Asbury Automotive Group, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparisons are with Q1 2011 unless otherwise noted. Asbury operated 99 franchises at 79 dealership locations in 18 markets across 10 states, with 30 vehicle brands and 25 collision repair centers.
Financial performance
- Revenue: $1.100 billion, up 6%. New vehicle revenue was $589.7 million (+5%); used vehicles $325.7 million (+10%); parts and service $145.1 million (+2%); and finance and insurance (F&I) $39.0 million (+21%).
- Gross profit and margins: Gross profit was $189.5 million, up 11%; gross margin rose to 17.2% from 16.5%. F&I gross profit increased 21%, new vehicle gross profit 16%, parts and service 7%, and used vehicle gross profit 6%.
- Expenses and earnings: SG&A rose 7% to $141.4 million, but declined to 74.6% of gross profit from 77.8%. Operating income increased to $42.8 million from $22.0 million. Continuing-operations income was $18.0 million versus $4.5 million; diluted EPS from continuing operations was $0.57 versus $0.13. Net income was $17.6 million, down from $19.9 million, and diluted EPS was $0.56 versus $0.59.
- Cash flow: GAAP operating cash flow was negative $36.1 million, compared with negative $49.6 million. Management’s non-GAAP adjusted operating cash flow was positive $32.2 million versus negative $22.7 million. Investing cash flow was negative $14.0 million; financing cash flow was positive $43.0 million. Cash declined $7.1 million to $4.3 million.
- Balance sheet and liquidity: Total assets were $1.483 billion and shareholders’ equity $348.0 million. Long-term debt, including current maturities, totaled $432.9 million; floor-plan notes payable totaled $486.1 million. Total available liquidity was $243.3 million: $4.3 million cash, $223.5 million revolving-facility availability, and $15.5 million in the floor-plan offset account. The company reported compliance with debt covenants.
Material changes and drivers
- Revenue and continuing-operations earnings improved with higher vehicle volumes, stronger F&I per vehicle, and higher parts and service gross profit. U.S. new-vehicle SAAR was 14.6 million versus 13.1 million a year earlier.
- New vehicle gross profit per unit rose 15%, partly because supply constraints following 2011 events in Japan reduced availability of higher-volume, lower-margin vehicles. Management cautioned that these margins may not persist as supply normalizes.
- Used retail unit sales rose 14%, while used retail gross margin fell to 9.9% from 10.6%. Parts and service margin increased to 57.0% from 54.7%.
- Net income declined despite stronger continuing operations because Q1 2011 included a $15.9 million after-tax gain on the sale of the heavy-truck business. Q1 2011 also included legal-claim and executive-separation costs that reduced continuing results.
- The company repaid approximately $24.7 million of mortgage debt early. It repurchased 18,000 shares for $0.5 million under its authorization and bought another 84,959 shares for $2.2 million related to employee award net settlements.
Outlook, risks and unusual items
- Management expected approximately $60 million of 2012 capital expenditures, excluding real estate purchases, and stated that available liquidity should be sufficient for needs over at least the next 12 months. The filing provides no specific revenue or earnings guidance.
- The $15.1 million face amount of 3% convertible notes was due September 15, 2012. Management noted no other material long-term debt maturities before then.
- Management expected a 2012 effective tax rate of 38%–40%. Results are seasonal, typically stronger in the second and third quarters; the company described the economic recovery as fragile.
- Key risks include economic and consumer-credit conditions, interest rates, vehicle supply and manufacturer performance, pricing and margin pressure, floor-plan financing availability, covenant compliance, franchise agreements, and litigation or regulatory claims. A 1% interest-rate change could affect annual interest expense by as much as $5.4 million based on variable-rate debt outstanding.
- The company had accrued its best estimate for an alleged manufacturer-related service-work overpayment matter. It estimated reasonably possible losses above recorded accruals for known claims could reach approximately $1.0 million in aggregate, while noting outcomes remain uncertain. Letters of credit outstanding were $14.6 million; a $7.5 million surety-bond line was also maintained.
- Disclosure controls were assessed as effective. The company completed implementation of the ADP Dealer Management System across its dealerships during the quarter.
Important facts for investors to verify
- Whether improved vehicle availability reverses the Q1 benefit to new-vehicle margins, and how used-vehicle margins evolve.
- How much of adjusted operating cash flow reflects sustainable operating performance versus floor-plan classification and working-capital movements; GAAP operating cash flow remained negative.
- The repayment or refinancing of the September 2012 convertible-note maturity and continued covenant headroom and borrowing availability.
- The outcome and potential exposure from the manufacturer-related claim and other contingencies.
- Whether planned capital spending and share repurchases remain consistent with liquidity needs and debt obligations.