Asbury Automotive Group, Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The filing also reports fourth-quarter results. Unless otherwise noted, amounts are in U.S. dollars.
Business context
Asbury operated 104 franchises at 83 dealership locations in 18 metropolitan markets across 10 states, plus three Q auto used-vehicle stores and 25 collision repair centers. Its business includes new and used vehicle sales, parts and service, and finance and insurance (F&I). New vehicles generated most revenue, while parts and service and F&I contributed disproportionately to gross profit.
Financial performance and liquidity
| Metric | 2014 | 2013 |
|---|---|---|
| Revenue | $5,867.7 million | $5,334.9 million |
| Gross profit / gross margin | $967.2 million / 16.5% | $876.0 million / 16.4% |
| Operating income | $268.2 million | $226.1 million |
| Income from continuing operations | $112.0 million | $101.1 million |
| Net income | $111.6 million | $109.1 million |
| Diluted EPS from continuing operations | $3.72 | $3.25 |
| Cash from operating activities, GAAP | $84.2 million | $50.7 million |
| Cash from operating activities, adjusted non-GAAP | $193.2 million | $72.6 million |
- Revenue grew 10%; gross profit rose 10% and operating income increased 19%. Parts and service gross profit rose 12%, F&I 11%, new vehicle 9%, and used vehicle 6%.
- SG&A was $671.6 million, or 69.4% of gross profit, improving from 70.5%. Same-store parts and service margin increased 170 basis points to 61.8%; same-store used retail margin declined 40 basis points to 8.5%; new vehicle margin held at 6.1%.
- Net income increased only 2%, partly because the 2014 debt-refinancing loss was substantially larger. Fourth-quarter revenue was $1,503.0 million and gross profit was $244.6 million; net income was $11.8 million versus $26.9 million in Q4 2013, including a $19.5 million after-tax debt-extinguishment loss.
- GAAP operating cash flow improved to $84.2 million. Management’s adjusted measure was $193.2 million; it includes certain non-trade floor-plan cash flows and is non-GAAP. Investing cash outflow was $230.8 million, including $152.2 million for acquisitions; financing cash inflow was $144.1 million.
- At year-end, cash was $2.9 million, working capital $235.6 million, and stated available liquidity $285.0 million, including $164.7 million of revolving-credit availability, $91.5 million of used-vehicle facility availability, and $25.9 million in the floor-plan offset account.
- Long-term debt was $707.4 million, excluding $766.8 million of floor-plan notes payable. Total assets were $2,192.0 million and shareholders’ equity was $444.9 million. The company reported compliance with its covenants at year-end.
Material changes and unusual items
- Acquired four franchises at three dealership locations for $152.2 million. The acquisitions contributed $44.4 million of 2014 revenue from acquisition date through year-end.
- Issued $400 million of 6.0% senior subordinated notes due 2024 and redeemed $300 million of 8.375% notes due 2020. The refinancing generated a $31.9 million pretax loss, including redemption premiums and write-offs.
- Repurchased 2,349,494 shares for $161.4 million under repurchase programs, in addition to $6.3 million of employee-related share repurchases. No dividends were paid. As of January 28, 2015, authorization remained for up to $300 million of repurchases, subject to financing restrictions.
- Used vehicle retail units rose 8% as reported, while same-store retail gross margin contracted amid increased used-vehicle supply and a focus on retail sales over wholesale.
- Parts and service warranty gross profit benefited partly from manufacturer recalls. Used-vehicle inventory losses were $21.7 million, compared with $13.7 million in 2013.
Outlook, risks and contingencies
- Management described the economic recovery as fragile. U.S. new-vehicle SAAR rose to 16.5 million in 2014 from 15.6 million in 2013; results remain sensitive to consumer confidence, credit availability, interest rates, employment, fuel prices and vehicle supply.
- Management expected 2015 capital expenditures of approximately $45 million and an effective tax rate of 38%–40%. It stated that liquidity should be sufficient for at least the next 12 months. No specific revenue or earnings guidance was provided.
- A 1 percentage-point increase in market interest rates could raise annual interest expense, including floor-plan interest, by as much as $7.7 million. The company had $766.7 million of variable-rate debt, including floor-plan notes, for this sensitivity disclosure.
- Key risks include reliance on manufacturers and dealer agreements, vehicle-demand and used-vehicle margin volatility, consumer financing access, competition, covenant compliance and substantial debt service. The company also highlighted regulatory, litigation, environmental, data-security, weather and operational-system risks.
- Known legal and regulatory claims were assessed and accrued where probable and estimable; management did not expect known claims to materially affect results, but outcomes remain uncertain. The company reported no known material environmental liability. A $0.9 million non-cash impairment charge was recorded on property held for sale.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. The acquired operations of three franchises were excluded from the year-end internal-control assessment under SEC guidance.
Important facts for investors to verify
- Reconcile GAAP operating cash flow with management’s adjusted non-GAAP measure and assess the effect of floor-plan financing and working-capital movements.
- Evaluate the refinancing economics: the $400 million 6.0% notes issuance, the $31.9 million extinguishment loss, and the resulting debt and interest burden.
- Monitor same-store used-vehicle margins, inventory losses, days of supply, and whether parts and service and F&I growth persists.
- Review liquidity and covenant headroom alongside the company’s substantial floor-plan obligations, share-repurchase plans, and acquisition and capital-spending needs.
- Assess the impact of manufacturer incentives and recalls, financing-market changes, and local-market conditions on future sales and profitability.