Group 1 Automotive, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. The company operates automotive dealerships and related parts, service, finance and insurance businesses in the U.S., U.K. and Brazil. Results are seasonal, and first-quarter results are not necessarily indicative of the full year.
Financial results and key metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenue | $2.608 billion | $2.433 billion | +7.2% |
| Gross profit | $389.1 million | $363.9 million | +6.9% |
| Gross margin | 14.9% | 15.0% | Down 0.1 percentage point |
| Operating income | $82.0 million | $80.7 million | +1.6% |
| Operating margin | 3.1% | 3.3% | Down 0.2 percentage point |
| Net income | $34.3 million | $35.8 million | Down 4.3% |
| Diluted EPS | $1.47 | $1.47 | Flat |
| Net cash from operating activities | $116.1 million | $58.2 million | Higher year over year |
Management’s non-GAAP adjusted results were operating income of $85.7 million, net income of $37.1 million and diluted EPS of $1.59, compared with adjusted EPS of $1.47 a year earlier. Adjusted operating margin was 3.3%, unchanged year over year. Adjusted operating cash flow was $98.6 million versus $51.7 million.
- Revenue and operations: Retail new-vehicle sales revenue rose 5.8%; used retail rose 10.4%; parts and service rose 9.4%; finance, insurance and other revenue rose 5.9%. Total retail units increased 6.3%, to 73,572, including acquired dealerships.
- Margins and expenses: Parts and service gross margin improved to 54.0% from 53.4%, while new-vehicle margin declined to 5.1% from 5.2% and total used-vehicle margin declined to 6.4% from 6.7%. SG&A increased 8.2%; GAAP SG&A was 75.5% of gross profit versus 74.6% a year earlier.
- Cash, liquidity and investment: Cash was $22.4 million at quarter-end, excluding $134.1 million of immediately available funds applied to floorplan balances. Working capital was $150.7 million. Investing activities used $71.0 million, including $51.1 million in net acquisition payments and $33.7 million in property and equipment purchases.
- Debt and capacity: Long-term debt, including current maturities, was approximately $1.294 billion. Floorplan notes were $1.677 billion before offset accounts of $134.1 million. The $1.7 billion revolving facility had $282.9 million of available acquisition-line capacity and $246.7 million of available floorplan capacity; the separate $300 million Ford facility had $117.1 million available. The company reported compliance with applicable credit-facility covenants.
- Capital returns: The company repurchased 576,230 shares for $31.9 million in Q1 and paid $5.1 million in dividends. The quarterly dividend was $0.22 per share, versus $0.20. After quarter-end it repurchased a further 911,207 shares for $50.0 million.
Material changes versus the prior period
- Revenue and gross profit grew, but net income declined and GAAP diluted EPS was unchanged; gross and operating margins also edged down.
- U.S. and U.K. performance and U.K. dealership acquisitions supported growth. The company acquired 12 U.K. dealerships, comprising 15 franchises, for a stated purchase price of $56.1 million.
- Brazil remained weak: industry new-vehicle registrations fell 28.3% year over year. The Brazilian real’s average exchange rate weakened 36.6% against the U.S. dollar, reducing reported results.
- Operating cash flow increased substantially, while inventory-related cash use and higher inventory contributed to increased floorplan interest expense, up 17.8% to $11.0 million.
- Other interest expense rose 21.7% to $16.9 million, primarily reflecting interest on the 5.25% senior notes issued in December 2015. Total long-term debt increased from year-end.
Outlook, commentary, risks and unusual items
- Management cited a U.S. industry forecast of 17.8 million vehicles for 2016, up 2.3% from 2015, and anticipated continued U.K. growth. It expected Brazilian conditions and vehicle sales to remain under pressure through the rest of 2016 and into 2017.
- Management expected 2016 capital spending to be less than $135 million and an effective tax rate of approximately 37.0% for the remainder of the year. It believed operating cash flow and available borrowing capacity would fund current operations, planned capital spending and acquisitions for the rest of 2016, subject to economic and business conditions.
- Management reported Q1 GAAP results included after-tax impacts of $1.7 million from catastrophic events, $0.6 million in acquisition costs, $0.3 million in non-cash impairment charges and $0.2 million in net losses on real estate and dealership transactions. Adjusted measures exclude specified items and are non-GAAP.
- Vehicle recall campaigns and stop-sale orders increased inventory and loaner-vehicle costs; management said the Volkswagen diesel matter and other recall issues were being monitored and did not then appear likely to have a material impact.
- Key exposures include consumer demand and credit availability, manufacturer incentives and supply, interest rates, foreign exchange, the Brazilian recession, acquisition integration, inventory levels, litigation and regulatory changes. The company did not hedge foreign-currency exposure. A 10% currency devaluation would have reduced Q1 translated revenue by an estimated $39.3 million for sterling and $8.6 million for the Brazilian real.
- Interest-rate swaps covered $617.5 million of notional debt at a weighted average fixed rate of 2.6%; the company estimated a 100-basis-point rate change would alter annual interest expense by $11.2 million after swaps, based on quarter-end variable borrowings. It expected $12.9 million of accumulated swap losses to be reclassified to interest expense over the next 12 months.
- The filing reported no legal proceedings expected to have a material adverse effect and no material change to previously disclosed risk factors. It also noted lease indemnities and guarantees whose ultimate exposure is difficult to estimate.
Most important facts for investors to verify
- Whether revenue growth converts into sustained earnings and margin improvement, given rising SG&A and interest costs.
- Whether inventory levels, floorplan expense and recall-related loaner costs normalize, and whether manufacturer interest assistance continues to offset floorplan interest.
- Whether the U.K. acquisitions deliver expected returns and Brazil’s operating performance stabilizes amid recession and currency volatility.
- Current debt, covenant headroom, cash availability and the effect of the $50 million post-quarter share repurchase on liquidity and restricted-payment capacity.
- The assumptions behind management’s 2016 capital-spending, tax-rate and market outlook, and the effect of seasonal patterns on full-year results.