ABG

Asbury Automotive Group Inc. - 10-Q Summary (Period Ended June 30, 2005)

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2005, and the six months ended on that date. Asbury Automotive Group, Inc. is a national automotive retailer operating 94 dealership locations (129 franchises) across 23 metropolitan markets in 11 states. The company offers new and used vehicles, parts, service, collision repair, and finance/insurance products. During the first quarter of 2005, the company reorganized its operations into four primary regions (Florida, West, Mid-Atlantic, and South) to improve management effectiveness and cost efficiencies.

Key Financial Metrics

Note: Total Debt includes Floor plan notes payable ($613,137), Current maturities of long-term debt ($32,936), and Long-term debt ($476,408).

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 12% for the quarter and 14% for the six-month period compared to the prior year. This was driven by increases in new and used vehicle sales volumes and substantial growth in fixed operations (parts, service, and collision repair).
• Profitability: Net income increased 8% for the quarter and 2% for the six-month period. Income from continuing operations rose 9% (quarter) and 4% (six months).
• Margin Pressure: While gross profit increased, the company noted margin pressure on new vehicle retail sales due to manufacturer incentive programs. However, this was offset by improved gross profit per vehicle retailed (PVR) in used vehicles and F&I.
• Interest Expense: Floor plan interest expense increased significantly (up 63% for the quarter and 64% for six months) due to rising interest rates.
• Discontinued Operations: The company recorded a net loss from discontinued operations of $1.5 million for the quarter and $2.3 million for the six months, primarily due to the sale of dealership locations and operating losses of pending dispositions.

Guidance, Outlook, and Risks

• Reorganization Impact: The company incurred $3.6 million in severance and reorganization costs in the first six months of 2005. Management estimates this will negatively impact 2005 income by $0.03 per diluted share but expects to improve income by approximately $3.0 million annually starting in 2006.
• Capital Expenditures: Expected to total between $80.0 million and $90.0 million for 2005, with 60-70% financed through sale-leaseback agreements.
• Acquisitions: The company plans to spend between $25.0 million and $50.0 million on acquisitions in 2005.
• Liquidity: As of June 30, 2005, the company had $11.0 million in cash and $145.0 million available under its committed credit facility. Management believes these resources are sufficient for foreseeable needs.
• Risks: Key risks include rising interest rates (impacting floor plan costs), manufacturer incentive programs compressing new vehicle margins, and the potential loss of dealer agreements. The company utilizes interest rate swaps to hedge against variable rate debt risks.

Investor Verification Checklist

• Inventory Levels: Verify the $722.2 million inventory balance against sales velocity, noting the $4.4 million reserve for lower of cost or market.
• Debt Covenants: Confirm continued compliance with the Committed Credit Facility covenants (Adjusted Current Ratio 1.5:1, Fixed Charge Coverage 1.5:1, Leverage 3.6:1).
• Reorganization Savings: Monitor the realization of the projected $5.0 million annual SG&A reduction starting in 2006.
• Interest Rate Exposure: Assess the impact of rising rates on the $236.2 million of variable rate debt and the effectiveness of the $170 million interest rate swap hedge.
• Discontinued Operations: Track the final disposition of the three dealership locations (five franchises) currently held for sale.