Group 1 Automotive, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparison is with Q1 2019 unless noted. The company operated 186 dealerships across the U.S., U.K. and Brazil. Results were significantly affected by COVID-19 disruptions beginning in March.
Financial performance
- Revenue: $2.691 billion, down 4.2% reported (3.2% on a constant-currency basis). U.S. revenue was $2.008 billion, U.K. $590.7 million and Brazil $92.5 million.
- Profit and margins: Gross profit was $416.5 million, down 3.5%; gross margin was 15.5%, versus 15.4%. Operating income was $69.9 million, versus $86.8 million. Net income was $29.8 million, versus $38.6 million; diluted EPS was $1.61, versus $2.08.
- Sales trends: Retail new units fell 9.0% and retail used units fell 5.3%. Same-store revenue declined 5.7%; same-store gross profit declined 5.2%. Higher F&I profit per retail unit partly offset weaker vehicle gross profit.
- Cash flow: Operating cash flow was $44.1 million, versus $127.9 million; management’s adjusted operating cash flow measure was $51.9 million, versus $132.0 million. Investing activities used $31.1 million; financing activities used $18.5 million.
- Liquidity: Cash was $19.2 million, plus $82.6 million in floorplan offset accounts. Management reported $359.6 million of immediate liquidity, including $257.8 million of available Acquisition Line capacity. Working capital was a $241.0 million deficit, mainly because $297.5 million of 5.25% notes was classified as current before its subsequent redemption.
- Debt: Total debt, excluding floorplan payables, was approximately $1.500 billion at March 31; floorplan payables were approximately $1.654 billion. The company reported covenant compliance: leverage ratio 3.31 versus a maximum 5.50, and fixed-charge coverage 2.92 versus a minimum 1.20.
Changes and notable items
- Compared with Q1 2019, revenue and earnings declined, with vehicle sales and gross profit pressured by lower demand; SG&A was broadly flat as reported. Lower interest rates and inventory levels reduced floorplan interest expense.
- Q1 included $4.8 million of additional used-vehicle inventory reserves, $0.4 million of additional expected-credit-loss reserves and $0.9 million of Brazil severance expense related to COVID-19.
- On April 2, the company redeemed $300 million of 5.25% Senior Notes for $307.9 million, plus accrued interest, funded with Acquisition Line borrowings, mortgage borrowings and cash. It reported a $10.4 million redemption loss and expected the refinancing to lower annual interest expense by approximately $8.5 million. It also entered into approximately $130 million of additional U.S. mortgage loans after quarter-end.
- The company repurchased 597,764 shares for $48.9 million and declared a $0.30 per-share dividend during Q1. On April 7, it canceled the repurchase program and suspended the dividend.
- No impairment of goodwill or franchise rights was identified at March 31; that conclusion depended partly on management’s assumption that pandemic effects would be temporary.
Outlook, commentary and risks
- Management expected Q2 results to be significantly below the prior year. It anticipated service to recover faster than vehicle sales, with recovery beginning in late spring and summer as restrictions eased; timing and extent remained uncertain.
- Full-year 2020 capital expenditures were forecast below $70 million, down from the prior $125 million forecast. The company expected a 2020 effective tax rate of 23%–24%.
- Cost and liquidity actions included furloughs or terminations across all regions, reductions in management and board compensation, substantial advertising cuts and deferred capital spending. Management stated it had adequate liquidity and did not anticipate material covenant or liquidity constraints, based on conditions then known.
- Risks include continued closures and weak demand, vehicle and parts supply disruptions, uncertainty about economic recovery, oil-price exposure in Texas and Oklahoma, foreign-exchange movements, and potential impairment if recovery assumptions weaken. COVID-19-related business disruptions were stated to be uninsured.
Important facts for investors to verify
- Subsequent sales, service activity and operating results against management’s expectation of a significantly weaker Q2 and gradual recovery.
- Actual liquidity and borrowing availability after the note redemption and additional mortgage financing, including any covenant or facility limitations.
- Whether cost reductions, reduced capital spending and the dividend suspension adequately preserve cash if demand remains weak.
- Vehicle and parts inventory valuation, receivable-loss reserves, and the assumptions supporting the no-impairment conclusion.
- Effects of currency movements and interest-rate exposure, including the transition from LIBOR and the company’s interest-rate swaps.