Business Context and Reporting Period
Company: Asbury Automotive Group, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2002
Context: The Company completed an Initial Public Offering (IPO) in March 2002 and converted from a Limited Liability Company (LLC) to a corporation. This filing reflects the first full quarter as a public corporation, incorporating a one-time tax charge related to the conversion and the adoption of new accounting standards (SFAS 142 for goodwill and SFAS 144 for discontinued operations).
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sept 30, 2002 |
Nine Months Ended Sept 30, 2002 |
Nine Months Ended Sept 30, 2001 |
|---|---|---|---|
| Total Revenues | $1,214,127 | $3,407,580 | $3,097,592 |
| Gross Profit | $187,096 | $536,699 | $481,996 |
| Net Income | $14,644 | $32,586 | $33,858 |
| Pro Forma Net Income (9mo) | - | $38,840 | - |
| Earnings Per Share (Diluted) | $0.43 | $0.99 | $0.99 |
| Cash and Equivalents | $51,640 | $51,640 | $53,344 |
| Operating Cash Flow (9mo) | - | $69,881 | $73,458 |
| Total Debt (Current + Long-Term) | $480,032 | $480,032 | $538,712 |
| Goodwill | $399,198 | $399,198 | $392,856 |
Note: Total Debt includes Floor plan notes payable ($426,754), Short-term debt ($10,167), Current maturities of long-term debt ($43,264), and Long-term debt ($414,011).
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 13% ($137.5 million) for the quarter and 10% ($310.0 million) for the nine-month period compared to the prior year. Growth was driven by acquisitions and same-store performance, particularly in new vehicle retail and finance/insurance lines.
- Profitability: Net income for the nine months ended Sept 30, 2002, decreased slightly to $32.6 million from $33.9 million in 2001. This decline is primarily due to a one-time, non-recurring tax charge of $11.6 million associated with the conversion to a corporation. On a pro forma basis, net income for the nine months was $38.8 million.
- Interest Expense: Floor plan interest expense decreased significantly (40% for the quarter, 40% for the nine months) due to lower interest rates. Total interest expense was offset by lower borrowings on the committed credit facility following the IPO.
- Goodwill Accounting: The Company adopted SFAS No. 142, eliminating goodwill amortization. This resulted in a decrease in depreciation and amortization expense of $2.1 million for the quarter and $5.0 million for the nine-month period compared to 2001.
- Discontinued Operations: The Company divested four dealerships and held two for sale. These are now reported as discontinued operations, resulting in a net loss of $1.4 million for the nine months ended Sept 30, 2002.
Guidance, Outlook, and Risks
- Acquisitions: The Company signed an agreement to acquire Bob Baker Auto Group (six dealerships, ten franchises) for $89.5 million. Funding is expected via $73.3 million in debt and the remainder in stock. The deal is subject to manufacturer consents.
- Capital Expenditures: Expected to be approximately $60 million for the full year 2002, primarily for operational improvements and facility upgrades.
- Stock Repurchase: The Board authorized the repurchase of up to $15 million of common stock. Between Sept 30 and Nov 8, 2002, the Company repurchased 234,424 shares for approximately $2.2 million.
- Liquidity: The Company has a $550 million Committed Credit Facility with approximately $481.7 million available as of Sept 30, 2002. A new Cash Management Sublimit of $75 million was established to optimize cash usage.
- Risks:
- Interest Rate Risk: A 100 basis-point increase in variable rates would increase annual non-floor plan interest expense by ~$2.0 million and floor plan interest expense by ~$4.3 million.
- Acquisition Risk: The Bob Baker acquisition is contingent on manufacturer approvals; refusal could alter or prevent the deal.
- Market Conditions: Results are subject to general economic conditions and manufacturer incentives, which impact new and used vehicle demand.
Investor Verification Checklist
- Pro Forma Adjustments: Verify the impact of the $11.6 million one-time tax charge on the conversion to a corporation to understand underlying operating performance.
- Bob Baker Acquisition: Monitor the status of manufacturer consents required to close the $89.5 million acquisition.
- Price One Pilot Program: Review the ongoing evaluation of the "Price One" used car pilot program, which incurred a $2.3 million loss in the quarter.
- Debt Structure: Confirm the terms of the new $250 million 9% Senior Subordinated Notes issued in June 2002 and their impact on future interest obligations.
- Inventory Valuation: Note the change in inventory valuation method from LIFO to FIFO/Specific Identification effective March 19, 2002, and its impact on cost of sales comparisons.