Business context and reporting period
Asbury Automotive Group, Inc. filed this Form 10-K for the fiscal year ended December 31, 2012. It operated 98 franchises at 77 dealership locations across 18 metropolitan markets in 10 states, selling new and used vehicles and providing parts and service, collision repair, and finance and insurance (F&I) products. Results are consolidated; the company reports one automotive-retail segment.
The filing also provides unaudited fourth-quarter results. Unless noted otherwise, financial figures below are for the full fiscal year and are in millions of dollars.
Financial performance and liquidity
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Revenue | $4,640.3 | $4,140.1 | Up 12% |
| Gross profit | $763.6 | $699.0 | Up 9% |
| Income from operations | $185.9 | $131.2 | Up 42% |
| Income from continuing operations | $83.3 | $46.5 | Up 79% |
| Net income | $82.2 | $67.9 | Up 21% |
| Diluted EPS, continuing operations | $2.64 | $1.43 | Up 85% |
- Revenue growth reflected new vehicles of $2,607.4 (up 16%), used vehicles of $1,301.0 (up 8%), parts and service of $565.3 (up 2%), and F&I of $166.6 (up 22%).
- Gross margin was approximately 16.5%, versus 16.9% in 2011. Operating margin was approximately 4.0% and net margin approximately 1.8%, calculated from reported figures. SG&A declined to 72.8% of gross profit from 76.1%.
- Parts and service generated 42.9% of gross profit and F&I 21.8%; new vehicles generated 56.2% of revenue but 21.7% of gross profit. New and used retail gross profit per vehicle declined 5% and 3%, respectively, on a same-store basis.
- Cash provided by operating activities, as reported under GAAP, was negative $20.7, compared with negative $181.1 in 2011. Management’s non-GAAP adjusted operating cash flow measure was positive $114.7, down from $135.1. The filing cautions that this adjusted measure has limitations and may not be comparable with similarly titled measures at other companies.
- Investing activities used $113.5 of cash; financing activities provided $129.0. Year-end cash was $6.2, down from $11.4.
- Year-end total debt was $466.0, excluding floor-plan notes payable of $562.1. Working capital was $206.6. Available liquidity was $232.7, comprising $6.2 cash, $213.9 revolving-credit availability, and $12.6 in the floor-plan offset account. The company reported covenant compliance at year-end.
- Debt included $200.0 of 8.375% notes due 2020, $143.2 of 7.625% notes due 2017, and $118.9 of mortgage notes. The $15.1 remaining principal of 3% convertible notes matured and was repaid in September 2012.
Fourth-quarter 2012 revenue was $1,218.7, gross profit $194.2, net income $22.8, and diluted EPS $0.73. Fourth-quarter 2011 figures were $1,058.0, $174.6, $21.5, and $0.68, respectively.
Material changes versus the prior comparable period
- U.S. new-vehicle SAAR rose to 14.5 million in 2012 from 12.8 million in 2011. Same-store new-vehicle retail units increased 16%; used retail units rose 6%.
- F&I and parts-and-service gross profit increased 22% and 5%, respectively. Same-store parts-and-service gross margin improved 200 basis points to 58.0%; F&I per retail vehicle sold rose 9% to $1,212.
- Overall gross margin fell 40 basis points, reflecting lower same-store new- and used-retail margins and a lower parts-and-service share of gross profit, partly offset by improved parts-and-service margin. SG&A leverage improved, contributing to stronger operating income.
- 2011 net income included $22.3 of after-tax gains from business disposals. Accordingly, 2012 net income growth was slower than the increase in continuing-operations income.
- The company acquired two franchises at two dealership locations in December 2012 for $34.7. It sold two franchises during 2012, closed two others, and had one franchise pending disposition at year-end. One additional Houston franchise was sold in January 2013.
Outlook, commentary, risks, and unusual items
- Management described the economic recovery as fragile and the timing of a stronger recovery as uncertain, while citing improved consumer confidence, credit availability, and pent-up demand as contributors to 2012 performance. No specific revenue or earnings guidance was provided.
- Management expected 2013 capital expenditures of approximately $45.0, excluding real-estate purchases, and an effective tax rate of 38%–40%. It said liquidity should be sufficient for at least the next 12 months.
- Key sensitivities include vehicle demand and brand mix, consumer credit availability, manufacturer vehicle allocation and incentive programs, competition and sales margins, and the stability of parts-and-service demand. The company’s 86% luxury and mid-line import mix and dependence on franchise agreements expose it to manufacturer-specific and local-market risks.
- Interest-rate exposure is material: $661.3 of variable-rate debt, including floor-plan debt, was outstanding at year-end; a 1 percentage-point rate increase could raise annual interest expense by as much as $6.6. Management noted that manufacturer floor-plan assistance may increase as rates rise, but its future amount is uncertain.
- Unusual items included $1.1 of after-tax real-estate-related charges affecting 2012 continuing results, and $2.3 of non-cash impairment charges on assets held for sale and other property. The company also recorded $1.4 of insurance-related operating income. The 2011 period included legal-claim and executive-separation expenses.
- The company was discussing alleged overpayments for vehicle-service work with a manufacturer affiliate and had accrued its best estimate of probable exposure. It estimated that reasonably possible losses above accrued amounts for known claims could total up to approximately $0.5; management did not expect known claims to have a material adverse effect, but outcomes remain uncertain.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. The internal-control assessment excluded two franchises acquired in December 2012, which represented approximately $26.4 of assets and $4.9 of 2012 revenue.
Important facts for investors to verify
- Reconcile reported negative GAAP operating cash flow with management’s adjusted operating cash flow measure, including floor-plan financing and inventory movements.
- Assess whether higher vehicle volumes can be sustained without further pressure on new- and used-retail gross profit per vehicle and overall gross margin.
- Review total borrowing needs, floor-plan balances, covenant headroom, debt maturities, and exposure to rising interest rates.
- Track the outcome and potential financial effect of the manufacturer overpayment matter, other legal claims, and remaining asset or franchise dispositions.
- Confirm delivery of the stated 2013 capital-spending and tax-rate expectations, and monitor liquidity and cash conversion against management’s outlook.