Annual report pursuant to Section 13 and 15(d)

Fair Value Measurements

v2.4.0.6
Fair Value Measurements
 12 Months Ended
Dec. 31, 2012
Fair Value Measurements [Abstract]  
Fair Value Measurements
(15)  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 December 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
December 31,
2012
December 31,
2011
Non-COLI assets held in DSC Plan
Other assets
Level 1
$120
$300
 
 
 
 
 
Interest rate swaps
Accrued expenses
Level 2
$ 1,194
$1,122
 
 
 
 
 
Earn-out obligation - current
Accrued expenses
Level 3
$-
$4,153
 
 
 
 
 
Earn-out obligations - long-term
Earn-out obligations
Level 3
$9,098
$16,415

Changes in the fair value of the Non-COLI assets held in the deferred supplemental compensation plan 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 $1.2 million and $1.1 million at December 31, 2012 and 2011, respectively,  has been reported in accrued expenses.  The offset, net of an income tax effect of approximately $457 thousand and $430 thousand, is included in accumulated other comprehensive loss in the accompanying consolidated balance sheet as of December 31, 2012 and 2011, respectively. 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.

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, 2012, therefore no earn-out was due.  See Footnote 5 for the contingent earn-out obligations resulting from the WBI acquisition. WBI earned approximately $7.1 million based on its financial performance for the earn-out period ended June 30, 2012. 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 $5.1 million for the year ended December 31, 2012. The fair value of the WBI earn-out obligation increased $802 thousand for the year ended December 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
  
Earn-out payments
    
(7,133
)
    
-
      
(7,133
)
Fair value adjustment included in earnings
    
-
      
(4,337
)
    
(4,337
)
Reclassification from long-term to short-term
    
2,980
      
(2,980
)
    
-
  
Balance as of December 31, 2012
  
$
-
    
$
9,098
    
$
9,098