6. Fair Value

Financial Assets and Liabilities

We carry our cash equivalents, marketable securities and foreign currency forward contracts at market value. Cash equivalents are comprised of short-term, highly liquid investments, including money market funds and other investment grade securities such as certificates of deposit, commercial paper, corporate and municipal bonds and obligations of U.S. government sponsored enterprises. Our marketable securities consist of debt securities with original maturities of greater than three months and include obligations of U.S. government sponsored enterprises, commercial paper, certificates of deposit and corporate and municipal debt. The fair value of our foreign currency contracts is estimated based on the prevailing exchange rates of the various hedged currencies as of the end of the period.

Fair value accounting provides a definition of fair value, establishes acceptable methods of measuring fair value and expands disclosures for fair value measurements. The principles apply under accounting pronouncements that require measurement of fair value and do not require any new fair value measurements in accounting pronouncements where fair value is the relevant measurement attribute. Fair value accounting also specifies a fair value hierarchy based upon the observability of inputs used in valuation techniques. Observable inputs (highest level) reflect market data obtained from independent sources, while unobservable inputs (lowest level) reflect internally developed market assumptions.

In accordance with fair value accounting, fair value measurements are classified under the following hierarchy:

Level 1—Quoted prices for identical instruments in active markets.

Level 2—Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.

Level 3—Model-derived valuations in which one or more significant inputs or significant value-drivers are unobservable.

Fair value measurements are classified according to the lowest level input or value-driver that is significant to the valuation. A measurement may therefore be classified within Level 3 even though there may be significant inputs that are readily observable.

Where applicable, the determination of fair values is based on unadjusted quoted prices that are available in active markets for the identical assets or liabilities at the measurement date. This pricing methodology applies to our Level 1 investments. To the extent quoted prices in active markets are not available at the measurement date, fair values can be based on usage of observable market prices in less active markets, use of broker/dealer quotes and alternative pricing sources with reasonable levels of price transparency.

Because many fixed income securities do not trade on a daily basis or have market prices from multiple sources, the pricing applications may apply available information as applicable to determine the fair value as of the measurement date. This methodology applies to our Level 2 investments. Currently, we do not hold any Level 3 investments.

We recorded an acquisition-related liability for contingent consideration representing the amounts payable to former Contur equity holders, as outlined under the terms of the Contur Purchase Agreement, upon the achievement by Contur of certain agreed-upon performance milestones. The fair value of this Level 3 liability is estimated based on a discounted probability-weighted income approach derived from revenue estimates and a probability assessment with respect to the likelihood of achieving the milestone criteria. Subsequent changes in the fair value of the contingent consideration liability were recorded in the statement of operations through final payment in the second quarter of 2013 and resulted from updates to assumed probability of achievement of milestones and adjustments to the discount periods and rates.

The following table summarizes our assets and liabilities that require fair value measurements on a recurring basis and their respective input levels based on the fair value hierarchy:



	Estimated Fair Value		Quoted Market Prices for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In thousands)
December 31, 2013:
Cash equivalents (1)	$	3,673	$	3,673	$	—	$	—
Short-Term Marketable Securities:
U.S. Treasury securities	1,503		1,503		—		—
U.S. government and agency securities	152		—		152		—
Commercial paper and certificates of deposit	1,300		—		1,300		—
Corporate debt securities	22,425		—		22,425		—
Municipal debt securities	500		—		500		—
Long-Term Marketable Securities:
Corporate debt securities	2,879		—		2,879		—
Total marketable securities:	28,759		1,503		27,256		—
Foreign currency forward contracts not designated as hedges	34		—		34		—
Total assets measured at fair value	$	32,466	$	5,176	$	27,290	$	—


(1)	Cash equivalents are included in the Cash and cash equivalents line in the consolidated balance sheet

There were no transfers between Level 1 and Level 2 securities during the year ended December 31, 2013.



	Estimated Fair Value		Quoted Market Prices for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In thousands)
December 31, 2012:
Cash equivalents (1)	$	46,043	$	46,043	$	—	$	—
Short-Term Marketable Securities:
U.S. Treasury securities	1,805		1,805		—		—
U.S. government and agency securities	3,023		—		3,023		—
Commercial paper and certificates of deposit	6,003		—		6,003		—
Corporate debt securities	16,020		—		16,020		—
Municipal debt securities	—		—		—		—
Long-Term Marketable Securities:
U.S. Treasury securities	1,521		1,521		—		—
U.S. government and agency securities	158		—		158		—
Corporate debt securities	10,869		—		10,869		—
Total assets at fair value	$	85,442	$	49,369	$	36,073	—
Liabilities:
Acquisition-related contingent consideration	$	241	$	—	$	—	$	241
Foreign currency forward contracts not designated as hedges	99		—		99		—
Total liabilities at fair value	$	340	$	—	$	99	$	241


(1)	Cash equivalents are included in the Cash and cash equivalents line in the consolidated balance sheet

The following table includes a summary of the contingent consideration measured at fair value using significant unobservable inputs (Level 3) during the year ended December 31, 2013 (in thousands):



Balance at December 31, 2012	$	241
Expenses recorded due to changes in fair value	9
Payments	(250		)
Balance at December 31, 2013	$	—

Additional Disclosures Regarding Fair Value Measurements

The carrying amount of accounts receivable, accounts payable and accrued liabilities are considered to be representative of their respective fair values due to their short-term nature. Our cost-method investments in privately held companies are carried at cost. Our notes receivable are carried at the expected net realizable value. It is impracticable for us to estimate the fair value of these instruments on a recurring basis if there are no identified events or changes in circumstances that may have a significant adverse effect on their fair value.

As a result of indicators of impairment identified in the fourth quarter of 2013, we evaluated the recoverability of the Freeslate note receivable as of December 31, 2013 based on a discounted cash flow model and as a result of this analysis we established a reserve of $1.7 million through an impairment charge on the note receivable which is included in the consolidated statement of operations. The note receivable is classified as a Level 3 instrument, as the inputs used in the analysis are unobservable and required significant management judgment.



	Estimated Fair Value		Quoted Market Prices for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In thousands)
Promissory notes receivable	$	7,393	$	—	$	—	$	7,393

Prior to establishing any allowance, the note had a carrying value of $9.1 million with accrued interest receivable of $0.6 million. In performing our impairment assessment we determined the fair value of the note and interest receivable from Freeslate as of December 31, 2013 to be approximately $8.1 million resulting in the recognition of a reserve and related impairment charge of $1.7 million. In our impairment assessment we applied a discount rate of 11.0% and a remaining estimated term of 6.25 years. In addition, our risk adjusted estimated cash flows assumed the payment of $4.0 million due in March 2020 to be reduced to $0.8 million based on risk associated with generating sufficient cash flows to service the note under the current contractual terms, but that Freeslate would continue to service their interest obligations through the end of the note term. Any differences between our estimate and actual cash receipts would have a one for one impact on the amount of the impairment, adjusted for discounting.

We performed a sensitivity analysis on our assumptions, primarily around the risk adjusted estimated future cash flows and the discount rate assumptions. Our sensitivity analysis includes several combinations of reasonably possible scenarios with regard to these assumptions. If we do not adjust the cash flows for the potential risk that expected cash flows will not materialize, the fair value of the note and related interest receivable is approximately $9.7 million and as such would not be considered impaired.

Non-Financial Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Our non-financial assets and liabilities (e.g., goodwill, intangible assets, property and equipment and nonfinancial assets and liabilities initially measured at fair value in a business combination) are re-measured at fair value subsequent to initial recognition only when they are deemed to be other-than-temporarily impaired. There were no non-financial assets and liabilities deemed to be other-than-temporarily impaired and measured at fair value on a nonrecurring basis for the periods presented.