Business Context and Reporting Period
Company: Asbury Automotive Group, Inc.
Filing Type: Form 10-Q (Unaudited)
Period Ended: June 30, 2007
Operations: Asbury operates 119 franchises across 89 dealership locations in 21 metropolitan markets within 10 states. The company sells new and used vehicles, parts, and services, and offers financing and insurance products. The portfolio is heavily weighted toward luxury and mid-line import brands.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended June 30, 2007 | Six Months Ended June 30, 2007 |
|---|---|---|
| Total Revenues | $1,506,533 | $2,922,103 |
| Gross Profit | $232,412 | $456,475 |
| Net Income | $20,559 | $20,992 |
| Diluted EPS (Net Income) | $0.62 | $0.62 |
| Cash and Cash Equivalents | $48,680 (Balance Sheet) | $48,680 (Balance Sheet) |
| Working Capital | $375,500 (Calculated) | $375,500 (Calculated) |
| Total Debt (Current + Long-Term) | $690,232 | $690,232 |
Note: Working Capital calculated as Total Current Assets ($1,223,762) minus Total Current Liabilities ($848,263).
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 1% ($7.7 million) for the three months ended June 30, 2007, compared to the same period in 2006. For the six months, revenues increased 2% ($57.5 million).
- Profitability: Net income increased 8% ($1.6 million) for the quarter but decreased 33% ($10.6 million) for the six months ended June 30, 2007, compared to 2006.
- Segment Performance:
- New Vehicles: Revenue decreased 2% for the quarter and was flat for the six months. This was driven by a 45% drop in heavy truck sales due to emission law changes and a weaker freight market, partially offset by a 47% increase in fleet revenue.
- Used Vehicles: Revenue increased 4% for the quarter and 6% for the six months, driven by higher wholesale and retail volumes.
- Fixed Operations: Revenue increased 3% for the quarter and 3% for the six months, with gross profit margins improving.
- Finance & Insurance (F&I): Dealership-generated F&I revenue increased 13% for the quarter and 13% for the six months.
- Debt Refinancing Impact: The company recognized an $18.5 million loss on the extinguishment of long-term debt during the six months ended June 30, 2007, related to the repurchase of $250 million of 9% Senior Subordinated Notes and $3 million of 8% Notes. This non-recurring item significantly impacted the six-month net income comparison.
- Cash Flow: Net cash used in operating activities was $48.1 million for the six months ended June 30, 2007, compared to $105.7 million provided in the prior year period. Adjusted operating cash flow (excluding floor plan financing classification differences) was $25.4 million provided.
Guidance, Outlook, and Risks
- Outlook: Management expects light vehicle unit sales, revenue, and gross profit to outperform the U.S. light retail industry due to a strong brand mix (luxury and mid-line imports). However, heavy truck sales are expected to continue decreasing significantly in 2007.
- Capital Expenditures: Expected to total between $70 million and $80 million for 2007, with 50-60% financed through sale-leaseback agreements.
- Acquisitions: The company acquired five franchises for $34.1 million in the first half of 2007 and expects to meaningfully exceed its annual target of adding $200 million in annual revenues through acquisitions.
- Dividends and Buybacks: The board declared a $0.225 per share dividend payable in August 2007. A share repurchase program of 1.3 million shares was completed in February 2007 for $36.1 million.
- Risks:
- Market Factors: Fluctuations in consumer confidence, credit availability, and fuel prices.
- Manufacturer Relations: Dependence on manufacturer incentives and franchise agreements.
- Interest Rates: Exposure to variable rate debt (floor plan notes); a 1% change in rates would impact annual interest expense by approximately $5.6 million.
- Regulatory: Changes in emission laws impacting heavy truck demand.
Key Facts for Investor Verification
- Debt Refinancing Loss: Verify the $18.5 million loss on debt extinguishment and its impact on the six-month net income decline.
- Heavy Truck Sales Decline: Confirm the 45% drop in heavy truck revenue and its expected persistence through 2007 due to regulatory changes.
- Adjusted Metrics: Review management's "Adjusted Income from Continuing Operations" which excludes one-time items (debt loss, abandoned projects, F&I gain) to assess core operational performance.
- Cash Flow Classification: Note the significant difference between reported operating cash flow and adjusted operating cash flow due to the classification of floor plan notes payable.
- Inventory Levels: Monitor inventory levels ($808.2 million) relative to sales velocity, particularly for new vehicles, given the heavy truck inventory mix.