Group 1 Automotive, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. The company operates franchised dealerships and related vehicle financing, insurance, parts, service and collision businesses in the U.S., U.K. and Brazil. Results are unaudited.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $2,860.0 million | $2,518.8 million | +13.5% |
| Gross profit / gross margin | $419.8 million / 14.7% | $383.5 million / 15.2% | +9.4% profit; margin down 0.5 percentage point |
| Operating income / operating margin | $79.1 million / 2.8% | $80.1 million / 3.2% | Operating income down 1.3% |
| Net income | $35.8 million | $33.9 million | +5.5% |
| Diluted EPS | $1.70 | $1.58 | +7.6% |
| Cash dividends per common share | $0.26 | $0.24 |
Revenue growth included higher retail vehicle sales, parts and service, and finance and insurance revenue. Total retail vehicle units rose 10.8%, including a 14.7% increase in used retail units. However, SG&A increased 11.9%, faster than gross profit, and total gross margin narrowed. Same-store used-vehicle gross profit fell 8.4%, largely reflecting lower U.S. used-vehicle gross profit per unit. F&I revenue per retail unit increased to $1,451 from $1,386.
Cash flow, liquidity and debt
- GAAP operating cash flow was $148.8 million, versus $69.2 million a year earlier. On the company’s adjusted, non-GAAP basis—which reclassifies floorplan financing activity—operating cash flow was $102.5 million, versus $104.1 million.
- Investing cash outflow was $116.4 million, including $71.5 million paid for acquisitions, net of cash received, and $47.9 million of property and equipment purchases. Financing cash outflow was $27.5 million. Cash, cash equivalents and restricted cash ended at $34.6 million.
- Working capital was $146.0 million. The company also reported $98.4 million of immediately available funds held as paydowns of floorplan facilities; these are separate from reported cash.
- Long-term debt, net of current maturities, was $1.377 billion; total long-term debt including current maturities was $1.435 billion. Net floorplan notes payable were approximately $1.522 billion after the reported offset accounts.
- U.S. credit facilities had $814.2 million of available capacity, subject to borrowing-base and covenant limitations. The company reported compliance with applicable covenants; its total adjusted leverage ratio was 3.89 against a maximum of 5.50, and fixed-charge coverage was 2.31 against a minimum of 1.20.
Material changes, outlook and risks
- The company acquired five U.K. dealerships and two U.S. dealerships during the quarter, and opened a U.K. dealership. Aggregate consideration, including associated real estate and goodwill, was $76.6 million.
- Management expected 2018 capital spending below $130 million, excluding real-estate purchases associated with franchise acquisitions and lease buy-outs. It expected a full-year effective tax rate of 23%–24% and believed available cash flow and borrowing capacity would fund operations, capital expenditures and acquisitions for the remainder of 2018.
- Management cited improving U.S. industry registrations and energy-market conditions, but expected U.K. industry sales to remain volatile and potentially decline for full-year 2018. It anticipated continued improvement in Brazilian market conditions. The company described acquisition-led growth, used-vehicle expansion, and parts and service growth as priorities.
- Key exposures include changing consumer demand and credit availability, manufacturer incentives and vehicle supply, rising interest rates, foreign-exchange movements, and economic conditions in the U.K. and Brazil. A 100-basis-point rate change was estimated to change annual interest expense by about $9.7 million after swaps. A 10% currency devaluation would reduce quarterly revenue by an estimated $60.0 million for sterling or $10.1 million for the Brazilian real.
- The company adopted ASC 606 using the modified retrospective method. The adoption increased opening retained earnings by $11.4 million; its Q1 2018 impact was to reduce net income by $0.5 million versus balances without adoption. The 2017 comparative results were not restated. Accounting for certain Tax Act effects remained provisional at quarter-end.
- There were no legal proceedings identified as reasonably expected to have a material adverse effect, though the filing cautions that litigation and other contingencies could still produce adverse outcomes. The filing also notes operating-lease exposure; adoption of the new lease standard was expected to significantly affect the balance sheet.
Important facts for investors to verify
- Whether revenue growth can translate into improved operating profitability as SG&A rises and vehicle gross margins compress.
- Used-vehicle gross profit per unit, inventory levels and the results of the Val-U-Line retailing initiative.
- Cash generation on both GAAP and adjusted bases, and the effect of floorplan borrowing and repayments on reported cash flows.
- Acquisition integration, returns on dealership and real-estate investment, and progress against the capital-spending outlook.
- Debt covenant headroom, interest-rate sensitivity, foreign-exchange exposure, and the effects of lease-accounting adoption.
- The final Tax Act accounting and any revisions to estimates of variable F&I commissions under ASC 606.