Asbury Automotive Group, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Asbury operated 102 new-vehicle franchises across 83 dealership locations, plus 24 collision centers, in nine states. The quarter was materially affected by COVID-19 disruptions and a gradual sales recovery in May and June.
Financial performance
- Q2 revenue: $1.445 billion, down 20% from $1.804 billion a year earlier. New vehicles declined 21%, used vehicles 16%, parts and service 25%, and finance and insurance (F&I) 17%.
- Q2 earnings: Gross profit was $242.8 million, down 18%; operating income was $82.2 million, down 4%; net income was $49.6 million, down 10%. Diluted EPS was $2.57 versus $2.84.
- Q2 margins and costs: Gross margin increased to 16.8% from 16.4%. SG&A was $152.2 million, down 24%, and 62.7% of gross profit versus 68.0% a year earlier. New- and used-vehicle gross profit per retail unit improved, while parts-and-service gross profit fell 29%.
- First-half revenue and earnings: Revenue was $3.052 billion, down 12%; gross profit was $515.2 million, down 10%; operating income was $117.2 million, down 28%; net income was $69.1 million, down 28%. Diluted EPS was $3.58 versus $4.96. Gross margin was 16.9% versus 16.5%.
- Cash flow: First-half net cash from operating activities was $554.6 million versus $160.5 million. The filing’s adjusted operating cash flow measure, which includes specified floor-plan cash flows, was $255.4 million versus $85.4 million. Investing activities provided $36.1 million, including dealership divestiture proceeds; financing activities provided $19.0 million. Cash ended the period at $613.2 million.
- Debt and liquidity: Total debt outstanding was $1.244 billion at June 30; long-term debt, including current maturities and net of issuance costs, was $1.234 billion. Total available liquidity was $746.9 million: $613.2 million cash, $116.7 million in floor-plan offset accounts, and $17.0 million available under the used-vehicle floor-plan facility. The revolving credit facility had no remaining availability at quarter-end; Asbury repaid $162 million on it in July. The company reported covenant compliance.
- Balance sheet: Total assets were $2.934 billion and shareholders’ equity was $713.1 million at June 30. Inventories were $636.4 million, down from $985.0 million at year-end 2019.
Material changes and unusual items
- COVID-19 drove steep sales and service declines in late March and April; activity rebounded gradually in May and June. U.S. new-vehicle SAAR was 11.3 million in Q2 versus 17.1 million a year earlier. Quarter-end new-vehicle supply was about 52 days, below the 70–75-day target; used supply was 26 days versus a 30–35-day target.
- Management reported Q2 gross margins improved over the prior year and that May and June profitability exceeded the comparable prior-year months. Cost actions included furloughing about 2,300 employees, permanently reducing the workforce by 1,300, reducing pay temporarily, cutting marketing and deferring most capital spending. Full pay was restored for most affected employees in July.
- First-half results included a $23.0 million non-cash franchise-rights impairment, a $20.6 million debt-extinguishment loss, $33.7 million of gains on dealership divestitures, and $8.9 million of other operating expense. The latter included an $11.6 million charge related to terminating the initial Park Place transaction.
- Asbury refinanced its $600 million 6% notes with 2028 notes at 4.50% and 2030 notes at 4.75%, then redeemed portions of the new notes after the initial Park Place acquisition was terminated. The resulting debt-extinguishment charges weighed on first-half earnings.
- On July 6, 2020, Asbury signed a revised agreement to acquire 12 Park Place franchises, two collision centers and an auto auction. Stated consideration is approximately $685 million for goodwill and $50 million for parts, fixed assets and leaseholds, excluding vehicle inventory and subject to adjustments. The transaction is subject to customary conditions, including manufacturer approvals, and has no financing condition. Funding is expected from cash, debt and seller financing.
Outlook, risks and contingencies
- Management gave no specific revenue or earnings guidance in the provided filing text. It expects 2020 capital expenditures of approximately $29.3 million and an effective tax rate of about 25%; it said it expects liquidity to cover requirements for at least the next 12 months.
- Management expects SG&A as a percentage of gross profit to return to historical mid-to-upper-60% levels in future quarters. It cautioned that pandemic duration and effects remain uncertain, with possible further demand, supply-chain, liquidity and asset-impairment impacts.
- Other risks include reduced vehicle production and inventory availability, consumer credit and demand, interest-rate exposure, manufacturer franchise relationships, leverage and covenant compliance, and execution, integration, cost and liability risks related to the revised Park Place transaction. A 100-basis-point rate change on $926.5 million of variable-rate debt could change annual interest expense by as much as $9.3 million.
- The filing reports no known claim expected to materially adversely affect results, but legal outcomes are uncertain. Asbury had $12.7 million of letters of credit and a $5.3 million surety bond line outstanding/maintained at quarter-end.
Investor facts to verify
- Whether the revised Park Place transaction receives manufacturer approvals, closes on expected terms, and is funded without impairing liquidity or increasing leverage beyond expectations.
- Whether May–June recovery persisted, particularly in parts and service, and how constrained new-vehicle supply affects unit volumes and margins.
- How cash generation develops after accounting for floor-plan borrowings and repayments, inventory movements, and divestiture proceeds.
- Whether the reported $746.9 million liquidity remains available after the July revolver repayment and in light of transaction funding needs and debt covenants.
- Whether further COVID-related impairment charges, workforce and cost changes, or transaction-related costs materially affect future earnings.