Group 1 Automotive, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011; comparisons are with the corresponding 2010 periods unless noted. Group 1 operates automotive dealerships in the U.S. and U.K., selling new and used vehicles and providing finance, insurance, parts, service, and collision repair. Unless otherwise stated, dollar amounts below are in millions.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $1,570.4 | $1,461.8 | $4,453.8 | $4,071.4 |
| Gross profit | $248.8 | $228.8 | $714.7 | $660.0 |
| Income from operations | $50.1 | $46.5 | $143.7 | $114.2 |
| Net income | $21.5 | $19.0 | $61.5 | $39.7 |
| Diluted EPS | $0.94 | $0.83 | $2.67 | $1.70 |
| Operating margin | 3.2% | 3.2% | 3.2% | 2.8% |
| Pretax margin | 2.2% | 2.1% | 2.2% | 1.6% |
- Revenue rose 7.4% in Q3 and 9.4% year to date; gross profit increased 8.7% and 8.3%, respectively. Pretax income grew 12.7% in Q3 and 52.3% year to date.
- Total gross margin was 15.8% in Q3 versus 15.7%; year-to-date margin was 16.0% versus 16.2%. SG&A was 75.7% of gross profit in Q3, compared with 76.0%, and 76.5% year to date, compared with 79.2%.
- Q3 new-vehicle retail margin improved to 6.5% from 5.7%; used-vehicle margin declined to 7.1% from 7.7%. Parts-and-service margin fell to 52.0% from 54.3%. Finance and insurance revenue per retail unit increased to $1,156 from $1,006.
Cash flow, debt and liquidity
- Operating cash flow was $301.1 for the first nine months, versus cash used of $52.2 in 2010. The 2011 inflow included a $111.7 inventory reduction and other working-capital movements; it should not be read as earnings alone.
- Investing activities used $148.8, including $109.9 for dealership acquisitions and $45.1 for property and equipment purchases. Financing activities used $160.8, including net floorplan-line repayments, $44.9 of share repurchases, and $8.3 of dividends. Cash declined $8.5 to $11.3.
- At September 30, current assets were $937.4 and current liabilities $801.9; reported working capital was $135.5. The company reported $662.9 of available Floorplan Line capacity, including $116.8 of immediately available funds, and $232.8 of available Acquisition Line capacity. The Acquisition Line had no borrowings outstanding; its $17.3 reported balance represented letters of credit and related availability calculations.
- Floorplan notes payable totaled $559.4 ($437.1 under the revolving credit facility and $122.4 with manufacturer affiliates). Long-term debt, including current maturities, was $487.2, up from $466.1 at December 31, 2010. The $1.35 billion revolving facility matures in 2016.
- The company was in compliance with revolving-credit and mortgage-facility covenants. Revolver actual ratios included senior secured leverage of 2.57 versus a maximum 3.75, total leverage of 3.83 versus a maximum 5.50, and fixed-charge coverage of 1.89 versus a minimum 1.35.
Material changes, outlook and risks
- Q3 and nine-month earnings improved, aided by higher revenue and gross profit, improved new-vehicle margins, stronger finance-and-insurance results, cost control, and lower floorplan interest expense. Other interest expense rose 25.4% in Q3 and 22.4% year to date, principally due to higher-cost and increased real-estate borrowings.
- Japan’s 2011 earthquake and tsunami constrained supply from key import brands, reducing Q3 same-store new-vehicle units 7.1%; management expected supply limitations to persist into early 2012. Management said supply should improve near term and expected 2011 industry vehicle sales to exceed 2010; it noted recovery to historical selling levels could take longer.
- Used-vehicle auction-price declines and tighter new/used price relativities pressured used-vehicle margins; wholesale sales produced a Q3 gross loss. Parts-and-service revenue increased, but margins declined as lower-margin collision and wholesale parts grew faster and prior-year Toyota recall work did not recur. Hurricane Irene disrupted roughly a week of business at affected Northeast stores, which represent about 25% of normal total sales revenue.
- Management forecast 2011 capital spending below $50, including about $10 for parts-and-service growth initiatives, and said available cash flow and borrowing capacity were expected to fund operations, capital spending, and acquisitions for the remainder of 2011. It expected an approximately 39% effective tax rate for the rest of 2011. These are management expectations, not guarantees.
- Q3 included a $3.2 pretax impairment after certain real estate investments were classified as held for sale. The company also acquired five dealerships during the first nine months for $109.9; subsequent to quarter-end it acquired a Houston dealership and was awarded two Volkswagen franchises.
- Interest-rate exposure remains: a 100-basis-point rate change was estimated to alter annual interest expense by about $6.0 before swaps and $3.0 after swaps, based on period-end borrowings. The company had $300.0 notional swaps in effect and $575.0 of forward-starting swaps. Other risks include dependence on a limited number of vehicle manufacturers, consumer demand and credit conditions, inventory availability, and financing costs.
- No legal proceedings were identified as reasonably expected to have a material adverse effect, but outcomes are uncertain. The company estimated $21.8 of potential lease rental payments on assigned or sublet leases if counterparties do not perform. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether operating cash generation remains strong when inventory and other working-capital movements normalize.
- Whether import-brand vehicle availability recovers as expected, and how unit volumes and margins develop across new, used, and wholesale vehicles.
- Whether parts-and-service and finance-and-insurance growth can offset the pressure on their margins and any further deterioration in used-vehicle pricing.
- Available borrowing capacity, covenant headroom, debt maturities, and the effect of interest-rate swaps and real-estate financing costs.
- Execution and returns from acquisitions, planned capital spending, share repurchases, and dividends, including their interaction with restricted-payment limits.