Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

v2.4.0.6
Fair Value Measurements
 3 Months Ended
Mar. 31, 2012
Fair Value Measurements [Abstract]  
Fair Value Measurements
(9) Fair Value Measurements

The accounting standard for fair value measurements defines fair value, and establishes a market-based framework or hierarchy for measuring fair value.  The standard is applicable whenever assets and liabilities are measured at fair value.
 
The fair value hierarchy established in the standard prioritizes the inputs used in valuation techniques into three levels as follows:
 
Level 1 - Observable inputs - quoted prices in active markets for identical assets and liabilities;
 
Level 2 - Observable inputs other than the quoted prices in active markets for identical assets and liabilities - includes quoted prices for similar instruments,  quoted  prices  for identical or similar instruments in inactive markets, and amounts derived from valuation models where all significant inputs are observable in active markets; and
 
Level 3 - Unobservable inputs - includes amounts derived from valuation models where one or more significant inputs are unobservable and require us to develop relevant assumptions.
 
The following table summarizes the financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2012 and December 31, 2011 and the level they fall within the fair value hierarchy (in thousands):

Amounts Recorded at Fair Value
  
Financial Statement Classification
  
Fair Value Hierarchy
  
Fair Value March 31, 2012
  
Fair Value December 31, 2011
Mutual funds held in DSC Plan
  
Other assets
  
Level 1
  
$361
  
$300
Interest rate swaps
  
Accrued expenses
  
Level 2
  
  $1,437
  
  $1,122
Earn-out obligation - current
  
Current portion of earn-out obligations
  
Level 3
  
$8,660
  
$4,153
Earn-out obligation - long-term
  
Earn-out obligations
  
Level 3
  
$11,356
  
$16,415

Changes in the fair value of the mutual funds held in the deferred supplemental compensation plan, as well as changes in the related deferred compensation obligation, are recorded as selling, general and administrative expenses.
 
We account for our interest rate swap agreements under the provisions of ASC 815, and have determined that our swap agreements qualify as highly effective hedges. Accordingly, the fair value of the swap agreements, which is a liability of approximately $1.4 million and $1.1 million at March 31, 2012 and December 31, 2011, respectively, has been reported in accrued expenses.  The offset, net of an income tax effect of approximately $550 thousand and $429 thousand, is included in accumulated other comprehensive loss in the accompanying balance sheets as of March 31, 2012 and December 31, 2011. The amounts paid and received on the swap agreements will be recorded in interest expense as yield adjustments in the period during which the related floating-rate interest is incurred. We determine the fair value of the swap agreements based on a valuation model using market data inputs.
 
Our acquisitions of Akimeka and WBI may require future earn-out obligation payments.  The Akimeka acquisition may require additional payments to be made to the sellers of up to $11 million over a three-year post-closing period if Akimeka achieves certain financial performance targets. Akimeka did not achieve the required financial performance targets for the year ended December 31, 2011, therefore no earn-out was due.  See Footnote 7 for the contingent consideration details resulting from the WBI acquisition. We determined the fair value of the earn-out obligations related to the Akimeka and WBI acquisitions by using a valuation model that included the evaluation of all possible outcomes and the application of an appropriate discount rate.  At the end of each reporting period, the fair value of the contingent consideration is re-measured and any changes are recorded as contract costs. The fair value of the Akimeka earn-out obligation decreased approximately $964 thousand for the three months ended March 31, 2012. The fair value of the WBI earn-out obligation increased $412 thousand for the three months ended March 31, 2012.
 
The following table provides a reconciliation of the beginning and ending balance of the earn-out obligations measured at fair value on a recurring basis that used significant unobservable inputs (Level 3).

Earn-out obligations
  
Current portion
    
Long-term portion
    
Total
  
Balance as of December 31, 2011
   $ 4,153     $ 16,415     $ 20,568  
Fair value adjustment included in earnings
     -       (552 )     (552 )
Reclassification from long-term to short-term
     4,507       (4,507 )     -  
Balance as of March 31, 2012
   $ 8,660     $ 11,356     $ 20,016  

(10) Recently Adopted Accounting Guidance

On January 1, 2012, we adopted an update issued by the Financial Accounting Standards Board ("FASB") to existing guidance on the presentation of comprehensive income.  This update requires the presentation of the components of net income and other comprehensive income either income either in a single continuous statement or in two separate but consecutive statements. Net income and other comprehensive income has been presented in two separate but consecutive statements for the current reporting period and prior comparative period in our condensed consolidated financial statements.