Fair Value Measurements

12 Months Ended

Dec. 31, 2012

Fair Value Measurements [Abstract]

Fair Value Measurements

12. FAIR VALUE MEASUREMENTS

FASB ASC Topic 820, "Fair Value Measurements and Disclosures," defines fair value, sets out a framework for measuring fair value, and requires certain disclosures about fair value measurements. A fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability. Fair value is defined based upon an exit price model.

FASB ASC Topic 820 establishes a valuation hierarchy for disclosure of the inputs used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on the Company's assumptions used to measure assets and liabilities at fair value. A financial asset or liability's classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

As disclosed in Note 1 of the consolidated financial statements, an interest rate swap expired in 2010 and the Company did not hold any other derivatives as of December 31, 2012 and 2011. The Company did not have any other material assets or liabilities carried at fair value and measured on a recurring basis as of December 31, 2012 and 2011.

As described in Note 4 of the consolidated financial statements, the Company completed four acquisitions during the year ended December 31, 2012. The estimated fair values allocated to the assets acquired and liabilities assumed relied upon fair value measurements based in part on Level 3 inputs which are further described below.

Property, plant and equipment

Real property: The cost approach was utilized to determine fair value for real property. This valuation technique considers the current cost of reproducing the property, less estimated depreciation plus the market value of the land. The income approach was not utilized since the property was not an income producing property. The sales comparison approach was considered and comparable sales were obtained to ensure the ascribed value was appropriate.

The reproduction / replacement cost is derived from various building cost manuals as well as a knowledge of actual construction costs by an independent third party appraiser.

The estimated depreciation is determined by the following elements:

• Physical Depreciation: The adverse effect on value caused by deterioration of impairment of condition as a result of wear and tear an disintegration;
• Functional Obsolescence: The adverse effect on value resulting from defects in design or other factors that impair utility;
• Economic Obsolescence: Created outside of the property by specific detrimental economic influences or from the real estate market's lack of recognition for this type of property.

Market value of land reflects the purchase price of similar parcels of vacant land, and after adjustments to the subject land, the common price level provides a useful indicator of market value.

Personal property: The cost approach was utilized to determine fair value for tangible property. Similar to the utilization in the real property approach noted above, this approach considers the current replacement cost of the property and then deducts for the loss in value cause by physical deterioration, functional obsolescence and economic obsolescence. The replacement cost is derived by referencing prices for similar or comparable equipment in cost manuals, the internet, in market publications, as well as, reaching out to manufacturers of major equipment items for confirmation on current costs. In estimating the fair values, declining balance curves in the rate of depreciation are differentiated based on the type of property being valued. These curves emphasize the typical relationship between the used market and original costs for the various types of property considering their components and functions.

Intangible assets

The fair value measurements for intangible assets were calculated using discounted cash flow analyses which rely upon significant unobservable Level 3 inputs which included the following:

Unobservable input	Range
Discount rate (WACC)	10.9% - 13.2%
Risk premium	1.0% - 3.0%
Royalty rate	0.5% - 1.0%
Future attributable revenues	70% - 100%

The Company also applied fair value principles during the goodwill impairment tests performed during 2012, 2011, and 2010. Step one of the goodwill impairment test consisted of determining a fair value for each of the Company's reporting units. The fair value for the Company's reporting units cannot be determined using readily available quoted Level 1 or Level 2 inputs that are observable or available from active markets. Therefore, the Company used two valuation models to estimate the fair values of its reporting units, both of which use Level 3 inputs. To estimate the fair values of reporting units, the Company uses significant estimates and judgmental factors. The key estimates and factors used in the valuation models include revenue growth rates and profit margins based on internal forecasts, terminal value, WACC, and earnings multiples. As a result of the goodwill impairment test performed during 2012 and 2010, the Company recognized goodwill impairment charges. See Note 5 of the consolidated financial statements for the results of the Company's goodwill impairment tests.

During 2012 and 2010, the Company also recognized impairments to intangible assets. The impairment charges were calculated by determining the fair value of these assets. The fair value measurements were calculated using discounted cash flow analyses which rely upon unobservable inputs classified as Level 3 inputs. See Note 5 of the consolidated financial statements for more disclosure regarding the impairment of intangible assets.

The Company also recognized the impairment of certain property, plant, and equipment during the years ended December 31, 2012, 2011 and 2010. The impairment charges were calculated by determining the fair value of the property, plant, and equipment using unobservable inputs which primarily include market data for transactions involving similar assets. These inputs are classified as Level 3 inputs. See Note 14 of the consolidated financial statements for more disclosure regarding the impairment of certain property, plant, and equipment.

The Company's financial instruments primarily consist of cash and cash equivalents, accounts receivable, notes receivable, accounts payable, and long-term debt. The carrying values for our financial instruments approximate fair value with the exception, at times, of long-term debt. At December 31, 2012, the fair value of outstanding debt was $210,466,000 compared to its carrying value of $207,803,000. The fair value of the Company's Senior Subordinated 8% Notes was estimated based on quoted market prices, a Level 1 input.