Asbury Automotive Group, Inc. — FY2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. This is an annual filing, not a standalone fourth-quarter report; quarterly figures are noted separately below. Amounts are in U.S. dollars.
Business context
Asbury operated 99 franchises at 79 dealership locations in 18 metropolitan markets across 10 states, plus 25 collision repair centers. Its business includes new and used vehicle sales, parts and service, and finance and insurance (F&I). Luxury and mid-line import brands represented 84% of new-vehicle sales.
Financial performance
| Metric | FY2011 | FY2010 | Change |
|---|---|---|---|
| Revenue | $4,276.7 million | $3,897.2 million | +10% |
| Gross profit | $721.0 million | $650.6 million | +11% |
| Income from operations | $133.9 million | $126.9 million | +6% |
| Income from continuing operations | $48.0 million | $37.4 million | +28% |
| Net income | $67.9 million | $38.1 million | +78% |
| Diluted EPS, continuing operations | $1.47 | $1.12 | +31% |
| Diluted EPS, net income | $2.08 | $1.14 | +82% |
Gross margin increased 20 basis points to 16.9%; SG&A was 76.3% of gross profit, down from 77.3%. Revenue growth reflected higher new-vehicle sales (+7%), used-vehicle sales (+16%), parts and service (+4%), and F&I (+23%). F&I and parts and service supplied 19.6% and 44.7% of gross profit, respectively, while new vehicles supplied 21.6%.
Reported net income included $19.9 million, net of tax, from discontinued operations, principally gains on business disposals. Continuing-operations earnings therefore provide a different view of ongoing performance. FY2011 included $9.0 million of legal-claim expense, $6.6 million of executive separation costs, and $1.1 million of real-estate-related charges, before tax.
Cash flow: GAAP operating cash flow was negative $181.1 million, compared with positive $9.9 million in FY2010. The company’s adjusted measure, which includes certain non-trade floor-plan flows, was positive $135.1 million versus $23.1 million. The filing attributes the increase largely to lower inventory net of floor-plan debt and timing of receivable collections; the adjusted measure is non-GAAP and should not be treated as a substitute for GAAP cash flow. Investing cash flow was positive $34.3 million and financing cash flow positive $136.9 million. Cash ended the year at $11.4 million.
Liquidity and debt: Management reported available liquidity of $231.0 million: $11.4 million cash, $204.1 million borrowing availability, and $15.5 million in a floor-plan offset account. Year-end long-term debt was approximately $458.6 million on the balance sheet (about $459.0 million principal for contractual-debt disclosures), excluding $434.0 million of floor-plan notes payable. Total debt including floor plan was about $892.6 million. The $15.1 million face amount of 3% convertible notes was due September 2012; mortgage debt was $96.8 million. The company said it was covenant-compliant and expected sufficient liquidity for at least 12 months.
FY2011 fourth-quarter figures: Revenue was $1,090.4 million, gross profit $179.8 million, net income $21.5 million, and diluted EPS $0.68. In FY2010’s fourth quarter, the corresponding reported figures were $1,011.6 million, $166.0 million, $5.4 million, and $0.16; FY2010 fourth-quarter earnings were reduced by debt-extinguishment and amendment-related expenses.
Material changes and unusual items
- The U.S. new-vehicle SAAR rose to 12.8 million in 2011 from 11.6 million in 2010. Japan-related production disruptions constrained some inventory during 2011 and supported new-vehicle margins; management cautioned those margins might not persist as supply normalized.
- Same-store used retail unit sales increased 17%, but same-store used retail gross profit per vehicle fell 8% to $1,853 and gross margin declined 80 basis points to 9.8%.
- The company sold its Atlanta heavy-truck business and other franchises and an ancillary business. Disposals produced a $22.3 million after-tax gain in discontinued operations; proceeds from asset sales were $104.4 million.
- During 2011, Asbury repurchased 2.6 million shares for $44.8 million. It paid no dividends.
- In October 2011, the company entered a new senior secured credit agreement with a $175 million revolver, a $625 million new-vehicle floor-plan facility, and a $100 million used-vehicle floor-plan facility, generally maturing in October 2016.
- A long-running Arkansas class action was settled, with a $5.4 million payment in the fourth quarter. The filing also describes a separate manufacturer-affiliate dispute over alleged service-work overpayments; a reserve was recorded, but the amount is not specified here.
- In February 2012, the board elected to terminate the deferred compensation plan and reclassified related assets and liabilities as current.
Outlook, risks and contingencies
Management expected only modest U.S. SAAR improvement in 2012 and anticipated Japanese-manufacturer inventory shortages would ease by the first quarter, while noting there was no assurance. It forecast approximately $50 million of 2012 capital expenditures, excluding real-estate purchases, and an effective tax rate of 38%–40%.
Key risks include consumer demand and vehicle-financing availability, interest-rate sensitivity, manufacturer production and franchise terms, competition and local economic conditions, covenant compliance and access to financing, and environmental, consumer-protection, employment, and data-security exposures. A 1% increase in market rates was estimated to raise annual interest expense, including floor-plan interest, by as much as $5.1 million. Known claims could exceed recorded reserves by up to approximately $1.1 million in aggregate, though the company did not expect known claims to materially affect results. The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Separate ongoing continuing-operations earnings from disposal gains and other unusual costs when assessing earnings quality.
- Reconcile negative GAAP operating cash flow with the company’s adjusted cash-flow measure and review floor-plan classification and inventory movements.
- Assess refinancing and repayment capacity for the 2012 convertible-note maturity, mortgage obligations, and continuing floor-plan needs.
- Monitor whether Japanese vehicle supply normalization affects new-vehicle margins and whether used-vehicle per-unit profitability recovers.
- Review the adequacy of legal, F&I chargeback, insurance, inventory, and other estimates, including the unresolved manufacturer-related matter.
- Compare the stated 2012 SAAR, capital expenditure, and tax-rate outlook with subsequent reported results.