Group 1 Automotive, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless stated otherwise. Amounts are U.S. dollars.
Business context and reporting period
Group 1 operates franchised automotive dealerships, collision centers and related finance, insurance, parts and service businesses in the U.S., U.K. and Brazil. At quarter-end it had 195 franchises at 150 dealership locations and 38 collision centers. The company reports three segments: U.S., U.K. and Brazil. Results are seasonal, and management cautions that Q1 performance is not necessarily indicative of the full year.
Financial and operating performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $2,432.9 million | $2,260.9 million | +7.6% |
| Gross profit | $363.9 million | $338.1 million | +7.6% |
| Operating income | $80.7 million | $70.6 million | +14.3% |
| Income before tax | $57.5 million | $49.2 million | +16.8% |
| Net income | $35.8 million | $31.3 million | +14.4% |
| Diluted EPS | $1.47 | $1.19 | +23.5% per MD&A |
| GAAP operating cash flow | $58.2 million | $133.2 million | -56.3% |
| Adjusted operating cash flow, non-GAAP | $51.7 million | $69.7 million | -25.8% |
Total gross margin was 15.0%, unchanged year over year; operating margin improved to 3.3% from 3.1%, and pretax margin to 2.4% from 2.2%. SG&A rose 5.4% to $271.5 million, but fell to 74.6% of gross profit from 76.2%. Parts and service gross margin rose to 53.4% from 52.6%; new vehicle retail margin eased to 5.2% from 5.3%, and total used vehicle margin declined to 6.7% from 7.2%.
Retail vehicle sales increased: new units were up 3.9% and used units up 11.6%. Finance and insurance revenue per retail unit rose to $1,366 from $1,294. Parts and service sales increased 4.8%. The filing reports basic EPS of $1.47 for 2015 and $1.29 for 2014; diluted EPS was $1.47 and $1.19, respectively. The diluted-share comparison reflects convertible notes and warrants included in 2014 but no longer outstanding in 2015.
Liquidity, debt and cash flows
Cash was $26.3 million at March 31, 2015, down from $41.0 million at year-end. Management separately reported $100.8 million of immediately available funds used to pay down floorplan facilities. Working capital was $165.4 million. Total assets were $4.10 billion and stockholders’ equity was $959.8 million.
Long-term debt, including current maturities, totaled approximately $1.147 billion: $69.3 million current and $1.078 billion non-current. The company also had substantial vehicle floorplan financing. The $1.7 billion revolving facility had $1.223 billion outstanding, including $1.054 billion on the floorplan line and $123.7 million of acquisition-line borrowings; reported available capacity was $476.5 million, including $150.6 million on the acquisition line. The separate $300 million FMCC facility had $117.0 million outstanding and $183.0 million available. The company reported compliance with debt covenants; actual senior secured leverage was 2.18 versus a maximum 3.75, total adjusted leverage 3.58 versus a maximum 5.50, and fixed-charge coverage 2.16 versus a minimum 1.35.
Investing activities used $71.8 million, including $50.1 million for acquisitions and $23.2 million for property and equipment, including real estate. Financing activities provided $2.0 million. Cash declined by $14.7 million, including a $3.0 million adverse currency effect. Dividends paid were $4.9 million and common-stock repurchases were $16.2 million. Q1 floorplan interest expense decreased to $9.3 million from $10.9 million, while other interest expense increased to $13.9 million from $10.5 million.
Material changes and management outlook
- Revenue and gross profit grew, supported by U.S. and U.K. operations, acquisition contributions, higher vehicle volumes and stronger parts and service and finance and insurance results.
- Brazil remained a headwind: local economic weakness, the end of a vehicle tax incentive and a weaker real weighed on reported results. Brazilian revenue was $134.8 million versus $178.5 million; the segment reported a pretax loss of $0.8 million.
- Average exchange rates weakened against the U.S. dollar: the pound by 9.1% and the Brazilian real by 21.0%. These movements reduced reported foreign-segment results.
- Management expected U.S. demand to benefit from improving economic conditions, projected sustainable U.K. growth, and expected Brazilian industry sales to be flat to down for the rest of 2015. It anticipated 2015 capital spending below $125 million, remained committed to acquisitions, and expected an effective tax rate of approximately 38% for the rest of 2015.
- Management said it expected adequate cash flow and borrowing capacity to fund operations, capital expenditures and acquisitions for the remainder of 2015, while noting that deterioration in business conditions or changes in spending plans could require additional capital-market funding.
Risks, contingencies and unusual items
Interest-rate exposure is partly hedged: swaps in effect totaled $563 million at a weighted average fixed rate of 2.5%; additional forward-starting swaps had $775 million aggregate notional value. A 100-basis-point rate change was estimated to change annual interest expense by $11.0 million after swaps, based on quarter-end variable-rate borrowings. Foreign currency exposure is not hedged. Other key risks include economic and consumer-credit conditions, manufacturer and inventory availability, competition and margins, acquisition execution, interest rates, foreign exchange, and the company’s ability to refinance or maintain covenant compliance.
Other comprehensive loss was $35.1 million, primarily reflecting a $30.6 million foreign-currency translation loss and a $4.5 million after-tax loss on interest-rate swaps; comprehensive income was $0.7 million despite net income of $35.8 million. The company reported no legal proceedings expected to have a material adverse effect, but noted ordinary-course litigation and manufacturer incentive, rebate and warranty chargeback exposure. Estimated rental-payment obligations on assigned or sublet leases were $2.6 million; the company said it had no known material environmental contingencies.
The exchange offer registration statement for the 5.00% senior notes due 2022 had not been declared effective as of May 8, 2015. If the exchange was not completed by June 2, 2015, additional interest could accrue, initially at 0.25% annually and increasing in successive 90-day periods up to 1.00%.
Important facts for investors to verify
- Reconcile the reported decline in GAAP and adjusted operating cash flow, including working-capital movements and floorplan financing presentation.
- Monitor debt levels, available borrowing capacity, covenant headroom, and the effect of interest-rate changes despite hedges and manufacturer assistance.
- Assess the sustainability of vehicle margins and the extent to which service growth and finance and insurance revenue offset competitive pricing.
- Track Brazil’s operating performance and currency exposure, and distinguish local-currency trends from reported U.S.-dollar results.
- Confirm completion timing and any additional-interest consequences of the 5.00% notes exchange offer, along with acquisition spending, capital expenditure and share-repurchase plans.