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Fair Value of Financial Instruments
9 Months Ended
Sep. 30, 2011
Fair Value of Financial Instruments 
Fair Value of Financial Instruments

14. Fair Value of Financial Instruments

 

The fair value measurement statement defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value, the Company considers the principal or most advantageous market in which the Company would transact, and the Company considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of non-performance.

 

The Company’s financial instruments are measured and recorded at fair value, except for cost method investments and convertible notes. The Company’s non-financial assets, such as goodwill, intangible assets, and property, plant and equipment, are measured at fair value when there is an indicator of impairment and recorded at fair value only when an impairment charge is recognized.

 

Fair Value Hierarchy

 

The fair value measurement statement requires disclosure that establishes a framework for measuring fair value and expands disclosure about fair value measurements. The statement requires fair value measurement be classified and disclosed in one of the following three categories:

 

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

 

The Company uses unadjusted quotes to determine fair value. The financial assets in Level 1 include money market funds.

 

Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability.

 

The Company uses observable pricing inputs including benchmark yields, reported trades, and broker/dealer quotes. The financial assets in Level 2 include U.S. government sponsored obligations, corporate notes, commercial paper and municipal bonds and notes.

 

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

 

The financial assets in Level 3 include a cost investment whose value is determined using inputs that are both unobservable and significant to the fair value measurements.

 

The Company tests the pricing inputs by obtaining prices from two different sources for the same security on a sample of its portfolio. The Company has not adjusted the pricing inputs it has obtained. The following table presents the financial instruments that are carried at fair value and summarizes the valuation of its cash equivalents and marketable securities by the above pricing levels as of September 30, 2011 and December 31, 2010:

 

 

 

As of September 30, 2011

 

 

 

Total

 

Quoted
Market
Prices in
Active
Markets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

 

 

(In thousands)

 

Money market funds

 

$

132,721

 

$

132,721

 

$

—

 

$

—

 

U.S. government sponsored obligations

 

35,668

 

—

 

35,668

 

—

 

Corporate notes, bonds and commercial paper

 

96,241

 

—

 

96,241

 

—

 

Total available-for-sale securities

 

$

264,630

 

$

132,721

 

$

131,909

 

$

—

 

 

 

 

As of December 31, 2010

 

 

 

Total

 

Quoted
Market
Prices in
Active
Markets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

 

 

(In thousands)

 

Money market funds

 

$

132,364

 

$

132,364

 

$

—

 

$

—

 

U.S. government sponsored obligations

 

266,817

 

48,604

 

218,213

 

—

 

Corporate notes, bonds and commercial paper

 

95,724

 

—

 

95,724

 

—

 

Total available-for-sale securities

 

$

494,905

 

$

180,968

 

$

313,937

 

$

—

 

 

The Company monitors the investment for other-than-temporary impairment and records appropriate reductions in carrying value when necessary. The Company made an investment of $2.0 million in a non-marketable equity security of a private company during the third quarter of 2009. The Company evaluated the fair value of the investment in the non-marketable security as of September 30, 2011 and determined that there were no events that caused a decrease in its fair value below the carrying cost.

 

The following table presents the financial instruments that are measured and carried at cost on a nonrecurring basis as of September 30, 2011 and December 31, 2010:

 

 

 

As of September 30, 2011

 

(in thousands)

 

Carrying
Value

 

Quoted
market
prices in
active
markets
(Level 1)

 

Significant
other
observable
inputs
(Level 2)

 

Significant
unobservable
inputs
(Level 3)

 

Impairment
charges for the
nine months
ended September
30, 2011

 

Investment in non-marketable security

 

$

2,000

 

$

—

 

$

—

 

$

2,000

 

$

—

 

 

 

 

As of December 31, 2010

 

(in thousands)

 

Carrying
Value

 

Quoted
market
prices in
active
markets
(Level 1)

 

Significant
other
observable
inputs
(Level 2)

 

Significant
unobservable
inputs
(Level 3)

 

Impairment
charges for the
year ended
December 31,
2010

 

Investment in non-marketable security

 

$

2,000

 

$

—

 

$

—

 

$

2,000

 

$

—

 

 

The following table presents the financial instruments that are not carried at fair value but which require fair value disclosure as of September 30, 2011 and December 31, 2010:

 

 

 

As of September 30, 2011

 

As of December 31, 2010

 

(in thousands)

 

Face
Value

 

Carrying
Value

 

Fair Value

 

Face
Value

 

Carrying
Value

 

Fair Value

 

5% Convertible Senior Notes due 2014

 

$

172,500

 

$

130,354

 

$

191,632

 

$

172,500

 

$

121,500

 

$

224,504

 

 

The fair value of the convertible notes at each balance sheet date is determined based on recent quoted market prices for these notes. As of September 30, 2011, the convertible notes are carried at face value of $172.5 million less any unamortized debt discount. The carrying value of other financial instruments, including cash, accounts receivable, accounts payable and other payables, approximates fair value due to their short maturities.

 

The Company monitors its investments for other than temporary losses by considering current factors, including the economic environment, market conditions, operational performance, specific factors relating to the business underlying the investment, reductions in carrying values when applicable and the Company’s ability and intent to hold the investment for a period of time which may be sufficient for anticipated recovery in the market. Any other than temporary loss is reported under “Interest and other income (expense), net” in the condensed consolidated statement of operations. For the nine months ended September 30, 2011, the Company has not incurred any impairment loss on its investments.