Asbury Automotive Group, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are to Q1 2018 unless noted. Asbury operated 106 new-vehicle franchises, 87 dealership locations and 25 collision centers across nine states.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $1,670.8 million | $1,609.2 million | +4% |
| Gross profit | $279.2 million | $265.4 million | +5% |
| Gross margin | 16.7% | 16.5% | +0.2 percentage points |
| Operating income | $77.8 million | $73.2 million | +6% |
| Income before taxes | $53.7 million | $53.4 million | +1% |
| Net income | $40.9 million | $40.1 million | +2% |
| Diluted EPS | $2.11 | $1.93 | +9% |
| Operating cash flow, GAAP | $65.2 million | $35.8 million | +$29.4 million |
- Revenue growth was led by parts and service (+9%), used vehicles (+5%) and finance and insurance (+5%); new-vehicle revenue rose 2%. Parts and service and F&I generated 74.1% of gross profit combined.
- New-vehicle gross profit fell 2%; same-store new-vehicle gross profit declined 5%, with domestic-brand margin pressure. Same-store used-vehicle gross profit decreased 2% despite higher revenue per retail unit.
- SG&A increased 4% to $191.0 million, but declined to 68.4% of gross profit from 69.4%. Floor-plan interest expense rose 55% to $10.2 million, primarily from higher LIBOR and greater new-vehicle inventory borrowings.
- Management’s non-GAAP “cash provided by operating activities, as adjusted” was $97.9 million versus $83.0 million. This adds net non-trade new-vehicle floor-plan borrowings to GAAP operating cash flow; it is not a substitute for GAAP cash flow.
- Investing cash outflow was $127.0 million, including $118.5 million of acquisitions. Financing cash inflow was $64.4 million. Cash ended the quarter at $10.9 million.
Balance sheet and liquidity
- At March 31, 2019, total assets were $2.90 billion and shareholders’ equity was $504.6 million. Long-term debt, including current maturities, was $913.4 million; floor-plan notes payable, net, totaled $1.035 billion. Operating lease liabilities were $77.7 million.
- Total available liquidity was $315.4 million: cash of $10.9 million, floor-plan offset funds of $45.0 million, and stated availability across credit and floor-plan facilities of $259.5 million. Management said liquidity was sufficient for at least the next 12 months; the filing also notes facility availability is subject to borrowing bases and covenants.
- Approximately $1.1 billion of variable-rate debt was outstanding. Management estimated a 100-basis-point rate change could alter annual interest expense by as much as $10.8 million. Interest-rate swaps partially hedge this exposure.
Material changes, outlook and risks
- Asbury acquired eight franchises at four Indianapolis-area dealership locations for a purchase price of $121.0 million, funded with cash, floor-plan borrowings and holdbacks. Goodwill increased to $213.2 million, including preliminary acquisition goodwill.
- A dealership disposal was pending at quarter-end and closed April 29, 2019. Assets and associated liabilities held for sale were $55.3 million and $17.7 million, respectively.
- The company adopted ASC 842 lease accounting on January 1, 2019, recording lease right-of-use assets and liabilities; management said the adoption had minimal impact on Q1 financial results. Comparative periods were not restated.
- Management expected 2019 capital expenditures of approximately $45 million and an effective tax rate of 25%–26%. It noted that revenue and operating income are historically higher in the second through fourth quarters; no full-year revenue or earnings guidance was provided.
- Risks highlighted include economic and consumer-credit conditions, interest rates, vehicle demand and manufacturer incentives, competition and margin pressure, vehicle supply disruptions, tariffs and trade restrictions, manufacturer franchise relationships, covenant compliance, litigation, and access to floor-plan and other financing. The company reported covenant compliance at quarter-end and no known claims expected to materially harm results, while noting outcomes remain uncertain.
- Q1 included a $2.4 million pre-tax fixed-asset write-off within other operating expense. The company repurchased $7.4 million of shares under its program and spent another $4.7 million on employee share net settlements.
Investor verification points
- Track whether parts-and-service growth and improved SG&A efficiency persist, and whether new-vehicle gross-profit pressure continues.
- Verify the acquired dealerships’ contribution to earnings and cash flow, and the final allocation of purchase price, including franchise rights.
- Monitor floor-plan balances, interest costs, variable-rate exposure, facility availability and covenant headroom.
- Reconcile reported GAAP operating cash flow with the company’s adjusted non-GAAP measure and assess acquisition-related cash requirements.
- Confirm realization of the stated $45 million capital-expenditure plan, 25%–26% tax-rate outlook and completed dealership sale.