ABG

Asbury Automotive Group, Inc. - Q1 2006 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2006. Asbury Automotive Group, Inc. is a national automotive retailer operating 122 franchises across 89 dealership locations in 22 metropolitan markets within 11 states. The company offers new and used vehicles, parts, service, collision repair, and finance and insurance (F&I) products. In April 2006, subsequent to the reporting period, the company sold its remaining two dealerships in Portland, Oregon, reducing its market presence to 21 metropolitan areas.

Key Financial Metrics

Note: Debt figures include floor plan notes payable and long-term debt. Floor plan notes payable totaled $659.4 million as of March 31, 2006.

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 8% year-over-year, driven by a 12% increase in used vehicle revenue and a 12% increase in parts, service, and collision repair revenue. New vehicle revenue rose 7%.
• Profitability: Net income increased 30% to $12.6 million. Income from continuing operations rose 38% to $13.6 million. Adjusted income from continuing operations (excluding stock compensation and reorganization costs) increased 19% to $14.5 million.
• Expense Management: Selling, general, and administrative (SG&A) expenses increased 5% to $165.7 million. However, adjusted SG&A as a percentage of gross profit improved by 180 basis points to 77.7%, aided by regional reorganization and advertising efficiencies.
• Interest Expense: Floor plan interest expense surged 40% to $9.2 million due to rising interest rates, despite lower average floor plan balances. Other interest expense increased 14% to $10.9 million.
• Discontinued Operations: The company reported a loss of $1.1 million from discontinued operations, compared to a $0.2 million loss in the prior year, primarily due to operating losses from franchises pending disposition.

Guidance, Outlook, and Risks

• Accounting Changes: The company adopted SFAS No. 123R (Share-Based Payment) effective January 1, 2006, resulting in $1.4 million of stock-based compensation expense for the quarter. Management expects total stock compensation for 2006 to be approximately $5.5 million.
• Capital Expenditures: Capital expenditures for 2006 are projected to total approximately $80.0 million, with 60% expected to be financed through sale-leaseback agreements.
• Acquisitions: The company anticipates spending between $25.0 million and $50.0 million on acquisitions in 2006, targeting $100.0 million to $200.0 million in annualized revenue.
• Interest Rate Risk: With $694.9 million in variable rate debt, a 1% increase in interest rates would increase annual interest expense by approximately $6.9 million. Three interest rate swaps expired in March 2006, which will increase interest expense by $1.7 million in 2006.
• Liquidity: The company maintains a committed credit facility with $125.0 million available for working capital and $795.0 million for floor plan financing. All debt covenants were met as of March 31, 2006.
• Divestitures: The company continues to evaluate its portfolio, specifically the bottom 10% of dealerships by operating income contribution, and may divest underperforming assets.

Key Facts for Investor Verification

• Verify the impact of rising interest rates on future floor plan interest expenses, given the expiration of hedging instruments.
• Monitor the execution of the $80 million capital expenditure plan and the success of sale-leaseback financing.
• Assess the performance of the "same store" metrics, particularly the 14% increase in used vehicle retail gross profit and the 8% increase in fixed operations gross profit.
• Review the status of the three franchises pending disposition as of March 31, 2006, and their impact on future discontinued operations losses.
• Confirm the company's ability to maintain debt covenants, specifically the adjusted leverage ratio (3.1 to 1) and fixed charge coverage ratio (1.5 to 1), amidst rising interest costs.