Asbury Automotive Group, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparisons are with Q1 2013 unless noted. Asbury operated 101 franchises at 80 dealership locations across 18 metropolitan markets in 10 states, plus 24 collision repair centers.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total revenue | $1,355.7 million | $1,225.4 million | +11% |
| Gross profit | $230.1 million | $206.3 million | +12% |
| Gross margin | 17.0% | 16.8% | +20 basis points |
| Income from operations | $64.2 million | $52.6 million | +22% |
| Income from continuing operations | $31.5 million | $23.9 million | +32% |
| Net income | $31.4 million | $32.5 million | -3% |
| Diluted EPS, continuing operations | $1.03 | $0.77 | +$0.26 |
| Diluted EPS, net income | $1.02 | $1.04 | -$0.02 |
| Operating cash flow (GAAP) | $54.6 million | $8.4 million | +$46.2 million |
- Revenue increased in all reported business lines: new vehicles $726.0 million (+9%); used vehicles $416.9 million (+14%); parts and service $159.4 million (+8%); and finance and insurance (F&I) $53.4 million (+14%). Gross profit rose across all four lines.
- SG&A was $159.8 million, up 8%; it declined to 69.4% of gross profit from 71.6%. Total other expense was $12.7 million, down from $13.5 million. The effective tax rate was 38.8%.
- Management’s non-GAAP “cash provided by operating activities, as adjusted” was $33.1 million, versus cash used of $29.8 million in Q1 2013. The measure adjusts GAAP operating cash flow for specified non-trade floor-plan cash flows; it is not a substitute for GAAP cash flow.
Balance sheet, debt and liquidity
- At March 31, 2014, cash was $6.1 million; total assets were $1,883.1 million; current liabilities were $810.0 million; and shareholders’ equity was $511.7 million.
- Long-term debt was $540.4 million, excluding $11.4 million of current maturities. Debt included $300.0 million principal of 8.375% senior subordinated notes due 2020, $164.9 million of mortgage notes, and $74.3 million outstanding under a real estate credit agreement. Floor-plan payables totaled $574.1 million.
- Management reported available liquidity of $313.3 million: $6.1 million cash, $244.5 million borrowing availability under revolving credit facilities, and $62.7 million in the floor-plan offset account. No revolver borrowings were outstanding; the company reported compliance with its debt covenants.
- Variable-rate debt, including floor-plan notes, totaled $574.0 million. Management estimated a 1 percentage-point rate change could change annual interest expense by as much as $5.7 million.
Changes, outlook and risks
- Revenue growth reflected higher same-store vehicle volumes and growth in parts and service and F&I, as well as the January acquisition of one Greenville, South Carolina franchise for $4.6 million. Same-store new vehicle units rose 5%; same-store used retail units rose 10%.
- Used vehicle retail gross margin declined 50 basis points, which management attributed partly to increased used-vehicle supply and a shift toward retail rather than wholesale sales. Same-store parts and service gross margin improved 180 basis points. SG&A leverage improved, in part due to lower rent and insurance expense.
- Net income was lower despite stronger continuing operations because Q1 2013 included an $8.9 million after-tax gain on a franchise sale; Q1 2014 discontinued operations recorded a $0.1 million loss. No franchises were pending disposition at March 31, 2014.
- Management expected the U.S. economic recovery to remain fragile. New-vehicle SAAR was 15.7 million in Q1 2014 versus 15.3 million a year earlier. The company cited consumer confidence, credit availability, employment, fuel prices, vehicle supply and manufacturer incentives as factors affecting results. Results are seasonal, historically stronger in Q2 and Q3.
- Management expected a 2014 effective tax rate of 38%–40%. It estimated approximately $60 million of 2014 capital expenditures for existing facilities, service capacity, technology and equipment, and said investment in the Q auto stand-alone used-car business could reach $25 million over the remainder of 2014. No earnings or revenue guidance was provided.
- Risks include interest-rate exposure, vehicle demand and margin pressure, access to consumer and floor-plan financing, manufacturer relationships and franchise requirements, recalls or supply disruptions, litigation and regulatory matters, and the ability to maintain liquidity and meet financing covenants. Management stated known claims were not expected to materially affect results, while noting outcomes remain uncertain. Letters of credit outstanding were $14.6 million.
- The board authorized an additional $50 million in share repurchases in January. The company repurchased 181,728 shares for $9.4 million under the program and bought 106,106 employee shares for $5.3 million through net share settlement during the quarter.
Most important facts for investors to verify
- Whether continuing-operations earnings growth and improving gross-profit contribution translate into sustained results, particularly as used-vehicle margins face pressure.
- The cash-flow trend, including the effects of floor-plan financing and the distinction between reported GAAP operating cash flow and management’s adjusted measure.
- Available liquidity, variable-rate debt exposure, covenant headroom and the company’s ability to fund planned capital spending and Q auto investment.
- Whether the announced capital expenditures and share repurchases proceed as described, and how they affect leverage and liquidity.
- The impact of seasonality, vehicle demand, manufacturer incentives, recalls, franchise requirements and any developments in legal or regulatory claims.