Asbury Automotive Group, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013; comparisons are to the corresponding 2012 periods. Dollar amounts are in millions unless stated otherwise. Asbury operated 100 franchises at 79 dealership locations in 18 markets across 10 states, with 87% of its brand mix weighted to luxury and mid-line imports.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $1,390.0 | $1,191.1 | $3,959.9 | $3,422.6 |
| Gross profit | $225.3 | $194.2 | $653.9 | $570.5 |
| Income from operations | $58.0 | $49.2 | $168.0 | $137.6 |
| Income from continuing operations | $22.8 | $22.6 | $73.9 | $60.7 |
| Net income | $22.7 | $20.7 | $82.2 | $59.4 |
| Diluted EPS | $0.73 | $0.66 | $2.64 | $1.88 |
| Gross margin | 16.2% | 16.3% | 16.5% | 16.7% |
| SG&A as % of gross profit | 70.9% | 72.1% | 70.7% | 72.9% |
- Q3 revenue rose 17%, gross profit 16%, and net income 10%. Continuing-operations income was nearly flat: increased gross profit was substantially offset by higher SG&A, interest expense, real-estate-related charges, and a $6.8 loss on debt redemption.
- Nine-month revenue grew 16%, gross profit 15%, operating income 22%, and continuing-operations income 22%. Net income increased 38%, including an $8.9 after-tax gain on a franchise sale; continuing-operations results exclude that gain.
- Growth was broad-based. Q3 new- and used-vehicle revenue increased 13% and 27%, respectively; parts and service rose 9%, and finance and insurance (F&I) rose 24%. Same-store used retail unit sales increased 25% in Q3, while same-store new retail units increased 8%.
- Gross-margin mix showed strength in F&I and parts and service, but same-store vehicle margins faced pressure. Q3 same-store used retail gross margin fell 0.8 percentage points to 8.6%; nine-month same-store new and used retail margins fell 0.3 and 0.6 points, respectively. Used-vehicle supply and competition were cited as pressures.
- Parts and service same-store gross margin improved 2.7 percentage points to 60.9% in Q3 and 60.6% for the nine-month period, partly reflecting reconditioning activity and manufacturer recall-related warranty work. F&I per retail vehicle sold rose 5% in Q3 and 9% year to date.
Cash flow, balance sheet and liquidity
- For the nine months, operating cash flow was $75.0, versus $16.6 in 2012. The company’s non-GAAP adjusted operating cash flow, which includes specified non-trade floor-plan activity, was $68.8 versus $74.2; the filing cautions it has limitations and is not comparable necessarily to similarly titled measures.
- Investing cash outflow was $101.7, including $61.8 for three dealership acquisitions, $32.8 to purchase previously leased real estate, and other capital spending. Financing cash inflow was $21.8. Cash declined $4.9 to $1.3.
- At September 30, 2013, total assets were $1,775.5 and shareholders’ equity was $470.9. Inventory was $734.5, up from $648.5 at year-end 2012. Long-term debt including current maturities was $519.8; current and long-term floor-plan notes totaled $570.1.
- Reported available liquidity was $272.4: $1.3 cash, $235.3 revolving-credit availability, and $35.8 in the floor-plan offset account. Management stated liquidity was sufficient for at least the next 12 months; the company was in compliance with covenants and said they did not further restrict facility availability.
- Variable-rate debt, including floor-plan debt, totaled $627.4. Management estimated a 1 percentage-point rate change could affect annual interest expense by as much as $6.3. A rate swap had $18.8 notional value and a $0.4 net liability at quarter-end.
Debt, outlook, risks and unusual items
- In June, Asbury issued $100.0 principal of 8.375% notes due 2020, receiving approximately $108.3 net proceeds. In September, it redeemed all $143.2 principal of 7.625% notes due 2017 for $147.2, recognizing a $6.8 loss. The refinancing used note proceeds and a new real-estate term facility; $57.3 was drawn under the facility, with the remaining $17.7 expected to be borrowed in Q4 subject to conditions.
- The August restated credit agreement increased the new-vehicle floor-plan facility by $200 to $825, reduced specified floor-plan borrowing spreads by 25 basis points, and extended maturity to August 2018. The new real-estate term facility is secured by financed properties and includes financial covenants and customary default provisions.
- Management expected 2013 effective tax rate of 38%–40% and approximately $50 of 2013 capital expenditures excluding real estate. No earnings or revenue guidance was provided. Management described the recovery as fragile; it cited Q3 U.S. new-vehicle SAAR of 15.5 million versus 14.3 million a year earlier.
- Q3 included $2.1 of pretax real-estate-related charges, including lease termination costs. Nine-month other operating expense also included $5.5 of lease termination charges and $1.8 of property-disposal charges. The nine-month discontinued-operations result included the franchise-sale gain.
- Key risks include economic and consumer-credit conditions, interest rates, vehicle supply and demand, vehicle and parts recalls or disruptions, manufacturer relationships and franchise requirements, competitive margin pressure, financing availability and covenant compliance. Management estimated possible losses above accrued amounts for known claims of up to approximately $0.5 in aggregate, while noting adverse outcomes could be material. Letters of credit outstanding were $14.6; a $5.0 surety-bond line was also maintained.
- Disclosure controls were reported effective; no material change in internal control over financial reporting was reported for the quarter.
Important facts for investors to verify
- Whether vehicle-unit growth, particularly the used-car initiative, is sustainable and how used-car supply affects gross margins.
- Whether parts-and-service and F&I gains persist, including how much warranty growth was recall-related.
- The quality and sustainability of reported earnings: Q3 debt-redemption and property-related charges, and the nine-month franchise-sale gain.
- Floor-plan obligations, low cash on hand, refinancing and covenant terms, variable-rate exposure, and the conditions for the remaining real-estate term borrowing.
- Acquisition integration and returns, planned capital spending, and management’s expectation of adequate liquidity over the next 12 months.