Asbury Automotive Group, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016; comparisons are to the corresponding 2015 periods. Asbury operated 98 new-vehicle franchises at 81 dealership locations, plus 25 collision centers, across nine states.
Financial performance
- Third quarter: Revenue was $1.683 billion, down 2%; gross profit was $265.7 million, down 3%; operating income was $70.7 million, down 8%; and net income was $32.4 million, down 37%. Diluted EPS was $1.47, versus $1.96.
- Nine months: Revenue was $4.861 billion, down 2%; gross profit was $794.1 million, down 1%; operating income was $217.7 million, down 6%; and net income was $100.1 million, down 22%. Diluted EPS was $4.37, versus $4.76.
- Revenue mix and margins: Parts and service revenue increased 5% in both the quarter and nine-month period. New- and used-vehicle revenue declined, as did finance and insurance revenue. Gross margin was 15.8% in Q3 (15.9% in 2015) and 16.3% for nine months (16.2% in 2015). SG&A was 69.9% of gross profit in Q3 and 69.2% year to date, up from 69.2% and 68.3%, respectively.
- Cash flow: Nine-month operating cash flow was $151.1 million, versus $145.0 million; investing cash outflow was $77.5 million and financing cash outflow was $72.7 million. Management’s non-GAAP “cash provided by operating activities, as adjusted” was $227.6 million, versus $196.5 million.
- Debt and liquidity: Long-term debt, including current maturities, had a carrying amount of $930.2 million; separately, net trade and non-trade floor-plan notes totaled $769.5 million. Cash was $3.7 million. Reported available liquidity was $367.5 million, including $36.1 million in floor-plan offset accounts and $327.7 million of available revolving and used-vehicle floor-plan borrowing capacity.
Changes, outlook and risks
- Q3 results were pressured by lower new- and used-vehicle units and weaker vehicle gross profit per unit. Same-store new-vehicle gross profit declined 7%; same-store used-vehicle gross profit declined 8%. Parts and service remained a growth contributor, with same-store revenue up 8% in Q3 and 8% for nine months.
- Year-over-year earnings comparisons were affected by a $21.4 million divestiture gain recorded in 2015, absent in 2016. Higher interest expense also weighed on results, reflecting the October 2015 issuance of $200 million of 6.0% notes. Nine-month 2016 results included $3.1 million of non-cash real-estate impairments and $2.1 million of lease-termination charges.
- Management expected 2016 capital expenditures of approximately $80 million and stated it believed liquidity would be sufficient for at least the next 12 months. No specific revenue or earnings guidance was provided. Management cited competition, manufacturer incentives and vehicle availability, consumer credit and economic conditions, and interest rates as relevant uncertainties.
- Used-vehicle supply was affected by manufacturer stop-sale programs; inventory stood at 40 days of supply, above the company’s 30–35-day target. New-vehicle inventory was approximately 72 days of supply. A 100-basis-point interest-rate change could affect annual interest expense by up to $7.9 million, based on variable-rate debt at quarter-end.
- Five franchises at four dealership locations were pending disposition. Asbury reported covenant compliance at September 30, 2016. It repurchased $162.0 million of shares under its program during the first nine months, with $138.1 million of authorization remaining. The filing describes legal and regulatory claims but says known claims were not expected to materially harm results or liquidity; outcomes remain uncertain.
Important facts for investors to verify
- Whether vehicle sales volumes and per-unit gross profit stabilize, particularly for domestic brands, and whether used-vehicle supply returns to the target range.
- Whether parts-and-service growth can continue to offset vehicle and F&I weakness, while SG&A and insurance costs remain controlled.
- Debt-service capacity and interest-rate sensitivity, including the effects of floor-plan financing and the 6.0% notes.
- Execution and proceeds from pending dealership dispositions, and the scope of further real-estate or lease-related charges.
- Cash generation and capital allocation, including planned capital spending, share repurchases, covenant headroom, and the distinction between reported and adjusted operating cash flow.