Fair Value Measurements

6 Months Ended

Jun. 30, 2011

Fair Value Measurements

Fair Value Measurements

5. Fair Value Measurements

Fair value is defined in accounting guidance as the price that would be received to sell an asset or paid to transfer a liability (i.e. exit price) in an orderly transaction between market participants at the measurement date.  This guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available.  The hierarchy for inputs is categorized into three levels based on the reliability of inputs as follows:

Level 1—Observable inputs such as quoted prices in active markets.

Level 2—Inputs (other than quoted prices in active markets) that are either directly or indirectly observable.

Level 3—Unobservable inputs which requires management's best estimate of what market participants would use in pricing the asset or liability.

Our financial instruments include cash and short-term investments, investments in marketable securities, accounts receivable, accounts payable, debt, and forward foreign currency contracts.  Except as described below, the estimated fair value of such financial instruments at June 30, 2011 and December 31, 2010 approximates their carrying value as reflected in our Condensed Consolidated Balance Sheets.

Our debt consists of our United States Government Ship Financing Title XI bonds and our Senior Convertible Debentures due 2027 (the "Senior Convertible Debentures").  The fair value of the bonds, based on current market conditions and net present value calculations, as of June 30, 2011 and December 31, 2010, was approximately $69.8 million and $71.5 million, respectively.  The fair value of the Senior Convertible Debentures, based on quoted market prices, as of June 30, 2011 and December 31, 2010 was $243.8 million and $232.5 million, respectively.

Assets measured at fair value on a recurring basis are categorized in the tables below based upon the lowest level of significant input to the valuations.

Fair Value Measurements at June 30, 2011
(In thousands)
Description	Total		Level 1		Level 2		Level 3
Cash equivalents	$	123,558	$	123,558	$	0	$	0
Marketable securities		29,936		29,936		0		0
Derivative contracts		341		0		341		0
Total	$	153,835	$	153,494	$	341	$	0

Fair Value Measurements at December 31, 2010
(In thousands)
Description	Total		Level 1		Level 2		Level 3
Cash equivalents	$	179,887	$	179,887	$	0	$	0
Derivative contracts		804		0		804		0
Total	$	180,691	$	179,887	$	804	$	0

Financial instruments classified as Level 2 in the fair value hierarchy represent our forward foreign currency contracts.  These contracts are valued using the market approach which uses prices and other information generated by market transactions involving identical or comparable assets or liabilities. 

Financial instruments classified as Level 3 in the fair value hierarchy represent our previous investment in auction rate securities and the related put option with UBS in which management used at least one significant unobservable input in the valuation model.  Due to the lack of observable market quotes on our prior auction rate securities portfolio, we utilized a valuation model that relied on Level 3 inputs including market, tax status, credit quality, duration, recent market observations and overall capital market liquidity. The valuation of our auction rate securities was subject to uncertainties that were difficult to predict. Factors that may have impacted our valuation included changes to credit ratings of the securities as well as to the underlying assets supporting those securities, rates of default of the underlying assets, underlying collateral value, discount rates, counterparty risk and ongoing strength and quality of market credit and liquidity.

The following table presents a reconciliation of activity for such securities:

Changes in Level 3 Financial Instruments (In thousands)
	Three Months Ended				Six Months Ended
	June 30				June 30
	2011		2010		2011			2010
Balance at beginning of period	$	0	$	30,750	$	0	$	41,847
Sales		0		(30,000)		0		(40,664)
Total gains or (losses):
Realized losses included in other income (expense), net		0		0		0		(561)
Changes in net unrealized gain (losses) included in other comprehensive income		0		0		0		128
Balance at end of period	$	0	$	750	$	0	$	750

In the second quarter of 2011, we re-measured the fair value of all assets currently held for sale, including the Hercules reel, the Subtec 1, and other equipment.  In determining the fair value of these assets, we used a valuation model that relies on Level 3 inputs including market data of recent sales of similar assets, our prior experience in the sale of similar assets, and the price of third party offers for the assets.  The carrying amount of these assets of $7.3 million was written down to their fair value of $1.8 million resulting in an impairment of $5.5 million, which was included in earnings for the second quarter of 2011.  (See Note 7 for additional information regarding the impairment of these assets.)