Business Context and Reporting Period
Company: Asbury Automotive Group, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2010
Business Overview: Asbury is one of the largest automotive retailers in the U.S., operating 107 franchises across 80 dealership locations in 11 states. The portfolio includes new and used vehicle sales, parts and service, and finance and insurance (F&I) products. The brand mix is weighted 84% towards luxury and mid-line import brands.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2010 | Six Months Ended June 30, 2010 |
|---|---|---|
| Total Revenues | $1,061.7 million | $2,025.6 million |
| Net Income | $12.8 million | $20.2 million |
| Diluted EPS (Net Income) | $0.39 | $0.62 |
| Gross Profit | $175.9 million | $339.4 million |
| Operating Income | $36.1 million | $64.7 million |
| Cash and Cash Equivalents | $27.0 million (Balance Sheet) | N/A |
| Total Debt (Current + Long-Term) | $850.7 million | N/A |
| Working Capital | $241.9 million | N/A |
Note: Total Debt calculated as Floor plan notes payable (trade + non-trade) + Current maturities of long-term debt + Long-term debt.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 13% ($124.9 million) for the quarter and 15% ($264.9 million) for the six months compared to the prior year periods. This was driven by a 14% increase in new vehicle revenue and an 18% increase in used vehicle revenue.
- Profitability Surge: Net income increased 133% ($7.3 million) for the quarter and 248% ($14.4 million) for the six months. Income from continuing operations rose 108% and 147%, respectively.
- Margin Expansion: Gross profit increased 13% for the quarter and 13% for the six months. Selling, General, and Administrative (SG&A) expenses as a percentage of gross profit decreased by 400 basis points for the quarter (76.5% vs. 80.5%) and 390 basis points for the six months (77.8% vs. 81.7%), primarily due to fixed cost leverage and restructuring.
- Interest Expense: Floor plan interest expense decreased 13% for the quarter and 15% for the six months, attributed to lower average inventory balances and a lower interest rate environment.
- Cash Flow: Net cash used in operating activities was $37.1 million for the six months ended June 30, 2010, compared to $29.1 million provided in the prior year period. This shift was largely due to the use of excess cash to repay floor plan notes payable via offset accounts.
Guidance, Outlook, and Risks
- Outlook: Management expects U.S. new vehicle sales to experience a modest recovery in 2010. The company anticipates capital expenditures of approximately $25.0 million for the full year 2010.
- Liquidity: As of June 30, 2010, total available liquidity was $260.0 million, comprising $27.0 million in cash, $166.0 million in credit facility availability, and $67.0 million in floor plan offset accounts. No material long-term debt maturities are due until September 2012.
- Dividend/Repurchase Restrictions: Due to debt covenants, the ability to repurchase common stock or pay dividends is currently limited to $2.0 million.
- Risks and Contingencies:
- Mercury Brand Discontinuation: Ford announced the cessation of Mercury production by end of 2010; management does not expect a material impact.
- Insurance Proceeds: A tornado damaged a dealership building in Mississippi (book value $1.5 million). The company expects to receive $4.5 million to $5.0 million in insurance proceeds, with the remaining gain expected to be recognized in Q3 2010.
- Market Risks: Exposure to interest rate fluctuations on variable rate debt ($380.4 million outstanding). A 1% change in rates would impact annual interest expense by approximately $3.8 million.
Investor Verification Checklist
- Inventory Levels: Verify the 34 days of supply for used vehicle inventory and the composition of new vehicle inventory ($400.6 million) to assess exposure to market demand shifts.
- Debt Covenants: Confirm continued compliance with the Fixed Charge Coverage Ratio (1.79 vs. 1.10 required) and Current Ratio (1.70 vs. 1.20 required) to ensure access to credit facilities.
- F&I Performance: Monitor the sustainability of the 35% increase in Finance and Insurance gross profit, which was driven by less stringent lending standards and improved per-vehicle metrics.
- Discontinued Operations: Review the $2.5 million net loss from discontinued operations for the six months, ensuring no hidden liabilities from sold franchises.
- Insurance Claim: Track the receipt of the remaining insurance proceeds from the Mississippi tornado damage in Q3 2010.