ABG

Business Context and Reporting Period

Company: Asbury Automotive Group, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2003
Business Overview: Asbury operates a network of automotive dealerships selling new and used vehicles, parts, service, and collision repair, along with finance and insurance products. The company is actively managing a portfolio of franchises, executing acquisitions, and divesting non-core or underperforming assets.

Key Financial Metrics

Note: Total Debt includes Floor plan notes payable ($488,502), Current maturities of long-term debt ($31,855), and Long-term debt ($503,949).

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 8% year-over-year for the nine months ended September 30, 2003, driven by a 4% increase in same-store revenue and $127.9 million in revenue from acquisitions.
• Profitability: Net income rose 9% for the nine-month period to $35.6 million. However, income from continuing operations before taxes decreased 9% to $64.8 million due to margin pressure on new and used vehicles and expense deterioration in the first quarter.
• Segment Performance:
  • New Vehicles: Same-store retail units declined 1%, but revenue increased 5% due to a higher average selling price driven by luxury and import sales.
  • Fixed Operations: Parts, service, and collision repair revenue grew 10% (6% same-store) due to increased warranty work and customer pay.
  • F&I: Finance and insurance revenue grew 15% (10% same-store), with gross profit per vehicle retailed increasing 11%.
• Discontinued Operations: The company recorded a $3.9 million loss from discontinued operations for the nine months, primarily related to the closure of the "Price 1" pilot program and the sale of non-core dealerships.
• Acquisitions: The company acquired four dealerships (ten franchises) for approximately $72.4 million in cash during the period.

Guidance, Outlook, and Risks

• Capital Expenditures: Management expects capital spending (excluding acquisitions and sale/leaseback proceeds) to total approximately $44 million for the full year 2003.
• Debt and Liquidity: The company amended its credit facility in June 2003, reducing total availability to $450 million but increasing working capital capacity to $75 million. As of September 30, 2003, approximately $306 million was available under the committed credit facility.
• Interest Rate Risk: The company has significant variable-rate debt. A 1% change in interest rates would impact annual floor plan interest expense by approximately $4.9 million and other interest expense by $2.8 million.
• Management Commentary: Management noted continued margin pressure on vehicle sales but highlighted strong performance in fixed operations and F&I. They also cited $3.2 million in charges related to management changes at the Oregon and Texas platforms and corporate level.
• Subsequent Event: An arbitration regarding the estate of former CEO Brian E. Kendrick was resolved in the company's favor, with no further amounts due.

Investor Verification Checklist

• Margin Pressure: Verify the sustainability of gross profit margins given the reported decline in same-store new and used vehicle gross profit.
• Expense Control: Monitor the effectiveness of expense reduction initiatives in the second and third quarters to offset first-quarter deterioration.
• Debt Covenants: Review the terms of the amended credit facility and the impact of the $450 million cap on future acquisition financing.
• Discontinued Operations: Confirm the final financial impact of the "Price 1" program closure and the sale of remaining held-for-sale dealerships.
• Interest Rate Exposure: Assess the company's hedging strategies or reliance on manufacturer interest credit assistance to mitigate rising interest rate costs.