Business Context and Reporting Period
Company: Asbury Automotive Group, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2005
Business Overview: Asbury is one of the largest automotive retailers in the United States, operating 125 franchises at 90 dealership locations across 23 metropolitan markets in 11 states. The company sells new and used vehicles, provides maintenance and repair services, sells replacement parts, and offers finance and insurance products. In 2005, the company completed a reorganization of its retail network into four principal regions and began divesting certain underperforming franchises in Oregon and Southern California.
Key Financial Metrics
| Metric | 2005 | 2004 |
|---|---|---|
| Total Revenues | $5,540.7 million | $4,971.9 million |
| Gross Profit | $838.4 million | $755.8 million |
| Net Income | $61.1 million | $50.1 million |
| Income from Continuing Operations | $59.9 million | $52.6 million |
| Diluted EPS (Continuing Ops) | $1.82 | $1.61 |
| Working Capital | $347.0 million | $295.5 million |
| Total Debt (excl. floor plan) | $496.9 million | $526.4 million |
| Floor Plan Notes Payable | $614.4 million | $650.9 million |
| Cash and Cash Equivalents | $57.2 million | $28.1 million |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 11% to $5.5 billion, driven by double-digit growth in all business segments. Used vehicle revenue grew 14%, and fixed operations (parts, service, collision) grew 12%.
- Profitability: Net income increased 22% to $61.1 million. Income from continuing operations rose 14% to $59.9 million. This was aided by a 90 basis point improvement in Selling, General, and Administrative (SG&A) expenses as a percentage of gross profit.
- Interest Expense: Floor plan interest expense surged 49% to $29.1 million due to rising interest rates and higher average inventory levels. Other interest expense increased 5% to $40.8 million.
- Discontinued Operations: The company recognized a net gain of $1.2 million from discontinued operations in 2005, primarily due to an $8.8 million tax benefit from the sale of an Oregon business, offset by operating losses from franchises held for sale.
- Divestitures: During 2005, the company sold ten franchises (six locations) and had four franchises pending disposition as of year-end.
Guidance, Outlook, and Risks
Management Commentary & Outlook:
- Reorganization Benefits: Management expects the 2005 regional reorganization to improve income from continuing operations by approximately $3.0 million annually starting in 2006.
- Expense Outlook: SG&A expenses are expected to increase by approximately $5.0 million in 2006 due to the adoption of SFAS No. 123 (revised 2004) regarding share-based payment.
- Capital Expenditures: Expected to total approximately $80.0 million in 2006, with 60% financed through sale-leaseback agreements.
- Acquisitions: The company anticipates spending between $50.0 million and $150.0 million on acquisitions in 2006.
Risks and Contingencies:
- Manufacturer Dependence: Operations are heavily dependent on vehicle manufacturers for inventory allocation, incentive programs, and franchise renewals. Manufacturers can terminate agreements or restrict acquisitions based on performance metrics.
- Interest Rate Sensitivity: A significant portion of debt is variable-rate. A 1% increase in interest rates would increase annual interest expense by approximately $8.6 million.
- Debt Covenants: The company is subject to financial covenants under its Committed Credit Facility and indentures. Breach could lead to acceleration of debt.
- Legal Proceedings: The company is defending a breach of contract action in Arkansas seeking damages in excess of $23.0 million related to a discontinued "Price 1" program; management believes the claim is meritless.
Investor Verification Checklist
- Divestiture Completion: Verify the completion and financial impact of the pending sales of the remaining Thomason dealerships in Oregon and Spirit stores in Southern California.
- Interest Rate Exposure: Monitor the impact of rising interest rates on floor plan costs and customer financing demand, given the company's high variable-rate debt exposure.
- Manufacturer Relations: Review status of franchise agreements, particularly with Ford (where acquisition eligibility is currently restricted) and Toyota/Lexus (which have specific cross-default provisions).
- Accounting Changes: Confirm the actual impact of SFAS No. 123 (revised 2004) adoption on 2006 earnings, as the estimated $5.0 million increase in SG&A is based on current assumptions.
- Legal Liability: Track the status of the Arkansas breach of contract litigation regarding the "Price 1" program.