Group 1 Automotive, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; comparisons are with the corresponding 2019 periods. Group 1 operates 186 dealerships across the U.S., U.K. and Brazil.
Business context and results
COVID-19 restrictions sharply curtailed dealership activity, with closures and reduced operating capacity beginning in March. The U.K. showroom network reopened June 1; Brazil showrooms reopened in May with reduced hours. Results showed significant year-over-year declines in sales and earnings, partly offset by improved vehicle gross profit per unit and cost reductions.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $2,131.2 million | $3,005.7 million | $4,822.0 million | $5,814.1 million |
| Gross profit / margin | $358.8 million / 16.8% | $454.3 million / 15.1% | $775.3 million / 16.1% | $885.8 million / 15.2% |
| Operating income | $79.0 million | $97.1 million | $148.9 million | $183.9 million |
| Net income | $30.2 million | $49.2 million | $60.0 million | $87.9 million |
| Diluted EPS | $1.63 | $2.64 | $3.25 | $4.73 |
| Operating cash flow, U.S. GAAP | — | $688.2 million | $252.9 million |
- Q2 revenue fell 29.1%; new vehicle retail sales declined 32.1%, used vehicle retail sales 23.6%, parts and service 25.4%, and F&I 24.0%. Retail new units declined 37.1% and retail used units 23.2%.
- Gross margin rose to 16.8% from 15.1%, as higher new- and used-vehicle gross profit per unit and cost controls partly cushioned lower volumes. SG&A fell 30.0% in Q2; SG&A was 66.1% of gross profit versus 74.6% a year earlier.
- Six-month operating cash flow included a large working-capital benefit from lower inventory. The company’s adjusted operating cash flow, a non-GAAP measure that reclassifies floorplan cash flows, was $237.6 million versus $184.3 million.
- At June 30, cash was $72.7 million; working capital surplus was $59.5 million. Total immediate liquidity was $373.8 million, including cash, $107.8 million in floorplan offset accounts and $193.3 million of available Acquisition Line capacity.
- Long-term debt was $1,360.7 million, net of discounts, issuance costs and current maturities; total debt before those deductions was $1,422.6 million. Net floorplan notes payable totaled $1,054.3 million. Stockholders’ equity was $1,215.9 million.
Material changes and unusual items
- Q2 segment revenue was $1,831.1 million in the U.S., $263.5 million in the U.K. and $36.6 million in Brazil. The U.K. and Brazil reported pretax losses of $19.7 million and $12.8 million, respectively; U.S. pretax income was $74.8 million.
- The company recorded $23.8 million of asset impairments: $10.7 million of Brazil goodwill, $11.1 million of U.K. franchise rights, $0.1 million of Brazil franchise rights and $1.9 million of lease right-of-use assets in the U.K. and Brazil.
- A $10.6 million out-of-period stock-based compensation adjustment reduced Q2 net income by $9.7 million and diluted EPS by $0.53. Management said the effect on previously reported periods was not material.
- On April 2, the company redeemed $300 million of 5.25% senior notes due 2023, paying $307.9 million plus accrued interest and recording a $10.4 million extinguishment loss. Refinancing was expected to reduce annual interest expense by approximately $8.5 million.
- Cash dividends and share repurchases were suspended/canceled in April. The company repurchased $48.9 million of shares before canceling the program and paid $5.5 million in dividends in the first half.
Outlook, risks and contingencies
- Management expected Q3 used-vehicle and service operations to return to prior-year levels, while reduced new-vehicle inventory in the U.S. and U.K. was expected to constrain Q3 sales recovery and potentially persist until Q4. Demand and the pandemic’s duration remained uncertain.
- Management forecast 2020 capital expenditures of approximately $70 million, excluding real estate purchases and future acquisitions, and an effective tax rate of 23%–24% for the remainder of 2020.
- Management said liquidity was currently sufficient for operations, capital expenditures and acquisitions over the next 12 months, and anticipated no material liquidity or covenant-compliance issues. At June 30, leverage and fixed-charge coverage ratios were 2.99 and 3.42, against limits of less than 5.50 and greater than 1.20.
- COVID-19 remains a material risk to demand, operations, vehicle supply, liquidity and asset valuations. Further impairment charges are possible. The company also identifies foreign-exchange exposure, interest-rate/LIBOR transition risk, manufacturer concentration, and debt and covenant risks.
- No legal proceedings were identified as reasonably expected to have a material adverse effect. The company estimated $37.3 million of remaining lease obligations tied to previously sold dealerships for which it could be liable if purchasers fail to pay.
Important facts for investors to verify
- Whether sales volumes, vehicle inventory availability and parts-and-service activity recovered as projected after Q2, particularly in the U.K. and Brazil.
- How much of operating cash flow reflected temporary inventory and receivables reductions, and whether adjusted cash flow can be sustained.
- The ongoing effects of the $10.6 million stock-compensation adjustment, impairment assumptions and potential additional impairments.
- Debt refinancing costs and savings, available borrowing capacity, covenant headroom, and the status of dividends and share repurchases.
- Exposure to currency movements, LIBOR replacement, and the $37.3 million contingent lease obligations.