Business context and reporting period
Group 1 Automotive, Inc. operates franchised dealerships, collision centers and related parts, service, financing and insurance businesses in the U.S., U.K. and Brazil. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2013; comparisons are with the corresponding 2012 periods. Results include Brazil operations following the February 2013 acquisition of UAB Motors, so reported growth reflects both acquisitions and underlying performance.
Financial and operating performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Revenue | $2,335.1 million | $1,895.8 million | $4,298.9 million | $3,560.6 million |
| Gross profit | $341.3 million | $285.3 million | $641.8 million | $545.8 million |
| Operating income | $80.6 million | $63.1 million | $139.3 million | $117.1 million |
| Net income | $37.4 million | $28.6 million | $59.5 million | $51.7 million |
| Diluted EPS | $1.43 | $1.20 | $2.32 | $2.18 |
| Gross margin | 14.6% | 15.1% | 14.9% | 15.3% |
| Operating margin | 3.5% | 3.3% | 3.2% | 3.3% |
Revenue grew 23.2% in Q2 and 20.7% in the first half; net income rose 30.6% and 15.0%, respectively. Diluted EPS increased 19.2% in Q2 and 6.4% year to date. Total vehicle sales were 80,237 in Q2, up 21.3%, and 147,906 for the half, up 18.5%. Management cited stronger U.S. demand, improved inventory availability, dealership execution and acquisitions. Same-store revenue grew 6.6% in Q2 and 6.8% for the half; same-store gross profit rose 7.9% and 7.4%.
Margin pressure persisted: consolidated gross margin declined 50 basis points in Q2 and 40 basis points for the half, reflecting a greater mix of lower-margin vehicle sales and foreign operations. New-vehicle retail margin was 5.8% in Q2 versus 5.9%; total used-vehicle margin was 7.1% versus 7.4%. Parts and service revenue grew 18.4% in Q2 and 15.0% for the half, while its consolidated Q2 gross margin eased to 52.5% from 53.1%, partly due to Brazil mix. SG&A was 73.6% of gross profit in Q2 versus 75.1%, but 75.5% for the half versus 75.8%.
For the six months, operating cash flow was $87.3 million, compared with cash used of $45.7 million in 2012. Inventory growth used $111.9 million of cash, partly offset by increases in payables/accruals and manufacturer-affiliate floorplan borrowings. Investing cash outflow was $58.6 million, including acquisitions and capital spending, offset by $77.9 million of disposition proceeds. Financing cash outflow was $21.9 million, including debt principal payments and dividends. Cash increased $6.2 million to $10.9 million.
Balance sheet, debt and liquidity
At June 30, 2013, total assets were $3.409 billion, current assets $1.731 billion and current liabilities $1.643 billion, giving reported working capital of $88.0 million. Long-term debt, including current maturities, totaled approximately $565.3 million. The filing reports $1.187 billion of variable-rate floorplan borrowings, in addition to other vehicle financing. Floorplan obligations are principally tied to vehicle inventory and generally repaid as vehicles are sold.
The amended revolving credit facility increased total commitment from $1.35 billion to $1.70 billion and extended maturity to June 20, 2018. At quarter-end, the company reported $450.7 million of available floorplan capacity and $263.6 million of available acquisition-line capacity; total credit-facility availability was $764.0 million, including $82.0 million of immediately available funds in the floorplan offset account. The company reported compliance with debt covenants. Its reported senior secured adjusted leverage ratio was 2.19 against a maximum of 3.75, total adjusted leverage was 3.17 against 5.50, and fixed-charge coverage was 2.16 against a minimum of 1.35.
Floorplan interest expense rose 38.3% in Q2 and 30.7% for the half, primarily from higher borrowings associated with acquisitions and increased inventory. Other interest expense rose 4.1% and 3.2%, respectively. A 100-basis-point rate change was estimated to affect annual interest expense by approximately $8.8 million after swaps. The company had $450 million of swaps in effect and $525 million of forward-starting swaps; the combined notional was structured not to exceed $600 million through 2019.
Material changes, outlook and risks
During the first half, the company acquired 23 dealerships, including UAB Motors in Brazil, and paid aggregate consideration of $173.3 million, comprising $89.8 million cash and 1.45 million shares; it also assumed debt, of which $65.1 million was promptly extinguished. Acquisition-related costs were $6.5 million. Dealership dispositions generated net gains of $8.4 million in Q2 and $9.0 million for the first half.
Management expected full-year 2013 capital spending of approximately $70 million and an effective tax rate of approximately 38% for the remainder of 2013, excluding specified acquisition and disposition tax effects. It described U.S. demand as improving and expected U.K. vehicle sales to continue growing. It expected Brazil industry sales to be flat in 2013 amid inflation, higher interest rates and a weaker real, while remaining optimistic about longer-term growth. Management said operating cash flow and available borrowing capacity should fund operations, capital spending and acquisitions for the remainder of 2013, based on current conditions.
Risks include changes in consumer demand, credit availability, interest rates, manufacturer incentives and inventory supply; dependence on key manufacturers; acquisition integration and goodwill impairment; foreign-exchange movements and economic or political conditions in Brazil and the U.K.; and debt covenant, refinancing and liquidity constraints. The company reported $11.1 million of Q2 losses from catastrophic events ($11.9 million for the half), primarily affecting U.S. operations. It reported no legal proceedings expected to have a material adverse effect, but noted ordinary-course litigation, manufacturer chargeback exposure and potential lease obligations of $17.2 million on assigned or sublet leases. It reported no known material environmental contingencies.
Important facts for investors to verify
- How much reported revenue and earnings growth came from acquisitions versus same-store performance, including the acquired Brazil business.
- Whether inventory growth, vehicle mix and foreign operations continue to pressure gross margins and floorplan interest costs.
- Actual full-year capital expenditures, acquisition spending and cash generation relative to management’s expectations.
- Debt levels, covenant headroom, available borrowing capacity and the effect of higher interest rates, including swap settlements and manufacturer assistance.
- Brazil’s operating performance, currency exposure and economic conditions, as well as the final purchase-price allocation and recoverability of acquisition-related goodwill.
- The magnitude and recurrence of catastrophic-event costs, disposition gains, acquisition expenses and other unusual items.