Asbury Automotive Group, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; balance sheet compared with December 31, 2019. Dollar amounts are in millions unless noted.
Business context and period
Asbury operated 113 new-vehicle franchises across 90 dealership locations, 25 collision centers, and 31 brands in nine states. Revenue comes from new and used vehicles, parts and service, and finance and insurance (F&I). Results reflect COVID-19 disruption and the August 24 acquisition of Park Place’s 12 franchises, two collision centers, and an auto auction for a purchase price of $889.9.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $1,845.4 | $1,842.0 | $4,897.8 | $5,316.3 |
| Gross profit | $335.9 | $293.1 | $851.1 | $867.3 |
| Gross margin | 18.2% | 15.9% | 17.4% | 16.3% |
| Operating income | $119.1 | $82.2 | $236.3 | $245.9 |
| Net income | $96.2 | $45.0 | $165.3 | $140.8 |
| Diluted EPS | $4.96 | $2.33 | $8.56 | $7.30 |
- Q3 revenue was nearly flat year over year; new-vehicle revenue fell 3%, while used-vehicle and parts-and-service revenue each rose 4%. Q3 net income more than doubled, with higher vehicle gross profit, lower floor-plan interest, and a $24.7 dealership-divestiture gain contributing.
- For the nine months, revenue declined 8% and gross profit declined 2%, while net income increased 17%. Higher new- and used-vehicle gross profit and lower SG&A and floor-plan interest helped offset lower parts-and-service and F&I gross profit, a $23.0 franchise-rights impairment, and debt-refinancing costs.
- Q3 SG&A was $206.5, or 61.5% of gross profit, versus $202.0, or 68.9%, a year earlier. The nine-month ratio was 65.0%, versus 68.5%.
- Cash from operating activities was $625.2 for the nine months, versus $347.7. The company’s adjusted operating cash flow measure, which includes specified floor-plan cash flows, was $417.8 versus $168.3. Inventory changes were a significant source of reported operating cash flow.
- Cash was $4.1 at September 30. Reported total available liquidity was $384.9: cash, $39.8 in floor-plan offset accounts, $237.3 of revolving-credit availability, and $103.7 of used-vehicle floor-plan availability.
- Long-term debt, including current maturities, was $1,223.8; separately, net floor-plan notes payable totaled $695.6. Total debt outstanding was reported as $1,234.6, excluding floor-plan notes. Shareholders’ equity was $811.9.
Material changes and unusual items
- Park Place contributed $148.4 of revenue and $7.0 of net income from August 24 through September 30. Its preliminary purchase-price allocation included $685.9 of goodwill and intangible assets; valuations were not final.
- In March, the company redeemed $600.0 of 6.0% notes due 2024 at 103% of par and recorded a $19.1 loss on extinguishment. It also redeemed portions of the 2028 and 2030 notes after terminating the original Park Place transaction; the associated debt-cost write-off contributed to the reported $20.6 nine-month debt-extinguishment loss.
- In September, it issued an additional $250.0 of 4.50% notes due 2028 and 4.75% notes due 2030. Proceeds were used to redeem $200.0 of Park Place seller notes and repay about $50.0 under the revolving facility.
- Nine-month dealership divestitures generated a $58.4 pretax gain, compared with $11.7 in 2019. The original Park Place deal termination resulted in a $10.0 liquidated-damages payment; the company reported $11.6 of related termination expense in other operating expense.
- The first quarter included a $23.0 non-cash impairment of franchise rights. No further goodwill or franchise-rights impairment was recorded in Q2 or Q3.
Outlook, management commentary, and risks
- Management said the recovery that began in May and June continued in Q3. U.S. new-vehicle SAAR was 15.4 million in Q3 versus 17.0 million a year earlier. New-vehicle supply constraints lifted vehicle gross profit per unit, but Asbury ended Q3 with about 47 days of new-vehicle supply, below its 70–75-day target; used-vehicle supply was 35 days, within its 30–35-day target.
- Management expected sufficient liquidity for at least the next 12 months. It estimated 2020 capital expenditures of approximately $27.6 and an effective tax rate near 25%. It expected SG&A as a percentage of gross profit to return toward its historical mid-to-upper 60% range in future quarters.
- COVID-19 risks include renewed operating restrictions, weaker customer traffic or spending, manufacturer and parts supply disruptions, and possible further impairment charges. Management said the pandemic’s duration and overall financial impact could not be reasonably estimated.
- Other material risks include Park Place integration and realization of anticipated savings, leverage and covenant compliance, variable-rate debt, consumer credit availability, manufacturer relationships and franchise agreements, competition, cybersecurity, regulation, and litigation. A 100-basis-point rate increase could raise annual interest expense by as much as $6.8 based on variable-rate debt at quarter-end.
- The company reported compliance with debt covenants at September 30 and effective disclosure controls. It said known claims were not expected to materially harm results, but adverse resolutions could have a material effect. It had $12.7 of letters of credit outstanding and a $7.7 surety-bond line.
Important facts for investors to verify
- Whether the Q3 improvement in vehicle margins can persist as vehicle supply recovers, and whether new-vehicle inventory returns toward target.
- Park Place integration progress, final purchase accounting, realized synergies, and any additional integration costs or liabilities.
- Liquidity and debt-service capacity after the acquisition and refinancing, including floor-plan obligations, borrowing availability, and covenant headroom.
- Whether parts-and-service volumes recover and whether management’s expected SG&A ratio and capital-expenditure outlook hold.
- Potential further COVID-related impairments and the outcome of legal, regulatory, manufacturer, and other contingencies.