Financial instruments and fair value measurements

9 Months Ended

Sep. 30, 2012

Financial instruments and fair value measurements

Note 15 - Financial instruments and fair value measurements:

The following table summarizes the valuation of our marketable securities, financial instruments and other items 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, 2011:
Marketable securities:
Current	$	22.5		$	20.9		$	1.6	$	—
Noncurrent		354.1			100.3			3.8		250.0
Currency forward contracts		(.8	)		(.8	)		—		—
Contingent consideration		.7			—			—		.7
September 30, 2012:
Marketable securities:
Current	$	.8		$	—		$	.8	$	—
Noncurrent		338.9			83.7			5.2		250.0
Currency forward contracts		2.2			2.2			—		—

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, 2012, our Chemicals Segment had currency forward contracts to exchange:

• an aggregate of $12.0 million for an equivalent value of Canadian dollars at exchange rates ranging from Cdn. $1.0 to Cdn. $1.03 per U.S. dollar. These contracts with Wells Fargo Bank, N.A., mature from October 2012 through December 2012 at a rate of $4.0 million per month, subject to early redemption provisions at our option; and

• an aggregate $30.0 million for an equivalent value of Norwegian kroner at exchange rates ranging from kroner 5.99 to kroner 6.13 per U.S. dollar. These contracts with DnB Nor Bank ASA mature at a rate of $5.0 million per month in certain months from November 2012 through May 2013.

The estimated fair value of our Chemical Segment’s currency forward contracts at September 30, 2012 was a $2.0 million net asset, of which $2.0 million is recognized as part of accounts and other receivables. There is also a corresponding $2.0 million currency transaction gain recognized in our Condensed Consolidated Statement of Income. Our Chemicals Segment is not currently using hedge accounting for our outstanding currency forward contracts at September 30, 2012, and it did not use hedge accounting for any of such contracts it previously held in 2011 or 2012.

At September 30, 2012, our Component Products Segment held a series of contracts to exchange an aggregate of U.S. $4.2 million for an equivalent value of Canadian dollars at an exchange rate of Cdn. $1.03 per U.S. dollar. These contracts qualified for hedge accounting and mature through December 2012. The exchange rate was Cdn. $0.98 per U.S. dollar at September 30, 2012. The estimated fair value of the contracts was an asset of approximately $.2 million at September 30, 2012.

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

	December 31, 2011				September 30, 2012
	Carrying amount		Fair value		Carrying amount		Fair value
	(In millions)
Cash, cash equivalents and restricted cash equivalents	$	109.3	$	109.3	$	141.8	$	141.8
Note receivable from Contran		11.2		11.2		11.2		11.2
Long-term debt (excluding capitalized leases):
Publicly-traded fixed rate debt - KII Senior Secured Notes	$	360.6	$	362.6	$	—	$	—
Kronos term loan		—		—		389.3		400.4
Snake River Sugar Company fixed rate loans		250.0		250.0		250.0		250.0
WCS fixed rate debt		82.8		82.8		82.1		82.1
Kronos variable rate bank credit facility		—		—		45.2		45.2
CompX variable rate promissory note		22.2		22.2		20.5		20.5
NL variable rate promissory note		9.0		9.0		5.1		5.1
CompX variable rate bank credit facility		2.0		2.0		2.0		2.0
Noncontrolling interest in:
Kronos common stock	$	240.2	$	409.4	$	277.5	$	339.1
NL common stock		84.6		107.3		78.6		95.1
CompX common stock		11.0		23.9		11.4		24.8
Valhi stockholders’ equity	$	657.2	$	6,835.3	$	775.6	$	4,137.2

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. At December 31, 2011, the estimated market price of KII 6.5% Notes was approximately €1,004 per €1,000 principal amount. At September 30, 2012, the estimated market price of Kronos’ term loan was $1,014 per $1,000 principal amount. The fair value of the 6.5% Notes and term loan was based on quoted market prices; however, these quoted market prices represent Level 2 inputs because the markets in which the Notes and term loan trade were not active. 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, which represents Level 2 inputs. 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.