Fair Value Measurements

3 Months Ended

Mar. 31, 2015

Fair Value Measurements

Fair Value Measurements

Note 4—Fair Value Measurements

ASC Topic 820, “Fair Value Measurements and Disclosures”, defines fair value, establishes a framework for measuring fair value in GAAP and requires certain disclosures about fair value measurements.  ASC Topic 820 addresses fair value GAAP for financial assets and financial liabilities that are re-measured and reported at fair value at each reporting period and for non-financial assets and liabilities that are re-measured and reported at fair value on a non-recurring basis.

In general, fair values determined by Level 1 inputs use quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs use data points that are observable such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs are “unobservable data points” for the asset or liability and include situations where there is little, if any, market activity for the asset or liability.

The following table presents, for each of the fair value hierarchy levels identified under ASC Topic 820, the Company’s financial assets and liabilities that are required to be measured at fair value at March 31, 2015 and December 31, 2014:

			Fair Value Measurements at Reporting Date
	Amount Recorded on Balance Sheet		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
Assets as of March 31, 2015:
Cash and cash equivalents	$	106,018	$	106,018	—	—
Short-term investments	$	30,494	$	30,494	—	—
Liabilities as of March 31, 2015:
Contingent consideration	$	1,967	—		—	$	1,967
Assets as of December 31, 2014:
Cash and cash equivalents	$	139,465	$	139,465	—	—
Short-term investments	$	30,992	$	30,992	—	—
Liabilities as of December 31, 2014:
Contingent consideration	$	6,922	—		—	$	6,922

Short-term investments consist primarily of U.S. Treasury bills with various financial institutions that are backed by the federal government.

Other financial instruments of the Company not listed in the table consist of accounts receivable, accounts payable and certain accrued liabilities. These financial instruments generally approximate fair value based on their short-term nature. The carrying value of the Company’s long-term debt approximates fair value based on comparison with current prevailing market rates for loans of similar risks and maturities.

The following table provides changes to the Company’s contingent consideration liability Level 3 fair value measurements during the three months ended March 31, 2015 and 2014:

	Significant Unobservable Inputs (Level 3)
	2015			2014
Contingent Consideration Liability
Beginning balance, January 1, 2015 and 2014	$	6,922		$	9,233
Additions to contingent consideration liability:
Change in fair value of contingent consideration liability	45			114
Reductions in the contingent consideration liability:
Payment to Q3C sellers for meeting performance targets	(5,000		)	(5,000		)
Ending balance, March 31, 2015 and 2014	$	1,967		$	4,347

On a quarterly basis, the Company assesses the estimated fair value of the contractual obligation to pay the contingent consideration and any changes in estimated fair value are recorded as other non-operating expense or income in the Company’s statement of income.  Fluctuations in the fair value of contingent consideration are impacted by two unobservable inputs, management’s estimate of the probability (which has ranged from 33% to 100%) of the acquired company meeting the contractual operating performance target and an estimated discount rate (a rate that approximates the Company’s cost of capital). Significant changes in either of those inputs in isolation would result in a different fair value measurement. Generally, a change in the assumption of the probability of meeting the performance target is accompanied by a directionally similar change in the fair value of contingent consideration liability, whereas a change in assumption used of the estimated discount rate is accompanied by a directionally opposite change in the fair value of contingent consideration liability.