Group 1 Automotive, Inc. — Q3 2019 Form 10-Q
Business context and period. The company operates automotive dealerships in the U.S., U.K. and Brazil, selling new and used vehicles and providing parts, service, financing and insurance products. This unaudited filing covers the quarter and nine months ended September 30, 2019; financial amounts are in U.S. dollars unless stated otherwise.
Key financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $3,118.3 million | $2,889.1 million | $8,932.4 million | $8,692.5 million |
| Gross profit / margin | $465.6 million / 14.9% | $435.1 million / 15.1% | $1,351.4 million / 15.1% | $1,293.0 million / 14.9% |
| Operating income | $83.3 million | $78.2 million | $267.2 million | $266.4 million |
| Net income | $38.0 million | $34.8 million | $125.9 million | $127.1 million |
| Diluted EPS | $2.04 | $1.74 | $6.77 | $6.18 |
- Revenue drivers: Q3 revenue rose 7.9% reported (9.1% constant currency), with growth in new and used retail sales, parts and service, and finance and insurance. Nine-month revenue increased 2.8% reported (4.4% constant currency).
- Profitability: Q3 gross profit increased 7.0%, but gross margin declined 0.2 percentage points and SG&A rose 11.7%, faster than gross profit. Nine-month gross profit increased 4.5%; operating income was nearly unchanged and net income declined about 1%.
- Cash flow: Nine-month operating cash flow was $310.8 million, down from $357.4 million. Management’s adjusted, non-GAAP operating cash flow was $241.9 million versus $280.1 million. Investing activities used $193.5 million, including $139.5 million for property and equipment, and financing activities used $90.1 million.
- Liquidity: Cash and cash equivalents were $41.0 million; cash, cash equivalents and restricted cash totaled $44.6 million. Working capital was a deficit of $10.8 million, compared with a $15.7 million surplus at year-end 2018; the company attributed much of the change to lease-accounting adoption.
- Debt: Long-term debt and current maturities totaled $1,376.4 million before unamortized issuance costs. Net floorplan notes payable totaled approximately $1,610.3 million. U.S. credit facilities had $695.7 million of stated availability; the company reported compliance with financial covenants.
Material changes and operating developments
- U.S. Q3 same-store revenue grew 9.7%; used retail units increased 11.9% and parts-and-service revenue grew 9.6%. New-vehicle gross profit per unit declined, while SG&A as a share of gross profit increased.
- U.K. Q3 same-store revenue declined 2.3% reported but increased 3.2% on a constant-currency basis. Vehicle gross profit was pressured by economic uncertainty related to Brexit; nine-month same-store gross profit fell 9.9% reported.
- Brazil Q3 same-store revenue grew 9.5% reported (10.2% constant currency), led by used vehicles, but gross profit declined 2.9%.
- The company acquired six dealerships during the first nine months for $97.0 million and opened two awarded-franchise dealerships. It also disposed of dealerships and franchises, recording a net pre-tax gain of $5.0 million.
- Operating lease assets and liabilities were recognized following adoption of Topic 842 on January 1, 2019; the company recorded a $6.1 million cumulative adjustment to retained earnings. Comparative periods were not restated.
Outlook, risks and unusual items
- Management said it expected adequate cash flow and borrowing capacity to fund operations, capital expenditures and acquisitions for the remainder of 2019, subject to economic and business conditions. It forecast approximately $100 million of 2019 capital expenditures, excluding real estate purchases associated with acquisitions and lease buy-outs.
- Management expected a full-year 2019 effective tax rate of 23.0%–24.0%. No specific revenue or earnings guidance was provided.
- Q3 included $11.9 million of insurance-deductible expense associated with Tropical Storm Imelda flooding in Texas. Nine-month storm-related costs, including hail damage, were $17.8 million.
- Q3 asset impairments totaled $10.3 million, including $8.6 million of franchise-right impairments in the U.S. and U.K.; nine-month impairments totaled $10.8 million. The U.K. impairments reflected Brexit-related uncertainty, among other factors.
- Brexit remained a material risk: potential tariffs, supply-chain delays, weaker demand and sterling volatility could affect U.K. operations. The U.K. generated about 21% of nine-month revenue. The company does not hedge foreign-exchange exposure.
- Variable-rate borrowings were approximately $1.8 billion. After interest-rate swaps, a 100-basis-point rate change was estimated to change annual interest expense by about $9.0 million. The company had $25.2 million of immediately available funds applied to floorplan paydowns, in addition to reported cash.
- No legal proceedings were identified as reasonably expected to have a material adverse effect. The company estimated $39.9 million of remaining lease obligations on certain disposed dealerships for which it could be liable if purchasers do not pay.
Important facts for investors to verify
- Whether U.S. sales and aftersales growth can continue to offset weaker new-vehicle unit volumes and rising SG&A costs.
- Whether U.K. vehicle margins, demand and franchise values stabilize as Brexit uncertainty and currency effects evolve.
- The sustainability of operating cash generation, the use of management’s adjusted cash-flow measure, and funding needs for acquisitions and real estate investment.
- Debt and interest-rate exposure, available facility capacity, covenant headroom and restrictions on dividends or share repurchases.
- The extent of further storm-related costs, asset impairments, and potential liabilities under assigned dealership leases.
- Execution and financial impact of the company’s dealership acquisitions, used-vehicle initiatives and service-technician staffing programs.