Group 1 Automotive, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Unaudited results. The company operates franchised dealerships and collision centers in the U.S., U.K. and Brazil, selling new and used vehicles, finance and insurance products, parts and services.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $2.889bn | $3.012bn | $8.693bn | $8.203bn |
| Gross profit | $435.1m | $431.4m | $1.293bn | $1.220bn |
| Operating income | $78.2m | $78.5m | $266.4m | $250.9m |
| Net income | $34.8m | $29.9m | $127.1m | $103.0m |
| Diluted EPS | $1.74 | $1.43 | $6.18 | $4.85 |
| Gross margin | 15.1% | 14.3% | 14.9% | 14.9% |
| Operating margin | 2.7% | 2.7% | 3.1% | 3.1% |
Cash flow and liquidity: Nine-month operating cash flow was $357.4m, versus $307.2m a year earlier; management’s adjusted, non-GAAP operating cash flow was $280.1m, up from $228.9m. Investing used $145.5m and financing used $204.2m. Cash and cash equivalents were $32.0m ($34.4m including restricted cash); reported working capital was $58.0m. U.S. revolving and Ford floorplan facilities had $858.6m of stated availability, subject to borrowing-base and covenant limits.
Debt: Long-term debt, including current maturities, was approximately $1.38bn. Vehicle floorplan financing is substantial: balance-sheet floorplan notes totaled about $1.57bn before offset accounts. The company reported compliance with credit-facility covenants; its total adjusted leverage ratio was 3.69 against a maximum of 5.50, and fixed-charge coverage was 2.46 against a minimum of 1.20.
Changes versus the prior comparable periods
- Q3 revenue fell 4.1%, while gross profit rose 0.9% and net income increased 16.4%. Nine-month revenue and gross profit each rose 6.0%; net income increased about 23%.
- Q3 new-vehicle retail units declined 9.8% overall and same-store units fell 12.7%. Used retail sales, parts and service, and finance and insurance helped offset the decline.
- Q3 same-store new-vehicle weakness reflected the comparison with Hurricane Harvey replacement demand in Houston and Beaumont in 2017, U.K. vehicle supply delays related to new emissions testing, and Brazil’s emphasis on margin over volume.
- Interest expense increased: Q3 floorplan interest was $14.7m versus $13.5m, and other interest expense was $19.1m versus $17.9m. Higher rates and borrowings contributed.
- The effective tax rate declined to 21.6% for Q3 and 23.3% for the nine months, from 36.6% and 35.7%, respectively, primarily reflecting the U.S. Tax Act.
Outlook, management commentary and notable items
- Management expected a 2018 effective tax rate of 23%–24% and capital spending below $120m, excluding real-estate purchases for acquisitions and lease buyouts. It expected continued positive operating cash flow and adequate liquidity for operations, capital expenditures and acquisitions for the remainder of 2018.
- Management cited U.S. industry new-vehicle sales growth of 0.3% for the first nine months. In the U.K., industry registrations fell 7.5%; management expected volatility and lower full-year 2018 industry sales than in 2017, citing Brexit uncertainty and WLTP-related supply constraints. Brazil registrations rose 13.1%, and management expected improving market conditions.
- Q3 included $23.2m of asset impairment charges, including $21.7m for franchise rights at two U.S. dealerships. Nine-month impairment charges were $27.4m. The company also recorded gains and losses on dealership or real-estate transactions, legal settlements and catastrophic events; its adjusted measures exclude certain such items and are non-GAAP.
- Adoption of Topic 606 increased Q3 net income by $3.5m and nine-month net income by $3.0m compared with balances calculated without the new standard. It also changed the timing of recognition for certain repair work and estimated retrospective finance-and-insurance commissions.
- Risks include interest-rate and foreign-exchange movements, manufacturer and inventory dependence, consumer demand, tariffs and trade restrictions, Brexit, and possible impairment of franchise or goodwill assets. A 100-basis-point rate change was estimated to alter annual interest expense by $9.1m after swaps, based on the period’s average borrowings. The company does not hedge foreign-currency exposure.
- No legal proceedings were identified as reasonably expected to have a material adverse effect. The company estimated $43.9m of remaining lease rental obligations on certain assigned or sublet dealership leases for which it may retain responsibility.
- The company repurchased $108.6m of shares in the first nine months, paid $16.0m in dividends, and repurchased 789,509 shares in Q3 at an average $69.77 per share. Subsequent to quarter-end, it repurchased a further $25.0m under a trading plan.
Important facts for investors to verify
- Whether the decline in same-store new-vehicle sales and U.K. supply constraints persist, and whether used-car and aftersales growth can offset them.
- The underlying earnings trend after considering the $27.4m nine-month impairments and other non-core items; compare GAAP results with the company’s non-GAAP adjustments.
- Floorplan and other debt exposure to rising interest rates, available borrowing capacity, covenant headroom, and the effect of manufacturer interest assistance.
- The assumptions and future revisions underlying Topic 606 estimates for retrospective finance-and-insurance commissions.
- Execution of the stated capital-spending outlook and the sustainability of share repurchases and dividends given liquidity, debt restrictions and lease-related exposures.