FINANCIAL INSTRUMENTS AND FAIR VALUE

The Company measures certain financial assets and liabilities at fair value on a recurring basis. Financial instruments consist primarily of cash, accounts receivable, accounts payable and floor plan notes payable. The carrying values of the Company’s financial instruments approximate fair value due either to their short-term nature or existence of variable interest rates, which approximate market rates.

Certain methods and assumptions were used by the Company in estimating the fair value of financial instruments at

December

31,

2016,

and

2015.

The carrying value of current assets and current liabilities approximates the fair value due to the short maturity of these items.

The fair value of the Company’s long-term debt is based on

secondary

market indicators. Because the Company’s debt is not quoted, estimates are based on each obligation’s characteristics, including remaining maturities, interest rate, credit rating, collateral and liquidity. Accordingly, the Company concluded the valuation measurement inputs of its long-term debt to represent, at its lowest level, current market interest rates available to the Company for similar debt and the Company’s current credit standing and has categorized such debt within Level

of the hierarchy framework. The carrying amount approximates fair value.

If investments are deemed to be impaired, the Company determines whether the impairment is temporary or other than temporary. If the impairment is deemed to be temporary, the Company records an unrealized loss in other comprehensive income. If the impairment is deemed other than temporary, the Company records the impairment in the Company’s Consolidated Statements of Income.

In prior years, the Company invested in interest-bearing short-term investments primarily consisting of investment-grade auction rate securities classified as available-for-sale and reported at fair value. These types of investments were designed to provide liquidity through an auction process that reset the applicable interest rates at predetermined periods ranging from

days. This reset mechanism was intended to allow existing investors to continue to own their respective interest in the auction rate security or to gain immediate liquidity by selling their interests at par.

Auctions for investment grade securities held by the Company have failed. However, a failed auction does not represent a default by the issuer. The auction rate securities continue to pay interest in accordance with the terms of the underlying security; however, liquidity will be limited until there is a successful auction or until such time as other markets for these investments develop. The Company has the intent and ability to hold these auction rate securities until liquidity returns to the market. The Company does not believe that the lack of liquidity relating to its auction rate securities will have a material impact on its ability to fund operations.

As of

December

31,

2016,

the Company held auction rate securities with underlying tax-exempt municipal bonds that mature in

2030

and have a fair value of

$6.2

million and a cost basis of

$6.7

million. As of

December

31,

2015,

the Company held auction rate securities with underlying tax-exempt municipal bonds that mature in

2030

and have a fair value of

$6.7

million and a cost basis of

$7.2

million. The issuer redeemed

$150,000

of the auction rate securities during the

second

quarter of

2014,

$275,000

during the

second

quarter of

2015,

$250,000

during the

second

quarter of

2016,

and

$200,000

during the

third

quarter of

2016.

These bonds have credit wrap insurance and a credit rating of A by a major credit rating agency.

The Company valued the auction rate securities at

December

31,

2016

using a discounted cash flow model based on the characteristics of the individual securities, which the Company believes yields the best estimate of fair value. The

first

step in the valuation included a credit analysis of the security which considered various factors including the credit quality of the issuer, the instrument’s position within the capital structure of the issuing authority, and the composition of the authority’s assets including the effect of insurance and/or government guarantees. Next, the future cash flows of the instruments were projected based on certain assumptions regarding the auction rate market significant to the valuation including the auction rate market will remain illiquid and auctions will continue to fail causing the interest rate to be the maximum applicable rate. This assumption resulted in discounted cash flow analysis being performed through

2019,

the point at which the Company estimates the securities will be redeemed by the municipality. The projected cash flows were then discounted using the applicable yield curve plus a

225

basis point liquidity premium added to the applicable discount rate.

The Company recorded a pre-tax impairment charge of

$1.0

million on these auction rate securities in

2011

and a subsequent pre-tax increase in fair value of

$427,000

during

2014.

The Company believes that the impairment is temporary and has included the impairment in accumulated other comprehensive loss.

The table below presents disclosures about the auction rate securities measured at fair value on a recurring basis in the Company’s financial statements as follows (in thousands):

	At December 31, 2016						At December 31, 2015
	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs
Investment in auction rate securities		-		-	$	6,231		-		-	$	6,650

	C ost Basis Amount		Gross Unrealized Loss In Accumulated OCI		Fair Value
December 31, 201 6
Investment in auction rate securities	$	6,700	$	469	$	6,231

December 31, 201 5
Investment in auction rate securities	$	7,150	$	500	$	6,650

Interest Rate Swap Agreements

January

2012,

the Company entered into swap agreements to hedge against the potential impact of increases in interest rates on its floating-rate debt instruments. All interest rate swap contracts expired by

July

2015,

therefore, at

December

31,

2016

and

2015,

the Company did not have any interest rate swap contracts. Swap agreements that hedge exposures to changes in interest rates exposed the Company to credit risk and market risk.

These swap contracts were designated as cash flow hedges to pay fixed rates of interest and received a floating interest rate based on LIBOR. The fixed interest rates specified in the interest rate swap contracts became effective on or about

January

2012.

The Company’s interest rate swaps qualified for cash flow hedge accounting treatment. Unrealized gains or losses were recorded in Accumulated Other Comprehensive Income (Loss) on the Consolidated Balance Sheets. Amounts received or paid under the contracts were recognized as interest expense over the life of the contracts.

The derivative instruments described above are on the accompanying Consolidated Statements of Income (in thousands):

Gain (Loss) Recognized in
OCI on Derivatives
(Effective Portion)
during the

Year

Ended

Location of Loss

Loss Reclassified
from Accumulated
OCI into Income
(Effective Portion)
during the

Year

Ended

December 31,

201

December 31,

201

Reclassified into
Income

December 31,

201

December 31,

201

Interest rate swaps

−

235

Interest Expense

−

(55

)

Long-Lived Assets

During the

first

quarter of

2016,

the Company instituted plans to consolidate its dealership network. In

2016,

the Company recorded an impairment charge related to the value of the real estate in the affected locations in the amount of

$7.5

million. The Company also classified certain excess real estate as held for sale, which resulted in an additional impairment charge.

The fair value measurements for the Company’s long-lived assets are based on Level

inputs. Fair values were based on evaluations by a

third

-party real estate broker that utilized its knowledge and historical experience in real estate markets and transactions. During the

third

and

fourth

quarter of

2016,

the Company sold

four

properties with a fair value of

$6.1

million. The Company is actively marketing the remaining real estate held for sale.

The following table presents long-lived assets measured and recorded at fair value on a nonrecurring basis (in thousands):

Description		Fair Value Measurements Using Significant Unobservable Inputs December 31 , 2016				Loss D uring the Year Ended December 31, 2016
Long-lived assets held for sale		$	13,955			$	(7,481	)

For further discussion of assets held for sale, see Note

– Restructuring Costs of the Notes to Consolidated Financial Statements. The loss was reported in selling, general and administrative expenses in the Consolidated Statements of Income and Comprehensive Income and was reported under the Truck Segment for

2016.