Business context and reporting period
Group 1 Automotive, Inc. filed this Form 10-K for the fiscal year ended December 31, 2015. It operates franchised automotive dealerships in the U.S., U.K. and Brazil, selling new and used vehicles and providing parts, service, collision repair, financing and insurance products. At year-end, it operated 199 franchises at 152 dealership locations and 35 collision centers.
Financial performance
| Metric | 2015 | 2014 | Change / context |
|---|---|---|---|
| Revenue | $10.63 billion | $9.94 billion | Up 7.0% |
| Gross profit | $1.534 billion | $1.448 billion | Up 5.9% |
| Gross margin | 14.4% | 14.6% | Down 0.2 percentage points |
| Operating income | $278.3 million | $302.1 million | Down 7.9%, including higher impairment charges |
| Operating margin | 2.6% | 3.0% | Down 0.4 percentage points |
| Net income | $94.0 million | $93.0 million | Up slightly; 2014 included a $46.4 million debt-extinguishment loss |
| Diluted EPS | $3.90 | $3.60 | Up 8.3% |
| GAAP operating cash flow | $141.0 million | $198.3 million | Down; working-capital and inventory movements affected cash |
| Adjusted operating cash flow (non-GAAP) | $244.3 million | $207.1 million | Company-adjusted measure; see cash flow classification discussion |
New vehicle retail revenue rose 4.5%, used retail revenue 13.5%, parts and service revenue 5.4%, and finance and insurance revenue 11.5%. New vehicle retail gross margin fell to 5.1% from 5.4%; total used vehicle margin fell to 5.8% from 6.5%. Parts and service margin improved to 54.1% from 52.8%. SG&A was 73.1% of gross profit, versus 73.3%.
Quarterly results were uneven: fourth-quarter 2015 revenue was $2.673 billion and gross profit $380.1 million, but net loss was $33.4 million, or $(1.41) per diluted share. Fourth-quarter asset impairment charges were $85.7 million.
Debt, liquidity and capital allocation
At December 31, 2015, reported current assets were $2.203 billion and current liabilities $2.039 billion; working capital was $163.5 million. Cash and cash equivalents were $13.0 million. The company separately reported $136.3 million of immediately available funds held as offsets against floorplan borrowings.
Balance-sheet debt included approximately $1.519 billion of floorplan notes payable before offset accounts and $1.256 billion of long-term debt, including $550 million principal of 5.00% senior notes due 2022 and $300 million of 5.25% senior notes due 2023. The filing’s $3.637 billion total contractual obligations also includes estimated interest, operating and capital leases, letters of credit and purchase commitments; it is not a measure of debt alone.
Available U.S. credit capacity was reported at approximately $636.0 million across the revolving facility and Ford facility, including $136.3 million of immediately available funds in floorplan offset accounts. The $1.7 billion revolving credit facility matures in June 2018. The company reported compliance with financial covenants at year-end (total adjusted leverage ratio 3.78 versus a maximum 5.50; fixed-charge coverage 2.03 versus a minimum 1.35).
In December 2015, the company issued $300 million of 5.25% notes, using proceeds in part to repay acquisition-line borrowings and mortgages and for general purposes. It repurchased 1.18 million shares for $97.5 million during 2015 and paid $19.9 million in dividends ($0.83 per share). The board authorized a new $150 million repurchase program in February 2016.
Material changes and unusual items
- Brazil reported revenue of $518.3 million, down from $775.4 million, and a net loss of $63.6 million, compared with a $18.5 million loss in 2014. The company recorded a $55.4 million goodwill impairment and $12.0 million of franchise-right impairment in Brazil. Brazil’s economic recession, weaker auto demand and real depreciation contributed to the deterioration.
- Total 2015 pretax non-cash asset impairments were $87.6 million, including $30.1 million of franchise-right impairments ($18.1 million U.S. and $12.0 million Brazil) and $2.1 million related to real estate and other long-lived assets.
- Foreign currency translation was a material headwind: the average pound weakened 7.7% and the Brazilian real 41.6% against the U.S. dollar. The company reported a $56.0 million other comprehensive loss, primarily reflecting foreign currency translation.
- U.S. and U.K. vehicle markets strengthened, while Brazil registrations declined 25.6%. Consolidated growth also reflected acquisitions: three U.S. dealerships acquired in 2015 had estimated annualized revenue of $340 million at acquisition. Dispositions and franchise terminations represented approximately $115 million of annual revenue.
- U.S. and U.K. parts and service benefited from manufacturer recall work; management also cited higher retail volumes and operating initiatives. Used-vehicle wholesale operations produced a $1.9 million gross loss, versus $2.3 million gross profit in 2014.
Outlook, risks and contingencies
Management said it expected adequate cash flow and borrowing capacity to fund 2016 operations, capital expenditures and acquisitions, while noting that deteriorating conditions or changed plans could require external financing. Planned 2016 capital expenditures were no more than $150 million, excluding acquisitions. Management forecast an approximately 38% effective tax rate for 2016, compared with 48.4% in 2015. No numerical revenue or earnings guidance was provided.
Management’s stated priorities include growing parts and service, gaining vehicle market share, improving customer satisfaction and operating efficiency, and selectively acquiring or disposing of dealerships. Key risks include continued weakness in Brazil and foreign-exchange volatility; exposure to U.S. regions dependent on oil and gas; vehicle demand, credit availability and interest rates; manufacturer relationships and franchise terms; competitive pressure on vehicle margins; leverage, floating-rate debt and covenant restrictions; environmental and regulatory obligations; recalls; and cybersecurity or data breaches.
The filing states that the company was not party to legal proceedings expected to have a material adverse effect, while acknowledging that outcomes of ordinary-course claims cannot be predicted. It reported no known material environmental contingencies. Management and the auditor concluded internal control over financial reporting was effective as of year-end.
Important facts for investors to verify
- Whether Brazil’s operating performance and goodwill/franchise-right valuations stabilize, and whether further impairment charges arise.
- Whether growth in revenue translates into improved operating income and margins, particularly as new- and used-vehicle margins remain under pressure.
- How much reported cash generation depends on floorplan financing and inventory movements; compare GAAP cash flow with the company’s adjusted non-GAAP presentation.
- Debt maturity, available borrowing capacity, interest-rate exposure, covenant headroom and restrictions on dividends and repurchases.
- Whether 2016 capital spending, acquisitions, the tax-rate outlook and share repurchases proceed as management described, subject to board discretion and financing constraints.
- How much of parts and service growth is recall-driven versus recurring customer-pay demand, and the sustainability of manufacturer incentives and finance-and-insurance income.