Fair Value Measurements

6 Months Ended

Jun. 30, 2011

Fair Value Measurements

Note 2 –Fair Value Measurements

The accounting guidance for fair value measurements establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value.

·   Level 1 – Quoted prices in active markets for identical assets or liabilities.

·   Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

·   Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Assets measured at fair value on a recurring basis during the period, categorized by the level of inputs used in the valuation, include:

(Dollars in thousands)	Carrying amount as of June 30, 2011		Level 1		Level 2		Level 3
Auction rate securities	$	30,477	$	-	$	-	$	30,477
Foreign currency option contracts	$	1,729	$	-	$	1,729	$	-

Current accounting guidance requires that an other-than-temporary impairment must be recognized in earnings for a security in an unrealized loss position when an entity either (a) has the intent to sell the security or (b) more likely than not will be required to sell the security before its anticipated recovery.  Prior to the adoption of this guidance, we were required to record an other-than-temporary impairment for a security in an unrealized loss position unless we could assert that we had both the intent and ability to hold the security for a period of time sufficient to allow for a recovery of its cost basis.

When an other-than-temporary impairment of a security has occurred, the amount of the other-than-temporary impairment recognized in earnings depends on whether we intend to sell the security or more likely than not will be required to sell the security before recovery of its cost basis. If we do not intend to sell the security and it is not more likely than not that we will be required to sell the security before the recovery of its cost basis, the other-than-temporary loss should be separated into the amount representing the credit loss and the amount related to all other factors.  The amount representing the credit loss is recognized in earnings, and as long as the factors above are not met, the remaining amount is recorded in other comprehensive income.

Auction Rate Securities

We have historically classified our auction rate securities as available-for-sale and recorded them at fair value as determined in the active market at the time.  However, due to events in the credit markets, the auctions failed during the first quarter of 2008 for the auction rate securities that we held at the end of the first quarter of 2008, and all of our auction rate securities have been in a loss position since that time.  Accordingly, the securities changed from a Level 1 valuation to a Level 3 valuation.

Through the end of the second quarter of 2011, approximately $20.8 million of auction rate securities in total have been redeemed at par value, including approximately $4.0 million in the first six months of 2011.  As of June 30, 2011, the par value of our remaining auction rate securities was approximately $33.6 million, which was comprised 96% of student loan-backed auction rate securities and 4% of municipality-backed auction rate securities.  We performed a fair value assessment of these securities based on a discounted cash flow model, utilizing various assumptions that included estimated interest rates, probabilities of successful auctions, the timing of cash flows, and the quality and level of collateral of the securities.  These inputs were chosen based on our current understanding of the expectations of the market and are consistent with the assumptions utilized during our assessment of these securities at year-end 2010.  This analysis resulted in an insignificant change in the fair value of our auction rate securities in the second quarter of 2011 and a total impairment of approximately $3.1 million overall on our current portfolio.

We have concluded that the impairment on the auction rate securities is other-than-temporary and should be separated into two amounts, one amount representing a credit loss and one amount representing an impairment due to all other factors.  The credit loss is primarily based on the underlying ratings of the securities.  As described above, we have determined that the amount representing the credit loss on our auction rate securities should be recorded in earnings, while the remaining impairment amount should be recorded in other comprehensive income (loss) in the equity section of our condensed consolidated statements of financial position.  We do not have the intent to sell the impaired securities, nor do we believe that it is more likely than not that we will be required to sell these securities before the recovery of their cost basis.  In the second quarter of 2011, we contracted to redeem $4.0 million of auction rate securities at 92.6% of par value, which was one tranche of our auction rate securities.  The cash received, subsequent to June 30, 2011, was approximately $3.7 million.

Additionally, due to our belief that it may take over twelve months for the auction rate securities market to recover, these securities are classified as long-term assets, except for those that are scheduled to be redeemed within the next twelve months, which are classified as short-term investments.  As of the second quarter we had approximately $3.7 million of auction rate securities classified as short-term investments.  These were subsequently redeemed on July 18, 2011.  The securities that we hold have maturities ranging from 21 to 36 years.

The reconciliation of our assets measured at fair value on a recurring basis using unobservable inputs (Level 3) is as follows:

(Dollars in thousands)	Auction Rate Securities
Balance at December 31, 2010	$	33,778
Redeemed at par		(4,000	)
Reported in other comprehensive income		667
Reported in earnings		32
Balance at June 30, 2011	$	30,477

A roll-forward of credit losses recognized in earnings from the date of the first other-than-temporary impairment, pertaining to the auction rate securities held by us, is as follows:

(Dollars in thousands)	Credit Losses
Balance at December 31, 2010	$	917
Additional credit losses		39
Reduction in credit losses due to redemptions		(71	)
Balance at June 30, 2011	$	885

These securities currently earn interest at rates ranging from 0.35% to 0.65%.  Upon the failure of these securities at auction, a penalty interest rate is triggered.  Since the securities we hold are investment-grade securities, the penalty rates are market-based, and therefore the aggregate interest rate that we earned has declined to 1% to 2% from a historical rate of 3% to 7% due to reductions in the referenced interest rates by the Federal government.

Foreign Currency Option Derivatives

As further explained below in Note 3 “Hedging Transactions and Derivative Financial Instruments”, we are exposed to certain risks relating to our ongoing business operations, and the primary risk managed using derivative instruments is foreign currency exchange rate risk.  The fair value of these foreign currency option derivatives is based upon valuation models applied to current market information such as strike price, spot rate, maturity date and volatility, and by reference to market values resulting from an over-the-counter market or obtaining market data for similar instruments with similar characteristics.