Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2014

Fair Value of Financial Instruments

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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 and deferred compensation liability are measured at fair value using quoted market prices for similar instruments; therefore, they are classified within Level 2 of the valuation hierarchy.

The Company had an obligation ("contingent consideration"), to be paid in cash, related to the acquisition of Continuous Computing Corporation ("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 which ended during the quarter ended September 30, 2014. The contingent consideration liability was established at the time of acquisition and was evaluated at the end of each reporting period. As the significant inputs used in determining the fair value were unobservable, this liability was classified within Level 3 of the fair value hierarchy.

The fair value of the contingent consideration was 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 was affected most significantly by changes in the amount and timing of the revenue projections. If the revenue projections increased or decreased the fair value of the contingent consideration would increase or decrease accordingly in amounts that will vary based on the timing of the projected revenues and the timing of the expected payments. The 36 month contingent consideration period ended during the quarter ended September 30, 2014 and the remaining liability of $0.3 million recorded at September 30, 2014 represents the final cash payment to be paid in the fourth quarter of 2014 and is recorded in other accrued liabilities on the Condensed Consolidated Balance Sheet at September 30, 2014.

The following table summarizes the fair value measurements for the Company's financial instruments (in thousands):



	Fair Value Measurements as of September 30, 2014
	Total			Level 1		Level 2			Level 3
Cash surrender value of life insurance contracts ^(A)	$	32		$	—	$	32		$	—
Deferred compensation liability ^(A)	(23		)	—		(23		)	—
Foreign currency forward contracts	(13		)	—		(13		)	—
Total	$	(4	)	$	—	$	(4	)	$	—



	Fair Value Measurements as of December 31, 2013
	Total			Level 1		Level 2			Level 3
Cash surrender value of life insurance contracts ^(A)	$	1,866		$	—	$	1,866		$	—
Deferred compensation liability ^(A)	(1,276		)	—		(1,276		)	—
Foreign currency forward contracts	(169		)	—		(169		)	—
Contingent consideration liability	(390		)	—		—			(390		)
Total	$	31		$	—	$	421		$	(390	)

(A) The company terminated its Deferred Compensation Plan in 2013. The distribution of plan assets was substantially completed during the quarter ended September 30, 2014. The remaining balance as of September 30, 2014 is payable in the first quarter of 2015 and is recorded in other accrued liabilities on the Condensed Consolidated Balance Sheet at September 30, 2014.

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



	Level 3
Balance at December 31, 2013	$	390
Change in estimate	(156		)
Payments	—
Accretion	39
Transfer out of level 3 measurement	(273		)
Balance at September 30, 2014	$	—

The Company records all changes in estimates and accretion on the contingent consideration liability to restructuring and other charges, net in the Condensed Consolidated Statements of Operations. The royalty earning period for Continuous Computing's products was completed during the quarter ended September 30, 2014. The 36 month contingent consideration period ended during the third quarter 2014 and the remaining liability of $0.3 million recorded represents the final cash payment to be paid in the fourth quarter and is recorded in other accrued liabilities on the Condensed Consolidated Balance Sheet at September 30, 2014.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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