Business context and reporting period
Asbury Automotive Group, Inc. (NYSE: ABG) filed this Form 10-K for the fiscal year ended December 31, 2019; it is an annual report, not a standalone fourth-quarter filing. The company operated 107 new-vehicle franchises across 88 dealership locations, 25 collision centers, and 31 brands in 17 metropolitan markets across 10 states. Its businesses include new and used vehicle sales, parts and service, and finance and insurance (F&I).
Financial performance
Amounts below are in millions of dollars except per-share data, percentages, and vehicle counts.
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $7,210.3 | $6,874.4 | +5% |
| Gross profit | $1,168.9 | $1,103.0 | +6% |
| Income from operations | $325.0 | $310.9 | +5% |
| Net income | $184.4 | $168.0 | +10% |
| Diluted EPS | $9.55 | $8.28 | +15% |
| Gross margin | 16.2% | 16.0% | +0.2 percentage points |
| SG&A as % of gross profit | 68.4% | 68.5% | Improved 0.1 percentage point |
2019 revenue by line: new vehicles $3,863.3 million (+2%); used vehicles $2,131.6 million (+8%); parts and service $899.4 million (+10%); and F&I, net, $316.0 million (+8%). Parts and service and F&I together generated 74.8% of gross profit. The effective tax rate was 24.4%, down from 25.3%.
Fourth-quarter 2019 unaudited results were revenue of $1,894.0 million, gross profit of $301.6 million, net income of $43.6 million, and diluted EPS of $2.26. The filing provides comparable fourth-quarter 2018 figures of $1,784.2 million, $281.8 million, $40.4 million, and $2.06, respectively.
Cash flow, debt and liquidity
- GAAP operating cash flow was $349.8 million, compared with $10.1 million in 2018. Management’s adjusted operating cash flow measure, which includes specified non-trade floor-plan borrowing and repayment flows, was $155.1 million versus $181.6 million.
- Investing activities used $227.6 million, including $210.0 million of acquisition cash outflows; financing activities used $127.0 million. Cash and cash equivalents were $3.5 million at year-end, down from $8.3 million.
- Year-end available liquidity was $472.9 million: $3.5 million cash, $132.1 million in floor-plan offset accounts, and stated availability of $190.0 million under the new-vehicle facility, $47.3 million under the revolving facility, and $100.0 million under the used-vehicle facility. Management said it expected sufficient liquidity for at least the next 12 months.
- Year-end long-term debt was reported as $943.3 million before specified balance-sheet adjustments and exclusions; the selected financial data reports total debt of $967.5 million including amounts classified with assets held for sale. Floor-plan notes payable were $850.8 million in the selected financial data, including amounts classified with assets held for sale. These figures should not be treated as directly interchangeable.
- Working capital was $355.6 million, versus $249.7 million in 2018. The company was in compliance with its debt covenants at year-end.
- Variable-rate debt exposure was estimated at $971.9 million; a 100-basis-point rate increase could raise annual interest expense by as much as $9.7 million. Floor-plan interest expense increased 17% to $37.9 million.
Material changes, outlook and notable items
- Revenue and net income rose, but same-store new-vehicle revenue fell 2% and gross profit fell 8%. Same-store new-vehicle unit sales declined 3%; new-vehicle margin fell to 4.1%, reflecting pressure particularly in import brands.
- Used-vehicle retail units increased 8% as reported, while retail gross margin declined 0.3 percentage point to 6.9%. Same-store parts and service revenue grew 7%, and same-store F&I per retail vehicle increased 6%.
- The company acquired 10 franchises and one collision center in 2019 for $210.4 million and divested one franchise and one collision center, recognizing an $11.7 million pretax gain. It also recorded $7.1 million of non-cash franchise-rights impairment, up from $3.7 million in 2018.
- Park Place: In December 2019, Asbury agreed to acquire substantially all assets of the Park Place dealership group and certain real estate for approximately $1.0 billion, excluding vehicle inventory. The transaction was expected to close in the first quarter of 2020 and had not closed as of the filing. Management cited expected integration and cost-saving opportunities, while cautioning that completion, integration, synergies, costs, and assumed liabilities were uncertain.
- Subsequent financing disclosed in the filing: in February 2020, Asbury issued $525 million of 4.50% notes due 2028 and $600 million of 4.75% notes due 2030 to help fund the proposed acquisition and refinance existing 6.0% notes. Redemption of the existing $600 million notes at 103% of par was conditional on closing the acquisition. The filing also disclosed planned facility expansions and approximately $387 million of floor-plan borrowing for Park Place inventory upon closing.
- Management estimated 2020 capital expenditures of approximately $68.8 million and an effective tax rate of 24.5%–25.5%. No revenue or earnings guidance was provided in the supplied filing text.
- The filing identified economic and vehicle-demand cyclicality, manufacturer and brand dependence, competition and margin pressure, consumer credit availability, variable interest rates and LIBOR transition, debt and covenant constraints, acquisition execution, regulatory and litigation exposure, cybersecurity, and environmental obligations as risks. It also noted the early-2020 coronavirus outbreak and uncertainty about potential effects on supply, customers, and employees.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting. The internal-control audit excluded the 2019 acquired operations, which contributed $260.7 million of reported 2019 revenue.
Important facts for investors to verify
- Whether the Park Place acquisition closed on the stated terms, including final purchase price for vehicle inventory, financing, integration costs, and realized synergies.
- Reconciliation of reported debt and floor-plan balances, including amounts classified as held for sale, offset-account cash, and post-year-end financing and note redemption.
- Cash-flow quality and working-capital effects: GAAP operating cash flow was substantially higher than the company’s adjusted measure in 2019.
- Whether parts and service and F&I growth can offset continued new-vehicle margin pressure and used-vehicle competition.
- Exposure to interest-rate and LIBOR changes, compliance with covenants, and the effect of the acquisition-related increase in leverage.
- Actual effects of the early-2020 coronavirus outbreak and other economic or supply-chain disruptions; these were uncertain at the filing date.