Business context and reporting period
Group 1 Automotive, Inc. operates franchised new and used vehicle dealerships, collision centers, and parts and service businesses in the U.S. and U.K. This Form 10-Q covers the quarter and six months ended June 30, 2011; income-statement and cash-flow comparisons are against the same periods in 2010. Financial amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $1,474.1 million | $1,418.5 million | $2,883.4 million | $2,609.7 million |
| Gross profit | $244.2 million | $226.7 million | $466.0 million | $431.2 million |
| Operating income | $54.4 million | $36.0 million | $93.7 million | $67.7 million |
| Net income | $24.7 million | $12.8 million | $40.0 million | $20.8 million |
| Diluted EPS | $1.06 | $0.54 | $1.72 | $0.88 |
| Operating cash flow | Not separately stated for the quarter | $200.4 million | $(56.1) million |
Q2 revenue rose 3.9%, gross profit 7.7%, and operating income 51.1% year over year; net income was nearly double. For the first half, revenue rose 10.5%, gross profit 8.1%, and operating income 38.4%.
Gross margin was 16.6% in Q2 versus 16.0% and 16.2% for the first half versus 16.5%. Operating margin improved to 3.7% from 2.5% in Q2 and to 3.2% from 2.6% for the first half. First-half SG&A was 77.0% of gross profit, down from 80.9%. Floorplan interest expense fell 18.0% for the first half, while other interest expense increased 20.9%, primarily reflecting higher real-estate borrowing costs.
At June 30, cash was $12.3 million, working capital was $138.4 million, and current assets were $995.6 million against current liabilities of $857.2 million. The company also reported $134.2 million of immediately available funds applied to reduce floorplan borrowings. Floorplan notes payable totaled $639.1 million, and long-term debt, including current maturities, had a carrying amount of $466.6 million. Available capacity under the then-current revolving and Ford floorplan facilities was reported at $790.4 million in total, including borrowing-base and covenant limitations.
First-half investing cash outflow was $127.5 million, including $109.9 million for acquisitions and $23.5 million for property and equipment purchases. Financing cash outflow was $80.6 million. The company paid $5.2 million in dividends and repurchased $14.0 million of stock. Dividends were $0.11 per share in Q2 and $0.22 per share for the first half; none were paid in the comparable 2010 periods.
Material changes and operating drivers
- New vehicle retail revenue increased 11.4% for the first half, although Q2 new vehicle retail units fell 4.0% company-wide. Japan’s earthquake and tsunami constrained supply, particularly for Toyota, Nissan and Honda brands. New vehicle retail gross margin improved to 6.1% for the first half from 5.9%.
- First-half used retail vehicle revenue increased 9.2%, while used wholesale gross profit rose 49.5%, benefiting from stronger used-vehicle values and limited supply. Management cautioned that wholesale gross profit per unit could return toward break-even as supply normalizes.
- First-half parts and service revenue rose 5.1%, but gross margin declined to 52.8% from 53.9%, reflecting a greater mix of lower-margin collision and wholesale parts activity and the normalization of warranty work after Toyota’s 2010 recalls.
- Finance and insurance revenue increased 13.1% for the first half; revenue per retail unit sold rose to $1,097 from $1,024.
- The company acquired five dealerships in Texas during the first half for $109.9 million; management said the acquired stores were expected to generate $340 million in aggregate annual revenue.
Outlook, risks and unusual items
Management expected 2011 industry vehicle sales to exceed 2010 levels as economic conditions stabilized, while noting that recovery to historically normal sales levels could take time. It expected supply constraints for certain import brands to persist into part of the second half of 2011. The company forecast 2011 capital spending below $50 million, including about $10 million for parts and service growth initiatives, and said cash flow and available borrowing capacity were expected to fund operations, capital spending and acquisitions for the remainder of the year. No earnings or revenue guidance was provided.
Effective July 1, 2011, the company amended and extended its $1.35 billion revolving credit facility to June 1, 2016, reallocating capacity between floorplan financing and working capital/acquisitions and changing pricing. The company reported compliance with applicable debt covenants at June 30 and expected continued compliance. A further $5.4 million BMW real-estate loan was entered into on July 6, 2011.
Key risks include manufacturer dependence and vehicle allocation, continuing Japan-related supply disruption, consumer demand and credit availability, interest rates and financing access, acquisition execution, and foreign exchange exposure. The company reported no legal proceedings expected to have a material adverse effect, but disclosed potential exposure under assigned or sublet leases: estimated remaining rental payments of $23.1 million if counterparties fail to perform. It also noted that regulatory changes, including indirect effects of Dodd-Frank, and health-care cost increases could affect operations. No material known environmental contingencies were reported.
Unusual or notable items include the strong first-half operating cash flow, driven in part by a $52.8 million inventory reduction and increased manufacturer-affiliate floorplan borrowings; cash paid for acquisitions; and $12.3 million of anticipated annual non-cash convertible-debt discount amortization included in other interest expense. The 2010 comparison included a $3.9 million pretax loss on redemption of debt, whereas no such loss occurred in 2011.
Important facts for investors to verify
- Whether Japan-related vehicle supply recovered as anticipated and how that affected unit sales, brand mix and margins.
- Whether used-vehicle wholesale profitability normalized, and whether parts and service margin pressure continued.
- Acquired dealerships’ realized revenue and returns compared with management’s $340 million annual revenue expectation.
- Cash-flow sustainability: first-half operating cash flow benefited materially from working-capital movements, including lower inventory.
- Liquidity and covenant headroom under the amended credit facility, as well as debt costs, restricted-payment limits and the company’s ability to fund acquisitions, dividends and repurchases.
- Potential lease, manufacturer chargeback, litigation and regulatory exposures; the filing states that outcomes of future matters cannot be predicted with certainty.