GROUP 1 AUTOMOTIVE INC annual report, FY2013

Group 1 Automotive, Inc. — 2013 Form 10-K

Reporting period: Fiscal year ended December 31, 2013. The filing reports full-year results; fourth-quarter figures are noted separately below. The company operates franchised dealerships in the U.S., U.K. and Brazil, selling new and used vehicles and providing parts, service, collision repair, and finance and insurance products.

Financial performance and liquidity

Metric	2013	2012
Revenue	$8.919 billion	$7.476 billion
Gross profit	$1.293 billion	$1.117 billion
Operating income	$273.3 million	$230.0 million
Net income	$114.0 million	$100.2 million
Diluted EPS	$4.32	$4.19
Gross margin	14.5%	14.9%
Operating margin	3.1%	3.1%

Revenue rose 19.3% and gross profit 15.7%, reflecting dealership acquisitions, stronger U.S. and U.K. markets, and increased sales volumes. Full-year retail new-vehicle sales were 155,866 units (+21.2%); used retail sales were 98,813 units (+15.8%).
Margins were pressured by lower new- and used-vehicle gross profit per unit and a greater contribution from lower-margin international operations. Parts and service generated 41.1% of gross profit; finance and insurance generated 24.1%.
Fourth quarter: Revenue was $2.279 billion, gross profit $321.3 million, net income $21.7 million, and diluted EPS $0.81, versus $1.939 billion, $280.3 million, $17.1 million, and $0.70, respectively, in Q4 2012.
GAAP operating cash flow was $52.4 million, compared with an outflow of $75.3 million in 2012. Management’s adjusted, non-GAAP operating cash flow was $202.8 million; this measure reclassifies certain floorplan financing cash flows. Investing cash flow was a $268.7 million outflow, largely for acquisitions and property/equipment.
Year-end cash was $20.2 million; working capital was $102.8 million, down from $170.6 million. Inventory was $1.542 billion. Total assets were $3.819 billion and shareholders’ equity $1.035 billion.
Year-end floorplan borrowings were approximately $1.434 billion before the $56.2 million offset account; long-term debt was $699.1 million, including current maturities. The filing’s $2.879 billion contractual-obligations total also includes leases, estimated interest, letters of credit and purchase commitments and is not a debt-only figure.
Available capacity included $311.2 million under the revolving Floorplan Line (including $56.2 million immediately available), $228.0 million under the Acquisition Line, and $9.0 million under the Ford facility. The company reported compliance with debt covenants.

Changes, strategy and outlook

In 2013, the company acquired 38 franchises, including Brazil-based UAB Motors, and disposed of seven franchises. Acquired businesses represented estimated annualized revenue of approximately $1.317 billion at acquisition; the UAB purchase included 1.39 million shares issued as consideration.
The revolving credit facility was amended to increase capacity from $1.35 billion to $1.7 billion and extend maturity to June 2018.
Management’s 2014 priorities include growing parts and service, gaining vehicle market share, improving efficiency and pursuing selective acquisitions. It forecast capital expenditures of no more than $95 million and an effective tax rate of approximately 39%; it gave no specific revenue or earnings guidance.
Management said available cash flow and borrowing capacity should support 2014 operations, capital expenditures and acquisitions, while noting that weaker conditions or changed plans could require additional capital-market funding.

Unusual items, risks and contingencies

2013 results included $6.5 million of non-cash asset impairments, $6.2 million of acquisition costs, $12.2 million of catastrophic-event insurance deductibles and related expenses, and an approximately $10 million net gain on dealership and real-estate dispositions.
The 2013 effective tax rate increased to 40.6% from 37.7%, including effects from foreign deferred-tax valuation allowances, non-deductible goodwill and acquisition costs, and geographic income mix.
Brazil operations expose the company to currency, inflation, interest-rate and economic risks; the company reported a weaker Brazilian real and higher inflation and interest rates. Foreign-currency translation reduced 2013 comprehensive income.
Other key risks include vehicle-manufacturer dependence and franchise terms, competitive pressure on vehicle margins, consumer credit availability, interest-rate sensitivity, acquisition integration, regulation, environmental liabilities, cyber/data-security incidents, self-insurance exposure and impairment of franchise rights or goodwill.
Convertible notes create potential conversion, cash repayment and dilution exposure. The $115 million principal 3.00% notes became holder-convertible for the first quarter of 2014 after a stock-price trigger; the company stated it intended and was able to refinance any conversion with long-term debt capacity.
The company reported no legal proceedings expected to have a material adverse effect. It was participating in Delaware’s unclaimed-property voluntary disclosure program; liability was not yet determined. Certain assigned leases carry estimated remaining rental-payment exposure of $25.2 million if counterparties fail to perform.

Important facts for investors to verify

Reconcile GAAP operating cash flow of $52.4 million with management’s adjusted non-GAAP figure of $202.8 million, including its floorplan-financing reclassifications.
Assess whether acquisition-driven growth, particularly the Brazil entry, can deliver returns that offset lower international margins, currency exposure and integration costs.
Track vehicle gross profit per unit, parts-and-service growth, inventory levels and floorplan interest as market competition and borrowing needs evolve.
Review debt maturities, covenant headroom, convertible-note conversion or repayment terms, and the limits on dividends and repurchases.
Monitor the outcome of the Delaware unclaimed-property review, lease guarantees, insurance claims and future impairment assumptions.