Asbury Automotive Group(ABG) - 2021 Q1 - Quarterly Report

PART I—Financial Information This section presents the unaudited condensed consolidated financial statements and management's discussion and analysis of financial condition and results of operations Item 1. Condensed Consolidated Financial Statements (unaudited) This section presents Asbury Automotive Group's unaudited condensed consolidated financial statements and detailed notes for Q1 2021 and FY 2020 Condensed Consolidated Balance Sheets The balance sheet shows a decrease in total assets and liabilities from December 31, 2020, to March 31, 2021, primarily driven by reductions in current assets and floor plan notes payable Condensed Consolidated Balance Sheet Highlights (in millions) | Metric | March 31, 2021 | December 31, 2020 | | :-------------------------------- | :------------- | :---------------- | | Total Assets | $3,582.3 | $3,676.3 | | Total Liabilities | $2,584.3 | $2,770.8 | | Total Shareholders' Equity | $998.0 | $905.5 | | Cash and cash equivalents | $27.8 | $1.4 | | Inventories | $769.6 | $875.2 | | Floor plan notes payable—non-trade, net | $478.1 | $637.3 | - Total assets decreased by $94.0 million from December 31, 2020, to March 31, 2021, primarily due to a reduction in current assets, notably inventories and accounts receivable[9] - Total shareholders' equity increased by $92.5 million, from $905.5 million to $998.0 million, indicating improved financial strength[9] Condensed Consolidated Statements of Income The company reported significant revenue and net income growth for the three months ended March 31, 2021, compared to the same period in 2020, driven by strong performance across all revenue segments Condensed Consolidated Statements of Income Highlights (in millions, except per share data) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Total Revenue | $2,192.9 | $1,607.3 | | Gross Profit | $382.7 | $272.4 | | Income From Operations | $136.3 | $35.0 | | Net Income | $92.8 | $19.5 | | Diluted Earnings Per Share | $4.78 | $1.01 | - Total revenue increased by 36% year-over-year, from $1,607.3 million in Q1 2020 to $2,192.9 million in Q1 2021[12] - Net income saw a substantial increase of 376%, rising from $19.5 million in Q1 2020 to $92.8 million in Q1 2021[12] Condensed Consolidated Statements of Comprehensive Income Comprehensive income significantly increased for the three months ended March 31, 2021, compared to the prior year, primarily due to higher net income and a positive change in the fair value of cash flow swaps Condensed Consolidated Statements of Comprehensive Income Highlights (in millions) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net Income | $92.8 | $19.5 | | Change in fair value of cash flow swaps | $6.2 | $(4.5) | | Income tax (expense) benefit associated with cash flow swaps | $(1.6) | $1.1 | | Comprehensive Income | $97.4 | $16.1 | - Comprehensive income surged by 505% from $16.1 million in Q1 2020 to $97.4 million in Q1 2021[14] Condensed Consolidated Statements of Shareholders' Equity Shareholders' equity increased from December 31, 2020, to March 31, 2021, driven by net income and fair value changes in cash flow swaps, partially offset by share repurchases Condensed Consolidated Statements of Shareholders' Equity Highlights (in millions) | Metric | March 31, 2021 | December 31, 2020 | | :-------------------------------- | :------------- | :---------------- | | Total Shareholders' Equity | $998.0 | $905.5 | | Retained Earnings | $1,441.7 | $1,348.9 | | Additional Paid-in Capital | $600.2 | $595.5 | | Treasury Stock, at cost | $(1,043.3) | $(1,033.7) | - Retained earnings increased by $92.8 million due to net income for the period[17] - The company repurchased $9.6 million of common stock associated with net share settlement of employee share-based awards[17] Condensed Consolidated Statements of Cash Flows Net cash provided by operating activities significantly increased in Q1 2021, while investing activities shifted to a net outflow and financing activities resulted in a net cash outflow Condensed Consolidated Statements of Cash Flows Highlights (in millions) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net Cash Provided by Operating Activities | $210.8 | $127.7 | | Net Cash Provided by (Used in) Investing Activities | $(3.7) | $45.2 | | Net Cash Provided by (Used in) Financing Activities | $(180.7) | $212.2 | | Net Increase in Cash and Cash Equivalents | $26.4 | $385.1 | | Cash and Cash Equivalents, end of period | $27.8 | $388.6 | - Net cash provided by operating activities increased by $83.1 million (65%) year-over-year[20] - Investing activities shifted from a net inflow of $45.2 million in Q1 2020 to a net outflow of $3.7 million in Q1 2021[20] Notes to Condensed Consolidated Financial Statements These notes provide detailed explanations of the company's business, accounting policies, revenue recognition, acquisitions, and financial instruments 1. Description of Business and Summary of Significant Accounting Policies Asbury Automotive Group operates 112 new vehicle franchises and 25 collision repair centers, with revenue from luxury, import, and domestic brands - As of March 31, 2021, the company operated 112 new vehicle franchises (91 dealership locations) representing 31 automobile brands and 25 collision repair centers, and one auto auction in 16 metropolitan markets within nine states[22] - New vehicle revenue brand mix as of March 31, 2021, consisted of 45% luxury, 38% imports, and 17% domestic brands[22] - The company is evaluating the impact of ASU 2020-04 and ASU 2021-01 (Reference Rate Reform) on its financial statements, as LIBOR benchmarking is used in its debt, credit facilities, floorplan facilities, and interest rate swaps[34] 2. Revenue Recognition Revenue is recognized upon satisfaction of performance obligations, with total revenue significantly increasing in Q1 2021 across all segments Revenue Breakdown (in millions) | Revenue Category | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | New vehicle | $1,151.7 | $822.1 | | Used vehicle retail | $607.5 | $446.0 | | Used vehicle wholesale | $83.4 | $47.2 | | Parts and services | $262.0 | $221.6 | | Finance and insurance, net | $88.3 | $70.4 | | Total Revenue | $2,192.9 | $1,607.3 | - Total revenue increased by $585.6 million (36%) year-over-year[36] - Contract assets related to vehicle repair and maintenance services and finance and insurance, net, totaled $21.2 million as of March 31, 2021[39] 3. Acquisitions and Divestitures The Park Place acquisition in August 2020 significantly contributed to Q1 2021 revenue, while Q1 2020 saw other acquisitions and divestitures - The Park Place acquisition, completed on August 24, 2020, involved 12 new vehicle franchises, two collision centers, and an auto auction, with a total purchase price of $889.9 million[42][43] Park Place Acquisition Purchase Price Allocation (in millions) | Asset/Liability Category | Amount | | :-------------------------------- | :----- | | Inventories | $120.8 | | Loaner vehicles | $57.0 | | Property and equipment | $36.5 | | Goodwill and intangible assets | $360.4 | | Manufacturer franchise rights | $324.0 | | Operating lease right-of-use assets | $202.7 | | Total assets acquired | $1,101.4 | | Operating lease liabilities | $(202.2) | | Other liabilities | $(9.3) | | Net assets acquired | $889.9 | - Park Place contributed $406.0 million in revenue for the three months ended March 31, 2021[45] - In Q1 2020, the company acquired three franchises for $63.6 million and sold seven franchises and one collision center for a pre-tax gain of $33.7 million[46][48] 4. Accounts Receivable Accounts receivable, net, decreased from December 31, 2020, to March 31, 2021, primarily due to reductions in vehicle and manufacturer receivables Accounts Receivable Breakdown (in millions) | Category | March 31, 2021 | December 31, 2020 | | :-------------------------------- | :------------- | :---------------- | | Vehicle receivables | $53.8 | $61.2 | | Manufacturer receivables | $45.8 | $57.1 | | Other receivables | $38.6 | $38.4 | | Total accounts receivable | $138.2 | $156.7 | | Less—Allowance for credit losses | $(1.4) | $(1.2) | | Accounts receivable, net | $136.8 | $155.5 | - Accounts receivable, net, decreased by $18.7 million (12%) from December 31, 2020, to March 31, 2021[50] 5. Inventories Total inventories significantly decreased from December 31, 2020, to March 31, 2021, mainly driven by a reduction in new vehicle inventory Inventories Breakdown (in millions) | Category | March 31, 2021 | December 31, 2020 | | :-------------------------------- | :------------- | :---------------- | | New vehicles | $527.5 | $640.0 | | Used vehicles | $193.5 | $188.5 | | Parts and accessories | $48.6 | $46.7 | | Total inventories | $769.6 | $875.2 | - Total inventories decreased by $105.6 million (12%) from December 31, 2020, to March 31, 2021, mainly due to a $112.5 million reduction in new vehicle inventory[51] - Lower of cost and net realizable value reserves reduced total inventories by $5.4 million as of March 31, 2021, down from $6.7 million as of December 31, 2020[52] 6. Assets and Liabilities Held for Sale Assets held for sale increased in Q1 2021 due to new classifications, while associated liabilities decreased, with property sales occurring Assets and Liabilities Held for Sale (in millions) | Category | March 31, 2021 | December 31, 2020 | | :-------------------------------- | :------------- | :---------------- | | Total Assets held for sale | $31.5 | $28.3 | | Total Liabilities associated with assets held for sale | $6.0 | $8.9 | | Net assets held for sale | $25.5 | $19.4 | - As of March 31, 2021, assets held for sale included one franchise and one real estate property not currently used in operations, totaling $31.5 million[55] - During Q1 2021, the company sold two vacant properties with a net book value of $12.5 million[56] 7. Goodwill and Intangible Franchise Rights Goodwill and intangible franchise rights are annually tested for impairment, with a $23.0 million charge in Q1 2020 due to COVID-19 - Goodwill and intangible franchise rights are tested annually for impairment as of October 1st, or more frequently if triggering events occur[57] - A $23.0 million pre-tax non-cash impairment charge was recognized for certain franchise rights during the three months ended March 31, 2020, due to the COVID-19 pandemic[58] - No impairment testing was performed for goodwill and franchise rights for the three months ended March 31, 2021, as no triggering events had occurred[58] 8. Floor Plan Notes Payable Floor plan notes payable decreased from December 31, 2020, to March 31, 2021, with increased use of offset accounts and facility re-designation Floor Plan Notes Payable (in millions) | Category | March 31, 2021 | December 31, 2020 | | :-------------------------------- | :------------- | :---------------- | | Floor plan notes payable—trade, net | $48.7 | $64.9 | | Floor plan notes payable—non-trade, net | $478.1 | $637.3 | | Total Floor Plan Notes Payable, net | $526.8 | $702.2 | - Total floor plan notes payable, net, decreased by $175.4 million (25%) from December 31, 2020, to March 31, 2021[60] - As of March 31, 2021, the company had $145.4 million in floor plan offset accounts, up from $85.4 million at December 31, 2020[61] - On April 6, 2021, $190.0 million of availability under the Revolving Credit Facility was re-designated to the New Vehicle Floor Plan Facility to take advantage of lower commitment fee rates[62] 9. Debt Long-term debt slightly decreased from December 31, 2020, to March 31, 2021, comprising Senior Notes, mortgage notes, and real estate facilities Long-Term Debt (in millions) | Category | March 31, 2021 | December 31, 2020 | | :-------------------------------- | :------------- | :---------------- | | 4.50% Senior Notes due 2028 | $405.0 | $405.0 | | 4.75% Senior Notes due 2030 | $445.0 | $445.0 | | Mortgage notes payable | $75.7 | $79.2 | | 2018 Bank of America Facility | $82.8 | $84.2 | | 2018 Wells Fargo Master Loan Facility | $85.6 | $86.9 | | 2013 BofA Real Estate Facility | $32.9 | $33.6 | | 2015 Wells Fargo Master Loan Facility | $60.5 | $61.7 | | Finance lease liability | $16.5 | $16.6 | | Total debt outstanding | $1,204.0 | $1,212.2 | | Long-term debt, including current portion | $1,194.1 | $1,201.8 | | Long-term debt (net of current portion) | $1,157.7 | $1,165.2 | - Long-term debt, net of current portion, decreased by $7.5 million from December 31, 2020, to March 31, 2021[64] - The 4.50% Senior Notes due 2028 and 4.75% Senior Notes due 2030 are fully and unconditionally guaranteed by substantially all subsidiaries[65] 10. Financial Instruments and Fair Value The company uses market and income approaches for fair value measurements, with most instruments approximating fair value, and employs interest rate swaps for hedging - The fair value of subordinated long-term debt and mortgage notes payable is estimated using Level 2 inputs[70] Carrying Value and Fair Value of Notes and Mortgage Notes Payable (in millions) | Metric | March 31, 2021 (Carrying Value) | March 31, 2021 (Fair Value) | December 31, 2020 (Carrying Value) | December 31, 2020 (Fair Value) | | :-------------------------------- | :------------------------------ | :-------------------------- | :--------------------------------- | :----------------------------- | | 4.50% Senior Notes due 2028 | $401.1 | $411.1 | $400.9 | $423.2 | | 4.75% Senior Notes due 2030 | $440.7 | $457.2 | $440.6 | $476.2 | | Mortgage notes payable | $335.8 | $347.2 | $343.7 | $354.5 | | Total | $1,177.6 | $1,215.5 | $1,185.2 | $1,253.9 | - The company has four interest rate swap agreements designed to hedge against fluctuations in one-month LIBOR, with a total notional value of $295.0 million as of March 31, 2021[74][75] 11. Supplemental Cash Flow Information Supplemental cash flow details include interest payments, no material income tax payments, and a significant transfer of loaner vehicles to inventories - Interest payments, including capitalized amounts, totaled $26.5 million for the three months ended March 31, 2021, compared to $22.3 million in the prior year[79] - Floor plan interest payments were $3.1 million in Q1 2021, down from $7.4 million in Q1 2020[79] - Loaner vehicles totaling $53.7 million were transferred from Other current assets to Inventories during the three months ended March 31, 2021[80] 12. Commitments and Contingencies The company faces various legal claims and regulatory risks, establishing loss contingency reserves, and has material commitments including debt and leases - The company evaluates pending and threatened claims and establishes loss contingency reserves for probable and reasonably estimable outcomes, with no indication of material reasonably possible losses in excess of accrued amounts[82][83] - As of March 31, 2021, the company had $10.8 million of letters of credit outstanding and maintained a $9.7 million surety bond line[86] - Other material commitments include floor plan notes payable, operating leases, long-term debt, and interest on long-term debt[86] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 2021 financial performance, highlighting revenue and net income growth, acquisition impacts, and liquidity, capital resources, and debt covenants Forward-Looking Information This section outlines forward-looking statements regarding future performance, industry trends, and financial position, identifying risks like COVID-19 and supply chain disruptions - Forward-looking statements include expectations regarding the seasonally adjusted annual rate of new vehicle sales, general economic conditions, parts and service revenue, capital allocation strategy, and the impact of the COVID-19 pandemic and supply shortages[89] - Key risk factors include the adverse impact of COVID-19, increased expenses from acquisitions/divestitures, changes in economic conditions, ability to generate cash flows, significant disruptions in vehicle/parts production (e.g., semiconductor chips), and high industry competition[90][91] Overview Asbury Automotive Group, a leading U.S. automotive retailer, experienced strong Q1 2021 revenue and gross profit growth despite supply disruptions, maintaining $551.3 million in liquidity - As of March 31, 2021, the company operated 112 new vehicle franchises (91 dealership locations), 25 collision centers, and one auto auction[93] - New vehicle revenue brand mix for Q1 2021 was 45% luxury, 38% imports, and 17% domestic brands[93] - The seasonally adjusted annual rate (SAAR) of new vehicle sales in the U.S. for Q1 2021 was 16.9 million, an 11% increase from 15.2 million in Q1 2020[100] - Total available liquidity as of March 31, 2021, was $551.3 million, including $27.8 million in cash and cash equivalents, $145.4 million in floor plan offset accounts, and $378.1 million in revolving credit facility availability[101] Results of Operations (Three Months Ended March 31, 2021 Compared to 2020) The company achieved substantial growth in revenue, gross profit, and net income for Q1 2021, driven by strong sales and improved margins despite increased operating expenses Overall Results of Operations Total revenue increased by 36% and gross profit by 40% in Q1 2021, leading to a 376% surge in net income due to strong sales Key Financial Results (in millions, except per share data) | Metric | Q1 2021 | Q1 2020 | Increase (Decrease) | % Change | | :-------------------------------- | :------ | :------ | :------------------ | :------- | | Total Revenue | $2,192.9 | $1,607.3 | $585.6 | 36% | | Total Gross Profit | $382.7 | $272.4 | $110.3 | 40% | | Income From Operations | $136.3 | $35.0 | $101.3 | 289% | | Net Income | $92.8 | $19.5 | $73.3 | 376% | | Diluted Net Income Per Share | $4.78 | $1.01 | $3.77 | 373% | Revenue Mix Percentages | Category | Q1 2021 | Q1 2020 | | :-------------------------------- | :------ | :------ | | New vehicle | 52.5% | 51.1% | | Used vehicle retail | 27.8% | 27.8% | | Used vehicle wholesale | 3.8% | 2.9% | | Parts and service | 11.9% | 13.8% | | Finance and insurance, net | 4.0% | 4.4% | | Total revenue | 100.0% | 100.0% | Gross Profit Mix Percentages | Category | Q1 2021 | Q1 2020 | | :-------------------------------- | :------ | :------ | | New vehicle | 19.7% | 13.4% | | Used vehicle retail | 12.4% | 11.5% | | Used vehicle wholesale | 2.2% | (0.2)% | | Parts and service | 42.6% | 49.5% | | Finance and insurance, net | 23.1% | 25.8% | | Total gross profit | 100.0% | 100.0% | Gross Profit Margin | Metric | Q1 2021 | Q1 2020 | | :-------------------------------- | :------ | :------ | | Gross Profit Margin | 17.5% | 16.9% | - Gross profit margin increased by 60 basis points to 17.5% in Q1 2021[110] New Vehicle Sales Performance New vehicle revenue increased by 40% and gross profit by 107% in Q1 2021, driven by higher units sold and improved margins from inventory shortages New Vehicle Performance (As Reported, in millions, except units) | Metric | Q1 2021 | Q1 2020 | Increase (Decrease) | % Change | | :-------------------------------- | :------ | :------ | :------------------ | :------- | | Total new vehicle revenue | $1,151.7 | $822.1 | $329.6 | 40% | | Total new vehicle gross profit | $75.5 | $36.4 | $39.1 | 107% | | Total new vehicle units | 27,259 | 21,977 | 5,282 | 24% | | Revenue per new vehicle sold | $42,250 | $37,407 | $4,843 | 13% | | Gross profit per new vehicle sold | $2,770 | $1,656 | $1,114 | 67% | | New vehicle gross margin | 6.6% | 4.4% | 2.2% | | New Vehicle Performance (Same Store, in millions, except units) | Metric | Q1 2021 | Q1 2020 | Increase (Decrease) | % Change | | :-------------------------------- | :------ | :------ | :------------------ | :------- | | Total new vehicle revenue | $949.8 | $781.1 | $168.7 | 22% | | Total new vehicle gross profit | $55.5 | $34.7 | $20.8 | 60% | | Total new vehicle units | 24,147 | 20,933 | 3,214 | 15% | | Revenue per new vehicle sold | $39,334 | $37,314 | $2,020 | 5% | | Gross profit per new vehicle sold | $2,298 | $1,658 | $640 | 39% | | New vehicle gross margin | 5.8% | 4.4% | 1.4% | | - Luxury new vehicle sales and gross profit increased by 87% and 164% respectively, partly due to the Park Place acquisition[119] - New vehicle days supply of inventory was approximately 34 days for March 31, 2021, about half the targeted supply, contributing to increased profitability[117] Used Vehicle Sales Performance Used vehicle revenue increased by 40% and gross profit by 82% in Q1 2021, driven by strong retail and wholesale performance and improved margins Used Vehicle Performance (As Reported, in millions, except units) | Metric | Q1 2021 | Q1 2020 | Increase (Decrease) | % Change | | :-------------------------------- | :------ | :------ | :------------------ | :------- | | Used vehicle revenue | $690.9 | $493.2 | $197.7 | 40% | | Used vehicle gross profit | $55.8 | $30.7 | $25.1 | 82% | | Used vehicle retail units | 23,519 | 20,287 | 3,232 | 16% | | Revenue per used vehicle retailed | $25,830 | $21,985 | $3,845 | 17% | | Gross profit per used vehicle retailed | $2,020 | $1,538 | $482 | 31% | | Used vehicle retail gross margin | 7.8% | 7.0% | 0.8% | | Used Vehicle Performance (Same Store, in millions, except units) | Metric | Q1 2021 | Q1 2020 | Increase (Decrease) | % Change | | :-------------------------------- | :------ | :------ | :------------------ | :------- | | Used vehicle revenue | $557.2 | $461.7 | $95.5 | 21% | | Used vehicle gross profit | $46.7 | $29.2 | $17.5 | 60% | | Used vehicle retail units | 20,740 | 18,979 | 1,761 | 9% | | Revenue per used vehicle retailed | $24,103 | $21,966 | $2,137 | 10% | | Gross profit per used vehicle retailed | $1,943 | $1,560 | $383 | 25% | | Used vehicle retail gross margin | 8.1% | 7.1% | 1.0% | | - Used vehicle retail gross margin increased by 80 basis points to 7.8% on an as-reported basis and 100 basis points to 8.1% on a same-store basis[122] - Used vehicle inventory ended Q1 2021 with a 27 days supply, below the targeted 35 days, indicating high demand[122] Parts and Service Performance Parts and service revenue increased by 18% and gross profit by 21% in Q1 2021, primarily from customer pay revenue, showing gradual improvement Parts and Service Performance (As Reported, in millions) | Metric | Q1 2021 | Q1 2020 | Increase (Decrease) | % Change | | :-------------------------------- | :------ | :------ | :------------------ | :------- | | Parts and service revenue | $262.0 | $221.6 | $40.4 | 18% | | Parts and service gross profit, excluding reconditioning and preparation | $128.2 | $105.3 | $22.9 | 22% | | Total parts and service gross profit | $163.1 | $134.9 | $28.2 | 21% | Parts and Service Performance (Same Store, in millions) | Metric | Q1 2021 | Q1 2020 | Increase (Decrease) | % Change | | :-------------------------------- | :------ | :------ | :------------------ | :------- | | Parts and service revenue | $212.4 | $211.1 | $1.3 | 1% | | Parts and service gross profit, excluding reconditioning and preparation | $101.2 | $100.6 | $0.6 | 1% | | Total parts and service gross profit | $130.5 | $128.6 | $1.9 | 1% | - Customer pay revenue increased by $33.7 million (23%) on an as-reported basis and $4.7 million (3%) on a same-store basis[124] - Parts and service gross profit, excluding reconditioning and preparation, increased by 22% as reported and 1% same-store[125] Finance and Insurance, net Performance F&I revenue, net, increased by 25% in Q1 2021, driven by higher new and used retail unit sales and improved gross profit per vehicle retailed Finance and Insurance, net Performance (in millions, except per vehicle data) | Metric | Q1 2021 | Q1 2020 | Increase (Decrease) | % Change | | :-------------------------------- | :------ | :------ | :------------------ | :------- | | F&I revenue, net (As Reported) | $88.3 | $70.4 | $17.9 | 25% | | F&I revenue, net per vehicle sold (As Reported) | $1,739 | $1,666 | $73 | 4% | | F&I revenue, net (Same Store) | $80.7 | $67.2 | $13.5 | 20% | | F&I revenue, net per vehicle sold (Same Store) | $1,798 | $1,684 | $114 | 7% | - F&I revenue, net, increased by $17.9 million (25%) year-over-year[127] - F&I PVR improved by $73 per unit (4%) on an as-reported basis and $114 per unit (7%) on a same-store basis[127] Selling, General, and Administrative Expense SG&A expense as a percentage of gross profit significantly decreased in Q1 2021 due to cost-cutting and higher gross profits, despite some cost increases SG&A Expense (As Reported, in millions) | Metric | Q1 2021 | % of Gross Profit (Q1 2021) | Q1 2020 | % of Gross Profit (Q1 2020) | Increase (Decrease) | % of Gross Profit Increase (Decrease) | | :-------------------------------- | :------ | :-------------------------- | :------ | :-------------------------- | :------------------ | :------------------------------------ | | Selling, general, and administrative expense | $239.8 | 62.7% | $194.7 | 71.5% | $45.1 | (8.8)% | SG&A Expense (Same Store, in millions) | Metric | Q1 2021 | % of Gross Profit (Q1 2021) | Q1 2020 | % of Gross Profit (Q1 2020) | Increase (Decrease) | % of Gross Profit Increase (Decrease) | | :-------------------------------- | :------ | :-------------------------- | :------ | :-------------------------- | :------------------ | :------------------------------------ | | Selling, general, and administrative expense | $199.8 | 63.8% | $185.1 | 71.3% | $14.7 | (7.5)% | - SG&A expense as a percentage of gross profit decreased by 880 basis points (from 71.5% to 62.7%) on an as-reported basis and 750 basis points (from 71.3% to 63.8%) on a same-store basis[129] - Personnel costs increased by $22.2 million and sales compensation by $10.0 million, primarily due to the Park Place acquisition and increased sales commissions[129] Franchise Rights Impairment A $23.0 million pre-tax non-cash impairment charge for franchise rights was recorded in Q1 2020 due to COVID-19, with no similar charge in Q1 2021 - A $23.0 million pre-tax non-cash impairment charge was recognized for certain franchise rights during the three months ended March 31, 2020[130] - The impairment in Q1 2020 was a direct result of a quantitative impairment analysis triggered by the COVID-19 pandemic[130] - No impairment charge was incurred in Q1 2021 due to the absence of triggering events[130] Other Operating Expense, net Other operating income, net, was $3.2 million in Q1 2021, primarily from legal settlements, contrasting with a $10.2 million expense in Q1 2020 - Other operating income, net, was $3.2 million for the three months ended March 31, 2021, primarily from a $3.5 million gain on legal settlements[131] - In Q1 2020, other operating expense, net, was $10.2 million, including an $11.6 million charge related to the termination of the 2019 Park Place acquisition agreement[131] Floor Plan Interest Expense Floor plan interest expense decreased by 59% in Q1 2021, primarily due to lower LIBOR and reduced new vehicle inventory levels Floor Plan Interest Expense (in millions) | Metric | Q1 2021 | Q1 2020 | Increase (Decrease) | % Change | | :-------------------------------- | :------ | :------ | :------------------ | :------- | | Floor plan interest expense | $2.9 | $7.0 | $(4.1) | (59)% | - The decrease was primarily a result of a decrease in LIBOR and lower new vehicle inventory levels[132] Loss on Extinguishment of Debt, net In Q1 2020, the company recorded a total loss on extinguishment of long-term debt of $20.6 million from redeeming notes and writing off debt issuance costs - In Q1 2020, a $19.1 million loss was recorded on the extinguishment of $600 million 6% Notes due 2024, comprising an $18.0 million redemption premium and $1.1 million write-off of unamortized premium and debt issuance costs[132] - An additional $1.5 million write-off of unamortized debt issuance costs occurred in Q1 2020 due to the special mandatory redemption of Senior Notes following the termination of the 2019 Asset Purchase Agreement for Park Place[133] Gain on Dealership Divestitures, net In Q1 2020, the company recorded a net pre-tax gain of $33.7 million from the divestiture of seven franchises and one collision center - A net pre-tax gain of $33.7 million was recorded in Q1 2020 from the sale of one franchise in Atlanta, Georgia, and six franchises and one collision center in Jackson, Mississippi[134] Income Tax Expense Income tax expense increased by $22.0 million in Q1 2021 due to higher income before taxes, with an effective tax rate of 22.3% Income Tax Expense (in millions) | Metric | Q1 2021 | Q1 2020 | Increase (Decrease) | % Change | | :-------------------------------- | :------ | :------ | :------------------ | :------- | | Income tax expense | $26.6 | $4.6 | $22.0 | 478% | - The effective tax rate for Q1 2021 was 22.3%, compared to 19.1% in Q1 2020[135] - The company expects its effective tax rate for 2021 to be around 25%[135] Liquidity and Capital Resources As of March 31, 2021, the company had $551.3 million in total available liquidity and believes it has sufficient funds for the next twelve months - Total available liquidity as of March 31, 2021, was $551.3 million, consisting of $27.8 million cash, $145.4 million in floor plan offset accounts, $239.2 million in revolving credit facility availability, and $138.9 million in used vehicle revolving floor plan facility availability[136] - Management believes there will be sufficient liquidity to meet debt service, working capital, commitments, acquisitions, and capital expenditures for at least the next twelve months[137] Material Indebtedness The company's material indebtedness includes the 2019 Senior Credit Facility, manufacturer-affiliated floor plan facilities, Senior Notes, and various real estate facilities - The 2019 Senior Credit Facility includes a $250.0 million Revolving Credit Facility (with $239.2 million available as of March 31, 2021), a $1.04 billion New Vehicle Floor Plan Facility, and a $160.0 million Used Vehicle Floor Plan Facility (with $138.9 million available)[138][139][140] - The company has $405.0 million aggregate principal amount of 4.50% Senior Notes due 2028 and $445.0 million aggregate principal amount of 4.75% Senior Notes due 2030 outstanding[145][146] - As of March 31, 2021, mortgage note obligations totaled $78.0 million, collateralized by associated real estate[146] Covenants The company was in compliance with all customary operating and restrictive covenants in its debt and lease agreements as of March 31, 2021 - As of March 31, 2021, the company was in compliance with all covenants in its various debt and lease agreements[150] Share Repurchases and Dividend Restrictions The Board authorized a $100 million share repurchase program, with $9.6 million in employee share settlements in Q1 2021, subject to debt covenants - On January 27, 2021, the Board of Directors increased the share repurchase authorization to $100.0 million[151] - During Q1 2021, the company repurchased 61,893 shares of common stock for $9.6 million from employees for net share settlement of equity-based awards[152] - Share repurchases and dividends are permitted as long as the Consolidated Total Leverage Ratio does not exceed 3.0 to 1.0; as of March 31, 2021, this condition was met[150] Cash Flows Net cash provided by operating activities increased in Q1 2021, while adjusted operating cash flow decreased, and investing and financing activities resulted in net outflows Cash Flow Summary (in millions) | Metric | Q1 2021 | Q1 2020 | | :-------------------------------- | :------ | :------ | | Net cash provided by operating activities (as reported) | $210.8 | $127.7 | | Net cash provided by operating activities (as adjusted) | $54.4 | $164.9 | | Net cash used in investing activities | $(3.7) | $45.2 (provided) | | Net cash used in financing activities | $(180.7) | $212.2 (provided) | - The $110.5 million decrease in 'cash provided by operating activities, as adjusted' was primarily due to a $166.5 million decrease related to higher accounts receivable and contracts-in-transit, and a $45.0 million decrease related to inventory changes[158] - Capital expenditures (excluding real estate) were $11.2 million in Q1 2021, with an expected total of $55.0 million for 2021[159] Off Balance Sheet Arrangements The company had no off-balance sheet arrangements during the periods presented, other than disclosed letters of credit and surety bonds - No off-balance sheet arrangements existed other than those disclosed in Note 12, which include $10.8 million of letters of credit and a $9.7 million surety bond line as of March 31, 2021[86][164] Critical Accounting Policies and Estimates The company's critical accounting policies and estimates remained materially unchanged during Q1 2021, consistent with the prior fiscal year - Critical accounting policies and estimates have not materially changed during the three months ended March 31, 2021[165] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to interest rate risk on its $496.4 million variable interest rate debt, using interest rate swaps to mitigate potential impacts - As of March 31, 2021, the company had $496.4 million of total variable interest rate debt[167] - A 100 basis point change in interest rates could result in a $5.0 million change to total annual interest expense[167] - The company uses four interest rate swap agreements to hedge against fluctuations in one-month LIBOR, all qualifying for cash flow hedge accounting[168] Interest Rate Risk The company's interest rate risk stems from variable rate debt and floor plan assistance, mitigated by interest rate swap agreements hedging LIBOR fluctuations - Floor plan assistance reduced cost of sales by $13.8 million in Q1 2021, up from $9.4 million in Q1 2020, but future amounts may be negatively impacted by interest rate changes[167] Interest Rate Swap Agreements Attributes (as of March 31, 2021, in millions) | Inception Date | Notional Principal at Inception | Notional Value as of March 31, 2021 | Notional Principal at Maturity | Maturity Date | | :------------- | :------------------------------ | :---------------------------------- | :----------------------------- | :------------ | | July 2020 | $93.5 | $90.5 | $50.6 | December 2028 | | July 2020 | $85.5 | $82.8 | $57.3 | November 2025 | | June 2015 | $100.0 | $73.7 | $53.1 | February 2025 | | November 2013 | $75.0 | $48.0 | $38.7 | September 2023 | Item 4. Controls and Procedures Disclosure controls and procedures were effective as of March 31, 2021, with no material changes in internal control over financial reporting during the quarter - The principal executive officer and principal financial officer concluded that disclosure controls and procedures were effective as of March 31, 2021[170] - Management acknowledges that control systems provide only reasonable assurance and have inherent limitations[170] Disclosure Controls and Procedures Disclosure controls and procedures were evaluated and deemed effective as of March 31, 2021, ensuring timely and accurate information reporting - Disclosure controls and procedures were evaluated and found effective as of March 31, 2021, ensuring information is recorded, processed, summarized, and reported within specified time periods[170] Changes in Internal Control Over Financial Reporting There were no material changes in the company's internal control over financial reporting during the quarter ended March 31, 2021 - No material changes in internal control over financial reporting occurred during the quarter ended March 31, 2021[171] PART II—Other Information This section covers legal proceedings, risk factors, unregistered sales of equity securities, and exhibits filed with the Form 10-Q Item 1. Legal Proceedings The company is routinely involved in various legal claims and proceedings, establishing loss contingency reserves, with no material adverse effects anticipated - The company is involved in various claims and legal proceedings, including financial audits, compliance with lender rules, and government regulations[172] - Loss contingency reserves are established for probable and reasonably estimable outcomes, and no material adverse effect on financial condition, liquidity, or results of operations is currently anticipated[173] Item 1A. Risk Factors The company faces material risks from disruptions in new vehicle and parts production due to supplier shortages, impacting inventory and revenue - Disruptions in new vehicle and parts production from manufacturers due to shortages of key components like semiconductor chips and rubber-based products pose a material adverse risk[175][176] - The company relies exclusively on vehicle manufacturers for new vehicle and parts inventory, making its profitability highly dependent on their operations and timely delivery[175] - Prolonged shortages could have a material adverse effect on the company's business, results of operations, financial condition, and cash flows[176] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The Board authorized a $100 million share repurchase program, with $9.6 million in employee share settlements in Q1 2021, leaving $100 million authorized - On January 27, 2021, the Board of Directors authorized a $100.0 million share repurchase program[177] - During Q1 2021, the company repurchased 61,893 shares of common stock for $9.6 million from employees in connection with net share settlement of equity-based awards[177] - As of March 31, 2021, $100.0 million remained authorized for repurchases under the program[178] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including CEO and CFO certifications and XBRL interactive data files - Exhibits include CEO and CFO certifications under Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[180] - XBRL interactive data files (Instance, Schema, Calculation, Definition, Label, Presentation Linkbase Documents, and Cover Page Interactive Data File) are also included[180] Signatures The report was signed by the CEO and CFO on April 27, 2021, certifying its submission pursuant to the Securities Exchange Act of 1934 - The report was signed by David W. Hult, CEO and President, and Patrick J. Guido, SVP and CFO, on April 27, 2021[183]