ABG

Business Context and Reporting Period

Company: Asbury Automotive Group, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2008
Operations: One of the largest automotive retailers in the U.S., operating 122 franchises (90 dealership locations) across 11 states. The company sells new and used vehicles, parts, and services, and offers financing and insurance products.

Key Financial Metrics

Note: Total Debt includes Floor Plan Notes Payable ($691.8M) and Long-Term Debt ($473.3M) less current maturities. The table above reflects the aggregate floor plan and long-term obligations.

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased 8% ($114.7 million) year-over-year. New vehicle revenue fell 10% and used vehicle revenue fell 13%, driven by lower unit sales volumes and a challenging economic environment. Parts and service revenue increased 6%.
• Profitability Improvement: Despite lower revenues, Net Income increased significantly to $10.5 million from $0.4 million. This was primarily due to the absence of a $17.7 million loss on the extinguishment of long-term debt recorded in Q1 2007 and a $1.8 million retirement benefit expense in the prior year.
• Margin Pressure: Total gross profit margin increased slightly to 16.2% from 15.9%, aided by a mix shift toward higher-margin parts and service and F&I businesses. However, new vehicle gross profit per vehicle retailed (PVR) declined 11%.
• Expense De-leveraging: Selling, General, and Administrative (SG&A) expenses as a percentage of gross profit increased to 80.6% from 77.3% due to the decline in vehicle sales volumes.
• Cash Flow: Net cash used in operating activities was minimal at $0.3 million, compared to $44.3 million used in the prior year. Adjusted operating cash flow (including non-manufacturer floor plan activity) was $26.9 million.

Guidance, Outlook, and Risks

• Outlook: Management expects the retail environment to remain challenging in 2008. They anticipate used vehicle unit sales to decrease by 5% to 8% compared to 2007. Heavy truck sales are expected to continue declining due to emission law changes.
• Capital Expenditures: Expected to total between $55.0 million and $65.0 million for 2008, with 60-70% financed through sale-leaseback agreements.
• Dividends: The Board declared a $0.225 per share cash dividend in May 2008, the eighth consecutive quarter of dividend payments.
• Risks and Contingencies:
  • Weather Events: A tornado in April 2008 directly hit two dealerships in Jackson, Mississippi; financial impact is being evaluated.
  • Sub-prime Lending: Reduced sales to sub-prime customers due to tighter lending practices and lower advance ratios from financing providers.
  • Interest Rate Risk: A 1% change in interest rates could impact annual other interest expense by approximately $5.6 million.
  • Accounting Changes: Adoption of FSP APB 14-a in 2009 is estimated to increase interest expense by approximately $4.0 million.

Investor Verification Checklist

• Adjusted vs. GAAP Earnings: Verify the impact of the $17.7 million debt extinguishment loss in 2007 on year-over-year comparisons; GAAP net income is significantly higher in 2008, but "adjusted" income from continuing operations actually decreased 26%.
• Inventory Levels: Confirm the reduction in used vehicle inventory (down over 20% vs. March 2007) and the associated lower of cost or market reserves ($3.6 million).
• Debt Covenants: Review compliance with financial covenants, specifically the Current Ratio (1.4:1) and Total Leverage Ratio (2.9:1), to ensure no acceleration of debt repayment is triggered.
• Discontinued Operations: Assess the net loss of $0.7 million from discontinued operations and the status of the one franchise pending disposition as of March 31, 2008.
• Subsequent Events: Monitor the financial impact of the tornado damage in Mississippi and the sale of a franchise in May 2008 for a $0.2 million loss.