Group 1 Automotive, Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012; comparisons are with the corresponding 2011 periods unless stated otherwise. Group 1 operated 143 U.S. franchises and 16 U.K. franchises, selling new and used vehicles, parts and services, and finance and insurance products. Financial figures below are in millions except per-share data.
Financial performance
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Revenue | $1,976.6 | $1,570.4 | $5,537.1 | $4,453.8 |
| Gross profit | $291.2 | $248.8 | $837.0 | $714.7 |
| Income from operations | $67.1 | $50.1 | $184.1 | $143.7 |
| Income before taxes | $49.5 | $34.5 | $132.8 | $98.7 |
| Net income | $31.3 | $21.5 | $83.1 | $61.5 |
| Diluted EPS | $1.32 | $0.91 | $3.50 | $2.57 |
| Gross margin | 14.7% | 15.8% | 15.1% | 16.0% |
| Operating margin | 3.4% | 3.2% | 3.3% | 3.2% |
Q3 revenue rose 25.9%, operating income 33.9%, and net income 45.8%; nine-month revenue rose 24.3% and net income 35.0%. Growth reflected higher vehicle volumes, acquisitions, and stronger finance and insurance results. Total gross margin declined as sales mix shifted toward lower-margin vehicle sales. New-vehicle retail margin fell to 5.8% from 6.5% in Q3; used-vehicle retail margin fell to 8.2% from 8.5%. Parts and service remained higher margin, at 52.5%.
- Q3 total vehicle sales were 69,014 units, up 27.2%; retail units were 56,965, up 27.9%. Same-store revenue increased 15.0% in Q3 and 14.1% in the first nine months.
- Finance and insurance revenue per retail unit increased to $1,220 in Q3 from $1,156; nine-month figure was $1,197 versus $1,118.
- SG&A increased in dollars, but declined as a share of gross profit: 74.2% versus 75.7% in Q3 and 75.2% versus 76.5% for nine months.
Cash flow, liquidity and debt
- Operating cash flow was negative $7.3 for the first nine months, versus positive $301.1 in 2011. The principal working-capital use was a $193.1 increase in inventory, compared with an inventory-related cash inflow of $111.7 in 2011.
- Investing cash outflow was $181.3, including $116.5 for acquisitions and $67.9 for property and equipment. Financing cash inflow was $213.8, mainly reflecting net floorplan borrowings and real-estate debt. Cash increased $23.9 to $38.8.
- Management reported $177.9 of working capital. At September 30, the $1.35 billion revolving facility had $543.1 of stated availability, including $317.4 on the floorplan line (of which $128.3 was immediately available) and $225.7 on the acquisition line. The separate $150 million Ford facility had $51.1 available.
- Long-term debt, including current maturities, was $567.7; floorplan notes payable included $910.8 under the credit facility, offset by $128.3 in the related offset account, and $172.7 owed to manufacturer affiliates. Total assets were $2,866.8 and stockholders’ equity $842.3.
- The company was in compliance with its credit covenants. Reported leverage ratios were 2.38 senior secured adjusted and 3.43 total adjusted, against limits below 3.75 and 5.50, respectively; fixed-charge coverage was 2.04 against a minimum of 1.35.
Outlook, material developments and risks
- Management cited improving vehicle demand and a September 2012 industry SAAR of 14.9 million, versus 13.1 million a year earlier, but expected the recovery to pre-downturn sales levels to be prolonged. It emphasized sales execution, parts and service growth, cost control, and acquisition opportunities.
- Management expected 2012 capital spending below $63 million, including about $15 million for parts-and-service growth initiatives, and an effective tax rate of approximately 38% for the remainder of 2012. It believed available cash flow and borrowing capacity would fund operations, capital expenditures, and acquisitions for the rest of the year, subject to economic conditions and plans.
- During the first nine months, the company acquired 13 dealerships—seven in the U.S. and six in the U.K.—for $116.5 million. A Texas franchise was terminated in Q3. The board authorized a new $50 million share-repurchase program in July; no purchases had been made under that authorization as of the filing.
- The 3.00% convertible notes became holder-convertible for the quarter ending December 31, 2012 following a stock-price trigger. The company reclassified $33.3 million of the notes’ redeemable equity component to temporary equity; management said it intended and was able to refinance conversions with long-term debt. The notes’ if-converted value exceeded principal by $67.8 million.
- Interest-rate swaps had $425 million notional outstanding, fixing the underlying one-month LIBOR at a weighted average 2.8%; a further $600 million of forward-starting swaps were contracted. Management estimated that a 100-basis-point rate move would change annual interest expense by about $6.2 million after swaps, based on borrowings at period-end.
- Hurricane Isaac reduced business at 12 Gulf Coast dealerships for about a week and led to $0.6 million of insurance-deductible charges. Oklahoma City hail damage also resulted in deductible charges, including $2.4 million related to vehicle inventory. Management cited consumer demand and credit, manufacturer supply and incentives, financing availability, regulation, competition, foreign exchange, and acquisition execution among the risks.
- The company reported no legal proceedings expected to have a material adverse effect, while noting that unfavorable outcomes in current or future matters remain possible. It estimated $8.2 million of remaining rental payments on certain assigned or sublet leases; environmental and other indemnification exposures may be difficult to estimate.
Important facts for investors to verify
- How much of revenue and earnings growth reflects same-store performance versus acquisitions, and whether vehicle volumes and margins are sustainable.
- Whether inventory growth and acquisition spending convert into operating cash flow; operating cash flow was negative despite higher net income.
- Available borrowing capacity, covenant headroom, and the effects of floorplan balances, interest rates, and refinancing needs.
- Potential dilution or refinancing consequences if convertible notes are converted, especially the 3.00% notes.
- Progress against the 2012 capital-spending outlook and management’s assumptions for demand, margins, and the expected tax rate.