Fair Value Measurements

3 Months Ended

May 04, 2013

Fair Value Measurements

NOTE 8.  Fair Value Measurements

Our financial assets and liabilities are valued at the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date.  We determine fair value based on assumptions that market participants would use in pricing an asset or liability.  As a basis for considering such assumptions, we prioritize the inputs used in measuring fair value into a three-tier fair value hierarchy, which are as follows:

Level 1: Observable inputs such as quoted prices in active markets (the fair value hierarchy gives the highest priority to Level 1 inputs);

Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

Level 3: Unobservable inputs in which there is little or no market data and require the reporting entity to develop its own assumptions (the fair value hierarchy gives the lowest priority to Level 3 inputs).

Financial assets and liabilities measured at fair value on a recurring basis as of the end of the first quarter of fiscal 2013 consisted of the following (in thousands):

	Balance at May 4, 2013		Quoted Prices in Active Markets for Identical Items (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Money market funds (cash equivalent)	$	44,374	$	44,374	$	-	$	-
Municipal bonds (short-term)		4,125		-		4,125		-
Auction rate security (long-term)		1,684		-		-		1,684
Total assets	$	50,183	$	44,374	$	4,125	$	1,684
Liabilities:
Deferred compensation plan (long-term)	$	6,089	$	-	$	6,089	$	-

The fair value of our short-term municipal bonds is based on market prices for similar assets from third-party pricing services using observable market information.  The money market funds fair value is determined based on quoted prices in active markets.  Due to the lack of availability of observable market quotes on our auction rate security, the fair market value of this security has been determined based on an internal valuation model which incorporates primarily management’s own current assumptions.  The model values the securities by estimating the present value of future principal and interest payments discounted at rates considered to reflect current market conditions.  Significant assumptions used in the valuation include those made about the liquidity horizon which we currently estimate to be approximately five years and the net trading yield rate which we currently estimate to be approximately 5%.  The fair value measurement of our auction rate security has an inverse relationship with our liquidity horizon assumption and changes in this assumption may cause the fair value to be significantly impacted.  Other factors that impact our valuation include changes to credit ratings of our auction rate security as well as to the underlying assets supporting these securities and the ongoing strength and quality of the credit markets.  Our valuation is subject to uncertainties that are difficult to predict and could change significantly based on future market conditions.  The deferred compensation plan liability represents the amount that would be earned by participants if the funds were invested in securities traded in active markets.  The fair value of the deferred compensation plan liability is determined based on quoted prices of similar assets that are traded in observable markets.

The activity of our auction rate security through the first quarter of fiscal 2013, whose fair value was measured using Level 3 inputs, is summarized below (in thousands):

	Non-current
Carrying value as of  February 2, 2013	$	1,730
Redemptions1		(50	)
Total gains
Included in earnings		-
Included in other comprehensive income 2		4
Carrying value as of  May 4, 2013	$	1,684

1 Redemptions of $50,000 occurred during the first quarter of fiscal 2013.

2 Unrealized losses of $6,000 and a recovery in fair value of $10,000 occurred during the first quarter of fiscal 2013.