Group 1 Automotive, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet figures are as of March 31, 2019. Comparisons are with Q1 2018 unless otherwise noted. The company operates franchised dealerships and collision centers in the U.S., U.K., and Brazil. Results are unaudited and subject to seasonal variation.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $2.808 billion | $2.860 billion | Down 1.8% |
| Gross profit | $431.5 million | $419.8 million | Up 2.8% |
| Gross margin | 15.4% | 14.7% | Up 0.7 percentage points |
| Operating income | $86.8 million | $79.1 million | Up 9.8% |
| Net income | $38.6 million | $35.8 million | Up 7.9% |
| Diluted EPS | $2.08 | $1.70 | Up 22.4% |
| Operating cash flow (GAAP) | $127.9 million | $148.8 million | Down 14.0% |
Revenue mix shifted: new vehicle retail sales fell 6.5%, while used retail sales rose 4.9% and parts and service sales rose 5.6%. Finance, insurance and other revenue increased 0.9%. Total vehicle sales declined 2.2%; used retail unit sales rose 7.2%, partly offsetting a 5.6% decline in new retail units. SG&A was $327.7 million, and SG&A as a share of gross profit improved to 75.9% from 77.3%. Floorplan interest expense rose to $15.7 million from $14.1 million; other interest expense was $18.9 million, broadly flat.
Management also reported non-GAAP adjusted diluted EPS of $2.06, compared with GAAP diluted EPS of $2.08. Adjustments included catastrophic-event costs, legal settlements, and gains on real estate and dealership transactions; investors should assess these measures alongside GAAP results.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $33.6 million; cash, cash equivalents and restricted cash totaled $36.9 million. The company also reported $98.7 million of immediately available funds used to pay down floorplan facilities.
- Total assets were $5.263 billion and stockholders’ equity was $1.128 billion. Working capital was negative $3.7 million, versus positive $15.8 million at December 31, 2018; management attributed much of the change to adoption of the new lease standard.
- Long-term debt, including current maturities, was $1.340 billion. Net floorplan obligations were approximately $1.601 billion after reported offset accounts; inventory financing is separate from the long-term debt figure. Operating lease liabilities totaled approximately $228.2 million.
- U.S. credit facilities had $739.1 million of stated available capacity, including floorplan and acquisition lines. The company reported compliance with covenants: total adjusted leverage ratio 3.70 against a maximum of 5.50, and fixed-charge coverage ratio 2.46 against a minimum of 1.20.
- GAAP investing cash flow was an outflow of $6.8 million and financing cash flow an outflow of $102.5 million. Capital expenditures, including real estate purchases, were $41.7 million; dividends paid were $4.8 million. No common shares were repurchased during the quarter.
Changes, outlook and risks
- U.S. industry new-vehicle sales fell 3.2%; the company’s same-store new-vehicle units fell 8.7%. Management said it prioritized gross profit per unit over new-vehicle volume. U.S. used retail growth included expansion of its Val-U-Line offering.
- U.K. new-vehicle registrations fell 2.4%. Brexit-related uncertainty and delays in vehicles meeting WLTP emissions requirements constrained supply, particularly for Audi, and currency movements reduced reported results. Brazil industry registrations rose 11.4%, but the company reported weaker same-store new-vehicle units and cited foreign-exchange effects and margin-over-volume choices.
- Same-store parts and service revenue increased 6.1%; management cited operating initiatives, technician retention and manufacturer recall work. Used retail gross profit also improved, while used wholesale gross profit declined sharply, including a loss per unit in the U.K.
- The company disposed of four dealerships representing seven franchises and recorded a $5.2 million pretax gain. It opened one dealership in each of the U.S. and U.K.; no acquisitions were completed in the quarter.
- Management expected 2019 capital spending below $110 million, excluding real estate purchases related to acquisitions and lease buyouts, and forecast a full-year effective tax rate of 23.5%–24.0%. It expected positive cash flow and adequate liquidity for operations, capital spending and acquisitions, based on current conditions. No specific revenue or earnings guidance was provided.
- Operating results are seasonal. Key risks include economic and vehicle-demand changes, interest rates and floorplan costs, manufacturer supply and incentives, Brexit and foreign-exchange volatility, Brazil conditions, tariffs, litigation, cybersecurity, and the ability to obtain financing. A 100-basis-point rate change was estimated to alter annual interest expense by about $9.6 million after swaps. The company does not hedge its foreign-currency exposure.
- The company adopted ASC 842 leases on January 1, 2019 without restating comparatives, adding about $236.7 million of operating lease assets and corresponding liabilities at adoption and recording a $6.1 million reduction to retained earnings. Adoption had no material impact on reported operations or cash flows.
- The filing reported no legal proceeding expected to have a material adverse effect, but noted that outcomes of current or future matters are uncertain. Estimated rental payment obligations on certain assigned or sublet leases were $43.4 million; the company said performance under them was not expected but could not assure there would be no material effect.
Investor verification priorities
- Reconcile GAAP and adjusted cash flow, including floorplan financing classifications, and assess the effects of working-capital movements.
- Track whether stronger used retail and parts-and-service performance offsets weaker new-vehicle volumes, wholesale results and higher floorplan interest.
- Monitor U.K. vehicle supply, Brexit and currency developments, as well as Brazil performance and foreign-exchange exposure.
- Review debt and floorplan availability, covenant headroom, interest-rate exposure, and the $83.2 million restricted-payment basket before evaluating dividends or buybacks.
- Consider the lease-accounting change when comparing balance sheets and liquidity with prior periods, and review the lease-related contingencies and non-GAAP adjustments.