Asbury Automotive Group, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. This is an annual report, not a standalone fourth-quarter filing; fourth-quarter figures are included where noted. Dollar amounts are in millions unless stated otherwise.
Business context
Asbury operated 99 new-vehicle franchises across 81 dealership locations, 25 collision centers and three Q auto used-vehicle stores in nine states. Its business spans new and used vehicle sales, parts and service, and finance and insurance (F&I). New vehicles generated about 55% of revenue, while used vehicles, parts and service, and F&I together contributed about 81% of gross profit.
Financial performance and liquidity
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Revenue | $6,588.3 | $5,867.7 | +12% |
| Gross profit | $1,060.8 | $967.2 | +10% |
| Gross margin | 16.1% | 16.5% | -0.4 percentage points |
| Income from operations | $301.6 | $268.2 | +12% |
| Net income | $169.2 | $111.6 | +52% |
| Diluted EPS | $6.41 | $3.71 | +73% |
| Cash from operating activities (GAAP) | $155.4 | $84.2 | +$71.2 |
| Cash from operating activities, adjusted | $118.9 | $193.2 | -$74.3 |
The company’s adjusted operating cash flow is a non-GAAP measure that includes specified non-trade floor-plan cash flows; it should be considered alongside, not instead of, GAAP cash flow. Investing activities used $61.9 and financing activities used $93.6. Cash and cash equivalents were $2.8 at year-end. Working capital was $335.2, and management reported total available liquidity of $393.4, including floor-plan offset funds and borrowing availability.
At year-end, floor-plan notes payable totaled $712.2. Long-term debt principal was reported as $959.7; the balance-sheet carrying amount, including unamortized premium and debt issuance costs, was $954.3. Shareholders’ equity was $314.5, down from $444.9. A 1 percentage-point increase in market rates was estimated to increase annual interest expense by as much as $7.1.
Changes versus 2014 and unusual items
- All major revenue lines increased: new vehicles +13%, used vehicles +11%, parts and service +11%, and F&I +15%. Parts and service gross profit rose 12%, and F&I gross profit rose 15%.
- Vehicle gross profit remained under pressure. New-vehicle gross profit per vehicle fell 8% to $1,915; same-store used retail margin declined from 8.5% to 8.0%. Management attributed pressure to competition and consumer preference shifting from cars to trucks, partly associated with lower fuel prices.
- Net income benefited from a $34.9 gain on divestitures; 2014 results included a $31.9 loss on extinguishment of debt. These items materially affect the year-over-year earnings comparison.
- The company sold seven franchises across five dealership locations and one collision center, receiving $105.9 in proceeds, and acquired two franchises for $69.4. It issued an additional $200.0 of 6.0% senior subordinated notes due 2024 in October.
- As reported in the quarterly supplementary data, fourth-quarter revenue was $1,640.5, gross profit $260.4, net income $41.1 and diluted EPS $1.64. Fourth-quarter net income included an $8.4 after-tax gain on divestitures.
Management outlook, risks and contingencies
Management expected approximately $85.0 of 2016 capital expenditures for facility upgrades and construction, service capacity, technology and equipment. It stated that liquidity should be sufficient for at least the next 12 months. The board reset the share repurchase authorization to $300.0 in aggregate in January 2016, subject to debt-agreement restrictions; the company paid no dividends in 2015.
Key risks include automotive sales cyclicality, competitive vehicle margins, consumer credit availability and interest rates, dependence on manufacturers and their franchise terms and vehicle supply, and regulatory scrutiny of dealer-arranged financing and F&I products. Other cited exposures include debt covenants and refinancing, cybersecurity and customer data, litigation, insurance and environmental liabilities, and impairment of goodwill or franchise rights. Volkswagen’s 2015 diesel stop-sale affected one company dealership; that brand represented about 1% of new-vehicle revenue. The company reported covenant compliance at year-end and no material environmental liabilities known to it. Known legal matters were accrued when probable and estimable; outcomes remain uncertain.
Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. The control assessment excluded two franchises acquired in 2015, representing $66.5 of assets and $91.3 of revenue.
Important facts for investors to verify
- How much of earnings growth persists absent the $34.9 divestiture gain, and how vehicle gross profit per unit and margins trend after the 2015 deterioration.
- Reconcile GAAP operating cash flow of $155.4 with adjusted operating cash flow of $118.9, including floor-plan offset movements and working-capital effects.
- Track total debt and floor-plan obligations, interest-rate sensitivity, covenant headroom and the maturity/refinancing profile, including the 2024 notes.
- Assess whether the $300.0 repurchase authorization is used within liquidity needs and financing restrictions, and whether capital spending is near the stated $85.0 outlook.
- Monitor manufacturer concentration and franchise requirements, consumer lending conditions, recall-related service revenue, and unresolved legal or regulatory matters.