Group 1 Automotive, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing is an annual report, not a standalone fourth-quarter filing; quarterly figures are included below where relevant. Group 1 operated 238 franchises across 183 dealerships and 47 collision centers in the U.S., U.K. and Brazil.
Financial performance
| Metric | FY 2018 | FY 2017 | Change / context |
|---|---|---|---|
| Revenue | $11.60 billion | $11.12 billion | +4.3% |
| Gross profit | $1.73 billion | $1.65 billion | +4.8%; gross margin 14.9% vs. 14.8% |
| Operating income | $341.1 million | $341.9 million | Nearly flat; operating margin 2.9% vs. 3.1% |
| Income before taxes | $205.4 million | $219.0 million | Pretax margin 1.8% vs. 2.0% |
| Net income | $157.8 million | $213.4 million | Down 26.1%; diluted EPS $7.83 vs. $10.08 |
| Operating cash flow | $270.0 million | $196.5 million | Company-adjusted, non-GAAP operating cash flow was $309.8 million vs. $282.3 million |
- Revenue growth reflected acquisitions and stronger used retail, parts and service, and finance and insurance revenue; same-store revenue declined 0.7%.
- New vehicle retail revenue was $6.18 billion; used retail revenue was $3.17 billion; parts and service revenue was $1.42 billion; finance, insurance and other revenue was $467.5 million.
- FY 2018 same-store new vehicle retail units fell 5.9%, while used retail units rose 7.8%. Parts and service same-store revenue grew 2.8%, and finance and insurance same-store revenue grew 5.3% (3.4% after the company’s adjustment for Hurricane Harvey-related reserve activity).
- Fourth-quarter revenue was $2.91 billion, gross profit $432.1 million, net income $30.7 million and diluted EPS $1.62.
Cash, debt and liquidity
- Year-end cash and cash equivalents were $15.9 million; the company also had $33.7 million of immediately available funds applied against floorplan facilities. Working capital was $15.8 million, down from $130.7 million a year earlier.
- Net cash used in investing activities was $168.0 million, including $135.3 million of acquisition payments and $141.0 million of property and equipment purchases, partly offset by $107.9 million of disposition proceeds. Capital expenditures were $110.1 million, excluding real estate purchases.
- Floorplan notes payable totaled $1.68 billion at year-end. Long-term debt, including its current portion, was $1.37 billion. Long-term debt to capitalization was 55%, unchanged from 2017.
- U.S. credit facilities had $664.5 million of stated availability at year-end, subject to borrowing-base calculations and covenants. The company reported covenant compliance; its total adjusted leverage ratio was 3.80 against a maximum of 5.50, and fixed-charge coverage was 2.42 against a minimum of 1.20.
- Net cash used in financing activities was $109.5 million, including $183.9 million of share repurchases and $20.9 million of dividends. The company repurchased 2.85 million shares during 2018 for $181.7 million and had $49.7 million remaining under its authorization at year-end.
Material changes and unusual items
- Net income comparisons are affected by the prior-year $73.0 million tax benefit from the 2017 U.S. tax-law change. The effective tax rate was 23.2% in 2018 versus 2.5% in 2017; management’s adjusted 2017 rate was 35.7%.
- FY 2018 included $43.9 million of non-cash asset impairments, principally $38.7 million of franchise-right impairments, compared with $19.5 million in 2017. Goodwill impairment testing did not indicate a charge.
- Dealership and real estate transactions generated a $25.2 million pretax gain in 2018. The company also recorded a $5.0 million pretax net loss associated with legal settlements and $5.3 million of insurance deductibles and related expenses, primarily from U.S. hail damage.
- U.K. new vehicle sales were affected by supply constraints tied to the new WLTP emissions testing rules and uncertainty surrounding Brexit. In the U.S., comparisons were affected by unusually strong replacement demand in Houston and Beaumont following Hurricane Harvey in late 2017. Brazil revenue translation was adversely affected by a weaker real.
- The company adopted ASC Topic 606 in 2018. Adoption increased opening retained earnings by $11.4 million; the company reported 2018 net income $4.0 million higher than it would have been without the new standard. Prior-year results were not restated.
Outlook, management commentary and risks
- Management’s 2019 priorities are growing higher-margin parts and service, improving customer experience, and raising operating efficiency. It intends to pursue selective acquisitions and portfolio dispositions, without setting a numeric acquisition target.
- Management expected a 2019 effective tax rate of approximately 23.0%–23.5% and capital expenditures of no more than $120 million, excluding future acquisitions. It stated that cash flow and borrowing capacity should be adequate for 2019 operations, capital expenditures and acquisitions, while noting that weaker conditions or changed plans could require additional capital-market funding.
- Key exposures include vehicle demand and credit availability, manufacturer supply and franchise relationships, interest rates and substantial floorplan financing, used-vehicle valuation, foreign exchange, Brexit and U.K. regulation, Brazil’s economic conditions, potential tariffs, competition, cyber incidents, environmental obligations, and litigation or manufacturer chargebacks.
- A 100-basis-point interest-rate increase was estimated to raise annual interest expense by about $9.3 million after considering swaps. The company had $1.9 billion of variable-rate borrowings at year-end and did not hedge its foreign-currency exposure.
- From January 1, 2019, the company expected lease-accounting adoption to add approximately $200 million–$300 million of operating lease liabilities and similar right-of-use assets to its balance sheet.
Important facts for investors to verify
- How much of reported earnings growth or decline reflects underlying dealership operations versus the prior-year tax benefit, impairment charges and disposition gains?
- Whether same-store new vehicle volume and margins stabilize, and whether growth in used retail, parts and service, and finance and insurance is sustained.
- Floorplan and other debt balances, facility availability, covenant headroom, and the cash demands of repurchases, dividends, acquisitions and capital spending.
- The assumptions supporting franchise-right valuations and the effects of further currency weakness, U.K. supply disruption or a deterioration in Brazil.
- The actual balance-sheet and financial-statement effects of lease-accounting adoption, and any developments in legal matters, manufacturer chargebacks or environmental contingencies.