In addition, local economic, competitiveChanges in fuel prices, government support, improvements in electric vehicles and other conditions affectmore electric vehicle options have increased the performancecustomer demand for more fuel efficient vehicles and electric vehicles. With a potential increase in demand by consumers for electric-powered vehicles, our manufacturers will need to adapt their product plans and production capabilities accordingly to meet these demands. As more electric vehicles potentially enter the market, and internal combustion or diesel engine vehicle production is reduced, it may be necessary to adapt to such changes by selling and servicing these units effectively in order to meet consumer demands and support the profitability of our dealerships. Our resultsIf maintenance costs of operations dependelectric-powered vehicles were to substantially on general economic conditions and spending habits in those regions of the U.S. where we maintain most of our operations. Since a large concentration of our new vehicle sales are in the state of Texas for the year ended December 31, 2019, which is dependent upon the oil and gas industry, declines in commodity prices have had and future declinesdecrease, this could have ana material adverse effect on our parts and service revenues. If consumer demand increases for fuel efficient vehicles or electric vehicles and our manufacturers are not able to adapt and produce vehicles that meet the customer demands or we are unable to align with the manufacturers of these vehicles, such events could adversely affect our new and used vehicle sales volumes, parts and service revenue and our results of operations.
Vehicle technology advancements and changes in consumer vehicle ownership preferences could adversely affect our new and used vehicle sales volumes, parts and service revenues and our results of operations.
Vehicle technology advancements are occurring at an accelerating pace. This includes driver assist functionality, autonomous vehicle development, rideshare and vehicle co-ownership business models. Many in the automotive industry believe that in the near future vehicles will be available to the automotive consumer at low usage costs, which may entice many vehicle owners, particularly in larger, highly populated areas, to abandon individual car ownership in favor of multiple co-ownership ride-sharing opportunities. An increased popularity in the ride-sharing subscription business model could adversely affect our new and used vehicle sales volumes, parts and service revenue and results of operations in those regions.operations.
We are subject to a concentration of risk in the event of financial distress, merger, sale or bankruptcy, including potential liquidation of, or other adverse economic impactsrisks associated with our dependence on certain major vehicle manufacturers.manufacturer business relationships and agreements.
The success of our dealerships is dependent on vehicle manufacturers. Wemanufacturers whom we rely exclusively on the various vehicle manufacturers for our new vehicle inventory. Our ability to sell new vehicles is dependent on a vehicle manufacturer’s ability to produce and allocate to our dealerships an attractive, high quality and desirable product mix at the right time in order to satisfy customer demand. Manufacturers generally support their franchisees by providing direct financial assistance in various areas, including, among others, incentives, floorplan assistance and advertising assistance. A discontinuation or change in our manufacturers’ warranty and incentive programs could adversely affect our business. Manufacturers also provide product warranties and, in some cases, service contracts to customers. Our dealerships perform warranty and service contract work for vehicles under manufacturer product warranties and service contracts and we bill the manufacturer directly as opposed to invoicing the customer. In addition, we rely on manufacturers to varying extents for various financing programs, OEM replacement parts, training, up-to-date product brochuresdesign, development of advertising materials and point of sale materials,programs and other items necessary for the success of our dealerships. Manufacturers generally offer various financing programs and incentives for our new and used vehicle customers.
Vehicle manufacturers may be adversely impacted by economic downturns or recessions, significant declines in the sales of their new vehicles, increases in interest rates, adverse fluctuations in currency exchange rates, declines in their credit ratings, reductions in access to capital or credit, labor strikes or similar disruptions (including within their major suppliers), supply shortages, rising raw material costs, rising employee benefit costs, adverse publicity that may reduce consumer demand for their products, including due to bankruptcy, product defects, litigation, ability to keep up with technology and business model changes, poor product mix or unappealing vehicle design, governmental laws and regulations, natural disasters or other adverse events. In particular, all our OEMs are investing material amounts to develop electric and autonomous vehicles. These investments could cause financial strain on our OEMs or fail to deliver attractive vehicles for customers which could lead to adverse impacts on our business. The OEMs are also impacted by the COVID-19 pandemic’s impact on the economy, factory production, parts shortages, including semiconductor chips, and other disruptions. These and other risks could materially adversely affect the financial condition of any manufacturer and impact its ability to profitably design, market, produce or distribute new vehicles, which in turn could have a material adverse effect on our business, results of operations and financial condition.
A declineAdditionally, many U.S. manufacturers of available financing in the lending market may have a materialvehicles, parts and adverse affect on our vehicle sales, financial condition and results of operations.
A significant portion of our vehicles purchased by our customers are financed. Sub-prime lenders have historically provided financing to those consumers who, for various reasons, do not have access to traditional financing, including those buyers who have a poor credit history or lack the down payment necessary to purchase a vehicle. In the event lenders tighten their credit standards or there is a decline in the availability of credit in the lending market, the ability of these consumers to purchase vehicles could be limited, which could have a material adverse effect on our business, financial condition and results of operations.
Wesupplies are dependent on imported products and raw materials in their production. Any significant increase in existing tariffs on such goods and raw materials, or implementation of new tariffs, could adversely affect our relationships with manufacturers and ifprofits on the vehicles we sell.
If we are unable to enter into new franchise agreements with manufacturers in connection with dealership acquisitions or maintain or renew our existing franchise agreements on favorable terms, our operations may be significantly impaired.
We are dependent on our relationships with manufacturers, which exercise a great degree of influence over our operations through the franchise agreements. For example, delaysOur franchise agreements may be terminated or not renewed by the manufacturer for a variety of reasons, including any unapproved changes of ownership or management, sales and customer satisfaction performance deficiencies and other material breaches of the franchise agreements. Manufacturers may also have a right of first refusal if we seek to sell dealerships. Additionally, we cannot guarantee that the terms of any renewals will be as favorable to us as our current agreements. If such an instance occurs, although we are generally protected by automotive dealership franchise laws requiring “good cause” be shown for such termination, we cannot guarantee that the termination of the franchise will not be successful.
A manufacturer may also limit the number of its dealerships that we may own or the number that we may own in a particular geographic area. Delays in obtaining, or failing to obtain, manufacturer approvals and franchise agreements for dealership acquisitions could adversely affect our acquisition program. In determining whether to approve an acquisition, manufacturers may consider many factors, including the moral character and business experience of the dealership principals, the financial condition, and ownership structure, as well as Customer Satisfaction Index scores, sales efficiency, and other performance measures of our other dealerships. Manufacturers may use these performance indicators, as well as sales performance numbers, as conditions for certain payments and as factors in evaluating applications for additional acquisitions. In unusual cases where performance indicators, such as the ones described above, are not met to the satisfaction of the manufacturer, certain manufacturers may either limit our ability to acquire additional dealerships or require the disposal of existing dealerships or both. From time to time, we have not met all of the manufacturers’ requirements to make acquisitions and have received requests to dispose of certain of our dealerships. In the event one or more of our manufacturers sought to prohibit future acquisitions, or imposed requirements to dispose of one or more of our dealerships, our acquisition and growth strategy could be adversely affected. A manufacturer may also limit the number of its dealerships that we may own or the number that we may own in a particular geographic area.
In addition, each ofMoreover, our franchise agreements may be terminated or not renewed by the manufacturer for a variety of reasons, including any unapproved changes of ownership or management, sales and customer satisfaction performance deficiencies and other material breaches of the franchise agreements. Manufacturers may also have a right of first refusal if we seek to sell dealerships. We cannot guarantee all of our franchise agreements will be renewed or that the terms of the renewals will be as favorable to us as our current agreements. In addition, we cannot guarantee that our manufacturers will not attempt to terminate our franchise agreements if they perceive that performance deficiencies exist. If such an instance occurs, although we are generally protected by automotive dealership franchise laws requiring “good cause” be shown for such termination, we cannot guarantee that the termination of the franchise will not be successful. Actions taken by manufacturers to exploit their bargaining position in negotiating the terms of renewals of franchise agreements could also have a material adverse effect on our results of operations. Further, the terms of certain of our real estate-related indebtedness require the repayment of all amounts outstanding in the event that the associated franchise is terminated. Our results of operations may be materially and adversely affected to the extent that our franchise rights become compromised or our operations restricted due to the terms of our franchise agreements or if we lose substantial franchises.
Our franchise agreements do not give us the exclusive right to sell a manufacturer’s product within a given geographic area. Subject to state laws in the U.S. that are generally designed to protect dealers, a manufacturer may grant another dealer a franchise to start a new dealership near one of our locations, or an existing dealership may move its dealership to a location that would more directly compete against us. The location of new dealerships near our existing dealerships could have a material and adverse effect on our operations and reduce the profitability of our existing dealerships. Furthermore, if current manufacturers or future manufacturers are not required to conduct their business in accordance with state franchise laws and thereby circumvent the current dealer-network to sell directly to the customer, our results of operations may be materially and adversely affected.
Substantial competition in automotive sales and services could adversely impact our sales and our margins.
The automotive retail industry is highly competitive. Within our markets we are subject to competition from franchised automotive dealerships and other businesses as it relates to new and used vehicles, parts and service as well as acquisitions. We also face competition in arranging financing for our customers’ vehicle purchases from a broad range of financial institutions. Additionally, we do not have any cost advantage in purchasing new vehicles from vehicle manufacturers, and our franchise agreements do not grant us the exclusive right to sell a manufacturer’s product within a given geographic area. Increased competition can adversely impact our sales volumes and margins as well as our ability to acquire dealerships.
Please see Item 1. Business — Competition for further discussion of competition in our industry.
The U.K.’s withdrawal from the EU may have a negative effect on some global economic conditions, financial markets and our business, which could adversely affect our U.K. revenue and results of operations.
On June 23, 2016, British citizens voted on a referendum in favor of Brexit. The U.K. formally exited the EU on January 31, 2020, however the future terms of the U.K.’s relationship with the EU remain uncertain. Such uncertainty was diminished on December 24, 2020, as the U.K. and the EU reached agreement in principle on the terms of the EU-U.K. Trade and Cooperation Agreement (the “EU-U.K. Agreement”), which became provisionally applicable on January 1, 2021 and applies through the earlier of (1) February 28, 2021 or some other date decided by the Partnership Council (comprising representatives of the EU and the U.K.) or (2) the EU-U.K. Agreement’s entry into force. The EU-U.K. Agreement covers economic and security co-operation, has a single overarching governance framework, and includes trade in goods and in services, digital trade, intellectual property, public procurement, aviation and road transport, energy, fisheries, social security co-ordination, law enforcement and judicial co-operation in criminal matters, thematic co-operation, participation in EU programs, institutional arrangements, dispute settlement and safeguards. The scope of the EU-U.K. Agreement is narrower than the pre-Brexit trade framework, and the effects of Brexit will depend in part on any further agreements the U.K. makes to retain access to EU markets or to compensate elsewhere with agreements with other global markets. Accordingly, Brexit could adversely affect U.K. and European market conditions, could contribute to instability in some global financial and foreign exchange markets, including continued volatility in the value of the GBP or otherwise adversely affect trading agreements or similar cross-border cooperation arrangements (whether economic, tax, legal, regulatory or otherwise) beyond the date of Brexit. More specifically, it could lead to:
•Exchange Rate Fluctuations: a decrease in sales or revenues attributable to increased retail prices of new vehicles imported from other countries in Europe and due to a weaker pound exchange rate and volatility in the currencies in which we transact our business;
•Supply Risk: potential increase in supply chain risk for automotive retailers and manufacturers due to the U.K. no longer being party to the EU’s free trade agreements, however, the U.K. is able to enter into new free trade agreements with the countries;
•Loss of Franchise Protections: potential future loss of franchise protection laws as provided under EU Block Exemption. The EU-U.K. Agreement envisages cooperation and coordination between the respective competition authorities and certain block exceptions currently remain in effect under domestic U.K. law, as amended to apply to the U.K. competition framework; however, these may be revoked, extended or further amended by U.K. law;
•Economic Risk: the U.K. economy may be negatively impacted, resulting in a decrease to our revenues;
•Fiscal Risk: the new Rules of Origin apply to goods imported into the U.K from the EU or exported from the U.K to the EU might lead to the imposition of increased customs taxes and duties;
•Labor Risk: the loss of free movement of employees between the U.K. and EU may impact the hiring and movement of employees and may subject companies to local labor laws and efforts required to relocate U.K. operations or use EU subsidiaries; and
•Data Privacy Risk: inability or increased risk in transferring personal data from the U.K. to the EU after expiry of the six month bridging mechanism in the EU-U.K. Agreement that enables personal data to continue to flow cross-border from the European Economic Area to the U.K. if the U.K. does not receive a decision from the European Commission that permits such transfers to continue the same as pre-Brexit.
Any of these effects of Brexit, and others we cannot anticipate, could materially adversely affect our business, consolidated financial position, results of operations and cash flows.
The impairment of our goodwill and/or indefinite-lived intangibles could have a material adverse effect on our results of operations.
We assess goodwill and other indefinite-lived intangibles for impairment on an annual basis, or more frequently when events or circumstances indicate that an impairment may have occurred. Performance issues at individual dealerships, as well as adverse retail automotive industry and economic trends, increase the risk of an impairment charge, which could have a material adverse impact on our results of operations. During the year ended December 31, 2020, we recorded goodwill impairment charges to our Brazil region of $10.7 million. No goodwill impairments were recorded during the year ended December 31, 2019 and 2018. During the years ended December 31, 2020, 2019 and 2018, we recorded $20.8 million, $19.0 million and $38.7 million, respectively, of impairment of intangible franchise rights. We may be required to record additional impairment charges if the COVID-19 pandemic continues, and we cannot accurately predict the amount and timing of any additional impairment charge at this time, however, any such impairment charge could have an adverse effect on our results of operations. Refer to Note 11. Intangible Franchise Rights and Goodwill within our Notes to Consolidated Financial Statements for further discussion of impairment.
Our inability to acquire new dealerships and successfully integrate thosesuccessful new dealerships into our business could adversely affect the growth of our revenues and earnings.
Growth in our revenues and earnings partially depends on our ability to acquire new dealerships and successfully integrate those dealerships into our existing operations. We cannot guarantee that we will be able to identify and acquire dealerships in the future. In addition, we cannot guarantee that any acquisitions will be successful or on terms and conditions consistent with past acquisitions. Restrictions by our manufacturers, as well as covenants contained in our debt instruments, may directly or indirectly limit our ability to acquire additional dealerships. In addition, increased competition for acquisitions may develop, which could result in fewer acquisition opportunities available to us and/or higher acquisition prices. And, some of our competitors may have greater financial resources than us.
We will continue to require substantial capital in order to acquire additional automobile dealerships. We currently intend to finance future acquisitions by using cash generated from operations, borrowings under our Acquisition Line, proceeds from debt and/or equity offerings and/or issuing shares of our common stock as partial consideration for acquired dealerships. In the future, the cost of obtaining money from the credit markets could increase if lenders and institutional investors increase interest rates, enact tighter lending standards, refuse to refinance existing debt at maturity on terms similar to current debt or at all, and reduce or, in some cases, cease to provide funding to borrowers. Accordingly, our ability to complete acquisitions could be adversely affected if the price of our common stock is depressed or if our access to capital is limited.
In addition, managing and integrating additional dealerships into our existing mix of dealerships may result in substantial costs, diversion of our management’s attention, delays or other operational or financial problems. Acquisitions involve a number of special risks, including, among other things:
•incurring significantly higher capital expenditures and operating expenses;
•failing to integrate the operations and personnel of the acquired dealerships;
•entering new markets with which we are not familiar;
•incurring undiscovered liabilities at acquired dealerships, generally, in the case of stock acquisitions;
•disrupting our ongoing business;
•failing to retain key personnel of the acquired dealerships;
•impairing relationships with employees, manufacturers and customers; and
•incorrectly valuing acquired entities.
Operational Risks
These risksThe global outbreak of the COVID-19 pandemic, which has disrupted all of our dealership operations, has, and could continue to have a material adverse effectaffect on our business, results of operations and financial condition. Although we conduct what we believe to be a prudent level of investigation regarding the operating conditioncash flows.
The global outbreak of the businesses we purchase, in light of the circumstances of each transaction, an unavoidable level of risk remains regarding the actual operating condition of these acquired businesses.
We are subject to substantial governmental laws and regulations, which if we are found to be in violation of, or subject to liabilities under, may adversely affect our business and results of operations.
We operate inCOVID-19 pandemic had a highly regulated industry. A number of laws and regulations applicable to automotive companies affect our business and conduct, including, but not limited to our sales, operations, financing, insurance, advertising, and employment practices. Other laws and regulations include franchise laws and regulations, consumer protection laws and other extensive laws and regulations applicable to new and used motor vehicle dealers. Additionally, in every jurisdiction in which we operate, we must obtain various permits and licenses in order to conduct our businesses.
Other laws and regulations include franchise laws and regulations, consumer protection laws and other extensive laws and regulations applicable to new and used motor vehicle dealers. Any failure to comply with these laws and regulations may result in the assessment of administrative, civil, or criminal penalties, the imposition of investigatory remedial obligations or the issuance of injunctions limiting or prohibiting our operations.
Though unsuccessful to date, manufacturers’ lobbying efforts may lead to the repeal or revision of U.S. franchise laws. If U.S. franchise laws are repealed in the states in which we operate, manufacturers may be able to terminate our franchises without providing advance notice, an opportunity to cure or showing of good cause. Without the protection of U.S. franchise laws, it also may be more difficult for us to renew our franchise agreements upon expiration. Furthermore, some states have initiated consumer “bill of rights” statutes which involve increases in our costs associated with the sale of vehicles, or decreases in some of our profit centers.
In the U.S., our financing activities with customers are subject to federal truth-in-lending, consumer leasing and equal credit opportunity laws and regulations, as well as state and local motor vehicle finance laws, installment finance laws, insurance laws, usury laws and other installment sales laws and regulations. Some states in the U.S. regulate finance fees and charges that may be paid as a result of vehicle sales. Claims arising out of actual or alleged violations of law may be asserted against us or our dealerships by individuals or governmental entities and may expose us to significant damages or other penalties, including revocation or suspension of our licenses to conduct dealership operations and fines. In the U.K., our finance operations are regulated by the Financial Conduct Authority (“FCA”), which is an independent watchdog that sets out a system for regulating financial services in order to protect and improve the U.K.’s economy, and regulates financial services of our dealerships.
In July 2010, the Dodd-Frank Act was signed into law and established the CFPB with broad regulatory powers in the U.S. Although automotive dealers are generally excluded from the CFPB’s regulatory authority, we are required to comply with regulations applicable to privacy notices, and the CFPB continues to regulate automotive financing activities through its regulation of automotive finance companies and other financial institutions that service the automotive industry. The CFPB has issued regulatory guidance instructing financial institutions to monitor dealer loans for potential discrimination resulting from the system used to compensate dealers for assisting in the customer financing transaction. The CFPB has instructed lenders that, if discrimination is found, the lender would be required to change dealer compensation practices. If this initiative substantially restricts our ability to generate revenue from arranging financing for our customers for the purchase of vehicles, the result could have anmaterial adverse effectimpact on our business, and results of operations.
In addition, the Dodd-Frank Act established federal oversight and regulation of derivative markets and entities, such as us, that participate in those markets. The Dodd-Frank Act requires the Commodity Futures Trading Commission (“CFTC”) and the SEC to promulgate rules and regulations implementing the Dodd-Frank Act. Pursuant to the Dodd-Frank Act, the CFTC has designated certain interest rate swaps and credit default swaps for mandatory clearing and exchange trading. Although we believe that we qualify for the end-user exceptions to the mandatory clearing and margin requirements with respect to our swaps entered to hedge our commercial risks, the Dodd-Frank Act and any new regulations could significantly increase the cost of derivative contracts, materially alter the terms of derivative contracts, or reduce our ability to monetize or restructure our existing derivative contracts. If we reduce our use of derivatives as a result of the Dodd-Frank Act and regulations, our results of operations may become more volatile and our cash flows may be less predictable, which could adversely affect our ability to plan for and fund capital expenditures. Any of these consequences could have a material adverse effect on our financial condition, results of operations and cash available for distributions to our shareholders.
The EU’s General Data Protection Regulation (“GDPR”), which became effective in May 2018, applies toincluding all organizations storing or processing the data of EU citizens, regardless of the organization’s location. The GDPR was designed to align data privacy laws across Europe, protect all EU citizens’ data by restricting third parties use of such data without such individual’s permission, and change the way organizations approach the protection of data and preserve citizens’ privacy. It provides for strict rules and requirements for EU and non-EU organizations, including requirements to report data breaches within 72 hours and to conduct impact assessments to identify vulnerabilities. Moreover, the GDPR applies a tiered penalty approach, which provides for heavy fines. If an organization seriously infringes the GDPR, the organization can be fined up to 4% of annual global turnover or 20 million euros, whichever is greater.
Similar to the GDPR, the California Consumer Privacy Act of 2018 (“CCPA”), which became effective January 1, 2020, grants California residents with several new rights relating to their personal information. The CCPA applies to businesses that conduct business in California and satisfies one of three financial conditions, including a business that has a gross revenue greater than $25 million. The CCPA sets forth several data protection obligations for applicable businesses, including, but not limited to the obligations to inform a consumer, at or before collection, of the purpose and intended use of the collection; and to delete a consumer’s personal information upon request. As for penalties and fines, the CCPA establishes a private right of action for serious data breaches, which allows consumers the right to seek damages. The CCPA also allows the California Attorney General to bring actions against non-compliant businesses with fines of $2,500 per violation or, if intentional, up to $7,500 per violation. Any future failure by us to comply with the GDPR and/or CCPA could have a material adverse effect on our business, results of operations or financial condition.
Possible penalties for violation of any of these laws or regulations include revocation or suspension of our licenses and/or civil or criminal fines and penalties. In addition, many laws may give customers a private cause of action. Violation of these laws, the cost of compliance with these laws, or changes in these laws could have a material adverse effect on our business and results of operations.
See further discussion of tariffs, import product restrictions, and foreign trade risks that may impair our ability to sell foreign vehicles profitably under the risk factor “We are subject to tariff and trade risks that may impair our ability to sell foreign vehicles profitably.”
See additional discussion of Brexit and its related regulatory risks under the risk factor “The U.K.’s withdrawal from the EU may have a negative effect on some global economic conditions, financial markets and our business, which could adversely affect our U.K. revenue and results of operations.”
Our operations are subject to environmental laws and regulations that may expose us to significant costs and liabilities.
Our operations involve the use, handling and storage of materials such as motor oil and filters, transmission fluids, antifreeze, refrigerants, paints, thinners, batteries, cleaning products, lubricants, degreasing agents, tires, and fuel. We contract for recycling and/or disposal of used fluids, filters and other waste materials generated by our operations.
These business activities are subject to stringent federal, regional, state and local laws, regulations and other controls governing the release of materials into the environment or otherwise relating to environmental protection. These laws, regulations and controls may impose numerous obligations upon our operations including the acquisition of permits to conduct regulated activities, the imposition of restrictions on where or how to manage or dispose of used products and wastes, the incurrence of capital expenditures to limit or prevent releases of such material, and the imposition of substantial liabilities for pollution resulting from our operations or attributable to former operations. For example, in the U.S., mostU.K. and Brazil. Extraordinary and wide-ranging actions taken by governmental authorities to reduce the spread of the virus, including mandates for many individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations, significantly reduced the operating capacity of all of our dealerships utilize storage tanks that are subject to testing, containment, upgrading, and removal regulations under the federal Resource Conservation and Recovery Act. Comparable regulations have been or may be enacted in the U.K. and Brazil. Failure to comply with these laws, regulations, and permits may result in the assessment of sanctions, including administrative, civil, and criminal penalties, the imposition of investigatory remedial and corrective action obligations or increase of capital expenditures, restrictions, delays and cancellations in permitting or in the performance of projects and the issuance of injunctions limiting or preventing some or all of our operations in affected areas. In some situations, we could be exposed to liability as a result of our conduct that was lawful at the time it occurred or the conduct of, or conditions caused by, prior operators or other third parties. Moreover, laws and regulations protecting the environment generally become more stringent over time, which may result in increased costs for future environmental compliance and remediation.
Additionally, vehicle manufacturers in the U.S. are subject to regulations adopted in 2012 by the U.S. EPA and the National Highway Traffic Safety Administration (“NHTSA”) that establish GHG emissions and corporate average fuel economy (“CAFE”) standards applicable to light-duty vehicles for model years 2017 through 2021. Vehicle GHG emission standards have previously also been promulgated by California, and followed by several other states, under a waiver, but in September 2019 EPA revoked this waiver in a rulemaking with NHTSA that found state regulation of vehicle GHG emissions to be preempted and litigation is ongoing. Furthermore, under the Obama Administration, CAFE standards were set to reach 46 miles per gallon by 2025. However, the Trump Administration has sought to reduce these standards. The final rules are expected sometime in early 2020. California had indicated that it would retain more stringent levels under its clean air act (“CAA”) waiver authority should the Trump Administration finalize a rulemaking on reducing those standards and thus, if California is successful in its litigation over its CAA waiver status, there could be uncertainty amongst vehicle manufacturers if multiple standards were placed into effect, which could have an indirect adverse effect on automotive retail dealers, such as ourselves. Comparable laws and regulations have been enacted in the U.K. and Brazil. The adoption of any laws or regulations requiring significant increases in fuel economy requirements or new restrictions on emissions of vehicle GHG emissions could adversely affect prices of and demand for the vehicles we sell.
At the international level, there is an agreement, the United Nations-sponsored “Paris Agreement,” for nations to limit their GHG emissions through non-binding, individually-determined reduction goals every five years after 2020. Although the U.S. has announced its withdrawal from the agreement, effective November 4, 2020, the U.K. and Brazil remain parties. Future treaties or international standards may result in more stringent requirements in party states, which could include the U.S., U.K. and Brazil beginning in mid-March 2020. As the restrictions eased during the latter part of 2020, we continued to experience disruptions from reduced capacity and departmental shutdowns as a result of COVID-19 outbreaks and quarantines impacting our employees. Depending on future developments, the COVID-19 pandemic may delay or otherwise adversely affect the ability of vehicle manufacturerscontinue to manufacture and timely deliver vehicles to operators in the automotive retail industry.
If we lose key personnel or are unable to attract additional qualified personnel,disrupt our business could be adversely affected because we rely on the industry knowledge and relationships of our key personnel.
We believe our success depends to a significant extent upon the efforts and abilities of our executive officers and senior management. The unexpected or unanticipated loss of the services of one or more members of our senior management team could have an adverse effect on our business and impair the efficiency and productivity of our operations. We do not have key man insurance for any of our executive officers or key personnel. In addition, the market for qualified employees in the industry and in the regions in which we operate, particularly for general managers and sales and service personnel, is highly competitive and may subject us to increased labor costs during periods of low unemployment. We do not have employment agreements with our dealership general managers and other key dealership personnel. Accordingly, the inability to retain key employees or the failure to attract qualified personnel could have an adverse effect on our business and may impact the ability of our dealerships to conduct their operations in accordance with our standards.
Substantial competition in automotive sales and services may materially and adversely affect our results of operations due to our need to lower prices to sustain sales.
The automotive retail industry is highly competitive. Depending on the geographic market, we compete with:
franchised automotive dealerships in our markets that sell the same or similar makes of new and used vehicles that we offer, occasionally at lower prices than we do;
other national or regional affiliated groups of franchised dealerships and/or of used vehicle dealerships;
private market buyers and sellers of used vehicles;
internet-based vehicle brokers that sell vehicles obtained from franchised dealers directly to consumers;
auto parts retailers;
local, regional and national collision centers;
service center chain stores; and
independent service and repair shops.
We do not have a cost advantage in purchasing new vehicles from vehicle manufacturers and typically rely on advertising, merchandising, sales expertise, service reputation, product demand and dealership location in order to sell new vehicles. Our franchise agreements do not grant us the exclusive right to sell a manufacturer’s product within a given geographic area. If competing dealerships expand their market share or are awarded additional franchises by manufacturers it could have a material and adverse effect on our businessfinancial condition and results of operations.
In additionRefer to competition for vehicle sales, our dealerships compete with franchised dealerships to perform warranty maintenance and repair services and with other automotive dealers, franchised and independent service center chains and independent garages for non-warranty repair and routine maintenance business. Our parts operations compete with other automotive dealers, service stores and auto parts retailers. We believe the principal competitive factors in the parts and service business are the quality of customer service, the use of factory-approved replacement parts, familiarity with a manufacturer’s brands and models, convenience, access to and use of technology required for certain repairs and services, location, price, the competence of technicians and the availability of training programs to enhance such expertise. A number of regional or national chains offer selected parts and services at prices that may be lower than our dealerships’ prices. We also compete with a broad range of financial institutions in arranging financing for our customers’ vehicle purchases.
The internet has also become a significant part of the advertising and sales process in our industry. Customers are using the internet as part of the sales process to compare pricing for cars and related F&I services, which may reduce gross profit margins for new and used cars and profits for related F&I services. Some retailers offer vehicles for sale over internet websites without the benefit of having a dealership franchise, although they must currently source their vehicles from a franchised dealer. One or more companies are currently manufacturing electric vehicles for sale solely through the internet without using the traditional dealer-network, and circumventing the state franchise laws of several states in the U.S. If more states where we do business eliminate or lessen their laws prohibiting retail sales by non-dealer companies, and if those companies are successful in selling their vehicles without the requirements of establishing a dealer-network, they may be able to have a competitive advantage over the traditional dealers, which could adversely affect our sales in those states. If internet new vehicle sales are allowed to be conducted without the involvement of franchised dealers, or if dealerships are able to effectively use the internet to sell outside of their markets, our business could be materially adversely affected. Our business would also be materially adversely affected to the extent that internet companies acquire dealerships or align themselves with our competitors’ dealerships.
Please see “ItemItem 1. Business — Competition” for further discussion of competition inthe impact of the COVID-19 pandemic on each of our industry.regions and our response to date.
A cybersecurity breach, including loss of confidential information or a breach of personally identifiable information (“PII”) about our customers or employees, could negatively affect operations and result in high costs.
There has been a substantial increase in attempts by third parties with bad intentions to steal data from numerous businesses world-wide, including our dealerships, by highly sophisticated means. If a third party is successful in obtaining such confidential information of our dealerships or our customers or disrupting our operations through high-tech security breaches and hacking methods, we could have substantial liability in connection with such security breaches. While we attempt to implement state of the art technological defenses to thwart such activities, there is no guarantee that we will be able to keep up with the ever evolving sophisticated methods of breaching security systems and continue to combat such attempts to breach our own data systems. Failure to do so could ultimately have a material adverse effect on our business operations.
The protection of customer, employee, and our data is critical to our business. Customers have a high expectation that we will adequately protect their PII from cyber-attack or other security breaches. A significant breach of customer, employee, or our data could attract a substantial amount of media attention, damage our customer relationships and reputation, and result in lost sales, fines, or lawsuits.
In the ordinary course of business, we and our business affiliates receive significant PII about our customers in order to complete the sale or service of a vehicle and related products. We also receive PII from our employees. Numerous stateA security incident to obtain such information could be caused by malicious insiders and federal regulations in the U.S., as well as payment card industrythird parties using sophisticated, targeted methods to circumvent firewalls, encryption and other vendor standards, govern the collection and maintenancesecurity defenses, including hacking, fraud, trickery, or other forms of PII from consumers and other individuals.deception. Although many companies across many industries are affected by malicious efforts to obtain access to PII, the automotive dealership industry has been a particular target of identity thieves. Moreover, thereThe techniques used by cyber attackers change frequently and may be difficult to detect for long periods of time. We have implemented security measures that are numerous opportunities for a data security breach, including cyber-security breaches, burglary, lost or misplaced data, scams, or misappropriation of data by employees, vendors or unaffiliated third parties. We will continuedesigned to combatdetect and protect against cyber-attacks and other forms of security breaches.cyberattacks. Despite the securitythese measures we have in place and any additional measures we may implement or adopt in the future, our facilities and systems, and those of our third-party service providers, could beare vulnerable to security breaches, computer viruses, lost or misplaced data, programming errors, scams, burglary, human errors, acts of vandalism, or other events. AllegedSome of our third-party service providers have experienced security breaches, although we have not been significantly impacted. If an unauthorized party is successful in obtaining confidential information of our dealerships or actual data security breachesour customers or disrupting our operations through a cyberattack, it can increase costs of doing business, negatively affect customer satisfaction and loyalty, expose us to negative publicity, result in individual claims or consumer class actions, administrative, and civil or criminal investigations or actions, and infringe on proprietary information, any of which could have a material adverse effect on our business, results of operations or financial condition.
Our business is sensitiveIn addition, we are subject to manufacturer recalls,numerous laws and the effects such recalls haveregulations designed to protect information of clients, customers, employees and other third parties that we collect and maintain. See Item 1. Business — Governmental Regulations for information on the reputation of our manufacturers.
Our business is highly dependent on consumer demand and brand preferences of our manufacturer’s products. Manufacturer recall campaigns are a common occurrence that have accelerated in frequency and scope over the last several years. Manufacturer recall campaigns could adversely affect our new and used vehicle sales or customer residual trade-in valuations, could cause us to temporarily remove vehicles from our inventory available for sale, could force us to incur increased costs and could expose us to litigation and adverse publicityrisks related to the sale of recalled vehicles, which could have a material adverse effect on our business, salescompliance with such laws and results of operations.
The impairment of our goodwill, indefinite-lived intangibles could have a material adverse effect on our results of operations.
We assess goodwill and other indefinite-lived intangibles for impairment on an annual basis, or more frequently when events or circumstances indicate that an impairment may have occurred. See Note 1 “Business and Summary of Significant Accounting Policies” and Note 11 “Intangible Franchise Rights and Goodwill” within our Notes to Consolidated Financial Statements for further discussion of our impairment model and related assumptions.
Performance issues at individual dealerships, as well as adverse retail automotive industry and economic trends, increase the risk of an impairment charge, which could have a material adverse impact on our results of operations and stockholders' equity. During the years ended December 31, 2019, 2018 and 2017, we recorded $19.0 million, $38.7 million and $19.3 million, respectively, of impairment of intangible franchise rights, which is discussed further in Note 11 “Intangible Franchise Rights and Goodwill” within our Notes to Consolidated Financial Statements.
Material increases in interest rates on our variable rate obligations or resulting from the phasing out of LIBOR could adversely impact our results of operations.
Borrowings under our credit facilities and various other notes payable bear interest based on a floating rate. Therefore, our interest expense would increase with any rise in interest rates. A rise in interest rates may also have the effect of depressing demand in the interest rate sensitive aspects of our business, particularly new and used vehicle sales, as many of our customers finance their vehicle purchases. As a result, a rise in interest rates may have the effect of simultaneously increasing our costs and reducing our revenues.
In addition, on July 27, 2017, the Chief Executive of the U.K. Financial Conduct Authority, which regulates LIBOR, announced that it intends to stop persuading or requiring banks to submit rates for the calculation of LIBOR after 2021. This announcement, in conjunction with financial benchmark reforms more generally and changes in the interbank lending markets, have resulted in uncertainty about the future of LIBOR and certain other rates or indices which have historically been used as interest rate “benchmarks” in our borrowings, including the majority of our floorplan notes payable, mortgages and other debt. Accordingly, the use of an alternative rate on these borrowings could result in increased interest expense, in addition to costs to amend the loan agreements and other applicable arrangements to a new reference rate. At this time, no consensus exists as to what rate or rates may become acceptable alternatives to LIBOR and we are unable to predict the effect of any such alternatives on our business, results of operations or financial condition.
Although we have entered into derivative transactions to convert a portion of our variable-rate debt to fixed rates, which may partially mitigate the impact of fluctuations in interest rates, the interest rates on our derivatives are also benchmarked on LIBOR and could be adversely impacted by the proposed elimination of LIBOR.
Please see Part II, “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” for a discussion regarding our interest rate sensitivity.
Natural disasters and adverse weather events can disrupt our business.
Some of our dealerships are concentrated in states and regions in the U.S., U.K. and Brazil in which actual or threatened natural disasters and severe weather events (such as hurricanes, earthquakes, snow storms, flooding, and hail storms) have in the past, and may in the future, disrupt our dealership operations. A disruption in our operations may adversely impact our business, results of operations, financial condition and cash flows. In addition to business interruption, the automotive retailing business is subject to substantial risk of property loss due to the significant concentration of property value at dealership locations. Natural disasters and severe weather events have in the past and may in the future impair the value of our dealership property. Although we have, subject to certain limitations and exclusions, substantial insurance, including business interruption insurance, we may be exposed to uninsured losses that could have a material adverse effect on our business, results of operations and financial condition.
regulations.
Our insurance does not fully cover all of our operational risks, and changes in the cost of insurance or the availability of insurance could materially increase our insurance costs or result in a decrease in our insurance coverage.
The operation of automobile dealerships is subject to compliance with a wide range of laws and regulations and is subject to a broad variety of risks. While we have insurance on our real property, comprehensive coverage for our vehicle inventory, general liability insurance, workers’ compensation insurance, employee dishonesty coverage, cybersecurity breach insurance, employment practices liability insurance, pollution coverage and errors and omissions insurance in connection with vehicle sales and financing activities, we are self-insured for a portion of our potential liabilities. We purchase insurance policies for worker’s compensation, liability, auto physical damage, property, pollution, employee medical benefits and other risks consisting of large deductibles and/or self-insured retentions.
In certain instances, our insurance may not fully cover an insured loss depending on the magnitude and nature of the claim. Additionally, changes in the cost of insurance or the availability of insurance in the future could substantially increase our costs to maintain our current level of coverage or could cause us to reduce our insurance coverage and increase the portion of our risks that we self-insure.
The insurance companies that underwrite our insurance require that we secure certain of our obligations for self-insured exposures with collateral. Our collateral requirements are set by the insurance companies and, to date, have been satisfied by posting surety bonds, letters of credit and/or cash deposits. Our collateral requirements may change from time to time based on, among other things, our total insured exposure and the related self-insured retention assumed under the policies. We are subject to potential premium cost fluctuations with the annual renewal of these programs.
Vehicle technology advancements
Natural disasters and ownership model changes couldadverse weather events can disrupt our business and may adversely affect our new and used vehicle sales volumes, parts and service revenue andimpact our results of operations.operations, financial condition and cash flows.
With the advancementSome of our dealerships are concentrated in states and regions in the technologyU.S., U.K. and Brazil, in which actual or threatened natural disasters and severe weather events (such as hurricanes, earthquakes, snow storms, flooding and hail storms) have in the past, and may in the future, disrupt our dealership operations. A disruption in our operations may adversely impact our business, results of semioperations, financial condition and fully autonomous electric-powered vehicles, several newcash flows. In addition to business models areinterruption, the automotive retailing business is subject to substantial risk of property loss due to the significant concentration of property value at dealership locations. Natural disasters and severe weather events have in early stage developmentthe past and may in the future impair the value of our dealership property. Although we have, subject to create high mileage, self-driving and/or co-ownership vehicle opportunities. These autonomous-electric vehiclescertain limitations and exclusions, substantial insurance, including business interruption insurance, we may be manufactured by existing automotive manufacturers or other companies who do not presently manufacture hydrocarbon or alternative fuel source vehicles. Even with the current highway and road infrastructure challenges and the large number of existing internal combustion engines currently in service andexposed to be in service for many years to come, which will create obstacles to the wide-spread implementation of such autonomous-electric vehicles in the immediate future, many in the automotive industry believeuninsured losses that it will only be a matter of time until such vehicles will be available to the automotive consumer at low usage costs. Such industry participants believe projected low usage costs of autonomous-electric vehicles may entice many vehicle owners, particularly in larger, highly populated areas, to abandon individual car ownership in favor of multiple co-ownership ride-sharing opportunities. If such autonomous-electric vehicles can be mass produced at a reasonable production and operating cost and sold by companies not required to conduct their business in accordance with state franchise laws and thereby circumvent the current dealer-network, and/or if the ride-sharing subscription business model becomes widely popular, such events could adversely affect industry new and used vehicle sales volumes, parts and service revenue and our results of operations.
Additionally, with a potential increase in demand by consumers for electric-powered vehicles, our manufacturers will need to adapt their product plans and production capabilities accordingly to meet these demands. As more electric vehicles potentially enter the market, and more combustible engine vehicle production is reduced, our ability to adapt to such changes, particularly in regard to our ability to sell and service these units effectively, will be necessary to meet the consumer demands and support the profitability of our dealerships. Furthermore, while in the short term we do not believe there will be a significant difference in maintenance costs incurred by a vehicle owner of a combustible engine versus maintenance costs of a vehicle owner of a new electric-powered vehicle, that may not be the case as technology advancements are made in the development of electric-powered vehicles. If such maintenance costs by a consumer of an electric-powered vehicle were to substantially decrease, this could have a material adverse effect on our parts and service revenues. If such electric vehicles can be mass produced at a reasonable production and operating cost and sold by companies not required to conduct their business, in accordance with state franchise laws and thereby circumvent the current dealer-network, such events could adversely affect industry new and used vehicle sales volumes, parts and service revenue and our results of operations.
Our indebtednessoperations and the associated covenants could materially adversely affect our ability to obtain additional financing, including for acquisitions and capital expenditures, limit our flexibility to manage our business, prevent us from fulfilling our financial obligations and restrict our use of capital.
Our indebtedness could impact uscondition. For example, in the following ways:
our ability to obtain additional financing for acquisitions, capital expenditures, working capital or general corporate purposes may be impaired2019 Tropical Storm Imelda caused catastrophic flooding in the future;
a portionBeaumont, Texas, resulting in $11.9 million in damages not covered by insurance. In 2017, Hurricane Harvey caused catastrophic flooding in Houston, Texas, one of our current cash flow from operations must be dedicated to the paymentprimary markets, resulting in $14.7 million in damages not covered by insurance. Additionally, should we suffer significant losses in a short period of principal and interest on our indebtedness, thereby reducing the funds available to us for our operations and other corporate purposes;
some of our borrowings are and will continue to be at variable rates of interest, which exposes us totime, we run the risk of increasing interest rates;
we may be more leveraged than some ofthat our competitors, which may place us at a relative competitive disadvantage and make us more vulnerable to changing market conditions and regulations; and
during periods of economic downturn, we may be more susceptible to a breach of our debt covenants and default on our indebtedness.
Our debt instruments contain numerous covenants that limit our discretion with respect to business matters, including mergers premiums and/or acquisitions, paying dividends, repurchasing our common stock, international investments, incurring additional debt or disposing of assets. A breach of any of these covenantsdeductibles could result in a default under the applicable agreement or indenture. In addition, a default under one agreement or indenture could result in a default and acceleration of our repayment obligations under the other agreements or indentures under the cross default provisions in those agreements or indentures. If a default or cross default were to occur, we may be required to renegotiate the terms of our indebtedness, which would likely be under less favorable terms than our current terms and cause us to incur additional fees to process. Alternatively, we may not be able to pay our debts or borrow sufficient funds to refinance them. As a result of this risk, we could be forced to take actions that we otherwise would not take, or not take actions that we otherwise might take, in order to comply with the covenants in these agreements and indentures.
We are subject to tariff and trade risks that may impair our ability to sell foreign vehicles profitably.
Increased tariffs, import product restrictions, and foreign trade risks may impair our ability to sell foreign vehicles profitably. In an effort to increase, the U.S.’s penetration of competitive markets throughout the world, the Trump Administration has, from-time-to-time, threatened and on occasion implemented tariffs on the import of foreign produced goods and raw materials. The Trump Administration has been critical of the unfair trade balance that existed between the U.S. and China and has implemented tariffs on Chinese goods and of raw materials, primarily steel. While China imports a limited number of vehicles into the U.S., many U.S. manufacturers of vehicles, parts and supplies are dependent on Chinese products and raw materials in their production of their products. Implementation of tariffs on such goods and raw materials could affect the price of vehicles we sell. On January 15, 2020, the Trump Administration entered into a trade agreement which preserved many of the tariffs that were placed on certain Chinese goods. This agreement is considered Phase I of the agreement, and there is no definitive time frame for when Phase II will occur, what the terms will be and the impact on our business. Regarding the EU, while the Trump Administration has indicated tariffs will be imposed on European automobiles, to date no tariffs have been imposed on vehicles and auto parts produced in the EU and imported to the U.S. Additionally, with the recent completion of Brexit, it is reasonable to expect the U.S. will seek to enter into a trade agreement with the U.K. which among other things will deal with reciprocal trade agreements. If the U.S. is unable to reach an agreement with the EU or the U.K. on reciprocal trade agreements it is possible that tariffs could be imposed on many of the vehicles we will import from the U.K. and the EU.
There continues to be substantial uncertainty regarding, among other factors: (i) the ultimate outcome of the implementation and effects of trade tariffs; (ii), definition of “foreign” vehicles - assembled outside the U.S. or U.S. assembled vehicles that contain non-U.S. parts; and (iii) the retaliatory response by foreign governments to such trade tariffs. Additionally, the recent passing of Brexit and its uncertain effects with the U.S. and Europe continues to create uncertainty in the U.K. There is no clear indication of how (i) the China Phase I (or the contemplated Phase II), (ii) the anticipated Trump Administration’s negotiations with the EU or (iii) the effects of the Brexit decision will ultimately affect tariffs, imports and foreign trade applicable to the U.S. and the U.K. economies and our business operations. See the risk factor “The U.K.’s withdrawal from the EU may have a negative effect on some global economic conditions, financial markets and our business, which could adversely affect our U.K. revenue and results of operations” for further discussion of Brexit. Should import tariffs be implemented or increased as described above, we expect the price of many new vehicles we sell to increase and foreign trade to be depressed, which may adversely affect our new vehicle retail sales revenues and related finance, insurance and other revenues.business.
We are subject to risksRisks associated with our non-U.S.international operations that could have a material adverse effect on our business, results of operations and financial condition.
We have operations outside the U.S., including the U.KU.K. and Brazil. As a result, we face political and economic risks and uncertainties with respect to our international operations. These risks may include the following, but are not limited to:
•wage inflation in emerging markets;
•legal uncertainties, timing delays and expenses associated with tariffs, labor matters, import or export licenses and other trade barriers;
the difficulty of enforcing agreements and collecting receivables through certain foreign legal systems;
the potential for nationalization of enterprises;
•transparency issues in general and, more specifically, the U.S. Foreign Corrupt Practices Act of 1974, as amended, (the “FCPA”), the U.K. Bribery Act and other anti-corruption compliance laws and issues;
unsettled social and political conditions, in general, and possible terrorist attacks, drug cartel related violence or acts of war, civil unrest, expansion of hostilities and other political risks;
increased risk of corruption;
•inability to obtain or preserve franchise rights in the foreign countries in which we operate; and
•fluctuations in foreign currency exchange restrictions; and
exposure to currencytranslations within our financial statements driven by exchange rate fluctuations.volatility.
As exchange rates fluctuate,Legal, Regulatory and Compliance Risks
We are subject to automotive and other laws and regulations, which, if we are found to have violated, may adversely affect our business and results of operations.
We operate in a highly regulated industry. A number of laws and regulations applicable to automotive companies affect our business and conduct, including, but not limited to, our sales, operations, financing, insurance, advertising and employment practices. Other rules such as reportedfranchise laws and regulations, consumer protection laws and other extensive laws and regulations apply to new and used motor vehicle dealers. Additionally, in USDs fluctuate. Fluctuationsevery jurisdiction in which we operate, we must obtain various permits and licenses in order to conduct our businesses. Any failure to comply with these laws and regulations may result in the assessment of administrative, civil or criminal penalties, the imposition of investigatory remedial obligations or the issuance of injunctions limiting or prohibiting our operations.
Refer to Item 1. Business — Governmental Regulations for further discussion of automotive and other laws and regulations impacting our business.
Operational risks associated with environmental laws and regulations may expose us to significant costs and liabilities.
Our business activities in the U.S., U.K. and Brazil are subject to stringent federal, regional, state and local laws, regulations and other controls governing specific health and safety criteria to address worker protection, the release of materials into the environment or otherwise relating to environmental protection. These laws, regulations and controls may impose numerous obligations upon our operations including the acquisition of permits to conduct regulated activities, the imposition of restrictions on where or how to manage or dispose of used products and wastes, the occurrence of capital expenditures to limit or prevent releases of such currency rates may have a material effect onand the imposition of substantial liabilities for pollution resulting from our results of operations or financial position.attributable to former operations. Our compliance with these regulations may expose us to significant costs and liabilities.
We may be exposedAdditionally, vehicle manufacturers in the U.S., U.K. and Brazil are subject to liabilities under the FCPA and similar anti-corruptionvarying guidelines, laws and any determination that we violated such laws couldregulations adopted by their applicable governmental and administrative agencies, which include GHG emissions and CAFE standards in the U.S. Such standards may affect our manufacturers’ ability to produce cost effective vehicles, which may have a material adverse effect on our business.sales.
We are subject to the FCPA, Brazil’s clean company and anti-corruption act, the U.K. anti-bribery act and similar anti-bribery and anti-corruption laws that generally prohibit companies and their personnel and intermediaries from offering, authorizing, or making improper payments to government officials for the purpose of obtaining or retaining business, securing some improper advantage in business or engaging in conduct involving money-laundering. We do business in countries and regions where strict compliance with anti-bribery laws may not be customary. Our personnel and intermediaries may face, directly or indirectly, corrupt demands by government officials, political parties and officials, tribal or insurgent organizations, or private entities in the countries in which we operate or may operate in, in the future. As a result, we face the risk that an unauthorized payment or offer of payment could be made by one of our employees or intermediaries, even if such parties are not always subject to our control or are not themselves subject to the FCPA or other anti-bribery laws to which we may be subject. Existing compliance safeguards and any future improvements may not prevent all such conduct, and it is possible that our employees and intermediaries may engage in conduct for which we might be investigated by authorities and held responsible. Violations of the FCPA and other anti-bribery and other anti-corruption laws (either due to our acts or our inadvertence) may result in criminal and civil sanctions and could subject us to other liabilities in the U.S. and elsewhere. Even allegations of such violations could disrupt our business and result in a material adverse effect on our business and operations.
Our growth in emerging markets, such as Brazil, is subject to special risks that could have a material adverse effect on our operations.
In February 2013, we acquired UAB Motors Participações S.A. (“UAB Motors”), which allowed us to enter the Brazilian market. At the time we entered the Brazilian market, it was an emerging growth market. Since then, Brazil experienced a significant economic downturn and has been in the midst of a recession. Since February 2013, Brazil has also experienced significant currency fluctuations. And, while recent data is beginning to show signs of a recovery, there is no assurance that our future growth strategies in Brazil will be successful, that Brazil’s economy will continue its recovery or that future volatility will not happen. If the Brazil financial recovery is longer than expected or if future volatility occurs, it could have a material adverse effect on our business, results of operations and financial condition. See also “We are subject to risks associated with our non-U.S. operations that could have a material adverse effect on our business, results of operations and financial condition.” Further, our growth in emerging markets by acquisition of existing dealerships, such as our acquisition of UAB Motors, is subject to additional risk as discussed in the risk factor “Our ability to acquire new dealerships and successfully integrate those dealerships into our business could adversely affect the growth of our revenues and earnings.”
Certain restrictions relating to our management and ownership of our common stock could deter prospective acquirers from acquiring control of us and adversely affect our ability to engage in equity offerings.18
As a condition to granting their consent to our previous acquisitions and our initial public offering, some of our manufacturers have imposed other restrictions on us. These restrictions prohibit, among other things:
the removal of a non-employee director from office, except for cause;
any one person or entity, who in the opinion of the manufacturer is unqualified to own its franchised dealership or has interests incompatible with the manufacturer, from acquiring more than a specified percentage of our common stock (ranging from 20% to 50% depending on the particular manufacturer’s restrictions) and this trigger level can fall to as low as 5% if another vehicle manufacturer is the entity acquiring the ownership interest or voting rights;
certain material changes in our business or extraordinary corporate transactions, such as a merger or saleRefer to Item 1. Business — Governmental Regulations for further discussion of a material amount of our assets;
the removal of a dealership general manager without the consent of the manufacturer;environmental and
a change in control of our Board of Directors or a change in management.
Our manufacturers may also impose additional similar restrictions on us in the future. Actions by our stockholders or prospective stockholders, which would violate any of the above restrictions, are generally outside our control. If we are unable to comply with or renegotiate these restrictions, we may be forced to terminate or sell one or more franchises, which could have a material adverse effect on regulations impacting our business. These restrictions may prevent or deter prospective acquirers from acquiring control of us and, therefore, may adversely impact the value of our common stock. These restrictions also may impede our ability to acquire dealership groups, to raise required capital or to issue our stock as consideration for future acquisitions.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We lease our corporate headquarters, located at 800 Gessner, Suite 500, Houston, Texas, as well as our regional headquarters in Brazil. We own our regional headquarters in the U.K. As of December 31, 2019,2020, we had 186184 dealerships as shown below by region and by whether the associated real estate is leased or owned as of December 31, 2019:owned: | | | | | | | | | | | | | | |
| | Dealerships |
Region | | Owned | | Leased |
United States | | 83 | | | 34 | |
United Kingdom | | 23 | | | 27 | |
Brazil | | 5 | | | 12 | |
Total | | 111 | | | 73 | |
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| | Dealerships |
Region | | Owned | | Leased |
United States | | 84 |
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United Kingdom | | 21 |
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Brazil | | 5 |
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Total | | 110 |
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Item 3. Legal Proceedings
From time to time, our dealerships are named in various types of litigation involving customer claims, employment matters, class action claims, purported class action claims, as well as claims involving the manufacturer of automobiles, contractual disputes and other matters arising in the ordinary course of business. We are not party to any legal proceedings, including class action lawsuits that, individually or in the aggregate, are reasonably expected to have a material adverse effect on our results of operations, financial condition or cash flows. For afurther discussion of our legal proceedings, see Part IV “Item 15. Exhibits, Financial Statement Schedules”refer to Note 16. Commitments and Note 16 “Commitments and Contingencies”Contingencies within our Notes to Consolidated Financial Statements.
Item 4. Mine Safety Disclosures
Not Applicable.
PART II
Item 5. Market for Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is listed on the NYSE under the symbol “GPI.” There were 4443 holders of record of our common stock as of February 10, 2020.18, 2021. A substantially greater number of holders of our common stock are “street name” or beneficial holders, whose shares are held of record by banks, brokers and other financial institutions.
Issuer Purchases of Equity Securities
The following table sets forth information with respect to shares of common stock repurchased by us during the three months ended December 31, 2020: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in millions) (1) |
October 1 — October 31, 2020 | | 22,799 | | | $ | 106.08 | | | 22,799 | | | $ | 197.6 | |
November 1 — November 30, 2020 | | 86,789 | | | $ | 117.17 | | | 86,789 | | | $ | 187.4 | |
December 1 — December 31, 2020 | | 156,220 | | | $ | 119.63 | | | 156,220 | | | $ | 168.7 | |
Total | | 265,808 | | | | | 265,808 | | | |
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(1) Our Board of Directors from time to time authorizes the repurchase of shares of our common stock up to a certain monetary limit. On October 5, 2020, our Board of Directors approved a $200.0 million share repurchase authorization. This share repurchase authorization does not have an expiration date. Future share repurchases are subject to the business judgment of our Board of Directors, taking into consideration our historical and projected results of operations, financial condition, cash flows, capital requirements, covenant compliance, current economic environment and other factors considered relevant.
Performance Graph
The following graph and table compares the performance of our common stock to the S&P 500 Index and to an industry peer group for our last five fiscal years. The members of the peer group are Asbury Automotive Group, Inc., AutoNation, Inc., Lithia Motors, Inc., Penske Automotive Group, Inc. and Sonic Automotive, Inc. The source for the information contained in thisthe table isbelow was provided by Zack’s Investment Research, Inc.
The returns of each member of the peer group are weighted according to each member’s stock market capitalization as of the beginning of each period measured.capitalization. The graph assumes that the value of the investment in our common stock, the S&P 500 Index and the peer group was $100 on the last trading day of December 2014,2015, and that all dividends were reinvested.
Performance data for Group 1 Automotive, Inc., the S&P 500 Index and for the peer group is provided as of the last trading day of each of our last five fiscal years. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Base Period | | Indexed Returns for the Years Ended |
Company /Index | | 12/31/2015 | | 12/31/2016 | | 12/31/2017 | | 12/31/2018 | | 12/31/2019 | | 12/31/2020 |
Group 1 Automotive, Inc. | | $ | 100.00 | | | $ | 104.49 | | | $ | 96.51 | | | $ | 72.81 | | | $ | 140.10 | | | $ | 184.83 | |
S&P 500 | | $ | 100.00 | | | $ | 111.96 | | | $ | 136.40 | | | $ | 130.42 | | | $ | 171.49 | | | $ | 203.04 | |
Peer Group | | $ | 100.00 | | | $ | 96.27 | | | $ | 98.70 | | | $ | 77.06 | | | $ | 117.97 | | | $ | 173.03 | |
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Measurement Date | | Group 1 Automotive, Inc. | | S&P 500 | | Peer Group |
December 2014 | | $100.00 | | $100.00 | | $100.00 |
December 2015 | | 85.31 | | 101.38 | | 96.86 |
December 2016 | | 89.14 | | 113.51 | | 93.24 |
December 2017 | | 82.33 | | 138.29 | | 95.60 |
December 2018 | | 62.11 | | 132.23 | | 74.64 |
December 2019 | | 119.51 | | 173.86 | | 114.26 |
Recent Sales of Unregistered Securities
None.
Purchases of Equity Securities by the Issuer
The following table sets forth information with respect to shares of common stock repurchased by us during 2019: |
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Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in millions) (1) |
December 1 - December 31, 2019 | | 14,200 |
| | $ | 99.98 |
| | 14,200 |
| | $ | 73.6 |
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Total | | 14,200 |
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(1)Our Board of Directors from time to time authorizes the repurchase of shares of our common stock up to a certain monetary limit. During the year ended December 31, 2019, 14,200 shares were repurchased at an average price of $99.98 per share, for a total of $1.4 million, leaving $73.6 million available under our stock repurchase limit of $75.0 million most recently authorized by our Board of Directors. Our stock repurchase program does not have an expiration date. Future repurchases are subject to the discretion of our Board of Directors after considering our results of operations, financial condition, cash flows, capital requirements, existing debt covenants, outlook for our business, general business conditions and other factors.
In December 2019, we entered into a Rule 10b5-1 repurchase plan that was effective from January 2, 2020 to February 3, 2020. Under the plan, we have purchased 149,284 shares subsequent to December 31, 2019, at an average price of $98.12 per share for an aggregate cost of $14.7 million, leaving $58.9 million available under our stock repurchase program.
Item 6. Selected Financial Data
The following table sets forth the selected financial data as of and for the years ended December 31, 2019, 2018, 2017, 2016, and 2015. Certain reclassifications of amounts previously reported have been made to the accompanying income statement data and balance sheet data in order to conform to current presentation. These reclassifications at times are due to the adoption of new or updated accounting standards, and therefore this selected financial data information should be read in conjunction with Item 7 “Management's Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements and the Notes thereto, included elsewhere in this annual report on Form 10-K. |
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| | | | (In millions, except per share amounts) | | |
Income Statement Data: | | | | | | | | | | |
Revenues | | $ | 12,043.8 |
| | $ | 11,601.4 |
| | $ | 11,123.7 |
| | $ | 10,887.6 |
| | $ | 10,632.5 |
|
Cost of sales | | 10,227.8 |
| | 9,876.3 |
| | 9,478.2 |
| | 9,292.5 |
| | 9,098.5 |
|
Gross profit | | 1,816.0 |
| | 1,725.1 |
| | 1,645.5 |
| | 1,595.1 |
| | 1,534.0 |
|
Selling, general and administrative expenses | | 1,358.4 |
| | 1,273.1 |
| | 1,226.2 |
| | 1,170.8 |
| | 1,120.8 |
|
Depreciation and amortization expense | | 71.6 |
| | 67.1 |
| | 57.9 |
| | 51.2 |
| | 47.2 |
|
Asset impairments | | 22.2 |
| | 43.9 |
| | 19.5 |
| | 32.8 |
| | 87.6 |
|
Income (loss) from operations | | 363.7 |
| | 341.1 |
| | 341.9 |
| | 340.2 |
| | 278.4 |
|
Interest expense: | | | | | | | | | | |
Floorplan interest expense | | 61.6 |
| | 59.9 |
| | 52.4 |
| | 44.9 |
| | 39.3 |
|
Other interest expense, net | | 74.9 |
| | 75.8 |
| | 70.5 |
| | 67.9 |
| | 56.9 |
|
Income (loss) before income taxes | | 227.3 |
| | 205.4 |
| | 219.0 |
| | 227.4 |
| | 182.2 |
|
(Benefit) provision for income taxes | | 53.3 |
| | 47.6 |
| | 5.6 |
| | 80.3 |
| | 88.2 |
|
Net income (loss) | | $ | 174.0 |
| | $ | 157.8 |
| | $ | 213.4 |
| | $ | 147.1 |
| | $ | 94.0 |
|
| | | | | | | | | | |
Earnings per common share: | | | | | | | | | | |
Basic | | $ | 9.35 |
| | $ | 7.83 |
| | $ | 10.08 |
| | $ | 6.67 |
| | $ | 3.91 |
|
Diluted | | $ | 9.34 |
| | $ | 7.83 |
| | $ | 10.08 |
| | $ | 6.67 |
| | $ | 3.90 |
|
Dividends per share | | $ | 1.09 |
| | $ | 1.04 |
| | $ | 0.97 |
| | $ | 0.91 |
| | $ | 0.83 |
|
Weighted average common shares outstanding: | | | | | | | | | | |
Basic | | 17.9 |
| | 19.5 |
| | 20.4 |
| | 21.2 |
| | 23.1 |
|
Diluted | | 17.9 |
| | 19.5 |
| | 20.4 |
| | 21.2 |
| | 23.2 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| | | | (In millions) | | |
Balance Sheet Data: | | | | | | | | | | |
Working capital | | $ | 94.0 |
| | $ | 15.8 |
| | $ | 130.7 |
| | $ | 97.5 |
| | $ | 149.1 |
|
Inventories | | $ | 1,901.7 |
| | $ | 1,844.1 |
| | $ | 1,763.3 |
| | $ | 1,651.8 |
| | $ | 1,737.8 |
|
Total assets | | $ | 5,570.2 |
| | $ | 5,001.1 |
| | $ | 4,871.1 |
| | $ | 4,461.9 |
| | $ | 4,396.7 |
|
Floorplan notes payable — credit facility and other (1) | | $ | 1,144.4 |
| | $ | 1,258.8 |
| | $ | 1,154.1 |
| | $ | 1,077.0 |
| | $ | 1,155.0 |
|
Floorplan notes payable — manufacturer affiliates (2) | | $ | 459.9 |
| | $ | 417.8 |
| | $ | 374.7 |
| | $ | 367.2 |
| | $ | 363.6 |
|
Total Debt | | $ | 1,491.2 |
| | $ | 1,374.5 |
| | $ | 1,395.8 |
| | $ | 1,285.2 |
| | $ | 1,254.5 |
|
Stockholders’ equity | | $ | 1,255.7 |
| | $ | 1,095.7 |
| | $ | 1,124.3 |
| | $ | 930.2 |
| | $ | 918.3 |
|
Total debt to capitalization | | 54 | % | | 56 | % | | 55 | % | | 58 | % | | 58 | % |
(1)Includes immediately available funds of $106.8 million, $33.6 million, $86.5 million, $59.6 million, and $110.8 million as of December 31, 2019, 2018, 2017, 2016, and2015, respectively, that we temporarily invest as an offset to the gross outstanding borrowings.
(2)Includes immediately available funds of $4.1 million, $0.1 million, $22.5 million, $25.5 million, and $25.5 million as of December 31, 2019, 2018, 2017, 2016, and2015, respectively, that we temporarily invest as an offset to the gross outstanding borrowings.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with Part I, including the matters set forth in “ItemItem 1A. Risk Factors,” and our Consolidated Financial Statements and notes thereto included elsewhere in this Annual Report on Form 10-K.
Overview
We are a leading operator in the automotive retail industry. Through our dealerships, we sell new and used cars and light trucks; arrange related vehicle financing; sell service and other insurance contracts; provide automotive maintenance and repair services; and sell vehicle parts. Our operations are aligned into three regions, which comprise our reportable segments: (1)the U.S., (2) U.K., and (3) Brazil. The U.S. and Brazil segments are led by the President, U.S. and Brazilian Operations, and the U.KU.K. segment is led by a Managingan Operations Director, each reporting directly to our Chief Executive Officer, who is the Chief Operating Decision Maker.CODM. The President, U.S. and Brazilian Operations, and the U.K ManagingU.K. Operations Director are responsible for the overall performance of their respective regions, as well as for overseeing field level management. The U.S. segment includes the activities of our corporate office.
As of December 31, 2019,2020, our retail network consisted of 119117 dealerships in the U.S., 50 dealerships in the U.K. and 17 dealerships in Brazil. Our operations are primarily located in major metropolitan areas in 15 states in the U.S., 33 towns in the U.K., and three states in Brazil.
Our typical acquisition strategy is to acquire large, profitable, well-established and well-managed dealerships that are leaders in their respective market areas. From January 1, 2015 through December 31, 2019, we acquired 53 dealerships representing 67 franchises with expected annual revenues estimated at the time of acquisition of $2.3 billion and opened eight dealerships representing 11 new franchises with expected annual revenues estimated at the time of acquisition of $260.0 million.
During the year ended December 31, 2019, we acquired eight dealerships representing 11 franchises with expected annual revenues estimated at the time of acquisition of $305.0 million. Aggregate consideration paid for these dealerships, which were accounted for as business combinations, totaled $143.2 million. We also opened three dealerships representing four new franchises with expected annual revenues estimated at the time of acquisition of $125.0 million. By segment, we acquired four dealerships representing six franchises in the U.S. and four dealerships representing five franchises in the U.K. We also opened one dealership representing one franchise in the U.S. and two dealerships representing three franchises in the U.K.
We make disposition decisions based principally on the rate of return on our capital investment, the location of the dealership, our ability to leverage our cost structure, the brand, future capital investments required and existing real estate obligations. From January 1, 2015 through December 31, 2019, we disposed of or terminated 36 franchises with annual revenues of approximately $825.0 million.
During the year ended December 31, 2019, we disposed of eight dealerships representing 14 franchises, with aggregate annual revenues at the time of disposition of $240.0 million. We recorded a net pre-tax gain totaling $5.0 million related to these dispositions. By segment, our dispositions included four dealerships representing seven franchises and two terminated franchises in the U.S., three dealerships representing four terminated franchises in the U.K. and one dealership representing one franchise in Brazil.
Our operating results reflect the combined performance of each of our interrelated business activities, which include the sale of new vehicles, used vehicles, F&I products and parts, as well as maintenance and repair business. Historically, each of these activities has been directly or indirectly impacted by a variety of supply/demand factors, including vehicle inventories, consumer confidence, consumer transportation preferences, discretionary spending levels, availability and affordability of consumer credit, manufacturer incentives, weather patterns, fuel prices and interest rates. For example, during periods of sustained economic downturn or significant supply/demand imbalances, new vehicle sales may be negatively impacted as consumers tend to shift their purchases to used vehicles. Some consumers may even delay their purchasing decisions altogether, electing instead to continue to maintain and repair their existing vehicles. In such cases, however, we believe the new vehicle sales impact on our overall business is mitigated by our ability to offer other products and services, such as used vehicles and parts, as well as maintenance, repair and collision business.services. In addition, our ability to expediently adjust our cost structure in response to changes in new vehicle sales volumes also tempers any negative impact of such sales volume changes.
In 2020, the industry sales in each of our regions was negatively impacted by economic restrictions as a result of the COVID-19 pandemic and the inventory shortages resulting from reduced manufacturer production and parts disruptions, including semiconductor chips. According to U.S. industry experts, the annual new light vehicle unit sales for 20192020 decreased 1.4%14.8%, to 17.0 million units as compared to the same period a year ago. In the U.K. which represents the fifth largest economy in the world, vehicle registrations decreased 2.4% to 2.3 million during 2019 as compared to the same period in 2018. The U.K. industry's new vehicle sales have experienced more volatility than normal following the Brexit vote in 2016. The announcement of Brexit caused significant exchange rate fluctuations that resulted in the weakening of the GBP, in which we conduct business in the U.K., against the USD and other global currencies. The weakening of the GBP since the initial Brexit vote has and may continue to adversely affect our results of operations, as well as have a negative impact on the pricing and affordability of the vehicles in the U.K. Volatility in exchange rates is expected to continue in the short term, at least until there is a clear path forward in response to Brexit. In 2019, the Brazilian economy, which represents the ninth largest economy in the world, continued to recover from a recession. During 2019, new vehicle registrations in Brazil increased 7.6%, to 2.714.5 million units as compared to the same period in 2018.2019. During 2020, new vehicle registrations decreased 29.4%, to 1.6 million units in the U.K. and decreased 26.6%, to 2.0 million units in Brazil as compared to the same period in 2019. We expect macro-economic conditions to continue to improve in Brazil. Longer term, we expect sustained improvements in industry sales volumes in 2021 as all three markets recover from the pandemic.
We were able to partially offset the profit impact from a reduction in total revenues of 9.9% in 2020 as compared to 2019 by increasing gross margins from 15.1% in 2019 to 16.3% in 2020, resulting in a decline in total gross profit of only 2.6%. The increase in gross margins was primarily a result of increased new and are utilizingused vehicle gross margins due to the inventory shortages. Our cost reduction actions in the spring and summer and an increase in our employee productivity resulted in a strategydecrease in SG&A as a % of aligninggross profit of 8.7% which more than offset the decrease in gross profit and drove record dilutive earnings per share of $15.51 in 2020, a 66.0% increase over 2019.
As of December 31, 2020, our total cash liquidity was $263.7 million, which included $87.3 million of cash on hand and $176.4 million of immediately available funds used to pay down our Floorplan Line and FMCC Facility. We had additional liquidity available under our Acquisition Line. As further discussed in Liquidity and Capital Resources, we have sufficient liquidity currently and do not anticipate any material liquidity constraints or issues with growing brands,our ability to remain in order to most effectively capitalize on that industry growth.compliance with debt covenants.
Recent Accounting Pronouncements
Refer to Note 1 “Business1. Business and Summary of Significant Accounting Polices”Policies within our Notes to Consolidated Financial Statements for afurther discussion of thosethe most recent pronouncements that impact us.
Critical Accounting Policies and Accounting Estimates
The preparation of our financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions, including those associated with the difficult, subjective and complex areas described above. 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. Below are the accounting policies and estimates that have been determined to be critical to our business operations and the understanding of our results of operations.
Goodwill and Intangible Franchise Rights
Goodwill represents the excess, at the date of acquisition, of the purchase price of the business acquired over the fair value of the net tangible and intangible assets acquired. We are organized into three geographic regions, the U.S. region, the U.K. region and the Brazil region. We have determined that each region represents a reporting unit for the purpose of assessing goodwill for impairment. Our only significantrecognized identifiable intangible assets, other than goodwill, are rights under franchise agreements with manufacturers, which are recorded at an individual dealership level.
We evaluate goodwill and intangible franchise rights for impairment annually in the fourth quarter as of October 31, or more frequently if events or circumstances indicate possible impairment has occurred. In evaluating goodwill and intangibles for impairment, an optional qualitative assessment may be initially performed to determine whether it is more likely than notmore-likely-than-not (i.e., a likelihood of greater than 50%) that an impairment exists. If it is concluded that it is more likely than notmore-likely-than-not that an impairment exists, a quantitative test is required to measure the amount of impairment which, for goodwill, consists of comparing the fair value of the reporting unit to its carrying amount and, for intangibles, consists of comparing the fair value of the intangible asset to its carrying amount.
When a quantitative impairment test is performed, we estimate fair value of goodwill using a combination of the discounted cash flow, or income approach, and the market approach. We weight the income approach and market approach 80% and 20%, respectively, in the fair value model. For our intangible franchise rights, we estimate the fair value of the respective franchise right using a discounted cash flow, or income approach. The income approach measures fair value by discounting expected future cash flows at a WACC that proportionately weights the cost of debt and equity. Significant assumptions included in the model include changes in revenue growth rates, future gross margins, future SG&A expenses, and the WACC and terminal growth rates. We apply a five year projection period which aligns with our strategic plan. Key considerations in the assumed growth rates include industry SAAR projections, macroeconomic conditions including consumer confidence levels, unemployment rates and gross domestic product growth, and internal measures such as historical financial performance, cost control and planned capital expenditures. The revenue growth rates assume a significant increase in 2021 as the business recovers from the pandemic and limited increases in the next four years corresponding with the industry SAAR projections plus a return to more normal vehicle gross margins as inventories recover. Beyond the five forecasted years, the terminal value is determined using a perpetuity growth rate based on long-term inflation projections for each reporting unit. Significant inputs to the WACC include the risk free rate, an adjustment for stock market risk, an adjustment for company size risk and country risk adjustments for the U.K. and Brazil. In 2020, the WACC applied in the impairment tests for the U.S., U.K. and Brazil was 11%, 13% and 16%, respectively. For the market approach, we utilize recent market multiples of guideline companies for both revenue and pre-tax net income weighted as appropriate by reporting unit. Each ofDeveloping these assumptions requires us to use itsapplying management’s knowledge of (1) the industry, (2) recent transactions and (3) reasonable performance expectations for its operations.
OurThe qualitative test includes a review of changes, since the last quantitative test was performed, in those assumptions having the most significant impact on the current year fair value, which are consistent with the significant assumptions identified in the quantitative test above.
During the year ended December 31, 2020, we recorded goodwill impairment charges of $10.7 million within the Brazil reporting unit, largely due to the impact of the COVID-19 pandemic on our Brazilian markets and our operations. There was no remaining goodwill balance in the Brazil segment following the impairment charges recorded in 2020. As of the last quantitative test performed for the U.S. and U.K. reporting units in the fourth quarter of 2018, the fair value of the reporting units each exceeded their respective carrying values by over 90%. Based on the qualitative test performed for the U.S. and U.K. reporting units in the fourth quarter of 2020, no quantitative test was deemed necessary. No goodwill impairments were recorded on any reporting units during the year ended December 31, 2019.
During the years ended December 31, 2019, 20182020 and 2017,2019, we recorded $19.0 million, $38.7$20.8 million and $19.3$19.0 million, respectively, of impairments of intangible franchise rights. As our intangible franchise rights are tested for impairment at the dealership level, any impairments are specific to the performance and outlook of the respective dealership. The impact of the COVID-19 pandemic on the economy and unemployment in 2020 adversely impacted our long-term outlook projections, which resulted in the impairment charges on certain dealerships in the U.S., U.K. and Brazil. See Item 1. Business for a discussion of the impact of COVID-19 pandemic on each of our regions and our response to date. If the COVID-19 pandemic and any lockdowns or other restrictions to contain the pandemic continue and impact our long-term projections, we may be required to record additional impairment charges in the future.
Refer to Note 11 “Intangible11. Intangible Franchise Rights and Goodwill” within our Notes to Consolidated Financial Statements for details on our intangibles, including the results of our impairment testing.
Chargebacks
We may be charged back in the future for unearned financing, insurance contract or vehicle service contract fees in the event of early termination of the contracts by customers. A reserve for future amounts estimated to be charged back, representing variable consideration, is recorded as a reduction of Finance, Insurance and Other Revenue, Net in the Consolidated Statement of Operations. The reserve is estimated based on our historical charge back results and the termination provisions of the applicable contracts, and was $49.7 million and $46.4 million at December 31, 2019 and 2018, respectively.
See Note 1 “Business and Summary of Significant Accounting Policies” and Note 2 “Revenues”Goodwill within our Notes to Consolidated Financial Statements for further discussion of these accounting policiesour goodwill and estimates.intangibles, including the results of our impairment testing.
Results of Operations
The “Same Store”“same store” amounts presented below include the results of dealerships and corporate headquarters for the identical months in each period presented in comparison, commencing with the first full month in which the dealership was owned by us and, in the case of dispositions, ending with the last full month it was owned by us. For example, the results for a dealership acquired on August 15, 2020 will appear in our same store comparison beginning in 2021 for the period September 2021 through December 2021, when comparing to September 2020 through December 2020 results. If we disposed of a store on August 15, 2020, the results from this store would be excluded from same store results beginning in August 2020 as July 2020 was the last full month the dealership was owned by us. Same Storestore results also include the activitiesprovide a measurement of our corporate headquarters.ability to grow revenues and profitability of our existing stores and also provide a metric for peer group comparisons. For these reasons, same store results allows management to manage and monitor the performance of the business and is also useful to investors.
We evaluate our results of operations on both an as reported and on a constant currency basis. The constant currency presentation, which is a non-GAAP measure, excludes the impact of fluctuations in foreign currency exchange rates. We believe providing constant currency information provides valuable supplemental information regarding our underlying business and results of operations, consistent with how we evaluate our performance. We calculate constant currency percentages by converting our current period reported results for entities reporting in currencies other than USD using comparative period exchange rates rather than the actual exchange rates in effect during the respective periods. The constant currency performance measures should not be considered a substitute for, or superior to, the measures of financial performance prepared in accordance with U.S. GAAP. Additionally, we caution investors not to place undue reliance on non-GAAP measures, but also to consider them with the most directly comparable U.S. GAAP measures. Our management also uses constant currency and adjusted cash flows from operating, investing and financing activities in conjunction with U.S. GAAP financial measures to assess our business, including communication with our Board of Directors, investors and industry analysts concerning financial performance. We disclose these non-GAAP measures, and the related reconciliations, because we believe investors use these metrics in evaluating longer-term period-over-period performance, and toperformance. These metrics also allow investors to better understand and evaluate the information used by management to assess operating performance.
Certain disclosures are reported as zero balances, oramounts in the financial statements may not compute due to rounding.
All computations have been calculated using unrounded amounts for all periods presented. Additionally, refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2019 Annual Report on Form 10-K for management’s discussion and analysis of financial condition and results of operations for the fiscal year 2019 compared to fiscal year 2018.
The following tables summarize our operating results on a reported basis and on a Same Store basis for the year ended December 31, 20192020 as compared to 2018 and for the year ended December 31, 2018, as compared to 2017.2019.
Reported Operating Data -— Consolidated
(In millions, except unit and per unit amounts)data)
| | | For the Years Ended December 31, | | For the Years Ended December 31, | |
| 2019 | | 2018 | | Increase/ (Decrease) | | % Change | | | Currency Impact on Current Period Results | | Constant Currency % Change | | 2020 | | 2019 | | Increase/ (Decrease) | | % Change | | | Currency Impact on Current Period Results | | Constant Currency % Change | |
Revenues: | | | | | | | | | | | | | Revenues: | | | | | | | | | | | | | |
New vehicle retail sales | $ | 6,314.1 |
| | $ | 6,181.4 |
| | $ | 132.7 |
| | 2.1 | % | | | $ | (82.3 | ) | | 3.5 | % | New vehicle retail sales | $ | 5,580.8 | | | $ | 6,314.1 | | | $ | (733.3) | | | (11.6) | % | | | $ | (37.5) | | | (11.0) | % | |
Used vehicle retail sales | 3,366.6 |
| | 3,166.1 |
| | 200.6 |
| | 6.3 | % | | | (43.0 | ) | | 7.7 | % | Used vehicle retail sales | 3,105.7 | | | 3,366.6 | | | (261.0) | | | (7.8) | % | | | (5.8) | | | (7.6) | % | |
Used vehicle wholesale sales | 355.2 |
| | 369.6 |
| | (14.4 | ) | | (3.9 | )% | | | (8.8 | ) | | (1.5 | )% | Used vehicle wholesale sales | 308.1 | | | 355.2 | | | (47.1) | | | (13.3) | % | | | (2.3) | | | (12.6) | % | |
Total used | 3,721.8 |
| | 3,535.6 |
| | 186.1 |
| | 5.3 | % | | | (51.8 | ) | | 6.7 | % | Total used | 3,413.7 | | | 3,721.8 | | | (308.1) | | | (8.3) | % | | | (8.1) | | | (8.1) | % | |
Parts and service sales | 1,510.0 |
| | 1,416.9 |
| | 93.1 |
| | 6.6 | % | | | (14.3 | ) | | 7.6 | % | Parts and service sales | 1,389.3 | | | 1,510.0 | | | (120.7) | | | (8.0) | % | | | (7.1) | | | (7.5) | % | |
F&I, net | 497.9 |
| | 467.5 |
| | 30.4 |
| | 6.5 | % | | | (2.9 | ) | | 7.1 | % | F&I, net | 467.9 | | | 497.9 | | | (29.9) | | | (6.0) | % | | | (1.1) | | | (5.8) | % | |
Total revenues | $ | 12,043.8 |
| | $ | 11,601.4 |
| | $ | 442.4 |
| | 3.8 | % | | | $ | (151.4 | ) | | 5.1 | % | Total revenues | $ | 10,851.8 | | | $ | 12,043.8 | | | $ | (1,191.9) | | | (9.9) | % | | | $ | (53.8) | | | (9.4) | % | |
Gross profit: | | | | | | | | | | | | | Gross profit: | | | | | | | | | | |
New vehicle retail sales | $ | 300.8 |
| | $ | 310.9 |
| | $ | (10.1 | ) | | (3.2 | )% | | | $ | (3.5 | ) | | (2.1 | )% | New vehicle retail sales | $ | 330.5 | | | $ | 300.8 | | | $ | 29.7 | | | 9.9 | % | | | $ | (3.1) | | | 10.9 | % | |
Used vehicle retail sales | 201.3 |
| | 185.9 |
| | 15.4 |
| | 8.3 | % | | | (2.1 | ) | | 9.4 | % | Used vehicle retail sales | 208.7 | | | 201.3 | | | 7.4 | | | 3.7 | % | | | (0.6) | | | 4.0 | % | |
Used vehicle wholesale sales | 1.0 |
| | 1.7 |
| | (0.7 | ) | | (40.6 | )% | | | — |
| | (39.2 | )% | Used vehicle wholesale sales | 11.0 | | | 1.0 | | | 10.0 | | | 991.6 | % | | | (0.3) | | | 1017.5 | % | |
Total used | 202.3 |
| | 187.6 |
| | 14.7 |
| | 7.8 | % | | | (2.1 | ) | | 9.0 | % | Total used | 219.7 | | | 202.3 | | | 17.4 | | | 8.6 | % | | | (0.9) | | | 9.0 | % | |
Parts and service sales | 815.0 |
| | 759.1 |
| | 55.8 |
| | 7.4 | % | | | (7.5 | ) | | 8.3 | % | Parts and service sales | 750.8 | | | 815.0 | | | (64.1) | | | (7.9) | % | | | (2.9) | | | (7.5) | % | |
F&I, net | 497.9 |
| | 467.5 |
| | 30.4 |
| | 6.5 | % | | | (2.9 | ) | | 7.1 | % | F&I, net | 467.9 | | | 497.9 | | | (29.9) | | | (6.0) | % | | | (1.1) | | | (5.8) | % | |
Total gross profit | $ | 1,816.0 |
| | $ | 1,725.1 |
| | $ | 90.9 |
| | 5.3 | % | | | $ | (16.1 | ) | | 6.2 | % | Total gross profit | $ | 1,769.0 | | | $ | 1,816.0 | | | $ | (47.0) | | | (2.6) | % | | | $ | (7.9) | | | (2.2) | % | |
Gross margin: | | | | | | | | | | | | | Gross margin: | | | | | | | | | | |
New vehicle retail sales | 4.8 | % | | 5.0 | % | | (0.3 | )% | | | | | | | | New vehicle retail sales | 5.9 | % | | 4.8 | % | | 1.2 | % | | | | |
Used vehicle retail sales | 6.0 | % | | 5.9 | % | | 0.1 | % | | | | | | | | Used vehicle retail sales | 6.7 | % | | 6.0 | % | | 0.7 | % | | | | |
Used vehicle wholesale sales | 0.3 | % | | 0.5 | % | | (0.2 | )% | | | | | | | | Used vehicle wholesale sales | 3.6 | % | | 0.3 | % | | 3.3 | % | | | | |
Total used | 5.4 | % | | 5.3 | % | | 0.1 | % | | | | | | | | Total used | 6.4 | % | | 5.4 | % | | 1.0 | % | | | | |
Parts and service sales | 54.0 | % | | 53.6 | % | | 0.4 | % | | | | | | | | Parts and service sales | 54.0 | % | | 54.0 | % | | 0.1 | % | | | | |
F&I, net | 100.0 | % | | 100.0 | % | | — | % | | | | | | | | F&I, net | 100.0 | % | | 100.0 | % | | — | % | | | | |
Total gross margin | 15.1 | % | | 14.9 | % | | 0.2 | % | | | | | | | | Total gross margin | 16.3 | % | | 15.1 | % | | 1.2 | % | | | | |
Units sold: | | | | | | | | | | | | | Units sold: | | | | |
Retail new vehicles sold | 169,136 |
| | 170,517 |
| | (1,381 | ) | | (0.8 | )% | | | | | | Retail new vehicles sold | 140,221 | | | 169,136 | | | (28,915) | | | (17.1) | % | | | | |
Retail used vehicles sold | 158,549 |
| | 147,999 |
| | 10,550 |
| | 7.1 | % | | | | | | Retail used vehicles sold | 140,118 | | | 158,549 | | | (18,431) | | | (11.6) | % | | | | |
Wholesale used vehicles sold | 51,205 |
| | 53,887 |
| | (2,682 | ) | | (5.0 | )% | | | | | | Wholesale used vehicles sold | 41,786 | | | 51,205 | | | (9,419) | | | (18.4) | % | | | | |
Total used | 209,754 |
| | 201,886 |
| | 7,868 |
| | 3.9 | % | | | | | | Total used | 181,904 | | | 209,754 | | | (27,850) | | | (13.3) | % | | | | |
Average sales price per unit sold: | | | | | | | | | | | | | Average sales price per unit sold: | | | | | | | | | |
New vehicle retail | $ | 37,332 |
| | $ | 36,251 |
| | $ | 1,081 |
| | 3.0 | % | | | $ | (486 | ) | | 4.3 | % | New vehicle retail | $ | 39,800 | | | $ | 37,332 | | | $ | 2,469 | | | 6.6 | % | | | $ | (268) | | | 7.3 | % | |
Used vehicle retail | $ | 21,234 |
| | $ | 21,393 |
| | $ | (158 | ) | | (0.7 | )% | | | $ | (271 | ) | | 0.5 | % | Used vehicle retail | $ | 22,165 | | | $ | 21,234 | | | $ | 931 | | | 4.4 | % | | | $ | (42) | | | 4.6 | % | |
Gross profit per unit sold: | | | | | | | | | | | | | Gross profit per unit sold: | | | | |
New vehicle retail sales | $ | 1,778 |
| | $ | 1,823 |
| | $ | (45 | ) | | (2.4 | )% | | | $ | (21 | ) | | (1.3 | )% | New vehicle retail sales | $ | 2,357 | | | $ | 1,778 | | | $ | 578 | | | 32.5 | % | | | $ | (22) | | | 33.7 | % | |
Used vehicle retail sales | $ | 1,270 |
| | $ | 1,256 |
| | $ | 13 |
| | 1.1 | % | | | $ | (13 | ) | | 2.1 | % | Used vehicle retail sales | $ | 1,490 | | | $ | 1,270 | | | $ | 220 | | | 17.3 | % | | | $ | (4) | | | 17.6 | % | |
Used vehicle wholesale sales | $ | 20 |
| | $ | 31 |
| | $ | (12 | ) | | (37.4 | )% | | | $ | — |
| | (36.0 | )% | Used vehicle wholesale sales | $ | 263 | | | $ | 20 | | | $ | 244 | | | 1,237.7 | % | | | $ | (6) | | | 1,269.3 | % | |
Total used | $ | 965 |
| | $ | 929 |
| | $ | 35 |
| | 3.8 | % | | | $ | (10 | ) | | 4.9 | % | Total used | $ | 1208 | | | $ | 965 | | | $ | 243 | | | 25.2 | % | | | $ | (5) | | | 25.7 | % | |
F&I PRU | $ | 1,519 |
| | $ | 1,468 |
| | $ | 52 |
| | 3.5 | % | | | $ | (9 | ) | | 4.1 | % | F&I PRU | $ | 1,669 | | | $ | 1,519 | | | $ | 150 | | | 9.9 | % | | | $ | (4) | | | 10.1 | % | |
Other: | | | | | | | | | | | | | Other: | | | | |
| SG&A expenses | $ | 1,358.4 |
| | $ | 1,273.1 |
| | $ | 85.3 |
| | 6.7 | % | | | $ | (13.9 | ) | | 7.8 | % | SG&A expenses | $ | 1,169.3 | | | $ | 1,358.4 | | | $ | (189.1) | | | (13.9) | % | | | $ | (7.3) | | | (13.4) | % | |
| SG&A as % gross profit | 74.8 | % | | 73.8 | % | | 1.0 | % | | | | | | | | SG&A as % gross profit | 66.1 | % | | 74.8 | % | | (8.7) | % | | | | |
| Floorplan expense: | | | | | | | | | | | | | Floorplan expense: | | | | |
Floorplan interest expense | $ | 61.6 |
| | $ | 59.9 |
| | $ | 1.7 |
| | 2.8 | % | | | $ | (0.4 | ) | | 3.5 | % | Floorplan interest expense | $ | 39.5 | | | $ | 61.6 | | | $ | (22.1) | | | (35.8) | % | | | $ | (0.1) | | | (35.7) | % | |
Less: floorplan assistance (1) | 49.1 |
| | 47.3 |
| | 1.9 |
| | 4.0 | % | | | — |
| | 4.0 | % | Less: floorplan assistance (1) | 47.3 | | | 49.1 | | | (1.8) | | | (3.7) | % | | | — | | | (3.7) | % | |
Net floorplan expense | $ | 12.4 |
| | $ | 12.6 |
| | $ | (0.2 | ) | | (1.3 | )% | | | $ | (0.4 | ) | | 1.5 | % | Net floorplan expense | $ | (7.8) | | | $ | 12.4 | | | $ | (20.2) | | | (162.6) | % | | | $ | (0.1) | | | (162.0) | % | |
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