notes due 2024, net of unamortized debt issuance costs of $1.8 (2020—$1.9)
298.2  298.1 
Debt payable to unconsolidated affiliate 27.4  25.6 
Other borrowings 2.8  4.2 
Total debt 1,989.2  1,990.4 
Less debt payable within one year 14.4  15.3 
Debt payable after one year $ 1,974.8  $ 1,975.1 
Weighted average interest rates on total debt 3.5  % 3.5  %
See Note 4 for a discussion of the fair value of Grace’s debt.
Grace also maintains a $400 million revolving credit facility. As of March 31, 2021, the available credit under this facility was reduced to $391.8 million by outstanding letters of credit.
4. Fair Value Measurements and Risk
Certain of Grace’s assets and liabilities are reported at fair value on a gross basis. ASC 820 “Fair Value Measurement” 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.
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Notes to Consolidated Financial Statements (Continued)

4. Fair Value Measurements and Risk (Continued)
At March 31, 2021, and December 31, 2020, the carrying amounts, net of unamortized debt issuance costs and discounts (see Note 3), and fair values of Grace’s debt were as follows:
March 31, 2021 December 31, 2020
(In millions) Carrying Amount Fair Value Carrying Amount Fair Value
2018 U.S. dollar term loan $ 920.5  $ 915.9  $ 922.6  $ 904.1 
Senior notes due 2027 740.3  768.4  739.9  784.7 
Senior notes due 2024 298.2  329.7  298.1  322.4 
Other borrowings 30.2  30.2  29.8  29.8 
Total debt $ 1,989.2  $ 2,044.2  $ 1,990.4  $ 2,041.0 
At March 31, 2021, 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 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. Forward points are excluded from the assessment of effectiveness and amortized to income on a systematic basis.
Grace also enters into foreign currency forward contracts and swaps to hedge a portion of its net outstanding monetary assets and liabilities. These forward contracts and swaps are not designated as hedging instruments under applicable accounting guidance, and therefore all changes in their fair value are recorded in “other (income) expense, net,” in the Consolidated Statements of Operations. These forward contracts and swaps 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 and swaps 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 and swaps outstanding as of March 31, 2021, were $444.9 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. Gains and losses on these cash flow hedges are recorded in “accumulated other comprehensive income (loss)” and reclassified into “other (income) expense, net” and “interest expense and related financing costs” during the hedged period.
In connection with the 2018 U.S. dollar term loan, Grace entered into cross-currency swaps beginning on November 5, 2018, and maturing on March 31, 2023, to synthetically convert $600.0 million of U.S. dollar-denominated floating rate debt into €525.9 million of euro-denominated debt fixed at 1.785%. The valuation of these cross-currency swaps is determined using an income approach, using LIBOR and EURIBOR (Euro Interbank Offered Rate) 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
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Notes to Consolidated Financial Statements (Continued)

4. Fair Value Measurements and Risk (Continued)
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 the 2018 U.S. dollar term loan, Grace entered into interest rate swaps beginning on April 3, 2018, and maturing on March 31, 2023, fixing the LIBOR component of the interest on $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 March 31, 2021, and December 31, 2020:
Fair Value Measurements at March 31, 2021, 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 $ 4.8  —  $ 4.8  — 
Total Assets $ 4.8  $   $ 4.8  $  
Liabilities        
Variable-to-fixed cross-currency derivatives $ 27.8  $ —  $ 27.8  $ — 
Currency derivatives 11.0  —  11.0  — 
Interest rate derivatives 4.9  —  4.9  — 
Total Liabilities $ 43.7  $   $ 43.7  $  
Fair Value Measurements at December 31, 2020, Using

(In millions)
Total Quoted Prices in Active Markets for Identical Assets or Liabilities
(Level 1)
Significant Other Observable Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
Assets        
Currency derivatives $ 1.6  $ —  $ 1.6  $ — 
Total Assets $ 1.6  $   $ 1.6  $  
Liabilities        
Variable-to-fixed cross-currency derivatives $ 51.0  $ —  $ 51.0  $ — 
Currency derivatives 17.8  —  17.8  — 
Interest rate derivatives 5.5  —  5.5  — 
Total Liabilities $ 74.3  $   $ 74.3  $  
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Notes to Consolidated Financial Statements (Continued)

4. Fair Value Measurements and Risk (Continued)
The following tables present the location and fair values of derivative instruments included in the Consolidated Balance Sheets as of March 31, 2021, and December 31, 2020:
March 31, 2021
(In millions)
Asset Derivatives Liability Derivatives
Balance Sheet
Location
Fair Value Balance Sheet
Location
Fair Value
Derivatives designated as hedging instruments under ASC 815:
       
Currency contracts Other current assets $ 4.6  Other current liabilities $ 9.5 
Currency contracts Other assets 0.2  Other liabilities — 
Interest rate contracts Other current assets —  Other current liabilities 2.6 
Interest rate contracts Other assets —  Other liabilities 2.3 
Variable-to-fixed cross-currency derivatives Other current assets —  Other current assets (0.5)
Variable-to-fixed cross-currency derivatives Other assets —  Other liabilities 28.3 
Derivatives not designated as hedging instruments under ASC 815:
       
Currency contracts Other current assets —  Other current assets (0.1)
Currency contracts Other assets —  Other current liabilities 1.6 
Total derivatives   $ 4.8    $ 43.7 
December 31, 2020
(In millions)
Asset Derivatives Liability Derivatives
Balance Sheet
Location
Fair Value Balance Sheet
Location
Fair Value
Derivatives designated as hedging instruments under ASC 815:
       
Currency contracts Other current assets $ —  Other current liabilities $ 17.7 
Currency contracts Other assets —  Other liabilities 0.1 
Interest rate contracts Other current assets —  Other current liabilities 2.5 
Interest rate contracts Other assets —  Other liabilities 3.0 
Variable-to-fixed cross-currency swaps Other current assets —  Other current liabilities 0.2 
Variable-to-fixed cross-currency swaps Other liabilities —  Other liabilities 50.8 
Derivatives not designated as hedging instruments under ASC 815:
       
Currency contracts Other current assets 1.9  Other current liabilities — 
Currency contracts Other current liabilities (0.3) Other current liabilities — 
Total derivatives   $ 1.6    $ 74.3 
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Notes to Consolidated Financial Statements (Continued)

4. Fair Value Measurements and Risk (Continued)
The following tables present the location and amount of gains and losses on derivative instruments included in the Consolidated Statements of Operations or, when applicable, gains and losses initially recognized in other comprehensive income (loss) (“OCI”) for the three months ended March 31, 2021 and 2020:
Three Months Ended March 31, 2021
(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 $ —  Interest expense $ (0.7)
Currency contracts 5.7  Other expense 5.7 
Variable-to-fixed cross-currency swaps 1.1  Interest expense (0.2)
Variable-to-fixed cross-currency swaps 21.9  Other expense 21.9 
Total derivatives $ 28.7    $ 26.7 
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)
Three Months Ended March 31, 2020
(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 $ (3.1) Interest expense $ (0.2)
Currency contracts(1) 2.4  Other expense 1.4 
Variable-to-fixed cross-currency swaps 3.4  Interest expense 2.5 
Variable-to-fixed cross-currency swaps 7.6  Other expense 7.6 
Total derivatives $ 10.3    $ 11.3 
Location of Gain (Loss) Recognized in Income on Derivatives Amount of Gain (Loss) Recognized in Income on Derivatives
Derivatives not designated as hedging instruments under ASC 815:  
Currency contracts Other expense $ (1.9)
___________________________________________________________________________________________________________________
(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.
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Notes to Consolidated Financial Statements (Continued)

4. Fair Value Measurements and Risk (Continued)
The following table presents 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 March 31,
2021 2020
(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
$ (19.0) $ 42.1  $ (18.3) $ 8.8 
Gain (loss) on cash flow hedging relationships in ASC 815
Interest rate contracts
Gain (loss) reclassified from accumulated OCI into income
$ (0.7) $   $ (0.2) $ — 
Variable-to-fixed cross-currency swaps
Gain (loss) reclassified from accumulated OCI into income
(0.2) 21.9  2.5  7.6 
Currency contracts
Gain (loss) reclassified from accumulated OCI into income
  5.7  —  1.4 
Amount excluded from effectiveness testing recognized in earnings based on amortization approach (included in above)
  0.3  —  0.7 
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 $0.8 million and $0.9 million for the three months ended March 31, 2021 and 2020, respectively. At March 31, 2021, 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.
The following table presents the amount of gains and losses on financial instruments designated as net investment hedges, recorded to “currency translation adjustments” within “accumulated other comprehensive income (loss)” for the three months ended March 31, 2021 and 2020. There were no reclassifications of the effective portion of net investment hedges out of OCI and into earnings for the periods presented.
Three Months Ended March 31,
(In millions) 2021 2020
Derivatives in ASC 815 net investment hedging relationships:
Cross-currency swap $ 6.6  $ 6.1 
Credit Risk    Grace is exposed to credit risk in its trade accounts receivable. 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.
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5. Income Taxes
Grace’s effective tax rates for the three months ended March 31, 2021 and 2020, were 21.1% and 27.2%, respectively.
Grace’s effective tax rate for the three months ended March 31, 2021, approximated the U.S. federal statutory rate as the effect of income taxed in jurisdictions with higher statutory tax rates than the U.S. was offset by the Global Intangible Low-Taxed Income (“GILTI”) high-tax exclusion benefit recorded in the quarter for the filing of the 2018 Federal Amended Return.
Grace’s effective tax rate for the three months ended March 31, 2020, was higher than the U.S. federal statutory rate primarily due to income taxed in jurisdictions with higher statutory tax rates than the U.S.
As of March 31, 2021, and December 31, 2020, Grace had $317.4 million in federal tax credit carryforwards before unrecognized tax benefits.
6. Pension Plans and Other Retirement Plans
Pension Plans    The following table presents the funded status of Grace’s pension plans:
(In millions) March 31,
2021
December 31,
2020
Overfunded defined benefit pension plans $ 11.8  $ 11.4 
Underfunded defined benefit pension plans (91.2) (128.3)
Unfunded defined benefit pension plans (501.6) (520.7)
Total underfunded and unfunded defined benefit pension plans (592.8) (649.0)
Pension liabilities included in other current liabilities (15.4) (15.7)
Net funded status $ (596.4) $ (653.3)
Fully funded plans include several advance-funded plans where the fair value of the plan assets exceeds the projected benefit obligation (“PBO”). 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 following table presents the components of net periodic benefit cost (income).
Three Months Ended March 31,
2021 2020
(In millions) U.S. Non-U.S. U.S. Non-U.S.
Service cost $ 4.3  $ 3.5  $ 4.7  $ 2.7 
Interest cost 5.4  0.7  7.6  1.0 
Expected return on plan assets (11.3) (0.3) (12.0) (0.3)
Amortization of prior service credit
(0.1)   (0.2) — 
Mark-to-market adjustment (13.7)   —  — 
Curtailment gain
(25.6)   —  — 
Net periodic benefit cost (income)
$ (41.0) $ 3.9  $ 0.1  $ 3.4 
In the 2021 first quarter, Grace announced to employees that the U.S. salaried plan will be frozen effective January 1, 2025. Grace recorded a $13.7 million mark-to-market gain on remeasurement of the liability as a result of an increase in discount rates since December 31, 2020, partially offset by actual asset performance less than expected through the remeasurement date. Additionally, Grace recorded a $25.6 million gain on the plan curtailment, which is attributable to the elimination of future pay recognition in the pension benefit after 2024.
Plan Contributions and Funding    Grace intends to continue 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
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6. Pension Plans and Other Retirement Plans (Continued)
Security Act of 1974 (“ERISA”). For ERISA purposes, funded status is calculated on a different basis than under U.S. GAAP.
Grace intends to continue to fund non-U.S. pension plans based on applicable legal requirements and actuarial recommendations.
Defined Contribution Retirement Plans    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 cost related to this benefit plan for the three months ended March 31, 2021, was $3.5 million compared with $3.3 million for the prior-year quarter.
U.S. salaried employees and certain U.S. hourly employees hired on or after January 1, 2017, participate in an enhanced defined contribution plan instead of a defined benefit pension plan. Grace contributes 4% of an individual employee’s salary or wages. Grace’s cost related to this enhanced defined contribution plan for the three months ended March 31, 2021, was $1.2 million compared with $1.0 million for the prior-year quarter.
7. Other Balance Sheet Accounts
(In millions) March 31,
2021
December 31,
2020
Other Current Liabilities
Accrued compensation $ 44.5  $ 60.6 
Deferred revenue (see Note 13) 34.3  33.8 
Liability for dam spillway replacement (see Note 8) 24.8  20.3 
Accrued interest (see Note 3) 19.2  5.8 
Pension liabilities (see Note 6) 15.4  15.7 
Environmental contingencies (see Note 8) 15.0  13.8 
Fair value of currency, interest rate, and commodity contracts (see Note 4) 13.7  21.6 
Operating lease liabilities 12.1  10.1 
Income taxes payable (see Note 5) 9.0  5.1 
Other accrued liabilities 94.7  95.1 
$ 282.7  $ 281.9 
Accrued compensation includes salaries and wages as well as estimated current amounts due under the annual and long-term incentive programs.
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7. Other Balance Sheet Accounts (Continued)
(In millions) March 31,
2021
December 31,
2020
Other Liabilities
Environmental contingencies (see Note 8) $ 94.8  $ 95.4 
Liability for dam spillway replacement (see Note 8) 60.8  69.3 
Operating lease liabilities 37.4  25.8 
Fair value of currency and interest rate contracts (see Note 4) 30.7  53.9 
Legacy product liability (see Note 8) 24.0  24.0 
Deferred revenue (see Note 13) 21.1  23.4 
Retained obligations of divested businesses 11.8  12.2 
Deferred income taxes 9.9  10.4 
Asset retirement obligations 9.3  9.6 
Unrecognized tax benefits 3.8  3.9 
Other noncurrent liabilities 19.8  19.7 
$ 323.4  $ 347.6 
8. Commitments and Contingent Liabilities
Legacy Matters
Over the years, Grace operated numerous types of businesses that are no longer part of its ongoing operations. As Grace divested or otherwise ceased operating these businesses, it retained certain liabilities and obligations, which Grace refers to as legacy liabilities. These liabilities include product, environmental and other liabilities. Although the outcome of each of the matters discussed below cannot be predicted with certainty, Grace has assessed its risk and has recorded estimated liabilities as required under U.S. GAAP.
Legacy Product Liabilities    Grace emerged from an asbestos-related Chapter 11 bankruptcy on February 3, 2014 (the “Effective Date”). Under its plan of reorganization, all pending and future asbestos-related claims are channeled for resolution to either a personal injury trust (the “PI Trust”) or a property damage trust (the “PD Trust”). The trusts are the sole recourse for holders of asbestos-related claims. The channeling injunctions issued by the bankruptcy court prohibit holders of asbestos-related claims from asserting such claims directly against Grace.
Grace has satisfied all of its financial obligations to the PI Trust. Grace has contingent financial obligations remaining to the PD Trust. With respect to property damage claims related to Grace’s former Zonolite attic insulation product (“ZAI PD Claims”), the PD Trust was funded with $49.4 million (net of $15 million of attorneys’ fees) to pay claims and expenses. Grace is also obligated to make up to 10 contingent deferred payments of $8 million per year to the PD Trust during the 20-year period beginning on February 3, 2019, with each such payment due only if the assets of the PD Trust in respect of ZAI PD Claims fall below $10 million during the preceding year. As of March 31, 2021, the PD Trust has paid out approximately $40 million in ZAI PD Claims and expenses, leaving a balance of approximately $17 million, including the benefit of net investment gains.
Due to the limited claims history, the unique nature of this product, and the uncertainty of future claims patterns, an actuarial analysis was completed to estimate the range of possible future payments. The analysis was conducted by a third-party actuarial firm directed by Grace and using historical claims data provided by the ZAI trustee. Certain key assumptions employed in the analysis were (1) projections of the future number of filed claims, assuming a percentage increase in claims during earlier years and annual decreases in later years; (2) application of historical percentages of claims closed with indemnity payment compared to total closed claims, applied on a regional basis; and (3) application of the average claim payout, which reflects the average indemnity cost per claim closing with payment. As a result of the analysis and taking into account the relative uncertainty of future claims activity, Grace determined that contingent funding obligations beyond 2025 are not reasonably estimable. Grace estimates that the reasonable range of payments over the period of 2021 to 2025 is expected to
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8. Commitments and Contingent Liabilities (Continued)
be between $16 million and $24 million and projects that the first payment could be due as early as 2022. In the 2019 fourth quarter, Grace recorded a $24.0 million liability related to probable future obligations to fund the PD Trust for ZAI PD Claims. Grace’s maximum financial obligation over the next 18 years is $80.0 million, and no single year’s payment can exceed $8.0 million.
With respect to other asbestos property damage claims (“Other PD Claims”), claims unresolved as of the Effective Date are to be litigated in the bankruptcy court and any future claims are to be litigated in a federal district court, in each case pursuant to procedures approved by the bankruptcy court. To the extent any such Other PD Claims are determined to be allowed claims, they are to be paid in cash by the PD Trust. Grace is obligated to make a payment to the PD Trust every six months in the amount of any Other PD Claims allowed during the preceding six months plus interest (if applicable) and the amount of PD Trust expenses for the preceding six months (the “PD Obligation”). Grace has not paid any Other PD Claims since emergence. Annual expenses have been approximately $0.2 million per year. The aggregate amount to be paid under the PD Obligation is not capped, and Grace may be obligated to make additional payments to the PD Trust in respect of the PD Obligation. Grace has accrued for those unresolved Other PD Claims that it believes are probable and estimable. Grace has not accrued for other unresolved or unasserted Other PD Claims as it does not believe that payment is probable.
All payments to the PD Trust required after the Effective Date are secured by the Company’s obligation to issue 77,372,257 shares of Company common stock to the PD Trust in the event of default, subject to customary anti-dilution provisions.
This summary of the commitments and contingencies related to the Chapter 11 proceeding does not purport to be complete and is qualified in its entirety by reference to the plan of reorganization and the exhibits and documents related thereto, which have been filed with the SEC and are readily available on the internet at www.sec.gov.
Legacy Environmental Liabilities    Grace is subject to loss contingencies resulting from extensive and evolving federal, state, local and foreign environmental laws and regulations relating to its manufacturing operations. Grace has procedures in place to minimize such contingencies; nevertheless, it has liabilities associated with past operations and additional claims may arise in the future, which may be material. To address its legacy liabilities, Grace accrues for anticipated costs of response efforts where an assessment has indicated that a probable liability has been incurred and the cost can be reasonably estimated. These accruals do not take into account any discounting for the time value of money.
Grace’s environmental liabilities are reassessed regularly and adjusted when circumstances become better defined or response efforts and their costs can be better estimated, typically as a matter moves through the life-cycle of environmental investigation and remediation. These liabilities are evaluated based on currently available information relating to the nature and extent of contamination, risk assessments, feasibility of response actions, and apportionment amongst other potentially responsible parties, all evaluated in light of prior experience.
At March 31, 2021, Grace’s estimated liability for legacy environmental response costs totaled $109.8 million, compared with $109.2 million at December 31, 2020, and was included in “other current liabilities” and “other liabilities” in the Consolidated Balance Sheets. These amounts are based on agreements in place or on Grace’s estimate of costs where no formal remediation plan or agreement to pay exists, yet there is sufficient information to estimate response costs.
Vermiculite-Related Matters
Grace purchased a vermiculite mine in Libby, Montana, in 1963 and operated it until 1990. Vermiculite concentrate from the Libby mine was used in the manufacture of attic insulation and other products. Some of the vermiculite ore contained naturally occurring asbestos.
Grace is engaged with the U.S. Environmental Protection Agency (the “EPA”) and other federal, state, and local governmental agencies in a remedial investigation and feasibility study (“RI/FS”) of the Libby mine and the surrounding area, known as Operable Unit 3 (“OU3”). The RI/FS will study the specific areas within OU3 requiring
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8. Commitments and Contingent Liabilities (Continued)
remediation and will identify possible remedial action alternatives. Possible remedial actions within OU3 are wide-ranging, from institutional controls such as land use restrictions, to more active measures involving soil removal, containment projects, or other protective measures.
As part of the RI/FS process, Grace contracted an engineering and consulting firm to develop a range of possible remedial alternatives and associated cost estimates for OU3. Based on this work, Grace recorded a pre-tax charge of $70.0 million during the three months ended September 30, 2018, for the estimated costs of remediation of OU3. Grace believes that this amount should provide for a protective remedy meeting the statutory requirements of the Comprehensive Environmental Response, Compensation, and Liability Act.
The estimated costs of remediation are preliminary and consist of several components, each of which may vary significantly as the remedial alternatives are further developed. It is reasonably possible that the ultimate costs of remediation could range between $30 million and $170 million. Grace is working closely with the EPA, and the ultimate remedy will be determined by the EPA after the RI/FS is finalized. Such remedy will be set forth in a Record of Decision (“ROD”) that is currently expected to be issued by the EPA no earlier than 2024. Costs associated with the more active remedial alternatives would be expected to be incurred over a decade or more. Grace will reevaluate its estimated liability as remedial alternatives evolve based on further work by the engineering and consulting firm and discussions with the EPA as the RI/FS process moves toward a ROD. Technical memoranda expected prior to the issuance of the ROD may provide insight into the likely remedial alternatives ultimately selected, allowing Grace to update its cost of remediation estimate. Depending on the remedial alternatives that the EPA selects in the ROD, the total cost of remediating OU3 may exceed Grace’s current estimate by material amounts. The amounts set forth above do not include possible liability for natural resources damage. Based on ecological studies conducted by the EPA, Grace does not believe that natural resources damage has occurred. However, if a party were to be successful in asserting a natural resources damage claim, liability related to such obligation could be material.
Grace has cooperated with the EPA in investigating and remediating a number of formerly owned or operated sites that processed Libby vermiculite into finished products. Grace has recorded a liability for remaining expected response costs, including costs for EPA oversight and potential future site remediation, where a review has indicated that liability is probable and the cost is estimable. The EPA may commence additional investigations in the future at other sites that processed Libby vermiculite. Liability for unaccrued additional investigation and remediation costs is probable but not yet estimable, and could be material.
Grace’s estimated liability for response costs that are currently estimable for OU3 and vermiculite processing sites outside of Libby at March 31, 2021, and December 31, 2020, totaled $70.6 million and $71.2 million, respectively. It is possible that Grace’s ultimate liability for these vermiculite-related matters will exceed current estimates by material amounts.
Non-Vermiculite-Related Environmental Matters
At March 31, 2021, and December 31, 2020, Grace’s estimated legacy environmental liability for response costs at sites not related to its former vermiculite mining and processing activities totaled $39.2 million and $38.0 million, respectively. This liability relates to Grace’s former businesses or operations, including its share of liability at off-site disposal facilities. Grace’s estimated liability is based upon regulatory requirements and environmental conditions at each site. As Grace receives new information, its estimated liability may change materially.
Other Legacy Liabilities    Beginning in 1971, as part of implementing a wet milling process at the Libby, Montana, vermiculite mine, Grace constructed a dam at the mine property that now prevents vermiculite ore tailings from moving into nearby creeks and rivers. Ongoing operation of the dam is regulated by the Montana Department of Natural Resources and Conservation (“DNRC”). In April 2019, the DNRC renewed the permit necessary for operation of the dam. Grace is legally obligated to operate the dam and construct a new spillway in accordance with the latest permit conditions.
Construction of the new dam spillway at the former mine site is a key element of Grace’s overall remediation strategy. The project includes both an upper spillway and a lower spillway that are being managed as two separate projects with different engineering design and construction timelines. In 2019, Grace contracted a third-
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8. Commitments and Contingent Liabilities (Continued)
party engineering and consulting firm to develop an initial range of cost estimates for the total project. Based on this work, Grace recorded a liability of $68.0 million in 2019 for the estimated costs of the project. These costs were preliminary and subject to change as new information becomes available, including defining the final scope of the projects through the contract bidding process. During the three months ended September 30, 2020, Grace completed a review of contractor bids for the replacement of the upper spillway and increased its cost estimate for this portion of the project by $27.0 million, bringing the estimate for the total project to $95.0 million. Regarding the lower spillway, final engineering will be completed and submitted to the state of Montana for design approval in 2022, after which Grace will seek contract bids for this portion of the project. Grace believes it is reasonably possible that the ultimate costs of the two spillway projects could range between $80 million and $120 million. As Grace receives new information, its estimated liability may change materially. Construction will begin in 2021 and is expected to take three to four years.
Commercial and Financial Commitments and Contingencies
Purchase Commitments    Grace uses purchase commitments to ensure supply and to minimize the volatility of major components of direct manufacturing costs including natural gas, certain metals, rare earths, and other materials. Such commitments are for quantities that Grace fully expects to use in its normal operations.
Guarantees and Indemnification Obligations    Grace is a party to many contracts containing guarantees and indemnification obligations. These contracts primarily consist of:
Product warranties with respect to certain products sold to customers in the ordinary course of business. These warranties typically provide that products will conform to specifications. Grace accrues a warranty liability on a transaction-specific basis depending on the individual facts and circumstances related to each sale.
Performance guarantees offered to customers under certain licensing arrangements. Grace has not established a liability for these arrangements based on past performance.
Licenses of intellectual property by Grace to third parties in which Grace has agreed to indemnify the licensee against third party infringement claims.
Contracts providing for the sale or spin-off of a former business unit or product line in which Grace has agreed to indemnify the buyer or resulting entity against certain liabilities related to activities prior to the closing of the transaction, including environmental, tax, and employee liabilities.
Indemnification obligations of Grace as a tenant of real property leases; and 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. As of March 31, 2021, Grace had gross financial assurances issued and outstanding of $140.0 million, composed of $78.8 million of surety bonds issued by various insurance companies and $61.2 million of standby letters of credit and other financial assurances issued by various banks.
9. Restructuring Expenses and Repositioning Expenses
Restructuring Expenses    The restructuring gain for the three months ended March 31, 2021, was due to the adjustment of the estimated asset write-off in connection with the idling of our methanol-to-olefins (“MTO”) manufacturing facility. Costs for the three months ended March 31, 2020, primarily related to severance costs pertaining to sales force reorganization. These costs are included in “restructuring and repositioning expenses” in the Consolidated Statements of Operations, and are not included in segment operating income.
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9. Restructuring Expenses and Repositioning Expenses (Continued)
The following table presents restructuring activity by reportable segment for the three months ended March 31, 2021 and 2020.
Three Months Ended March 31,
(In millions) 2021 2020
Catalysts Technologies $ (0.1) $ — 
Materials Technologies   0.2 
Total restructuring (income) expense $ (0.1) $ 0.2 
The following table presents components of the change in the restructuring liability from December 31, 2020, to March 31, 2021.
(In millions)
Balance, December 31, 2020 $ 3.9 
Accruals for severance and other costs — 
Payments (0.1)
Balance, March 31, 2021 $ 3.8 
Substantially all costs related to the restructuring programs are expected to be paid by June 30, 2023, but could be paid earlier subject to negotiations around certain plant exit costs.
Repositioning Expenses    Repositioning expenses for the three months ended March 31, 2021, were $12.9 million and primarily related to Grace’s review of strategic alternatives. Repositioning expenses for the three months ended March 31, 2020, were $2.5 million and primarily related to a multi-year program to transform manufacturing and business processes to extend Grace’s competitive advantages and improve its cost position.
10. Other (Income) Expense, net
Components of other (income) expense, net are as follows:
  Three Months Ended March 31,
(In millions) 2021 2020
Gain on curtailment of U.S. salaried pension plan (see Note 6) $ (25.6) $ — 
Defined benefit pension (income) expense other than service cost (19.3) (3.9)
Weather-related impacts 1.7  — 
Third-party acquisition-related costs 1.3  1.5 
Net (gain) loss on sales of investments and disposals of assets 0.7  0.5 
Currency transaction effects (0.1) (0.9)
Business interruption insurance recoveries   (8.0)
Other miscellaneous (income) expense (0.8) 2.0 
Total other (income) expense, net $ (42.1) $ (8.8)
During the three months ended March 31, 2021, Winter Storm Uri caused widespread manufacturing disruption across Texas and Louisiana. Grace operates four manufacturing facilities in the region. All sites experienced interruptions, with extended downtime at three plants ranging from 8 to 24 days. All Grace sites have resumed operations; however, operating costs are expected to remain higher than normal while some maintenance and repair activity is ongoing. Most customers have restarted operations and returned to normal operating rates. The total estimated weather-related costs are expected to be approximately $15 million, with $8.5 million impacting the first quarter and approximately $6.5 million expected in the second quarter. The
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10. Other (Income) Expense, net (Continued)
weather-related costs were primarily due to lower fixed cost absorption during the downtime, increased costs to supply customers from other Grace manufacturing plants, and costs to repair plants impacted by the weather.
The weather-related costs in other (income) expense of $1.7 million primarily related to the costs to repair the plants in order to resume operations. Cost of goods sold includes weather-related impacts of $6.2 million. In addition, Grace’s equity in earnings from unconsolidated affiliate was reduced by $0.6 million due to weather-related costs incurred by the joint venture.
In July 2019, a North American FCC catalysts customer filed for bankruptcy protection after announcing it would not resume refinery operations following a fire in its refinery. Grace received $16.3 million during the six months ended June 30, 2020, under its business interruption insurance policy. Including the $8.0 million received in the 2019 fourth quarter, Grace received $24.3 million of insurance recoveries related to this event, reflecting approximately eight quarters of the impact of the incident on earnings. This claim has been fully resolved.
11. Other Comprehensive Income (Loss)
The following tables present the pre-tax, tax, and after-tax components of Grace’s other comprehensive income (loss) for the three months ended March 31, 2021 and 2020:
Three Months Ended March 31, 2021
(In millions)
Pre-Tax Amount Tax Benefit/ (Expense) After-Tax Amount
Amortization of net prior service credit included in net periodic benefit cost and other costs (credits), net
$ (0.1) $   $ (0.1)
Currency translation adjustments 27.3  (2.2) 25.1 
Gain (loss) from hedging activities 2.7  (0.7) 2.0 
Other comprehensive income (loss) attributable to W. R. Grace & Co. shareholders
$ 29.9  $ (2.9) $ 27.0 
Three Months Ended March 31, 2020
(In millions)
Pre-Tax Amount Tax Benefit/ (Expense) After-Tax Amount
Amortization of net prior service credit included in net periodic benefit cost and other costs (credits), net
$ (0.1) $ —  $ (0.1)
Currency translation adjustments 3.9  (1.4) 2.5 
Gain (loss) from hedging activities (1.4) 0.4  (1.0)
Other comprehensive income (loss) attributable to W. R. Grace & Co. shareholders
$ 2.4  $ (1.0) $ 1.4 
The following tables present the changes in accumulated other comprehensive income (loss), net of tax, for the three months ended March 31, 2021 and 2020:
Three Months Ended March 31, 2021
(In millions)
Defined Benefit Pension and Other Postretirement Plans Currency Translation Adjustments Gain (Loss) from Hedging Activities Total
Balance, December 31, 2020 $ (0.9) $ 42.8  $ (12.6) $ 29.3 
Other comprehensive income (loss) before reclassifications
—  25.1  21.0  46.1 
Amounts reclassified from accumulated other comprehensive income (loss)
(0.1) —  (19.0) (19.1)
Net current-period other comprehensive income (loss)
(0.1) 25.1  2.0  27.0 
Balance, March 31, 2021 $ (1.0) $ 67.9  $ (10.6) $ 56.3 
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11. Other Comprehensive Income (Loss) (Continued)
Three Months Ended March 31, 2020
(In millions)
Defined Benefit Pension and Other Postretirement Plans Currency Translation Adjustments Gain (Loss) from Hedging Activities Total
Balance, December 31, 2019 $ (0.5) $ 92.7  $ (13.4) $ 78.8 
Other comprehensive income (loss) before reclassifications
—  2.5  7.2  9.7 
Amounts reclassified from accumulated other comprehensive income (loss)
(0.1) —  (8.2) (8.3)
Net current-period other comprehensive income (loss)
(0.1) 2.5  (1.0) 1.4 
Balance, March 31, 2020 $ (0.6) $ 95.2  $ (14.4) $ 80.2 
Grace is a global enterprise operating in many 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, as well as amounts related to net investment hedges. See Note 4 for a discussion of hedging activities. See Note 6 for a discussion of pension plans.
12. 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) 2021 2020
Numerators
Net income (loss) attributable to W. R. Grace & Co. shareholders $ 68.4  $ 42.0 
Denominators
Weighted average common shares—basic calculation 66.2  66.5 
Dilutive effect of employee stock options 0.1  — 
Weighted average common shares—diluted calculation 66.3  66.5 
Basic earnings per share
$ 1.03  $ 0.63 
Diluted earnings per share
$ 1.03  $ 0.63 
There were 1.3 million anti-dilutive options outstanding for the three months ended March 31, 2021, compared with 1.7 million for the prior-year quarter.
On February 8, 2017, the Company announced that its Board of Directors had authorized a share repurchase program of up to $250 million. On February 28, 2020, Grace announced that its Board of Directors had increased its share repurchase authorization to $250 million, including approximately $83 million remaining under the previously announced program. The Company did not repurchase Company common stock during the three months ended March 31, 2021. During the three months ended March 31, 2020, the Company repurchased 673,807 shares of Company common stock for $40.4 million, pursuant to the terms of the share repurchase program. Consistent with the terms of the Merger Agreement (see Note 17), the Company will not repurchase shares of Company common stock going forward.
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13. Revenues
Grace generates revenues from customer arrangements primarily by manufacturing and delivering specialty chemicals and specialty materials, and by licensing technology through its two reportable segments. See Note 14 for additional information about Grace’s reportable segments.
Disaggregation of Revenue    The following tables present Grace's revenues by geography and product group, within its respective reportable segments, for the three months ended March 31, 2021 and 2020.
Three Months Ended March 31, 2021
(In millions)
North America Europe Middle East Africa (EMEA) Asia Pacific Latin America Total
Polyolefin and Chemical Catalysts
$ 40.3  $ 48.7  $ 57.3  $ 5.5  $ 151.8 
Refining Catalysts 52.8  76.1  40.1  8.8  177.8 
Total Catalysts Technologies
93.1  124.8  97.4  14.3  329.6 
Pharma & Consumer 15.8  14.0  5.3  5.2  40.3 
Coatings 7.2  20.2  11.4  2.8  41.6 
Chemical process 8.7  20.3  9.0  1.3  39.3 
Other 1.6  4.1  0.1  0.1  5.9 
Total Materials Technologies 33.3  58.6  25.8  9.4  127.1 
Total Grace $ 126.4  $ 183.4  $ 123.2  $ 23.7  $ 456.7 
Three Months Ended March 31, 2020
(In millions)
North America EMEA Asia Pacific Latin America Total
Polyolefin and Chemical Catalysts
$ 35.3  $ 52.7  $ 46.6  $ 4.8  $ 139.4 
Refining Catalysts 57.8  73.8  31.5  5.5  168.6 
Total Catalysts Technologies
93.1  126.5  78.1  10.3  308.0 
Pharma & Consumer 10.3  13.6  4.8  4.8  33.5 
Coatings 7.2  18.4  8.6  2.4  36.6 
Chemical process 8.2  19.0  8.7  1.9  37.8 
Other 1.4  4.1  0.1  —  5.6 
Total Materials Technologies 27.1  55.1  22.2  9.1  113.5 
Total Grace $ 120.2  $ 181.6  $ 100.3  $ 19.4  $ 421.5 
Contract Balances    Grace invoices customers for product sales once performance obligations have been satisfied, generally at the point of delivery, at which point payment becomes unconditional. Accordingly, Grace’s product sales contracts generally do not give rise to material contract assets or liabilities under ASC 606; however, from time to time certain customers may pay in advance, which results in a contract liability. In the technology licensing business, Grace typically invoices licensees at the time that contractual milestones are achieved. However, in respect of the milestone billings, Grace is frequently obligated to provide services in future periods, and this results in recording contract liabilities.
The following table presents Grace’s deferred revenue balances as of March 31, 2021, and December 31, 2020:
(In millions) March 31,
2021
December 31,
2020
Current $ 34.3  $ 33.8 
Noncurrent 21.1  23.4 
Total $ 55.4  $ 57.2 
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Notes to Consolidated Financial Statements (Continued)

13. Revenues (Continued)
Grace records deferred revenues when cash payments are received or due in advance of performance. The change in deferred revenue reflects cash payments from customers received or due in advance of satisfying performance obligations, offset by $9.6 million of revenue recognized for the three months ended March 31, 2021, that was included in the deferred revenue balance as of December 31, 2020.
The noncurrent portion of deferred revenue will be recognized as performance obligations under the technology licensing agreements are satisfied, which is expected to be over the next four years.
Remaining performance obligations represent the estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied). The aggregate amount of the transaction price allocated to remaining performance obligations for such contracts with a duration of more than one year was approximately $160 million as of March 31, 2021, and includes certain amounts reported as deferred revenue above. In accordance with the available practical expedient, Grace does not disclose information about remaining performance obligations that have original expected durations of one year or less, which generally relate to customer prepayments on product sales and are generally satisfied in less than one year. Grace expects to recognize revenue related to remaining performance obligations over several years, as follows:
Year Approximate percentage of revenue related to remaining performance obligations recognized
Remainder of 2021 19  %
2022 20  %
2023 19  %
2024 17  %
Thereafter through 2030 25  %
For the three months ended March 31, 2021 and 2020, revenue recognized from performance obligations related to prior periods was not material. Grace has not capitalized any costs to obtain or fulfill contracts with customers under ASC 606. No material impairment losses have been recognized on any receivables or contract assets arising from contracts with customers.
14. Segment Information
Grace is a global producer of specialty chemicals and specialty materials. Grace’s two reportable business segments are Grace Catalysts Technologies and Grace Materials Technologies. Grace Catalysts Technologies includes catalysts and related products and technologies used in petrochemical, refining, and other chemical manufacturing applications. Advanced Refining Technologies LLC (“ART”), Grace’s joint venture with Chevron U.S.A. Inc. (“Chevron”), is managed in this segment. (See Note 15.) Grace Catalysts Technologies comprises two operating segments, Grace Specialty Catalysts and Grace Refining Technologies, which are aggregated into one reportable segment based upon similar economic characteristics, the nature of the products and production processes, type and class of customer, and channels of distribution. Grace Materials Technologies includes specialty materials, including silica-based and complex organic molecules, used in pharma & consumer, coatings, and chemical process applications. The table below presents information related to Grace’s reportable segments. Only those corporate expenses directly related to the reportable 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 reportable segment performance as defined benefit pension expense is not managed at a reportable segment level.
Grace defines Adjusted EBIT to be net income attributable to W. R. Grace & Co. shareholders adjusted for interest income and expense; income taxes; costs related to legacy matters; restructuring and repositioning expenses and asset impairments; pension costs other than service and interest costs, expected returns on plan assets, and amortization of prior service costs/credits; gains and losses on sales or exits of businesses, product lines, and certain other investments; third-party acquisition-related costs and the amortization of acquired
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Notes to Consolidated Financial Statements (Continued)

14. Segment Information (Continued)
inventory fair value adjustment; gains and losses on modification or extinguishment of debt; the effects of these items on equity in earnings of unconsolidated affiliate; and certain other items that are not representative of underlying trends.
Reportable Segment Data
Three Months Ended March 31,
(In millions) 2021 2020
Net Sales
Catalysts Technologies $ 329.6  $ 308.0 
Materials Technologies 127.1  113.5 
Total $ 456.7  $ 421.5 
Adjusted EBIT
Catalysts Technologies segment operating income $ 75.8  $ 82.0 
Materials Technologies segment operating income 26.8  19.0 
Corporate costs (15.4) (15.6)
Certain pension costs (2.0) (3.1)
Total $ 85.2  $ 82.3 
Corporate costs include functional costs and other costs such as professional fees, incentive compensation, and insurance premiums. Certain pension costs include only ongoing costs recognized quarterly, which include service and interest costs, expected returns on plan assets, and amortization of prior service costs/credits.
Reconciliation of Reportable Segment Data to Financial Statements    Grace Adjusted EBIT for the three months ended March 31, 2021 and 2020, is reconciled below to “income (loss) before income taxes” presented in the accompanying Consolidated Statements of Operations.
Three Months Ended March 31,
(In millions) 2021 2020
Grace Adjusted EBIT $ 85.2  $ 82.3 
Gain on curtailment of U.S. salaried pension plan 25.6  — 
Pension MTM adjustment and other related costs, net 13.7  — 
Restructuring and repositioning expenses (12.8) (2.7)
Costs related to legacy matters (4.6) (2.7)
Third-party acquisition-related costs (1.3) (1.5)
Taxes and interest included in equity in earnings of unconsolidated affiliate (0.2) — 
Interest expense, net (18.9) (17.7)
Net income (loss) attributable to noncontrolling interests 0.2  0.1 
Income (loss) before income taxes
$ 86.9  $ 57.8 
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Notes to Consolidated Financial Statements (Continued)

14. Segment Information (Continued)
Geographic Area Data    The table below presents information related to the geographic areas in which Grace operates. Sales are attributed to geographic areas based on the location to which the product is transported.
Three Months Ended March 31,
(In millions) 2021 2020
Net Sales
United States $ 115.6  $ 108.8 
Canada 10.8  11.4 
Total North America
126.4  120.2 
Europe Middle East Africa 183.4  181.6 
Asia Pacific 123.2  100.3 
Latin America 23.7  19.4 
Total $ 456.7  $ 421.5 
15. Related Party Transactions
Unconsolidated Affiliate    Grace accounts for its 50% ownership interest in ART, its joint venture with Chevron, using the equity method of accounting. Grace’s investment in ART amounted to $177.4 million and $175.5 million as of March 31, 2021, and December 31, 2020, respectively. ART is a private, limited liability company, taxed as a partnership, and accordingly does not have a quoted market price available.
The table below presents the components of Grace’s “equity in earnings of unconsolidated affiliate” in the Consolidated Statements of Operations.
Three Months Ended March 31,
(In millions) 2021 2020
Operating income $ 4.5  $ 1.6 
Depreciation and amortization (1.1) (0.4)
Interest expense and income taxes (0.2) — 
Equity in earnings of unconsolidated affiliate $ 3.2  $ 1.2 
The table below presents summary financial data related to ART’s balance sheet and results of operations.
(In millions) March 31,
2021
December 31,
2020
Summary Balance Sheet information:
Current assets $ 265.5  $ 286.4 
Noncurrent assets 234.5  235.8 
Total assets $ 500.0  $ 522.2 
Current liabilities $ 147.0  $ 173.0 
Noncurrent liabilities 0.3  0.3 
Total liabilities $ 147.3  $ 173.3 
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Notes to Consolidated Financial Statements (Continued)

15. Related Party Transactions (Continued)
Three Months Ended March 31,
(In millions) 2021 2020
Summary Statement of Operations information:
Net sales $ 95.2  $ 75.3 
Costs and expenses applicable to net sales 83.7  68.0 
Income before income taxes 6.5  2.9 
Net income 6.5  2.5 
Grace and ART transact business on a regular basis and maintain several agreements in order to operate the joint venture. These agreements and the resulting transactions are treated as related party activities with an unconsolidated affiliate. Product manufactured by Grace for ART is accounted for on a net basis, with a mark-up, which reduces “cost of goods sold” in the Consolidated Statements of Operations. Grace also receives reimbursement from ART for fixed costs; research and development; selling, general and administrative services; and depreciation. Grace records reimbursements against the respective line items in Grace’s Consolidated Statements of Operations. The table below presents summary financial data related to transactions between Grace and ART.
Three Months Ended March 31,
(In millions) 2021 2020
Product manufactured for ART $ 67.6  $ 71.1 
Mark-up on product manufactured for ART included as a reduction of Grace’s cost of goods sold
1.3  1.4 
Charges for fixed costs; research and development; selling, general and administrative services; and depreciation to ART
14.1  14.1 
The table below presents balances in Grace’s Consolidated Financial Statements related to ART.
(in millions) March 31,
2021
December 31,
2020
Trade accounts receivable $ 20.3  $ 28.3 
Accounts payable 16.6  19.8 
Debt payable within one year 3.9  3.5 
Debt payable after one year 23.5  22.1 
Grace and ART maintain an agreement whereby ART loans Grace funds for maintenance capital expenditures at manufacturing facilities used to produce catalysts for ART. Grace makes principal and interest payments on the loans on a monthly basis. These unsecured loans have repayment terms of up to eight years, unless earlier repayment is demanded by ART. The loans bear interest at the three-month LIBOR plus 1.25%.
Grace and Chevron provide lines of credit in the amount of $15.0 million each at a commitment fee of 0.1% of the credit amount. These agreements have been approved by the ART Executive Committee for renewal until February 2022. No amounts were outstanding at March 31, 2021, or December 31, 2020.
Joint Venture Arrangement    In 2018, Grace formed a joint venture in a developing country in Asia. The purpose of the joint venture is to establish a logistics facility and catalyst testing laboratory and to be the exclusive FCC catalysts and additives supplier to certain customers in the country. Grace’s joint venture partner is the parent company of the customers. Grace has an 87.5% ownership interest in the joint venture and consolidates the activities of the entity. Grace’s Consolidated Balance Sheets as of March 31, 2021, and December 31, 2020, include trade accounts receivable of $0.0 million and $2.2 million, respectively, from these customers. Grace’s
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Notes to Consolidated Financial Statements (Continued)

15. Related Party Transactions (Continued)
Consolidated Statements of Operations for the three months ended March 31, 2021, include $1.6 million of revenues from these customers, compared with $1.9 million in the prior-year quarter.
16. Acquisitions
On February 25, 2021, Grace entered into a definitive agreement to acquire the Fine Chemistry Services business of Albemarle Corporation (“Albemarle”) for approximately $570 million, including $300 million to be paid in cash at closing and $270 million to be funded through the issuance to Albemarle of non-participating preferred equity of a newly created wholly owned Grace subsidiary. On March 31, 2021, Grace secured financing for the cash portion of the purchase price with a new $300 million senior secured term loan maturing in 2028. This acquisition would strengthen and expand Grace’s existing pharma portfolio, within the Materials Technologies segment. The transaction is expected to close in the 2021 second quarter and is subject to customary closing conditions.
17. Subsequent Events
On April 26, 2021, Grace announced that it had entered into a definitive agreement (the “Merger Agreement”) providing for the acquisition of the Company by an affiliate of Standard Industries Holdings Inc. (“Standard Industries”), subject to the terms and conditions contained therein. Under the terms of the agreement, Standard Industries Holdings will acquire all of the outstanding shares of Grace common stock for $70.00 per share in cash. Grace also announced that Standard Industries’ related investment platform 40 North Latitude Master Fund Ltd. (“40 North”), which owns approximately 14.9% of the Company’s outstanding common stock, has entered into a voting agreement pursuant to which 40 North has agreed to vote its shares of Grace common stock in favor of the transaction.
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ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
References
We generally refer to the quarter ended March 31, 2021, as the “first quarter” and the quarter ended March 31, 2020, as the “prior-year quarter.” Our references to “advanced economies” and “emerging regions” refer to classifications established by the International Monetary Fund. See Analysis of Operations for a discussion of our non-GAAP performance measures.
Results of Operations
First Quarter Performance Summary
Following is a summary of our financial performance for the first quarter compared with the prior-year quarter.
Net sales increased 8.4% to $456.7 million.
Net income attributable to Grace shareholders was $68.4 million.
Adjusted EBIT1 increased 3.5% to $85.2 million.
Diluted earnings per share was $1.03 per diluted share.
Adjusted EPS1 increased 2.8% to $0.73 per diluted share.
1 Non-GAAP performance measures further discussed below.
Summary Description of Business
We are engaged in specialty chemicals and specialty materials businesses on a worldwide basis through our two reportable segments.
Grace Catalysts Technologies produces and sells catalysts and related products and technologies used in petrochemical, refining, and other chemical manufacturing applications, as follows:
Polyolefin catalysts and catalyst supports, also called specialty catalysts (SC), for the production of polyethylene (PE) and polypropylene (PP) thermoplastic resins, which can be customized to enhance the performance of a wide range of industrial and consumer end-use applications including high pressure pipe, geomembranes, food packaging, automotive parts, medical devices, and textiles. High-activity, non-phthalate catalysts allow customers to produce phthalate-free PP products and cleaner, clearer PP products. Our catalysts also improve resin properties that allow for the lightweighting of automobiles by replacing steel parts with PP while meeting demanding performance standards of automakers.
Gas-phase polypropylene process technology, which provides our licensees with a cost-effective, flexible, and reliable capability to manufacture polypropylene products having a wide spectrum of performance attributes, enabling customers to manufacture products for a broad array of end-use applications. This capability, coupled with a complete family of catalysts and donors with a suite of value-added solutions, enables our licensees to compete effectively in their markets over the lifetime of the plant. We are the leading independent supplier that provides both PP process technology licenses and catalysts.
Fluid catalytic cracking catalysts, also called FCC catalysts, that help to “crack” the hydrocarbon chains in distilled crude oil to produce transportation fuels, such as gasoline and diesel fuels, and feeds for production of petrochemicals; and FCC additives used to reduce sulfur in gasoline, maximize propylene production from refinery FCC units, and reduce emissions of sulfur oxides, nitrogen oxides, and carbon monoxide from refinery FCC units.
Hydroprocessing catalysts (HPC), most of which are marketed through our Advanced Refining Technologies LLC (“ART”) joint venture with Chevron U.S.A. Inc. (“Chevron”), that are used in process reactors to upgrade heavy oils into lighter, more useful products, enabling less expensive feedstock usage in the petroleum refining process, and to produce products that meet more stringent
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environmental regulations. These catalysts and solutions allow our customers to improve their profitability in the production of cleaner petroleum-based fuels to meet regulatory and fuel quality standards. (We hold a 50% economic interest in ART, which is not consolidated in our financial statements, so ART’s sales are excluded from our sales.)
Chemical catalysts, which include hydrogenation and dehydrogenation catalyst products. These catalysts can be customized for use in a variety of petrochemical chain conversions as well as fine chemical production.
Grace Materials Technologies produces and sells specialty materials, which are either silica-based or complex organic molecules, that can be used in pharma & consumer, coatings, and chemical process applications, including as follows:
Pharma & Consumer, specialty materials used as additives, intermediates and purification aids for pharmaceuticals, nutraceuticals, toothpaste, beer, food, and cosmetic segments. Our Fine Chemicals business specializes in regulatory starting materials and intermediates, especially peptide building blocks, specialty amino acids, chiral boronic acids, and esters.
Coatings, functional additives for wood, coil, general industrial, and architectural coatings that provide surface effects and corrosion protection for metal substrates.
Chemical process, functional materials for use in plastics, rubber, tire, and metal casting, and adsorbent products for petrochemical, natural gas, and more specialized applications.
Global Scope
We operate our business on a global scale with approximately 73% of our annual 2020 sales and 75% of our first quarter sales to customers located outside the United States. We operate and/or sell to customers in over 60 countries and do business in over 30 currencies. We manage our operating segments on a global basis, to serve global markets. Currency fluctuations affect our reported results of operations, cash flows, and financial position.
Analysis of Operations
We have set forth in the table below our key operating statistics with percentage changes for the first quarter compared with the prior-year quarter. Please refer to this Analysis of Operations when reviewing this Management’s Discussion and Analysis of Financial Condition and Results of Operations. In the table we present financial information in accordance with U.S. GAAP, as well as the non-GAAP financial information described below. We believe that the non-GAAP financial information provides useful supplemental information about the performance of our businesses, improves period-to-period comparability, and provides clarity on the information our management uses to evaluate the performance of our businesses. In the table, we have provided reconciliations of these non-GAAP financial measures to the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP. The non-GAAP financial measures should not be considered as a substitute for financial measures calculated in accordance with U.S. GAAP, and the financial results calculated in accordance with U.S. GAAP and reconciliations from those results should be evaluated carefully.
We define Adjusted EBIT (a non-GAAP financial measure) to be net income attributable to W. R. Grace & Co. shareholders adjusted for interest income and expense; income taxes; costs related to legacy matters; restructuring and repositioning expenses and asset impairments; pension costs other than service and interest costs, expected returns on plan assets, and amortization of prior service costs/credits; gains and losses on sales and exits of businesses, product lines, and certain other investments; third-party acquisition-related costs and the amortization of acquired inventory fair value adjustment; gains and losses on modification or extinguishment of debt; the effects of these items on equity in earnings of unconsolidated affiliate; and certain other items that are not representative of underlying trends.
We define Adjusted EBITDA (a non-GAAP financial measure) to be Adjusted EBIT adjusted for depreciation and amortization, and depreciation and amortization included in equity in earnings of unconsolidated affiliate (collectively, Adjusted Depreciation and Amortization).
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We define Adjusted EBIT Return on Invested Capital (a non-GAAP financial measure) to be Adjusted EBIT (on a trailing four quarters basis) divided by Adjusted Invested Capital, which is defined as equity adjusted for debt; underfunded and unfunded defined benefit pension plans; liabilities related to legacy matters; cash, cash equivalents, and restricted cash; net income tax assets; and certain other assets and liabilities.
We define Adjusted Gross Margin (a non-GAAP financial measure) to be gross margin adjusted for pension-related costs included in cost of goods sold, the amortization of acquired inventory fair value adjustment, write-offs of inventory related to exits of businesses and product lines and significant manufacturing process changes, and certain other items that are not representative of underlying trends.
We define Adjusted Earnings Per Share (EPS) (a non-GAAP financial measure) to be diluted EPS adjusted for costs related to legacy matters; restructuring and repositioning expenses and asset impairments; pension costs other than service and interest costs, expected returns on plan assets, and amortization of prior service costs/credits; gains and losses on sales and exits of businesses, product lines and certain other investments; third-party acquisition-related costs and the amortization of acquired inventory fair value adjustment; gains and losses on modification or extinguishment of debt; certain other items that are not representative of underlying trends; certain discrete tax items; and income tax expense related to historical tax attributes.
We define the change in net sales on a constant currency basis (a non-GAAP financial measure) to be the period-over-period change in net sales calculated using the foreign currency exchange rates that were in effect during the previous comparable period.
“Legacy matters” include legacy (i) product, (ii) environmental, and (iii) other liabilities, relating to past activities of Grace.
We use Adjusted EBIT as a performance measure in significant business decisions and in determining certain incentive compensation. We use Adjusted EBIT as a performance measure because it provides improved period-to-period comparability for decision making and compensation purposes, and because it better measures the ongoing earnings results of our strategic and operating decisions by excluding the earnings effects of our legacy matters; restructuring and repositioning activities; certain acquisition-related items; and certain other items that are not representative of underlying trends.
We use Adjusted EBITDA, Adjusted EBIT Return on Invested Capital, Adjusted Gross Margin, and Adjusted EPS as performance measures and may use these measures in determining certain incentive compensation. We use Adjusted EBIT Return on Invested Capital in making operating and investment decisions and in balancing the growth and profitability of our operations.
We use the change in net sales on a constant currency basis as a performance measure to compare current period financial performance to historical financial performance by excluding the impact of foreign currency exchange rate fluctuations that are not representative of underlying business trends and are largely outside of our control.
Adjusted EBIT, Adjusted EBITDA, Adjusted EBIT Return on Invested Capital, Adjusted Gross Margin, Adjusted EPS, and the change in net sales on a constant currency basis are non-GAAP financial measures; do not purport to represent income measures as defined under U.S. GAAP; and should not be used as alternatives to such measures as an indicator of our performance. These measures are provided to investors and others to improve the period-to-period comparability and peer-to-peer comparability of our financial results, and to ensure that investors understand the information we use to evaluate the performance of our businesses. They distinguish the operating results of Grace’s current business base from the costs of Grace’s legacy matters; restructuring and repositioning activities; and certain other items. These measures may have material limitations due to the exclusion or inclusion of amounts that are included or excluded, respectively, in the most directly comparable measures calculated and presented in accordance with U.S. GAAP, and thus investors and others should review carefully our financial results calculated in accordance with U.S. GAAP.
Adjusted EBIT has material limitations as an operating performance measure because it excludes costs related to legacy matters, and may exclude income and expenses from restructuring, repositioning, and other activities, which historically have been material components of our net income. Adjusted EBITDA also has material limitations as an operating performance measure because it excludes the impact of depreciation and amortization expense. Our business is substantially dependent on the successful deployment of capital, and depreciation and amortization expense is a necessary element of our costs. We compensate for the limitations of
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these measurements by using these indicators together with net income as measured under U.S. GAAP to present a complete analysis of our results of operations. Adjusted EBIT and Adjusted EBITDA should be evaluated together with net income and net income attributable to Grace shareholders, measured under U.S. GAAP, for a complete understanding of our results of operations.
Analysis of Operations
(In millions, except per share amounts)
Three Months Ended March 31,
2021 2020 % Change
Net sales:
Catalysts Technologies $ 329.6  $ 308.0  7.0  %
Materials Technologies 127.1  113.5  12.0  %
Total Grace net sales $ 456.7  $ 421.5  8.4  %
Net sales by region:
North America $ 126.4  $ 120.2  5.2  %
Europe Middle East Africa 183.4  181.6  1.0  %
Asia Pacific 123.2  100.3  22.8  %
Latin America 23.7  19.4  22.2  %
Total net sales by region $ 456.7