Business Context and Reporting Period
Company: Asbury Automotive Group, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Operations: One of the largest U.S. automotive retailers, operating 106 franchises (81 locations) across 11 states. The portfolio includes new and used vehicle sales, parts and service, and finance and insurance (F&I) products. The company operates under various local brands including Coggin, Courtesy, Crown, Nalley, McDavid, North Point, Plaza, and Gray-Daniels.
Key Financial Metrics
| Metric (in millions) | Q3 2009 | Q3 2008 | 9 Months 2009 | 9 Months 2008 |
|---|---|---|---|---|
| Total Revenues | $983.0 | $1,119.4 | $2,711.4 | $3,502.2 |
| Gross Profit | $162.7 | $182.7 | $458.4 | $567.6 |
| Net Income | $7.4 | $5.5 | $13.2 | $26.0 |
| Diluted EPS | $0.22 | $0.17 | $0.40 | $0.80 |
| Cash & Equivalents | $33.7 | $21.4 | $33.7 | $21.4 |
| Total Debt (Current + Long-Term) | $802.2 | $1,212.5 | $802.2 | $1,212.5 |
| Operating Cash Flow | N/A | N/A | $59.7 | $458.6 |
Note: Total Debt includes Floor plan notes payable (trade and non-trade), current maturities of long-term debt, and long-term debt.
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 12% in Q3 2009 and 23% for the nine months ended September 30, 2009, compared to the prior year. New vehicle revenue was the primary driver, down 17% in Q3 and 28% year-to-date, reflecting a weak economic environment and tighter lending standards.
- Profitability: Despite revenue declines, Net Income increased 35% in Q3 2009 ($7.4M vs $5.5M) due to significant cost reductions. However, for the nine-month period, Net Income decreased 49% ($13.2M vs $26.0M).
- Expense Reduction: Selling, General, and Administrative (SG&A) expenses decreased 12% in Q3 and 17% year-to-date. This was driven by restructuring initiatives, including the elimination of the regional management structure and corporate office relocation, which delivered $17.9 million in operating expense reductions in Q3.
- Inventory Management: Total inventories dropped significantly from $666.6 million (Dec 31, 2008) to $426.3 million (Sep 30, 2009). New vehicle inventory days of supply decreased to 46 days.
- Discontinued Operations: The company sold four franchises and closed six franchises during the first nine months of 2009. Discontinued operations resulted in a net loss of $2.1 million in Q3 and $3.5 million for the nine months.
Guidance, Outlook, and Risks
- Outlook: Management expects the remainder of 2009 to remain a "very challenging retail environment" with continued negative impacts on new vehicle and F&I revenue. They anticipate lower net income for the full year 2009 compared to 2008, excluding 2008 impairment expenses.
- Cash for Clunkers (CARS): The federal CARS program boosted Q3 sales (approx. 3,300 units for Asbury), but management warns this may have accelerated future demand, making Q3 volumes potentially unsustainable.
- Liquidity and Debt Covenants: As of September 30, 2009, total available liquidity was $204.3 million. The company amended its credit facilities in May and July 2009 to remove total leverage ratio covenants and reduce fixed charge coverage requirements to ensure compliance in the depressed economy. These amendments included increased interest rates and restrictions on new indebtedness.
- Capital Allocation: The company has suspended acquisitions, eliminated dividend payments, and significantly reduced capital expenditure plans. A $30 million authorization was granted in October 2009 to repurchase debt or purchase leased property.
- Risks: Key risks include continued weak economic conditions, consumer credit availability, manufacturer financial health, and the ability to comply with financial covenants.
Investor Verification Checklist
- Covenant Compliance: Verify the specific terms of the amended credit facilities (BofA and JPMorgan) and the impact of increased interest rates on future earnings.
- Inventory Valuation: Review the "Lower of Cost or Market" reserves for used vehicle inventory ($2.9 million as of Sep 30, 2009) given the volatility in used car prices.
- F&I Chargebacks: Assess the adequacy of the F&I chargeback reserve ($13.5 million) given tighter lending standards and potential increases in contract defaults.
- Discontinued Operations: Monitor the status of the three franchises pending disposition and the associated liabilities ($27.7 million).
- Debt Repurchase: Track the execution of the $30 million debt repurchase authorization announced in October 2009 and its impact on the balance sheet.