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FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

9 Months Ended

Sep. 30, 2023

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 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 the instruments and/or the existence of variable interest rates.

Fixed Rate Long-Term Debt

The Company estimates the fair value of its $750.0 million 4.00% Senior Notes due August 2028 (“4.00% 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). Refer to Note 9. Debt for further discussion of the Company’s long-term debt arrangements.

The carrying value and fair value of the Company’s 4.00% Senior Notes and fixed rate mortgages were as follows (in millions):


	September 30, 2023				December 31, 2022
	Carrying Value (1)		Fair Value		Carrying Value (1)		Fair Value
4.00% Senior Notes	$	750.0	$	651.5	$	750.0	$	633.9
Real estate related	93.0		82.7		99.2		90.5
Total	$	843.0	$	734.2	$	849.2	$	724.4

(1) Carrying value excludes unamortized debt issuance costs.

Derivative Financial Instruments

The Company holds interest rate swaps to hedge against variability of interest payments indexed to SOFR. The Company’s interest rate swaps are measured at fair value utilizing a SOFR 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 SOFR yield curve and the relevant interest rate according to rating agencies. The inputs to the fair value measurements reflect Level 2 of the hierarchy framework.

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


	September 30, 2023		December 31, 2022
Assets:
Other current assets	$	0.4	$	0.1
Other long-term assets (1)	121.2		109.2
Total assets	$	121.6	$	109.3
Liabilities:
Accrued expenses and other current liabilities	$	—	$	—
Other long-term liabilities	—		—
Total liabilities	$	—	$	—

(1) As of September 30, 2023, the balance included gross fair value of $4.9 million related to the de-designated swap as described below.

Interest Rate Swaps De-designated as Cash Flow Hedges

During the three months ended March 31, 2023, the Company de-designated one mortgage interest rate swap due to the Company settling the underlying mortgages associated with the swap during the same period. As of September 30, 2023, the de-designated swap had an aggregate notional value of $30.3 million that fixed its underlying one-month SOFR at an annual interest rate of 0.60% and will mature on March 1, 2030. No interest rate swaps were de-designated by the Company during the three months ended September 30, 2023.

The Company reclassified the entire previously deferred gain associated with the de-designated interest rate swap of $3.1 million, net of tax of $1.0 million, from AOCI into income as an adjustment to Other interest expense, net, as the remaining forecasted hedged transactions associated with the interest rate swap were probable of not occurring due to the settlement of the mortgages described above. Additionally, the Company recorded unrealized mark-to-market gains of $0.4 million and $0.8 million and realized gains of $0.4 million and $0.7 million associated with the interest rate swap within Other interest expense, net, for the three and nine months ended September 30, 2023, respectively.

Interest Rate Swaps Designated as Cash Flow Hedges

Interest rate swaps designated as cash flow hedges and the related gains or losses are deferred in stockholders’ equity as a component of AOCI in the Company’s Condensed Consolidated Balance Sheets. 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. Gains or losses for periods where future forecasted hedged transactions are deemed probable of not occurring are reclassified from AOCI into income as Floorplan interest expense or Other interest expense, net.

As of September 30, 2023, the Company held 35 interest rate swaps designated as cash flow hedges with a total notional value of $866.2 million that fixed its underlying SOFR at a weighted average rate of 1.25%. The Company also held two additional interest rate swaps designated as cash flow hedges with forward start dates beginning in December 2023, that had an aggregate notional value of $100.0 million and a weighted average interest rate of 0.94% as of September 30, 2023. The maturity dates of the Company’s designated interest rate swaps with forward start dates range between December 2027 and December 2028. As of September 30, 2022, the Company held 41 interest rate swaps designated as cash flow hedges with a total notional value of $949.1 million that fixed its underlying SOFR at a weighted average rate of 1.23%. The Company completed the transition of interest rate swaps from LIBOR to SOFR during 2022.

The following tables present the impact of the Company’s interest rate swaps designated as cash flow hedges (in millions):


	Amount of Unrealized Income (Loss), Net of Tax, Recognized in Other Comprehensive Income (Loss)
	Three Months Ended September 30,				Nine Months Ended September 30,
Derivatives in Cash Flow Hedging Relationship	2023		2022		2023		2022
Interest rate swaps	$	15.1	$	31.9	$	27.3	$	84.8


	Amount Reclassified from Other Comprehensive Income (Loss) into Statements of Operations
Statement of Operations Classification	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Floorplan interest expense	$	4.1	$	0.7	$	11.2	$	(1.4)
Other interest expense, net	$	4.7	$	1.2	$	13.2	$	(0.7)

The amount of gain expected to be reclassified out of AOCI into earnings as an offset to Floorplan interest expense or Other interest expense, net in the next twelve months is $25.3 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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