Asbury Automotive Group, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparisons are with Q1 2012 unless noted. Asbury operated 97 franchises at 76 dealership locations in 18 metropolitan markets across 10 states, plus 25 collision repair centers. Its brand mix was 85% luxury and mid-line imports.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenue | $1,225.4 million | $1,070.0 million | +15% |
| Gross profit | $206.7 million | $184.5 million | +12% |
| Income from operations | $52.6 million | $41.4 million | +27% |
| Income from continuing operations | $23.9 million | $17.2 million | +39% |
| Net income | $32.5 million | $17.6 million | +85% |
| Diluted EPS | $1.04 | $0.56 | +86% |
| Operating cash flow, reported | $8.4 million | $(36.1) million | Improved |
| Cash and cash equivalents | $0.1 million at March 31 | $6.2 million at December 31 | Down $6.1 million |
- Revenue growth was led by new vehicles (+16%), used vehicles (+16%) and finance and insurance (F&I) (+25%); parts and service revenue increased 5%.
- Gross margin declined 30 basis points to 16.9%. Same-store new and used retail vehicle margins declined, while same-store parts and service margin improved 230 basis points to 59.4%.
- SG&A rose 8% to $148.1 million, slower than gross-profit growth; SG&A was 71.6% of gross profit versus 74.5% a year earlier.
- Continuing-operations income growth reflected higher gross profit, partly offset by increased SG&A and taxes. Effective tax rates were 38.9% in 2013 and 38.8% in 2012.
Debt, liquidity and cash flow
- Total available liquidity was $311.7 million: $0.1 million cash, $224.9 million revolving-credit availability and $86.7 million in the floor-plan offset account. Management believed liquidity would be sufficient for at least the next 12 months.
- Long-term debt, including current maturities, totaled $477.3 million at quarter-end, including $343.2 million of senior subordinated notes and $130.3 million of mortgage notes. Floor-plan notes payable were $524.0 million ($60.6 million trade and $463.4 million non-trade). These are distinct financing categories.
- No amounts were drawn on the $175 million revolving credit facility; $14.6 million of letters of credit were outstanding. The company reported compliance with its debt covenants. It had no long-term debt maturities until October 2015, when two mortgages totaling $19.4 million were due.
- Operating cash flow, adjusted for non-trade floor-plan activity, was negative $29.8 million versus positive $32.2 million in Q1 2012. The company attributed the decline mainly to inventory net of floor-plan debt and a $74.1 million increase in its offset account, as well as lower accounts payable/accruals and the absence of a prior-year deferred-compensation-plan refund.
- Investing cash flow was positive $27.4 million, including $33.9 million proceeds from asset sales; capital expenditures excluding real estate were $6.5 million. Financing cash flow was negative $41.9 million, including share repurchases and floor-plan repayments.
Material changes and unusual items
- Net income included $8.6 million after tax from discontinued operations, principally an $8.9 million after-tax gain on the sale of one franchise and dealership location; this materially boosted reported net income relative to continuing operations.
- The company repurchased 213,303 shares for $7.4 million under its buyback program and purchased another 114,561 shares for $4.2 million in employee award net settlements. Buyback authorization remaining at quarter-end was $42.6 million.
- A new $12.5 million fixed-rate mortgage was entered into during the quarter, secured by dealership real estate.
- One interest-rate swap had a $19.4 million notional value and a $0.5 million net liability; the company expected a $1.0 million loss to be reclassified from accumulated other comprehensive loss into earnings over the next 12 months.
Outlook, commentary and risks
- Management cited improving U.S. auto-market conditions: first-quarter new-vehicle SAAR was 15.3 million versus 14.2 million a year earlier. It also characterized the economic recovery as fragile and difficult to predict.
- No formal revenue or earnings guidance was provided. Management expected 2013 effective tax rate of 38%–40% and approximately $45 million of capital expenditures, excluding real estate.
- Management said near-term new-vehicle margins would depend primarily on supply and demand. It highlighted competition and margin pressure, consumer credit and confidence, interest rates, vehicle availability, manufacturer relationships and incentives, and economic conditions as risks.
- Variable-rate debt exposure was $634.8 million; a 1-percentage-point rate change could affect annual interest expense by as much as $6.3 million. Manufacturer floor-plan assistance partly offsets financing costs, but future assistance is not assured.
- In April 2013, the company settled a manufacturer-affiliate service-work overpayment dispute for approximately its previously accrued amount; the settlement was not material. Management said known claims were not expected to materially affect results, though reasonably possible losses above accruals were estimated at up to approximately $0.5 million in aggregate.
Important facts for investors to verify
- How much of the 85% net-income increase was attributable to the one-time franchise-sale gain rather than continuing operations.
- Whether vehicle-unit growth and F&I gains can persist while new- and used-vehicle retail margins remain under pressure.
- How inventory, floor-plan balances and use of the offset account affect adjusted operating cash flow and liquidity.
- Debt covenant headroom, variable-rate exposure and refinancing needs ahead of the October 2015 mortgage maturities.
- Whether planned capital spending, ongoing repurchases and potential acquisitions or divestitures remain consistent with management’s liquidity outlook.