FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS:

3 Months Ended

Mar. 31, 2013

FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS:

FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS:

4.  FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS:

Financial instruments include cash and cash equivalents, accounts receivable, accounts payable, debt instruments and derivatives. Due to their short term maturity, the carrying amount of receivables and payables approximates fair value. Cash equivalents primarily consist of highly liquid investments with original maturities of three months or less at the time of purchase and are recorded at cost, which approximates fair value. The Company has exposure to market risk from changes in interest rates and foreign currency exchange rates. As a result, certain derivative financial instruments may be used when available on a cost-effective basis to hedge the underlying economic exposure. Certain of these instruments qualify as cash flow and net investment hedges upon meeting the requisite criteria, including effectiveness of offsetting hedged exposures. Changes in the fair value of derivatives that do not qualify for hedge accounting are recognized in earnings as they occur. Derivative financial instruments are not used for trading purposes.

Qualifying Hedges

Cash Flow Hedges

Foreign currency forward contracts are utilized to hedge forecasted transactions for certain foreign currencies in the Company’s Surface Treatment segment. These contracts have been designated as foreign currency cash flow hedges and expire in December 2013. The effective portion of changes in fair value for the designated foreign currency hedges is temporarily reported in accumulated other comprehensive income and recognized in earnings when the hedged item affects earnings. The net deferred losses on foreign currency contracts for cash flow accounting are expected to be reclassified into earnings by the end of December 2013.

Effectiveness is assessed at inception of the hedge and on a quarterly basis. These assessments determine whether derivatives designated as qualifying hedges continue to be highly effective in offsetting changes in the cash flows of hedged items. Any ineffective portion of change in fair value is included in current period earnings. There was no impact of ineffectiveness on earnings during the three months ended March 31, 2013 and 2012.

Interest Rate Swaps Not Designated as Hedging Instruments

In June 2012, the Company’s Titanium Dioxide Pigments venture entered into a new facility agreement (See Note 8, “Long-Term Debt”) which required the venture to convert 50% of the term loan balances from variable to fixed interest rates for a period of two years. To comply with this requirement, the Titanium Dioxide Pigments venture entered into interest rate swaps (“New Swaps”) in July 2012 with an aggregate notional amount of €400.0 million. The New Swaps had a maturity date of September 2014. The Company had not applied hedge accounting for these interest rate swaps and had recorded the mark-to-market adjustment of these derivatives as a component of interest expense in its condensed consolidated statements of operations.

The Company had $911.0 million ($587.3 million of which was subject to a Libor floor of 1.00%) of variable-rate debt outstanding as of March 31, 2013. Including the effect of the interest rate swaps, the Company had $924.1 million ($587.3 million of which was subject to a Libor floor of 1.00%) of variable-rate debt outstanding as of December 31, 2012.

Prior to executing the new facility agreement, the Titanium Dioxide Pigments venture had entered into interest rate swaps to manage its exposure to changes in interest rates related to certain variable-rate debt. These contracts effectively converted all of the obligations under the Titanium Dioxide Pigments venture’s term loan facility to fixed rate obligations. In July 2012, these interest rate swaps were terminated and the fair market value of these swaps was transferred into the New Swaps.  As a result of the repayment of all borrowings under the facility agreement in March 2013, the Titanium Dioxide Pigments venture terminated the outstanding swaps, resulting in a payment of €3.0 million ($3.9 million based on the exchange rate in effect on the date of the payment).  See Note 8, “Long-Term Debt,” for further details of the repayment of debt.

The following table provides the fair value and balance sheet location of the Company’s derivative instruments as of March 31, 2013 and December 31, 2012:

		March 31, 2013				December 31, 2012
($ in millions)	Balance Sheet Location	Notional		Fair Value		Notional		Fair Value
Derivatives Designated as Hedging Instruments:
Foreign exchange contracts	Accrued expenses and other current liabilities	$	12.6	$	0.1	$	—	$	—
Total derivatives designated as hedging instruments				$	0.1			$	—
Derivatives Not Designated as Hedging Instruments:
Interest rate swaps	Accrued expenses and other current liabilities	$	—	$	—	$	662.9	$	3.0
	Other liabilities			—				1.8
Total derivatives not designated as hedging instruments				$	—			$	4.8
Total derivatives				$	0.1			$	4.8

All financial instruments, including derivatives, are subject to counterparty credit risk which is considered as part of the overall fair value measurement.  Counterparty credit risk is mitigated by entering into derivative contracts with only major financial institutions of investment grade quality and by limiting the amount of exposure to each financial institution. The Company has considered credit adjustments in its determination of the fair value of its derivative assets and liabilities as of March 31, 2013 and December 31, 2012, based on market participant assumptions. In addition, based on the credit evaluation of each counter-party institution as of March 31, 2013 and December 31, 2012, the Company believes the carrying values to be fully realizable. No counterparty has experienced a significant downgrade in 2013 and the condensed consolidated financial statements would not be materially impacted if any counterparties failed to perform according to the terms of its agreement. Under the terms of the agreements, posting of collateral is not required by any party whether derivatives are in an asset or liability position.

The following table provides the gains and losses reported in “Other Comprehensive Income” (“OCI”) within Equity for the three months ended March 31, 2013 and 2012:

	Amount of Gain or (Loss) Recognized in
	OCI on Derivatives and Other Financial
	Instruments (Effective Portion)
	Three months ended March 31,
($ in millions)	2013			2012
Derivatives Designated as Cash Flow Hedges:
Foreign exchange contracts	$	(0.1	)	$	0.1
Non-Derivative Debt Designated as Net Investment Hedge:
Euro-denominated debt	$	—		$	(0.3	)

The following table provides the gains and losses reported in the condensed consolidated statements of operations for the three months ended March 31, 2013 and 2012:

	Amount of Gain or (Loss)
	Recognized in Income on Derivatives					Location of Gain or (Loss)
	Three months ended March 31,					Recognized in Income on
($ in millions)	2013		2012			Derivatives
Derivatives Not Designated as Hedging Instruments:
Interest rate swaps	$	0.9	$	(0.4	)	Interest expense, net
Total derivatives	$	0.9	$	(0.4	)

The Company follows a fair value measurement hierarchy to measure assets and liabilities. As of March 31, 2013 and December 31, 2012, the assets and liabilities measured at fair value on a recurring basis are derivatives, cash equivalents and government debt securities. In addition, the Company measures its pension plan assets at fair value (see Item 8. Financial Statements and Supplementary Data - Note 14, “Employee Benefit Plans” in the Company’s 2012 Annual Report on Form 10-K for further details). The Company’s financial assets and liabilities are measured using inputs from the three levels of the fair value hierarchy as follows:

Level 1 — Inputs are unadjusted quoted market prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. The fair values of cash equivalents, marketable equity securities and government securities are based on unadjusted quoted market prices from various financial information service providers and securities exchanges.

Level 2 — Inputs are directly or indirectly observable, which include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and inputs that are derived principally from or corroborated by observable market data by correlation or other means. The fair values of derivatives are based on quoted market prices from various banks for similar instruments. The valuation of these instruments reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including forward curves.

Level 3 — Inputs are unobservable inputs that are used to measure fair value to the extent observable inputs are not available. The Company does not have any recurring financial assets or liabilities that are recorded on its condensed consolidated balance sheets as of March 31, 2013 and December 31, 2012 that are classified as Level 3 inputs.

In accordance with the fair value hierarchy, the following table provides the fair value of the Company’s recurring financial assets and liabilities that are measured at fair value in the condensed consolidated balance sheets as of March 31, 2013 and December 31, 2012:

	As of March 31, 2013						As of December 31, 2012
($ in millions)	Total		Level 1		Level 2		Total		Level 1		Level 2
Assets
Cash equivalents	$	325.2	$	325.2	$	—	$	1,110.1	$	1,110.1	$	—
Government securities	0.3		0.3		—		0.3		0.3		—
Marketable equity securities	—		—		—		2.2		2.2		—
Total assets at fair value	$	325.5	$	325.5	$	—	$	1,112.6	$	1,112.6	$	—
Liabilities
Foreign exchange contracts	$	0.1	$	—	$	0.1	$	—	$	—	$	—
Interest rate swaps	—		—		—		4.8		—		4.8
Total liabilities at fair value	$	0.1	$	—	$	0.1	$	4.8	$	—	$	4.8

Note Receivable

The Company has a non-interest bearing note receivable from its former titanium dioxide pigments venture partner that is due in August 2028 with a carrying value of $6.4 million and $6.5 million in the condensed consolidated balance sheet as of March 31, 2013 and December 31, 2012, respectively. The fair value of the note receivable was approximately $13.5 million and $13.8 million at March 31, 2013 and December 31, 2012, respectively, and was categorized as Level 3 in the fair value hierarchy. The fair value was determined based on an internally developed valuation that uses current interest rates in developing a present value of the receivable.

Debt

The carrying value of the Company’s term loans under the senior secured credit facilities approximates fair value as they bear interest based on prevailing variable market rates currently available. As a result, the Company categorizes these term loans as Level 2 in the fair value hierarchy.

As of March 31, 2013 and December 31, 2012, the Company estimated the fair value of its unsecured Senior Notes due in 2020 (“2020 Notes”) was $1,287.5 million and $1,300.8 million, respectively, based on quoted market values in active markets from financial service providers. The Company’s principal carrying amount of the 2020 Notes was $1,250.0 million at March 31, 2013 and December 31, 2012. The Company categorizes these 2020 Notes as Level 1 in the fair value hierarchy.