ABG

Business Context and Reporting Period

Company: Asbury Automotive Group, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2002
Context: The Company operates a network of automotive dealerships. During the first half of 2002, the Company completed an Initial Public Offering (IPO) in March and converted from a Limited Liability Company (LLC) to a corporation. This conversion resulted in a one-time non-recurring tax charge. The Company also issued $250 million in Senior Subordinated Notes in June 2002.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 9% ($94.2 million) for the quarter and 8% ($172.8 million) for the six months compared to the prior year periods. Growth was driven primarily by acquisitions, with same-store retail revenues increasing 0.4% for the quarter and 1% for the six months.
• Profitability: Net income from continuing operations for the quarter was $13.8 million, up significantly from the prior year. Income before taxes increased 48% for the quarter and 52% for the six months, adjusted for the elimination of goodwill amortization under new accounting standards (SFAS No. 142).
• Interest Expense: Floor plan interest expense decreased significantly (from $7.6 million to $4.6 million for the quarter) due to lower interest rates. Other interest expense also declined.
• Discontinued Operations: The Company divested four dealerships in the first half of 2002, resulting in a net loss of $0.955 million for the six-month period, primarily due to a loss on real estate associated with a disposed dealership.

Guidance, Outlook, and Risks

• Capital Expenditures: Management expects capital spending (excluding acquisitions) to be approximately $60 million for the full year 2002, focused on operational improvements and manufacturer-required facility upgrades.
• Strategic Initiatives: The Company is piloting the "Price 1 Auto Store" program, selling used vehicles on Wal-Mart parking lots in Houston. Start-up expenses for this pilot were $1.5 million in the quarter and $2.2 million for the six months.
• Market Risks: The Company faces interest rate risk on variable rate debt. A 1% change in rates would impact annual non-floor plan interest expense by approximately $2.3 million and floor plan interest expense by $4.6 million.
• Accounting Changes: The Company adopted SFAS No. 142, eliminating goodwill amortization. It also recorded a one-time $11.6 million tax charge related to its conversion to a corporation. Pro forma net income for the six months, excluding this charge, was $24.2 million ($0.75 per share).
• Contingencies: The Company terminated three interest rate swap agreements in Q2, realizing a $0.2 million loss net of tax, which will be reclassified to earnings over the remaining term of the related debt.

Investor Verification Checklist

• Pro Forma Adjustments: Verify the impact of the $11.6 million one-time tax charge on net income and the resulting pro forma EPS of $0.75.
• Debt Structure: Confirm the terms of the new $250 million Senior Subordinated Notes (9% interest, due 2012) and the remaining availability under the $550 million Committed Credit Facility.
• Acquisition Impact: Assess the contribution of acquisitions to revenue growth versus organic same-store sales performance, particularly in the Texas and Oregon markets which showed weakness.
• Inventory Valuation: Note the change in inventory valuation method from LIFO to FIFO/Specific Identification effective March 19, 2002, and its impact on financial presentation.
• Discontinued Operations: Review the details of the four divested dealerships and the associated real estate losses.