Group 1 Automotive, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also reports unaudited fourth-quarter results. Group 1 operated 227 franchises across 173 dealerships and 48 collision centers in the U.S., U.K. and Brazil, selling vehicles and providing parts, service, financing and insurance products.
Financial performance and liquidity
- Revenue: $11.124 billion, up 2.2% from $10.888 billion in 2016. Gross profit was $1.646 billion, up 3.2%; gross margin rose to 14.8% from 14.7%.
- Profit: Operating income was $341.9 million, approximately flat with $340.2 million. Net income increased to $213.4 million from $147.1 million; diluted EPS rose to $10.08 from $6.67. The 2017 result included a provisional $73.0 million tax benefit from the Tax Cuts and Jobs Act. The company’s non-GAAP adjusted diluted EPS was $7.73.
- Margins and expenses: Operating margin was 3.1%, unchanged year over year; SG&A rose to 74.5% of gross profit from 73.4%. Adjusted operating margin was 3.4%, unchanged.
- Cash flow: GAAP operating cash flow was $198.9 million, versus $384.9 million in 2016. The company’s adjusted, non-GAAP operating cash flow was $284.7 million, versus $271.7 million. Investing activities used $312.6 million, including $109.1 million for acquisitions and $215.8 million for property and equipment, including real estate. Financing activities provided $121.5 million.
- Liquidity: Cash and cash equivalents were $28.8 million; working capital was $130.7 million. The company also had $109.0 million of immediately available funds applied against floorplan facilities. It reported $308.2 million available under the Acquisition Line, $306.7 million under the Floorplan Line and $169.5 million under the FMCC facility; availability is subject to facility terms and covenants.
- Debt and obligations: Long-term debt, including current maturities, was $1.358 billion. Floorplan notes payable were approximately $1.529 billion before offset accounts. The filing reports total indebtedness together with lease and other obligations of $3.652 billion. The company was in covenant compliance; its total adjusted leverage ratio was 3.83 against a maximum of 5.50.
- Capital returns: Dividends were $0.97 per share for 2017. The company repurchased 649,298 shares for $40.1 million, with $49.6 million remaining under its current authorization at year-end.
Changes versus 2016
- Revenue and gross profit grew, but same-store new-vehicle retail units declined 1.5% and same-store used-vehicle retail units declined 1.8%. Same-store parts and service revenue increased 5.1%, supporting growth in the higher-margin service business.
- New-vehicle gross margin held at 5.2%; total used-vehicle gross margin declined to 5.5% from 5.6%. Total gross margin improved modestly, while SG&A as a share of gross profit increased.
- Net income rose substantially, but the comparison is materially affected by the $73.0 million provisional tax benefit. The reported effective tax rate fell to 2.5% from 35.3%; management reported an adjusted 2017 rate of 35.7%.
- GAAP operating cash flow fell sharply, while management’s adjusted measure increased. Floorplan borrowing classification and changes in inventory and other working-capital items affect comparability; review the filing’s reconciliations when assessing cash generation.
- 2017 included $19.5 million in asset impairments, principally franchise rights, compared with $32.8 million in 2016. Hurricane Harvey and Irma contributed $8.8 million of SG&A charges and $6.6 million of finance-and-insurance chargeback reserves.
Outlook, commentary and risks
- Management expected a 2018 effective tax rate of approximately 23%–24%, subject to completion of its provisional Tax Act accounting. It forecast 2018 capital expenditures of no more than $140 million, excluding future acquisitions, and said available resources were adequate for current operations, planned capital spending and acquisitions.
- 2018 priorities include growing parts and service, improving new- and used-vehicle profitability, enhancing customer satisfaction and improving operating efficiencies. Management provided no fixed acquisition target, but expected to pursue acquisitions offering attractive returns.
- Management cited softness in energy-dependent U.S. markets, a 5.7% decline in U.K. industry vehicle registrations, currency fluctuations and Brexit uncertainty. Brazil’s vehicle market showed signs of recovery, but its economic outlook remained uncertain.
- Key risks include vehicle demand and credit availability, competition and margin pressure, dependence on manufacturers and franchise agreements, interest-rate and foreign-exchange exposure, high debt and restrictive covenants, integration of acquisitions, goodwill and franchise-rights impairments, environmental and regulatory obligations, cybersecurity, severe weather and changes in vehicle technology or ownership models.
- The company reported no legal proceedings reasonably expected to have a material adverse effect, while noting that litigation outcomes and manufacturer chargebacks cannot be predicted with certainty. Its 2017 goodwill tests passed, but it recorded franchise-rights impairments and disclosed sensitivity to valuation assumptions.
Most important facts for investors to verify
- How much of 2017’s earnings and EPS improvement is attributable to the one-time provisional tax benefit, and what final tax adjustments were recorded after year-end.
- Whether parts-and-service growth and vehicle gross margins can offset weaker same-store retail volumes and rising SG&A and floorplan interest costs.
- Cash generation using both GAAP cash flow and management’s adjusted measure, including the effects of inventory, floorplan financing and acquisition spending.
- Total debt, lease commitments, covenant headroom and the amount of borrowing capacity that is actually available under facility conditions.
- Exposure to U.S., U.K. and Brazilian economic conditions, currency movements, manufacturer concentration, impairments and hurricane-related costs.