Fair Value Measurements

12 Months Ended

Dec. 31, 2014

We account for certain assets and liabilities at fair value, and categorize each of our fair value measurements in one of the following three levels based on the lowest level input that is significant to the fair value measurement in its entirety:

Level 1—Inputs to the valuation methodology are unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2—Observable inputs other than quoted prices in active markets for identical assets and liabilities include:

a) quoted prices for similar assets or liabilities in active markets;

b) quoted prices for identical or similar assets or liabilities in inactive markets;

c) inputs other than quoted prices that are observable for the asset or liability;

d) inputs that are derived principally from or corroborated by observable market data by correlation or other means.

If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability.

Level 3—Inputs to the valuation methodology are unobservable (i.e., supported by little or no market activity) and significant to the fair value measure.

Assets and Liabilities Measured at Fair Value

Our fixed price diesel swap contracts are Level 2 derivatives measured at fair value on a recurring basis. As of December 31, 2014 and 2013, immaterial amounts ($4 or less) were reflected in prepaid expenses and other assets, and accrued expenses and other liabilities in our consolidated balance sheets, reflecting the fair values of the fixed price swap contracts. As discussed in note 10 to the consolidated financial statements, we entered into the fixed price swap contracts on diesel purchases to mitigate the price risk associated with forecasted purchases of diesel. Fair value is determined based on observable market data. As of December 31, 2014, we have fixed price swap contracts covering 5.4 million gallons of diesel which we will buy throughout 2015 at the average contract price of $3.64 per gallon, while the average forward price for the hedged gallons was $2.97 per gallon as of December 31, 2014.

The fair value of the contingent cash consideration we expect to pay associated with the April 2014 National Pump acquisition discussed in note 3 to our consolidated financial statements was $78 as of December 31, 2014. The contingent consideration is recorded in accrued expenses and other liabilities in our consolidated balance sheets, and is a Level 3 liability measured at fair value on a recurring basis. Fair value was determined using a probability weighted discounted cash flow methodology. Key inputs to the valuation included: (i) discrete scenarios of potential payouts under the two earn-out arrangements discussed in note 3 to our consolidated financial statements; (ii) probability weightings assigned to each of the scenarios for each of the two earn-out payments; and (iii) a rate of return with which to discount the probability weighted payouts to present value. The discrete payout scenarios were based on the low case, base case and high case forecasts of financial performance prepared by management in connection with the acquisition, as well as a potential settlement scenario. The probability weighted payments were then discounted to present value using a discount rate of 11.0 percent based on a calculated risk adjusted rate for National Pump, and using a 2.9 percent discount rate for the settlement scenario, resulting in fair values of $70 and $8 for the first and second earn out-payments, respectively. Changes to the inputs used in the valuation could result in material changes to fair value. As discussed in note 3 to our consolidated financial statements, the fair value of the contingent cash consideration was $76 as of the acquisition date. Changes to the fair value of the contingent cash consideration are reflected in our consolidated statements of income as “Merger related costs” which included $2 of such changes for the year ended December 31, 2014.

Fair Value of Financial Instruments

The carrying amounts reported in our consolidated balance sheets for accounts receivable, accounts payable and accrued expenses and other liabilities approximate fair value due to the immediate to short-term maturity of these financial instruments. The fair values of our senior secured asset-based revolving credit facility (“ABL facility”) and accounts receivable securitization facility approximate their book values as of December 31, 2014 and 2013. The estimated fair values of our other financial instruments at December 31, 2014 and 2013 have been calculated based upon available market information or an appropriate valuation technique, and are as follows:



	December 31, 2014				December 31, 2013
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Level 1:
Senior and senior subordinated notes	$	6,063	$	6,390	$	5,381	$	5,848
Level 2:
4 percent Convertible Senior Notes (1)	32		33		136		149
Level 3:
Capital leases (2)	105		104		120		118

(1)

The fair value of the 4 percent Convertible Senior Notes is based on the market value of comparable notes. Consistent with the carrying amount, the fair value excludes the equity component of the notes. To exclude the equity component and calculate the fair value, we used an effective interest rate of 7.3 percent. As discussed below (see note 12), the total cost to settle the notes based on the closing price of our common stock on December 31, 2014 would be $310.


(2)	The fair value of capital leases reflects the present value of the leases using a 7.0 percent interest rate.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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