Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

v2.3.0.15
Fair Value Measurements
 9 Months Ended
Sep. 30, 2011
Fair Value Measurements [Abstract]  
Fair Value Measurements

9. Fair Value Measurements

In determining fair value, Sonic uses various valuation approaches including market, income and/or cost approaches. “Fair Value Measurements and Disclosures” in the ASC establishes 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 sources independent of Sonic. Unobservable inputs are inputs that reflect Sonic’s 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 Sonic has the ability to access. Assets utilizing Level 1 inputs include marketable securities that are actively traded.

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.

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, those used in assessing impairment of property, plant and equipment and other intangibles and those used in the reporting unit valuation in the first step of the annual goodwill impairment evaluation. For instance, certain assets held for sale in the accompanying Unaudited Condensed Consolidated Balance Sheets are valued based on estimated proceeds to be received in connection with the disposal of those assets.

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 by Sonic in determining 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 (Level 3 being the lowest level) 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, Sonic’s own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. Sonic uses inputs that are current as of the measurement date, including during periods when the market may be abnormally high or abnormally low. Accordingly, fair value measurements can be volatile based on various factors that may or may not be within Sonic’s control.

 

Assets or liabilities recorded at fair value in the accompanying balance sheet as of September 30, 2011 are as follows:

 

                                 
    Fair Value at Reporting Date Using:  
          Quoted Prices in
Active Markets for
Identical Assets		     Significant
Other
Observable
Inputs		     Significant
Unobservable
Inputs		  
        Total         (Level 1)     (Level 2)     (Level 3)  
    (In millions)  
         

Cash flow swaps designated as
hedges (1)

   $ (33.6)     $ —       $ (33.6)     $ —    

Cash flow swaps not designated as hedges (2)

     (5.7)       —         (5.7)       —    
   

 

 

    

 

 

    

 

 

    

 

 

  
         

Total

   $ (39.3)     $ —       $ (39.3)     $ —    
   

 

 

    

 

 

    

 

 

    

 

 

  

 

  (1)

$11.3 million and $22.3 million are included in other accrued liabilities and Other Long-Term Liabilities, respectively, in the accompanying Unaudited Condensed Consolidated Balance Sheets.

  (2) $3.5 million and $2.2 million are included in other accrued liabilities and Other Long-Term Liabilities, respectively, in the accompanying Unaudited Condensed Consolidated Balance Sheets.

As of September 30, 2011 and December 31, 2010, the fair values of Sonic’s financial instruments including receivables, notes receivable from finance contracts, notes payable — floor plan, trade accounts payable, borrowings under the revolving credit facilities and certain mortgage notes approximate their carrying values due either to length of maturity or existence of variable interest rates that approximate prevailing market rates.

The fair value and carrying value of Sonic’s fixed rate long-term debt was as follows:

 

                                 
    September 30, 2011     December 31, 2010  
    Fair Value     Carrying Value     Fair Value     Carrying Value  
    (In thousands)  
         

9.0% Notes (1)

   $ 222,600     $ 208,733     $ 220,836     $ 208,630  
         

8.625% Notes (1)

   $ —       $ —       $ 43,498     $ 42,673  
         

5.0% Convertible Notes (1)

   $ 218,285     $ 144,766     $ 215,453     $ 147,824  
         

Mortgage notes (2)

   $ 114,961     $ 117,568     $ 88,119     $ 88,262  
         

Notes payable to a finance company (2)

   $ 13,888     $ 15,201     $ 15,676     $ 17,427  
         

Other (2)

   $ 5,191     $ 5,605     $ 5,311     $ 5,751  

 

  (1) As determined by market quotations as of September 30, 2011 and December 31, 2010 (Level 1).
  (2) As determined by discounted cash flows (Level 3).