Group 1 Automotive, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; comparisons are against the corresponding 2020 periods. Amounts are in U.S. dollars. Group 1 operates dealerships in the U.S., U.K. and Brazil.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $3,509.2 million | $3,039.6 million | $10,219.7 million | $7,861.7 million |
| Gross profit | $653.2 million | $512.0 million | $1,805.1 million | $1,287.2 million |
| Gross margin | 18.6% | 16.8% | 17.7% | 16.4% |
| Operating income | $246.8 million | $187.1 million | $665.3 million | $336.0 million |
| Net income | $172.1 million | $126.4 million | $465.0 million | $186.4 million |
| Diluted EPS | $9.33 | $6.83 | $25.21 | $10.08 |
- Q3 revenue increased 15.4%, gross profit 27.6%, and net income 36.2% year over year. New-vehicle retail sales were nearly flat, while used-vehicle retail sales rose 44.0%; parts and service revenue rose 13.8%.
- For the first nine months, revenue grew 30.0% and gross profit 40.2%. SG&A was $1,080.3 million, up 24.0%; SG&A as a share of gross profit improved to 59.8% from 67.7%.
- Q3 new-vehicle gross margin increased to 10.6% from 6.3%; used-vehicle retail margin eased to 7.9% from 8.2%. Higher vehicle prices and margins amid constrained supply supported results.
- Nine-month operating cash flow under U.S. GAAP was $1,117.5 million, versus $712.7 million. Management’s adjusted operating cash flow measure was $593.8 million versus $358.3 million; the difference reflects floorplan financing classification and inventory-related cash movements. Inventory reductions generated a substantial cash inflow.
Balance sheet, debt and liquidity
- At September 30, 2021, cash was $296.9 million; cash plus floorplan offset balances was $631.6 million. Including $282.3 million of available Acquisition Line capacity, reported immediate liquidity was $913.9 million.
- Total debt was $1,342.4 million, including $550 million of 4.00% senior notes due 2028; long-term debt, net of current maturities and issuance costs, was $1,276.3 million. The company reported $83.8 million of net floorplan notes payable to credit facilities and other lenders and $234.2 million payable to manufacturer affiliates.
- Working capital surplus was $524.7 million, compared with $161.5 million at December 31, 2020. Management stated it expected adequate cash flow and borrowing capacity for operations, capital expenditures and acquisitions over the next 12 months.
- The company reported compliance with debt covenants: total adjusted leverage ratio 1.54 versus a maximum of 5.50, and fixed-charge coverage ratio 5.81 versus a minimum of 1.20.
Material changes and management commentary
- Global semiconductor shortages sharply reduced new-vehicle availability. Company-wide new-vehicle supply was about 14 days at quarter-end, versus 41 days a year earlier and 52 days at December 2020. Management expected low inventory through the remainder of 2021 and into the first half of 2022.
- U.S. Q3 same-store revenue grew 13.0%; new-vehicle unit sales declined 14.3%, while used-vehicle units rose 9.0%. U.K. same-store revenue fell 8.8% reported and 14.6% at constant currency, reflecting vehicle shortages and comparisons with reopening-related demand in 2020. Brazil revenue rose as operations reopened and demand improved after pandemic restrictions.
- Management’s stated priorities included acquisitions, digital retailing, used-vehicle growth, parts and service, cost productivity, employee retention and securing vehicle inventory. U.S. AcceleRide online retail unit sales increased 67.8% in Q3 year over year.
- No broad earnings or revenue forecast was provided. Management expected a 22.5%–23.5% effective tax rate for the remainder of 2021 and forecast approximately $100 million of 2021 capital expenditures, excluding real estate purchases and future acquisitions.
Acquisitions, unusual items and risks
- In September, Group 1 agreed to acquire substantially all assets of Prime Automotive Group, comprising 30 dealerships, 43 franchises and three collision centers, for approximately $880 million, excluding sellers’ floorplan repayment and subject to adjustments and manufacturer rights of first refusal. The transaction was expected to close in November 2021. A $20 million deposit had been placed in escrow. The company said financing would combine cash, credit lines and debt.
- After quarter-end, Group 1 issued an additional $200 million of 4.00% senior notes for approximately $199.7 million net proceeds and acquired three U.S. dealerships for approximately $66.8 million. It also reported earlier 2021 acquisitions costing $74.6 million.
- Q3 included $1.7 million of U.S. asset impairments, $3.8 million of Brazilian debt-extinguishment loss, acquisition costs, Hurricane Ida expenses, favorable legal-settlement gains and a non-cash interest-rate-swap gain. Nine-month results also included winter-storm expenses, dealership transaction gains/losses and a $1.4 million non-cash swap loss. These items affect comparability.
- Key risks include prolonged chip shortages and inability to meet vehicle demand; dependence on manufacturers and possible changes to U.K. agency sales models; pandemic and economic conditions; foreign-exchange exposure; and acquisition execution, financing, manufacturer approvals and integration. For Prime, manufacturer approval is not a condition of closing; dealerships not approved may need to be sold, potentially at a loss. The filing also cites possible purchase-price increases from inventory value changes.
- No legal proceedings were identified as reasonably expected to have a material adverse effect. The company disclosed $25.4 million of estimated lease obligations for sold dealerships for which it remained a guarantor, with $4.3 million of related letters of credit held as collateral support.
Important facts for investors to verify
- Whether vehicle production and inventory recover as expected, and how normalized supply affects selling prices, gross profit per unit and margins.
- Prime acquisition closing, final purchase price, manufacturer approvals, financing mix, integration costs and realized benefits.
- Whether reported cash generation persists after inventory-driven cash releases and floorplan financing movements; distinguish GAAP cash flow from management’s adjusted measure.
- Debt, covenant headroom and liquidity after the Prime transaction and subsequent note issuance, including sensitivity to interest rates and foreign exchange.
- Whether strong used-vehicle and finance-and-insurance profitability, and the improvement in SG&A leverage, are sustainable.