Group 1 Automotive, Inc. — Q1 2014 Form 10-Q
Business context and reporting period
Unaudited results for the three months ended March 31, 2014, compared with Q1 2013. Group 1 operates franchised dealerships, collision centers, and related vehicle financing, insurance, parts, and service businesses in the U.S., U.K., and Brazil. At quarter-end it reported 191 franchises across 151 dealership locations. Results are seasonal; U.S. first-quarter activity is typically lower, and Brazil’s first quarter is generally its weakest.
Financial and operating results
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $2,260.9 million | $1,963.8 million |
| Gross profit / gross margin | $338.1 million / 15.0% | $300.5 million / 15.3% |
| Operating income / operating margin | $70.6 million / 3.1% | $58.6 million / 3.0% |
| Income before taxes | $49.2 million | $39.2 million |
| Net income | $31.3 million | $22.1 million |
| Diluted EPS | $1.19 | $0.88 |
| Net cash from operating activities (GAAP) | $133.2 million | $61.9 million |
| Adjusted net cash from operating activities (non-GAAP) | $69.7 million | $98.1 million |
Revenue rose 15.1%, net income 41.5%, and diluted EPS 35.2%. Growth reflected higher unit sales, acquisitions, and stronger U.K. performance. Total vehicle sales increased 14.4% to 77,410 units. Same-store revenue increased 5.9%; same-store gross profit rose 5.2%. The reported gross margin declined 30 basis points, as lower new- and used-vehicle margins and a greater contribution from lower-margin foreign operations offset growth. SG&A was 76.2% of gross profit, down from 77.7%.
Parts and service revenue increased 13.4% to $269.3 million, with gross margin holding at 52.6%. Finance, insurance and other revenue increased 19.3% to $83.6 million; F&I revenue per retail unit rose to $1,294 from $1,245. Floorplan interest expense increased 16.5% to $10.9 million, and other interest expense rose 13.8% to $10.5 million.
Balance sheet, liquidity and capital
- Cash was $17.7 million at March 31, down from $20.2 million at year-end. Working capital was $85.4 million.
- Floorplan notes payable were approximately $1.390 billion net of the $33.6 million offset account. Long-term debt was $665.0 million, net of current maturities; the debt schedule reported total long-term debt of $694.2 million before current maturities.
- The $1.7 billion revolving credit facility had $518.1 million of available capacity, including $319.3 million on the floorplan line and $198.8 million on the acquisition line. The company reported compliance with covenants. It also had $26.0 million available under the $200 million FMCC facility.
- Operating cash flow was $133.2 million under GAAP, but $69.7 million on management’s adjusted, non-GAAP basis, down 28.9% year over year. The difference reflects floorplan financing classification and activity; the company says adjusted cash flow better reflects its view of operating cash generation.
- Investing activities used $81.1 million, including $52.6 million of acquisition cash payments and $27.1 million of property and equipment purchases. Financing activities used $42.4 million, including $16.9 million for share repurchases and $4.1 million in dividends.
- During Q1, the company acquired two U.S. dealerships and opened a dealership in Brazil. It repurchased 270,054 shares for $16.9 million at an average $62.74 per share.
Outlook, commentary and risks
Management cited improving U.S. and U.K. demand, while Brazil’s market weakened; it expected Brazil industry sales to be flat in 2014 and remained optimistic about longer-term growth. Management expected positive cash generation and stated that cash and available borrowing capacity should fund operations, capital expenditures, and acquisitions for the remainder of 2014, subject to economic conditions and plans. It forecast 2014 capital spending of no more than $95 million and an effective tax rate of approximately 38% for the rest of the year. No earnings or revenue guidance was provided.
Severe U.S. winter weather caused store closures, reduced traffic, and additional costs. Management identified competitive pressure on vehicle margins, foreign currency movements, consumer demand and credit availability, interest rates, manufacturer concentration and incentives, acquisition integration, debt covenants, and access to financing as important risks. Brazil’s borrowing rates were 14.85%–19.02%. A 100-basis-point interest-rate change was estimated to alter annual interest expense by about $10.8 million after swaps.
The company had $450 million notional of interest-rate swaps in effect and $525 million of forward-starting swaps. The 3.00% convertible notes became convertible at holders’ option for the quarter ending June 30, 2014; the company classified $28.2 million of related redeemable equity as temporary equity. It reported no legal proceedings expected to have a material adverse effect, while noting ordinary-course litigation and lease, indemnity, and regulatory exposures. Management said disclosure controls were effective and reported no material change in internal controls.
Important facts for investors to verify
- Whether revenue and earnings growth persists on a same-store basis, excluding acquisition contributions.
- Whether vehicle gross-margin declines continue, particularly in the U.S., and whether parts and service growth offsets them.
- Why adjusted operating cash flow fell despite higher GAAP operating cash flow, and how floorplan borrowings affect cash conversion.
- Debt and liquidity headroom, covenant compliance, interest-rate exposure, and the potential conversion or dilution effects of convertible notes and warrants.
- Execution and returns on recent acquisitions and planned capital spending, alongside Brazil operating performance and foreign-exchange exposure.