Fair Value Measurements

Financial Assets and Liabilities Measured at Fair Value

We use the market and income approaches to value our financial assets and liabilities, and during the three months ended March 31, 2014, there were no significant changes in valuation techniques or inputs related to the financial assets or liabilities that we have historically recorded at fair value. The tiers in the fair value hierarchy include: Level 1, defined as observable inputs such as quoted market prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

The following tables present information about our financial assets and liabilities measured at fair value on a recurring basis and indicate the fair value hierarchy of the valuation inputs we utilized to determine such fair value as of March 31, 2014 and December 31, 2013 (in thousands):



	Balance as of March 31, 2014		Fair Value Measurements as of March 31, 2014
	Balance as of March 31, 2014		Level 1		Level 2		Level 3
Assets:
Cash surrender value of life insurance	$	26,296	$	—	$	26,296	$	—
Total Assets	$	26,296	$	—	$	26,296	$	—
Liabilities:
Contingent consideration liabilities	$	57,091	$	—	$	—	$	57,091
Deferred compensation liabilities	26,169		—		26,169		—
Foreign currency forward contract	11,533		—		11,533		—
Interest rate swaps	7,760		—		7,760		—
Total Liabilities	$	102,553	$	—	$	45,462	$	57,091



	Balance as of December 31, 2013		Fair Value Measurements as of December 31, 2013
	Balance as of December 31, 2013		Level 1		Level 2		Level 3
Assets:
Cash surrender value of life insurance	$	25,745	$	—	$	25,745	$	—
Total Assets	$	25,745	$	—	$	25,745	$	—
Liabilities:
Contingent consideration liabilities	$	55,653	$	—	$	—	$	55,653
Deferred compensation liabilities	25,232		—		25,232		—
Foreign currency forward contracts	21,818		—		21,818		—
Interest rate swaps	8,470		—		8,470		—
Total Liabilities	$	111,173	$	—	$	55,520	$	55,653

The cash surrender value of life insurance and deferred compensation liabilities are included in Other Assets and Other Noncurrent Liabilities, respectively, on our Unaudited Condensed Consolidated Balance Sheets. The contingent consideration liabilities are classified as a separate line item in current liabilities and within Other Noncurrent Liabilities on our Unaudited Condensed Consolidated Balance Sheets based on the expected timing of the related payments. The balance sheet classification of the interest rate swaps and foreign currency forward contracts is presented in Note 5, "Derivative Instruments and Hedging Activities."

Our Level 2 assets and liabilities are valued using inputs from third parties and market observable data. We obtain valuation data for the cash surrender value of life insurance and deferred compensation liabilities from third party sources, which determine the net asset values for our accounts using quoted market prices, investment allocations and reportable trades. We value our derivative instruments using a third party valuation model that performs a discounted cash flow analysis based on the terms of the contracts and market observable inputs such as current and forward interest rates and current and forward foreign exchange rates.

Our contingent consideration liabilities are related to our business acquisitions as further described in Note 8, "Business Combinations." Under the terms of the contingent consideration agreements, payments may be made at specified future dates depending on the performance of the acquired business subsequent to the acquisition. The liabilities for these payments are classified as Level 3 liabilities because the related fair value measurement, which is determined using an income approach, includes significant inputs not observable in the market. These unobservable inputs include internally-developed assumptions of the probabilities of achieving specified targets, which are used to determine the resulting cash flows and the applicable discount rate. Our Level 3 fair value measurements are established and updated quarterly by our corporate accounting department using current information about these key assumptions, with the input and oversight of our operational and executive management teams. We evaluate the performance of the business during the period compared to our previous expectations, along with any changes to our future projections, and update the estimated cash flows accordingly. In addition, we consider changes to our cost of capital and changes to the probability of achieving the earnout payment targets when updating our discount rate on a quarterly basis.

The significant unobservable inputs used in the fair value measurements of our Level 3 contingent consideration liabilities were as follows:



	March 31,		December 31,
	2014		2013
Unobservable Input	(Weighted Average)
Probability of achieving payout targets	96.4	%	70.6	%
Discount rate	6.7	%	6.5	%

A significant decrease in the assessed probabilities of achieving the targets or a significant increase in the discount rate, in isolation, would result in a significantly lower fair value measurement. Changes in the values of the liabilities are recorded in Change in Fair Value of Contingent Consideration Liabilities within Other Expense (Income) on our Unaudited Condensed Consolidated Statements of Income.

Changes in the fair value of our contingent consideration obligations are as follows (in thousands):



	Three Months Ended
	March 31,
	2014			2013
Beginning Balance	$	55,653		$	90,009
Contingent consideration liabilities recorded for business acquisitions	4,317			2,389
Payments	(2,006		)	(37,768		)
(Decrease) increase in fair value included in earnings	(1,222		)	823
Exchange rate effects	349			(5,888		)
Ending Balance	$	57,091		$	49,565

The purchase price for our 2011 acquisition of Euro Car Parts Holdings Limited included contingent payments depending on the achievement of certain annual performance targets in 2012 and 2013. The performance target for 2012 was exceeded, and during the three months ended March 31, 2013, we paid £25 million, the maximum contingent payment, through a cash payment of $33.9 million (£22.4 million) and the issuance of notes for $3.9 million (£2.6 million). In April 2014, we settled the liability for the 2013 performance period for the maximum amount of £30 million, including a cash payment of $44.8 million (£26.9 million) and the issuance of notes for $5.1 million (£3.1 million).

Of the amounts included in earnings for the three months ended March 31, 2014 and 2013, $0.7 million of gains and $0.8 million of losses, respectively, were related to contingent consideration obligations outstanding as of March 31, 2014. The changes in the fair value of contingent consideration obligations during the respective periods in 2014 and 2013 are a result of the quarterly assessment of the fair value inputs.

Financial Assets and Liabilities Not Measured at Fair Value

Our debt is reflected on the Unaudited Condensed Consolidated Balance Sheets at cost. Based on market conditions as of March 31, 2014 and December 31, 2013, the fair value of our credit agreement borrowings reasonably approximated the carrying value of $992 million and $673 million, respectively. In addition, based on market conditions, the fair value of the outstanding borrowings under the receivables facility reasonably approximated the carrying value of $80 million at March 31, 2014; we did not have any borrowings outstanding under the receivables facility as of December 31, 2013. As of March 31, 2014, the fair value of our senior notes was approximately $572 million compared to a carrying value of $600 million.

The fair value measurements of the borrowings under our credit agreement and receivables facility are classified as Level 2 within the fair value hierarchy since they are determined based upon significant inputs observable in the market, including interest rates on recent financing transactions with similar terms and maturities. We estimated the fair value by calculating the upfront cash payment a market participant would require to assume these obligations. The fair value of our senior notes, which is determined using quoted market prices in the secondary market, is also classified as Level 2 within the fair value hierarchy because the market for these financial instruments is not considered an active market.