Asbury Automotive Group, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless otherwise noted. Asbury operated 104 franchises across 83 dealership locations in 18 markets and 10 states, plus 25 collision repair centers and three used-vehicle stores.
Financial results
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total revenue | $1,541.8 million | $1,355.7 million | +14% |
| Gross profit | $256.4 million | $230.1 million | +11% |
| Income from operations | $73.1 million | $64.2 million | +14% |
| Net income | $35.9 million | $31.4 million | +14% |
| Diluted EPS | $1.30 | $1.02 | +$0.28 |
| Operating cash flow, GAAP | $80.1 million | $54.6 million | +$25.5 million |
Revenue rose in every business line: new vehicles $830.5 million (+14%), used vehicles $473.4 million (+14%), parts and service $176.7 million (+11%), and finance and insurance (F&I) $61.2 million (+15%). Gross profit increased across all four lines. Overall gross margin was 16.6%, down 40 basis points, primarily because same-store new- and used-vehicle margins declined. SG&A was $175.7 million, up 10%; SG&A as a share of gross profit improved to 68.5% from 69.4%.
Operating cash flow on the company’s adjusted, non-GAAP basis was $117.9 million, versus $33.1 million. Management attributed the increase primarily to inventory and floor-plan financing changes and higher accounts payable and accrued expenses; the adjusted measure should not be treated as a substitute for GAAP cash flow. Investing activities used $10.4 million, financing activities used $71.5 million, and cash decreased $1.8 million to $1.1 million.
Balance sheet, debt and liquidity
- At March 31, 2015, total assets were $2,177.6 million and shareholders’ equity was $378.5 million, compared with $2,192.0 million and $444.9 million at year-end 2014.
- Long-term debt, including its current portion, was $690.7 million; this included $400.0 million of 6.0% senior subordinated notes due 2024. Floor-plan notes payable were $777.6 million in total ($102.8 million trade and $674.8 million non-trade). These are separate debt categories.
- Management reported total available liquidity of $271.7 million: $1.1 million cash, $15.9 million in the floor-plan offset account, and $164.7 million and $90.0 million of availability under revolving credit and used-vehicle floor-plan facilities. No revolver borrowings were outstanding. The company said it expected adequate liquidity for at least the next 12 months and was in compliance with debt covenants.
- Variable-rate debt, including floor-plan notes, totaled $791.1 million; management estimated a 1 percentage-point rate change could affect annual interest expense by up to $7.9 million. Interest-rate swaps had a combined $3.7 million net liability.
Material changes and management commentary
- U.S. new-vehicle SAAR increased to 16.7 million from 15.7 million. Same-store new retail units rose 8%; same-store used retail units rose 3%. Reported results also included revenue and gross profit from acquisitions and new stores.
- Parts-and-service gross profit rose 13%, including higher warranty work partly associated with manufacturer recall campaigns. Same-store parts-and-service gross margin improved 120 basis points to 62.2%.
- Same-store new-vehicle gross profit per unit declined 2% to $2,050, and used-vehicle retail gross profit per unit declined 3% to $1,748. Management cited lower same-store vehicle margins.
- The company repurchased 1,349,517 shares for $101.9 million under its program and bought another 79,241 shares for $6.3 million through employee award net settlements. Remaining program authorization was $252.0 million at quarter-end.
- Two franchises at two dealership locations were pending disposal and classified as held for sale; related assets were $47.5 million and liabilities were $27.1 million. The filing reported no pending dealership disposals qualifying as discontinued operations under the newly adopted accounting standard.
Outlook, risks and contingencies
- No revenue or earnings guidance was provided. The company expected 2015 capital expenditures, excluding real estate purchases, of approximately $65 million and an effective tax rate of 38%–40%.
- Management described the economic recovery as uncertain. Results are exposed to consumer confidence, interest rates and credit availability, employment, fuel prices, vehicle supply and demand, manufacturer incentives and recalls, competitive pricing and vehicle margins, and access to floor-plan and other financing. The business is seasonal, with historically lower revenue and operating income in Q1.
- Manufacturer franchise agreements can require costly facility upgrades; loss or renewal on unfavorable terms could harm results. The company also faces litigation, regulatory, tax, lender and manufacturer claims. Management said it believed probable and estimable losses were adequately accrued and saw no indication of material reasonably possible losses above accruals, but adverse outcomes could be material.
- Letters of credit of $10.3 million and a $5.0 million surety-bond line were disclosed as off-balance-sheet arrangements. Disclosure controls were reported effective, with no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Assess whether revenue and earnings growth can persist if same-store vehicle margins remain under pressure, and separate organic performance from acquisition contributions.
- Review the cash-flow reconciliation and floor-plan financing movements; compare adjusted cash flow with GAAP operating cash flow.
- Evaluate liquidity against floor-plan obligations, variable-rate exposure, debt covenants, and the company’s significant share repurchases and planned capital expenditures.
- Track execution and proceeds from the two pending dealership disposals, and monitor manufacturer recall-related service activity and any related claims.