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Fair Value Measurements and Financial Instruments
9 Months Ended
Sep. 30, 2015
Fair Value Disclosures [Abstract]  
Fair Value Measurements and Financial Instruments

Note 16—Fair value measurements and financial instruments:

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)

 

Asset (liability)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current

$

2.7

 

 

$

1.7

 

 

$

1.0

 

 

$

 

Noncurrent

 

255.6

 

 

 

2.5

 

 

 

3.1

 

 

 

250.0

 

Currency forward contracts

 

(4.2

)

 

 

(4.2

)

 

 

 

 

 

 

September 30, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current

$

1.7

 

 

$

 

 

$

1.7

 

 

$

 

Noncurrent

 

256.0

 

 

 

3.6

 

 

 

2.4

 

 

 

250.0

 

Currency forward contracts

 

(2.7

)

 

 

(2.7

)

 

 

 

 

 

 

Interest rate swap

 

(5.7

)

 

 

 

 

 

(5.7

)

 

 

 

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

Certain of our Chemicals Segment’s sales generated by its non-U.S. operations are denominated in U.S. dollars. Our Chemicals Segment periodically uses currency forward contracts to manage a very nominal portion of currency exchange rate risk associated with trade receivables denominated in a currency other than the holder’s functional currency or similar exchange rate risk associated with future sales.  Derivatives used to hedge forecasted transactions and specific cash flows associated with financial assets and liabilities denominated in currencies other than the U.S. dollar and which meet the criteria for hedge accounting are designated as cash flow hedges. Consequently, the effective portion of gains and losses is deferred as a component of accumulated other comprehensive income (loss) and is recognized in earnings at the time the hedged item affects earnings. Contracts that do not meet the criteria for hedge accounting are marked-to-market at each balance sheet date with any resulting gain or loss recognized in income currently as part of net foreign currency transaction gains and losses.  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, 2015, our Chemicals Segment had currency forward contracts to exchange:  

 

·

an aggregate $8.1 million for an equivalent value of Norwegian kroner at exchange rates ranging from krone 7.10 to krone 7.11 per U.S. dollar. These contracts with DnB Nor Bank ASA mature at a rate of $2.7 million per month from October 2015 to December 2015;

 

·

an aggregate €5.0 million for an equivalent value of Norwegian kroner at an exchange rate of krone 8.56 per euro.  This contract with DnB Nor Bank ASA matures in December 2015; and

 

·

an aggregate of $25.6 million for an equivalent value of Canadian dollar at an exchange rate of Cdn. $1.29 per U.S. dollar.  These contracts with Wells Fargo Bank, N.A. mature from October 2015 through July 2016 at a rate of $2.6 million per month.

The estimated aggregate fair value of our currency forward contracts at September 30, 2015 was a $2.7 million net liability which is recognized as part of accounts payable and accrued liabilities in our Condensed Consolidated Balance Sheet. We have also recognized a corresponding $2.7 million currency transaction loss in our Condensed Consolidated Statement of Operations during the quarter ended September 30, 2015. Our Chemicals Segment is not currently using hedge accounting for our outstanding currency forward contracts at September 30, 2015, and we did not use hedge accounting for any of such contracts we previously held in 2014.   Accordingly, changes in the aggregate fair value of currency forward contracts we hold are recognized as a foreign currency transaction gain or loss.

Interest rate swap contract - As part of our interest rate risk management strategy, in August 2015 Kronos entered into a pay- fixed/receive-variable interest rate swap contract with Wells Fargo Bank, N.A. to minimize its exposure to volatility in LIBOR as it relates to Kronos' forecasted outstanding variable-rate indebtedness.  Under this interest rate swap, Kronos will pay a fixed rate of 2.016% per annum, payable quarterly, and receive a variable rate of three-month LIBOR (subject to a 1.00% floor), also payable quarterly, in each case based on the notional amount of the swap then outstanding.  The effective date of the swap contract was September 30, 2015.  The notional amount of the swap started at $344.75 million and declines by $875,000 each quarter beginning December 31, 2015, with a final maturity of the swap contract in February 2020.  This swap contract has been designated as a cash flow hedge and qualified as an effective hedge at inception under ASC Topic 815.  The effective portion of changes in fair value on this interest rate swap is recorded as a component of other comprehensive income (loss), net of deferred income taxes.  Commencing in the fourth quarter of 2015, as interest expense accrues on LIBOR-based variable rate debt, we will classify the amount we pay under the pay-fixed leg of the swap and the amount we receive under the receive-variable leg of the swap as part of interest expense, with the net effect that the amount of interest expense we recognize on our LIBOR-based variable rate debt each quarter, as it relates to the notional amount of the swap outstanding each quarter, will be based on a fixed rate of 2.016% per annum in lieu of the level of LIBOR prevailing during the quarter.  The amount of hedge ineffectiveness, if any, related to the swap will be recorded in earnings (also as part of interest expense).  As of September 30, 2015, there were no gains or losses recognized in earnings in the current period representing hedge ineffectiveness with respect to the interest rate swap.

During the period ended September 30, 2015, the pretax amount recognized in other comprehensive income (loss) related to the interest rate swap contract was a $5.7 million loss.  During the same period, no amounts were reclassified from accumulated other comprehensive income (loss) into earnings.  During the next twelve months the amount of the September 30, 2015 accumulated other comprehensive income balance that is expected to be reclassified to earnings is $3.5 million pre-tax.

The fair value of the interest rate swap contract at September 30, 2015 was a liability of $5.7 million and is reflected in the Condensed Consolidated Balance Sheet as part of accounts payable and accrued liabilities of $3.5 million and other noncurrent liabilities of $2.2 million.  See Notes 7 and 8.  The fair value of the interest rate swap was estimated by a third party using inputs that are observable or that can be corroborated by observable market data such as interest rate yield curves, and therefore, is classified within Level 2 of the valuation hierarchy.

 

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

 

 

December 31, 2014

 

 

September 30, 2015

 

 

Carrying
amount

 

 

Fair
value

 

 

Carrying
amount

 

 

Fair
value

 

 

(In millions)

 

Cash, cash equivalents and restricted cash equivalents

$

280.3

 

 

$

280.3

 

 

$

257.7

 

 

$

257.7

 

Deferred payment obligation

$

8.5

 

 

$

8.5

 

 

$

8.7

 

 

$

8.7

 

Long-term debt (excluding capitalized leases):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Kronos term loan

$

345.9

 

 

$

341.5

 

 

$

343.5

 

 

$

344.3

 

Snake River Sugar Company fixed rate loans

 

250.0

 

 

 

250.0

 

 

 

250.0

 

 

 

250.0

 

WCS fixed rate debt

 

67.1

 

 

 

67.1

 

 

 

66.0

 

 

 

66.0

 

Valhi credit facility with Contran

 

223.7

 

 

 

223.7

 

 

 

248.6

 

 

 

248.6

 

Tremont promissory note payable

 

17.4

 

 

 

17.4

 

 

 

17.3

 

 

 

17.3

 

BMI bank note payable

 

10.3

 

 

 

10.3

 

 

 

9.6

 

 

 

9.6

 

LandWell note payable to the City of Henderson

 

3.1

 

 

 

3.1

 

 

 

3.1

 

 

 

3.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2014 and September 30, 2015, the estimated market price of Kronos’ term loan was $983.1 per $1,000 principal amount and $998.75 per $1,000 principal amount, respectively.   The fair value of Kronos’ term loan is based on quoted market prices; however, these quoted market prices represent Level 2 inputs because the markets in which the term loan trades 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 value 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.