Item 1. Financial Statements
Item 1. Financial Statements
GROUP 1 AUTOMOTIVE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In millions, except share data)
September 30, 2020
December 31, 2019
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
$
66.2
$
23.8
Contracts-in-transit and vehicle receivables, net
218.9
253.8
Accounts and notes receivables, net
193.5
225.1
Inventories, net
1,375.7
1,901.7
Prepaid expenses
39.8
96.4
Other current assets
22.6
15.5
TOTAL CURRENT ASSETS
1,916.6
2,516.3
Property and equipment, net of accumulated depreciation of $441.9 and $400.2, respectively
1,592.0
1,547.1
Operating lease assets
209.9
220.1
Goodwill
993.5
1,008.3
Intangible franchise rights
241.3
253.5
Other long-term assets
30.0
24.8
TOTAL ASSETS
$
4,983.4
$
5,570.2
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Floorplan notes payable — credit facility and other, net of offset account of $108.2 and $106.8, respectively
$
771.3
$
1,144.4
Floorplan notes payable — manufacturer affiliates, net of offset account of $18.5 and $4.1, respectively
314.8
459.9
Current maturities of long-term debt
65.8
59.1
Current operating lease liabilities
21.5
24.6
Accounts payable
408.3
527.5
Accrued expenses and other current liabilities
230.4
206.7
TOTAL CURRENT LIABILITIES
1,812.1
2,422.3
Long-term debt
1,307.8
1,432.1
Long-term operating lease liabilities
207.1
210.7
Deferred income taxes
135.4
145.7
Long-term interest rate swap liabilities
49.4
4.4
Other long-term liabilities
114.8
99.2
Commitments and Contingencies (Note 12)
STOCKHOLDERS’ EQUITY:
Common stock, $0.01 par value, 50,000,000 shares authorized; 25,439,746 and 25,486,711 shares issued, respectively
0.3
0.3
Additional paid-in capital
304.0
295.3
Retained earnings
1,723.3
1,542.4
Accumulated other comprehensive income (loss)
( 206.3
)
( 147.0
)
Treasury stock, at cost; 7,122,366 and 6,858,503 shares, respectively
( 464.3
)
( 435.3
)
TOTAL STOCKHOLDERS’ EQUITY
1,356.9
1,255.7
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
4,983.4
$
5,570.2
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited)
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GROUP 1 AUTOMOTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In millions, except per share data)
Three Months Ended September 30,
Nine Months Ended September 30,
2020
2019
2020
2019
REVENUES:
New vehicle retail sales
$
1,580.7
$
1,652.3
$
3,985.5
$
4,632.2
Used vehicle retail sales
867.2
869.7
2,287.4
2,527.8
Used vehicle wholesale sales
86.7
85.2
221.9
273.4
Parts and service sales
375.6
383.5
1,028.2
1,130.8
Finance, insurance and other, net
129.5
127.5
338.7
368.2
Total revenues
3,039.6
3,118.3
7,861.7
8,932.4
COST OF SALES:
New vehicle retail sales
1,481.5
1,577.0
3,759.7
4,415.7
Used vehicle retail sales
796.1
815.5
2,127.9
2,372.5
Used vehicle wholesale sales
80.7
84.9
212.9
272.7
Parts and service sales
169.4
175.4
473.9
520.1
Total cost of sales
2,527.7
2,652.7
6,574.4
7,581.0
GROSS PROFIT
512.0
465.6
1,287.2
1,351.4
Selling, general and administrative expenses
305.8
353.9
870.9
1,020.3
Depreciation and amortization expense
19.1
18.2
56.5
53.0
Asset impairments
—
10.3
23.8
10.8
INCOME (LOSS) FROM OPERATIONS
187.1
83.3
336.0
267.2
Floorplan interest expense
8.1
15.3
31.1
47.0
Other interest expense, net
14.6
18.9
49.0
55.8
(Gain) loss on extinguishment of debt
3.3
—
13.7
—
INCOME (LOSS) BEFORE INCOME TAXES
161.0
49.0
242.2
164.4
(Benefit) provision for income taxes
34.6
10.9
55.8
38.5
NET INCOME (LOSS)
$
126.4
$
38.0
$
186.4
$
125.9
BASIC EARNINGS (LOSS) PER SHARE
$
6.86
$
2.04
$
10.11
$
6.78
Weighted average common shares outstanding
17.8
18.0
17.8
17.9
DILUTED EARNINGS (LOSS) PER SHARE
$
6.83
$
2.04
$
10.08
$
6.77
Weighted average dilutive common shares outstanding
17.8
18.0
17.8
17.9
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited)
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GROUP 1 AUTOMOTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In millions)
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020
2019
2020
2019
NET INCOME (LOSS)
$
126.4
$
38.0
$
186.4
$
125.9
Other comprehensive income (loss), net of taxes:
Foreign currency translation adjustment
6.0
( 11.6
)
( 24.4
)
( 12.0
)
Net unrealized gain (loss) on interest rate risk management activities, net of tax:
Unrealized gain (loss) arising during the period, net of tax benefit (provision) of $0.6, $1.7, $12.6 and $6.0, respectively
( 1.8
)
( 5.6
)
( 40.4
)
( 19.2
)
Reclassification adjustment for realized (gain) loss on interest rate swap termination included in SG&A, net of tax benefit (provision) of $— for all periods presented
0.1
0.1
0.1
0.1
Reclassification adjustment for (gain) loss included in interest expense, net of tax benefit (provision) of $0.8, $—, $1.7 and ($0.2), respectively
2.7
0.1
5.4
( 0.6
)
Unrealized gain (loss) on interest rate risk management activities, net of tax
1.0
( 5.4
)
( 35.0
)
( 19.7
)
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX
7.0
( 17.0
)
( 59.3
)
( 31.7
)
COMPREHENSIVE INCOME (LOSS)
$
133.4
$
21.0
$
127.0
$
94.2
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited)
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GROUP 1 AUTOMOTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
(In millions, except share data)
Common Stock
Additional
Paid-in Capital
Retained Earnings
Accumulated
Other
Comprehensive Income (Loss)
Treasury Stock
Total
Shares
Amount
BALANCE, JUNE 30, 2020
25,439,581
$
0.3
$
300.0
$
1,596.9
$
( 213.3
)
$
( 467.9
)
$
1,215.9
Net income (loss)
—
—
—
126.4
—
—
126.4
Other comprehensive income (loss), net of taxes
—
—
—
—
7.0
—
7.0
Net issuance of treasury shares to stock compensation plans
165
—
( 1.4
)
—
—
3.6
2.2
Stock-based compensation
—
—
5.3
—
—
—
5.3
BALANCE, SEPTEMBER 30, 2020
25,439,746
$
0.3
$
304.0
$
1,723.3
$
( 206.3
)
$
( 464.3
)
$
1,356.9
Common Stock
Additional
Paid-in Capital
Retained Earnings
Accumulated
Other
Comprehensive Income (Loss)
Treasury Stock
Total
Shares
Amount
BALANCE, DECEMBER 31, 2019
25,486,711
$
0.3
$
295.3
$
1,542.4
$
( 147.0
)
$
( 435.3
)
$
1,255.7
Net income (loss)
—
—
—
186.4
—
—
186.4
Other comprehensive income (loss), net of taxes
—
—
—
—
( 59.3
)
—
( 59.3
)
Purchases of treasury stock
—
—
—
—
—
( 48.9
)
( 48.9
)
Net issuance of treasury shares to stock compensation plans
( 46,964
)
—
( 18.4
)
—
—
20.0
1.6
Stock-based compensation
—
—
27.0
—
—
—
27.0
Dividends declared ($0.30 per share)
—
—
—
( 5.5
)
—
—
( 5.5
)
BALANCE, SEPTEMBER 30, 2020
25,439,746
$
0.3
$
304.0
$
1,723.3
$
( 206.3
)
$
( 464.3
)
$
1,356.9
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited)
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GROUP 1 AUTOMOTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
(In millions, except share data)
Common Stock
Additional
Paid-in Capital
Retained Earnings
Accumulated
Other
Comprehensive Income (Loss)
Treasury Stock
Total
Shares
Amount
BALANCE, JUNE 30, 2019
25,510,280
$
0.3
$
288.2
$
1,467.0
$
( 152.5
)
$
( 438.8
)
$
1,164.1
Net income (loss)
—
—
—
38.0
—
—
38.0
Other comprehensive income (loss), net of taxes
—
—
—
—
( 17.0
)
—
( 17.0
)
Net issuance of treasury shares to stock compensation plans
( 6,149
)
—
( 0.7
)
—
—
2.6
1.9
Stock-based compensation
—
—
4.5
—
—
—
4.5
Dividends declared ($0.28 per share)
—
—
—
( 5.2
)
—
—
( 5.2
)
BALANCE, SEPTEMBER 30, 2019
25,504,131
$
0.3
$
292.0
$
1,499.8
$
( 169.5
)
$
( 436.2
)
$
1,186.3
Common Stock
Additional
Paid-in Capital
Retained Earnings
Accumulated
Other
Comprehensive Income (Loss)
Treasury Stock
Total
Shares
Amount
BALANCE, DECEMBER 31, 2018
25,494,328
$
0.3
$
292.8
$
1,394.8
$
( 137.8
)
$
( 454.4
)
$
1,095.7
Net income (loss)
—
—
—
125.9
—
—
125.9
Other comprehensive income (loss), net of taxes
—
—
—
—
( 31.7
)
—
( 31.7
)
Net issuance of treasury shares to stock compensation plans
9,803
—
( 15.3
)
—
—
18.1
2.9
Stock-based compensation
—
—
14.5
—
—
—
14.5
Dividends declared ($0.80 per share)
—
—
—
( 14.8
)
—
—
( 14.8
)
ASC 842 cumulative adjustment
—
—
—
( 6.1
)
—
—
( 6.1
)
BALANCE, SEPTEMBER 30, 2019
25,504,131
$
0.3
$
292.0
$
1,499.8
$
( 169.5
)
$
( 436.2
)
$
1,186.3
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited)
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GROUP 1 AUTOMOTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
Nine Months Ended September 30,
2020
2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)
$
186.4
$
125.9
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization
56.5
53.0
Change in operating lease assets
18.1
21.2
Deferred income taxes
( 2.8
)
3.6
Asset impairments
23.8
10.8
Stock-based compensation
27.0
14.5
Amortization of debt discount and issue costs
2.6
3.1
(Gain) loss on disposition of assets
—
( 5.9
)
(Gain) loss on extinguishment of debt
13.7
—
Other
1.9
0.7
Changes in assets and liabilities, net of acquisitions and dispositions:
Accounts payable and accrued expenses
( 58.8
)
99.0
Accounts and notes receivables
25.2
( 31.7
)
Inventories
499.6
41.7
Contracts-in-transit and vehicle receivables
33.0
8.1
Prepaid expenses and other assets
41.1
( 10.6
)
Floorplan notes payable — manufacturer affiliates
( 137.9
)
( 1.1
)
Deferred revenues
( 0.4
)
( 0.4
)
Operating lease liabilities
( 16.3
)
( 21.3
)
Net cash provided by (used in) operating activities
712.7
310.8
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions, net of cash received
( 1.3
)
( 97.0
)
Proceeds from disposition of franchises, property and equipment
1.3
43.1
Purchases of property and equipment
( 78.8
)
( 139.6
)
Other
—
( 0.1
)
Net cash provided by (used in) investing activities
( 78.8
)
( 193.5
)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on credit facility — floorplan line and other
7,590.5
5,311.2
Repayments on credit facility — floorplan line and other
( 7,960.7
)
( 5,364.3
)
Borrowings on credit facility — acquisition line
284.0
230.5
Repayments on credit facility — acquisition line
( 296.5
)
( 211.4
)
Debt issuance costs
( 9.0
)
( 3.2
)
Borrowings of senior notes
550.0
—
Repayments of senior notes
( 857.9
)
—
Borrowings on other debt
252.9
205.6
Repayments on other debt
( 90.8
)
( 246.5
)
Proceeds from employee stock purchase plan
7.0
6.5
Payments of tax withholding for stock-based awards
( 5.5
)
( 3.6
)
Repurchases of common stock, amounts based on settlement date
( 48.9
)
—
Dividends paid
( 5.5
)
( 14.8
)
Net cash provided by (used in) financing activities
( 590.4
)
( 90.1
)
Effect of exchange rate changes on cash
( 5.4
)
( 1.3
)
Net increase (decrease) in cash, cash equivalents and restricted cash
38.1
25.9
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of period
28.1
18.7
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period
$
66.2
$
44.6
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited)
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GROUP 1 AUTOMOTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1 . INTERIM FINANCIAL INFORMATION
Business
Group 1 Automotive, Inc., a Delaware corporation, is a leading operator in the automotive retailing industry with business activities in 15 states in the U.S., 33 towns in the U.K. and three states in Brazil. Group 1 Automotive, Inc. and its subsidiaries are collectively referred to as the “Company” in these Notes to Condensed Consolidated Financial Statements. The Company, through its regions, sells new and used cars and light trucks; arranges related vehicle financing; sells service and insurance contracts; provides automotive maintenance and repair services; and sells vehicle parts.
As of September 30, 2020 , the Company’s retail network consisted of 119 dealerships in the U.S., 50 dealerships in the U.K. and 17 dealerships in Brazil. The U.S. and Brazil are led by the President, U.S. and Brazilian Operations, and the U.K. is led by an Operations Director, each reporting directly to the Company's Chief Executive Officer. The President, U.S. and Brazilian Operations, and the U.K. Operations Director are responsible for the overall performance of their respective regions, as well as for overseeing field level management.
The Company’s operating results are generally subject to seasonal variations, as well as changes in the economic environment. In the U.S., the Company generally experiences higher volumes of vehicle sales and service in the second and third calendar quarters of each year. In addition, in some regions of the U.S., vehicle purchases decline during the winter months due to inclement weather. In the U.K., the first and third quarters tend to be stronger, driven by the vehicle license plate change months of March and September. In Brazil, the first quarter is generally the weakest, driven by more consumer vacations and activities associated with Carnival, while the third and fourth quarters tend to be stronger. Other factors unrelated to seasonality, such as changes in economic conditions, manufacturer incentive programs, supply issues, seasonal weather events and/or changes in currency exchange rates may exaggerate seasonal or cause counter-seasonal fluctuations in the Company’s revenues and operating income.
COVID-19 Pandemic
On March 11, 2020, the WHO declared COVID-19 a pandemic, and subsequently, various countries declared the COVID-19 pandemic a national emergency. The global spread of the COVID-19 pandemic continues to adversely impact the Company’s markets in the U.S., U.K. and Brazil. Government mandated restrictions to contain and combat the virus, such as stay-at-home orders on individuals and operating restrictions on businesses, impacted the Company’s dealerships beginning in mid-March 2020. However, these measures began easing in the second quarter and most of the Company’s markets have since shown signs of recovery. Despite signs of market recovery, the potential impact from the COVID-19 pandemic is difficult to predict, especially as cases rise in certain markets and governments consider re-instituting lockdown measures and other restrictions. On October 31, 2020, the U.K. government announced a national lockdown of non-essential businesses, which includes the Company’s dealership vehicle showrooms, beginning November 5, 2020 through December 2, 2020, at which time the government will determine whether the lockdown restrictions are extended. The Company’s dealership service operations will remain open, however this mandate will adversely impact the Company’s U.K. vehicle sales in the fourth quarter. The extent to which the impact may negatively affect the Company’s business, financial condition and results of operations will depend on future developments and new information that may emerge regarding the severity and duration of the COVID-19 pandemic. If the U.K. lockdown is extended for a significant period of time, or if additional lockdowns, other travel and business restrictions or additional restrictions are imposed in the Company’s other markets, the adverse impact on the Company’s business, results of operations and cash flows could be material. The associated risks are further described in Part II, “Item 1A. Risk Factors” of this Form 10-Q and the potential impacts could also exacerbate the risks identified in the risk factors listed in Part I, “Item 1A. Risk Factors” from the Company’s annual report on Form 10-K for the year ended December 31, 2019.
Basis of Presentation
The accompanying Condensed Consolidated Financial Statements and notes thereto, have been prepared in accordance with U.S. GAAP for interim financial information and in accordance with the rules and regulations of the SEC. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. Results for interim periods are not necessarily indicative of the results that can be expected for a full year and therefore should be read in conjunction with the Company’s audited Financial Statements and notes thereto included within the Company’s most recent Annual Report on Form 10-K.
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GROUP 1 AUTOMOTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)– (Continued)
The accompanying Condensed Consolidated Financial Statements reflect the consolidated accounts of the parent company, Group 1 Automotive, Inc., and its subsidiaries, all of which are wholly owned. The results of operations of all business combinations completed during the period are included from the effective dates of the closings of the acquisitions. All intercompany balances and transactions have been eliminated in consolidation.
During the three months ended June 30, 2020, the Company recorded an out-of-period adjustment of $ 10.6 million resulting in an increase to Selling, general and administrative expenses and Additional paid-in capital to correct stock-based compensation for awards granted in prior years to retirement eligible employees not recognized timely due to the incorrect treatment of a non-substantive service condition. The impact to the three months ended June 30, 2020 was a decrease to net income of $ 9.7 million resulting in a decrease to diluted earnings per common share of $ 0.53 . The effect of this adjustment on any previously reported period was not material based on a quantitative and qualitative evaluation.
Certain prior-period amounts have been reclassified to conform to current-period presentation. Specifically, the long-term liabilities associated with the Company’s interest rate swaps have been reclassified from the caption Other long-term liabilities to the caption Long-term interest rate swap liabilities in the Condensed Consolidated Balance Sheets. This reclassification had no effect on any subtotal in the Condensed Consolidated Balance Sheets. Additionally, repayments and borrowings on the Company’s real estate related and other debt have been combined within the captions Repayments on other debt and Borrowings on other debt , respectively, in the Condensed Consolidated Statements of Cash Flows. Finally, proceeds from purchases under the Company’s employee stock purchase plan and the tax withholdings related to stock-based awards have been separated within the captions Proceeds from employee stock purchase plan and Payments of tax withholding for stock-based awards , respectively, in the Condensed Consolidated Statements of Cash Flows. The aforementioned reclassifications within the Condensed Consolidated Statements of Cash Flows had no effect on any subtotal in the statements.
Certain amounts in the Condensed Consolidated Financial Statements and the accompanying notes may not compute due to rounding. All computations have been calculated using unrounded amounts for all periods presented. These Condensed Consolidated Financial Statements reflect, in the opinion of management, all normal recurring adjustments necessary to fairly state, in all material respects, the Company’s financial position and results of operations for the periods presented.
Use of Estimates
The preparation of the Company’s financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities at the balance sheet date and the amounts of revenues and expenses recognized during the reporting period. Management analyzes the Company’s estimates based on historical experience and other assumptions that are believed to be reasonable under the circumstances, however actual results could differ materially from such estimates. Significant estimates made in the accompanying Condensed Consolidated Financial Statements include, but are not limited to, inventory valuation adjustments, reserves for future chargebacks on finance, insurance and vehicle service contract fees, self-insured property and casualty insurance exposure, the fair value of assets acquired and liabilities assumed in business combinations, the valuation of goodwill and intangible franchise rights and reserves for potential litigation. Additionally, while the full impact of the COVID-19 pandemic is unknown and cannot be reasonably estimated, the Company has made accounting estimates based on the facts and circumstances available as of the reporting date.
Recent Accounting Pronouncements
Reference Rate Reform
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting . The ASU provides optional expedients and exceptions for companies that have contracts, hedging relationships and other transactions that reference LIBOR or other reference rates expected to be discontinued because of reference rate reform. The optional expedients and exceptions apply during the transition period and are intended to ease the financial reporting burdens mainly related to contract modification accounting, hedge accounting and lease accounting. The transition period is effective as of March 12, 2020 and will apply through December 31, 2022. LIBOR is used as an interest rate “benchmark” in the majority of the Company’s floorplan notes payable, as well as its mortgages, other debt and lease contracts. Additionally, the Company’s derivative instruments are benchmarked to LIBOR. The Company will apply the relief described as its arrangements are modified and does not expect the adoption will have an impact on the Company’s consolidated financial statements due to the relief provided.
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GROUP 1 AUTOMOTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)– (Continued)
Impairments
The Company evaluates its intangible assets, consisting entirely of indefinite-lived franchise rights and goodwill, for impairment annually, or more frequently if events or circumstances indicate possible impairment. During the three months ended June 30, 2020, the Company recorded goodwill impairment charges of $ 10.7 million within the Brazil reporting unit and franchise rights impairment charges of $ 11.1 million within the U.K segment and $ 0.1 million within the Brazil segment. Refer to Note 8 “Intangibles” for additional discussion of the Company’s interim impairment assessment.
The Company also reviews long-lived assets that are held-for-use, including the Company’s property and equipment and ROU assets, for impairment at the lowest level of identifiable cash flows whenever there are indicators that the carrying value of these assets may not be recoverable. During the three months ended June 30, 2020, the Company recognized ROU asset impairment charges of $ 1.7 million relating to seven dealerships within the U.K. segment and $ 0.2 million relating to one dealership within the Brazil segment.
The impairment charges were recognized within Asset impairments in the Company’s Condensed Consolidated Statements of Operations. No impairment charges were recorded during the three months ended September 30, 2020.
2 . REVENUES
The following tables present the Company’s revenues disaggregated by revenue source and geographical segments (in millions):
Three Months Ended September 30, 2020
Nine Months Ended September 30, 2020
U.S.
U.K.
Brazil
Total
U.S.
U.K.
Brazil
Total
REVENUES:
New vehicle retail sales
$
1,172.2
$
376.6
$
31.9
$
1,580.7
$
3,076.3
$
800.1
$
109.1
$
3,985.5
Used vehicle retail sales
608.2
248.1
10.9
867.2
1,719.4
529.7
38.3
2,287.4
Used vehicle wholesale sales
44.8
39.5
2.4
86.7
122.1
90.6
9.2
221.9
Total new and used vehicle sales
1,825.2
664.2
45.2
2,534.6
4,917.8
1,420.4
156.6
6,494.8
Parts and service sales (1)
306.4
61.3
8.0
375.6
865.2
139.5
23.4
1,028.2
Finance, insurance and other, net (2)
113.0
15.4
1.1
129.5
300.2
35.1
3.4
338.7
Total revenues
$
2,244.6
$
740.8
$
54.3
$
3,039.6
$
6,083.3
$
1,595.0
$
183.4
$
7,861.7
Three Months Ended September 30, 2019
Nine Months Ended September 30, 2019
U.S.
U.K.
Brazil
Total
U.S.
U.K.
Brazil
Total
REVENUES:
New vehicle retail sales
$
1,291.8
$
290.7
$
69.9
$
1,652.3
$
3,512.3
$
911.5
$
208.4
$
4,632.2
Used vehicle retail sales
657.7
189.3
22.8
869.7
1,877.5
586.8
63.4
2,527.8
Used vehicle wholesale sales
45.8
35.0
4.4
85.2
132.9
127.1
13.3
273.4
Total new and used vehicle sales
1,995.3
515.0
97.1
2,607.3
5,522.8
1,625.5
285.1
7,433.4
Parts and service sales (1)
314.9
56.6
12.0
383.5
922.1
172.5
36.1
1,130.8
Finance, insurance and other, net (2)
112.7
13.0
1.9
127.5
319.4
43.2
5.6
368.2
Total revenues
$
2,422.8
$
584.6
$
110.9
$
3,118.3
$
6,764.3
$
1,841.2
$
326.9
$
8,932.4
(1) The Company has applied the optional exemption not to disclose revenues related to remaining performance obligations on its maintenance and repair services as the duration of these contracts is less than one year. Revenues from these contracts are recognized upon completion of the services, which occurs over time.
(2) Includes variable consideration recognized of $ 7.6 million and $ 2.6 million during the three months ended September 30, 2020 and 2019 , respectively, and $ 16.9 million and $ 14.8 million during the nine months ended September 30, 2020 and 2019 , respectively, relating to performance obligations satisfied in previous periods on the Company’s retrospective commission income contracts. See Note 7 “Receivables and Contract Assets, Net” for additional information on the Company’s contract assets associated with revenues from the arrangement of financing and sale of service and insurance contracts.
3 . ACQUISITIONS AND DISPOSITIONS
Acquisitions
The Company accounts for business combinations under the acquisition method of accounting, under which the Company allocates the purchase price to the assets and liabilities assumed based on an estimate of fair value.
During the nine months ended September 30, 2020 , the Company acquired a collision center in the U.S., which was integrated into an existing dealership.
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GROUP 1 AUTOMOTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)– (Continued)
During the nine months ended September 30, 2019 , the Company acquired two dealerships representing four franchises in the U.S. and four dealerships representing five franchises in the U.K. Aggregate consideration paid for these dealerships, which were accounted for as business combinations, totaled $ 97.0 million . The Company also opened one dealership representing one franchise in the U.S. and one dealership representing one franchise in the U.K.
Dispositions
During the nine months ended September 30, 2020 , the Company did not dispose of any businesses.
During the nine months ended September 30, 2019 , the Company disposed of four dealerships representing seven franchises and terminated two franchises in the U.S., disposed of three dealerships representing four franchises in the U.K and disposed of one dealership representing one franchise in Brazil. The Company recorded a net pre-tax gain totaling $ 5.0 million related to these dispositions.
The Company’s dispositions generally consist of dealership assets and related real estate. Gains and losses on dispositions are recorded in Selling, general and administrative expenses in the Condensed Consolidated Statements of Operations.
4 . SEGMENT INFORMATION
As of September 30, 2020 , the Company had three reportable segments: the U.S., the U.K. and Brazil. The U.S. and Brazil segments are led by the President, U.S. and Brazilian Operations, and the U.K. segment is led by an Operations Director, each reporting directly to the Company's Chief Executive Officer, who is the Chief Operating Decision Maker. The President, U.S. and Brazilian Operations, and the U.K. Operations Director are responsible for the overall performance of their respective regions, as well as for overseeing field level management. Each segment is comprised of retail automotive franchises that sell new and used cars and light trucks; arrange related vehicle financing; sell service insurance contracts; provide automotive maintenance and repair services; and sell vehicle parts. The vast majority of the Company’s corporate activities are associated with the operations of the U.S. segment and therefore the corporate financial results are included within the U.S. segment.
Reportable segment revenues and income (loss) before income taxes were as follows for the three and nine months ended September 30, 2020 and 2019 (in millions):
Three Months Ended September 30, 2020
Nine Months Ended September 30, 2020
U.S.
U.K.
Brazil
Total
U.S.
U.K.
Brazil
Total
Total revenues
$
2,244.6
$
740.8
$
54.3
$
3,039.6
$
6,083.3
$
1,595.0
$
183.4
$
7,861.7
Income (loss) before income taxes (1)
$
132.9
$
27.1
$
1.0
$
161.0
$
249.8
$
4.7
$
( 12.4
)
$
242.2
Three Months Ended September 30, 2019
Nine Months Ended September 30, 2019
U.S.
U.K.
Brazil
Total
U.S.
U.K.
Brazil
Total
Total revenues
$
2,422.8
$
584.6
$
110.9
$
3,118.3
$
6,764.3
$
1,841.2
$
326.9
$
8,932.4
Income (loss) before income taxes (2)
$
54.6
$
( 7.4
)
$
1.8
$
49.0
$
164.8
$
( 2.7
)
$
2.3
$
164.4
(1) For the three months ended September 30, 2020 , income (loss) before income taxes includes a $ 3.3 million loss on debt extinguishment in the U.S. segment. For the nine months ended September 30, 2020 , income (loss) before income taxes includes the following: in the U.S. segment, $ 13.7 million loss on debt extinguishment and $ 10.6 million in stock-based compensation expense related to an out-of-period adjustment; in the U.K. segment, $ 12.8 million in asset impairments and $ 1.2 million in severance expense; and in the Brazil segment, $ 11.1 million in asset impairments and $ 0.9 million in severance expense.
(2) For the three months ended September 30, 2019 , income (loss) before income taxes includes the following: in the U.S. segment, $ 11.9 million in expenses related to flood damage from Tropical Storm Imelda in Texas, $ 3.2 million in asset impairments and $ 0.8 million net loss on disposition of real estate and dealership transactions; and in the U.K. segment, $ 7.0 million in asset impairment charges and $ 0.5 million net loss on disposition of real estate and dealership transactions. For the nine months ended September 30, 2019 , income (loss) before income taxes includes the following: in the U.S. segment, $ 17.8 million in expenses related to flood damage from Tropical Storm Imelda and hail storm damages primarily in Texas, $ 4.4 million net gain on disposition of real estate and dealership transactions, $ 3.2 million in asset impairments and $ 1.8 million net loss on legal matters; in the U.K. segment, $ 7.0 million in asset impairments and $ 0.5 million net loss on disposition of real estate and dealership transactions; and in the Brazil segment, $ 0.5 million in asset impairments, $ 0.2 million net gain on disposition of real estate and dealership transactions and $ 0.2 million net loss on legal matters.
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GROUP 1 AUTOMOTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)– (Continued)
5 . EARNINGS PER SHARE
The two-class method is utilized for the computation of the Company’s EPS. The two-class method requires a portion of net income to be allocated to participating securities, which are unvested awards of share-based payments with non-forfeitable rights to receive dividends. The Company’s RSAs are participating securities. Income allocated to these participating securities is excluded from net earnings available to common shares, as shown in the table below. Basic EPS is computed by dividing net income available to basic common shares by the weighted average number of basic common shares outstanding during the period. Diluted EPS is computed by dividing net income available to diluted common shares by the weighted average number of dilutive common shares outstanding during the period.
The following table sets forth the calculation of EPS for the three and nine months ended September 30, 2020 and 2019 (in millions, except share and per share data):
Three Months Ended September 30,
Nine Months Ended September 30,
2020
2019
2020
2019
Weighted average basic common shares outstanding
17,776,888
17,961,555
17,770,619
17,889,572
Dilutive effect of stock-based awards and employee stock purchases
58,661
17,145
47,919
17,978
Weighted average dilutive common shares
17,835,549
17,978,700
17,818,538
17,907,550
Basic:
Net income (loss)
$
126.4
$
38.0
$
186.4
$
125.9
Less: Earnings (loss) allocated to participating securities
4.6
1.4
6.7
4.7
Net income (loss) available to basic common shares
$
121.9
$
36.7
$
179.7
$
121.2
Basic earnings (loss) per common share
$
6.86
$
2.04
$
10.11
$
6.78
Diluted:
Net income (loss)
$
126.4
$
38.0
$
186.4
$
125.9
Less: Earnings (loss) allocated to participating securities
4.5
1.4
6.7
4.7
Net income (loss) available to diluted common shares
$
121.9
$
36.7
$
179.7
$
121.2
Diluted earnings (loss) per common share
$
6.83
$
2.04
$
10.08
$
6.77
6 . 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 Receivables, 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.
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GROUP 1 AUTOMOTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)– (Continued)
Demand Notes
The Company periodically invests in demand notes with a manufacturer-affiliated finance company that bear interest at a variable rate determined by the manufacturer and represent unsecured, unsubordinated and unguaranteed debt obligations of the manufacturer. The instruments are redeemable on demand by the Company and therefore the Company has classified these instruments as Cash and cash equivalents in the accompanying Condensed Consolidated Balance Sheets. As of September 30, 2020 , the carrying value of these instruments was $ 30.2 million . 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. Accordingly, the Company has classified these instruments within Level 2 of the hierarchy framework.
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. On August 17, 2020, the Company issued $ 550.0 million in aggregate principal of 4.00 % Senior Notes due August 2028 (“ 4.00 % Senior Notes”). Refer to Note 9 “Debt” for further discussion of the issuance. The Company estimates the fair value of its 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).
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, 2020
December 31, 2019
Carrying Value (1)
Fair Value
Carrying Value (1)
Fair Value
4.00% Senior Notes
$
550.0
$
539.6
$
—
$
—
Real estate related
88.1
80.4
40.7
41.1
Total
$
638.1
$
620.0
$
40.7
$
41.1
(1) Carrying value excludes unamortized debt issuance costs.
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. Refer to Note 9 “Debt” for further discussion of the redemption.
On September 2, 2020, the Company fully redeemed $ 550.0 million in aggregate principal amount of its outstanding 5.00 % Senior Notes due June 2022. Refer to Note 9 “Debt” for further discussion of the redemption.
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 and nine months ended September 30, 2020 and 2019 .
As of September 30, 2020 , the Company held 39 interest rate swaps in effect with a total notional value of $ 929.4 million that fixed its underlying one-month LIBOR at a weighted average rate of 1.69 % . The Company also held 12 additional interest rate swaps with forward start dates beginning December 2020 that had an aggregate notional value of $ 700.0 million and a weighted average interest rate of 1.47 % as of September 30, 2020 . The maturity dates of the Company’s interest rate swaps range between December 2020 and December 2031.
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 rating agencies. The inputs to the fair value measurements reflect Level 2 inputs.
15
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GROUP 1 AUTOMOTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)– (Continued)
Assets and liabilities associated with the Company’s interest rate swaps as reflected in the Condensed Consolidated Balance Sheets were as follows (in millions):
September 30, 2020
December 31, 2019
Assets:
Other long-term assets
$
—
$
1.9
Total assets
$
—
$
1.9
Liabilities:
Accrued expenses and other current liabilities
$
1.8
$
2.8
Long-term interest rate swap liabilities
49.4
4.4
Total liabilities
$
51.2
$
7.2
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)
Nine Months Ended September 30,
Derivatives in Cash Flow Hedging Relationship
2020
2019
Interest rate swaps
$
( 40.4
)
$
( 19.2
)
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
Nine Months Ended September 30,
2020
2019
Floorplan interest expense
$
( 5.3
)
$
0.4
Other interest expense, net
$
( 1.8
)
$
0.3
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 $ 1.8 million .
16
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GROUP 1 AUTOMOTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)– (Continued)
7 . RECEIVABLES AND CONTRACT ASSETS, NET
The Company’s financial assets measured at amortized cost and the associated allowance for doubtful accounts consisted of the following (in millions):
September 30, 2020
December 31, 2019
Contracts-in-transit and vehicle receivables, net:
Contracts-in-transit
$
142.5
$
169.9
Vehicle receivables
76.7
84.3
Total contracts-in-transit and vehicle receivables
219.2
254.1
Less: allowance for doubtful accounts (1)
0.3
0.3
Total contracts-in-transit and vehicle receivables, net
$
218.9
$
253.8
Accounts and notes receivables, net:
Manufacturer receivables
$
108.5
$
123.9
Parts and service receivables
51.9
57.0
F&I receivables
24.9
28.3
Other
11.8
18.7
Total accounts and notes receivables
197.1
227.9
Less: allowance for doubtful accounts (1)
3.6
2.8
Total accounts and notes receivables, net
$
193.5
$
225.1
Within Other current assets and Other long-term assets:
Total contract assets, net (1), (2)
$
29.7
$
21.6
(1) The allowance for doubtful accounts as of September 30, 2020 is calculated under the current expected credit loss (“CECL”) model described below, which was introduced under ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASC 326”) , that became effective for the Company on January 1, 2020. The adoption of ASC 326 did not materially change the calculation of the allowance for doubtful accounts.
(2) No allowance for doubtful accounts was recorded for Contract assets, net as of September 30, 2020 or December 31, 2019. No past due balances existed as of either date, and there were no expected credit losses as of September 30, 2020 .
The CECL model applies to financial assets measured at amortized cost, as shown in the table above, and requires the Company to reflect expected credit losses over the remaining contractual term of the asset. As the large majority of the Company’s receivables settle within 30 days, the forecast period under the CECL model is a relatively short horizon. The Company uses an aging method to estimate allowances for doubtful accounts under the CECL model as the Company has determined that the aging method adequately reflects expected credit losses, as corroborated by historical loss-rates. However, the Company will apply adjustments for asset-specific factors and current economic conditions as needed at each reporting date.
The Company recorded an adjustment of approximately $ 0.4 million for expected credit losses as of September 30, 2020 as a result of adverse economic conditions arising from the COVID-19 pandemic impacting certain customers in the U.S. and U.K. The adjustment primarily impacted receivables that were not past due and thus were not subject to estimated credit losses under the aging method.
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GROUP 1 AUTOMOTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)– (Continued)
8 . INTANGIBLES
The Company evaluates its intangible assets, consisting entirely of goodwill and indefinite-lived franchise rights, for impairment annually, or more frequently if events or circumstances indicate possible impairment.
As described in Note 1 “Interim Financial Information,” since emerging in December 2019, the COVID-19 pandemic has spread globally, including to all of the Company’s markets in the U.S., U.K. and Brazil. While the U.S. and U.K. began to show signs of recovery in the second quarter of 2020, the Company’s showrooms in Brazil did not fully reopen until May 2020 and then operated at reduced hours. Despite operations resuming in Brazil, the impact of the virus continued to worsen in the second quarter and had not yet reached its peak in some of the Company’s Brazilian markets in the second quarter. The slower than expected recovery from the COVID-19 pandemic in Brazil during the second quarter of 2020 constituted a triggering event indicating that goodwill may be impaired. Therefore the Company performed a quantitative goodwill impairment test for the Brazil reporting unit as of June 30, 2020 and as a result, the Company recorded a goodwill impairment charge of $ 10.7 million within the Brazil reporting unit. No impairment charges were recorded to goodwill during the three months ended September 30, 2020.
The following is a roll-forward of the Company’s goodwill accounts by reporting unit (in millions):
Goodwill
U.S.
U.K.
Brazil
Total
Balance, December 31, 2019 (1)
$
902.3
$
92.1
$
13.9
$
1,008.3
Additions and adjustments
1.3
—
—
1.3
Disposals
—
—
—
—
Impairments
—
—
( 10.7
)
( 10.7
)
Currency translation
—
( 2.2
)
( 3.1
)
( 5.3
)
Balance, September 30, 2020
$
903.6
$
89.9
$
—
$
993.5
(1) Net of accumulated impairments of $ 97.8 million , comprised of $ 40.6 million in the U.S. reporting unit and $ 57.2 million in the Brazil reporting unit.
The impact of the COVID-19 pandemic on the economy and unemployment during the second quarter of 2020 adversely impacted the Company’s operating results in the U.S., U.K. and Brazil, as well as the Company’s long-term outlook projections compared to the projections in first quarter of 2020. As a result, it was concluded that it was more-likely-than-not that the intangible franchise rights of some dealerships were impaired, requiring a quantitative test as of June 30, 2020. As a result of the quantitative impairment test, the Company determined that the fair value of the franchise rights on six U.K. dealerships and one Brazil dealership were below their respective carrying values. This resulted in franchise rights impairment charges of $ 11.1 million in the U.K. segment and $ 0.1 million in the Brazil segment. There was no remaining intangible franchise rights balance in the Brazil segment following the impairment charges recorded in the second quarter of 2020. No impairment charges were recorded to intangible franchise rights during the three months ended September 30, 2020, reflecting the improving business results in the U.S. and U.K. regions.
In estimating the fair value required for the goodwill and intangible franchise rights impairment tests, the Company used a discounted cash flow model, or income approach, specifically the excess earnings method. Significant inputs to the model included changes in revenue growth rates, future gross margins, future SG&A expenses, terminal growth rates and the WACC, which were unobservable inputs, or Level 3 in the fair value hierarchy. The impairment charges were recognized within Asset impairments in the Company's Condensed Consolidated Statements of Operations.
Despite the Company’s improved results in the third quarter of 2020, COVID-19 cases in certain markets in the U.S., and more pervasively throughout the U.K., have continued to rise in the fourth quarter of 2020. On October 31, 2020, the U.K. government announced a national lockdown of non-essential businesses, which includes the Company’s dealership vehicle showrooms, beginning November 5, 2020 through December 2, 2020, at which time the government will determine whether the lockdown restrictions are extended. The Company’s dealership service operations will remain open, however this mandate will adversely impact the Company’s U.K. vehicle sales in the fourth quarter. Due to the temporary nature of the U.K. lockdown in the fourth quarter, no impairment indicators of goodwill or intangible franchise rights were identified subsequent to September 30, 2020 through the date of issuance of this Form 10-Q. However if the COVID-19 pandemic and any lockdowns or other restrictions to contain the pandemic continue long-term, the Company may be required to record additional impairment charges in the future.
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GROUP 1 AUTOMOTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)– (Continued)
9 . DEBT
Long-term debt consisted of the following (in millions):
September 30, 2020
December 31, 2019
4.00% Senior Notes due August 15, 2028
$
550.0
$
—
5.00% Senior Notes redeemed September 2, 2020
—
550.0
5.25% Senior Notes redeemed April 2, 2020
—
300.0
Acquisition Line
57.9
72.5
Other Debt:
Real estate related
628.1
453.3
Finance leases
123.1
83.0
Other
25.7
42.8
Total other debt
776.9
579.1
Total debt
1,384.9
1,501.7
Less: unamortized discount
—
( 5.6
)
Less: unamortized debt issuance costs
( 11.2
)
( 4.8
)
Less: current maturities
( 65.8
)
( 59.1
)
Total long-term debt
$
1,307.8
$
1,432.1
Acquisition Line
The proceeds of the Acquisition Line are used for working capital, general corporate and acquisition purposes. As of September 30, 2020 , borrowings under the Acquisition Line, a component of the Revolving Credit Facility (as described in Note 10 , “Floorplan Notes Payable” ), totaled $ 57.9 million . The average interest rate on this facility was 1.30 % during the three months ended September 30, 2020 .
Real Estate Related
The Company has mortgage loans in the U.S., U.K. and Brazil that are paid in monthly installments. As of September 30, 2020 , borrowings outstanding under these facilities totaled $ 628.1 million , gross of debt issuance costs, comprised of $ 526.6 million in the U.S., $ 90.2 million in the U.K. and $ 11.3 million in Brazil.
4.00% Senior Notes Issuance
On August 17, 2020, the Company issued the following notes, at par:
Description
Principal Amount
(in millions)
Maturity Date
Effective Interest Rate (1)
Interest Payment Dates
4.00% Senior Notes
$ 550.0
August 15, 2028
4.21 %
February 15 th , August 15 th
(1) The effective interest rate is after the impact of associated debt issuance costs
The Company, at its option, may redeem some or all of the notes at the redemption prices (expressed as percentages of principal amount of the notes) set forth below, plus accrued and unpaid interest.
Redemption Period
Redemption Price
August 15, 2023
102.000 %
August 15, 2024
101.333 %
August 15, 2025
100.667 %
August 15, 2026 and thereafter
100.000 %
The 4.00 % Senior Notes are unsecured obligations and rank equal in right of payment to all of the Company’s existing and future senior unsecured debt and senior in right of payment to all of the Company’s future subordinated debt. The 4.00 % Senior Notes are guaranteed by substantially all of the Company’s U.S. subsidiaries. The U.S. subsidiary guarantees rank equally in the right of payment to all of the Company’s U.S. subsidiary guarantor’s existing and future senior unsecured debt.
19
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GROUP 1 AUTOMOTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)– (Continued)
The Company may be required to purchase the 4.00 % Senior Notes if it sells certain assets or triggers the change in control provisions defined in the senior notes indenture. The 4.00 % Senior Notes contain customary restrictions on the Company, including the ability to pay dividends, incur additional indebtedness, create liens, sell or otherwise dispose of assets and repurchase shares of outstanding common stock. Such restrictions are similar to those contained in the Company's 5.25 % and 5.00 % Senior Notes that were redeemed in the current year, as described further below.
5.00 % Senior Notes Redemption
On September 2, 2020, the Company fully redeemed $ 550.0 million in aggregate principal amount of its outstanding 5.00 % Senior Notes due June 2022, at par value. The Company recognized a loss on extinguishment of $ 3.3 million which included write offs of unamortized discount in the amount of $ 2.6 million and unamortized debt issuance costs in the amount of $ 0.7 million . Additionally, the Company paid accrued interest of $ 6.9 million up to the date of redemption.
5.25 % Senior Notes Redemption
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 Company recognized a loss on extinguishment of $ 10.4 million which included write offs of unamortized discount in the amount of $ 1.9 million and unamortized debt issuance costs in the amount of $ 0.6 million . Additionally, the Company paid accrued interest of $ 4.6 million up to the date of redemption.
10 . FLOORPLAN NOTES PAYABLE
The Company’s floorplan notes payable consisted of the following (in millions):
September 30, 2020
December 31, 2019
Revolving credit facility — floorplan notes payable
$
840.4
$
1,206.0
Revolving credit facility — floorplan notes payable offset account
( 108.2
)
( 106.8
)
Revolving credit facility — floorplan notes payable, net
732.2
1,099.1
Other non-manufacturer facilities
39.0
45.3
Floorplan notes payable — credit facility and other, net
$
771.3
$
1,144.4
FMCC facility
$
133.2
$
208.5
FMCC facility offset account
( 18.5
)
( 4.1
)
FMCC facility, net
114.7
204.5
Other manufacturer affiliate facilities
200.1
255.4
Floorplan notes payable — manufacturer affiliates, net
$
314.8
$
459.9
Floorplan Notes Payable - Credit Facility
Revolving Credit Facility
In the U.S., the Company has a $ 1.75 billion revolving syndicated credit arrangement with 22 participating financial institutions that matures on June 27, 2024 (“Revolving Credit Facility”). The Revolving Credit Facility consists of two tranches: (i) a $ 1.70 billion maximum capacity tranche for U.S. vehicle inventory floorplan financing (“Floorplan Line”) which the outstanding balance, net of offset account discussed below, is reported in Floorplan notes payable - credit facility and other, net ; and (ii) a $ 349.0 million maximum capacity and $ 50.0 million minimum capacity tranche (“Acquisition Line”), which is not due until maturity of the Revolving Credit Facility and is therefore classified in Long-term debt - see Note 9 “Debt” for additional discussion. The capacity under these two tranches can be re-designated within the overall $ 1.75 billion commitment, subject to the aforementioned limits. The Acquisition Line includes a $ 100 million sub-limit for letters of credit. As of September 30, 2020 and December 31, 2019 , the Company had $ 17.8 million and $ 23.6 million , respectively, in outstanding letters of credit.
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GROUP 1 AUTOMOTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)– (Continued)
The Floorplan Line bears interest at rates equal to LIBOR plus 110 basis points for new vehicle inventory and LIBOR plus 140 basis points for used vehicle inventory. The weighted average interest rate on the Floorplan Line was 1.22 % as of September 30, 2020 , excluding the impact of the Company’s interest rate derivative instruments. The Acquisition Line bears interest at LIBOR or a LIBOR equivalent plus 100 to 200 basis points, depending on the Company’s total adjusted leverage ratio, on borrowings in U.S. dollars, Euros or British pound sterling. The Floorplan Line requires a commitment fee of 0.15 % per annum on the unused portion. Amounts borrowed by the Company under the Floorplan Line for specific vehicle inventory are to be repaid upon the sale of the vehicle financed and in no case is a borrowing for a vehicle to remain outstanding for greater than one year. The Acquisition Line requires a commitment fee ranging from 0.15 % to 0.40 % per annum, depending on the Company’s total adjusted leverage ratio, based on a minimum commitment of $ 50.0 million less outstanding borrowings.
In conjunction with the Revolving Credit Facility, the Company has $ 3.9 million of related unamortized debt issuance costs as of September 30, 2020 , which are included in Prepaid expenses and Other long-term assets in the Company’s Condensed Consolidated Balance Sheets and amortized over the term of the facility.
Offset Accounts
Offset accounts consist of immediately available cash used to pay down the Floorplan Line and FMCC Facility, and therefore offset the respective outstanding balances in the Company’s Condensed Consolidated Balance Sheets. The offset accounts are the Company’s primary options for the short-term investment of excess cash.
Floorplan Notes Payable - Manufacturer Affiliates
FMCC Facility
The Company has a $ 300.0 million floorplan arrangement with FMCC for financing of new Ford vehicles in the U.S. This facility bears interest at the higher of the actual U.S. Prime rate or a Prime floor of 4.00 % , plus 150 basis points minus certain incentives. The interest rate on the FMCC Facility was 5.50 % before considering the applicable incentives as of September 30, 2020 .
Other Manufacturer Facilities
The Company has other credit facilities in the U.S., U.K. and Brazil with financial institutions affiliated with manufacturers for financing of new, used and rental vehicle inventories. As of September 30, 2020 , borrowings outstanding under these facilities totaled $ 200.1 million , comprised of $ 91.5 million in the U.S., with annual interest rates ranging from less than 1% to approximately 6 % , $ 102.2 million in the U.K., with annual interest rates ranging from approximately 1 % to 4 % , and $ 6.4 million in Brazil, with annual interest rates ranging from approximately 2 % to 10 % .
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GROUP 1 AUTOMOTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)– (Continued)
11 . CASH FLOW INFORMATION
Cash, Cash Equivalents and Restricted Cash
The cash flows presented within the Company’s Condensed Consolidated Statements of Cash Flows reflect cash and cash equivalents of $ 66.2 million as of September 30, 2020 , and cash and cash equivalents of $ 23.8 million and restricted cash of $ 4.3 million included in Other long-term assets as of December 31, 2019 .
Non-cash Activities
The accrual for capital expenditures decreased $ 1.0 million and $ 3.6 million for the nine months ended September 30, 2020 and 2019 , respectively.
The following table presents ROU assets obtained in exchange for lease obligations (in millions):
Nine Months Ended September 30,
2020
2019
ROU assets obtained in exchange for lease obligations:
Operating leases, initial recognition
$
3.4
$
18.2
Operating leases, modifications and remeasurements
$
10.0
$
( 9.5
)
Finance leases, initial recognition
$
13.8
$
14.0
Finance leases, modifications and remeasurements
$
31.8
$
8.2
Interest and Income Taxes Paid
Cash paid for interest, including the monthly settlement of the Company’s interest rate derivatives, was $ 77.7 million and $ 83.1 million for the nine months ended September 30, 2020 and 2019 , respectively. Cash paid for income taxes, net of refunds, was $ 26.2 million and $ 34.8 million for the nine months ended September 30, 2020 and 2019 , respectively.
12 . COMMITMENTS AND CONTINGENCIES
From time to time, the Company’s dealerships are named in various types of litigation involving customer claims, employment matters, class action claims, purported class action claims, claims involving the manufacturers of automobiles, contractual disputes and other matters arising in the ordinary course of business. The Company may be involved in legal proceedings or suffer losses that could have a material adverse effect on the Company’s business. In the normal course of business, the Company is required to respond to customer, employee and other third-party complaints. In addition, the manufacturers of the vehicles that the Company sells and services have audit rights allowing them to review the validity of amounts claimed for incentive, rebate or warranty-related items and charge the Company back for amounts determined to be invalid payments under the manufacturers’ programs, subject to the Company’s right to appeal any such decision.
Legal Proceedings
As of September 30, 2020 , the Company was not party to any legal proceedings that, individually or in the aggregate, are reasonably expected to have a material adverse effect on the Company’s results of operations, financial condition or cash flows, including class action lawsuits. However, the results of current or future matters cannot be predicted with certainty and an unfavorable resolution of one or more of such matters could have a material adverse effect on the Company’s results of operations, financial condition or cash flows.
Other Matters
From time to time, the Company sells its dealerships to third parties. In those instances where the Company did not own the real estate and was a tenant, it assigned the lease to the purchaser but remained liable as a guarantor for the remaining lease payments in the event of non-payment by the purchaser. Although the Company has no reason to believe that it will be called upon to perform under any such assigned leases, the Company estimates that lessee remaining rental obligations were $ 29.7 million as of September 30, 2020 . In certain instances, the Company obtains collateral support for the rental obligations that the Company remains obligated for upon sale of a dealership to a lessee. Total associated letters of credit issued on behalf of the lessee where the Company is the beneficiary was $ 5.7 million as of September 30, 2020 .
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GROUP 1 AUTOMOTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)– (Continued)
13 . ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Changes in the balances of each component of Accumulated other comprehensive income (loss) were as follows (in millions):
Nine Months Ended September 30, 2020
Accumulated income (loss) on foreign currency translation
Accumulated income (loss) on interest rate swaps
Total
Balance, December 31, 2019
$
( 142.9
)
$
( 4.1
)
$
( 147.0
)
Other comprehensive income (loss) before reclassifications:
Pre-tax
( 24.4
)
( 51.3
)
( 75.6
)
Tax effect
—
10.9
10.9
Amount reclassified from accumulated other comprehensive income (loss):
Floorplan interest expense (pre-tax)
—
5.3
5.3
Other interest expense, net (pre-tax)
—
1.7
1.7
Realized (gain) loss on interest rate swap termination (pre-tax)
—
0.1
0.1
Provision (benefit) for income taxes
—
( 1.7
)
( 1.7
)
Net current period other comprehensive income (loss)
( 24.4
)
( 35.0
)
( 59.3
)
Balance, September 30, 2020
$
( 167.2
)
$
( 39.1
)
$
( 206.3
)
Nine Months Ended September 30, 2019
Accumulated income (loss) on foreign currency translation
Accumulated income (loss) on interest rate swaps
Total
Balance, December 31, 2018
$
( 146.7
)
$
8.9
$
( 137.8
)
Other comprehensive income (loss) before reclassifications:
Pre-tax
( 12.0
)
( 25.2
)
( 37.1
)
Tax effect
—
6.0
6.0
Amount reclassified from accumulated other comprehensive income (loss):
Floorplan interest expense (pre-tax)
—
( 0.4
)
( 0.4
)
Other interest expense (pre-tax)
—
( 0.4
)
( 0.4
)
Realized (gain) loss on interest rate swap termination (pre-tax)
—
0.1
0.1
Provision (benefit) for income taxes
—
0.2
0.2
Net current period other comprehensive income (loss)
( 12.0
)
( 19.7
)
( 31.7
)
Balance, September 30, 2019
$
( 158.7
)
$
( 10.8
)
$
( 169.5
)
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CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this “Form 10-Q”) includes certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (“Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”). Forward-looking statements may appear throughout this report including, but not limited to, the following sections: “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Quantitative and Qualitative Disclosures About Market Risk.” This information includes statements regarding our strategy, plans, goals or current expectations with respect to, among other things:
• our future operating performance;
• our ability to maintain or improve our margins;
• our ability to accomplish and sustain SG&A expense decreases;
• operating cash flows and availability of capital;
• the completion of future acquisitions and divestitures;
• the future revenues of acquired dealerships;
• future stock repurchases, refinancing of debt and dividends;
• future capital expenditures;
• changes in sales volumes and availability of credit for customer financing in new and used vehicles and sales volumes in the parts and service markets;
• business trends in the retail automotive industry, including the level of manufacturer incentives, new and used vehicle retail sales volume and pricing, customer demand, interest rates and changes in industry-wide inventory levels;
• manufacturer quality issues, including the recall of vehicles and any related negative impact on vehicle sales and brand reputation;
• availability of financing for inventory, working capital, real estate and capital expenditures;
• changes in regulatory practices, tariffs and taxes, including Brexit;
• the impacts of any potential global recession;
• our ability to meet our financial covenants in our debt obligations and to maintain sufficient liquidity to operate; and
• the impacts of the COVID-19 pandemic on our business.
Although we believe that the expectations reflected in these forward-looking statements are reasonable when and as made, we cannot assure you that these expectations will prove to be correct. When used in this Form 10-Q, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may” and similar expressions are intended to identify forward-looking statements. These forward-looking statements are based on our expectations and beliefs as of the date of this Form 10-Q concerning future developments and their potential effect on us. While management believes that these forward-looking statements are reasonable as and when made, there can be no assurance that future developments affecting us will be those that we anticipate. All comments concerning our expectations for future revenues and operating results are based on our forecasts for our existing operations and do not include the potential impact of any future acquisitions. Our forward-looking statements involve significant risks and uncertainties (some of which are beyond our control) and assumptions that could cause actual results to differ materially from our historical experience and our present expectations or projections. Known material factors that could cause actual results to differ from those in the forward-looking statements include:
• adverse developments in the global economy as well as the public health crisis related to the COVID-19 pandemic and the resulting impact on the demand for new and used vehicles and related parts and services;
• uncertainty regarding the length of time it will take for the U.S. and the rest of the world to slow the spread of the COVID-19 pandemic, the actions to be taken by governments to contain and combat the pandemic and the timing, pace and extent of an economic recovery in the U.S. and elsewhere, which in turn will likely affect demand for our vehicles, parts and services;
• future deterioration in the economic environment, including consumer confidence, consumer preferences, interest rates, the prices of oil and gasoline, the level of manufacturer incentives, the implementation of international and domestic trade tariffs and the availability of consumer credit may affect the demand for new and used vehicles, replacement parts, maintenance and repair services, and F&I products;
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• adverse domestic and international developments such as war, terrorism, political conflicts, social protests or other hostilities may adversely affect the demand for our products and services;
• uncertainty of the potential impact of Brexit on the overall U.K. economy and, more specifically, the potential adverse effect on retail automotive industry sales could have a material adverse effect on our revenues and business operations;
• the existing and future regulatory environment, including legislation related to the Dodd-Frank Wall Street Reform and Consumer Protection Act, climate control legislation, changes to U.S. federal, U.S. state, U.K. or Brazil tax regulations and unexpected litigation or adverse legislation, including changes in U.S. state franchise laws, may impose additional costs on us or otherwise adversely affect us;
• a concentration of risk associated with our principal automobile manufacturers, especially Toyota, Nissan, Honda, BMW, Ford, Daimler, General Motors, Chrysler, Hyundai, Volkswagen and Jaguar-Land Rover, because of financial distress, bankruptcy, natural disasters or pandemics, such as the COVID-19 pandemic, that disrupt production, or other reasons, may not continue to produce or make available to us vehicles that are in high demand by our customers or provide financing, insurance, advertising or other assistance to us;
• restructuring by one or more of our principal manufacturers, up to and including bankruptcy, may cause us to suffer financial loss in the form of uncollectible receivables, devalued inventory or loss of franchises;
• requirements imposed on us by our manufacturers may require dispositions, limit our acquisitions or require increases in the level of capital expenditures related to our dealership facilities;
• our existing and/or new dealership operations may not perform at our or manufacturer expected levels or achieve expected improvements;
• our failure to achieve expected future cost savings or future costs may be higher than we expect;
• manufacturer quality issues, including the recall of vehicles, may negatively impact vehicle sales and brand reputation;
• available capital resources, increases in cost of financing (such as higher interest rates) and our various debt agreements may limit our ability to complete acquisitions, complete construction of new or expanded facilities, repurchase shares, or pay dividends;
• our ability to refinance or obtain financing in the future may be limited and the cost of financing could increase significantly;
• our ability to facilitate credit for consumers;
• foreign exchange controls and currency fluctuations;
• new accounting standards could materially impact our reported EPS;
• our ability to acquire new dealerships and successfully integrate those dealerships into our business;
• the impairment of our goodwill, our indefinite-lived intangibles and our other long-lived assets;
• natural disasters, adverse weather events and other catastrophic events;
• a cybersecurity event of our systems or a third party partners’ systems, including a breach of personally identifiable information about our customers or employees or a shutdown of our operating systems;
• our foreign operations and sales in the U.K. and Brazil, which pose additional risks;
• the inability to adjust our cost structure and inventory levels to offset any reduction in the demand for our products and services;
• loss of our key personnel;
• our losses may not be fully covered by insurance or may only be fully covered with a significant increase to our insurance costs;
• our inability to obtain inventory of new and used vehicles and parts, including imported inventory, at the cost, or in the volume, we expect; and
• advancements in vehicle technology and changes in vehicle ownership models/consumer preferences.
For additional information regarding known material factors that could cause our actual results to differ from our projected results, please see Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Form 10-K”), and this Form 10-Q, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Quantitative and Qualitative Disclosures About Market Risk.”
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Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. We undertake no responsibility and expressly disclaim any duty, to update any such statements, whether as a result of new information, new developments or otherwise, or to publicly release the result of any revision of our forward-looking statements after the date they are made, except to the extent required by law.
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