Asbury Automotive Group, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This is an annual filing, not a standalone fourth-quarter report. Asbury operated 94 new-vehicle franchises across 80 dealerships, plus 24 collision centers, in 17 markets and nine states.
Financial performance
Amounts are in millions of dollars except per-share data, percentages, and vehicle counts.
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue | $6,456.5 | $6,527.8 | -1% |
| Gross profit | $1,055.9 | $1,058.7 | -0.3% |
| Gross margin | 16.4% | 16.2% | +0.2 percentage points |
| Operating income | $287.7 | $297.8 | -3% |
| Net income | $139.1 | $167.2 | -17% |
| Diluted EPS | $6.62 | $7.40 | -11% |
| Cash provided by operating activities (GAAP) | $266.3 | $142.5 | +$123.8 |
| Cash provided by operating activities, as adjusted (non-GAAP) | $195.6 | $260.5 | -$64.9 |
- New-vehicle revenue declined 1% to $3,561.1 million; units sold fell 2%, and gross profit per new vehicle fell 8% to $1,690. Used-vehicle revenue fell 2% to $1,834.1 million, with retail gross margin down 0.4 percentage points to 7.4%.
- Parts and service revenue rose 1% to $786.1 million; F&I revenue rose 5% to $275.2 million. F&I per retail vehicle increased 8% to $1,556. Parts and service and F&I together generated 72.5% of gross profit; management also says approximately 84% came from used vehicles, parts and service, and F&I.
- SG&A was $729.7 million, or 69.1% of gross profit, slightly better than 69.2% in 2016. Total gross profit was nearly flat, but operating income included a $5.1 million non-cash franchise-rights impairment.
Balance sheet, debt, and liquidity
- Cash was $4.7 million; working capital was $243.9 million; inventory was $826.0 million; total assets were $2,356.7 million; and shareholders’ equity was $394.2 million at year-end.
- Gross long-term debt was $879.3 million, excluding floor-plan notes; floor-plan notes payable were $732.1 million. The filing’s selected financial data presents debt net of issuance costs and premium differently ($875.5 million), so the debt basis should be checked when comparing figures.
- Available liquidity was reported as $379.5 million, including cash, floor-plan offset funds, and available borrowing capacity. Management believed liquidity would be sufficient for at least the next 12 months. The company reported compliance with debt covenants at year-end.
- Variable-rate debt was $718.4 million; management estimated a 100-basis-point rate increase could raise annual interest expense by up to $7.2 million. Two interest-rate swaps hedge a portion of exposure.
Material changes and unusual items
- Net income fell largely because 2016 included a $45.5 million gain on divestitures; there was no comparable gain in 2017. Floor-plan interest expense also increased $3.4 million as rates rose.
- The 2017 effective tax rate was 33.5%, versus 37.6% in 2016. The Tax Cuts and Jobs Act produced a provisional $7.9 million tax benefit from remeasuring deferred tax liabilities; the company said its tax accounting remained subject to completion in 2018.
- Asbury acquired two franchises and one collision center in Indianapolis during 2017 for $80.1 million. It repurchased 584,696 shares for $34.8 million under its program and paid no dividends. In January 2018, it acquired one additional franchise.
- Fourth-quarter 2017 net income was $42.5 million versus $67.1 million in fourth-quarter 2016. The prior-year quarter included divestiture and legal-settlement gains; 2017 included the tax-reform benefit and franchise impairment.
Outlook, commentary, and risks
- Management forecast approximately $50 million of 2018 capital expenditures for facilities, service capacity, technology, and equipment. The filing provides no specific revenue or earnings guidance.
- Management cited U.S. new-vehicle sales of 17.2 million in 2017, down from 17.6 million in 2016. It emphasized resilient parts and service, F&I, and used-vehicle operations, while noting seasonality and sensitivity to economic conditions, incentives, and weather.
- Key risks include vehicle demand and margin pressure, consumer credit availability and interest rates, manufacturer allocation and franchise agreements, competition and price transparency, debt and covenant obligations, cyber/data-security incidents, and regulatory or litigation exposure. Longer-term changes from ride-sharing, electric vehicles, and autonomous vehicles could also affect sales and service economics.
- The company had a May 2016 FTC consent order concerning disclosures for used vehicles with open safety recalls. It made no admission or payment but agreed to disclosure and recordkeeping requirements. Management said known legal matters were not expected to have a material adverse effect, while acknowledging outcomes are uncertain.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. The internal-control assessment did not include two 2017-acquired franchises, which represented $64 million of assets and $136 million of revenue for the year.
Important facts for investors to verify
- Reconcile the reported liquidity figure and debt totals, including floor-plan financing, offsets, and debt issuance costs.
- Assess whether vehicle gross-profit pressure and lower volumes are being offset sustainably by growth in F&I and parts and service.
- Review the assumptions behind the $5.1 million franchise-rights impairment and the provisional $7.9 million tax-reform benefit.
- Track cash generation using both GAAP operating cash flow and management’s adjusted non-GAAP measure, and compare both with acquisition spending, capital expenditures, debt service, and buybacks.
- Monitor covenant headroom, floating-rate exposure, manufacturer relationships, and the impact of the FTC order and other legal or regulatory matters.