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Financial Instruments
 9 Months Ended
Sep. 30, 2012
Financial Instruments

7. Financial Instruments

Derivative Financial Instruments

From time to time, we hedge the cash flows and fair values of some of our long-term debt using interest rate swaps. We enter into these derivative contracts to manage our exposure to interest rate changes by achieving a desired proportion of fixed rate versus variable rate debt.

Accordingly, to achieve the desired mix of fixed and floating interest rate debt, we entered into four interest rate swap agreements in March 2011, which we designated as fair value hedges of our 7 3/4% senior notes due 2016 (“2016 Notes”). Under the terms of the interest rate swaps, we received interest on the $215.0 million notional amount at a fixed rate of 7 3/4% and paid a variable rate of interest, which varied between 5.43% and 5.56% for the year ended December 31, 2011. The variable rate was based on the London Interbank Offered Rate (“LIBOR”) as the benchmark interest rate. The maturity, payment dates and other critical terms of these swaps exactly matched those of the hedged 2016 Notes. These interest rate swaps qualified for hedge accounting using the short-cut method under ASC 815-20-25, Derivatives and Hedging, which assumes no hedge ineffectiveness. As a result, the changes in the fair value of the interest rate swaps and the changes in fair value of the hedged debt were assumed to be equal and offsetting.

 

On December 16, 2011, we negotiated the right to terminate the interest rate swap agreements. Upon termination of these interest rate swap agreements we received cash proceeds of approximately $6.6 million, including $1.0 million of accrued interest. The net proceeds of $5.6 million have been recorded in “Long-term debt and capital lease obligations” on the Condensed Consolidated Balance Sheets and will be amortized as a reduction to interest expense over the remaining term of the 2016 Notes, resulting in an effective interest rate of 7.1% per annum. For the nine months ended September 30, 2012, $0.8 million of the net proceeds have been amortized as a reduction of interest expense, with a remaining balance of $4.8 million at September 30, 2012. At September 30, 2012, we had no derivative instruments.

Fair Value of Financial Instruments

We consider the recorded value of certain of our financial assets and liabilities, which consist primarily of cash equivalents, accounts receivable and accounts payable, to approximate the fair value of the respective assets and liabilities at September 30, 2012 and December 31, 2011, based on the short-term nature of the assets and liabilities. The fair value of our long-term debt at September 30, 2012 was $747 million compared to a carrying value of $718 million. At December 31, 2011, the fair value of our long-term debt was $882 million compared to a carrying value of $815 million. We determine the fair value of our long-term debt primarily based on quoted market prices for our 2016 Notes, 6 3/4% senior notes due 2020 and Convertible Notes. The fair value of our long-term debt is classified within Level 2 of the fair value hierarchy, because it is traded in less active markets. At December 31, 2011, the carrying value of long-term debt includes the $18.0 million equity component of our Convertible Notes which is recorded in “Additional paid-in capital” on the Condensed Consolidated Balance Sheets. Our Convertible Notes matured on July 15, 2012 and were paid in full on July 16, 2012.

For business combinations consummated on or after January 1, 2009, we estimate the fair value of acquisition-related contingent consideration using a probability-weighted discounted cash flow model. This fair value measure is based on significant inputs not observed in the market and thus represents a Level 3 measurement. Fair value measurements characterized within Level 3 of the fair value hierarchy are measured based on unobservable inputs that are supported by little or no market activity and reflect our own assumptions in measuring fair value.

The significant unobservable inputs used in the fair value measurements of our acquisition-related contingent consideration are our measures of the future profitability and related cash flows and discount rates. Significant increases (decreases) in any of these inputs in isolation would result in a significantly lower (higher) fair value measurement. Generally, a change in the assumptions used for the discount rates is accompanied by a directionally opposite change in the fair value measurement and a change in the assumptions used for the future cash flows is accompanied by a directionally similar change in the fair value measurement.

During the second quarter of 2012, management determined that the fair value of the acquisition-related contingent consideration liability had declined. This remeasurement of the contingent consideration was based on management’s probability-adjusted present value of the consideration expected to be transferred during the remainder of the earnout period, based on the acquired operations’ forecasted results. The resulting reduction in the liability of $4.1 million is recorded as income and is included within “Acquisition-related contingent consideration” in the Condensed Consolidated Statements of Comprehensive Income. There were no remeasurement gains or losses for the quarter ended September 30, 2012.

Accretion expense for acquisition-related contingent consideration totaled $0.4 million and $1.5 million for the three and nine months ended September 30, 2012, respectively, and $0.9 million and $2.5 million for the three and nine months ended September 30, 2011, respectively.

 

The following table represents the change in the acquisition-related contingent consideration liability during the three and nine months ended September 30, 2012 and 2011:

 

     Three Months  Ended
September 30,		     Nine Months Ended
September 30,		  

(in thousands)

        2012              2011         2012     2011  

Beginning balance

    $ 8,237       $ 23,882      $ 14,990      $ 19,864   

Acquisition date fair value measurement

      1,150         —          1,150        3,000   

Adjustments to fair value recorded in earnings(a)

      404         944        (2,581 )      2,538   

Payments

      —           —          (1,287 )      (577 ) 

Elimination of contingency(b)

      —           —          (2,534 )      —     

Unrealized gains (losses) related to currency translation in other comprehensive income

      59         (95 )      112        (94 ) 
  

 

 

     

 

 

    

 

 

    

 

 

  

Ending balance

    $ 9,850       $ 24,731      $ 9,850      $ 24,731   
  

 

 

     

 

 

    

 

 

    

 

 

  

 

(a)

Adjustments to fair value related to accretion and remeasurement of contingent consideration are recorded in “Acquisition-related contingent consideration” on the Condensed Consolidated Statements of Comprehensive Income.

 

(b)

During the three months ended June 30, 2012, we fixed an acquisition-related contingent consideration liability in the amount of $2.5 million. The non-contingent consideration liability is no longer required to be remeasured to fair value and, accordingly, is not classified as a Level 3 measurement.

The following table presents financial liabilities measured at fair value:

 

     Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)		      Significant
Other
Observable
Inputs
(Level 2)		      Significant
Unobservable
Inputs
(Level 3)		      Total  

As of September 30, 2012

            

Liabilities:

            

Acquisition-related contingent consideration, including current portion

    $ —         $ —         $ 9,850       $ 9,850   

As of December 31, 2011

            

Liabilities:

            

Acquisition-related contingent consideration, including current portion

    $ —         $ —         $ 14,990       $ 14,990