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Financial Instruments and Fair Value Measurements

3 Months Ended

Mar. 31, 2020

FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

Accounting standards define fair value as the price that would be received from selling an asset or paid to transfer a liability in the most advantageous market in an orderly transaction between market participants at the measurement date. Accounting standards establish a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value and also establishes the following three levels of inputs that may be used to measure fair value:


•	Level 1 — Quoted prices for identical assets or liabilities in active markets.


•	Level 2 — Observable inputs other than Level 1 prices such as quoted prices for similar assets and liabilities; quoted prices in markets that are not active; or model-derived valuations or other inputs that are observable or that can be corroborated by observable market data for substantially the full term of the assets or liabilities.


•	Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Cash and Cash Equivalents, Contracts-In-Transit and Vehicle Receivables, Accounts and Notes Receivable, Accounts Payable, Variable Rate Long-Term Debt and Floorplan Notes Payable

The fair values of these financial instruments approximate their carrying values due to the short-term nature of these instruments and/or the existence of variable interest rates.

Fixed Rate Long-Term Debt

The Company’s fixed rate long-term debt primarily consists of amounts outstanding under its senior unsecured notes and certain mortgage facilities. See Note 9 “Debt” for further discussion of the Company’s long-term debt arrangements. The Company estimates the fair value of its 5.00% Senior Notes using quoted prices for the identical liability (Level 1) and estimates the fair value of its fixed-rate mortgage facilities using a present value technique based on current market interest rates for similar types of financial instruments (Level 2).

The carrying value and fair value of the Company’s 5.00% Senior Notes and fixed rate mortgages were as follows (in millions):



	March 31, 2020				December 31, 2019
	Carrying Value ⁽¹⁾		Fair Value		Carrying Value ⁽¹⁾		Fair Value
5.00% Senior Notes	$	546.8	$	510.4	$	546.4	$	559.5
Real estate related	39.3		38.9		40.7		41.1
Total	$	586.1	$	549.3	$	587.1	$	600.6

(1)Carrying value includes unamortized discount and excludes debt issuance costs.

As described in Note 9 “Debt,” on April 2, 2020, the Company fully redeemed $300.0 million in aggregate principal amount of its outstanding 5.25% Senior Notes due June 2023, at a premium of 102.625%. The total redemption price, consisting of the principal amount of the notes redeemed plus associated premium, amounted to $307.9 million. The redemption price approximated the fair value of the 5.25% Senior Notes as of March 31, 2020.

Derivative financial instruments

The Company holds interest rate swaps to hedge against variability of interest payments indexed to LIBOR. The interest rate swaps are designated as cash flow hedges and the related gains or losses are deferred in stockholders’ equity as a component of Accumulated other comprehensive income (loss). The deferred gains or losses are recognized in income in the period in which the related items being hedged are recognized in expense. Monthly contractual settlements of the positions are recognized as Floorplan interest expense or Other interest expense, net, in the Company’s Condensed Consolidated Statements of Operations. The Company had no gains or losses related to ineffectiveness recognized in the Condensed Consolidated Statements of Operations for the three months ended March 31, 2020 and 2019.

As of March 31, 2020, the Company held 29 interest rate swaps in effect with a total notional value of $786.2 million that fixed its underlying one-month LIBOR at a weighted average rate of 1.91%. The Company also held 13 additional interest rate swaps with forward start dates beginning April 2020 that had an aggregate notional value of $580.8 million and a weighted average interest rate of 1.60% as of March 31, 2020. The maturity dates of the Company’s interest rate swaps range between December 2020 and December 2030.

The Company’s interest rate swaps are measured at fair value utilizing the option-pricing Black-Scholes present value technique. This technique utilizes a one-month LIBOR forward yield curve matched to the identical maturity term of the instrument being measured. Observable inputs utilized in the income approach valuation technique incorporate identical contractual notional amounts, fixed coupon rates, periodic terms for interest payments and contract maturity. The fair value of the interest rate swaps also considers the credit risk of the Company for instruments in a liability position or the counterparty for instruments in an asset position. The credit risk is calculated using the spread between the one-month LIBOR yield curve and the relevant interest rate according to Standard and Poor’s. The inputs to the fair value measurements reflect level 2 inputs.

Assets and liabilities associated with the Company’s interest rate swaps as reflected in the Condensed Consolidated Balance Sheets were as follows (in millions):



	March 31, 2020		December 31, 2019
Assets from interest rate risk management activities:
Other long-term assets	$	—	$	1.9
Liabilities from interest rate risk management activities:
Accrued expenses and other current liabilities	$	4.4	$	2.8
Long-term interest rate swap liabilities	41.7		4.4
Total long-term liabilities from interest rate risk management activities	$	46.1	$	7.2

Included in Accumulated other comprehensive income (loss) as of March 31, 2020 and 2019, were unrealized gains (losses), net of tax, totaling ($35.2) million and $4.4 million, respectively, related to the Company’s interest rate swaps.

The following tables present the impact of the Company’s interest rate swaps (in millions):



	Amount of Unrealized Income (Loss), Net of Tax, Recognized in Other Comprehensive Income (Loss)
	Three Months Ended March 31,
Derivatives in Cash Flow Hedging Relationship	2020			2019
Interest rate swaps	$	(31.6	)	$	(4.2	)

	Amount of Income (Loss) Reclassified from Other Comprehensive Income (Loss) into Statements of Operations
Location of Income (Loss) Reclassified from Other Comprehensive Income (Loss) into Statements of Operations	Three Months Ended March 31,
	2020			2019
Floorplan interest expense, net	$	(0.6	)	$	0.3
Other interest expense, net	$	(0.1	)	$	0.1

The net amount of loss expected to be reclassified out of Accumulated other comprehensive income (loss) into earnings as an offset to Floorplan interest expense or Other interest expense, net in the next twelve months is $4.4 million.

- 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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