GROUP 1 AUTOMOTIVE INC 10-Q

Item 3. Quantitative and Qualitative Disclosures About Market Risk We are exposed to a variety of market risks, including interest rate risk and foreign currency exchange rate risk. We address interest rate risks primarily through the use of interest rate swaps. We do not currently hedge foreign exchange risk, as discussed further below. The following quantitative and qualitative information is provided regarding our foreign currency exchange rates and financial instruments to which we are a party at September 30, 2021, and from which we may incur future gains or losses from changes in market interest rates and/or foreign currency rates. We do not enter into derivative or other financial instruments for speculative or trading purposes. 54 Table of Contents Interest Rates We have interest rate risk on our variable-rate debt obligations, primarily consisting of our U.S. Floorplan Line. Based on the amount of variable-rate borrowings outstanding of $0.8 billion and $1.6 billion as of September 30, 2021 and 2020, respectively, a 100 basis-point change in interest rates would have resulted in an approximate $1.2 million decrease and a $6.9 million increase to our annual interest expense, respectively, after consideration of the interest rate swaps in effect. Our exposure to changes in interest rates with respect to our variable-rate floorplan borrowings is partially mitigated by manufacturers’ interest assistance, which in some cases is influenced by changes in market based variable interest rates. We reflect interest assistance as a reduction of new vehicle inventory cost until the associated vehicle is sold. During the nine months ended September 30, 2021 and 2020, we recognized $40.6 million and $33.0 million of interest assistance as a reduction of new vehicle cost of sales, respectively. For additional information about the potential impact of LIBOR phase out on our results of operations, see Item 1A. Risk Factors of our 2020 Form 10-K. Foreign Currency Exchange Rates The functional currency of our U.K. subsidiaries is the GBP and of our Brazil subsidiaries is the BRL. Our exposure to fluctuating foreign currency exchange rates relates to the effects of translating financial statements of those subsidiaries into our reporting currency, which we do not hedge against based on our investment strategy in these foreign operations. A 10% devaluation in average foreign currency exchange rates for the GBP to the USD would have resulted in a $181.9 million and $145.0 million decrease to our revenues for the nine months ended September 30, 2021 and 2020, respectively. A 10% devaluation in average foreign currency exchange rates for the BRL to the USD would have resulted in a $20.7 million and $16.7 million decrease to our revenues for the nine months ended September 30, 2021 and 2020, respectively. For additional information about our market sensitive financial instruments, refer to Note 6. Financial Instruments and Fair Value Measurements in our Notes to Condensed Consolidated Financial Statements.