Group 1 Automotive, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. The company operates franchised dealerships in the U.S., U.K. and Brazil, selling vehicles and providing finance and insurance products, parts, service and collision repair. Results are seasonal and acquisitions affect reported comparisons.
Financial performance
Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $2,823.2 | $2,800.6 | $8,214.0 | $7,959.9 |
| Gross profit | $406.7 | $398.4 | $1,205.9 | $1,153.8 |
| Operating income | $83.9 | $96.6 | $263.3 | $275.4 |
| Net income | $35.4 | $45.3 | $116.2 | $127.4 |
| Diluted EPS | $1.65 | $1.88 | $5.22 | $5.26 |
| Operating margin | 3.0% | 3.5% | 3.2% | 3.5% |
- Revenue increased 0.8% in Q3 and 3.2% year to date; gross profit increased 2.1% and 4.5%, respectively. U.K. acquisitions contributed materially to growth, while U.S. and Brazil revenue declined.
- Reported net income fell 21.9% in Q3 and 8.8% year to date. Adjusted diluted EPS, a non-GAAP measure, rose 2.6% to $1.96 in Q3 and 6.0% to $5.68 year to date; management attributed the per-share improvement partly to lower share counts following repurchases.
- Consolidated gross margin was 14.4% in Q3 and 14.7% year to date, up 0.2 percentage points in each comparison. SG&A was 73.5% of gross profit in Q3 and 73.9% year to date, versus 72.5% and 72.9% a year earlier.
- Parts and service revenue grew 5.3% in Q3 and 6.9% year to date. New-vehicle retail revenue declined 0.8% in Q3 but rose 1.6% year to date; used-vehicle retail revenue rose 2.2% and 5.7%, respectively.
- Brazil reported pretax losses of $0.9 million in Q3 and $3.1 million year to date. U.S. energy-market softness weighed on new-vehicle sales, while U.K. growth reflected acquisitions and operating performance, partly offset by sterling weakness.
Cash flow, debt and liquidity
- Nine-month GAAP operating cash flow was $386.6 million, up from $230.9 million. Management’s adjusted operating cash flow, a non-GAAP measure that adjusts for floorplan financing activity, was $237.8 million versus $229.8 million.
- Investing cash outflow was $157.0 million, including $57.3 million for acquisitions and $125.7 million for property, equipment and real estate purchases. Financing cash outflow was $222.1 million, including $127.6 million of share repurchases and $15.1 million of dividends.
- Cash and cash equivalents were $22.9 million at September 30; management also reported $82.2 million of immediately available funds used to pay down floorplan facilities. Working capital was $71.9 million.
- Long-term debt, including current maturities, totaled approximately $1.295 billion. The company also had substantial vehicle floorplan financing. Available capacity under U.S. credit facilities was reported at $864.2 million, subject to borrowing-base and covenant provisions.
- The revolving facility was amended in June: total commitment increased to $1.8 billion and maturity extended to June 2021. The company reported compliance with its covenants; actual total adjusted leverage was 3.88 against a maximum of 5.50, and fixed-charge coverage was 2.35 against a minimum of 1.20.
Outlook, commentary and notable items
- Management forecast 2016 capital spending below $125 million, expected continued positive cash generation, and described acquisitions as a continuing long-term growth strategy. It gave no specific earnings or revenue guidance.
- Management expected the U.K. market to be volatile and flat to slightly down in 2017, and Brazilian industry sales to remain under pressure through the rest of 2016 and into 2017. It expected a roughly 37% effective tax rate for the remainder of 2016.
- Brexit weakened sterling and created uncertainty about U.K. market conditions and regulation. The company does not hedge its foreign-currency exposure; a 10% average-rate devaluation would have reduced nine-month revenue by an estimated $121.4 million for sterling or $28.6 million for the Brazilian real.
- Q3 included $10.9 million of asset impairment charges, chiefly a $10.6 million write-down of two U.S. franchise rights. Other reported non-core items included catastrophic-event losses and a Brazil foreign transaction tax. Management noted continued impairment risk if market or operating assumptions deteriorate.
- Vehicle recalls and stop-sale orders affected inventory, including about 500 U.S. used vehicles awaiting repairs at quarter end. Higher interest expense, manufacturer concentration, consumer-credit availability, economic conditions and currency movements are additional risks.
- After quarter end, the company was notified it would receive approximately $13.2 million from Volkswagen’s dealer settlement relating to current and former ownership of seven U.S. dealerships; half was due immediately and the balance in 18 monthly installments. The filing said no pending legal proceeding was then expected to have a material adverse effect, while cautioning that outcomes remain uncertain.
Important facts for investors to verify
- Whether operating trends and margins improve as management pursues pricing discipline, cost efficiencies and parts-and-service growth, particularly in U.S. energy-dependent markets.
- How much reported growth and profit depends on U.K. acquisitions, and the continuing effects of Brexit and foreign-exchange movements.
- Whether Brazil’s operating losses and weak vehicle demand stabilize, and whether local currency and financing conditions worsen.
- Cash generation after floorplan adjustments, capital spending, acquisitions, dividends and repurchases; also monitor covenant headroom and debt costs.
- Potential further franchise or goodwill impairments, recall-related inventory restrictions, and the timing and receipt of Volkswagen settlement payments.