Asbury Automotive Group, Inc. — Q2 2016 Form 10-Q
Business context and period. The filing covers the quarter and six months ended June 30, 2016, compared with the corresponding 2015 periods. Asbury operated 99 new-vehicle franchises at 82 dealerships, 25 collision centers, and three stand-alone used-vehicle stores across nine states. Its business includes new and used vehicles, parts and service, and finance and insurance products.
Financial performance and key metrics
- Second-quarter revenue: $1.627 billion, down 4% year over year. New-vehicle revenue fell 3%, used-vehicle revenue fell 7%, and finance and insurance revenue fell 4%; parts and service revenue grew 4%.
- Second-quarter earnings: Gross profit was $267.6 million, down 1%; operating income was $78.1 million, down 5%; and net income was $36.7 million, down 11%. Diluted EPS rose to $1.65 from $1.52, alongside a decline in diluted weighted-average shares to 22.2 million from 27.0 million.
- Margins: Gross margin improved 30 basis points to 16.4%, mainly from stronger used-vehicle margins and a higher parts-and-service revenue mix. SG&A rose to 68.1% of gross profit from 67.0%.
- First-half results: Revenue was $3.178 billion, down 2%; gross profit was $528.4 million, essentially flat; operating income was $147.0 million, down 5%; and net income was $67.7 million, down 12%. Diluted EPS was $2.91 versus $2.82. Gross margin increased to 16.6% from 16.3%, while SG&A increased to 68.8% of gross profit from 67.8%.
- Business mix and volumes: First-half parts-and-service revenue increased 5%, and same-store parts-and-service revenue increased 8%. New-vehicle units declined 3% as reported and used-vehicle retail units declined 6%; same-store declines were 2% and 3%, respectively. Used-vehicle gross profit per retailed unit improved.
- Cash flow: First-half operating cash flow was $69.6 million, versus $89.2 million in 2015. The company’s non-GAAP operating cash flow “as adjusted” for non-trade new-vehicle floor-plan changes was $223.5 million versus $125.9 million; management attributed much of the improvement to the reduction in the floor-plan offset account. Investing cash outflow was $51.8 million and financing cash outflow was $18.8 million.
- Liquidity and debt: Cash was $1.8 million at June 30. Reported available liquidity was $272.6 million, including $5.2 million in the floor-plan offset account and borrowing availability of $165.6 million under the revolving facility and $100.0 million under the used-vehicle floor-plan facility. Long-term debt, including its current portion, had a carrying value of $942.5 million; floor-plan notes payable were $156.3 million trade and $727.3 million non-trade, net. Total shareholders’ equity was $219.6 million, down from $314.5 million at year-end, in part reflecting share repurchases.
Material changes, outlook, and risks
- Higher interest costs weighed on earnings: second-quarter other interest expense rose 28% to $13.4 million, primarily following the October 2015 issuance of an additional $200 million of 6.0% notes. First-half total other expenses increased 27% to $37.8 million.
- During the first half, the company repurchased 2.83 million shares for $161.9 million; $138.1 million remained authorized at June 30. These repurchases reduced the share count and supported EPS despite lower net income.
- Capital spending outlook: Management expected 2016 capital expenditures of approximately $80 million for facilities, real estate, service capacity, technology, and equipment. The filing does not provide earnings or revenue guidance. Management said it expected sufficient liquidity for at least the next 12 months.
- Subsequent financing event: On July 25, 2016, Asbury entered a new senior secured credit facility with a $250 million revolving facility, a $900 million new-vehicle floor-plan facility, and a $150 million used-vehicle floor-plan facility, subject to availability limits. It matures July 25, 2021 and includes customary financial covenants and collateral arrangements. As of July 25, no revolving or used-vehicle facility borrowings were outstanding; new-vehicle floor-plan borrowings were $693.5 million net of the offset account.
- Unusual items: First-half operating expenses included a $1.5 million non-cash impairment on vacant real estate held for sale and a $1.9 million non-cash charge for accelerated rent on an abandoned property. Hail damage and higher insurance reserves also contributed to increased insurance expense.
- Key risks: Results are exposed to vehicle demand, sales mix and pricing pressure, manufacturer incentives and franchise agreements, vehicle availability and stop-sale programs, consumer credit and interest rates, and the company’s debt and covenant requirements. A 100-basis-point rate change could affect annual interest expense by up to $8.8 million based on variable-rate debt outstanding at June 30; interest-rate swaps partially hedge exposure. The company disclosed claims and litigation but did not expect known claims to materially adversely affect results, while noting outcomes remain uncertain.
Important facts for investors to verify
- Whether parts-and-service growth and improved used-vehicle margins can offset weaker vehicle unit volumes and lower new-vehicle gross profit.
- How elevated SG&A as a share of gross profit and higher interest expense affect earnings and cash generation.
- Liquidity availability, floor-plan borrowing levels, covenant compliance, and the terms and operation of the July 2016 credit facility.
- The cash-flow effect of floor-plan financing and the company’s substantial first-half share repurchases alongside planned capital expenditures.
- Potential effects of vehicle stop-sale programs, manufacturer requirements, insurance costs, interest rates, and pending or future claims.