NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Asbury Automotive Group, Inc., a Delaware corporation organized in 2002, is one of the largest automotive retailers in the United States. Our store operations are conducted by our subsidiaries.
As of March 31, 2023, we owned and operated 184 new vehicle franchises (139 dealership locations), representing 31 brands of automobiles, and 32 collision centers in 14 states. For the three months ended March 31, 2023, our new vehicle revenue brand mix consisted of 34% luxury, 38% imports and 28% domestic brands. Our stores offer an extensive range of automotive products and services, including new and used vehicles; parts and service, which includes repair and maintenance services, replacement parts and collision repair services (collectively referred to as "parts and services" or "P&S"); and finance and insurance ("F&I") products, including arranging vehicle financing through third parties and aftermarket products, such as extended service contracts, guaranteed asset protection ("GAP") debt cancellation and prepaid maintenance. The finance and insurance products are provided by independent third parties and Total Care Auto, Powered by Landcar ("TCA"). The Company reflects its operations in two reportable segments: Dealerships and TCA.
Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"), and reflect the consolidated accounts of Asbury Automotive Group, Inc. (the "Company") and our wholly owned subsidiaries. All intercompany transactions have been eliminated in consolidation. If necessary, reclassifications of amounts previously reported have been made to the accompanying condensed consolidated financial statements in order to conform to current presentation.
In the opinion of management, all adjustments, consisting only of normal, recurring adjustments, considered necessary for a fair statement of the condensed consolidated financial statements as of March 31, 2023, and for the three months ended March 31, 2023 and 2022, have been included, unless otherwise indicated. Amounts presented in the condensed consolidated financial statements have been calculated using non-rounded amounts for all periods presented and therefore certain amounts may not compute or tie to prior year financial statements due to rounding.
The results of operations for the three months ended March 31, 2023 are not necessarily indicative of the results that may be expected for any other interim period, or any full year period. Our condensed consolidated financial statements should be read together with our audited consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2022.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the periods presented. Actual results could differ materially from these estimates. Estimates and assumptions are reviewed quarterly and the effects of any revisions are reflected in the consolidated financial statements in the period they are determined to be necessary. Estimates made in the accompanying condensed consolidated financial statements include, but are not limited to, those relating to inventory valuation reserves, reserves for chargebacks against revenue recognized from the sale of finance and insurance products, reserves for self-insurance programs, and certain assumptions related to goodwill and dealership franchise rights intangible assets.
Share Repurchases
Share repurchases may be made from time-to-time in open market transactions or through privately negotiated transactions under the authorization approved by the Board of Directors. Periodically, the Company may retire repurchased shares of common stock previously held by the Company as treasury stock. In accordance with our accounting policy, we allocate any excess share repurchase price over par value between additional paid-in capital, which is limited to amounts initially recorded for the same issue, and retained earnings. During the three months ended March 31, 2023 and 2022, the Company repurchased 110,323 and 1,069,203 shares and retired 164,527 and 1,069,203 shares, of our common stock under our share repurchase program, respectively. The cash paid for share repurchases was $20.7 million and $200.0 million for the three months ended March 31, 2023 and 2022, respectively. From April 1, 2023 through April 27, 2023, the Company repurchased 149,765 shares for $28.7 million pursuant to a 10b5-1 agreement.
Earnings per Share
Basic earnings per share is computed by dividing net income by the weighted-average common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted-average common shares and common share equivalents outstanding during the period. The Company excluded 4,005 and 2,123 restricted share units and 476 and 533 performance share units issued under the Asbury Automotive Group, Inc. 2019 Equity and Incentive Compensation Plan from its computation of diluted earnings per share for the three months ended March 31, 2023 and 2022, respectively, because they were anti-dilutive. For all periods presented, there were no adjustments to the numerator necessary to compute diluted earnings per share.
Recent Accounting Pronouncements
In September 2022, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2022-04, Liabilities-Supplier Finance Programs. This standard serves to improve transparency about supplier finance programs. The ASU requires certain disclosures around key terms of outstanding supply chain finance programs and changes in obligations during a reporting period related to vendors participating in these programs. The new disclosure requirements do not affect the recognition, measurement or financial statement presentation of any amounts due. The guidance is effective for fiscal years beginning after December 15, 2022, except for rollforward information, which is effective in the first quarter of 2024. Early adoption is permitted. The adoption of this new guidance on January 1, 2023 did not have a material impact on our condensed consolidated financial statements. Refer to Note 8, "Floor Plan Notes Payable."
2. REVENUE RECOGNITION
Disaggregation of Revenue
Revenue from contracts with customers for the three months ended March 31, 2023 and 2022 consists of the following: | | | | | | | | | | | |
| For the Three Months Ended March 31, |
| 2023 | | 2022 |
| (In millions) |
Revenue: | | | |
New vehicle | $ | 1,767.7 | | | $ | 1,855.6 | |
Used vehicle retail | 1,021.6 | | | 1,217.0 | |
Used vehicle wholesale | 104.9 | | | 134.0 | |
New and used vehicle | 2,894.2 | | | 3,206.5 | |
Sale of vehicle parts and accessories | 126.0 | | | 130.2 | |
Vehicle repair and maintenance services | 389.6 | | | 371.7 | |
Parts and service | 515.6 | | | 501.9 | |
Finance and insurance, net | 172.5 | | | 203.4 | |
Total revenue | $ | 3,582.3 | | | $ | 3,911.8 | |
Contract Assets
Changes in contract assets during the period are reflected in the table below. Contract assets related to vehicle repair and maintenance services are transferred to receivables when a repair order is completed and invoiced to the customer. Certain incremental sales commissions payable to obtain an F&I revenue contract with a customer have been capitalized and are amortized using the same pattern of recognition applicable to the associated F&I revenue contract.
| | | | | | | | | | | | | | | | | | | | | | | |
| Vehicle Repair and Maintenance Services | | Finance and Insurance, net | | Deferred Sales Commissions | | Total |
| (In millions) |
Balance as of January 1, 2023 | $ | 14.7 | | | $ | 14.7 | | | $ | 37.2 | | | $ | 66.6 | |
Transferred to receivables from contract assets recognized at the beginning of the period | (14.7) | | | (3.0) | | | — | | | (17.7) | |
Amortization of costs to obtain a contract with a customer | — | | | — | | | (2.0) | | | (2.0) | |
Costs incurred to obtain a contract with a customer | — | | | — | | | 8.6 | | | 8.6 | |
Increases related to revenue recognized, inclusive of adjustments to constraint, during the period | 16.3 | | | 2.8 | | | — | | | 19.1 | |
Balance as of March 31, 2023 | $ | 16.3 | | | $ | 14.5 | | | $ | 43.8 | | | $ | 74.6 | |
| | | | | | | |
Contract Assets (current), March 31, 2023 | 16.3 | | | 14.5 | | | 12.9 | | | 43.7 | |
Contract Assets (long-term), March 31, 2023 | — | | | — | | | 30.9 | | | 30.9 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Deferred Revenue
The condensed consolidated balance sheets reflect $713.7 million and $713.9 million of deferred revenue as of March 31, 2023 and December 31, 2022, respectively. Approximately $62.4 million of deferred revenue at December 31, 2022 was recorded in finance and insurance, net revenue in the condensed consolidated statements of income during the three months ended March 31, 2023.
During the three months ended March 31, 2022, we sold one franchise (one dealership location) in St. Louis, Missouri, and three franchises (three dealership locations) in the Denver, Colorado market. The Company recorded a pre-tax gain totaling $33.1 million, for the three months ended March 31, 2022, which is presented in our accompanying condensed consolidated statements of income as gain on dealership divestitures, net. There were no divestitures during the three months ended March 31, 2023.
4. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following:
| | | | | | | | | | | |
| As of |
| March 31, 2023 | | December 31, 2022 |
| (In millions) |
Vehicle receivables | $ | 48.1 | | | $ | 50.4 | |
Manufacturer receivables | 42.1 | | | 43.3 | |
Other receivables | 78.6 | | | 80.5 | |
Total accounts receivable | 168.9 | | | 174.1 | |
Less—Allowance for credit losses | (2.3) | | | (2.2) | |
Accounts receivable, net | $ | 166.6 | | | $ | 171.9 | |
5. INVENTORIES
Inventories consisted of the following: | | | | | | | | | | | |
| As of |
| March 31, 2023 | | December 31, 2022 |
| (In millions) |
New vehicles | $ | 643.0 | | | $ | 527.7 | |
Used vehicles | 308.5 | | | 304.4 | |
Parts and accessories | 129.9 | | | 127.2 | |
Total inventories, net (a) | $ | 1,081.4 | | | $ | 959.2 | |
____________________________ (a) Inventories, net as of March 31, 2023 and December 31, 2022, excluded $5.0 million and $3.4 million classified as assets held for sale, respectively.
The lower of cost and net realizable value reserves reduced total inventories by $9.5 million and $10.7 million as of March 31, 2023 and December 31, 2022, respectively. As of March 31, 2023 and December 31, 2022, certain automobile manufacturer incentives reduced new vehicle inventory cost by $4.0 million and $2.7 million, respectively, and reduced new vehicle cost of sales for the three months ended March 31, 2023 and 2022 by $22.3 million and $25.5 million, respectively.
6. ASSETS AND LIABILITIES HELD FOR SALE
Assets and liabilities classified as held for sale include (i) assets and liabilities associated with pending dealership disposals, (ii) real estate not currently used in our operations that we are actively marketing to sell and (iii) the related mortgage notes payable, if applicable.
A summary of assets held for sale and liabilities associated with assets held for sale is as follows:
| | | | | | | | | | | |
| As of |
| March 31, 2023 | | December 31, 2022 |
| (In millions) |
Assets: | | | |
| | | |
| | | |
Inventory | $ | 5.0 | | | $ | 3.4 | |
Loaners, net | 0.9 | | | 0.9 | |
| | | |
Property and equipment, net | 36.0 | | | 24.0 | |
Operating lease right-of-use assets | 2.1 | | | — | |
Goodwill | 0.9 | | | 0.9 | |
| | | |
Total assets held for sale | 44.9 | | | 29.1 | |
Liabilities: | | | |
| | | |
Floor plan notes payable—non-trade | 4.2 | | | 2.8 | |
Loaners notes payable | 1.0 | | | 0.8 | |
| | | |
Current maturities of long-term debt | 1.0 | | | 0.6 | |
Current maturities of operating leases | 0.5 | | | — | |
Long-term debt | 14.8 | | | 6.2 | |
Operating lease liabilities | 1.6 | | | — | |
Total liabilities associated with assets held for sale | 23.1 | | | 10.5 | |
Net assets held for sale | $ | 21.8 | | | $ | 18.7 | |
As of March 31, 2023, assets held for sale consisted of one franchise (one dealership location), real estate associated with five used vehicle stores, one collision center, and one real estate property not currently used in our operations.
As of December 31, 2022, assets held for sale consisted of one franchise (one dealership location) in addition to one real estate property not currently used in our operations.
7. INVESTMENTS
Our investment portfolio is primarily funded by product premiums from the sale of our TCA F&I products. The amortized cost, gross unrealized gains and losses and estimated fair values of debt securities available-for-sale, equity securities, and other investments measured at net asset value are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| As of March 31, 2023 |
| Amortized Cost | | | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| (In millions) |
Short-term investments | $ | 5.5 | | | | | $ | — | | | $ | — | | | $ | 5.5 | |
U.S. Treasury | 11.9 | | | | | 0.1 | | | (0.1) | | | 11.9 | |
Municipal | 28.3 | | | | | 0.2 | | | (0.2) | | | 28.3 | |
Corporate | 93.8 | | | | | 0.6 | | | (1.4) | | | 93.0 | |
Mortgage and other asset-backed securities | 96.5 | | | | | 0.6 | | | (1.1) | | | 96.0 | |
Total debt securities | 236.0 | | | | | 1.5 | | | (2.8) | | | 234.6 | |
Common stock | 51.7 | | | | | — | | | — | | | 51.7 | |
| | | | | | | | | |
| | | | | | | | | |
Total investments | $ | 287.7 | | | | | $ | 1.5 | | | $ | (2.8) | | | $ | 286.3 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2022 |
| Amortized Cost | | | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| (In millions) |
Short-term investments | $ | 5.4 | | | | | $ | — | | | $ | — | | | $ | 5.4 | |
U.S. Treasury | 11.8 | | | | | — | | | (0.2) | | | 11.6 | |
Municipal | 22.8 | | | | | — | | | (0.4) | | | 22.4 | |
Corporate | 81.8 | | | | | 0.2 | | | (2.3) | | | 79.7 | |
Mortgage and other asset-backed securities | 73.8 | | | | | 0.3 | | | (1.4) | | | 72.7 | |
Total debt securities | 195.5 | | | | | 0.5 | | | (4.4) | | | 191.7 | |
Common stock | 48.7 | | | | | — | | | — | | | 48.7 | |
| | | | | | | | | |
| | | | | | | | | |
Total investments | $ | 244.2 | | | | | $ | 0.5 | | | $ | (4.4) | | | $ | 240.4 | |
The Company had an unrealized gain of $2.6 million and an unrealized loss of $0.4 million related to equity securities held as of March 31, 2023 and December 31, 2022, respectively.
As of March 31, 2023 and December 31, 2022, the Company had $1.5 million and $1.3 million of accrued interest receivable, which is included in other current assets on the condensed consolidated balance sheets. The Company does not consider accrued interest receivable in the carrying amount of financial assets held at amortized cost basis or in the allowance for credit losses.
A summary of amortized costs and fair value of investments by time to maturity, is as follows:
| | | | | | | | | | | |
| As of March 31, 2023 |
| Amortized Cost | | Fair Value |
| (In millions) |
Due in 1 year or less | $ | 5.5 | | | $ | 5.5 | |
Due in 1-5 years | 87.7 | | | 87.0 | |
Due in 6-10 years | 44.0 | | | 43.9 | |
Due after 10 years | 2.3 | | | 2.3 | |
Total by maturity | 139.5 | | | 138.7 | |
Mortgage and other asset-backed securities | 96.5 | | | 96.0 | |
Common stock | 51.7 | | | 51.7 | |
| | | |
| | | |
Total investment securities | $ | 287.7 | | | $ | 286.3 | |
There were no gross losses and $0.1 million gross gains realized related to the sale of available-for-sale debt securities carried at fair value for the three months ended March 31, 2023. There were no gross gains or losses realized related to the sale of equity securities carried at fair value for the three months ended March 31, 2023.
The following tables summarize the amount of unrealized losses, defined as the amount by which the amortized cost exceeds fair value, and the related fair value of investments with unrealized losses. The investments were segregated into two categories: those that have been in a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for 12 or more months. The reference point for determining how long an investment was in an unrealized loss position was March 31, 2023.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of March 31, 2023 |
| Less than 12 Months | | Greater than 12 Months | | Total |
| Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
| (In millions) |
Short-term investments | $ | 4.0 | | | $ | — | | | $ | — | | | $ | — | | | $ | 4.0 | | | $ | — | |
U.S. Treasury | 7.4 | | | (0.1) | | | 0.1 | | | — | | | 7.5 | | | (0.1) | |
Municipal | 14.8 | | | (0.1) | | | 0.9 | | | — | | | 15.7 | | | (0.2) | |
Corporate | 52.4 | | | (0.8) | | | 9.5 | | | (0.6) | | | 61.9 | | | (1.4) | |
Mortgage and other asset-backed securities | 55.3 | | | (0.9) | | | 3.5 | | | (0.3) | | | 58.8 | | | (1.1) | |
Total debt securities | $ | 133.9 | | | $ | (1.9) | | | $ | 13.9 | | | $ | (0.9) | | | $ | 147.8 | | | $ | (2.8) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2022 |
| Less than 12 Months | | Greater than 12 Months | | Total |
| Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
| (In millions) |
| | | | | | | | | | | |
U.S. Treasury | $ | 9.2 | | | $ | (0.2) | | | $ | — | | | $ | — | | | $ | 9.2 | | | $ | (0.2) | |
Municipal | 19.0 | | | (0.4) | | | — | | | — | | | 19.0 | | | (0.4) | |
Corporate | 66.2 | | | (0.1) | | | 5.2 | | | (0.3) | | | 71.4 | | | (0.4) | |
Mortgage and other asset-backed securities | 51.4 | | | (1.3) | | | 1.5 | | | (0.2) | | | 52.9 | | | (1.5) | |
Total debt securities | $ | 145.7 | | | $ | (2.0) | | | $ | 6.8 | | | $ | (0.5) | | | $ | 152.6 | | | $ | (2.5) | |
The Company reviews the investment securities portfolio at the security level on a quarterly basis for potential credit losses, which takes into consideration numerous factors including changes in credit ratings. The decline in fair value identified in the tables above are a result of widening market spreads and not a result of credit quality. Additionally, the Company has
determined it has both the intent and ability to hold these investments until the market price recovers or until maturity and does not believe it will be required to sell the securities before maturity. Accordingly, no credit losses were recognized on these securities during the three months ended March 31, 2023.
8. FLOOR PLAN NOTES PAYABLE
Floor plan notes payable consisted of the following:
| | | | | | | | | | | |
| As of |
| March 31, 2023 | | December 31, 2022 |
| (In millions) |
Floor plan notes payable—trade | $ | 59.9 | | | $ | 65.1 | |
Floor plan notes payable offset account | (14.3) | | | (14.2) | |
Floor plan notes payable—trade, net | $ | 45.6 | | | $ | 51.0 | |
| | | |
Floor plan notes payable—new non-trade (a) | $ | 680.0 | | | $ | 613.6 | |
| | | |
Floor plan notes payable offset account (b) | (680.0) | | | (613.6) | |
Floor plan notes payable—non-trade, net | $ | — | | | $ | — | |
____________________________
(a) Floor plan notes payable—new non-trade as of March 31, 2023 and December 31, 2022, excluded $4.2 million and $2.8 million classified as liabilities associated with assets held for sale, respectively.
(b) In addition to the $680.0 million and $613.6 million shown above as of March 31, 2023 and December 31, 2022, respectively, we held $158.1 million and $164.0 million, in the floor plan notes payable offset account as of March 31, 2023 and December 31, 2022, respectively. As of March 31, 2023, $77.2 million of the $158.1 million was reflected within cash and cash equivalents and the remaining $80.9 million was shown as an offset to loaner vehicles notes payable. As of December 31, 2022, $100.8 million of the $164.0 million was reflected within cash and cash equivalents and the remaining $63.2 million was shown as an offset to loaner vehicles notes payable. Loaner vehicle notes payable is included in accounts payable and accrued liabilities within the condensed consolidated balance sheets.
We have floor plan offset accounts that allow us to offset our floor plan notes payable balances outstanding with transfers of cash to reduce the amount of outstanding floor plan notes payable that would otherwise accrue interest, while retaining the ability to transfer amounts from the offset account into our operating cash accounts within the same day.
We have the ability to convert a portion of our availability under the Revolving Credit Facility to the New Vehicle Floor Plan Facility or the Used Vehicle Floor Plan Facility. The maximum amount we are allowed to convert is determined based on our aggregate revolving commitment under the Revolving Credit Facility, less $50.0 million. In addition, we are able to convert any amounts moved to the New Vehicle Floor Plan Facility or Used Vehicle Floor Plan Facility back to the Revolving Credit Facility.
On May 27, 2022, $389.0 million of our availability under the Revolving Credit Facility was re-designated to the New Vehicle Floor Plan Facility to take advantage of lower commitment fee rates. On March 31, 2023, we designated this $389.0 million back to the Revolving Credit Facility.
In addition to our new and used vehicle floor plan facilities, we have loaner vehicle floor plan facilities with Ford Motor Credit Company (“Ford Credit”), Bank of America and certain original equipment manufacturers (“OEMs”). Generally, the loaner vehicle programs with the OEMs provide for a short-term lease of the loaner vehicle pursuant to which we make monthly payments. During the term of the lease, the title and ownership of the loaner vehicles are retained by the OEM. We are obligated to purchase the loaner vehicle upon expiration of the lease. Under certain programs, we have the option to purchase the loaner vehicle prior to the expiration of the lease term. Loaner vehicles notes payable related to Ford Credit as of March 31, 2023 and December 31, 2022 were $13.7 million and $13.4 million, respectively. Loaner vehicles notes payable related to Bank of America as of March 31, 2023 and December 31, 2022 were $0.0 million and $10.8 million, net of offsets of $80.9 million and $63.2 million, respectively. Loaner vehicles notes payable related to OEMs as of March 31, 2023 and December 31, 2022 were $75.1 million and $70.4 million, respectively.
9. DEBT
Long-term debt consisted of the following:
| | | | | | | | | | | |
| As of |
March 31, 2023 | | December 31, 2022 |
(In millions) |
4.50% Senior Notes due 2028 | $ | 405.0 | | | $ | 405.0 | |
4.625% Senior Notes due 2029 | 800.0 | | | 800.0 | |
4.75% Senior Notes due 2030 | 445.0 | | | 445.0 | |
5.00% Senior Notes due 2032 | 600.0 | | | 600.0 | |
Mortgage notes payable bearing interest at fixed rates (a) | 37.7 | | | 38.3 | |
2021 Real Estate Facility (b) | 642.9 | | | 660.6 | |
2021 BofA Real Estate Facility | 171.5 | | | 173.3 | |
2018 Bank of America Facility (c) | 53.5 | | | 54.5 | |
2018 Wells Fargo Master Loan Facility | 75.7 | | | 76.9 | |
2013 BofA Real Estate Facility | 24.3 | | | 24.9 | |
2015 Wells Fargo Master Loan Facility | 41.1 | | | 42.3 | |
| | | |
Finance lease liability | 8.4 | | | 8.4 | |
Total debt outstanding | 3,304.9 | | | 3,329.2 | |
Add—unamortized premium on 4.50% Senior Notes due 2028 | 0.8 | | | 0.8 | |
Add—unamortized premium on 4.75% Senior Notes due 2030 | 1.5 | | | 1.6 | |
Less—debt issuance costs | (29.3) | | | (30.4) | |
Long-term debt, including current portion | 3,277.9 | | | 3,301.2 | |
Less—current portion, net of current portion of debt issuance costs | (83.1) | | | (84.5) | |
Long-term debt | $ | 3,194.8 | | | $ | 3,216.8 | |
____________________________
(a) Mortgage notes payable excluded $2.7 million that were classified as liabilities associated with assets held for sale as of both March 31, 2023 and December 31, 2022.
(b) Amounts reflected for the 2021 Real Estate Facility as of March 31, 2023 exclude $9.2 million classified as liabilities associated with assets held for sale.
(c) Amounts reflected for the 2018 Bank of America Facility as of March 31, 2023 and December 31, 2022, exclude $4.0 million and $4.1 million classified as liabilities associated with assets held for sale.
10. FINANCIAL INSTRUMENTS AND FAIR VALUE
In determining fair value, we use various valuation approaches, including market and income approaches. Accounting standards establish a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from independent sources. Unobservable inputs are inputs that reflect our assumptions about the presumptions market participants would use in pricing the asset or liability, developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs as follows:
Level 1-Valuations based on quoted prices in active markets for identical assets or liabilities that we have the ability to access.
Level 2-Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly. Assets and liabilities utilizing Level 2 inputs include interest rate swap instruments, exchange-traded debt securities that are not actively traded or do not have a high trading volume, mortgage notes payable and certain real estate properties on a non-recurring basis.
Level 3-Valuations based on inputs that are unobservable and significant to the overall fair value measurement. Asset and liability measurements utilizing Level 3 inputs include those used in estimating the fair value of certain non-financial assets and
non-financial liabilities in purchase acquisitions and those used in the assessment of impairment for goodwill and manufacturer franchise rights.
The availability of observable inputs can vary and is affected by a wide variety of factors. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment required to determine fair value is greatest for instruments categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed is determined based on the lowest level input that is significant to the fair value measurement.
Fair value is a market-based exit price measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, our assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. We use inputs that are current as of the measurement date, including during periods of significant market fluctuations.
Financial instruments consist primarily of cash and cash equivalents, contracts-in-transit, accounts receivable, cash surrender value of corporate-owned life insurance policies, accounts payable, floor plan notes payable, subordinated long-term debt, mortgage notes payable and interest rate swap instruments. The carrying values of our financial instruments, with the exception of subordinated long-term debt and certain mortgage notes payable, approximate fair value due to (i) their short-term nature, (ii) recently completed market transactions or (iii) existence of variable interest rates, which approximate market rates. The fair value of our subordinated long-term debt is based on reported market prices in an inactive market that reflect Level 2 inputs. We estimate the fair value of our mortgage notes payable using a present value technique based on current market interest rates for similar types of financial instruments that reflect Level 2 inputs.
A summary of the carrying values and fair values of our subordinated long-term debt and our mortgage notes payable is as follows:
| | | | | | | | | | | |
| As of |
| March 31, 2023 | | December 31, 2022 |
| (In millions) |
Carrying Value: | | | |
4.50% Senior Notes due 2028 | $ | 402.3 | | | $ | 409.5 | |
4.625% Senior Notes due 2029 | 789.4 | | | 789.1 | |
4.75% Senior Notes due 2030 | 441.8 | | | 441.7 | |
5.00% Senior Notes due 2032 | 591.7 | | | 591.5 | |
Mortgage notes payable (a) | 1,044.2 | | | 1,061.1 | |
Total carrying value | $ | 3,269.5 | | | $ | 3,292.9 | |
| | | |
Fair Value: | | | |
4.50% Senior Notes due 2028 | $ | 367.5 | | | $ | 354.4 | |
4.625% Senior Notes due 2029 | 708.0 | | | 672.0 | |
4.75% Senior Notes due 2030 | 393.8 | | | 372.7 | |
5.00% Senior Notes due 2032 | 523.5 | | | 492.0 | |
Mortgage notes payable (a) | 1,045.2 | | | 1,069.8 | |
Total fair value | $ | 3,038.0 | | | $ | 2,960.9 | |
____________________________
(a) Mortgage notes payable as of March 31, 2023 and December 31, 2022, exclude $15.8 million and $6.8 million classified as liabilities associated with assets held for sale, respectively.
Interest Rate Swap Agreements
We currently have seven interest rate swap agreements. In January 2022, we entered into two new interest rate swap agreements with a combined notional principal amount of $550.0 million. These swaps are designed to provide a hedge against changes in variable rate cash flows regarding fluctuations in the SOFR rate. All interest rate swap agreements with an inception date of 2021 and prior were amended on June 1, 2022 to provide a hedge against changes in variable rate cash flows regarding fluctuations in SOFR as compared to the previous benchmark rate of one-month LIBOR. The revisions to the interest rate swap
agreements did not impact our hedge accounting because we applied the accounting expedients outlined in ASU 2020-04 and ASU 2021-01 of ASC Topic 848, Reference Rate Reform. The following table provides information on the attributes of each swap as of March 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Inception Date | | Notional Principal at Inception | | Notional Value as of March 31, 2023 | | Notional Principal at Maturity | | Maturity Date |
| | (In millions) | | |
January 2022 | | $ | 300.0 | | | $ | 285.0 | | | $ | 228.8 | | | December 2026 |
January 2022 | | $ | 250.0 | | | $ | 250.0 | | | $ | 250.0 | | | December 2031 |
May 2021 | | $ | 184.4 | | | $ | 171.5 | | | $ | 110.6 | | | May 2031 |
July 2020 | | $ | 93.5 | | | $ | 80.1 | | | $ | 50.6 | | | December 2028 |
July 2020 | | $ | 85.5 | | | $ | 72.1 | | | $ | 57.3 | | | November 2025 |
June 2015 | | $ | 100.0 | | | $ | 62.7 | | | $ | 53.1 | | | February 2025 |
November 2013 | | $ | 75.0 | | | $ | 40.5 | | | $ | 38.7 | | | September 2023 |
The fair value of cash flow swaps is calculated as the present value of expected future cash flows, determined on the basis of forward interest rates and present value factors. Fair value estimates reflect a credit adjustment to the discount rate applied to all expected cash flows under the swaps. Other than this input, all other inputs used in the valuation of these swaps are designated to be Level 2 inputs. The fair value of our swaps was an $83.0 million and a $102.4 million net asset as of March 31, 2023 and December 31, 2022, respectively.
The following table provides information regarding the fair value of our interest rate swap agreements and the impact on the condensed consolidated balance sheets: | | | | | | | | | | | |
| As of |
| March 31, 2023 | | December 31, 2022 |
| (In millions) |
Other current assets | $ | 27.9 | | | $ | 29.6 | |
| | | |
Other long-term assets | 55.1 | | | 72.8 | |
| | | |
Total fair value | $ | 83.0 | | | $ | 102.4 | |
Our interest rate swaps qualify for cash flow hedge accounting treatment. These interest rate swaps are marked to market at each reporting date and any unrealized gains or losses are included in accumulated other comprehensive income and reclassified to interest expense in the same period or periods during which the hedged transactions affect earnings. Information about the effect of our interest rate swap agreements in the accompanying condensed consolidated statements of income and condensed consolidated statements of comprehensive income, is as follows (in millions): | | | | | | | | | | | | | | | | | | | | |
For the Three Months Ended March 31, | | Results Recognized in Accumulated Other Comprehensive Income/(Loss) | | Location of Amount Reclassified from Accumulated Other Comprehensive Income/(Loss) to Earnings | | Amount Reclassified from Accumulated Other Comprehensive Income/(Loss) to Earnings |
2023 | | $ | (27.0) | | | Other interest expense, net | | $ | (7.7) | |
2022 | | $ | 45.4 | | | Other interest expense, net | | $ | 3.1 | |
On the basis of yield curve conditions as of March 31, 2023 and including assumptions about future changes in fair value, we expect the amount to be reclassified out of Accumulated Other Comprehensive Income into earnings within the next 12 months will be gains of $27.9 million.
Investments
The table below presents the Company’s investment securities that are measured at fair value on a recurring basis aggregated by the level in the fair value hierarchy within which those measurements fall:
| | | | | | | | | | | | | | | | | | | | | | | |
| As of March 31, 2023 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| (In millions) |
Cash equivalents | $ | 2.5 | | | $ | — | | | $ | — | | | $ | 2.5 | |
Short-term investments | 1.5 | | | 4.0 | | | — | | | 5.5 | |
U.S. Treasury | 11.9 | | | — | | | — | | | 11.9 | |
Municipal | — | | | 28.3 | | | — | | | 28.3 | |
Corporate | — | | | 93.0 | | | — | | | 93.0 | |
Mortgage and other asset-backed securities | — | | | 96.0 | | | — | | | 96.0 | |
Total debt securities | 13.4 | | | 221.3 | | | — | | | 234.6 | |
Common stock | 51.7 | | | — | | | — | | | 51.7 | |
| | | | | | | |
Total | $ | 65.1 | | | $ | 221.3 | | | $ | — | | | $ | 286.3 | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2022 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| (In millions) |
Cash equivalents | $ | 6.6 | | | $ | — | | | $ | — | | | $ | 6.6 | |
Short-term investments | 0.6 | | | 4.8 | | | — | | | 5.4 | |
U.S. Treasury | 11.6 | | — | | | — | | | 11.6 | |
Municipal | — | | | 22.4 | | | — | | | 22.4 | |
Corporate | — | | | 79.7 | | | — | | | 79.7 | |
Mortgage and other asset-backed securities | — | | | 72.6 | | | — | | | 72.6 | |
Total debt securities | 12.2 | | | 179.5 | | | — | | | 191.7 | |
Common stock | 48.7 | | — | | | — | | | 48.7 | |
| | | | | | | |
Total | $ | 60.9 | | | $ | 179.5 | | | $ | — | | | $ | 240.4 | |
| | | | | | | |
| | | | | | | |
We review the fair value hierarchy classifications each reporting period. Changes in the observability of the valuation attributes may result in a reclassification of certain investments. Such reclassifications are reported as transfers in and out of Level 3, or between other levels, at the beginning fair value for the reporting period in which the changes occur.
Available-for-sale debt securities are recorded at fair value and any unrealized gains or losses are included in accumulated other comprehensive income and reclassified to finance and insurance, net revenue in the period or periods during which the debt securities are sold and the gains or losses are realized. Information about the effect of our available-for-sale debt securities in the accompanying condensed consolidated statements of income and condensed consolidated statements of comprehensive income, is as follows (in millions): | | | | | | | | | | | | | | | | | | | | |
For the Three Months Ended March 31, | | Results Recognized in Accumulated Other Comprehensive Income/(Loss) | | Location of Amount Reclassified from Accumulated Other Comprehensive Income/(Loss) to Earnings | | Amount Reclassified from Accumulated Other Comprehensive Income/(Loss) to Earnings |
2023 | | $ | 2.6 | | | Revenue-Finance and Insurance, net | | $ | 0.1 | |
2022 | | $ | (2.5) | | | Revenue-Finance and Insurance, net | | $ | (0.3) | |
11. SUPPLEMENTAL CASH FLOW INFORMATION
During the three months ended March 31, 2023 and 2022, we made interest payments, including amounts capitalized, totaling $28.4 million and $31.6 million, respectively. Included in these interest payments is net interest received of $0.2 million during the three months ended March 31, 2023 due to cash held in our floor plan offset accounts, and $2.6 million of floor plan interest payments during the three months ended March 31, 2022.
During the three months ended March 31, 2023 and 2022, we transferred $90.4 million and $57.5 million, respectively, of loaner vehicles from other current assets to inventories on our condensed consolidated balance sheets.
12. SEGMENT INFORMATION
As of March 31, 2023, the Company had two reportable segments: (1) Dealerships and (2) TCA. Our dealership operations are organized by management into geographic market-based groups within the Dealerships segment. The operations of our F&I product provider is reflected within our TCA segment. Our Chief Operating Decision Maker is our Chief Executive Officer who manages the business, regularly reviews financial information and allocates resources at the geographic market level for our dealerships and at the TCA segment level for our F&I product provider's operations. The geographic dealership group operating segments have been aggregated into one reportable segment as their operations (i) have similar economic characteristics (our markets all have similar long-term average gross margins), (ii) offer similar products and services (all of our markets offer new and used vehicles, parts and service, and finance and insurance products), (iii) have similar customers, (iv) have similar distribution and marketing practices (all of our markets distribute products and services through dealership facilities that market to customers in similar ways), and (v) operate under similar regulatory environments.
TCA's vehicle protection products are sold through affiliated dealerships and the revenue from the related commissions is included in finance and insurance, net revenue in the Dealerships segment before consolidation. The corresponding claims expense incurred and the amortization of deferred acquisition costs is recorded as a cost of sales in the TCA segment. The Dealerships segment also provides vehicle repair and maintenance services to TCA customers in connection with claims related to TCA's vehicle protection products. Upon consolidation, the associated service revenue and costs recorded by the Dealerships segment are eliminated against claims expense recorded by the TCA segment.
Reportable segment financial information for the three months ended March 31, 2023 and 2022, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2023 |
| Dealerships | | TCA | | Eliminations | | Total Company |
| (In millions) |
Revenue | $ | 3,556.3 | | | $ | 70.7 | | | $ | (44.7) | | | $ | 3,582.3 | |
Gross profit | $ | 679.6 | | | $ | 21.1 | | | $ | (4.5) | | | $ | 696.2 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2022 |
| Dealerships | | TCA | | Eliminations | | Total Company |
| (In millions) |
Revenue | $ | 3,894.2 | | | $ | 57.3 | | | $ | (39.7) | | | $ | 3,911.8 | |
Gross profit | $ | 781.4 | | | $ | 12.4 | | | $ | (1.9) | | | $ | 792.0 | |
Total assets by segment as of March 31, 2023 and as of December 31, 2022 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| As of March 31, 2023 |
| Dealerships | | TCA | | Eliminations | | Total Company |
| (In millions) |
Total assets | $ | 7,348.7 | | | $ | 840.5 | | | $ | (6.4) | | | $ | 8,182.8 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2022 |
| Dealerships | | TCA | | Eliminations | | Total Company |
| (In millions) |
Total assets | $ | 7,170.8 | | | $ | 869.2 | | | $ | (18.6) | | | $ | 8,021.4 | |
13. COMMITMENTS AND CONTINGENCIES
Our dealerships are party to dealer and framework agreements with applicable vehicle manufacturers. In accordance with these agreements, each dealership has certain rights and is subject to restrictions typical in the industry. The ability of these
manufacturers to influence the operations of the dealerships or the loss of any of these agreements could have a materially negative impact on our operating results.
In some instances, manufacturers may have the right, and may direct us, to implement costly capital improvements to dealerships as a condition to entering into, renewing, or extending franchise agreements with them. Manufacturers also typically require that their franchises meet specific standards of appearance. These factors, either alone or in combination, could cause us to use our financial resources on capital projects for which we might not have planned or otherwise determined to undertake.
From time-to-time, we and our dealerships are or may become involved in various claims relating to, and arising out of, our business and our operations. These claims may involve, but not be limited to, financial and other audits by vehicle manufacturers or lenders and certain federal, state, and local government authorities, which have historically related primarily to (i) incentive and warranty payments received from vehicle manufacturers, or allegations of violations of manufacturer agreements or policies, (ii) compliance with lender rules and covenants, and (iii) payments made to government authorities relating to federal, state, and local taxes, as well as compliance with other government regulations. Claims may also arise through litigation, government proceedings, and other dispute resolution processes. Such claims, including class actions, could relate to, but may not be limited to, the practice of charging administrative fees and other fees and commissions, employment-related matters, truth-in-lending and other dealer assisted financing obligations, contractual disputes, actions brought by governmental authorities, and other matters.
We evaluate pending and threatened claims and establish loss contingency reserves based upon outcomes we currently believe to be probable and reasonably estimable. Based on our review of the various types of claims currently known to us, there is no indication of material reasonably possible losses in excess of amounts accrued in the aggregate. We currently do not anticipate that any known claim will materially adversely affect our financial condition, liquidity, or results of operations. However, the outcome of any matter cannot be predicted with certainty, and an unfavorable resolution of one or more matters presently known or arising in the future could have a material adverse effect on our financial condition, liquidity, or results of operations.
A significant portion of our business involves the sale of vehicles, parts, or vehicles composed of parts that are manufactured outside the United States. As a result, our operations are subject to customary risks of importing merchandise, including fluctuations in the relative values of currencies, import duties, exchange controls, trade restrictions, work stoppages, and general political and socio-economic conditions in foreign countries. The United States or the countries from which our products are imported may, from time-to-time, impose new quotas, duties, tariffs, or other restrictions, or adjust presently prevailing quotas, duties, or tariffs, which may affect our operations, and our ability to purchase imported vehicles and/or parts at reasonable prices.
Substantially all of our facilities are subject to federal, state and local provisions regarding the discharge of materials into the environment. Compliance with these provisions has not had, nor do we expect such compliance to have, any material effect upon our capital expenditures, net earnings, financial condition, liquidity or competitive position. We believe that our current practices and procedures for the control and disposition of such materials comply with applicable federal, state, and local requirements. No assurances can be provided, however, that future laws or regulations, or changes in existing laws or regulations, would not require us to expend significant resources in order to comply therewith.
We had $12.5 million of letters of credit outstanding as of March 31, 2023, which are required by certain of our insurance providers. In addition, as of March 31, 2023, we maintained a $17.4 million surety bond line in the ordinary course of our business. Our letters of credit and surety bond line are considered to be off balance sheet arrangements.