Group 1 Automotive, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Group 1 operates franchised dealerships, collision centers, vehicle financing and insurance, and parts and service businesses in the U.S., U.K. and Brazil. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Revenue | $2,726.5 | $2,511.6 | $5,159.3 | $4,772.5 |
| Gross profit | $391.6 | $369.1 | $755.5 | $707.3 |
| Operating income | $98.0 | $84.7 | $178.8 | $155.3 |
| Net income | $46.3 | $16.9 | $82.1 | $48.2 |
| Diluted EPS | $1.91 | $0.62 | $3.38 | $1.80 |
| Gross margin | 14.4% | 14.7% | 14.6% | 14.8% |
| SG&A as % of gross profit | 71.7% | 73.7% | 73.1% | 74.9% |
Q2 revenue grew 8.6%, gross profit 6.1%, and operating income 15.7% year over year. The company attributed the net income and EPS increases partly to the prior-year $23.6 million pretax loss on extinguishment of debt and lower 2015 effective tax rates. Q2 operating margin was 3.6%, up from 3.4%; pretax margin was 2.7%, up from 1.5%.
Cash flow and liquidity: First-half GAAP operating cash flow was $80.6 million, down from $130.9 million. Management’s non-GAAP adjusted operating cash flow was $137.0 million, versus $87.2 million; the adjustment reclassifies certain floorplan financing flows. Investing activities used $165.6 million, including acquisitions and capital spending. Cash at June 30 was $24.2 million, and reported working capital was $88.8 million. U.S. credit facilities had $540.8 million of total available capacity, including $198.1 million on the floorplan line and $183.6 million on the acquisition line.
Debt: Long-term debt, including current maturities, was approximately $1.118 billion at June 30, compared with $1.081 billion at year-end 2014. Floorplan obligations are substantial and are generally repaid as vehicles are sold. The company had $550 million principal amount of 5.00% senior notes due 2022. It reported compliance with applicable credit-facility covenants.
Material changes and operating trends
- New vehicle retail sales revenue increased 4.7% in Q2 and 4.8% in the first half; consolidated new-vehicle gross margin fell to 5.0% in Q2 from 5.5%.
- Used retail vehicle revenue rose 18.2% in Q2, but used retail gross margin declined to 6.8% from 7.9%; used wholesale sales produced a Q2 gross loss of $0.9 million.
- Parts and service revenue increased 7.1% in Q2, with gross margin improving to 54.5% from 53.4%. Finance and insurance revenue increased 16.7%; revenue per retail unit was $1,381, up from $1,303.
- U.S. and U.K. activity generally strengthened, while Brazil weakened. First-half Brazil revenue fell to $265.7 million from $378.3 million, with currency depreciation and a deteriorating local market weighing on reported results. Average exchange rates against the U.S. dollar weakened 9.5% for sterling and 29.2% for the Brazilian real year over year.
- First-half results included two U.S. dealership acquisitions. The company repurchased $33.1 million of shares and paid $9.7 million in dividends.
Outlook, risks and unusual items
- Management expected U.S. demand to remain supported by improving economic conditions and cited a first-half U.S. industry SAAR of 16.9 million units, versus 16.1 million a year earlier. It anticipated U.K. market growth, but expected Brazil conditions to remain challenged, with industry sales flat to down for the rest of 2015.
- Management forecast 2015 capital spending of no more than $125 million and an effective tax rate of approximately 37.5% for the remainder of the year. It said operating cash flow and available borrowing capacity were expected to fund operations, capital expenditures and acquisitions for the rest of 2015. No specific earnings or revenue guidance was provided.
- Key sensitivities include consumer demand and credit availability, manufacturer incentives and vehicle supply, competition affecting vehicle margins, interest rates and financing access, foreign exchange exposure, and Brazil’s economic conditions. A 100-basis-point rate change was estimated to affect annual interest expense by $12.1 million after swaps. The company does not hedge foreign exchange exposure.
- Unusual Q2 expenses included a $1.0 million charge for vehicle inventory losses from Houston flooding, a $1.0 million legal settlement and a $0.4 million loss on real estate and dealership transactions. Asset impairments were $1.0 million for the quarter and first half. The company reported no legal proceedings expected to have a material adverse effect, while noting outcomes cannot be predicted with certainty.
Important facts for investors to verify
- Whether vehicle sales growth can offset continued pressure on new- and used-vehicle retail margins and weak wholesale results.
- How much reported growth reflects acquisitions versus same-store performance, and how currency movements affect U.K. and Brazil results.
- The distinction between GAAP operating cash flow and management’s adjusted non-GAAP measure, particularly given increased inventory investment.
- Floorplan and other debt levels, available borrowing capacity, covenant headroom, and exposure to higher interest rates.
- Whether management’s Brazil, capital spending and tax-rate expectations remain consistent with subsequent results and disclosures.