Asbury Automotive Group, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; comparisons are with the corresponding 2013 periods. Asbury operated 81 dealership locations and 24 collision repair centers across 10 states. Its new-vehicle brand mix was 85% luxury and mid-line imports.
Financial performance
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Revenue | $1,503.4 million | $1,345.3 million | $2,859.1 million | $2,570.7 million |
| Gross profit | $247.9 million | $222.3 million | $478.0 million | $428.6 million |
| Income from operations | $72.2 million | $57.4 million | $136.4 million | $110.0 million |
| Income from continuing operations | $36.2 million | $27.2 million | $67.7 million | $51.1 million |
| Net income | $35.9 million | $27.0 million | $67.3 million | $59.5 million |
| Diluted EPS | $1.18 | $0.87 | $2.20 | $1.91 |
- Q2 revenue rose 12%; gross profit rose 12%; net income rose 33%. First-half revenue rose 11%, gross profit 12%, continuing income 32%, and net income 13%.
- Q2 gross margin was 16.5%, unchanged year over year; first-half gross margin was 16.7%, also unchanged. SG&A was 68.3% of gross profit in Q2 versus 69.2%; first-half SG&A was 68.8% versus 70.4%.
- All four business lines grew gross profit. Q2 parts and service gross profit increased 11%, new vehicles 15%, used vehicles 8%, and finance and insurance 11%. Same-store used-vehicle retail margin declined 40 basis points in Q2 and 50 basis points for the first half.
- For the first half, net cash provided by operating activities was $80.7 million versus $24.7 million. Management’s non-GAAP adjusted measure, which includes specified non-trade floor-plan cash flows, was $86.1 million versus cash used of $40.1 million. Net investing cash outflow was $53.8 million; net financing cash outflow was $25.3 million. Cash ended the period at $7.0 million, compared with $5.4 million at year-end 2013.
- At June 30, cash was $7.0 million, total assets $1,935.9 million, shareholders’ equity $528.8 million, and long-term debt including current maturities $548.9 million. Floor-plan notes payable were $610.7 million ($546.7 million non-trade and $64.0 million trade). Total available liquidity was $308.5 million, including borrowing availability and the floor-plan offset account.
Changes and drivers
- Growth reflected higher vehicle volumes, stronger parts and service and F&I results, and contributions from acquisitions. Same-store new-vehicle units rose 7% in Q2; same-store used retail units rose 3%. Q2 U.S. new-vehicle SAAR was 16.6 million versus 15.5 million.
- Q2 2013 included $5.2 million of pre-tax real-estate-related operating charges. First-half 2013 net income included an $8.9 million after-tax gain on a dealership sale; consequently, first-half net income growth was lower than growth in continuing income.
- Two acquisitions were completed in the first half for $21.9 million: a Greenville franchise and an Orlando dealership. No franchises were pending disposition at June 30.
- Share repurchases totaled $29.4 million under the authorized program in the first half, plus $6.2 million of employee net-share-settlement repurchases. Remaining program authorization was $40.6 million at June 30.
Outlook, risks and unusual items
- Management expected 2014 effective income tax rate of 38%–40%. It estimated approximately $60 million of 2014 capital expenditures for facilities, service capacity, technology and equipment, and anticipated up to $25 million of additional investment in two planned Q auto used-vehicle stores during the remainder of 2014.
- Management said it believed liquidity would be sufficient for at least the next 12 months and reported compliance with debt covenants at June 30. In July, the company entered into $59.8 million of additional fixed-rate mortgage notes, secured by dealership real estate, and the board increased the stock repurchase authorization to $100 million.
- Risks cited include economic and consumer-credit conditions, interest rates, vehicle supply and demand, manufacturer relationships and franchise agreements, recalls or supply disruptions, competition and margin pressure, access to financing, and litigation and regulatory matters. Used-vehicle supply and resulting margin pressure were specifically noted; inventory supply was about 41 days at June 30 versus 36 days at March 31.
- A 1% change in rates on $610.7 million of variable-rate debt, including floor-plan notes, could change annual interest expense by as much as $6.1 million. Interest-rate swaps hedge some variable-rate exposure; the company expected $1.9 million of swap losses to be reclassified from accumulated other comprehensive income to earnings over the next 12 months.
- The filing reports $14.6 million of outstanding letters of credit and a $5.0 million surety-bond line. Management did not expect known claims to materially affect results, but noted that an unfavorable resolution could have a material adverse effect. Manufacturer requirements may also necessitate unplanned dealership capital spending.
Important facts for investors to verify
- How much reported growth came from same-store performance versus acquisitions, particularly in new and used vehicles.
- Whether used-vehicle margin pressure and rising inventory days persist, and whether parts and service growth is sustainable.
- The composition and repeatability of operating cash flow, including the floor-plan adjustment and changes in the floor-plan offset account.
- Debt and liquidity after the July mortgage financing, sensitivity to variable interest rates, and capacity under covenants and borrowing bases.
- Actual spending and returns for planned facility investment and Q auto expansion, and the pace of share repurchases under the enlarged authorization.