Group 1 Automotive, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone fourth-quarter filing. Amounts are in U.S. dollars unless stated otherwise.
Business context
Group 1 operates franchised automotive dealerships in the U.S., U.K. and Brazil, selling new and used vehicles and providing parts and service, financing arrangements, and related insurance and service contracts. At year-end it had 186 dealerships: 119 in the U.S., 50 in the U.K. and 17 in Brazil. The U.S. represented about 76% of 2019 revenue.
Financial and operating performance
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $12,043.8 million | $11,601.4 million | +3.8% |
| Gross profit / gross margin | $1,816.0 million / 15.1% | $1,725.1 million / 14.9% | +5.3%; margin +0.2 percentage points |
| Operating income | $363.7 million | $341.1 million | +6.6% |
| Net income | $174.0 million | $157.8 million | +10.3% |
| Diluted EPS | $9.34 | $7.83 | +19.3% |
| Net cash from operating activities (GAAP) | $370.9 million | $270.0 million | +$100.9 million |
| Adjusted net cash from operating activities (non-GAAP) | $332.1 million | $309.8 million | +$22.3 million |
Revenue growth came from used-vehicle retail, parts and service, and F&I; new-vehicle retail revenue also rose despite slightly lower unit sales. New-vehicle gross profit declined 3.2%, while used-vehicle retail gross profit rose 8.3%, parts and service gross profit rose 7.4%, and F&I revenue rose 6.5%. SG&A increased 6.7% to $1,358.4 million and rose to 74.8% of gross profit from 73.8%, absorbing some gross-profit growth. The reported figures include acquisitions, dispositions and currency movements; same-store revenue grew 3.3% and same-store gross profit 4.8% (constant-currency growth was 4.5% and 5.7%, respectively).
By region, 2019 revenue was $9,184.2 million in the U.S., $2,413.7 million in the U.K. and $445.9 million in Brazil. U.S. gross profit increased 7.4%; U.K. gross profit declined 4.4% as reported (same-store gross profit declined 4.3% in constant currency); Brazil gross profit declined 0.6% as reported (same-store gross profit rose 3.8% in constant currency).
Fourth-quarter snapshot: Revenue was $3,111.4 million versus $2,908.8 million in Q4 2018; net income was $48.1 million versus $30.7 million; diluted EPS was $2.57 versus $1.62. Q4 2019 included $11.5 million of asset impairment charges.
Liquidity, debt and capital allocation
Year-end working capital was $94.0 million, compared with $15.8 million a year earlier. Cash and cash equivalents were $23.8 million; the company also reported $4.3 million of restricted cash and $110.9 million of immediately available funds held in floorplan offset accounts. U.S. credit facilities showed $701.8 million of available capacity, subject to facility terms and covenants. Management said available cash flow and borrowing capacity should fund 2020 operations, capital expenditures and acquisitions, while warning that weaker conditions or changed plans could require external funding.
Total debt, as defined in the selected financial data, was $1,491.2 million, up from $1,374.5 million; this excludes separately reported floorplan borrowings. Net floorplan notes payable totaled about $1,604.3 million. Total debt to capitalization was 54%, versus 56% in 2018. The company reported covenant compliance at year-end: adjusted leverage ratio 3.26 against a maximum of 5.50, and fixed-charge coverage 2.82 against a minimum of 1.20. Floorplan interest expense was $61.6 million; other net interest expense was $74.9 million.
GAAP investing cash outflow was $291.6 million, including $191.8 million of property and equipment spending and $143.2 million paid for acquisitions, partly offset by disposition proceeds. Financing cash outflow was $67.0 million. The company paid $1.09 per share in dividends during 2019 and repurchased 14,200 shares for $1.4 million. It forecast approximately $125 million of 2020 capital expenditures, excluding future acquisitions, and expected a 2020 effective tax rate of approximately 23.0%–23.5%.
Material changes, outlook and notable items
- Revenue rose 3.8% and gross profit 5.3%; net income improved from 2018, though it remained below the unusually high $213.4 million reported in 2017.
- Retail used-vehicle units increased 7.1%, while retail new-vehicle units declined 0.8%. Management attributed U.S. used-car growth in part to its Val-U-Line program and data-driven pricing.
- The company acquired eight dealerships in 2019 for $143.2 million and opened three; it disposed of dealerships and franchises and recorded a $5.0 million net pretax gain. Management described acquisitions as return-driven but set no absolute 2020 acquisition target.
- 2019 results included $22.2 million of total asset impairments, including $19.0 million of franchise-right impairments. The filing cites Brexit uncertainty and dealership performance in impairment assessments; no goodwill impairment was recorded.
- Hail and Tropical Storm Imelda caused $16.0 million of inventory impairment charges and $17.8 million of U.S. same-store SG&A costs associated with storm damage. The filing also reports a $1.4 million U.K. operating-lease asset impairment.
- The company adopted lease accounting Topic 842 in 2019, recognizing operating lease assets and liabilities; the filing says adoption had no material effect on operating results or cash flows. The $6.1 million cumulative-effect adjustment reduced opening retained earnings.
- Management emphasized used-vehicle growth, expanding parts-and-service capacity, digital retailing and cost discipline. AcceleRide was deployed to all U.S. dealerships; approximately 26% of U.S. service appointments were booked online in 2019.
- Key risks include U.K. Brexit and foreign-exchange exposure, economic and vehicle-credit conditions, manufacturer supply and franchise relationships, competition and margin pressure, floating-rate debt and LIBOR transition, tariffs, regulation, cybersecurity, weather events, and potential impairment of franchise rights. A 10% weakening of the pound would have reduced 2019 reported revenue by an estimated $219.4 million; a 10% weakening of the Brazilian real by $40.5 million.
- The filing reported no legal proceedings expected to have a material adverse effect, while noting that outcomes of current or future matters cannot be predicted. The independent auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether growth in used vehicles, parts and service, and F&I can continue to offset weaker new-vehicle volumes and the higher SG&A burden.
- How much of reported growth reflects acquisitions, currency movements or one-time items versus comparable dealership performance; review the company’s same-store and constant-currency reconciliations.
- Whether 2020 capital spending, acquisition plans, floorplan needs and debt maturities remain fundable under the company’s borrowing capacity and covenant limits.
- Potential further franchise-right impairments, particularly given the valuation sensitivity to revenue, margins, discount rates and U.K. conditions.
- The effects of Brexit, exchange rates and benchmark-rate changes on U.K. operations, reported results and borrowing costs.
- The full impact of storm-related losses, insurance recoveries and self-insured exposures; also monitor the $49.7 million reserve for F&I contract chargebacks.
- Whether post-year-end repurchases under the 10b5-1 plan and future dividends remain consistent with liquidity needs and debt covenants.