Group 1 Automotive Earnings 2020-03-31

Balance Sheet	Income Statement	Cash Flow
Assets, Equity	Rev, G Profit, Net Income	Ops, Inv, Fin

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020



☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 1-13461

Group 1 Automotive, Inc.

(Exact name of registrant as specified in its charter)



Delaware		76-0506313
(State of other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
800 Gessner,	Suite 500	77024
Houston,	TX	(Zip code)
(Address of principal executive offices)

(713) 647-5700

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)



Securities registered pursuant to Section 12(b) of the Act:
Title of each class	Ticker symbol(s)	Name of exchange on which registered
Common stock, par value $0.01 per share	GPI	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer	þ	¨	Accelerated filer

Non-accelerated filer	¨	☐	Smaller reporting company

		☐	Emerging growth company

If an emerging growth company, indicate by check mark if that registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ

As of May 4, 2020, the registrant had 18,175,569 shares of common stock outstanding.

Table of Contents

TABLE OF CONTENTS




GLOSSARY OF DEFINITIONS		3
PART I. FINANCIAL INFORMATION		4
Item 1.	Financial Statements	4
	Cautionary Statement about Forward-Looking Statements	21
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	44
Item 4.	Controls and Procedures	45

PART II. OTHER INFORMATION		46
Item 1.	Legal Proceedings	46
Item 1A.	Risk Factors	46
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46
Item 6.	Exhibits	47
SIGNATURE		49

Table of Contents

GLOSSARY OF DEFINITIONS

The following are abbreviations and definitions of terms used within this report:



Terms		Definitions
ASC		Accounting Standards Codification
ASU		Accounting Standards Update
Brexit		Withdrawal of the U.K. from the EU
BRL		Brazilian Real (R$)
COVID-19 pandemic		Coronavirus disease first emerging in December 2019 and resulting in the ongoing global pandemic in 2020
EPS		Earnings per share
EU		European Union
F&I		Finance, insurance and other
FASB		Financial Accounting Standards Board
FMCC		Ford Motor Credit Company
GBP		British Pound Sterling (£)
LIBOR		London Interbank Offered Rate
OEM		Original equipment manufacturer
PRU		Per retail unit
ROU		Right-of-use
RSA		Restricted stock award
SEC		Securities and Exchange Commission
SG&A		Selling, general and administrative
USD		United States Dollar
U.K.		United Kingdom
U.S.		United States of America
U.S. GAAP		Accounting principles generally accepted in the U.S.
WHO		World Health Organization
WLTP		Worldwide Harmonised Light Vehicle Test Procedure

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

GROUP 1 AUTOMOTIVE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In millions, except share data)



	March 31, 2020			December 31, 2019
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	19.2		$	23.8
Contracts-in-transit and vehicle receivables, net	115.5			253.8
Accounts and notes receivable, net	177.1			225.1
Inventories, net	1,992.6			1,901.7
Prepaid expenses	82.6			96.4
Other current assets	12.3			15.5
TOTAL CURRENT ASSETS	2,399.3			2,516.3
Property and equipment, net of accumulated depreciation of $405.7 and $400.2, respectively	1,549.0			1,547.1
Operating lease assets	218.7			220.1
Goodwill	999.8			1,008.3
Intangible franchise rights	251.7			253.5
Other long-term assets	22.5			24.8
TOTAL ASSETS	$	5,441.1		$	5,570.2

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Floorplan notes payable — credit facility and other, net of offset account of $82.6 and $106.8, respectively	$	1,168.6		$	1,144.4
Floorplan notes payable — manufacturer affiliates, net of offset account of $0.2 and $4.1, respectively	484.9			459.9
Current maturities of long-term debt	354.7			59.1
Current operating lease liabilities	24.4			24.6
Accounts payable	410.7			527.5
Accrued expenses and other current liabilities	197.1			206.7
TOTAL CURRENT LIABILITIES	2,640.4			2,422.3
Long-term debt	1,137.7			1,432.1
Long-term operating lease liabilities	208.9			210.7
Deferred income taxes	135.8			145.7
Long-term interest rate swap liabilities	41.7			4.4
Other long-term liabilities	102.0			99.2
Commitments and Contingencies (Note 12)
STOCKHOLDERS’ EQUITY:
Common stock, $0.01 par value, 50,000,000 shares authorized; 25,448,274 and 25,486,711 shares issued, respectively	0.3			0.3
Additional paid-in capital	287.8			295.3
Retained earnings	1,566.7			1,542.4
Accumulated other comprehensive income (loss)	(206.0		)	(147.0		)
Treasury stock, at cost; 7,272,601 and 6,858,503 shares, respectively	(474.1		)	(435.3		)
TOTAL STOCKHOLDERS’ EQUITY	1,174.6			1,255.7
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	5,441.1		$	5,570.2

See accompanying Notes to Condensed Consolidated Financial Statements

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GROUP 1 AUTOMOTIVE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In millions, except per share data)



	Three Months Ended March 31,
	2020		2019
REVENUES:
New vehicle retail sales	$	1,342.2	$	1,414.5
Used vehicle retail sales	779.0		819.2
Used vehicle wholesale sales	86.5		92.1
Parts and service sales	370.6		369.2
Finance, insurance and other, net	112.5		113.4
Total revenues	2,690.8		2,808.4
COST OF SALES:
New vehicle retail sales	1,279.4		1,343.1
Used vehicle retail sales	736.9		771.4
Used vehicle wholesale sales	85.5		91.7
Parts and service sales	172.6		170.7
Total cost of sales	2,274.3		2,376.9
GROSS PROFIT	416.5		431.5
Selling, general and administrative expenses	328.0		327.7
Depreciation and amortization expense	18.6		17.0
INCOME (LOSS) FROM OPERATIONS	69.9		86.8
INTEREST EXPENSE:
Floorplan interest expense	12.9		15.7
Other interest expense, net	18.1		18.9
INCOME (LOSS) BEFORE INCOME TAXES	38.9		52.2
(Benefit) provision for income taxes	9.1		13.5
NET INCOME (LOSS)	$	29.8	$	38.6
BASIC EARNINGS (LOSS) PER SHARE	$	1.62	$	2.09
Weighted average common shares outstanding	17.8		17.8
DILUTED EARNINGS (LOSS) PER SHARE	$	1.61	$	2.08
Weighted average dilutive common shares outstanding	17.8		17.8

See accompanying Notes to Condensed Consolidated Financial Statements

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GROUP 1 AUTOMOTIVE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(In millions)



	Three Months Ended March 31,
	2020			2019
NET INCOME (LOSS)	$	29.8		$	38.6
Other comprehensive income (loss), net of taxes:
Foreign currency translation adjustment	(27.9		)	3.6
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 $9.7 and $1.3, respectively	(31.6		)	(4.2		)
Reclassification adjustment for (gain) loss included in interest expense, net of tax benefit (provision) of $0.2 and ($0.1), respectively	0.5			(0.3		)
Unrealized gain (loss) on interest rate risk management activities, net of tax	(31.1		)	(4.6		)
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX	(59.0		)	(1.0		)
COMPREHENSIVE INCOME (LOSS)	$	(29.3	)	$	37.7

See accompanying Notes to Condensed Consolidated Financial Statements

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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		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total
BALANCE, December 31, 2019	25,486,711		$	0.3	$	295.3		$	1,542.4		$	(147.0	)	$	(435.3	)	$	1,255.7
Net income (loss)	—		—		—			29.8			—			—			29.8
Other comprehensive income (loss), net of taxes	—		—		—			—			(59.0		)	—			(59.0		)
Purchases of treasury stock	—		—		—			—			—			(48.9		)	(48.9		)
Net issuance of treasury shares to stock compensation plans	(38,436	)	—		(12.7		)	—			—			10.2			(2.5		)
Stock-based compensation	—		—		5.1			—			—			—			5.1
Dividends declared ($0.30 per share)	—		—		—			(5.5		)	—			—			(5.5		)
BALANCE, March 31, 2020	25,448,275		$	0.3	$	287.8		$	1,566.7		$	(206.0	)	$	(474.1	)	$	1,174.6



	Common Stock			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total
	Shares	Amount		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total
BALANCE, December 31, 2018	25,494,328	$	0.3	$	292.8		$	1,394.8		$	(137.8	)	$	(454.4	)	$	1,095.7
Net income (loss)	—	—		—			38.6			—			—			38.6
Other comprehensive income (loss), net of taxes	—	—		—			—			(1.0		)	—			(1.0		)
Net issuance of treasury shares to stock compensation plans	28,055	—		(11.7		)	—			—			10.9			(0.8		)
Stock-based compensation	—	—		6.1			—			—			—			6.1
Dividends declared ($0.26 per share)	—	—		—			(4.8		)	—			—			(4.8		)
ASC 842 cumulative adjustment	—	—		—			(6.1		)	—			—			(6.1		)
BALANCE, March 31, 2019	25,522,383	$	0.3	$	287.1		$	1,422.6		$	(138.7	)	$	(443.5	)	$	1,127.7

See accompanying Notes to Condensed Consolidated Financial Statements

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GROUP 1 AUTOMOTIVE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In millions)



	Three Months Ended March 31,
	2020			2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	29.8		$	38.6
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization	18.6			17.0
Change in operating lease assets	6.4			7.6
Deferred income taxes	(0.4		)	4.1
Stock-based compensation	5.1			6.1
Amortization of debt discount and issue costs	1.0			0.9
(Gain) loss on disposition of assets	—			(5.8		)
Other	0.4			0.2
Changes in assets and liabilities, net of acquisitions and dispositions:
Accounts payable and accrued expenses	(98.1		)	101.6
Accounts and notes receivable	41.6			9.2
Inventories	(125.7		)	(28.1		)
Contracts-in-transit and vehicle receivables	135.2			5.1
Prepaid expenses and other assets	1.8			(17.7		)
Floorplan notes payable — manufacturer affiliates	35.9			(2.5		)
Deferred revenues	(0.2		)	(0.2		)
Operating lease liabilities	(7.3		)	(8.4		)
Net cash provided by (used in) operating activities	44.1			127.9
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposition of franchises, property and equipment	0.5			35.1
Purchases of property and equipment	(31.6		)	(41.7		)
Other	—			(0.2		)
Net cash provided by (used in) investing activities	(31.1		)	(6.8		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on credit facility — floorplan line and other	1,691.6			1,631.5
Repayments on credit facility — floorplan line and other	(1,665.6		)	(1,697.5		)
Borrowings on credit facility — acquisition line	30.0			107.8
Repayments on credit facility — acquisition line	(30.0		)	(111.5		)
Debt issue costs	(0.1		)	—
Borrowings on other debt	27.3			20.3
Principal payments on other debt	(26.0		)	(26.7		)
Borrowings on debt related to real estate	18.9			—
Principal payments on debt related to real estate	(7.6		)	(20.9		)
Proceeds from employee stock purchase plan	2.5			2.1
Payment of tax withholding for stock-based awards	(5.0		)	(2.9		)
Repurchases of common stock, amounts based on settlement date	(48.9		)	—
Dividends paid	(5.5		)	(4.8		)
Net cash provided by (used in) financing activities	(18.5		)	(102.5		)
Effect of exchange rate changes on cash	(3.4		)	(0.5		)
Net increase (decrease) in cash, cash equivalents and restricted cash	(8.9		)	18.1
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of period	28.1			18.7
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period	$	19.2		$	36.9

See accompanying Notes to Condensed Consolidated Financial Statements

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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 March 31, 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 a Managing Director, each reporting directly to the Company's Chief Executive Officer. The President, U.S. and Brazilian Operations, and the U.K. Managing 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

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, significantly impacting the Company’s operating results starting in March. On March 11, 2020, the WHO declared COVID-19 a pandemic, and subsequently, various countries including the U.S., U.K. and Brazil declared the COVID-19 pandemic a national emergency. Along with these declarations, there have been extraordinary and wide-ranging actions taken by international, federal, state and local public health and governmental authorities to contain and combat the outbreak and spread of the COVID-19 pandemic in regions across the world, including mandates for many individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations. Beginning in mid-March, these measures have either completely shut down or significantly reduced operating capacity of all of the Company’s dealerships in the U.S., the U.K. and Brazil. The length of the stay-at-home orders, travel restrictions and other restrictions on operating businesses and resulting economic impacts are uncertain. To date, these measures have significantly reduced the Company’s new and used vehicle sales volumes, parts and service revenues and F&I revenues, as well as impacted the Company’s vehicle and parts supply chain.

During the three months ended March 31, 2020, the Company incurred certain incremental charges as a result of the COVID-19 pandemic, which included one-time employee termination benefits associated with severance of $0.9 million recorded in Selling, general and administrative expenses, additional used vehicle inventory reserves of $4.8 million as a result of the adjustment to lower of specific cost or net realizable value and additional allowance for doubtful accounts reserves of $0.4 million as further described in Note 7 “Receivables and Contract Assets, Net.” The Company also performed an interim impairment assessment of goodwill and intangible franchise rights and concluded that it was not more-likely-than-not that the Company’s goodwill and intangible franchise rights were impaired as of March 31, 2020. Refer to Note 8 “Intangibles” for additional discussion of the Company’s interim impairment assessment.

The anticipated effects of the COVID-19 pandemic should not materially impact the Company’s estimated effective tax rate for the full-year of 2020.

As the potential impact from the COVID-19 pandemic is difficult to predict, the extent to which it may negatively affect the Company’s future operating results or the duration of any potential business disruption is uncertain. Any potential impact will depend on future developments and new information that may emerge regarding the severity and duration of the COVID-19 pandemic and the actions taken by authorities to contain it or treat its impact, all of which are beyond the Company’s control. These potential impacts, while uncertain, could adversely affect the Company’s business, financial condition and results of operations and could also exacerbate the risks identified in the risk factors listed in this Form 10-Q.

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GROUP 1 AUTOMOTIVE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)– (Continued)

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.

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.

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. Certain disclosures are reported as zero balances, or may not compute, due to rounding. 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 is expecting to adopt the relief described as its arrangements are modified.

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GROUP 1 AUTOMOTIVE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)– (Continued)

2. REVENUES

The following tables present the Company’s revenues disaggregated by revenue source and geographical segments (in millions):



	Three Months Ended March 31, 2020
	U.S.		U.K.		Brazil		Total
REVENUES:
New vehicle retail sales	$	988.4	$	296.3	$	57.5	$	1,342.2
Used vehicle retail sales	570.3		188.8		19.9		779.0
Used vehicle wholesale sales	46.8		35.8		3.8		86.5
Total new and used vehicle sales	1,605.5		520.9		81.3		2,207.7
Parts and service sales ⁽¹⁾	304.6		56.4		9.6		370.6
Finance, insurance and other, net ⁽²⁾	97.4		13.3		1.7		112.5
Total revenues	$	2,007.6	$	590.7	$	92.5	$	2,690.8



	Three Months Ended March 31, 2019
	U.S.		U.K.		Brazil		Total
REVENUES:
New vehicle retail sales	$	1,031.7	$	318.6	$	64.2	$	1,414.5
Used vehicle retail sales	594.4		203.6		21.2		819.2
Used vehicle wholesale sales	42.8		45.3		4.1		92.1
Total new and used vehicle sales	1,669.0		567.4		89.4		2,325.8
Parts and service sales ⁽¹⁾	297.6		59.6		12.0		369.2
Finance, insurance and other, net ⁽²⁾	96.2		15.2		2.0		113.4
Total revenues	$	2,062.8	$	642.2	$	103.4	$	2,808.4

⁽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 is recognized upon completion of the services, which occurs over time.

⁽²⁾Includes variable consideration recognized of $4.0 million and $3.2 million during the three months ended March 31, 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 three months ended March 31, 2020, the Company had no activity related to acquisitions.

During the three months ended March 31, 2019, the Company opened one dealership representing one franchise in the U.S. and one dealership representing one franchise in the U.K.

Dispositions

During the three months ended March 31, 2020, the Company had no activity related to dispositions.

During the three months ended March 31, 2019, the Company’s dispositions included three dealerships representing six franchises in the U.S. and one dealership representing one franchise in the U.K. The Company recorded a net pre-tax gain totaling $5.2 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 Statement of Operations.

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GROUP 1 AUTOMOTIVE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)– (Continued)

4. SEGMENT INFORMATION

As of March 31, 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 a Managing 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. Managing Director are responsible for the overall performance of their respective regions, as well as for overseeing field level management. Each of the segments 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 months ended March 31, 2020 and 2019 (in millions):



	Three Months Ended March 31, 2020
	U.S.		U.K.			Brazil			Total
Total revenues	$	2,007.6	$	590.7		$	92.5		$	2,690.8
Income (loss) before income taxes ⁽¹⁾	$	42.2	$	(2.7	)	$	(0.6	)	$	38.9



	Three Months Ended March 31, 2019
	U.S.		U.K.		Brazil			Total
Total revenues	$	2,062.8	$	642.2	$	103.4		$	2,808.4
Income (loss) before income taxes ⁽²⁾	$	46.4	$	6.2	$	(0.4	)	$	52.2

⁽¹⁾ Income (loss) before income taxes for the three months ended March 31, 2020 includes a $0.9 million severance expense in the Brazil segment as further described in Note 1 “Interim Financial Information.”

⁽²⁾ Income (loss) before income taxes for the three months ended March 31, 2019 includes a $5.2 million net gain on disposition of real estate and dealership transactions in the U.S. segment, a $2.4 million loss on legal matters in the U.S. and Brazil segments and $2.0 million in expense related to Oklahoma hail storm damages in the U.S. segment.

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.

Table of Contents

GROUP 1 AUTOMOTIVE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)– (Continued)

The following table sets forth the calculation of EPS for the three months ended March 31, 2020 and 2019 (in millions, except share data):



	Three Months Ended March 31,
	2020		2019
Weighted average basic common shares outstanding	17,763,451		17,797,318
Dilutive effect of stock-based awards and employee stock purchases	44,810		52,016
Weighted average dilutive common shares	17,808,261		17,849,334
Basic:
Net income (loss)	$	29.8	$	38.6
Less: Earnings (loss) allocated to participating securities	1.1		1.5
Net income (loss) available to basic common shares	$	28.7	$	37.2
Basic earnings (loss) per common share	$	1.62	$	2.09
Diluted:
Net income (loss)	$	29.8	$	38.6
Less: Earnings (loss) allocated to participating securities	1.1		1.5
Net income (loss) available to diluted common shares	$	28.7	$	37.2
Diluted earnings (loss) per common share	$	1.61	$	2.08

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 Receivable, 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 these instruments and/or the existence of variable interest rates.

Fixed Rate Long-Term Debt

The Company’s fixed rate long-term debt primarily consists of amounts outstanding under its senior unsecured notes and certain mortgage facilities. See Note 9 “Debt” for further discussion of the Company’s long-term debt arrangements. The Company estimates the fair value of its 5.00% 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).

Table of Contents

GROUP 1 AUTOMOTIVE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)– (Continued)

The carrying value and fair value of the Company’s 5.00% Senior Notes and fixed rate mortgages were as follows (in millions):



	March 31, 2020				December 31, 2019
	Carrying Value ⁽¹⁾		Fair Value		Carrying Value ⁽¹⁾		Fair Value
5.00% Senior Notes	$	546.8	$	510.4	$	546.4	$	559.5
Real estate related	39.3		38.9		40.7		41.1
Total	$	586.1	$	549.3	$	587.1	$	600.6

(1)Carrying value includes unamortized discount and excludes debt issuance costs.

As described in Note 9 “Debt,” 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 redemption price approximated the fair value of the 5.25% Senior Notes as of March 31, 2020.

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 months ended March 31, 2020 and 2019.

As of March 31, 2020, the Company held 29 interest rate swaps in effect with a total notional value of $786.2 million that fixed its underlying one-month LIBOR at a weighted average rate of 1.91%. The Company also held 13 additional interest rate swaps with forward start dates beginning April 2020 that had an aggregate notional value of $580.8 million and a weighted average interest rate of 1.60% as of March 31, 2020. The maturity dates of the Company’s interest rate swaps range between December 2020 and December 2030.

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 Standard and Poor’s. The inputs to the fair value measurements reflect level 2 inputs.

Assets and liabilities associated with the Company’s interest rate swaps as reflected in the Condensed Consolidated Balance Sheets were as follows (in millions):



	March 31, 2020		December 31, 2019
Assets from interest rate risk management activities:
Other long-term assets	$	—	$	1.9
Liabilities from interest rate risk management activities:
Accrued expenses and other current liabilities	$	4.4	$	2.8
Long-term interest rate swap liabilities	41.7		4.4
Total long-term liabilities from interest rate risk management activities	$	46.1	$	7.2

Included in Accumulated other comprehensive income (loss) as of March 31, 2020 and 2019, were unrealized gains (losses), net of tax, totaling ($35.2) million and $4.4 million, respectively, related to the Company’s interest rate swaps.

Table of Contents

GROUP 1 AUTOMOTIVE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)– (Continued)

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)
	Three Months Ended March 31,
Derivatives in Cash Flow Hedging Relationship	2020			2019
Interest rate swaps	$	(31.6	)	$	(4.2	)

	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	Three Months Ended March 31,
	2020			2019
Floorplan interest expense, net	$	(0.6	)	$	0.3
Other interest expense, net	$	(0.1	)	$	0.1

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 $4.4 million.

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):



	March 31, 2020		December 31, 2019
Contracts-in-transit and vehicle receivables, net
Contracts-in-transit	$	67.0	$	169.9
Vehicle receivables	48.7		84.3
Total contracts-in-transit and vehicle receivables	115.8		254.1
Less: allowance for doubtful accounts ⁽¹⁾	0.3		0.3
Total contracts-in-transit and vehicle receivables, net	$	115.5	$	253.8

Accounts and notes receivables, net
Manufacturer receivables	$	97.5	$	124.0
Parts and service receivables	51.2		57.0
F&I receivables	19.0		28.3
Other	12.8		18.6
Total accounts and notes receivables	180.5		227.9
Less: allowance for doubtful accounts ⁽¹⁾	3.4		2.8
Total accounts and notes receivables, net	$	177.1	$	225.1

Within Other current assets and Other long-term assets
Total contract assets, net ^{(1), (2)}	$	22.7	$	21.6

⁽¹⁾ The allowance for doubtful accounts as of March 31, 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 March 31, 2020 or December 31, 2019. No past due balances existed as of either date, and there were no expected credit losses as of March 31, 2020.

Table of Contents

Price	88.62	EPS	9
Shares	18	P/E	10
MCap	1,593	P/FCF	5
Net Debt	1,263	EBIT	195
TEV	2,857	TEV/EBIT	15
TTM 2019-09-30, in MM, except price, ratios

10-Q	2020-03-31	Filed 2020-05-08
10-K	2019-12-31	Filed 2020-02-13
10-Q	2019-09-30	Filed 2019-10-30
10-Q	2019-06-30	Filed 2019-08-02
10-Q	2019-03-31	Filed 2019-05-08
10-K	2018-12-31	Filed 2019-02-19
10-Q	2018-09-30	Filed 2018-11-01
10-Q	2018-06-30	Filed 2018-08-03
10-Q	2018-03-31	Filed 2018-05-04
10-K	2017-12-31	Filed 2018-02-20
10-Q	2017-09-30	Filed 2017-11-02
10-Q	2017-06-30	Filed 2017-08-02
10-Q	2017-03-31	Filed 2017-05-04
10-K	2016-12-31	Filed 2017-02-17
10-Q	2016-09-30	Filed 2016-11-03
10-Q	2016-06-30	Filed 2016-08-03
10-Q	2016-03-31	Filed 2016-05-03
10-K	2015-12-31	Filed 2016-02-17
10-Q	2015-09-30	Filed 2015-10-30
10-Q	2015-06-30	Filed 2015-07-30
10-Q	2015-03-31	Filed 2015-05-11
10-K	2014-12-31	Filed 2015-02-24
10-Q	2014-09-30	Filed 2014-11-07
10-Q	2014-06-30	Filed 2014-08-04
10-Q	2014-03-31	Filed 2014-04-29
10-K	2013-12-31	Filed 2014-03-03
10-Q	2013-09-30	Filed 2013-10-31
10-Q	2013-06-30	Filed 2013-08-01
10-Q	2013-03-31	Filed 2013-05-10
10-K	2012-12-31	Filed 2013-02-20
10-Q	2012-09-30	Filed 2012-10-26
10-Q	2012-06-30	Filed 2012-07-27
10-Q	2012-03-31	Filed 2012-04-27
10-Q	2011-09-30	Filed 2011-10-26
10-Q	2011-06-30	Filed 2011-07-27
10-Q	2011-03-31	Filed 2011-04-27
10-K	2010-12-31	Filed 2011-02-11
10-Q	2010-09-30	Filed 2010-10-28
10-Q	2010-06-30	Filed 2010-07-28
10-Q	2010-03-31	Filed 2010-04-28
10-K	2009-12-31	Filed 2010-02-12

8-K	2020-07-30	Earnings, Exhibits
8-K	2020-07-13	Regulation FD, Exhibits
8-K	2020-06-25	Other Events, Exhibits
8-K	2020-05-29
8-K	2020-05-13
8-K	2020-05-05
8-K	2020-04-23
8-K	2020-04-07
8-K	2020-04-02
8-K	2020-03-25
8-K	2020-03-03
8-K	2020-02-18
8-K	2020-02-14
8-K	2020-02-05
8-K	2020-01-13
8-K	2019-12-09
8-K	2019-12-02
8-K	2019-11-20
8-K	2019-11-12
8-K	2019-10-31
8-K	2019-10-24
8-K	2019-10-08
8-K	2019-09-23
8-K	2019-09-10
8-K	2019-08-14
8-K	2019-07-25
8-K	2019-07-22
8-K	2019-07-10
8-K	2019-07-08
8-K	2019-06-27
8-K	2019-06-04
8-K	2019-05-16
8-K	2019-04-25
8-K	2019-04-04
8-K	2019-04-02
8-K	2019-02-21
8-K	2019-02-14
8-K	2019-02-05
8-K	2019-01-17
8-K	2018-11-28
8-K	2018-11-15
8-K	2018-11-05
8-K	2018-10-25
8-K	2018-10-10
8-K	2018-09-25
8-K	2018-09-05
8-K	2018-08-30
8-K	2018-08-16
8-K	2018-08-07
8-K	2018-08-06
8-K	2018-07-26
8-K	2018-07-10
8-K	2018-05-16
8-K	2018-04-26
8-K	2018-04-16
8-K	2018-04-03
8-K	2018-03-26
8-K	2018-03-19
8-K	2018-02-28
8-K	2018-02-20
8-K	2018-02-15
8-K	2018-02-08
8-K	2018-02-08
8-K	2018-01-29
8-K	2018-01-17
8-K	2018-01-12
8-K	2018-01-08

EX-22	a2020q1exhibit22.htm
EX-31.1	a2020q1exhibit311.htm
EX-31.2	a2020q1exhibit312.htm
EX-32.1	a2020q1exhibit321.htm
EX-32.2	a2020q1exhibit322.htm

GPI 10Q Quarterly Report

Group 1 Automotive Earnings 2020-03-31