Asbury Automotive Group, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016 unless otherwise noted. Asbury operated 96 new-vehicle franchises at 80 dealership locations, 24 collision centers and two standalone used-vehicle stores across nine states. Results are typically seasonally weaker in the first quarter.
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $1,551.7 million | $1,550.8 million |
| Gross profit / margin | $260.1 million / 16.8% | $260.8 million / 16.8% |
| Income from operations | $72.3 million | $68.9 million |
| Net income | $34.0 million | $31.0 million |
| Diluted EPS | $1.61 | $1.27 |
| Net cash from operating activities | $98.3 million | $45.2 million |
| Operating cash flow, adjusted by company for floor-plan financing | $82.9 million | $126.8 million |
- Revenue mix: new vehicles $832.5 million, used vehicles $461.8 million, parts and service $191.5 million, and finance and insurance (F&I) $65.9 million.
- New-vehicle gross profit fell 10% to $40.4 million; same-store gross profit per new vehicle declined 9% to $1,716. Used-vehicle gross profit fell 5% to $33.9 million, while retail units increased 2% as reported. F&I revenue rose 6%, and parts-and-service revenue rose 1%.
- SG&A was $181.1 million, or 69.6% of gross profit, compared with 69.5%. Floor-plan interest expense rose 20% to $5.3 million, primarily from higher average new-vehicle inventory and interest rates.
- Cash and cash equivalents were $3.1 million at quarter-end. Total available liquidity was $400.6 million, including floor-plan offset funds and borrowing availability.
- Long-term debt, including its current portion, was $923.0 million carrying value. Net floor-plan notes payable totaled $811.6 million: $128.4 million trade and $683.2 million non-trade. Shareholders’ equity was $298.2 million.
Changes and notable developments
- Revenue was nearly flat, while net income rose 10% and diluted EPS rose 27%. The EPS comparison also reflects lower weighted-average diluted shares, 21.1 million versus 24.4 million, following share repurchases.
- Operating income improved partly because other operating items shifted from $3.2 million of expense in Q1 2016 to $1.2 million of income in Q1 2017. The current quarter included a $0.9 million gain from legal settlements; the prior-year quarter included $1.5 million of real-estate impairment and a $1.9 million accelerated-rent charge.
- Q1 2017 acquisitions: two franchises at two dealership locations and one collision center in the Indianapolis market for $80.1 million. The preliminary allocation included $32.6 million goodwill and $6.3 million franchise rights.
- Operating cash flow adjusted for floor-plan financing declined to $82.9 million from $126.8 million, mainly reflecting higher inventory net of floor-plan financing and lower offset-account balances; increased accounts payable and accrued liabilities partly offset the decline.
- The company repurchased 229,634 shares for $14.7 million under its program and bought another 66,586 shares for $4.3 million in employee award net settlements. Remaining program authorization was $73.4 million.
Outlook, risks and contingencies
- Management expected approximately $70 million of capital expenditures in 2017 for facility upgrades, construction, service capacity, technology and equipment. It stated that liquidity should be sufficient for at least the next 12 months.
- Management expected the effective tax rate to approximate 38% over the remaining quarters of 2017; Q1’s 36.0% rate was lower partly due to adoption of stock-compensation accounting guidance.
- U.S. new-vehicle SAAR was 17.3 million in Q1 2017 versus 17.4 million a year earlier. Management cited reduced import-brand manufacturer incentives and lower luxury-unit volumes as factors in weaker new-vehicle margins. It reported 74 days of new-vehicle supply and 32 days of used-vehicle supply.
- Interest-rate exposure is material: the filing estimates that a 100-basis-point rate change on $797.4 million of variable-rate debt could change annual interest expense by up to $8.0 million. The company uses interest-rate swaps to hedge some exposure.
- Key risks include economic and consumer-demand changes, vehicle availability and manufacturer incentives, competitive margin pressure, financing availability and interest rates, debt covenant compliance, manufacturer franchise agreements, litigation and regulatory matters, and disruptions to vehicle or parts supply. Management said it had adequately accrued probable and estimable claims and did not anticipate known claims materially affecting results, while noting adverse outcomes remain possible.
- The company was in compliance with its debt covenants at March 31, 2017. It reported $13.3 million of letters of credit and a $5.0 million surety bond line. No material reasonably possible losses in excess of accruals were indicated in the aggregate.
- Accounting updates: ASU 2016-09 adoption increased retained earnings by $0.5 million on January 1, 2017. Management planned to adopt the revenue standard in 2018 and lease standard in 2019; it expected lease right-of-use assets and liabilities to be material, but had not yet estimated the full impact.
Investor facts to verify
- Whether F&I growth and the Q1 benefit from amended insurance-underwriter commission terms are sustainable.
- Whether new- and used-vehicle gross-profit-per-unit pressure persists, particularly if incentives, brand mix or competitive pricing change.
- Cash conversion and inventory trends: GAAP operating cash flow improved year over year, but the company’s adjusted measure declined materially.
- Acquisition integration, final purchase-price allocation and returns on the $80.1 million Indianapolis transaction.
- Liquidity and debt capacity under changing interest rates, floor-plan requirements, capital spending and continued share repurchases.
- Final impacts of adopting the revenue and lease accounting standards, and developments in legal, manufacturer, regulatory or supply-related contingencies.