Group 1 Automotive, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; comparisons are to the corresponding 2019 periods. The company operates 186 dealerships across the U.S., U.K. and Brazil.
Financial performance
| Metric | Q3 2020 | Q3 2019 | First nine months 2020 | First nine months 2019 |
|---|---|---|---|---|
| Revenue | $3,039.6 million | $3,118.3 million | $7,861.7 million | $8,932.4 million |
| Gross profit | $512.0 million | $465.6 million | $1,287.2 million | $1,351.4 million |
| Operating income | $187.1 million | $83.3 million | $336.0 million | $267.2 million |
| Net income | $126.4 million | $38.0 million | $186.4 million | $125.9 million |
| Diluted EPS | $6.83 | $2.04 | $10.08 | $6.77 |
- Q3 revenue fell 2.5%, while gross profit rose 10.0%; gross margin increased to 16.8% from 14.9%. SG&A declined 13.6% to $305.8 million, and SG&A was 59.7% of gross profit versus 76.0%.
- For the first nine months, revenue fell 12.0% and gross profit fell 4.7%; gross margin increased to 16.4% from 15.1%. SG&A declined 14.6% to $870.9 million.
- Q3 improvement reflected stronger vehicle gross profit per unit and cost controls, despite lower unit volumes. Retail new units fell 10.7% and retail used units fell 7.1% year over year. New and used gross profit per retail unit rose 47.4% and 41.1%, respectively.
- Regional performance diverged: Q3 U.K. revenue increased 26.7% as operations recovered; U.S. revenue declined 7.4%; Brazil revenue declined 51.1% (33.8% lower on a constant-currency basis).
Cash flow, debt and liquidity
- For the first nine months, GAAP operating cash flow was $712.7 million, compared with $310.8 million in 2019. Management’s adjusted operating cash flow, which reclassifies floorplan-related cash flows, was $358.3 million versus $242.0 million. The GAAP figure benefited substantially from inventory reductions.
- Investing cash outflow was $78.8 million, including $78.8 million of property and equipment purchases; financing cash outflow was $590.4 million. Cash and cash equivalents were $66.2 million at quarter-end.
- At September 30, total immediate liquidity was $466.0 million: $66.2 million cash, $126.7 million in floorplan offset accounts and $273.1 million of available Acquisition Line capacity. Working capital was a $104.6 million surplus.
- Long-term debt was $1.308 billion, with $65.8 million of current maturities. Floorplan notes payable, net, totaled approximately $1.086 billion ($771.3 million of credit-facility and other floorplan debt plus $314.8 million with manufacturer affiliates).
- The company issued $550 million of 4.00% senior notes due 2028 and redeemed $550 million of 5.00% notes due 2022; it also redeemed $300 million of 5.25% notes due 2023. Management expects the refinancings to reduce annual interest expense by approximately $16.3 million in total. The company reported covenant compliance, with actual leverage and fixed-charge coverage ratios of 2.54 and 3.91 against limits of less than 5.50 and greater than 1.20.
Outlook, risks and notable items
- Management said it expected used-vehicle and service operations in Q4 to approach prior-year levels, but low new-vehicle inventory in the U.S. and U.K. would likely constrain new-unit recovery. It expected stronger margins to offset much or all of lower volume and anticipated a more cost-efficient structure than before the pandemic.
- After the quarter, the U.K. announced a lockdown of non-essential businesses, including vehicle showrooms, from November 5 through December 2, 2020, subject to possible extension. Dealership service operations were to remain open; management expected the restriction to adversely affect U.K. Q4 vehicle sales.
- COVID-19 disruption, manufacturer production and inventory constraints, further restrictions, consumer demand, currency movements and possible additional goodwill or franchise-rights impairments remain significant uncertainties. The company recorded $23.8 million of asset impairments in the first nine months, including $10.7 million of Brazil goodwill and $11.2 million of franchise-rights impairments; none were recorded in Q3.
- Other notable items included a $13.7 million year-to-date loss on debt extinguishment and a $10.6 million Q2 out-of-period stock-compensation adjustment, which reduced Q2 net income by $9.7 million. The adjustment was assessed as not material to previously reported periods.
- Management forecast 2020 capital expenditures of approximately $80 million, excluding real-estate purchases and future acquisitions, and an effective tax rate of 23%–24% for the remainder of 2020. It said current liquidity was adequate for the next 12 months and did not anticipate material liquidity or covenant constraints.
- The company suspended its dividend and canceled its prior repurchase program in April. On October 5, the board authorized a new $200 million share repurchase program. On October 30, the credit agreement was amended to permit an additional $30 million of annual restricted payments if the specified leverage condition is met.
- No legal proceedings were identified as reasonably expected to have a material adverse effect. The company disclosed $29.7 million of remaining rental obligations for leases guaranteed after dealership sales, with $5.7 million of related letters of credit held as collateral support.
Investor verification priorities
- Confirm the durability of Q3 vehicle gross-profit-per-unit gains and whether supply constraints, pricing and demand persist.
- Track the duration and sales impact of the U.K. lockdown and any further COVID-19 restrictions across the company’s markets.
- Assess operating cash generation excluding inventory and floorplan movements; reconcile GAAP and management-adjusted cash-flow measures.
- Monitor debt, available borrowing capacity, covenant headroom and the realized interest savings from refinancing.
- Review assumptions supporting goodwill and franchise-rights valuations, particularly in Brazil and the U.K., and the conditions for repurchases and any dividend resumption.