ABG

Business Context and Reporting Period

Company: Asbury Automotive Group, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2006
Operations: Asbury is a national automotive retailer operating 119 franchises across 86 dealership locations in 21 metropolitan markets within 10 states. The company offers new and used vehicles, parts, service, collision repair, and finance/insurance products. The network is organized into four regions: Florida, West, Mid-Atlantic, and South.

Key Financial Metrics (Six Months Ended June 30, 2006)

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 8% year-over-year, driven by a 6% increase in new vehicle revenue and an 11% increase in used vehicle revenue. New retail unit sales rose 4%, led by mid-line import brands (+8%) and heavy trucks (+17%).
• Profitability: Net income rose 23% to $31.6 million. Income from continuing operations increased 23% to $33.0 million. Adjusted income from continuing operations (excluding one-time items) increased 15% to $33.3 million.
• Expense Increases: Floor plan interest expense surged 46% to $20.4 million due to a 200 basis point increase in short-term interest rates. SG&A expenses increased 6% to $337.4 million, though adjusted SG&A as a percentage of adjusted gross profit improved by 170 basis points to 76.3%.
• Divestitures: The company sold six franchises (five locations) during the period for proceeds of approximately $42.0 million, resulting in a net gain of $2.6 million. One franchise and one ancillary business remain pending disposition.
• Accounting Changes: The company adopted SFAS No. 123R in January 2006, resulting in $2.3 million of stock-based compensation expense for the six months ended June 30, 2006, compared to negligible expense in the prior year.

Guidance, Outlook, and Risks

• Capital Expenditures: Management expects 2006 capital expenditures to total between $60.0 million and $70.0 million, with 40-50% financed via sale-leaseback agreements.
• Acquisitions: The company did not acquire any franchises in the first half of 2006. While the annual target is approximately $200 million in annualized revenue from acquisitions, management does not expect to achieve this target in 2006.
• Interest Rate Risk: With $697.0 million in variable rate debt, a 1% change in interest rates would impact annual interest expense by approximately $7.0 million. Three interest rate swaps expired in March 2006, increasing interest expense.
• Dividend: A quarterly dividend of $0.20 per share was declared on July 31, 2006, payable August 24, 2006.
• Key Risks: Risks include manufacturer relationships, indebtedness levels, general economic conditions, and the impact of rising interest rates on floor plan costs. The company is also evaluating the impact of new FASB Interpretation No. 48 regarding uncertainty in income taxes.

Investor Verification Checklist

• Interest Rate Sensitivity: Verify the impact of rising short-term rates on floor plan interest expense, which increased 46% YTD.
• Adjusted Metrics: Review the reconciliation of GAAP to Non-GAAP "Adjusted" income and SG&A ratios, specifically the exclusion of the $3.4 million corporate generated F&I gain and stock-based compensation.
• Divestiture Proceeds: Confirm the status of the remaining franchise and ancillary business pending disposition and the net proceeds realized from the six sold franchises.
• Debt Covenants: Monitor compliance with debt covenants, specifically the adjusted leverage ratio (currently 3.1 to 1, limit 4.5 to 1) and fixed charge coverage ratio (currently 1.5 to 1, limit 1.2 to 1).
• Inventory Valuation: Assess the adequacy of inventory reserves, particularly for used vehicles where a 1% change in loss estimates impacts Cost of Sales by approximately $1.2 million.