Group 1 Automotive, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016; unaudited. Group 1 operates franchised dealerships and related finance, insurance, parts, service and collision businesses in the U.S., U.K. and Brazil. At quarter-end it operated 161 dealership locations and 37 collision centers, with 212 franchises across 33 brands.
Financial performance
Amounts below are in millions of U.S. dollars except per-share data and percentages.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $2,782.4 | $2,726.5 | $5,390.8 | $5,159.3 |
| Gross profit | $410.1 | $391.6 | $799.2 | $755.5 |
| Operating income | $97.4 | $98.0 | $179.4 | $178.8 |
| Net income | $46.6 | $46.3 | $80.9 | $82.1 |
| Diluted EPS | $2.12 | $1.91 | $3.57 | $3.38 |
| Gross margin | 14.7% | 14.4% | 14.8% | 14.6% |
| Operating margin | 3.5% | 3.6% | 3.3% | 3.5% |
| Pretax margin | 2.5% | 2.7% | 2.3% | 2.5% |
- Revenue mix: Q2 new-vehicle retail revenue was $1,540.8; used retail $715.8; parts and service $322.1; and finance, insurance and other $107.6. Parts and service sales rose 6.2% in Q2 and 7.7% year to date.
- Cash flow: First-half GAAP operating cash flow was $172.9, versus $80.6 a year earlier; investing cash outflow was $107.9, versus $165.6; financing cash outflow was $55.3, compared with $69.9 of inflow. Management’s non-GAAP adjusted operating cash flow was $152.1, up from $137.0.
- Liquidity: Cash was $25.0 at June 30, plus $63.0 of immediately available funds used to pay down floorplan facilities. Reported working capital was $90.1. Available U.S. capacity was $241.9 on the floorplan line, $252.3 on the acquisition line and $141.0 on the Ford facility.
- Debt and interest: Long-term debt, net of current maturities, was $1,250.9; current maturities and short-term financing were $43.0. The company also had substantial vehicle floorplan financing. The revolving facility was amended to $1.8 billion and extended to June 2021. The company reported covenant compliance; total adjusted leverage was 3.89 against a maximum of 5.50, and fixed-charge coverage was 2.31 against a minimum of 1.20.
- Capital allocation: First-half share repurchases were $115.2 and dividends paid were $10.1. The quarterly dividend was $0.23 per share. After quarter-end, the company repurchased another 244,205 shares for $12.4.
Material changes versus prior year
- Q2 revenue rose 2.1% and gross profit rose 4.7%, but operating income declined 0.7%. Net income increased 0.6%; diluted EPS rose 11.0%, helped by a 9.6% reduction in weighted-average diluted shares.
- For the first half, revenue increased 4.5% and gross profit 5.8%, while operating income was nearly flat and net income declined 1.5%. Diluted EPS increased 5.6%, with shares down 6.9%.
- U.K. growth, including dealerships acquired in February, was a major contributor: segment revenue increased 51.8% in Q2 and 48.0% in the first half. U.S. Q2 segment revenue fell 3.5%, and Brazil fell 18.0%; reported results also reflected weaker sterling and Brazilian real exchange rates.
- SG&A increased 6.6% in Q2 and 7.4% year to date. Floorplan interest expense rose 15.8% in Q2 and 16.7% year to date, while other interest expense rose 17.4% and 19.5%, respectively. Higher inventory, acquired operations and interest on the 5.25% notes contributed to cost increases.
Outlook, commentary, risks and unusual items
- Management cited flat U.S. industry new-vehicle registrations in Q2, softness in energy-dependent U.S. markets and continued recessionary conditions in Brazil. It expected Brazilian auto sales to remain pressured through the remainder of 2016 and into 2017.
- Management’s priorities include improving vehicle gross profit per unit, growing parts and service, controlling costs and deploying capital selectively. It forecast 2016 capital spending below $135 million, expected an effective tax rate of approximately 37% for the remainder of 2016, and said it expected continued positive operating cash flow. No earnings or revenue guidance was provided.
- Management said current share repurchases appeared attractive relative to acquisitions, while retaining a longer-term acquisition strategy. The six-month period included acquisitions of 12 U.K. dealerships and one Brazil dealership, alongside two new Brazil dealerships; four Brazil dealerships were disposed of.
- Brexit created uncertainty around U.K. trading, currency and regulation. Sterling weakened following the vote; the company does not hedge its foreign-currency exposure. Brazil’s industry new-vehicle registrations fell 25.1% in the first half. A weaker currency can reduce reported results.
- Vehicle recalls and stop-sale instructions increased inventory and loaner-vehicle costs; about 600 U.S. used vehicles were awaiting recall repairs at June 30. Management said it did not then expect the Volkswagen emissions settlement or other identified recall matters to have a material impact, but their full effects were not known.
- First-half unusual items included $5.4 million of pretax catastrophic-event losses, $1.5 million of noncash impairment charges and $0.6 million of acquisition costs; a $1.7 million Brazil foreign deferred-tax benefit partly offset these items. The company reported $2.8 million of Q2 hail and flood-related losses in Texas.
- Interest-rate exposure remains material: a 100-basis-point rate change was estimated to change annual interest expense by about $11.0 million after swaps. Swap liabilities were $51.1 million. The filing identified no legal proceedings expected to have a material adverse effect, while noting ordinary-course litigation and indemnity/lease obligations.
Most important facts for investors to verify
- Whether U.S. new-vehicle demand, especially in energy-dependent markets, and Brazilian market conditions continue to weaken, and how that affects unit volumes and margins.
- Whether U.K. acquisition performance, Brexit-related currency movements and potential regulatory changes affect reported growth and profitability.
- Inventory aging and recall-related stop sales, floorplan borrowing costs, manufacturer assistance and the ability to keep operating margins from further deterioration.
- Debt covenant headroom, borrowing availability and the impact of interest-rate changes despite hedges; also assess the cash demands of buybacks, dividends, acquisitions and planned capital spending.
- How results compare on both GAAP and management’s non-GAAP adjusted basis; adjusted measures exclude selected items and are not GAAP measures.