Rovi Corp - 10-Q filing on 2015-04-30

Fair Value

3 Months Ended

Mar. 31, 2015

Fair Value Hierarchy

The Company uses valuation techniques that are based on observable and unobservable inputs to measure fair value. Observable inputs are developed using market data such as publicly available information and reflect the assumptions market participants would use, while unobservable inputs are developed using the best information available about the assumptions market participants would use. The fair value hierarchy gives the highest priority to observable inputs and the lowest priority to unobservable inputs. Assets and liabilities are classified in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement in its entirety:

Level 1. Quoted prices in active markets for identical assets or liabilities.

Level 2. Inputs other than Level 1 inputs that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or market-corroborated inputs.

Level 3. Unobservable inputs for the asset or liability.

Assets and liabilities measured at fair value on a recurring basis in the Condensed Consolidated Balance Sheets consisted of the following at March 31, 2015 and December 31, 2014 (in thousands):



		March 31, 2015
		Total		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
	Cash and Cash Equivalents
	Money market funds	$	116,256	$	116,256	$	—	$	—
	Short-Term Marketable Securities
	Corporate debt securities	40,528		—		40,528		—
	U.S. Treasuries / Agencies	46,751		—		46,751		—
	Long-Term Marketable Securities
	Auction rate securities	10,638		—		—		10,638
	Corporate debt securities	30,085		—		30,085		—
	Foreign government obligations	8,876		—		8,876		—
	U.S. Treasuries / Agencies	93,649		—		93,649		—
	Total Assets	$	346,783	$	116,256	$	219,889	$	10,638
Liabilities
	Accounts Payable and Accrued Expenses
	Veveo contingent consideration	$	3,000	$	—	$	—	$	3,000
	Interest rate swaps	1,786		—		1,786		—
	Other Long-Term Liabilities
	Interest rate swaps	23,870		—		23,870		—
	Total Liabilities	$	28,656	$	—	$	25,656	$	3,000



		December 31, 2014
		Total		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
	Cash and Cash Equivalents
	Money market funds	$	90,946	$	90,946	$	—	$	—
	Short-Term Marketable Securities
	Corporate debt securities	73,499		—		73,499		—
	Foreign government obligations	9,534		—		9,534		—
	U.S. Treasuries / Agencies	100,041		—		100,041		—
	Long-Term Marketable Securities
	Auction rate securities	10,638		—		—		10,638
	Corporate debt securities	24,777		—		24,777		—
	Foreign government obligations	1,013		—		1,013		—
	U.S. Treasuries / Agencies	94,950		—		94,950		—
	Total Assets	$	405,398	$	90,946	$	303,814	$	10,638
Liabilities
	Accounts Payable and Accrued Expenses
	IntegralReach contingent consideration	$	3,000	$	—	$	—	$	3,000
	Veveo contingent consideration	3,000		—		—		3,000
	Other Long-Term Liabilities
	Interest rate swaps (1)	16,788		—		16,788		—
	Total Liabilities	$	22,788	$	—	$	16,788	$	6,000


(1)	As of December 31, 2014, the fair value of the Company's interest rate swaps in an asset position was $5.8 million and in a liability position was $22.6 million. These amounts have been recorded on a net basis in the Condensed Consolidated Balance Sheets.

The Company recognizes transfers between levels of the fair value hierarchy at the end of the reporting period. For the three months ended March 31, 2015 and 2014, there were no transfers of assets between levels of the fair value hierarchy.

The following table provides a summary of changes in the Company’s Level 3 auction rate securities for the three months ended March 31, 2015 and 2014 (in thousands):



	Three Months Ended March 31,
	2015		2014
Balance at beginning of period	$	10,638	$	14,903
Unrealized gain included in accumulated other comprehensive loss	—		146
Balance at end of period	$	10,638	$	15,049

Valuation Techniques

The Company values interest rate swaps using widely accepted valuation techniques, including a discounted cash flow analysis on the expected cash flows of each interest rate swap. This analysis reflects the contractual terms of the interest rate swap, including the period to maturity, and uses market-corroborated inputs, including interest rate curves and implied volatilities. The fair value of an interest rate swap is estimated by netting the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are estimated based on an expectation of future interest rates derived from forward interest rate curves. The fair value of an interest rate swap also incorporates credit valuation adjustments that reflect nonperformance risk of the Company and the respective counterparty. In adjusting the fair value of its interest rate swaps for the effect of nonperformance risk, the Company has considered the impact of its master netting agreements.

The Company’s auction rate securities are valued using a discounted cash flow analysis or other type of valuation model. These analyses are highly judgmental and consider, among other items, the likelihood of redemption, credit quality, duration, insurance wraps and expected future cash flows. These securities were also compared, when possible, to other observable market data with characteristics similar to the securities held by the Company.

The Company measures the fair value of contingent consideration relating to acquisitions by estimating the amount that will ultimately be paid based on the terms of the underlying purchase agreement utilizing a probability-weighted discounted cash flow analysis. The significant unobservable inputs used in calculating the fair value of the contingent consideration includes financial performance scenarios, the probability of achieving those scenarios and the discount rate.

Other Fair Value Disclosures

The carrying amount and fair value of outstanding debt issued by the Company was as follows at March 31, 2015 and December 31, 2014 (in thousands):



	March 31, 2015				December 31, 2014
	Carrying Amount		Fair Value (1)		Carrying Amount		Fair Value (1)
2020 Convertible Notes	$	282,093	$	327,319	$	—	$	—
Term Loan A Facility	124,605		120,000		124,580		120,000
Term Loan B Facility	691,593		689,539		693,227		679,958
2040 Convertible Notes	3,604		3,604		289,125		291,354
	$	1,101,895	$	1,140,462	$	1,106,932	$	1,091,312

(1)

The fair value of outstanding debt issued by the Company is estimated primarily using quoted prices for the identical instrument in a market that is not active or an expected present value technique, which is based on observable market inputs using interest rates currently available to companies of similar credit standing for similar terms and remaining maturities, and considering its own credit risk. If measured at fair value in the Condensed Consolidated Balance Sheets, debt would be classified in Level 2 of the fair value hierarchy.