Asbury Automotive Group, Inc. — Q3 2018 Form 10-Q
Business and period: Quarterly results for the three and nine months ended September 30, 2018, compared with the same 2017 periods. Asbury operated 97 new-vehicle franchises at 83 dealership locations, 25 collision centers, and 29 vehicle brands across nine states.
Financial performance
| Metric ($ millions, except per-share data) | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Revenue | 1,757.4 | 1,602.1 | 5,090.2 | 4,785.6 |
| Gross profit | 278.0 | 260.3 | 821.2 | 787.5 |
| Gross margin | 15.8% | 16.2% | 16.1% | 16.5% |
| Operating income | 80.8 | 69.7 | 233.6 | 213.6 |
| Net income | 44.3 | 30.7 | 127.6 | 96.6 |
| Diluted EPS | $2.18 | $1.48 | $6.22 | $4.60 |
Q3 revenue increased 10% and net income 44%; nine-month revenue rose 6% and net income 32%. SG&A was 67.9% of gross profit in Q3 versus 70.1% a year earlier, and 68.6% for the nine months versus 69.7%.
For the first nine months, net cash from operating activities was $106.4 million versus $243.2 million in 2017. Management’s adjusted operating cash flow measure, which includes specified non-trade floor-plan cash flows, was $184.7 million versus $123.2 million. Investing activities used $132.8 million; financing activities provided $28.5 million. Cash was $6.8 million at quarter-end.
At September 30, long-term debt was $852.1 million, plus $13.1 million of current maturities. Floor-plan notes payable, net, totaled $831.1 million ($102.2 million trade and $728.9 million non-trade). Inventory was $962.8 million, up from $826.0 million at year-end 2017. Total available liquidity was $394.1 million, including cash, floor-plan offset funds and available credit facilities.
Changes, drivers, and unusual items
- Q3 revenue increased across new vehicles (+11%), used vehicles (+9%), parts and service (+5%), and finance and insurance (+8%). Nine-month revenue growth was led by new and used vehicles, each up 7%.
- Vehicle volumes supported growth, but vehicle margins weakened: Q3 new-vehicle gross profit per unit fell 7%; nine-month same-store new-vehicle margin declined 30 basis points to 4.4%. Management cited brand mix, missed manufacturer sales targets, and smaller dealer incentives. Nine-month same-store used-vehicle retail margin fell 40 basis points, which management attributed to competition and price transparency.
- Floor-plan interest expense rose 45% in Q3 and 35% for the first nine months, primarily due to higher rates and increased borrowings. The company reported $818.1 million of variable-rate debt; a 100-basis-point rate change could change annual interest expense by as much as $8.2 million. Interest-rate swaps hedge part of this exposure.
- The lower effective tax rate following the Tax Act contributed to earnings growth. Q3 effective tax rate was 25.0% versus 38.7%; the nine-month rate was 25.2% versus 37.6%. Q3 included a $0.6 million provisional tax expense relating to IRS guidance.
- ASC 606 adoption was recorded using the modified retrospective method; prior-year comparisons were not restated. Adoption increased Q3 2018 net income by $0.2 million but reduced nine-month net income by $1.3 million.
- Three franchises at three dealership locations were acquired for $93.2 million during the nine months. Share repurchases totaled $57.1 million under the program during that period. Q3 2017 results included disruption from Hurricanes Harvey and Irma; Q3 2018 results were affected to a lesser extent by Hurricane Florence-related temporary closures.
Outlook, liquidity, and risks
- Management expected a 2018 effective tax rate of 25%–26% and approximately $50 million of 2018 capital expenditures. It stated that liquidity should be sufficient for obligations and operating needs for at least the next 12 months; these are forward-looking expectations, not guarantees.
- Management described consumer credit availability, consumer confidence, and low unemployment as supportive, while noting that results are exposed to seasonality, economic conditions, vehicle demand and mix, manufacturer incentives and vehicle supply.
- Key risks include rising interest rates and financing costs, competition and margin pressure, reliance on manufacturer franchise agreements and incentives, tariffs or trade restrictions on imported vehicles and parts, litigation and regulatory matters, and the availability of financing. Manufacturers may also require costly dealership improvements.
- The company reported compliance with debt covenants and no known material reasonably possible losses in excess of accrued contingencies in the aggregate, while cautioning that an unfavorable outcome in a known or future matter could be material. Letters of credit of $13.0 million and a $5.0 million surety bond line were disclosed as off-balance-sheet arrangements.
- The company expected adoption of the lease accounting standard on January 1, 2019 to materially increase balance-sheet assets and liabilities through recognition of lease right-of-use assets and obligations.
Investor verification points
- Assess whether revenue and earnings growth can continue if vehicle volumes or consumer demand soften, particularly given declining new-vehicle margins.
- Reconcile GAAP operating cash flow with management’s adjusted measure and monitor working-capital movements, inventory, and floor-plan financing.
- Verify debt, liquidity, covenant headroom, interest-rate exposure, and the effects of any further rate increases.
- Track the effects of acquisitions, repurchases, and planned capital expenditures on leverage and cash generation.
- Review final Tax Act accounting, ASC 606 effects, the 2019 lease-standard balance-sheet impact, and developments in litigation, manufacturer agreements, and trade policy.