Business Context and Reporting Period
Company: Asbury Automotive Group, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2003
Business Overview: Asbury is one of the largest automotive retailers in the U.S., operating 140 franchises at 97 dealership locations across 21 markets in 11 states. The company is organized into nine regional "platforms" and offers new and used vehicles, parts, service, collision repair, and finance and insurance (F&I) products. The portfolio includes 35 brands, with 67% of new vehicle revenue derived from luxury and mid-line import brands.
Key Financial Metrics
| Metric | 2003 | 2002 |
|---|---|---|
| Total Revenues | $4,776.5 million | $4,415.3 million |
| Gross Profit | $740.3 million | $696.3 million |
| Net Income | $15.2 million | $38.1 million |
| Earnings Per Share (Basic) | $0.47 | $1.15 |
| Operating Cash Flow | $96.6 million | $65.1 million |
| Total Debt (excl. floor plan) | $592.4 million | $475.2 million |
| Floor Plan Notes Payable | $602.2 million | $528.6 million |
| Cash and Cash Equivalents | $106.7 million | $22.6 million |
| Working Capital | $255.0 million | $167.1 million |
Revenue Mix (2003): New vehicles (61%), Used vehicles (25%), Parts/Service/Collision (11%), F&I (3%).
Gross Profit Contribution (2003): New vehicles (29%), Used vehicles (14%), Parts/Service/Collision (39%), F&I (18%).
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 8% to $4.8 billion, driven by a 3% same-store increase and acquisitions. New vehicle retail revenue rose 10%, while used vehicle revenue grew 2%.
- Profitability Decline: Net income dropped 60% to $15.2 million. This was primarily due to a non-cash goodwill impairment charge of $37.9 million related to the Oregon platform, a $4.6 million loss from discontinued operations (including the "Price 1" pilot program), and increased insurance costs.
- Same-Store Performance: Same-store new vehicle retail units declined 1%, though revenue increased 5% due to a higher average selling price from a luxury/import mix. Same-store used vehicle units declined 2% due to manufacturer incentives on new cars.
- Debt Restructuring: The company issued $200 million in 8% Senior Subordinated Notes due 2014 in December 2003. Proceeds were used to repay all outstanding indebtedness under its Committed Credit Facility, leaving $250 million available for future borrowings.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
Management expects to continue growth through targeted "tuck-in" acquisitions and platform expansions. They anticipate capital expenditures of $50–$60 million in 2004. The company expects its annual effective tax rate to fluctuate between 37% and 38% in 2004. Management believes the Oregon platform will improve following management changes and expense reduction initiatives.
Unusual Items
- Goodwill Impairment: A $37.9 million charge was recorded for the Oregon platform due to delayed economic recovery, reduced used vehicle sales volumes, and management changes.
- Discontinued Operations: A $4.6 million loss included operating losses from divested dealerships and the closure of the "Price 1" pilot program.
- Legal Proceedings: A breach of contract action in Arkansas seeks damages in excess of $23 million related to the discontinued "Price 1" program; management believes the claim is meritless.
Risks and Contingencies
- Manufacturer Dependence: The company is subject to strict dealer agreements. Manufacturers can terminate agreements or require divestiture upon changes in control or failure to meet performance standards. Specific agreements with Toyota and Ford allow them to purchase dealerships at fair market value if debt obligations are accelerated.
- Acquisition Restrictions: The company has reached franchise ceilings with Acura and is near limits with Toyota, Lexus, and Jaguar, potentially limiting future growth without manufacturer consent.
- Interest Rate Risk: A 1% increase in market interest rates would increase total annual interest expense by approximately $8.9 million.
Investor Verification Checklist
- Goodwill Impairment: Verify the assumptions used in the Oregon platform valuation and the likelihood of future impairment charges.
- Debt Covenants: Confirm ongoing compliance with the fixed charge coverage ratio (1.5 to 1 as of Dec 31, 2003) and leverage ratio (0.8 to 1) under the Committed Credit Facility.
- Manufacturer Relations: Monitor the status of framework agreements with Toyota and Ford, specifically regarding change-of-control provisions and acquisition limits.
- Discontinued Operations: Assess the final financial impact of the "Price 1" program divestiture and the pending Arkansas litigation.
- Acquisition Pipeline: Review the $77 million in pending acquisitions and the integration risks associated with the new Sacramento market entry.