Fair Value of Financial Instruments (Notes)

12 Months Ended

Dec. 31, 2012

Fair Value Disclosures [Abstract]

Fair Value Disclosures

Fair Value of Financial Instruments

The Company measures at fair value certain financial assets and liabilities. GAAP specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company's market assumptions. These two types of inputs have created the following fair-value hierarchy:

Level 1— Quoted prices for identical instruments in active markets;

Level 2— Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and

Level 3— Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

Foreign currency forward contracts are measured at fair value using models based on observable market inputs such as foreign currency exchange rates; therefore, they are classified within Level 2 of the valuation hierarchy. The cash surrender value of life insurance contracts is measured at fair value using quoted market prices for similar instruments; therefore, they are classified within Level 2 of the valuation hierarchy.

The Company has obligations ("contingent consideration"), to be paid in cash, related to the acquisition of Continuous Computing based on the amount of product royalty revenues to be generated by a specified set of contracts associated with certain of Continuous Computing's products over a period of 36 months after closing. The contingent consideration liability was established at the time of acquisition and is evaluated at the end of each reporting period. As the significant inputs used in determining the fair value are unobservable, this liability is classified within Level 3 of the fair value hierarchy.

The fair value of this contingent consideration is determined by calculating the net present value of the expected payments using significant inputs that are not observable in the market, including revenue projections and discount rates consistent with the level of risk of achievement; therefore the Company developed its own assumptions for the expected product royalty revenues generated under the arrangement. The fair value of the contingent consideration is affected most significantly by changes in the amount and timing of the revenue projections. If the revenue projections increase or decrease, the fair value of the contingent consideration will adjust accordingly in amounts that will vary based on the timing of the projected revenues and expected payments.

The following table summarizes the fair value measurements as of December 31, 2012 for the Company's financial instruments (in thousands):

	Fair Value Measurements as of December 31, 2012
	Total			Level 1		Level 2			Level 3
Cash surrender value of life insurance contracts	$	3,398		$	—	$	3,398		$	—
Foreign currency forward contracts	(297		)	—		(297		)	—
Contingent consideration liability	(2,541		)	—		—			(2,541		)
Total	$	560		$	—	$	3,101		$	(2,541	)

The following table summarizes the fair value measurements as of December 31, 2011, for the Company’s financial instruments (in thousands):

	Fair Value Measurements as of December 31, 2011
	Total			Level 1		Level 2			Level 3
Cash surrender value of life insurance contracts	$	3,394		—		$	3,394		$	—
Foreign currency forward contracts	(647		)	—		(647		)	—
Contingent consideration liability	(7,594		)	—		—			(7,594		)
Total	$	(4,847	)	$	—	$	2,747		$	(7,594	)

The following table summarizes level 3 activity for the Company's contingent consideration liability (in thousands):

	Fair Value
	Contingent Consideration
Balance as of December 31, 2010	$	—
Additions	7,400
Increase in liability due to re-measurement (A)	143
Accretion (A)	51
Balance as of December 31, 2011	$	7,594
Additions	—
Decrease in liability due to re-measurement (A)	(5,910		)
Accretion (A)	857
Balance at December 31, 2012	$	2,541

__________________________

(A) The Company records all gains and losses and interest accretion associated with the contingent consideration liability to restructuring and acquisition-related charges, net in the Consolidated Statements of Operations.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

As discussed in Note 3 - Goodwill, during the third quarter of 2012, the Company performed an interim goodwill impairment assessment which resulted in a full impairment of the Company's goodwill, resulting in an impairment charge of $29.7 million. In the evaluation of goodwill, the Company used a market-based approach to estimate the fair value of its single reporting unit by adding to the Company's recent stock price a control premium that a hypothetical buyer would pay over the market price to acquire a majority share of the Company. The fair value of the single reporting unit was used to calculate an implied fair value of goodwill, which was compared to the carrying amount to measure the amount of impairment loss that should be recorded. The Company believes this is the most reliable indicator of fair value and is consistent with the approach a market place participant would use. This approach is categorized as a level 3 fair value measurement technique. The estimation of fair value utilizing the above approach includes numerous uncertainties which require significant judgment when making assumptions of the control premium, expected growth rates and the selection of discount rates, as well as assumptions regarding general economic and business conditions, among other factors.

Based on the analysis described above, the Company determined the fair value of its single reporting unit to be $130.2 million, using a control premium of 47%. Key assumptions used in measuring the fair value of the Company's projected intangible assets included a discount rate of 18%, revenue growth for the Company's technologies, including expected future attrition rates, and estimated royalty rates ranging 8% to 20% (based on the respective technology) used in the relief-from-royalty method to value the Company's technology assets.

The Company also assessed long-lived assets for impairment during the third quarter of 2012, comparing the undiscounted future cash flow the assets are expected to generate to the carrying value of the assets. The probability-weighted analysis of expected undiscounted future cash flows exceeded the book value of the long lived assets by $22.0 million, or 23%. Key assumptions used in this analysis included revenue growth for the Company's technologies as well as general economic and business conditions.