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Financial Instruments And Fair Value Measurements | 6 Months Ended
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Jun. 30, 2020
Fair Value Disclosures [Abstract] |
Financial Instruments and Fair Value Measurements | FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS The fair value of a financial instrument represents the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. Fair value estimates are made at a specific point in time based on relevant market information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of judgment, and therefore cannot be determined with precision. Accounting standards define fair value as the price that would be received from selling an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Accounting standards establish a fair value hierarchy which 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 in active markets for identical assets or liabilities
Level 2 | Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted market prices in markets that are not active; or model-derived valuations or other inputs that are observable or 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
The following methods and assumptions were used by us in estimating fair value disclosures for financial instruments:
• | Cash and cash equivalents, receivables, other current assets, vehicle floorplan payable, accounts payable, other current liabilities, commercial paper, and variable rate debt: The amounts reported in the accompanying Unaudited Condensed Consolidated Balance Sheets approximate fair value due to their short-term nature or the existence of variable interest rates that approximate prevailing market rates.
• | Investment in Security with a Readily Determinable Fair Value: Our minority equity investment in Vroom Inc. has a readily determinable fair value following Vroom’s initial public offering in the second quarter of 2020. As of June 30, 2020, the carrying amount of our Vroom equity investment was $290.5 million. The fair value of this equity investment is based on the quoted price in active markets for the identical asset (Level 1). The equity interest is reported in Other Assets in the accompanying Unaudited Condensed Consolidated Balance Sheets. During the three and six months ended June 30, 2020, we recognized an unrealized gain of $214.7 million related to this investment, which is reported in Other Non-Operating Income in the Consolidated Statements of Operations and in the “Corporate and other” category of our segment information.
• | Investments in Security without a Readily Determinable Fair Value: We elected to measure our minority equity investment in Waymo, which does not have a readily determinable fair value, using a measurement alternative as permitted by accounting standards, and we recorded the equity interest at its cost of $50.0 million. The equity interest is reported in Other Assets in the accompanying Unaudited Condensed Consolidated Balance Sheets. We have considered all relevant transactions since the date of our investment through June 30, 2020, and we have not recorded any impairments or upward or downward adjustments to the carrying amounts of our investment as of June 30, 2020, as there have not been any indications of impairment or observable price changes in orderly transactions for the identical or a similar investment of the same issuer as of such date.
• | Fixed rate long-term debt: Our fixed rate long-term debt primarily consists of amounts outstanding under our senior unsecured notes. We estimate the fair value of our senior unsecured notes using quoted prices for the identical liability (Level 1). A summary of the aggregate carrying values and fair values of our fixed rate long-term debt is as follows:
| June 30, 2020 |  | December 31, 2019
Carrying value | $ | 2,090.4 |  |  | $ | 1,934.1 |
Fair value | $ | 2,216.9 |  |  | $ | 2,001.8 |
Nonfinancial assets such as goodwill, other intangible assets, long-lived assets held and used, and right-of-use assets are measured at fair value when there is an indicator of impairment and recorded at fair value only when impairment is recognized or for a business combination. The fair values less costs to sell of long-lived assets held for sale are assessed each reporting period they remain classified as held for sale. Subsequent changes in the held for sale long-lived asset’s fair value less cost to sell (increase or decrease) is reported as an adjustment to its carrying amount, except that the adjusted carrying amount cannot exceed the carrying amount of the long-lived asset at the time it was initially classified as held for sale. The following table presents nonfinancial assets measured and recorded at fair value on a nonrecurring basis during the six months ended June 30, 2020 and 2019:
|  | 2020 |  | 2019
Description |  | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |  | Gain/(Loss) |  | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |  | Gain/(Loss)
Goodwill |  | $ | 457.5 |  |  | $ | (318.3 | ) |  | $ | — |  |  | $ | — |
Franchise rights and other |  | $ | 26.2 |  |  | $ | (59.9 | ) |  | $ | 8.9 |  |  | $ | (9.6 | )
Right-of-use assets |  | $ | 1.4 |  |  | $ | (0.4 | ) |  | $ | 0.1 |  |  | $ | (0.2 | )
Long-lived assets held and used |  | $ | 1.8 |  |  | $ | (5.8 | ) |  | $ | — |  |  | $ | — |
Long-lived assets held for sale in continuing operations |  | $ | — |  |  | $ | — |  |  | $ | 21.3 |  |  | $ | (1.1 | )
Goodwill and Other Intangible Assets Goodwill for our reporting units is tested for impairment annually as of April 30 or more frequently when events or changes in circumstances indicate that the carrying value of a reporting unit more likely than not exceeds its fair value. In light of the uncertainty surrounding the COVID-19 pandemic and the decrease in our market capitalization as of March 31, 2020, we concluded that a triggering event had occurred potentially indicating that the fair values of our reporting units were less than their carrying values as of March 31, 2020. Therefore, we performed quantitative goodwill impairment tests for each of our reporting units as of March 31, 2020. As a result of these impairment tests, during the three months ended March 31, 2020, we recorded non-cash goodwill impairment charges totaling $318.3 million, of which $257.4 million related to our Premium Luxury reporting unit, $41.6 million related to our Collision Centers reporting unit, and $19.3 million related to our Parts Center reporting unit. The non-cash impairment charges are reflected as Goodwill Impairment in the accompanying Unaudited Condensed Consolidated Statements of Operations and in the “Corporate and other” category of our segment information. The quantitative goodwill impairment test requires a determination of whether the fair value of a reporting unit is less than its carrying value. We estimate the fair value of our reporting units using an “income” valuation approach, which discounts projected free cash flows of the reporting unit at a computed weighted average cost of capital as the discount rate. The income valuation approach requires the use of significant estimates and assumptions, which include revenue growth rates and future operating margins used to calculate projected future cash flows, weighted average costs of capital, and future economic and market conditions. In connection with this process, we also reconcile the estimated aggregate fair values of our reporting units to our market capitalization, including consideration of a control premium, based upon our stock price and/or average stock price over a reasonable period as of the measurement date. We base our cash flow forecasts on our knowledge of the automotive industry, our recent performance, our expectations of our future performance, and other assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. Actual future results may differ from those estimates. We also make certain judgments and assumptions in allocating shared assets and liabilities to determine the carrying values for each of our reporting units. Under accounting standards, we chose to make a qualitative evaluation about the likelihood of goodwill impairment for our annual impairment testing as of April 30, 2020, and we determined that it was not more likely than not that the fair values of our reporting units were less than their carrying amounts. Our principal identifiable intangible assets are individual store rights under franchise agreements with vehicle manufacturers, which have indefinite lives and are tested for impairment annually as of April 30 or more frequently when events or changes in circumstances indicate that impairment may have occurred. During the first quarter of 2020, we concluded that, as a result of the impacts from the COVID-19 pandemic, a triggering event had occurred that indicated the fair values of our franchise rights may have been less than their carrying values as of March 31, 2020. Therefore, we performed quantitative franchise rights impairment tests as of March 31, 2020. The quantitative impairment test for franchise rights requires the comparison of the franchise rights’ estimated fair value to carrying value by store. Fair values of rights under franchise agreements are estimated using Level 3 inputs by discounting expected future cash flows of the store. The forecasted cash flows contain inherent uncertainties, including significant estimates and assumptions related to growth rates, margins, working capital requirements, capital expenditures, and cost of capital, for which we utilize certain market participant-based assumptions, using third-party industry projections, economic projections, and other marketplace data we believe to be reasonable. As a result of the quantitative impairment tests, we identified eight stores with franchise rights carrying values that exceeded their estimated fair values, and we recorded non-cash franchise rights impairment charges of $57.5 million during the three months ended March 31, 2020. We elected to perform quantitative tests for our annual franchise rights impairment testing as of April 30, 2020, and no additional impairment charges resulted from these quantitative tests. We elected to perform quantitative franchise rights impairment tests as of April 30, 2019, and recorded non-cash impairment charges of $9.6 million to reduce the carrying values of certain franchise rights to their estimated fair values. The non-cash impairment charges recorded during the six months ended June 30, 2020 and 2019, are reflected as Franchise Rights Impairment in the accompanying Unaudited Condensed Consolidated Statements of Operations and in the “Corporate and other” category of our segment information. We also recorded non-cash impairment charges of $2.4 million to reduce the carrying value of certain finite-lived intangible assets to estimated fair value during the three months ended March 31, 2020, which are included in Other Income (Expense), Net in our Unaudited Condensed Consolidated Statements of Operations and in the “Corporate and other” category of our segment information. Long-Lived Assets and Right-of-Use Assets Fair value measurements for our long-lived assets and right-of-use assets are based on Level 3 inputs. Changes in fair value measurements are reviewed and assessed each quarter for properties classified as held for sale, or when an indicator of impairment exists for properties classified as held and used or for right-of-use assets. The valuation process is generally based on a combination of the market and replacement cost approaches. In a market approach, we use transaction prices for comparable properties that have recently been sold. These transaction prices are adjusted for factors related to a specific property. We evaluate changes in local real estate markets, and/or recent market interest or negotiations related to a specific property. In a replacement cost approach, the cost to replace a specific long-lived asset is considered, which is adjusted for depreciation from physical deterioration, as well as functional and economic obsolescence, if present and measurable. To validate the fair values determined under the valuation process noted above, we also obtain independent third-party appraisals for our properties and/or third-party brokers’ opinions of value, which are generally developed using the same valuation approaches described above, and we evaluate any recent negotiations or discussions with third-party real estate brokers related to a specific long-lived asset or market. During the six months ended June 30, 2020, we recorded non-cash impairment charges of $5.8 million related to our long-lived assets held and used and $0.4 million related to our right-of-use assets. During the six months ended June 30, 2019, we recorded non-cash impairment charges of $1.1 million related to our long-lived assets held for sale in continuing operations and $0.2 million related to our right-of-use assets. The non-cash impairment charges are included in Other Income (Expense), Net in our Unaudited Condensed Consolidated Statements of Operations and in the “Corporate and other” category of our segment information. We had assets held for sale in continuing operations of $37.6 million as of June 30, 2020, and $40.6 million as of December 31, 2019, primarily related to property held for sale, as well as inventory, goodwill, and property of a disposal group held for sale. We had assets held for sale in discontinued operations of $8.0 million as of June 30, 2020, and $8.0 million as of December 31, 2019, primarily related to property held for sale. Assets held for sale are included in Other Current Assets in our Unaudited Condensed Consolidated Balance Sheets. Quantitative Information about Level 3 Fair Value Measurements
Description |  | Fair Value at March 31, 2020 |  | Valuation Technique |  | Unobservable Input |  | Range (Average)
Franchise rights |  | $ | 24.6 |  |  | Discounted cash flow |  | Weighted average cost of capital |  | 8.5%
|  |  |  |  |  | Discount rate |  | 11.1% - 14.3% (12.1%)
|  |  |  |  |  | Long-term revenue growth rate |  | 2.0%
|  |  |  |  |  | Long-term pretax income margin |  | 0.6% - 2.8% (1.4%)
|  |  |  |  |  | Contributory asset charges |  | 4.2% - 12.1% (6.2%)

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- 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. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=117815213&loc=d3e19207-110258 + Details
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