Asbury Automotive Group, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with Q1 2017 unless otherwise noted. Amounts are in millions of dollars except per-share data. Asbury operated 95 new-vehicle franchises at 81 dealership locations and 25 collision centers across 17 metropolitan markets in nine states.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / prior balance | Change |
|---|---|---|---|
| Revenue | $1,609.2 | $1,551.7 | Up 4% |
| Gross profit / gross margin | $265.4 / 16.5% | $260.1 / 16.8% | Profit up 2%; margin down 30 bps |
| Income from operations | $73.2 | $72.3 | Up 1% |
| Net income | $40.1 | $34.0 | Up 18% |
| Diluted EPS | $1.93 | $1.61 | Up 20% |
| Cash from operating activities (GAAP) | $35.8 | $98.3 | Down $62.5 |
| Cash from operating activities, adjusted by company for non-trade floor-plan flows | $83.0 | $82.9 | Essentially unchanged |
| Cash and cash equivalents | $4.8 | $4.7 at Dec. 31, 2017 | Up $0.1 |
| Long-term debt, including current portion | $872.1 | $875.5 at Dec. 31, 2017 | Down $3.4 |
Revenue increased across new vehicles (+3%), used vehicles (+5%), parts and service (+4%), and finance and insurance (+3%). Parts and service and F&I drove gross-profit growth, partly offset by lower new- and used-vehicle gross profit. New-vehicle gross profit per unit fell 5% to $1,632; used-vehicle retail gross profit per unit fell 5% to $1,565. Parts and service gross profit rose 4% to $125.1. SG&A increased 2% to $184.2, but declined slightly as a share of gross profit, to 69.4% from 69.6%.
The effective tax rate fell to 24.9% from 36.0%, mainly reflecting the Tax Cuts and Jobs Act, and was the principal reason net income rose faster than pretax income, which increased 1% to $53.4. The filing reports $795.1 of net floor-plan notes payable at March 31 ($110.5 trade and $684.6 non-trade), in addition to long-term debt. Total available liquidity was $378.4, including cash, floor-plan offset balances, and unused credit capacity.
Material changes and cash flows
- GAAP operating cash flow fell to $35.8 from $98.3. The company’s adjusted measure, which includes specified non-trade floor-plan activity, was $83.0 versus $82.9; this non-GAAP measure is not directly comparable across companies.
- Investing activities used $64.4, including $45.5 for acquisitions and $17.6 for real estate purchases. The company acquired one Indianapolis franchise and dealership location for $46.5.
- Financing activities provided $28.7. Asbury repurchased 296,822 shares for $20.0 under its program and spent a further $4.4 on employee share-settlement repurchases. Remaining program authorization was $80.0.
- Inventory increased to $912.8 from $826.0 at year-end, while net floor-plan debt increased to $795.1 from $732.1.
Outlook, commentary, and risks
- Management expected a 2018 effective tax rate of 25%–26%; it had not yet estimated the potential effect of certain Tax Act changes, including the Section 162(m) limitation, and expected to complete its Tax Act accounting during 2018.
- Expected 2018 capital expenditures were approximately $50.0, for facility upgrades, construction, service capacity, technology, and equipment. The company said it believed liquidity would be sufficient for at least the next 12 months.
- Management noted typical seasonality: revenue and operating income have historically been higher in the second through fourth quarters. U.S. new-vehicle SAAR was 17.2 million in both comparative first quarters.
- Risks include vehicle demand and availability, manufacturer incentives and franchise relationships, competitive pricing and margin pressure, consumer credit and interest rates, litigation and regulation, and access to financing. A 100-basis-point rate change could alter annual interest expense by as much as $7.8, based on $781.7 of variable-rate debt at quarter-end. Interest-rate swaps partially hedge exposure.
- Known claims were not expected by management to materially affect results, but outcomes are uncertain. Manufacturer agreements may require costly facility improvements. Letters of credit of $12.8 and a $5.0 surety-bond line were disclosed as off-balance-sheet arrangements.
- ASC 606 was adopted January 1, 2018 using the modified retrospective method. It increased Q1 2018 net income by $0.9 less than continued ASC 605 accounting would have; prior-year comparisons were not restated. Adoption increased opening retained earnings by $9.2, and the filing says it did not affect cash flows.
Important facts for investors to verify
- Whether vehicle-margin pressure—particularly in import and used-vehicle retail—continues, and whether parts-and-service and F&I gains offset it.
- How operating cash flow and inventory funding develop; distinguish GAAP operating cash flow from management’s adjusted non-GAAP measure.
- Whether the expected 25%–26% tax rate is achieved and whether final Tax Act accounting changes the provision.
- Interest-rate exposure, floor-plan borrowing, covenant compliance, and the availability of stated liquidity.
- Execution and funding of the $50.0 capital expenditure plan, acquisitions, and remaining share-repurchase authorization.