Business Context and Reporting Period
Company: Asbury Automotive Group, Inc.
Filing Type: Form 8-K (Current Report)
Date of Report: December 12, 2003
Reporting Period: This filing updates the consolidated financial statements for the year ended December 31, 2002, originally included in the Form 10-K. The update reflects the reclassification of certain operations as "discontinued operations" in accordance with SFAS No. 144, effective January 1, 2002, and subsequent divestitures through September 30, 2003.
Business Overview: Asbury is a national automotive retailer operating 93 new and used car dealerships (131 franchises) and 23 collision repair centers across 18 markets in the U.S. The company sells new and used vehicles, parts, and provides maintenance and financing services.
Key Financial Metrics (Year Ended Dec 31, 2002)
| Metric | 2002 (Updated) | 2001 | 2000 |
|---|---|---|---|
| Total Revenues | $4,416,901 | $4,153,042 | $3,827,346 |
| Gross Profit | $697,888 | $645,931 | $571,223 |
| Income from Operations | $139,211 | $118,193 | $116,667 |
| Net Income (Continuing Ops) | $44,310 | $40,770 | $26,623 |
| Net Income (Total) | $38,085 | $44,184 | $30,715 |
| EPS (Basic & Diluted) | $1.15 | N/A | N/A |
| Cash Flow from Operations | $68,006 | $96,525 | $63,012 |
| Total Assets | $1,605,644 | $1,465,013 | N/A |
| Total Debt (Current + Long-Term) | $1,003,743 | $979,712 | N/A |
| Cash and Equivalents | $22,613 | $60,506 | N/A |
Note: All figures in thousands except per share data.
Material Changes vs. Prior Period
- Discontinued Operations Reclassification: The most significant change is the reclassification of six dealerships (four divested, two held for sale) as discontinued operations. This resulted in a net loss from discontinued operations of $6,225 for 2002, compared to income of $3,414 in 2001. Consequently, total Net Income decreased to $38,085 from $44,184 in 2001, despite an increase in Net Income from Continuing Operations.
- Revenue Growth: Total revenues increased 6.4% to $4.42 billion, driven by growth in new vehicle sales ($2.64B vs $2.48B) and used vehicle sales ($1.16B vs $1.10B).
- Operating Expenses: Selling, general, and administrative expenses rose to $539.5 million from $500.0 million, reflecting business expansion and the impact of the IPO.
- Debt Structure: The company issued $250 million in 9% Senior Subordinated Notes in June 2002. Proceeds were used to repay a substantial portion of the Committed Credit Facility. Total long-term debt decreased slightly to $438.7 million from $492.5 million, while current maturities increased.
- Goodwill Accounting: Effective Jan 1, 2002, the company adopted SFAS No. 142, ceasing the amortization of goodwill. Goodwill balance increased to $402.1 million due to acquisitions.
Guidance, Outlook, Risks, and Unusual Items
- Covenant Waiver: As of December 31, 2002, the company was not in compliance with its fixed charge coverage ratio under the Committed Credit Facility. A waiver was obtained on February 5, 2003, extending through January 1, 2004. This waiver restricts acquisitions and stock repurchases during the period.
- Dividend Restriction: The Committed Credit Facility prohibits the declaration or payment of dividends or distributions to shareholders.
- Unusual Items:
- Tax Adjustment: A one-time, non-recurring charge of $11,553 was recorded for deferred taxes upon the conversion from an L.L.C. to a corporation in March 2002.
- Discontinued Operations: Losses from the disposition of discontinued operations totaled $1,490 in 2002.
- Risks:
- Franchise Agreements: Operations are subject to manufacturer franchise agreements; loss of a franchise could negatively impact results.
- Import Risks: A significant portion of inventory is imported, exposing the company to currency fluctuations, tariffs, and trade restrictions.
- Interest Rate Risk: The company utilizes floor plan financing and variable rate debt, though it has hedged portions of its long-term debt via interest rate swaps (terminated in Q2 2002).
Investor Verification Checklist
- Covenant Compliance: Verify the status of the fixed charge coverage ratio waiver and the company's ability to cure the default by January 1, 2004.
- Discontinued Operations: Review the specific financial performance of the divested dealerships to understand the impact on future organic growth.
- Debt Maturities: Assess the liquidity position relative to the $36.4 million in current maturities of long-term debt due in 2003 and the $106.1 million due in 2005.
- Goodwill Valuation: Confirm the results of the annual goodwill impairment test performed as of October 1, 2002, given the significant goodwill balance ($402M).
- Related Party Transactions: Review the $13.8 million in rent paid to entities controlled by shareholder members and the $3.7 million in land purchases from directors in 2002.