3. Fair Value Measurements

Definition and Hierarchy

The applicable accounting guidance defines fair value as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The guidance establishes a framework for measuring fair value and expands required disclosure about the fair value measurements of assets and liabilities. This guidance requires us to classify and disclose assets and liabilities measured at fair value on a recurring basis, as well as fair value measurements of assets and liabilities measured on a non-recurring basis in periods subsequent to initial measurement, in a fair value hierarchy.

The fair value hierarchy is broken down into three levels based on the reliability of inputs and requires an entity to maximize the use of observable inputs, where available. The following summarizes the three levels of inputs required, as well as the assets and liabilities that we value using those levels of inputs:

 

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Level 1 – Observable inputs that reflect quoted prices for identical assets or liabilities in active markets.

 

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Level 2 – Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not very active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

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Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The fair value measurements of the contingent consideration obligations related to our business acquisitions are valued using Level 3 inputs.

Valuation Techniques

When developing fair value estimates for certain financial assets and liabilities, we maximize the use of observable inputs and minimize the use of unobservable inputs. When available, we use quoted market prices, market comparables and discounted cash flow projections. Financial instruments include money market funds, corporate debt investments, asset-backed securities, government-sponsored enterprises and state municipal obligations.

In general, and where applicable, we use quoted prices in active markets for identical assets or liabilities to determine fair value. If quoted prices in active markets for identical assets or liabilities are not available to determine fair value, then we use quoted prices for similar assets and liabilities or inputs that are observable either directly or indirectly. In periods of market inactivity, the observability of prices and inputs may be reduced for certain instruments. This condition could cause an instrument to be reclassified from Level 1 to Level 2 or from Level 2 to Level 3. There were no reclassifications from Level 1 to Level 2 at October 31, 2013 and January 31, 2013.

 

Our financial assets and liabilities that are measured at fair value on a recurring basis as of October 31, 2013 and January 31, 2013 are as follows:

 

						Fair Value at October 31, 2013 Using
						Quoted
						Prices in				Significant
						Active				Other				Significant
						Markets for				Observable				Unobservable
		October 31,				Identical Assets				Inputs				Inputs
		2013				(Level 1)				(Level 2)				(Level 3)
		(Amounts in thousands)
Financial assets:
Cash		$	109,648			$	109,648			$	—			$	—
Money market accounts (a)			4,459				4,459				—				—
Available for sale marketable securities:
Current marketable securities:
U.S. government agency issues			3,021				3,021				—				—
Non-current marketable securities:
U.S. government agency issues			8,360				8,360				—				—
Total		$	125,488			$	125,488			$	—			$	—
						Fair Value at January 31, 2013 Using
						Quoted
						Prices in				Significant
						Active				Other				Significant
						Markets for				Observable				Unobservable
		January 31,				Identical Assets				Inputs				Inputs
		2013				(Level 1)				(Level 2)				(Level 3)
		(Amounts in thousands)
Financial assets:
Cash		$	104,109			$	104,109			$	—			$	—
Money market accounts (a)			2,612				2,612				—				—
Available for sale marketable securities:
Current marketable securities:
U.S. government agency issues			6,104				6,104				—				—
Non-current marketable securities:
U.S. government agency issues			7,169				7,169				—				—
Total		$	119,994			$	119,994			$	—			$	—
Other liabilities:
Acquisition-related consideration (b)		$	5,656			$	—			$	—			$	5,656

 

(a)	Money market funds and U.S. government agency securities, included in cash and cash equivalents on the accompanying consolidated balance sheets, are valued at quoted market prices for identical instruments in active markets.

(b)	The fair value of our contingent consideration arrangement is determined based on our evaluation as to the probability and amount of any earn-out that will be achieved based on expected future performance by the acquired entity, as well as the fair value of fixed purchase price.

The following table sets forth a reconciliation of liabilities measured at fair value on a recurring basis with the use of significant unobservable inputs (Level 3) for the nine months ended October 31, 2013:

 

		Level 3
		Accrued Contingent
		Consideration
		(Amounts in thousands)
Ending balance January 31, 2013		$	5,656
Change in fair value of contingent consideration			(60	)
Contingency payment/Issuance of stock			(5,619	)
Translation adjustment			23
Ending balance October 31, 2013		$	—

 

Marketable Securities Available-For-Sale

We determine the appropriate classification of debt investment securities at the time of purchase and re-evaluate such designation as of each balance sheet date. Our investment portfolio consists primarily of money market funds as of October 31, 2013 and January 31, 2013, but can consist of corporate debt investments, asset-backed securities and government-sponsored enterprises. All highly liquid investments with an original maturity of three months or less when purchased are considered to be cash equivalents. All cash equivalents are carried at cost, which approximates fair value. Our marketable securities are classified as available-for-sale and are reported at fair value with unrealized gains and losses, net of tax, reported in stockholders’ equity as a component of accumulated other comprehensive loss. The amortization of premiums and accretion of discounts to maturity are computed under the effective interest method and are included in other (expenses) income, net in our consolidated statements of operations and comprehensive income (loss). Interest on securities is recorded as earned and is also included in other (expenses) income, net. Any realized gains or losses would be shown in the accompanying consolidated statements of operations and comprehensive income (loss) in other (expenses) income, net. We provide fair value measurement disclosures of available-for-sale securities in accordance with one of three levels of fair value measurement mentioned in Note 3, “Fair Value Measurements.”

The following is a summary of available-for-sale securities, including the cost basis, aggregate fair value and gross unrealized gains and losses, for cash equivalents, short- and long-term marketable securities portfolio as of October 31, 2013 and January 31, 2013:

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Fair Value
		(Amounts in thousands)
October 31, 2013:
Cash		$	109,648			$	—			$	—			$	109,648
Cash equivalents			4,459				—				—				4,459
Cash and cash equivalents			114,107				—				—				114,107
U.S. government agency issues - short-term			3,019				2				—				3,021
U.S. government agency issues - long-term			8,338				22				—				8,360
Total cash equivalents and marketable securities		$	125,464			$	24			$	—			$	125,488
January 31, 2013:
Cash		$	104,109			$	—			$	—			$	104,109
Cash equivalents			2,612				—				—				2,612
Cash and cash equivalents			106,721				—				—				106,721
U.S. government agency issues - short-term			6,043				61				—				6,104
U.S. government agency issues - long-term			7,147				22				—				7,169
Total cash equivalents and marketable securities		$	119,911			$	83			$	—			$	119,994

The following is a schedule of the contractual maturities of available-for-sale investments as of October 31, 2013:

 

		Estimated
		Fair Value
Maturity of one year or less		$	3,021
Maturity between one and five years			8,360
Total		$	11,381