Asbury Automotive Group, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods. As of June 30, the company operated 105 new-vehicle franchises at 86 dealership locations and 24 collision centers across 17 markets in nine states. Amounts below are in millions of dollars except per-share data.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $1,803.5 | $1,723.6 | $3,474.3 | $3,332.8 |
| Gross profit | $295.0 | $277.8 | $574.2 | $543.2 |
| Gross margin | 16.4% | 16.1% | 16.5% | 16.3% |
| Operating income | $85.9 | $79.6 | $163.7 | $152.8 |
| Net income | $54.9 | $43.2 | $95.8 | $83.3 |
| Diluted EPS | $2.84 | $2.11 | $4.96 | $4.02 |
- Q2 revenue rose 5%; growth came from new vehicles (+4%), used vehicles (+3%), parts and service (+10%), and finance and insurance (F&I, +9%). Gross profit increased 6% and operating income 8%.
- Q2 net income rose 27%, aided by an $11.7 million pre-tax gain on a dealership and collision-center divestiture. The gain reduced reported net interest and other expense; it is a nonrecurring contributor to the comparison.
- Parts and service and F&I were key gross-profit drivers. New-vehicle gross profit fell 6% in Q2, and same-store new-vehicle gross profit fell 9%; same-store new-vehicle margin declined to 3.9% from 4.4%. Management cited margin pressure, particularly among import brands.
- SG&A was $200.7 million in Q2, up 5%, but improved to 68.0% of gross profit from 68.6%. Floor-plan interest expense increased 31% to $10.5 million, reflecting higher inventory and interest rates.
- For the first half, revenue increased 4%, gross profit 6%, operating income 7%, and net income 15%. New-vehicle gross profit declined 4%, while parts and service gross profit increased 8% and F&I increased 7%. SG&A was 68.2% of gross profit versus 69.0%.
Cash flow, debt and liquidity
- First-half operating cash flow was $160.5 million versus $29.1 million in 2018. The company’s non-GAAP “cash provided by operating activities, as adjusted” was $85.4 million versus $121.1 million, a decline attributed primarily to inventory, receivables/contracts-in-transit timing, and other working-capital movements. The adjusted measure includes specified non-trade floor-plan cash flows and is not directly comparable across companies.
- First-half investing cash outflow was $92.3 million, including $118.5 million for acquisitions; financing cash outflow was $66.9 million. Ending cash was $9.6 million.
- Reported total available liquidity was $448.0 million, including cash, $87.4 million in floor-plan offset accounts and available capacity under credit and floor-plan facilities. Facility availability is subject to borrowing bases and covenants.
- Long-term debt, including current maturities, was $909.6 million; floor-plan notes payable, net, totaled $918.7 million. The company also reported $88.4 million outstanding under manufacturer loaner-vehicle facilities in accounts payable and accrued liabilities. Operating lease liabilities were $83.1 million.
- The company was in compliance with debt and lease covenants at quarter-end and said it expected sufficient liquidity for at least the next 12 months. A 100-basis-point change in rates could affect annual interest expense by up to $9.5 million, based on $949.1 million of variable-rate debt.
Outlook, risks and notable items
- Management forecast 2019 capital expenditures of approximately $45 million and an effective tax rate of 25%–26%. No full-year revenue or earnings guidance was provided in the filing.
- Management noted U.S. new-vehicle SAAR of 17.0 million in Q2 2019 versus 17.3 million a year earlier. It cited consumer credit availability, confidence and employment as supportive, while emphasizing sensitivity to economic conditions, interest rates, vehicle supply, incentives and demand.
- New-vehicle inventory was approximately 86 days of supply, above the company’s 70–75-day target; used-vehicle supply was approximately 33 days. Higher inventory contributed to floor-plan interest costs.
- During the first half, the company acquired eight franchises at four Indianapolis locations for $121.0 million and divested one Houston franchise and a collision center, recognizing the $11.7 million gain. A further Indianapolis store acquisition closed July 29, 2019.
- ASC 842 lease accounting was adopted January 1, 2019, adding right-of-use assets and lease liabilities; management said the adoption had minimal impact on reported financial results. The filing identifies manufacturer franchise agreements, competition and margin pressure, financing availability, interest rates, tariffs, litigation and regulatory matters as risks. Management reported no known claim expected to materially harm results, while noting outcomes cannot be predicted with certainty.
Important facts for investors to verify
- How much of earnings growth reflects recurring dealership operations versus the divestiture gain and additional retrospective F&I commissions.
- Whether new-vehicle margins recover and inventory returns toward the stated target, and how floor-plan interest costs respond to rates and inventory levels.
- Underlying cash generation, including the effect of floor-plan financing classifications and working-capital swings; compare GAAP cash flow with the company’s adjusted measure.
- Debt, lease obligations, facility availability and covenant headroom, particularly given low cash on hand and substantial floor-plan financing.
- Progress against the $45 million capital-expenditure estimate, acquisition integration and the economics of the Indianapolis expansion.