ABG

Business Context and Reporting Period

Company: Asbury Automotive Group, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2007
Business Overview: Asbury is a national automotive retailer operating 112 franchises across 85 dealership locations in 21 metropolitan markets within 10 states. The company offers new and used vehicles, parts, service, collision repair, and finance and insurance (F&I) products. Its portfolio is heavily weighted toward luxury and mid-line import brands.

Key Financial Metrics

Note: Total Debt calculated as sum of Floor plan notes payable, Current maturities of long-term debt, and Long-term debt.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 4% ($49.8 million) driven by a 7% increase in used vehicle revenue and a 2% increase in new vehicle revenue.
• Profitability Decline: Net income plummeted 97% to $0.4 million. This was primarily due to a $17.7 million loss on the extinguishment of long-term debt and $3.0 million in CEO retirement benefits.
• Adjusted Performance: Excluding the debt refinancing loss and CEO retirement costs, adjusted income from continuing operations increased 12% to $15.3 million.
• Segment Performance:
  • Used Vehicles: Gross profit increased 12% due to a 9% rise in retail unit sales.
  • Fixed Operations: Gross profit increased 6% driven by higher "customer pay" parts and service volume.
  • F&I: Gross profit increased 10%, aided by a renegotiated service contract provider.
  • New Vehicles: Gross profit increased 4%, though heavy truck sales declined due to new emission laws.
• Interest Expense: Floor plan interest expense rose 26% due to higher short-term interest rates and increased inventory levels of heavy trucks.

Guidance, Outlook, and Risks

• Debt Refinancing: The company completed a major refinancing, issuing $115 million in 3% Convertible Notes and $150 million in 7.625% Senior Notes while repurchasing $238.1 million of 9% Notes. This is expected to reduce annual interest expense by approximately $7.9 million.
• Capital Expenditures: Management expects 2007 capital expenditures to range between $70 million and $80 million, with 50-60% financed via sale-leaseback agreements.
• Dividends: The board declared a $0.20 per share dividend, the fourth consecutive quarter at this rate.
• Outlook: Management anticipates continued market share gains for luxury and mid-line import brands. However, heavy truck sales are expected to decrease significantly in 2007 due to emission law changes.
• Risks:
  • Interest Rate Risk: A 1% change in interest rates could impact annual interest expense by approximately $5.6 million.
  • Manufacturer Relations: Operations are subject to manufacturer franchise agreements and potential loss of dealer agreements.
  • Regulatory: Ongoing IRS and state tax audits for years 2003-2005; no material adjustments proposed to date.

Investor Verification Checklist

• Debt Restructuring Impact: Verify the actual reduction in annual interest expense post-refinancing and the terms of the new convertible notes (conversion price $33.99, effective price $45.09 via hedge).
• Heavy Truck Inventory: Assess the risk of inventory write-downs or extended holding periods for 2006 model year heavy trucks due to emission law changes.
• Adjusted Earnings Quality: Scrutinize the "Adjusted Income" metric ($15.3M) versus GAAP Net Income ($0.4M) to understand the true operational performance versus one-time charges.
• Liquidity Position: Confirm the availability of the $125 million committed credit facility and compliance with debt covenants (Adjusted Current Ratio 1.6:1, Leverage Ratio 2.9:1).
• Dividend Sustainability: Evaluate the ability to maintain the $0.20 quarterly dividend given the debt covenants that limit share repurchases and dividends to $34.8 million as of March 31, 2007.