Group 1 Automotive, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Unaudited results; dollar amounts below are in millions unless stated otherwise. Group 1 operated dealerships and collision centers in the U.S. and U.K., selling new and used vehicles, finance and insurance products, parts, and service. It acquired 12 dealerships in the first half of 2012.
Financial performance
| Metric | Q2 2012 | Q2 2011 | H1 2012 | H1 2011 |
|---|---|---|---|---|
| Revenue | $1,895.8 | $1,474.1 | $3,560.6 | $2,883.4 |
| Gross profit | $285.3 | $244.2 | $545.8 | $466.0 |
| Income from operations | $63.1 | $54.4 | $117.1 | $93.7 |
| Net income | $28.6 | $24.7 | $51.7 | $40.0 |
| Diluted EPS | $1.20 | $1.03 | $2.18 | $1.66 |
| Total gross margin | 15.1% | 16.6% | 15.3% | 16.2% |
| Operating margin | 3.3% | 3.7% | 3.3% | 3.2% |
- Revenue rose 28.6% in Q2 and 23.5% in H1; gross profit rose 16.8% and 17.1%, respectively. Net income rose 16.0% in Q2 and 29.2% in H1.
- Vehicle volumes grew strongly, helped by normalized import-brand inventory after 2011 supply disruptions and by acquisitions. Q2 new retail vehicle units increased 36.6%; used retail units increased 27.9%.
- Margins weakened in new and used vehicles: Q2 new-vehicle margin was 5.9% versus 6.7%, and total used-vehicle margin was 7.4% versus 8.8%. Management cited increased new-vehicle supply, tighter new/used price relativities, and falling auction prices. Finance and insurance revenue per retail unit increased to $1,191 from $1,126.
- Parts and service revenue increased 7.9% in Q2 and 8.6% in H1, including acquisition effects. Same-store growth was more modest: 1.3% and 1.8%, respectively.
Cash flow, liquidity and debt
- H1 operating cash flow was a use of $45.7 million, versus a source of $200.4 million in H1 2011. The primary driver was a $160.1 million inventory increase as vehicle supply recovered. Investing activities used $152.8 million, including $115.0 million for acquisitions and $38.4 million for property and equipment. Financing activities provided $193.6 million; cash declined $5.4 million to $9.5 million.
- Working capital was $114.8 million. At June 30, available credit capacity was reported as $587.9 million, including $315.5 million under the floorplan line, $225.7 million under the acquisition line, and $46.7 million under the Ford facility. Floorplan availability includes $101.8 million of immediately available funds held as an offset to borrowings.
- Long-term debt, net of current maturities, was $517.0 million; current maturities of long-term debt and short-term financing were $25.2 million. Floorplan obligations are additional, inventory-related financing. The company reported $784.5 million outstanding on its revolving floorplan line and $103.3 million under the Ford facility; manufacturer-affiliate and other vehicle financing also applies.
- The company reported compliance with credit-facility covenants. Its revolving credit facility expires June 2016; the reported actual senior secured leverage, total leverage, and fixed-charge coverage ratios were 2.36, 3.44, and 1.97, respectively, against limits of less than 3.75, less than 5.50, and greater than 1.35.
- Cash dividends were $0.15 per share in Q2 and $0.29 per share for H1. H1 share repurchases cost $8.5 million on a cash-flow basis; the company later authorized a new repurchase program of up to $50 million.
Outlook, risks and unusual items
- Management said industry demand had improved, citing a June 2012 U.S. light-vehicle sales rate of 14.1 million annualized units versus 11.5 million a year earlier, but expected recovery to historically normalized levels to be extended. It emphasized growth, cost control, parts and service investment, and acquisitions. No earnings or revenue guidance was provided.
- Expected 2012 capital spending was less than $55 million, including about $15 million for parts and service growth initiatives. Management said current cash flow and borrowing capacity were adequate for operations, capital expenditures, and acquisitions for the rest of 2012, subject to economic and business conditions.
- Management expected an effective tax rate of approximately 39% for the remainder of 2012. Interest-rate exposure remains significant: a 100-basis-point rate change was estimated to alter annual interest expense by about $7.5 million after current swaps. The company also has foreign-exchange exposure from U.K. operations.
- An Oklahoma hailstorm caused $2.7 million of SG&A expense for insurance deductibles; $16.9 million of related insurance receivables was recorded and received in July 2012.
- A $7.5 million adverse jury award relating to a shuttle-van accident was accrued. The company appealed and maintained insurance coverage above a $1.0 million self-insured retention; the filing records a receivable for the award net of the deductible.
- Key risks include weaker consumer demand or credit availability, vehicle supply and pricing, manufacturer incentives or disruptions, rising interest and insurance costs, acquisition and integration performance, regulatory changes, and currency movements. The filing reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether vehicle-volume growth and acquisition contributions translate into sustained same-store earnings, particularly as new- and used-vehicle margins compress.
- Whether inventory growth, floorplan borrowing, and working-capital movements continue to constrain operating cash flow.
- Current borrowing availability, covenant headroom, and the effect of interest rates after manufacturer assistance and hedges.
- Collection of the hailstorm insurance receivable and the outcome or further developments in the appealed jury award.
- Execution of the acquisition strategy, the stated capital-spending plan, and the capacity for dividends and repurchases under debt restrictions.