Group 1 Automotive, Inc. — Q2 2019 Form 10-Q
Business and period: Quarterly report for the three and six months ended June 30, 2019. Group 1 operated 178 dealership locations and 47 collision centers across the U.S., U.K. and Brazil, selling new and used vehicles and providing parts, service, financing and related products. Results are seasonal and affected by economic conditions, vehicle supply, interest rates and exchange rates.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $3,005.7 million | $2,943.5 million | $5,814.1 million | $5,803.5 million |
| Gross profit | $454.3 million | $438.2 million | $885.8 million | $857.9 million |
| Operating income | $97.1 million | $109.2 million | $183.9 million | $188.2 million |
| Net income | $49.2 million | $56.5 million | $87.9 million | $92.3 million |
| Diluted EPS | $2.64 | $2.72 | $4.73 | $4.42 |
| Gross margin | 15.1% | 14.9% | 15.2% | 14.8% |
| Operating margin | 3.2% | 3.7% | 3.2% | 3.2% |
Q2 revenue rose 2.1% and gross profit rose 3.7%, while operating income and net income declined. SG&A grew faster than gross profit; reported SG&A was 74.6% of gross profit versus 70.3% a year earlier. For the first half, revenue was nearly flat, gross profit increased 3.2%, and net income declined 4.8%. Lower weighted-average shares helped lift first-half diluted EPS despite the net-income decrease.
Operating trends: Q2 total retail unit sales were approximately flat year over year, as fewer new vehicles were offset by higher used retail sales. New-vehicle gross margin fell to 4.5% from 4.9%; total used-vehicle margin rose to 5.7% from 5.6%. Parts and service revenue increased 5.6% as reported, while finance, insurance and other revenue increased 10.6%. Same-store parts and service revenue grew 7.9%, and same-store finance and insurance revenue grew 10.4%. Used-vehicle wholesale gross profit was approximately breakeven in Q2, compared with $0.2 million a year earlier.
Cash flow, balance sheet and financing
- Cash flow: Six-month GAAP operating cash flow was $252.9 million, down from $263.1 million. Management’s adjusted, non-GAAP operating cash flow, which reclassifies certain floorplan financing activity, was $184.3 million versus $185.7 million. Investing cash outflow was $71.6 million; financing cash outflow was $157.8 million. Cash, cash equivalents and restricted cash ended at $41.5 million; cash and cash equivalents alone were $37.7 million.
- Liquidity: Working capital was $26.8 million at June 30, up from $15.8 million at year-end. The company reported $760.1 million available under U.S. credit facilities, including availability on the revolving facility and Ford Credit facility; some borrowing availability may be constrained by covenants. Management said cash flow and borrowing capacity should be adequate for operations, planned capital expenditures and acquisitions through the remainder of 2019, subject to business conditions.
- Debt and inventory financing: Long-term debt and current maturities totaled $1.367 billion, excluding floorplan notes. Floorplan payables were $1.556 billion, comprising $1.130 billion of credit-facility and other floorplan debt and $426.5 million from manufacturer affiliates. The revolving credit facility was amended June 27, extending maturity to June 27, 2024; the U.S. facility had $637.6 million available at quarter-end. Covenant tests were met: total adjusted leverage ratio 3.33 versus a maximum of 5.50, and fixed-charge coverage 2.52 versus a minimum of 1.20.
- Interest-rate exposure: The filing reports $1.8 billion of variable-rate borrowings. A 100-basis-point rate change was estimated to change annual interest expense by about $17.9 million before swaps and $8.9 million after swaps. Interest-rate swaps in effect had $901.6 million notional value and a 2.3% weighted-average fixed LIBOR rate.
- Capital returns: Six-month dividends were $9.7 million. No common-stock repurchases were reported for the first half of 2019; the board had authorized a remaining repurchase amount of $75 million, subject to discretion and debt restrictions.
Material changes, outlook and risks
- U.S. industry new-vehicle sales declined 2.3% in the first half; U.K. registrations fell 3.4%, while Brazil registrations rose 10.7%. U.K. new-vehicle sales faced Brexit uncertainty and supply constraints related to emissions-testing delays. Management said U.K. industry sales were expected to remain volatile in the near term.
- Management cited U.S. aftersales growth, used-vehicle retail initiatives including Val-U-Line, cost efficiencies and employee retention as priorities. In the U.K., it emphasized integrating acquisitions and growing used vehicles and aftersales; in Brazil, optimizing the brand portfolio and improving efficiency.
- Management forecast 2019 capital spending below $110 million, excluding real-estate purchases tied to franchise acquisitions and lease buy-outs. It expected a 2019 effective tax rate of 23%–24% and said consolidated operations were expected to continue generating positive cash flow. No earnings or revenue guidance was provided in the supplied filing text.
- Brexit was a prominent risk: tariffs, customs checks, supply disruption, regulatory changes and sterling volatility could affect U.K. sales, costs and U.S.-dollar reported results. The U.K. generated about 22% of first-half revenue. A 10% weakening of sterling or the Brazilian real would have reduced first-half reported revenue by an estimated $114.2 million or $19.6 million, respectively.
- Other disclosed risks include economic and consumer-credit deterioration, manufacturer concentration and vehicle availability, rising financing costs, foreign-exchange movements, cyber incidents, catastrophic events, regulation and litigation. The company reported no legal proceedings expected to have a material adverse effect, while noting outcomes of current or future matters cannot be assured.
- Unusual items and accounting: Q2 SG&A included $4.0 million of catastrophic-event costs. First-half SG&A included $6.0 million of catastrophic-event costs, $1.8 million of legal costs and a $1.1 million net gain on real-estate and dealership transactions. First-half dealership dispositions generated a $5.4 million pretax gain; the company opened two dealerships and disposed of seven during the period. Adoption of lease accounting on January 1, 2019 added operating lease assets and liabilities and reduced retained earnings by $6.1 million; management said adoption had no material effect on operating results or cash flows.
Important facts for investors to verify
- Whether aftersales and finance-and-insurance growth can continue to offset weaker new-vehicle volumes and lower new-vehicle margins.
- Whether SG&A growth, catastrophic-event costs and U.K./Brazil segment performance improve relative to gross-profit growth.
- The impact of Brexit, sterling and real exchange rates, U.K. vehicle supply, and manufacturer emissions-testing constraints.
- Floorplan and variable-rate debt exposure, covenant headroom, swap coverage and the distinction between GAAP and adjusted cash flow.
- Execution of the sub-$110 million capital-spending plan, use of available credit and any future acquisitions, dispositions, dividends or share repurchases.
- Lease obligations, including $216.9 million of operating lease liabilities at quarter-end and $41.5 million of assigned lease payments for disposed dealerships for which the company may remain liable if purchasers do not pay.