Group 1 Automotive, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. Financial statements are unaudited. Group 1 operates automotive dealerships, collision centers, parts and service operations, and finance and insurance businesses in the U.S., U.K. and Brazil.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $1.964 billion | $1.665 billion | +18.0% |
| Gross profit | $300.5 million | $260.4 million | +15.4% |
| Income from operations | $58.6 million | $54.0 million | +8.6% |
| Net income | $22.1 million | $23.1 million | Down |
| Diluted EPS | $0.88 | $0.97 | Down |
| Operating margin | 3.0% | 3.2% | Down 0.2 percentage points |
| Pretax margin | 2.0% | 2.2% | Down 0.2 percentage points |
| Operating cash flow | $61.9 million | Cash used of $9.5 million | Improved |
Total gross margin was 15.3%, versus 15.6%; SG&A was 77.7% of gross profit, versus 76.5%. The effective tax rate was 43.7%, up from 38.1%, principally reflecting nondeductible acquisition costs and the mix of taxable income. Management expects an approximately 38.0% rate for the rest of 2013, excluding the first-quarter tax effect of those costs.
Revenue growth reflected both higher same-store sales and acquisitions. Same-store revenue and gross profit each increased 6.9%. Total retail vehicle units sold rose 15.7%; parts and service revenue increased 11.5%, and finance and insurance revenue increased 22.6%. New- and used-vehicle sales growth was accompanied by lower vehicle gross margins; same-store wholesale used-vehicle gross profit also declined.
Cash, debt and liquidity
- Cash and cash equivalents were $17.7 million at March 31, 2013, compared with $4.7 million at year-end. Working capital was $75.9 million.
- Operating cash flow of $61.9 million was partly offset by $60.3 million of investing outflows, including acquisitions, and $11.6 million of financing inflows. Inventory growth used $84.1 million of operating cash.
- Long-term debt, including current maturities, was approximately $587.0 million; this excludes floorplan financing. The balance sheet also showed $1.001 billion of floorplan notes payable under the credit facility, less a $59.2 million offset, and $291.9 million of manufacturer-affiliate floorplan notes.
- Available borrowing capacity was $158.2 million on the floorplan line and $220.7 million on the acquisition line; the former includes $59.2 million of immediately available funds. The separate Ford floorplan facility had $48.5 million available.
- The company reported compliance with credit-facility covenants. Its senior secured adjusted leverage ratio was 2.33 against a maximum of 3.75; total adjusted leverage was 3.35 against 5.50; and fixed-charge coverage was 1.98 against a minimum of 1.35.
- Cash dividends were $0.15 per common share. The company had $450 million of interest-rate swaps in effect and $525 million of forward-starting swaps.
Material changes, outlook and risks
- Acquisitions: In February, Group 1 acquired UAB Motors, comprising 18 dealerships in Brazil, and also acquired assets of four U.K. dealerships. Aggregate consideration was $141.8 million, including $58.3 million cash and 1.45 million shares; $65.1 million of assumed debt was contemporaneously extinguished. Acquisition-related costs were $6.5 million, and debt extinguishment resulted in a $0.8 million loss. Purchase-price allocations remain preliminary. Brazil generated $71.0 million revenue and a $0.9 million net loss for the quarter; acquired operations’ reported contribution was not material.
- Management outlook: Management cited improving U.S. vehicle demand and an industry March SAAR of 15.2 million units, versus 14.1 million a year earlier. It expects 2013 capital spending below $70 million, believes cash flow and available borrowing capacity can support current operations and planned investment, and intends to continue pursuing acquisitions. Management forecasts Brazil industry sales growth of flat to 3.5% and U.K. new-vehicle market growth of 3.0% in 2013.
- Post-quarter unusual item: Hail damaged vehicle inventory and dealership facilities in Oklahoma City and Houston on April 26–27. The company estimated an $8–$10 million pretax charge for Q2 2013, net of insurance recovery considerations; recoveries are subject to deductibles.
- Key risks: vehicle demand, consumer credit and manufacturer incentives; inventory and floorplan interest costs; acquisition integration and preliminary valuations; foreign-exchange and economic exposure in the U.K. and Brazil; debt covenants and financing access; weather losses and insurance coverage; and litigation, manufacturer chargebacks and regulatory changes. The company reported no legal proceedings expected to have a material adverse effect and no known material environmental contingencies.
Most important facts for investors to verify
- How much reported growth came from acquired dealerships versus continuing same-store operations, and whether the acquisitions meet expected returns.
- Whether vehicle margins, SG&A leverage and earnings recover after acquisition and catastrophic-event costs.
- The final purchase-price allocation, goodwill and intangible asset values, and the performance of the Brazil business.
- The actual Q2 hail-related charge and insurance proceeds, including deductibles and timing.
- Floorplan borrowing, available capacity, covenant headroom, interest-rate exposure and the ongoing cost of convertible debt.
- Whether management’s 2013 capital-spending, tax-rate and regional market expectations are achieved.