ABG

Business Context and Reporting Period

Company: Asbury Automotive Group, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2010
Business Overview: One of the largest automotive retailers in the U.S., operating 110 franchises across 84 dealership locations in 20 metropolitan markets. The portfolio is heavily weighted toward luxury and mid-line import brands (86% of new vehicle sales). The company sells new and used vehicles, provides parts and service, and offers finance and insurance (F&I) products.

Key Financial Metrics

Note: Total liquidity includes cash, credit facility availability, and floor plan offset accounts.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 16% ($529.9 million) driven by a 17% increase in new vehicle revenue and a 20% increase in used vehicle revenue. This reflects a recovery in the U.S. automotive market (SAAR improved to 11.6 million in 2010 from 10.4 million in 2009).
• Profitability: Net income surged 184% to $38.1 million. Gross profit increased 11% ($66.1 million), with significant contributions from F&I (up 28%) and Parts & Service (up 6%).
• Expense Management: SG&A expenses as a percentage of gross profit decreased 290 basis points to 77.0%, aided by the elimination of regional management structures and lower insurance costs.
• Debt Restructuring: The company incurred a $12.6 million loss on the extinguishment of long-term debt. This included repurchasing $179.4 million of 8% Senior Subordinated Notes and $25.2 million of 3% Convertible Notes, funded by the issuance of $200.0 million of 8.375% Senior Subordinated Notes due 2020.
• Discontinued Operations: The heavy truck business (10 franchises) was classified as held for sale/discontinued operations, resulting in a $0.8 million net income from discontinued operations in 2010, compared to an $11.8 million loss in 2009.

Guidance, Outlook, and Risks

• Outlook: Management expects U.S. new vehicle sales (SAAR) to improve to between 12.5 million and 13.0 million in 2011. The company anticipates continued reliance on manufacturer incentives to drive demand.
• Capital Allocation: The Board authorized a $25.0 million common stock repurchase program in December 2010 and a $30.0 million debt repurchase authorization in February 2011. Capital expenditures for 2011 are estimated at approximately $35.0 million (excluding real estate).
• Management Succession: Former CEO Charles R. Oglesby is retiring in July 2011; Craig T. Monaghan (former CFO) was elected President and CEO in February 2011.
• Key Risks:
  • Liquidity: Continued challenging economic conditions could impact cash flows and the ability to service debt.
  • Manufacturer Dependence: Profitability relies on the success of specific vehicle lines and the willingness of manufacturers to provide incentives.
  • Interest Rates: A significant portion of debt is variable rate; a 1% increase in rates could increase annual interest expense by up to $4.8 million.
  • Covenants: The company must maintain compliance with financial covenants in debt and lease agreements to avoid default.

Investor Verification Checklist

• Debt Covenants: Verify continued compliance with the fixed charge coverage ratio (1.20 to 1.00) and other financial covenants in the BofA Revolving Credit Facility and Wachovia Master Loan Agreement.
• Inventory Levels: Monitor used vehicle inventory days supply (target is 30 days; was 35 days at year-end) to assess potential markdown risks.
• Manufacturer Incentives: Assess the sustainability of manufacturer incentive programs, which significantly impacted 2010 gross margins.
• Divestiture Progress: Track the closing of the heavy truck business and other pending dispositions to confirm the realization of assets held for sale.
• Interest Rate Exposure: Evaluate the impact of rising interest rates on variable-rate floor plan notes and the effectiveness of existing interest rate swaps.