Group 1 Automotive, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless otherwise noted. The company operates automotive dealerships in the U.S., U.K. and Brazil. At quarter-end it had 118 U.S., 49 U.K. and 16 Brazil dealerships. Financial statements are unaudited.
Financial performance
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $3.010 billion | $2.691 billion |
| Gross profit / gross margin | $490.7 million / 16.3% | $416.5 million / 15.5% |
| Operating income | $152.7 million | $69.9 million |
| Net income | $101.9 million | $29.8 million |
| Diluted EPS | $5.52 | $1.61 |
| Cash from operating activities, GAAP | $239.3 million | $44.1 million |
| Adjusted operating cash flow, company-defined non-GAAP | $156.6 million | $51.9 million |
Revenue rose 11.9%; gross profit rose 17.8%; net income increased to $101.9 million from $29.8 million. Gross margin improved 0.8 percentage points to 16.3%. SG&A fell 2.9% to $318.4 million and declined to 64.9% of gross profit from 78.7%. Floorplan interest expense decreased 41.2% to $7.6 million; other interest expense fell 23.9% to $13.8 million.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $82.9 million at March 31, versus $87.3 million at December 31, 2020. The company also reported $244.8 million in floorplan offset accounts.
- Management reported total immediate liquidity of $610.9 million, including $283.2 million available on the Acquisition Line. Working capital surplus was $198.6 million.
- Total debt was $1.358 billion, including $550 million of 4.00% senior notes due 2028; balance-sheet long-term debt, net of current maturities and issuance costs, was $1.283 billion. Net floorplan notes payable totaled approximately $944.2 million.
- Operating cash flow under GAAP benefited from inventory reduction. The company’s adjusted measure, which reclassifies certain floorplan cash flows, was $156.6 million. Investing activities used $76.7 million, including $49.9 million for acquisitions and $37.3 million for property and equipment. Financing activities used $165.6 million under GAAP.
- The company was in compliance with debt covenants: total adjusted leverage ratio was 1.98 versus a maximum of 5.50, and fixed-charge coverage was 4.81 versus a minimum of 1.20.
Material changes and operating drivers
- U.S. revenue increased 19.8%, led by stronger new- and used-vehicle sales and higher prices and gross profit per unit. Same-store U.S. new and used retail gross profit per unit increased 44.4% and 42.2%, respectively.
- U.K. reported revenue fell 6.9% (13.9% lower on a constant-currency basis); showrooms were closed throughout Q1 under lockdown, while online sales and service operations continued. Reported gross profit increased 1.8%, but declined 4.1% on a same-store constant-currency basis.
- Brazil revenue declined 39.4% (24.9% lower on a constant-currency basis), amid COVID-related closures and weaker vehicle volumes. Higher gross profit per vehicle partly offset lower unit sales.
- Parts and service revenue declined 2.7% overall, including disruption from a severe Texas and Oklahoma winter storm. The company cited lower warranty and collision work, partly offset by customer-pay growth.
- Two U.S. Toyota dealerships were acquired for $49.9 million. The company also recorded a $1.0 million net pre-tax gain on U.S. dealership and franchise dispositions.
Outlook, risks and unusual items
- Management said liquidity was adequate for operations, capital expenditures and acquisitions over the next 12 months, based on current conditions; deterioration or changed spending plans could require additional capital.
- Management forecast approximately $110 million of 2021 capital expenditures, excluding real estate purchases and future acquisitions. It expected a 23%–24% effective tax rate for the remainder of 2021. No specific earnings or revenue guidance was provided.
- Global semiconductor shortages were reducing manufacturer production and vehicle availability. The company expected low inventory levels through the remainder of 2021; supply constraints supported selling prices and per-unit margins but could limit sales volumes and adversely affect results.
- COVID-19 remained a material operating risk, particularly due to U.K. showroom closures during the quarter and periodic closures in Brazil. Other disclosed risks include consumer demand, manufacturer production and incentives, interest rates, foreign-exchange movements, financing availability, and legal or regulatory matters.
- Q1 included $2.2 million of U.S. winter-storm expenses, a $1.0 million net gain on legal matters, and dealership/real-estate transaction gains or losses by segment. The company declared a $0.31-per-share dividend and made no share repurchases during the quarter.
- The company reported no legal proceedings expected to have a material adverse effect, while noting that outcomes of current or future matters cannot be predicted with certainty.
Important facts for investors to verify
- Whether semiconductor-related vehicle shortages persisted and how they affected inventory, unit sales, pricing and margins after Q1.
- Whether U.K. and Brazil operations recovered from lockdown-related disruption, and the continuing performance of parts and service.
- Cash-flow quality and the effect of inventory changes and floorplan reclassifications on GAAP and adjusted operating cash flow.
- Debt, covenant headroom, available borrowing capacity and the planned funding of acquisitions and capital expenditures.
- Whether unusually strong vehicle gross profit per unit and improved SG&A leverage were sustainable as supply and demand conditions changed.