Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2012

Fair Value Disclosures [Abstract]

Fair Value of Financial Instruments

Fair Value of Financial Instruments

The Company’s financial instruments consist of cash equivalents, trade receivables, investments and payables. The financial instruments listed in the tables below are measured at fair value and the remaining financial instruments have carrying values that approximate their fair values. The Company accounts for its assets utilizing 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.

Assets and liabilities measured and recorded at fair value on a recurring basis at December 31, 2012 were as follows:
	Carrying Amount		Total Fair Value		Cash		Level 1		Level 2		Level 3
Measured on a recurring basis:
Assets:
Cash	$	63,104	$	63,104	$	63,104	$	—	$	—	$	—
Cash equivalents	53,549		53,549		—		53,549		—		—
Short-term—marketable securities	22,305		22,305		—		4,510		17,795		—
Non-Qualified Deferred Compensation Plan Funds	4,591		4,591		—		4,591		—		—
Total	$	143,549	$	143,549	$	63,104	$	62,650	$	17,795	$	—
Liabilities:
Earnout and milestone payment liability	$	5,457	$	5,457	$	—	$	—	$	—	$	5,457
Non-Qualified Deferred Compensation Plan	4,591		4,591		—		4,591		—		—
Total	$	10,048	$	10,048	$	—	$	4,591	$	—	$	5,457

Assets and liabilities measured and recorded at fair value on a recurring basis at December 31, 2011 were as follows:
	Carrying Amount		Total Fair Value		Cash		Level 1		Level 2		Level 3
Measured on a recurring basis:
Assets:
Cash	$	47,502	$	47,502	$	47,502	$	—	$	—	$	—
Cash equivalents	68,803		68,803		—		40,793		28,010		—
Short-term—marketable securities	46,006		46,006		—		7,501		38,505		—
Non-Qualified Deferred Compensation Plan funds	3,635		3,635		—		3,635		—		—
Total	$	165,946	$	165,946	$	47,502	$	51,929	$	66,515	$	—
Liabilities:
Earnout payment liability	$	890	$	890	$	—	$	—	$	—	$	890
Non-Qualified Deferred Compensation Plan	3,635		3,635		—		3,635		—		—
Total	$	4,525	$	4,525	$	—	$	3,635	$	—	$	890

The instruments classified as Level 1 are measured at fair value using quoted market prices. The investments classified as Level 2 were valued using quoted prices for similar instruments in markets that are not active since identical instruments were not available. The Company determines the hierarchy levels at the end of each quarter.

The non-qualified deferred compensation plan provides eligible employees and members of the Board of Directors with the opportunity to defer a specified percentage of their cash compensation. The Company includes the asset deferred by the participants in the “Other noncurrent assets, net” line item of its consolidated balance sheets and the Company's obligation to deliver the deferred compensation in the “Other long-term liabilities” line item of its consolidated balance sheets.

The earnout and milestone payment liability as of December 31, 2012 resulted from two acquisitions during 2012 and represents the fair value of the estimated payout to the former owners contingent upon meeting certain requirements. For the first acquisition, the Company has estimated the fair value of the obligation as $1,972 using a cash flow based approach discounted with a market discount rate. For the second acquisition, the Company has estimated the fair value of the obligation as $3,485 using a monte carlo simulation discounted using the risk free rate adjusted for an applicable credit spread.

The earnout payment liability as of December 31, 2011 represented the remaining estimated obligation to pay the former shareholders related to an acquisition in 2009. The conditions to the earnout payments were never met and as such, the Company revalued the liability to zero. This amount was recorded as an offset to selling, general and administrative expenses in the statement of operations and is included as a component of "other" in the cash flows from operating activities.

Details of the Level 3 fair value measurements are as follows:

Ending earnout payment liability December 31, 2010	$	1,365
Accretion	206
Change in estimate	(681		)
Ending earnout payment liability December 31, 2011	$	890
Accretion	128
Change in estimate	(916		)
Additions	$	5,355
Ending earnout and milestone payment liability December 31, 2012	$	5,457

Financial Instruments Not Recorded at Fair Value on a Recurring Basis

The Company entered into a cross-licensing agreement in 2012. The fair value of the cross-licensing liability was estimated using a discounted cash flow model which discounts future cash flows using an incremental borrowing rate of 9%. The ending fair value of the cross-licensing liability at December 31, 2012 was $15,818, of which $3,000 is current.

In conjunction with the cross-licensing agreement, the Company recognized a prepaid cross-licensing asset of $20,716. In determining the estimated fair value of the prepaid cross-licensing asset, the Company used a relief from royalty valuation methodology. The inputs and assumptions used in the valuation included projected revenue, royalty rates, discount rates, useful lives and income tax rates, among others. The development of a number of these inputs and assumptions in the model required a significant amount of management judgment and is based upon a number of factors, including the selection of royalty rates, market growth rates and other relevant factors.

Both the asset and liability were categorized as Level 3 in the fair value hierarchy.