Asbury Automotive Group, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; comparisons are with the corresponding 2017 periods. Asbury operated 97 new-vehicle franchises at 83 dealership locations and 25 collision centers across nine states. Financial amounts below are in millions unless noted.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $1,723.6 | $1,631.8 | $3,332.8 | $3,183.5 |
| Gross profit | $277.8 | $267.1 | $543.2 | $527.2 |
| Gross margin | 16.1% | 16.4% | 16.3% | 16.6% |
| Operating income | $79.6 | $71.6 | $152.8 | $143.9 |
| Net income | $43.2 | $31.9 | $83.3 | $65.9 |
| Diluted EPS | $2.11 | $1.52 | $4.02 | $3.12 |
- Q2 revenue rose 6% and net income rose 35%; first-half revenue increased 5% and net income increased 26%.
- Q2 revenue growth reflected new vehicles (+5%), used vehicles (+8%), parts and service (+2%), and finance and insurance (F&I) (+7%). First-half gains were 4%, 6%, 3%, and 5%, respectively.
- Gross profit grew more slowly than revenue: 4% in Q2 and 3% for the first half. New-vehicle gross profit declined 1% in Q2 and 3% year to date, while parts and service and F&I contributed growth.
- Q2 SG&A was $190.6 million, or 68.6% of gross profit versus 69.5% a year earlier. First-half SG&A was $374.8 million, or 69.0% versus 69.6%.
- Q2 floor-plan interest expense increased 31% to $8.0 million; first-half expense rose 29% to $14.6 million, primarily reflecting higher interest rates. First-half total other expenses were $41.2 million versus $39.3 million.
- Effective tax rates fell to 25.8% in Q2 from 38.1%, and to 25.4% for the first half from 37.0%, primarily following the Tax Act.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was $29.1 million versus $118.3 million in 2017. Management’s adjusted operating cash flow measure, which includes specified non-trade floor-plan cash flows, was $121.1 million versus $108.0 million; this is a non-GAAP measure and is not directly comparable across companies.
- First-half investing cash outflow was $119.1 million, including $91.3 million of acquisition spending and $17.6 million of real-estate capital expenditures. Financing cash inflow was $87.8 million, including $44.8 million of share repurchases and employee share settlements. Cash ended at $2.5 million.
- At June 30, total assets were $2,520.9 million, shareholders’ equity $450.5 million, and long-term debt (excluding current maturities) $855.6 million. Total debt outstanding, including current maturities and before unamortized debt adjustments, was $872.2 million. Net floor-plan payables were $872.6 million ($105.0 million trade and $767.6 million non-trade).
- Reported available liquidity was $349.4 million: $2.5 million cash, $27.8 million in floor-plan offset accounts, and availability under vehicle floor-plan and revolving facilities. Management stated it expected sufficient liquidity for at least the next 12 months. The company was in compliance with debt covenants at quarter-end.
- Variable-rate debt was $859.5 million; management estimated a 100-basis-point rate change could change annual interest expense by up to $8.6 million. Two interest-rate swaps hedge a portion of rate exposure.
Changes, outlook and risks
- New-vehicle units rose 4% in Q2, but same-store new-vehicle gross profit per vehicle fell 4%; import-brand margin pressure was a key factor. Used retail units rose 7% in Q2, while same-store used-vehicle retail margin declined 40 basis points to 7.2%, which management attributed to competition and price transparency.
- Parts and service and F&I continued to support gross profit. Warranty revenue declined, partly offset by customer-pay and wholesale-parts growth. Management cited favorable consumer lending conditions and F&I training efforts.
- ASC 606 was adopted January 1, 2018 using the modified retrospective method; prior-year comparisons were not restated. Adoption reduced reported net income by $0.6 million in Q2 and $1.5 million for the first half versus continued application of prior guidance, principally due to timing of repair-order and retrospective F&I commission revenue.
- Management expected a 2018 effective tax rate of 25%–26% and approximately $50 million of 2018 capital expenditures. No full-year revenue or earnings guidance was provided in the filing.
- During the first half, the company acquired three franchises at three locations for $93.2 million. It repurchased 584,290 shares under its program for $40.2 million and had $59.8 million of authorization remaining at June 30.
- Q2 other operating income included a $0.7 million gain from legal settlements. Management reported no indication of material reasonably possible losses in excess of accrued contingencies, while cautioning that legal outcomes remain uncertain.
- Key exposures include interest rates, vehicle demand and manufacturer incentives, vehicle and used-car margins, consumer credit availability, manufacturer relationships and franchise requirements, potential tariffs on imported vehicles or parts, and litigation or regulatory matters. Management also noted uncertainty in final Tax Act accounting, including Section 162(m) effects.
Important facts for investors to verify
- Whether revenue growth can translate into sustained gross-profit growth as new- and used-vehicle margins face pressure.
- How cash generation develops: GAAP operating cash flow fell sharply year over year, while management’s adjusted measure increased.
- Current floor-plan financing balances, liquidity availability, covenant headroom and sensitivity to further rate increases.
- Whether the stated 25%–26% tax-rate outlook and provisional Tax Act accounting remain valid as the company completes its analysis.
- Acquisition returns, planned capital spending, and the pace and funding of share repurchases.
- The timing and financial effects of ASC 606 estimates, potential manufacturer-driven facility investments, and legal or regulatory contingencies.