Asbury Automotive Group, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Asbury operated 107 new-vehicle franchises across 88 dealership locations, 25 collision centers, 31 brands, and 18 metropolitan markets in ten states. Dollar amounts below are in millions except per-share data.
Financial performance
| Metric | Q3 2019 | Q3 2018 | First nine months 2019 | First nine months 2018 |
|---|---|---|---|---|
| Revenue | $1,842.0 | $1,757.4 | $5,316.3 | $5,090.2 |
| Gross profit | $293.1 | $278.0 | $867.3 | $821.2 |
| Gross margin | 15.9% | 15.8% | 16.3% | 16.1% |
| Operating income | $82.2 | $80.8 | $245.9 | $233.6 |
| Net income | $45.0 | $44.3 | $140.8 | $127.6 |
| Diluted EPS | $2.33 | $2.18 | $7.30 | $6.22 |
| SG&A as % of gross profit | 68.9% | 67.9% | 68.5% | 68.6% |
- Q3 revenue grew 5%; used vehicles, parts and service, and finance and insurance (F&I) each grew 10%, while new-vehicle revenue rose 1%. Q3 net income increased 2% and diluted EPS increased 7%.
- For the first nine months, revenue rose 4%, gross profit 6%, and net income 10%. Diluted EPS increased 17%, helped in part by lower weighted-average diluted shares.
- Parts and service and F&I were the principal gross-profit growth drivers. Q3 new-vehicle gross profit fell 8%; same-store new-vehicle gross margin declined 40 basis points to 3.9%. Used-vehicle retail margin also weakened: down 60 basis points in Q3 and 30 basis points for the nine-month period.
Cash flow, debt and liquidity
- For the first nine months, GAAP operating cash flow was $347.7, versus $106.4 a year earlier. The company’s non-GAAP operating cash flow measure, adjusted for specified non-trade floor-plan borrowings and repayments, was $168.3 versus $184.7. Management attributed the adjusted decrease primarily to inventory and floor-plan activity.
- Investing cash outflow was $206.2, including $210.0 of acquisition cash outlays; financing cash outflow was $148.0. Cash ended at $1.8, down from $8.3 at year-end 2018.
- At September 30, total available liquidity was $405.4, including $64.9 in floor-plan offset accounts and stated availability across revolving and floor-plan facilities. Availability is subject to borrowing-base limits and covenants.
- Long-term debt, including current maturities, was $905.9; separately, net floor-plan notes payable were $861.0 ($122.1 trade and $738.9 non-trade). The company had $600.0 principal outstanding on its 6.0% notes due 2024.
- On September 25, the company amended and restated its senior credit facility, providing a $250.0 revolving facility, a $1.04 billion new-vehicle floor-plan facility, and a $160.0 used-vehicle floor-plan facility. It reported compliance with covenants at quarter-end and stated it expected sufficient liquidity for at least the next 12 months.
- Operating lease right-of-use assets were $77.1 and operating lease liabilities totaled $81.3 following adoption of the new lease standard in 2019.
Material changes, outlook and risks
- Q3 performance reflected growth in used retail sales, service, and F&I, offset by pressure on vehicle margins and higher SG&A as a share of gross profit. Management cited import-brand incentive pressure, competition and price transparency in used vehicles, and higher floor-plan interest costs.
- For the nine months, floor-plan interest expense increased 29% to $29.7, which management attributed to higher LIBOR and higher new-vehicle inventory levels. A 100-basis-point rate change could alter annual interest expense by up to $8.9 based on variable-rate debt outstanding; swaps partially hedge rate exposure.
- A dealership and collision-center divestiture generated $39.1 of proceeds and an $11.7 pretax gain. Acquisitions cost $210.4 and added dealerships in Indianapolis and Denver. Acquisition purchase-price allocations remained preliminary.
- Management expected a 2019 effective tax rate of approximately 25% and approximately $45.0 of capital expenditures for the year. The filing gives no broader earnings or revenue guidance.
- Hurricane Dorian temporarily closed some Florida dealerships in Q3; management said the impact was not material. Other stated risks include economic and consumer-credit conditions, manufacturer relationships and vehicle supply, margin competition, interest rates, covenant compliance, tariffs, litigation, and disruptions to vehicle production or delivery.
- The company reported no known claim expected to materially adversely affect results, but noted that unfavorable resolution of claims could have a material effect. It also identified manufacturer requirements for potentially costly dealership improvements.
Important facts for investors to verify
- Whether growth in service and F&I can offset continued new- and used-vehicle margin pressure and rising SG&A.
- The sustainability and composition of operating cash flow; distinguish GAAP cash flow from management’s adjusted, non-GAAP measure and its floor-plan treatment.
- Actual borrowing availability, covenant headroom, interest-rate exposure, and the effect of the new credit facility’s terms.
- Final acquisition purchase-price allocations and whether the acquired locations deliver expected operating contributions.
- Progress against stated 2019 tax-rate and capital-expenditure expectations, and any subsequent changes in outlook or material contingencies.