Group 1 Automotive, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; unaudited. The company operates franchised dealerships and collision centers in the U.S., U.K. and Brazil. At quarter-end it had 200 franchises at 153 dealership locations and 35 collision centers.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $2,800.6 million | $2,626.4 million | $7,959.9 million | $7,398.9 million |
| Gross profit | $398.4 million | $374.7 million | $1,153.8 million | $1,082.0 million |
| Operating income | $96.6 million | $90.4 million | $275.4 million | $245.7 million |
| Net income | $45.3 million | $26.2 million | $127.4 million | $74.3 million |
| Diluted EPS | $1.88 | $1.03 | $5.26 | $2.82 |
| Gross margin | 14.2% | 14.3% | 14.5% | 14.6% |
| Operating margin | 3.5% | 3.4% | 3.5% | 3.3% |
- Q3 revenue rose 6.6% and gross profit 6.3%; nine-month revenue rose 7.6% and gross profit 6.6%. Retail unit sales increased, with acquisitions also contributing to growth.
- Parts and service and finance/insurance supported results, while new- and used-vehicle margins weakened. Q3 SG&A rose 9.4% to $289.0 million; SG&A was 72.5% of gross profit versus 70.5% a year earlier. Management attributed much of the expense increase to higher sales-related variable costs and noted a prior-year dealership-disposition gain.
- Q3 floorplan interest expense declined 7.3% to $9.7 million; other interest expense rose 5.1% to $13.9 million. For the nine months, those amounts were $29.0 million (down 8.4%) and $42.1 million (up 15.8%), respectively.
Cash flow, debt and liquidity
- Nine-month GAAP operating cash flow was $230.9 million, down from $271.8 million. Management’s adjusted, non-GAAP operating cash flow was $229.8 million, up from $215.1 million; the measures differ mainly in floorplan financing classification.
- Investing activities used $274.9 million, including $212.3 million of acquisition payments and $78.3 million of property and equipment purchases. Management forecast 2015 capital spending below $125 million.
- Cash and equivalents were $22.0 million at September 30, versus $41.0 million at December 31, 2014. Management also reported $48.1 million of immediately available funds used to pay down floorplan facilities. Working capital was $62.9 million.
- Long-term debt, including current maturities, was approximately $1.140 billion, compared with $1.081 billion at year-end. Floorplan notes, net of offset accounts, totaled approximately $1.477 billion. The company had $550 million principal of 5.00% senior notes due 2022.
- Available capacity under U.S. revolving and FMCC facilities totaled approximately $526.8 million, subject to borrowing-base and covenant terms. The company reported compliance with covenants; actual senior secured leverage was 2.05 against a maximum 3.75, total adjusted leverage 3.39 against a maximum 5.50, and fixed-charge coverage 2.10 against a minimum 1.35.
- Share repurchases were $66.7 million and dividends paid were $14.8 million in the first nine months. Q3 dividends were $0.21 per share. At quarter-end, $28.3 million remained under the $100 million repurchase authorization.
Material changes and management outlook
- Reported net income and EPS increased sharply versus 2014, when results included debt-extinguishment losses of $22.8 million in Q3 and $46.4 million for nine months. Lower diluted share counts also contributed to EPS growth.
- U.S. and U.K. vehicle markets improved. Management cited a U.S. industry SAAR of 17.2 million for the first nine months and expected the full-year 2015 rate to be 17.2 million. It saw opportunities in vehicle sales, parts and service, operating efficiency and acquisitions, but provided no specific earnings or revenue forecast.
- Management expected challenging Brazilian conditions and continued industry pressure into 2016. The Brazilian real’s average exchange rate weakened 55.7% against the U.S. dollar in Q3 year over year; sterling also weakened. Foreign exchange reduced reported results.
- Volkswagen’s emissions issue was identified as a potential business risk; Volkswagen, Audi and Porsche represented 7.0% of the company’s new-vehicle unit sales in the first nine months.
- The company completed three U.S. dealership acquisitions during the first nine months and remained committed to acquisitions, while scrutinizing capital spending. Results are seasonal and interim results may not indicate full-year performance.
Risks, contingencies and other items
- Interest-rate exposure: $1.651 billion of variable-rate borrowings; after swaps, a 100-basis-point rate change was estimated to affect annual interest expense by approximately $12.0 million. Swaps had $562.3 million notional in effect; additional forward-starting swaps totaled $650 million.
- Currency exposure is not hedged. Management estimated that a 10% devaluation in average sterling or Brazilian real exchange rates would have reduced nine-month revenue by $85.0 million or $35.9 million, respectively.
- Brazilian vehicle inventory financing carried annual rates of 16.77%–23.73%. Manufacturer-affiliate and other floorplan arrangements, acquisition borrowing needs, covenant limits and debt costs remain relevant liquidity considerations.
- No legal proceeding was identified as reasonably expected to have a material adverse effect, though the company cautioned that outcomes of current or future matters cannot be predicted. It reported no known material environmental contingencies.
- Management stated that disclosure controls were effective and that there were no material changes in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether operating gains persist after separating acquisition contributions, prior-year debt-extinguishment losses and the prior-year disposition gain.
- Whether vehicle gross-margin pressure and rising SG&A can be offset by parts/service and finance/insurance growth.
- Liquidity and covenant headroom after acquisitions, capital spending, dividends and repurchases, including the effect of floorplan borrowing.
- Brazil’s operating performance and currency impact, plus potential consequences of the Volkswagen emissions issue for affected franchises.
- Actual 2015 capital expenditures versus management’s below-$125-million expectation, and the company’s ability to sustain cash generation.