ABG

Business Context and Reporting Period

Company: Asbury Automotive Group, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2005
Operations: Asbury operates 94 dealership locations (130 franchises) across 23 metropolitan markets in 11 states, offering new and used vehicles, parts, service, collision repair, and finance/insurance products. During the quarter, the company reorganized its operations into four principal regions (Florida, West, Mid-Atlantic, and South) to improve management effectiveness and cost efficiency.

Key Financial Metrics

Note: Working Capital calculated as Total Current Assets ($1,174,008) minus Total Current Liabilities ($889,628).

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 14% year-over-year, driven by a 14% increase in new vehicle sales and a 13% increase in used vehicle sales. Same-store revenues rose 8%.
• Profitability: While reported Net Income decreased 7% to $9.6 million, this was primarily due to $3.6 million in pre-tax restructuring costs ($2.2 million after-tax). Excluding these costs, adjusted net income increased 15%.
• Operating Expenses: Selling, General, and Administrative (SG&A) expenses increased 16% to $173.1 million. This increase included the aforementioned restructuring costs and $2.3 million in incremental rent from sale-leaseback transactions. Adjusted SG&A as a percentage of gross profit improved to 74.2% from 75.4%.
• Interest Expense: Floor plan interest expense increased 64% to $7.4 million, attributed to rising interest rates and higher inventory balances.
• Cash Flow: Operating cash flow turned positive, providing $41.1 million compared to a $12.2 million outflow in the prior year, largely due to timing differences in working capital and a decision to stop financing used vehicles.

Guidance, Outlook, and Risks

• Restructuring Outlook: Management estimates the regional restructuring will negatively impact 2005 income by $0.02 to $0.04 per diluted share but will improve future income by approximately $0.10 per diluted share. Annual SG&A savings of approximately $5.0 million are expected beginning in 2006.
• Capital Expenditures: Expected to total between $80.0 million and $90.0 million for 2005, with 60-70% financed via sale-leaseback agreements.
• Acquisitions: The company anticipates spending between $75.0 million and $125.0 million on acquisitions in 2005. A $5.0 million acquisition in Arkansas was completed in Q2 2005.
• Market Risks: The company faces risks related to manufacturer incentive programs impacting used vehicle sales, rising interest rates affecting floor plan costs, and potential impairment of goodwill or intangible assets. The company is also subject to import risks and environmental regulations.
• Debt Covenants: As of March 31, 2005, the company was in compliance with all covenants under its new $800 million credit facility (including a 1.5:1 current ratio and 3.8:1 leverage ratio).

Investor Verification Checklist

• Restructuring Costs: Verify the $3.6 million in severance and restructuring costs and the projected $5.0 million annual savings.
• Used Vehicle Market: Monitor the impact of manufacturer incentives on new vehicles, which management notes continues to negatively impact the used vehicle retail market.
• Interest Rate Sensitivity: Assess exposure to rising rates; a 1% increase in rates would increase annual floor plan interest expense by approximately $6.9 million.
• Debt Structure: Review the terms of the new $800 million credit facility entered into on March 23, 2005, including covenants and extension options.
• Discontinued Operations: Track the disposition of assets held for sale, which totaled $16.1 million as of March 31, 2005.