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Financial Instruments and Fair Value Measurements
 6 Months Ended
Jun. 30, 2019
Fair Value Disclosures [Abstract]  
FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS 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
The Company’s financial instruments consist of cash and cash equivalents, contracts-in-transit and vehicle receivables, accounts and notes receivable, investments in debt and equity securities, accounts payable, credit facilities, long-term debt, and interest rate derivative instruments. Other than the Company’s fixed rate long-term debt, the carrying amount of all significant financial instruments approximates fair value due to either the length of maturity, the existence of variable interest rates that approximate prevailing market rates, or as a result of mark to market accounting.
Cash and Cash Equivalents, Contracts-In-Transit and Vehicle Receivables, Accounts and Notes Receivable, Accounts Payable, and Credit Facilities
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 mortgage facilities. The Company estimates the fair value of its senior unsecured notes using quoted prices for the identical liability (Level 1), and estimates the fair value of its mortgage facilities using a present value technique based on current market interest rates for similar type of financial instruments (Level 2).
 The carrying value and fair value of the Company’s fixed rate long-term debt were as follows at the dates indicated (in thousands):
 
 
June 30, 2019
 
December 31, 2018
 
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
5.00% Senior Notes
 
$
544,591

 
$
556,930

 
$
543,730

 
$
521,626

5.25% Senior Notes
 
297,035

 
307,518

 
296,735

 
286,500

Real estate related
 
71,933

 
72,477

 
79,537

 
76,156

Total
 
$
913,559

 
$
936,925

 
$
920,002

 
$
884,282


Investments
The Company maintains an investment balance with certain of the financial institutions in Brazil that provide credit facilities for the financing of new, used, and rental vehicle inventories. The investment balances bear interest at a variable rate and are redeemable by the Company in the future under certain conditions. The Company has classified these investment balances as restricted cash within Prepaid expenses and other current assets and Other assets in its Unaudited Condensed Consolidated Balance Sheets. The Company determined that the valuation measurement inputs of these instruments include inputs other than quoted market prices that are observable or that can be corroborated by observable data by correlation (Level 2). See Note 6, “Cash Flow Information” for further details regarding the Company’s investment balances.
Derivative financial instruments
All of the Company’s interest rate derivative instruments are designated as cash flow hedges. The related gains or losses on these interest rate derivative instruments are deferred in stockholders’ equity as a component of accumulated other comprehensive income (loss). These 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 these swap positions are recognized as Floorplan interest expense or Other interest expense, net, in the Company’s accompanying Unaudited Condensed Consolidated Statements of Operations. The Company had no gains or losses related to ineffectiveness recognized in the Unaudited Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2019 or 2018, respectively.
The Company held 26 interest rate derivative instruments in effect as of June 30, 2019 of $901.6 million in notional value that fixed its underlying one-month LIBOR at a weighted average rate of 2.3%. For the three months ended June 30, 2019 and 2018, the Company’s interest rate hedges in effect decreased interest expense by $0.4 million and increased interest expense by $1.4 million, respectively. For the six months ended June 30, 2019 and 2018, the Company’s interest rate hedges in effect decreased interest expense by $0.9 million and increased interest expense by $3.4 million, respectively.
In addition to the $901.6 million of swaps in effect as of June 30, 2019, the Company held five additional interest rate derivative instruments with forward start dates between December 2020 and December 2021 and expiration dates between January 2024 and December 2030. The aggregate notional value of these five forward-starting swaps was $325.0 million, and the weighted average interest rate was 1.9%. The combination of the interest rate derivative instruments currently in effect and these forward-starting derivative instruments is structured such that the notional value in effect at any given time through December 2030 does not exceed $901.6 million, which is less than the Company’s expectation for variable-rate debt outstanding during such period.
Assets and liabilities associated with interest rate derivative instruments, within Level 2 of the hierarchy framework, as reflected in the accompanying balance sheets were as follows (in thousands):
 
 
June 30, 2019
 
December 31, 2018
Assets from interest rate risk management activities
 
 
 
 
Prepaid expenses and other current assets
 
$
—

 
$
444

Other assets
 
1,006

 
13,132

Total
 
$
1,006

 
$
13,576

Liabilities from interest rate risk management activities
 
 
 
 
Accrued expenses and other current liabilities
 
$
748

 
$
115

Other liabilities
 
7,294

 
1,696

Total
 
$
8,042

 
$
1,811


Included in Accumulated other comprehensive income (loss) at June 30, 2019 and 2018, were accumulated unrealized gains, net of income taxes, totaling $5.4 million and $12.5 million, respectively, related to these interest rate derivative instruments.
The following tables present the impact of the Company’s interest rate derivative instruments (in thousands):
 
 
Amount of Unrealized Income (Loss), Net of Tax, Recognized in Other Comprehensive Income (Loss)
 
 
Six Months Ended June 30,
Derivatives in Cash Flow Hedging Relationship
 
2019
 
2018
Interest rate derivative instruments
 
$
(13,691
)
 
$
11,305

 
 
 
 
 
 
 
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
 
Six Months Ended June 30,
 
2019
 
2018
Floorplan interest expense, net
 
$
618

 
$
(2,999
)
Other interest expense, net
 
$
239

 
$
(390
)
The net amount of loss expected to be reclassified out of other comprehensive income (loss) into earnings as an offset to floorplan interest expense or other interest expense, net in the next twelve months is $0.7 million.