Asbury Automotive Group, Inc. — FY 2016 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2016; it is not a standalone fourth-quarter filing. Asbury operated 93 new-vehicle franchises across 77 dealership locations, 23 collision centers, and two stand-alone used-vehicle stores in eight states. Its business includes new and used vehicle sales, parts and service, and finance and insurance (F&I).
Financial performance and position
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Revenue | $6.528 billion | $6.588 billion |
| Gross profit / gross margin | $1.059 billion / 16.2% | $1.061 billion / 16.1% |
| Operating income | $297.8 million | $301.6 million |
| Net income | $167.2 million | $169.2 million |
| Diluted EPS | $7.40 | $6.41 |
| Operating cash flow (GAAP) | $142.3 million | $155.4 million |
| Operating cash flow, adjusted (non-GAAP) | $260.3 million | $118.9 million |
- Revenue mix: New vehicles generated $3.612 billion; used vehicles $1.876 billion; parts and service $778.5 million; and F&I, net, $261.0 million.
- Profitability: New-vehicle gross profit fell 8% to $187.1 million and used-vehicle gross profit fell 3% to $127.3 million. Parts and service gross profit increased 4% to $483.3 million. SG&A was $732.5 million, or 69.2% of gross profit, versus 68.8% in 2015.
- Liquidity: Reported available liquidity was $406.0 million, including $3.4 million cash, $70.9 million in floor-plan offset accounts, and available credit facilities. Working capital was $227.5 million, down from $323.4 million.
- Debt: Principal debt was $931.3 million, excluding floor-plan notes payable of $781.8 million. The balance-sheet carrying amount of long-term debt, including current maturities, was $926.7 million. The company reported covenant compliance at year-end.
- Cash investment and capital returns: Capital expenditures excluding real estate were $81.4 million; real estate purchases were $10.6 million, with an additional $19.6 million spent acquiring previously leased properties. The company repurchased 3.73 million shares for $211.9 million and paid no dividends.
Material changes versus FY 2015
- Revenue declined 1%, as lower new- and used-vehicle sales and slightly lower F&I revenue outweighed 5% growth in parts and service.
- Net income decreased 1%; diluted EPS rose to $7.40 from $6.41, alongside a lower average diluted share count (22.6 million versus 26.4 million).
- Same-store new-vehicle unit sales fell 1%; same-store new-vehicle gross profit declined 6%, with gross profit per vehicle down 5%. Management cited lower luxury volumes, reduced manufacturer incentives, and competitive pressure.
- Same-store parts and service revenue grew 8%, supporting overall gross-margin improvement. Same-store used-vehicle retail margin declined from 8.0% to 7.8% amid competition and price transparency.
- Interest costs increased: floor-plan interest expense rose 20% and other interest expense rose 21%. The latter primarily reflected the 2015 issuance of additional 6.0% notes due 2024.
- Operating cash flow on the company’s adjusted, non-GAAP basis increased substantially, driven in part by floor-plan financing changes and lower inventory; GAAP operating cash flow declined.
Outlook, risks, contingencies, and unusual items
- Management expected approximately $70 million of 2017 capital expenditures and stated it believed liquidity would be sufficient for at least the next 12 months. The filing provides no specific earnings or revenue guidance.
- Management cited a U.S. new-vehicle market of 17.6 million units in 2016, compared with 17.5 million in 2015, and described demand as supported by credit availability, employment, fuel prices, and interest rates. Results remain seasonal and sensitive to economic conditions, incentives, and weather.
- Interest-rate exposure is significant: management estimated that a 100-basis-point rate increase could raise annual interest expense by as much as $7.7 million. Interest-rate swaps partially hedge exposure.
- FY 2016 included $45.5 million of pretax divestiture gains from selling five franchises, four dealership locations, and two collision centers. Other operating income included $6.6 million of legal-settlement gains, partly offset by $5.7 million of real-estate-related charges. Fourth-quarter net income included a substantial after-tax divestiture gain; quarterly results also reflected settlement gains, real-estate charges, and a tax benefit.
- In January 2017, the company acquired two franchises, two dealership locations, and one collision center in Indianapolis. Through February 22, 2017, it repurchased an additional 222,200 shares for $14.3 million.
- The company entered into an FTC consent order in May 2016, subject to FTC approval, concerning allegations about disclosures in certain used-vehicle advertisements involving open safety recalls. It agreed to advertising disclosures and recordkeeping requirements, without admitting wrongdoing or making a payment.
- Key risks include vehicle demand and margin cyclicality, manufacturer and brand concentration, competition, consumer financing availability, rising rates, debt and covenant obligations, regulatory changes, litigation, cybersecurity and data protection, and potential property or environmental liabilities. Management reported no known material environmental remedial liabilities and did not expect known legal claims to materially affect results, while noting outcomes are uncertain.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- Assess whether parts and service growth can continue to offset pressure on new- and used-vehicle margins and lower vehicle volumes.
- Reconcile cash generation using GAAP operating cash flow and the company’s adjusted non-GAAP measure, including the effects of floor-plan debt and offset accounts.
- Review debt maturities, borrowing-base availability, covenant limits, and the sensitivity of interest expense to rate changes.
- Separate recurring earnings from divestiture and legal-settlement gains, real-estate charges, and other unusual items, particularly in fourth-quarter results.
- Monitor share repurchases, subsequent acquisitions, and the effects of manufacturer, consumer-credit, regulatory, and recall-related developments.