Business Context and Reporting Period
Company: Asbury Automotive Group, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2006
Business Overview: Asbury is a national automotive retailer operating 120 franchises across 87 dealership locations in 21 metropolitan markets within 10 states. The company offers new and used vehicles, parts, service, collision repair, and finance and insurance (F&I) products. The retail network is organized into four regions: Florida, West, Mid-Atlantic, and South.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2006 | Nine Months Ended Sep 30, 2006 |
|---|---|---|
| Total Revenues | $1,520,446 | $4,423,034 |
| Gross Profit | $229,760 | $669,872 |
| Income from Operations | $49,688 | $142,348 |
| Net Income | $17,179 | $48,736 |
| Diluted EPS (Net Income) | $0.51 | $1.44 |
| Cash and Cash Equivalents | $133,475 | $133,475 (Balance Sheet) |
| Working Capital | $390,165 | N/A |
| Total Debt (Current + Long-Term) | $738,809 | N/A |
| Net Cash Provided by Operating Activities | N/A | $188,361 |
Note: Working Capital calculated as Total Current Assets ($1,188,168) minus Total Current Liabilities ($798,003). Total Debt includes Floor Plan Notes Payable ($613,374), Current Maturities of Long-Term Debt ($26,263), and Long-Term Debt ($456,283).
Material Changes vs. Prior Comparable Period
- Revenue Growth: Total revenues increased 4% for the quarter and 6% for the nine-month period compared to 2005. Used vehicle revenue grew 10% (quarter) and 11% (nine months), while new vehicle revenue grew 2% (quarter) and 5% (nine months).
- Profitability: Net income increased 15% for the quarter and 20% for the nine-month period. Income from continuing operations rose 7% (quarter) and 17% (nine months).
- Interest Expense: Floor plan interest expense increased significantly by 58% for the quarter and 50% for the nine months, driven by a 170-190 basis point increase in short-term interest rates and higher inventory levels.
- Discontinued Operations: The company sold six franchises and one ancillary business during the nine months ended September 30, 2006, resulting in a net gain of $2.1 million. This contrasts with operating losses in discontinued operations in the prior year.
- Share-Based Compensation: The adoption of SFAS No. 123R in January 2006 resulted in the recognition of share-based compensation expense ($1.0 million for the quarter; $3.3 million for the nine months), which was not recorded in the comparable 2005 periods.
Guidance, Outlook, and Risks
- Outlook: Management expects total revenue to continue increasing due to a brand mix weighted toward luxury and mid-line imports, expansion of service capacity, and improved performance in high-margin businesses. Capital expenditures for 2006 are projected to total approximately $60.0 million.
- Dividends: The Board declared a quarterly dividend of $0.20 per share payable November 16, 2006. The ability to pay dividends is restricted by debt covenants, with an aggregate limit of $78.1 million as of September 30, 2006.
- Debt Management: The company repurchased $15.0 million of its 8% Senior Subordinated Notes in September 2006, recognizing a $0.9 million loss. The Board has authorized an additional $25.0 million repurchase of these notes.
- Risks:
- Interest Rate Risk: A 1% change in interest rates on variable rate debt ($650.3 million) would impact annual interest expense by approximately $6.5 million.
- Manufacturer Relations: Operations are subject to manufacturer franchise agreements; loss of an agreement could negatively impact results.
- Market Conditions: Sales are influenced by consumer confidence, credit availability, and fuel prices, though the company believes its brand mix mitigates some volatility.
Key Facts for Investor Verification
- Interest Rate Sensitivity: Verify the impact of rising LIBOR rates on floor plan interest expense, which increased 50% year-over-year for the nine-month period.
- Non-GAAP Adjustments: Review the reconciliation of "Adjusted Income from Continuing Operations," which excludes share-based compensation, debt extinguishment costs, and a $3.4 million gain from the sale of extended service contracts.
- Debt Covenants: Confirm continued compliance with the Committed Credit Facility covenants, specifically the adjusted leverage ratio (2.9 to 1 vs. 4.5 to 1 limit) and fixed charge coverage ratio (1.6 to 1 vs. 1.2 to 1 limit).
- Inventory Valuation: Assess the adequacy of the lower of cost or market reserves for new and used vehicle inventories, which totaled $5.2 million as of September 30, 2006.
- Dividend Restrictions: Monitor the $78.1 million limit on share repurchases and dividends imposed by indentures and credit facilities.