FINANCIAL INSTRUMENTS AND FAIR VALUE

In determining fair value, we use various valuation approaches, including market, income and/or cost approaches. Accounting standards establish 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. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from independent sources. Unobservable inputs are inputs that reflect our assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs as follows:

Level 1—Valuations based on quoted prices in active markets for identical assets or liabilities that we have the ability to access.

Level 2—Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly. Assets and liabilities utilizing Level 2 inputs include cash flow swap instruments and exchange-traded debt securities that are not actively traded or that do not have a high trading volume.

Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement. Asset and liability measurements utilizing Level 3 inputs include those used in estimating fair value of non-financial assets and non-financial liabilities in purchase acquisitions and those used in assessing impairment of manufacturer franchise rights.

The availability of observable inputs can vary and is affected by a wide variety of factors. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment required to determine fair value is greatest for instruments categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed is determined based on the lowest level input that is significant to the fair value measurement.

Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, our assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. We use inputs that are current as of the measurement date, including during periods of significant market fluctuations.

Financial instruments consist primarily of cash and cash equivalents, contracts-in-transit, accounts receivable, cash surrender value of corporate-owned life insurance policies, accounts payable, floor plan notes payable, subordinated long-term debt, mortgage notes payable and interest rate swap agreements. The carrying values of our financial instruments, with the exception of subordinated long-term debt, approximate fair value due to (i) their short-term nature, (ii) recently completed market transactions or (iii) existence of variable interest rates, which approximate market rates. The fair value of our subordinated long-term debt is based on reported market prices which reflect Level 2 inputs. A summary of the carrying values and fair values of our 8.375% Notes is as follows:



	As of
	June 30, 2014		December 31, 2013
	(In millions)
Carrying Value:
8.375% Senior Subordinated Notes due 2020	$	308.7	$	309.2
Total carrying value	$	308.7	$	309.2

Fair Value:
8.375% Senior Subordinated Notes due 2020	$	333.0	$	336.8
Total fair value	$	333.0	$	336.8

In November 2013, we entered into an interest rate swap agreement with a notional principal amount of $75.0 million. This swap was designed to provide a hedge against changes in variable rate cash flows through maturity in September 2023. The notional value of this swap was $73.3 million as of June 30, 2014 and is reducing over its remaining term to $38.7 million at maturity.

We are also party to an interest rate swap agreement that had a notional principal amount of $17.8 million as of June 30, 2014. This swap is designed to provide a hedge against changes in variable interest rate cash flows through maturity in October 2015. The notional value of this swap is reducing over the remaining term to $16.1 million at maturity.

Both of our interest rate swaps qualify for cash flow hedge accounting treatment and do not, and will not, contain any ineffectiveness.

Information about the effect of derivative instruments on the accompanying Condensed Consolidated Statements of Income, including the impact on Accumulated Other Comprehensive Income ("AOCI") (in millions):



For the Three Months Ended June 30,	Derivative in Cash Flow Hedging Relationships	Results Recognized in AOCI (Effective Portion)			Location of Results Reclassified from AOCI to Earnings	Amount Reclassified from AOCI to Earnings–Active Swaps			Amount Reclassified from AOCI to Earnings–Terminated Swaps			Ineffective Results Recognized in Earnings		Location of Ineffective Results
2014	Interest rate swaps	$	(1.5	)	Swap interest expense	$	(0.5	)	$	—		$	—	N/A
2013	Interest rate swaps	$	—		Swap interest expense	$	(0.1	)	$	(0.8	)	$	—	N/A



For the Six Months Ended June 30,	Derivative in Cash Flow Hedging Relationships	Results Recognized in AOCI (Effective Portion)	Location of Results Reclassified from AOCI to Earnings	Amount Reclassified from AOCI to Earnings–Active Swaps	Amount Reclassified from AOCI to Earnings–Terminated Swaps	Ineffective Results Recognized in Earnings	Location of Ineffective Results
2014	Interest rate swaps	$(2.8)	Swap interest expense	$(1.0)	$—	$—	N/A
2013	Interest rate swaps	$—	Swap interest expense	$(0.2)	$(1.9)	$—	N/A

On the basis of yield curve conditions as of June 30, 2014 and including assumptions about future changes in fair value, we anticipate that the amount expected to be reclassified out of AOCI into earnings in the next 12 calendar months will be a loss of $1.9 million.

Fair value estimates reflect a credit adjustment to the discount rate applied to all expected cash flows under the swap. Other than that assumption, all other inputs reflect Level 2 inputs.



Information about amounts reclassified out of AOCI	(In millions)
Accumulated other comprehensive income — December 31, 2013	$	0.2
Change in fair value of cash flow swaps	(1.8		)
Total amount reclassified to swap interest expense	(1.8		)
Income tax impact associated with cash flow swaps	0.7
Accumulated other comprehensive loss — June 30, 2014	$	(0.9	)

Market Risk Disclosures as of June 30, 2014:

Instruments entered into for trading purposes—None

Instruments entered into for hedging purposes (in millions)—



Type of Derivative	Notional Size	Underlying Rate	Expiration	Fair Value
Interest Rate Swap*	$73.3	1 month LIBOR	September 2023	$	(1.3	)
Interest Rate Swap*	$17.8	1 month LIBOR	October 2015	$	(0.3	)

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* The total fair value of our swaps is a $1.6 million net liability, of which $1.9 million is included in Accounts Payable and Accrued Liabilities, $0.1 million is included in Other Long-Term Liabilities and $0.4 million is included in Other Long-Term Assets on the accompanying Condensed Consolidated Balance Sheet.

Market Risk Disclosures as of December 31, 2013:

Instruments entered into for trading purposes—None

Instruments entered into for hedging purposes (in millions)—



Type of Derivative	Notional Size	Underlying Rate	Expiration	Fair Value
Interest Rate Swap*	$75.0	1 month LIBOR	September 2023	$	0.7
Interest Rate Swap*	$18.4	1 month LIBOR	October 2015	$	(0.4	)

____________________________

* The total fair value of our swaps is a $0.3 million net asset, of which $1.9 million is included in Accounts Payable and Accrued Liabilities, $0.1 million is included in Other Long-Term Liabilities and $2.3 million is included in Other Long-Term Assets on the accompanying Condensed Consolidated Balance Sheet.