ABG

Business Context and Reporting Period

Company: Asbury Automotive Group, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2010
Business Overview: Asbury is a major U.S. automotive retailer operating 106 franchises across 80 dealership locations in 11 states. The portfolio includes new and used vehicle sales, parts and service, and finance and insurance (F&I) products. The brand mix is weighted 84% toward luxury and mid-line import brands.

Key Financial Metrics

Note: Total Debt includes Floor plan notes payable ($355.6M), Current maturities of long-term debt ($9.1M), and Long-term debt ($500.7M) as of Sept 30, 2010.

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 9% in Q3 and 13% for the nine months ended Sept 30, 2010, compared to the prior year. This was driven by a 19% increase in used vehicle revenue and a 6% increase in new vehicle revenue.
• Profitability: Net income surged 69% in Q3 and 148% for the nine-month period. Gross profit increased 7% in Q3 and 11% for the nine months.
• Margin Expansion: Selling, General, and Administrative (SG&A) expenses as a percentage of gross profit decreased by 180 basis points in Q3 (77.3% vs 79.1%) and 310 basis points for the nine months (77.7% vs 80.8%), primarily due to reduced personnel costs and outside services.
• Cash Flow: Net cash used in operating activities was $44.0 million for the nine months ended Sept 30, 2010, compared to $59.7 million provided in the prior year. This shift was largely due to the use of excess cash to repay floor plan notes payable via offset accounts ($70.5 million) and timing differences in receivables.
• Debt Reduction: The company repurchased $25.2 million of its 3% Convertible Notes in Q3 2010, resulting in a $1.3 million loss on extinguishment.

Guidance, Outlook, and Risks

• Outlook: Management expects U.S. new vehicle sales to experience a modest recovery through the remainder of 2010. They anticipate an effective income tax rate between 38% and 40% for the full year 2010.
• Capital Expenditures: Expected to total between $25.0 million and $30.0 million for 2010.
• Subsequent Events: In October 2010, the company acquired a Mercedes-Benz dealership in Missouri and two heavy truck franchises, expected to contribute $26.0 million in annualized revenue. Additionally, two variable rate mortgages totaling $22.9 million were refinanced.
• Risks & Contingencies:
  • Discontinued Operations: A tornado damaged a former dealership building in Mississippi; the company received $4.9 million in insurance proceeds, recorded as a gain in discontinued operations.
  • Manufacturer Incentives: The company expects to receive approximately $2.5 million in manufacturer incentives in Q4 2010 upon meeting facility image standards.
  • Liquidity: While total available liquidity is $250.5 million, the ability to repurchase shares or pay dividends is currently limited to $2.0 million under debt covenants.

Investor Verification Checklist

• Liquidity Composition: Verify the accessibility of the $70.5 million held in floor plan offset accounts, which are included in total liquidity but restricted to offsetting inventory financing.
• Discontinued Operations Impact: Confirm the net income contribution from the $4.9 million insurance proceeds related to the Yazoo City, MS tornado damage, as this is a non-recurring item.
• Debt Covenants: Review the specific financial covenants (Fixed Charge Coverage Ratio) in the BofA Revolving Credit Facility and Wachovia Master Loan Agreement to ensure continued compliance.
• Inventory Levels: Assess the 37 days of supply for used vehicle inventory as of Sept 30, 2010, to gauge exposure to market demand fluctuations.
• Convertible Notes: Monitor the remaining $29.5 million principal of the 3% Convertible Notes due in September 2012 and the company's strategy for refinancing or repurchasing them.