Financial Instruments

9 Months Ended

Sep. 30, 2011

Financial Instruments

Financial Instruments

Note 15 – Financial instruments:

The following table summarizes the valuation of our marketable securities and financial instruments recorded on a fair value basis as of:

	Fair Value Measurements
	Total			Quoted Prices in Active Markets (Level 1)			Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In millions)
December 31, 2010:
Marketable securities:
Current	$	1.7		$	—		$	1.7	$	—
Noncurrent		340.4			87.2			3.2		250.0
Currency forward contracts		6.3			6.3			—		—
September 30, 2011:
Marketable securities:
Current	$	45.7		$	44.5		$	1.2	$	—
Noncurrent		354.6			97.7			6.9		250.0
Currency forward contracts		(2.8	)		(2.8	)		—		—

See Note 3 for information on how we determine fair value of our noncurrent marketable securities.

We periodically use currency forward contracts to manage a nominal portion of currency exchange rate market risk associated with trade receivables, or similar exchange rate risk associated with future sales, denominated in a currency other than the holder's functional currency. These contracts generally relate to our Chemicals and Component Products operations. We have not entered into these contracts for trading or speculative purposes in the past, nor do we currently anticipate entering into such contracts for trading or speculative purposes in the future. Some of the currency forward contracts we enter into meet the criteria for hedge accounting under GAAP and are designated as cash flow hedges. For these currency forward contracts, gains and losses representing the effective portion of our hedges are deferred as a component of accumulated other comprehensive income, and are subsequently recognized in earnings at the time the hedged item affects earnings. For the currency forward contracts we enter into which do not meet the criteria for hedge accounting, we mark-to-market the estimated fair value of such contracts at each balance sheet date, with any resulting gain or loss recognized in income currently as part of net currency transactions. The fair value of the currency forward contracts is determined using Level 1 inputs based on the currency spot forward rates quoted by banks or currency dealers.

At September 30, 2011, our Chemicals Segment had currency forward contracts to exchange an aggregate of $64.5 million for an equivalent value of Canadian dollars at exchange rates ranging from Cdn. $.9969 to Cdn. $1.0524 per U.S. dollar. These contracts with Wells Fargo Bank, National Association, mature from October 2011 through December 2012 at a rate of $4 million to $5.5 million per month, subject to early redemption provisions at our option. The estimated fair value of these currency forward contracts at September 30, 2011 was a $2.1 million net liability, which is included in our Condensed Consolidated Balance Sheet as part of Accounts Payable and Accrued Liabilities. There is also a corresponding $2.1 million currency transaction loss in our Condensed Consolidated Statement of Income for the nine months ended September 30, 2011. We are not currently using hedge accounting for our Chemicals Segment's outstanding currency forward contracts at September 30, 2011 and we did not use hedge accounting for any of such contracts we previously held in 2010 and 2011.

At September 30, 2011, our Component Products Segment held a series of contracts to exchange an aggregate of U.S. $22.4 million for an equivalent value of Canadian dollars at exchange rates ranging from Cdn. $1.03 to Cdn. $0.99 per U.S. dollar. These contracts qualified for hedge accounting and mature through December 2012. The exchange rate was $1.03 per U.S. dollar at September 30, 2011. The estimated fair value of the contracts was a liability of approximately $.7 million at September 30, 2011. Our Component Products Segment had no currency forward contracts outstanding at December 31, 2010.

The following table presents the financial instruments that are not carried at fair value but which require fair value disclosure:

	December 31, 2010				September 30, 2011
	Carrying amount		Fair value		Carrying amount		Fair value
	(In millions)
Cash, cash equivalents and restricted cash equivalents	$	334.8	$	334.8	$	134.9	$	134.9
Promissory note receivable		15.0		15.0		15.0		15.0
Long-term debt (excluding capitalized leases):
Publicly-traded fixed rate debt – KII Senior Secured Notes	$	532.8	$	536.0	$	397.6	$	393.6
Snake River Sugar Company fixed rate loans		250.0		250.0		250.0		250.0
WCS fixed rate debt		87.4		87.4		87.1		87.1
Variable rate bank credit facilities		3.0		3.0		4.8		4.8
CompX variable rate promissory note		42.2		42.2		37.5		37.5
NL variable rate promissory note		18.0		18.0		18.0		18.0
Noncontrolling interest in:
Kronos common stock	$	208.7	$	482.0	$	233.6	$	364.9
NL common stock		56.8		92.0		80.9		103.7
CompX common stock		10.9		18.6		11.0		20.7
Valhi stockholders' equity	$	541.8	$	2,509.2	$	648.4	$	6,123.2

The fair value of our publicly-traded marketable securities, noncontrolling interest in NL, Kronos and CompX and our common stockholders' equity are all based upon quoted market prices, Level 1 inputs at each balance sheet date. The fair value of our KII Senior Secured 6.5% Notes are also based on quoted market prices at each balance sheet date; however, these quoted market prices represent Level 2 inputs because the markets in which the Notes trade are not active. At December 31, 2010 and September 30, 2011, the estimated market price of the 6.5% Notes was approximately €1,004 and €988, respectively, per €1,000 principal amount. The fair value of our fixed-rate nonrecourse loans from Snake River Sugar Company is based upon the $250 million redemption price of our investment in Amalgamated, which collateralizes the nonrecourse loans (this is a Level 3 input). Fair values of the variable interest rate note receivable and variable interest debt and other fixed-rate debt are deemed to approximate book value. Due to their near-term maturities, the carrying amounts of accounts receivable and accounts payable are considered equivalent to fair value. See Notes 4 and 7.