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Group 1 Automotive: Revising Cash Flow Geography

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Posted by: Jack Ciesielski	1/31/2006 9:03 AM
An interesting non-reliance 8-K was filed this morning by Group 1 Automotive, one whose effects pertained mostly to the cash flow statement. "Floor plan financing" is a common practice in the auto dealer business: simply put, it's the financing of auto inventory with a third-party lender, as opposed to being financed by the auto manufacturer through trade payables. Trade payables that finance a purchase of inventory would be included in the operating section of the cash flow statement. Transactions involving floor plan financing belong in the financing section of the cash flow statement. Group 1 Automotive hadn't made the fine distinction between financings from its credit facility and its dealings with manufacturers in its balance sheet, and the lack of distinction carried through to the cash flow statement. In its filings, it revised the balance sheet classification of the two kinds of payables; in the revised cash flow statements, Group 1 pulled the floor plan financing effects out of the operating section and put them into the financing section. Result: cash from operations was lowered by $55 million for the year 2004; increased by $225 million for the year 2003; and lowered by $142 million in year 2002. Equal and opposite effects showed in the revisions to the financing cash flows. Group 1 is the second auto retailer noted to make this kind of change in January. Last week, a similar reclassification exercise was executed by United Auto Group, with similar effects on operating cash flows. What's driving the restatements? Probably a speech given by Joel Levine, the SEC's Associate Chief Accountant for the Division of Corporation Finance, at December's AICPA SEC/PCAOB confab. Levine set out the case that financings from sellers belong in operating cash flows, and financings from third parties belong in financing cash flows. Does it seem likely to spread? Maybe. While floor plan financing arrangements are typical in the auto dealer business, there simply aren't a lot of them in the publicly-traded domain. The same cash flow statement reporting principles would apply to any firm that might employ floor plan financing, and they don't necessarily have to be in the auto business. Keep watching.

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