Group 1 Automotive, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Group 1 operates automotive dealerships in the U.S., U.K. and Brazil. Unless noted otherwise, financial amounts below are in millions of U.S. dollars.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $3,700.4 | $2,131.2 | $6,710.5 | $4,822.0 |
| Gross profit | $661.3 | $358.8 | $1,151.9 | $775.3 |
| Income from operations | $265.8 | $79.0 | $418.5 | $148.9 |
| Net income | $191.0 | $30.2 | $292.9 | $60.0 |
| Diluted EPS | $10.35 | $1.63 | $15.88 | $3.25 |
| Gross margin | 17.9% | 16.8% | 17.2% | 16.1% |
- Q2 revenue rose 73.6% and gross profit rose 84.3% year over year. Results benefited from strong demand, higher vehicle prices and margins, and the reopening of U.K. showrooms; the comparison period was affected by COVID-19 restrictions.
- Q2 SG&A was $376.7 million, or 57.0% of gross profit, versus $237.2 million and 66.1% a year earlier. Six-month SG&A was $695.2 million, or 60.3% of gross profit, versus 72.9%.
- Q2 floorplan interest expense was $8.8 million and other interest expense was $13.7 million. For the first six months, they were $16.4 million and $27.5 million, respectively, both lower year over year.
- Six-month GAAP operating cash flow was $752.1 million; management’s adjusted measure was $359.4 million. The difference primarily reflects floorplan financing classification and inventory-related cash movements. Investing cash outflow was $93.8 million and financing cash outflow was $547.1 million.
Financial position and liquidity
- At June 30, 2021, cash was $198.7 million, including $100.1 million held in manufacturer-affiliated demand notes. A further $326.1 million was held in floorplan offset accounts. Reported working-capital surplus was $417.9 million.
- Immediate liquidity was $779.5 million: $198.7 million cash, $326.1 million in floorplan offsets and $254.7 million available under the Acquisition Line.
- Long-term debt was $1.322 billion, including current maturities; total debt before issuance costs and current classification was $1.392 billion. Net floorplan notes payable were $498.5 million. The $550 million 4.00% senior notes mature in August 2028.
- The company reported compliance with debt covenants at quarter-end: total adjusted leverage ratio 1.71 against a maximum of 5.50, and fixed-charge coverage 5.35 against a minimum of 1.20.
Changes, outlook and key risks
- The global semiconductor shortage sharply constrained new-vehicle supply: inventory was about 20 days’ supply at quarter-end, versus 52 days at December 2020 and 61 days a year earlier. Management expected low inventory levels through the remainder of 2021 and warned that continued shortages could limit sales and adversely affect results.
- Higher vehicle prices and gross profit per unit supported results, but those gains depend on tight supply and strong demand and may not persist. Used-vehicle inventory availability is also a risk.
- Management said it had adequate cash flow and borrowing capacity for operations, capital spending and acquisitions over the next 12 months, based on then-current conditions. It forecast 2021 capital expenditures of approximately $110 million, excluding real estate purchases and future acquisitions. Expected effective tax rate for the remainder of 2021 was 22.5%–23.5%.
- The company acquired two U.S. Toyota dealerships for $49.9 million in the first half. In July, it announced the acquisition of seven U.K. dealerships for approximately $36 million. Management estimated annualized revenues of $420 million for the U.S. and U.K. acquisitions combined.
- Other risks include COVID-19 and economic conditions, manufacturer dependence, currency movements, interest-rate exposure, changes to U.K. dealer distribution models, and litigation or manufacturer chargebacks. No legal proceedings were identified as reasonably expected to have a material adverse effect.
- Q2 2020 included a $10.6 million out-of-period stock-compensation expense adjustment, which reduced net income by $9.7 million and diluted EPS by $0.53. 2020 also included $23.8 million of asset impairments and a $10.4 million debt-extinguishment loss; these items affect year-over-year comparability.
Investor verification points
- Track semiconductor-related vehicle supply, inventory days, sales volumes and whether elevated new- and used-vehicle margins continue.
- Reconcile GAAP operating cash flow with management’s adjusted cash-flow measure and assess how inventory and floorplan financing affect cash generation.
- Monitor debt, liquidity, covenant headroom, interest-rate swaps and the expected reclassification of $9.8 million of accumulated swap losses into earnings over the next 12 months.
- Verify completion and integration of the announced U.K. dealership acquisition, its contribution to results, and the company’s planned capital spending and shareholder returns.
- Consider that 2020 comparisons reflect COVID-related closures and unusual expenses; reported growth is not solely a measure of normalized underlying performance.