Business context and reporting period
Group 1 Automotive, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2013. The company operates franchised dealerships and collision centers in the U.S., U.K. and Brazil, selling new and used vehicles, parts and services, and finance and insurance products. Results are seasonal; the second and third quarters are generally stronger.
At quarter-end, the company reported 179 franchises at 141 dealership locations and 35 collision centers. Brazil operations began with the February 2013 acquisition of UAB Motors.
Financial results and key metrics
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $2,340.1 million | $1,976.6 million | $6,639.1 million | $5,537.1 million |
| Gross profit | $329.5 million | $291.2 million | $971.2 million | $837.0 million |
| Operating income | $72.9 million | $67.1 million | $212.2 million | $184.1 million |
| Net income | $32.8 million | $31.3 million | $92.3 million | $83.1 million |
| Diluted EPS | $1.19 | $1.32 | $3.52 | $3.50 |
| Gross margin | 14.1% | 14.7% | 14.6% | 15.1% |
Q3 revenue rose 18.4%, gross profit 13.1%, operating income 8.8% and net income 4.6% year over year. Nine-month revenue rose 19.9%, gross profit 16.0%, operating income 15.3% and net income 11.1%. Diluted EPS fell in Q3 despite higher net income, as weighted-average diluted shares increased 17.3%, principally from potential conversion of convertible notes and related warrants.
For the first nine months, new vehicle retail unit sales increased 22.6% and used vehicle retail unit sales increased 14.9%. Growth reflected acquisitions, stronger U.S. demand, improved U.K. conditions and higher same-store sales. The overall gross-margin decline reflected a greater mix of lower-margin vehicle sales and foreign operations. New-vehicle retail margin was 5.3% in Q3 versus 5.8% a year earlier; same-store new-vehicle margins also weakened amid competitive pricing.
Parts and service revenue increased 13.5% in Q3 and 14.5% for the nine months. Same-store parts and service gross margin was 53.3% in Q3, up from 52.5%. SG&A was 74.9% of gross profit in Q3, versus 74.2%, reflecting expense growth, acquisition mix and other costs.
Cash flow, debt and liquidity
GAAP operating cash flow was $129.0 million for the nine months, compared with cash used of $7.3 million in 2012. Management’s adjusted, non-GAAP operating cash flow was $147.1 million, down 12.7% from $168.5 million. Inventory growth used $108.0 million of cash. Adjusted investing cash outflow was $93.7 million, including acquisitions and capital investment; adjusted financing cash outflow was $29.4 million. Cash at September 30 was $26.3 million, plus $47.7 million of immediately available funds applied to reduce floorplan borrowings.
Total assets were $3.41 billion and stockholders’ equity was $1.02 billion. Long-term debt, including current maturities, was $586.6 million; vehicle floorplan financing was substantially larger and is primarily tied to inventory. The company reported $123.5 million of working capital. Its amended revolving facility has $1.7 billion of capacity, with $471.8 million of floorplan availability and $227.7 million of acquisition-line availability at quarter-end. It reported compliance with applicable debt covenants.
Floorplan interest expense rose 34.6% in Q3 and 32.0% for the nine months, driven by higher borrowings, inventory and acquisitions. The company had $450 million of interest-rate swaps in effect, fixing one-month LIBOR at a weighted average 2.6%, and $525 million of forward-starting swaps. A 100-basis-point rate increase was estimated to raise annual interest expense by approximately $8.5 million after swaps, based on quarter-end variable-rate debt.
Material changes, outlook and risks
- The company acquired UAB Motors in Brazil and other dealerships, with aggregate consideration of $190.4 million, including $106.7 million cash and 1.39 million shares. The acquisitions increased goodwill and franchise rights and expanded the company’s exposure to Brazil.
- Dealership dispositions generated net gains of $1.4 million in Q3 and $10.4 million for the nine months. Nine-month SG&A included $6.5 million in acquisition costs; U.S. operations also recorded $12.2 million of catastrophic-event losses for the nine months. Debt extinguishment associated with acquired debt resulted in a $0.8 million loss.
- Management expected approximately $75 million of full-year 2013 capital spending and an effective tax rate of approximately 38% for the remainder of 2013, excluding specified acquisition and disposition tax effects. It expressed confidence in cash generation and available borrowing capacity to fund operations, capital spending and acquisitions; it gave no specific revenue or earnings forecast.
- Management cited improving U.S. vehicle demand and continued U.K. market strength, but expected Brazil industry sales to be flat in 2013 amid weaker recent sales, inflation, higher interest rates and currency depreciation. Management’s longer-term view of Brazil remained positive.
- Key risks include vehicle demand and consumer credit conditions, competitive pressure on vehicle margins, manufacturer concentration and inventory availability, interest-rate exposure, acquisition integration, and foreign-exchange, political, regulatory and economic risks—especially in Brazil. The company does not hedge its net investment in foreign operations.
- The filing reported no legal proceeding expected to have a material adverse effect, but noted ordinary-course litigation and potential manufacturer incentive, rebate and warranty chargebacks. Remaining rental obligations on certain assigned or sublet leases were estimated at $27.2 million; the company said exposure is difficult to estimate. No known material environmental contingencies were reported.
Important facts for investors to verify
- How much of reported growth and profitability came from same-store operations versus acquired dealerships, especially UAB Motors?
- Whether vehicle gross-margin pressure and rising SG&A and floorplan interest persist, and how effectively parts and service growth offsets them.
- Inventory levels, floorplan borrowing needs, adjusted versus GAAP operating cash flow, and available capacity under debt facilities and covenants.
- The potential dilution, refinancing or cash requirements associated with the convertible notes, warrants and noteholder conversion rights.
- Brazil results, currency exposure and financing costs, as well as the assumptions underlying the company’s capital-spending and tax-rate expectations.