Fair Value Measurements

3 Months Ended

Mar. 31, 2013

Fair Value Measurements

Fair Value Measurements

(5) Fair Value Measurements

The Company measures certain financial instruments, including cash and cash equivalents, such as money market funds, at fair value.  The fair values were determined based on a three-tier valuation hierarchy for disclosure of significant inputs.  These hierarchical tiers are defined as follows:

Level 1 — inputs are unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2 — inputs are other than quoted prices in active markets that are either directly or indirectly observable through market corroboration.

Level 3 — inputs are unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions based on the best information available in the circumstances.

The carrying amount of cash and cash equivalents approximates fair value due to the short-term nature of these items. The carrying value of receivables, payables and other amounts arising out of normal contract activities, including retainage, which may be settled beyond one year, is estimated to approximate fair value.  Of the Company’s long-term debt, the fair values of the fixed rate senior unsecured notes as of March 31, 2013 and December 31, 2012 were $315.0 million and $309.8 million, respectively, compared to the carrying value of $298.3 million at both March 31, 2013 and December 31, 2012.  The fair value of the senior unsecured notes was estimated using Level 1 inputs based on market quotations including broker quotes or interest rates for the same or similar financial instruments at March 31, 2013 and December 31, 2012.  The carrying values of the remaining balance of the Company’s long-term debt of $506.1 million and $438.8 million at March 31, 2013 and December 31, 2012, respectively, were estimated to approximate their fair values.

The following is a summary of financial statement items carried at estimated fair values measured on a recurring basis as of the dates presented:

At March 31, 2013

			Fair Value Measurements Using
					Significant
			Quoted prices		other		Significant
	Total		in active		observable		unobservable
	Carrying		markets		inputs		inputs
	Value		(Level 1)		(Level 2)		(Level 3)
	(in thousands)
Assets:
Cash and cash equivalents (1)	$	132,318	$	132,318	$	—	$	—
Restricted cash (1)	45,231		45,231		—		—
Short-term investments (2)	3,028		799		2,229		—
Investments in lieu of retainage (3)	21,196		8,705		12,491		—
Long-term investments - auction rate securities (4)	46,283		—		—		46,283
Total	$	248,056	$	187,053	$	14,720	$	46,283
Liabilities:
Interest rate swap contract (5)	$	1,643	$	—	$	1,643	$	—
Contingent Consideration (6)	44,004		—		—		44,004
	45,647		$	—	$	1,643	$	44,004

At December 31, 2012

			Fair Value Measurements Using
					Significant
			Quoted prices		other		Significant
	Total		in active		observable		unobservable
	Carrying		markets		inputs		inputs
	Value		(Level 1)		(Level 2)		(Level 3)
	(in thousands)
Assets:
Cash and cash equivalents (1)	$	168,056	$	168,056	$	—	$	—
Restricted cash (1)	38,717		38,717		—		—
Short-term investments (2)	2,679		—		2,679		—
Investments in lieu of retainage (3)	21,934		10,553		11,381		—
Long-term investments - auction rate securities (4)	46,283		—		—		46,283
Total	$	277,669	$	217,326	$	14,060	$	46,283
Liabilities:
Interest rate swap contract (5)	$	1,923	$	—	$	1,923	$	—
Contingent consideration (6)	42,624		—		—		42,624
	$	44,547	$	—	$	1,923	$	42,624

(1) Cash, cash equivalents and restricted cash consist primarily of money market funds with original maturity dates of three months or less, for which fair value is determined through quoted market prices.

(2) Short-term investments are classified as other current assets and are comprised of U.S. Treasury Notes and municipal bonds, the majority of which are rated Aa2 or better.  The fair values of the municipal bonds are obtained from readily-available pricing sources for comparable instruments, and as such, the Company has classified these assets as Level 2.

(3) Investments in lieu of retainage are classified as account receivables, including retainage and are comprised of U.S. Treasury Notes and other municipal bonds, the majority of which are rated Aa3 or better.  The fair values of the U.S. Treasury Notes and municipal bonds are obtained from readily-available pricing sources for comparable instruments, and as such, the Company has classified these assets as Level 2.

(4) At both March 31, 2013 and December 31, 2012 the Company had $46.3 million invested in auction rate securities (“ARS”) which the Company considers as available-for-sale long-term investments.  The long-term investments in ARS held by the Company at both March 31, 2013 and December 31, 2012 are in securities collateralized by student loan portfolios.  At both March 31, 2013 and December 31, 2012, most of the Company’s ARS were rated AA+.

(5) As discussed in Note 10 — Financial Commitments, the Company entered into a swap agreement with Bank of America, N.A. to establish a long-term interest rate for its $200 million five-year term loan.  The swap agreement became effective for the term loan principal balance outstanding at January 31, 2012 and will remain effective through the maturity date of the term loan.  The Company values the interest rate swap liability utilizing a discounted cash flow model that takes into consideration forward interest rates observable in the market and the counterparty’s credit risk.  This liability is classified as a component of other long-term liabilities.

(6) The liabilities listed as of March 31, 2013 and December 31, 2012 above represent the contingent consideration for the Company’s acquisitions in 2011 for which the measurement periods for purchase price analyses for the acquisitions have concluded.

The Company did not have any transfers between Levels 1 and 2 of financial assets or liabilities that are fair valued on a recurring basis during the three months ended March 31, 2013 and 2012.

The following is a summary of changes in Level 3 assets measured at fair value on a recurring basis during the three months ended March 31, 2013 and 2012:

	Auction Rate
	Securities
	(in thousands)
Balance at December 31, 2012	$	46,283
Purchases	—
Settlements	—
Realized loss included in other income (expense), net	—
Reversal of pretax impairment charges included in accumulated other comprehensive income (loss)	—
Balance at March 31, 2013	$	46,283

	Auction Rate
	Securities
	(in thousands)
Balance at December 31, 2011	$	62,311
Purchases	—
Settlements	(16,553		)
Realized loss included in other income (expense), net	(2,699		)
Reversal of pretax impairment charges included in accumulated other comprehensive income (loss)	3,224
Balance at March 31, 2012	$	46,283

At both March 31, 2013 and December 31, 2012, the Company had $46.3 million invested in auction rate securities (“ARS”) classified as available-for-sale.  All of the ARS are securities collateralized by student loan portfolios guaranteed by the United States government.  At both March 31, 2013 and December 31, 2012, most of the Company’s ARS were rated AA+.

The Company has classified its ARS investment as long-term investments due to the uncertainty in the timing of future ARS calls and the absence of an active market for government-backed student loans.  The Company expects that it will take in excess of twelve months before the ARS can be refinanced or sold.

During the three months ended March 31, 2012, the Company sold one ARS at auction for its full par value and two ARS in a secondary market. The settlement of the three securities resulted in a realized loss included in other income (expense), net of $2.7 million.

The Company performs a fair market value assessment of its ARS on a quarterly basis. To estimate fair value, the Company utilizes an income approach valuation model, with consideration given to market-based valuation inputs. The model considers, among other items, the following inputs: (i) the underlying structure of each security; (ii) the present value of future principal and interest payments discounted at rates considered to reflect current market conditions (discount rates range from 3% to 7% for investment grade securities); (iii) consideration of the probabilities of default or repurchase at par for each period (term periods range from 6 to 8 years); (iv) prices from recent comparable transactions; and (v) other third party pricing information.

The inputs and the Company’s analysis consider: (i) contractual terms of the ARS instruments; (ii) government-backed guarantees, if any; (iii) credit ratings on the ARS; (iv) current interest rates on the ARS and other market interest rate data; (v) trade data available, including trade data from secondary markets, for the Company’s ARS or similar ARS; (vi) recovery rates for any non-government guaranteed assets; (vii) historical transactions of the Company’s ARS being called at par; (viii) refunding initiatives of ARS; and (ix) risk of downgrade and default. Current market conditions, including repayment status of student loans, credit market risk, market liquidity and macro-economic influences are reflected in these inputs.

On a quarterly basis, the Company also assesses the recoverability of the ARS balance by reviewing: (i) the regularity and timely payment of interest on the securities; (ii) the probabilities of default or repurchase at par; (iii) the risk of loss of principal from government-backed versus non-government-backed securities; and (iv) the prioritization of the Company’s tranche of securities within the investment in case of default. The potential impact of any principal loss is included in the valuation model.

When the Company’s analysis indicates an impairment of a security, several factors are considered to determine the proper classification of the charge including: (i) any requirement or intent to sell the security; (ii) failure of the issuer to pay interest or principal; (iii) volatility of fair value; (iv) changes to the ratings of the security; (v) adverse conditions specific to the security or market; (vi) expected defaults; and (vii) length of time and extent that fair value has been less than the cost basis. The accumulation of this data is used to conclude if a credit loss exists for the specific security, and then to determine the classification of the impairment charge as temporary or other-than-temporary.

Based on the fair value assessment performed as of March 31, 2013, the Company does not believe that any change to the carrying value of the ARS is appropriate as the carrying value is within the range of fair market values.

The following is a summary of changes in Level 3 liabilities measured at fair value on a recurring basis during the three months ended March 31, 2013 and 2012:

	Contingent
	Consideration
	(in thousands)
Balance at December 31, 2012	$	42,624
Fair value adjustments included in other income (expense), net	1,380
Balance at March 31, 2013	$	44,004

	Contingent
	Consideration
	(in thousands)
Balance at December 31, 2011	$	51,555
Fair value adjustments included in other income (expense), net	142
Balance at March 31, 2012	$	51,697

The liabilities listed above represent the contingent consideration for the acquisitions in 2011 for which the measurement periods for purchase price analyses have concluded.

The fair values of the contingent consideration were estimated using an income approach based on the cash flows that the acquired entity is expected to generate in the future. This approach requires management to project revenues, operating expenses, working capital investment, capital spending and cash flows for the reporting unit over a multi-year period, as well as determine the weighted-average cost of capital to be used as a discount rate (weighted-average cost of capital inputs have ranged from 14-18%).