Asbury Automotive Group, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Asbury operated 181 new-vehicle franchises across 138 dealership locations, 31 collision centers and its TCA finance-and-insurance business. Figures are in U.S. dollars; financial amounts are in millions unless stated otherwise.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $3,666.2 | $3,865.9 | $10,991.0 | $11,727.9 |
| Gross profit | $673.5 | $767.8 | $2,082.8 | $2,362.5 |
| Gross margin | 18.4% | 19.9% | 19.0% | 20.1% |
| Income from operations | $264.7 | $313.6 | $829.0 | $970.0 |
| Net income | $169.2 | $205.0 | $547.0 | $644.1 |
| Diluted EPS | $8.19 | $9.23 | $25.91 | $28.72 |
- Revenue mix: For Q3, new vehicles generated $1,861.9 (up 3% year over year), used vehicles $1,111.7 (down 16%), parts and service $526.5 (down 2%), and F&I $166.1 (down 17%).
- Margins and expenses: Q3 new-vehicle gross profit per vehicle fell 17% to $4,567; used retail gross profit per vehicle fell 14% to $1,861. SG&A declined 11% to $391.7, but increased to 58.2% of gross profit from 57.1%. Nine-month SG&A was $1,203.3, or 57.8% of gross profit versus 56.8%.
- Cash flow: Nine-month operating cash flow was $239.8 versus $664.4 in 2022; management’s non-GAAP adjusted operating cash flow was $513.6 versus $781.6. Investing activities used $90.4; financing activities used $343.1. Cash and equivalents ended at $41.6, down from $235.3 at year-end 2022.
- Debt and liquidity: Total debt outstanding was $3,247.3, including current maturities; long-term debt carrying value, including current portion, was $3,222.3. September 30 available liquidity was reported as $1.68 billion, including $31.0 of cash excluding TCA, floor-plan offset funds, and borrowing availability. The company reported covenant compliance.
- Other balance-sheet measures: Inventory was $1,242.1, up from $959.2 at year-end 2022; shareholders’ equity was $3,248.5, versus $2,903.5.
Material changes versus prior periods
- Q3 revenue fell 5%, gross profit 12%, operating income 16%, and net income 17% year over year. For the first nine months, revenue fell 6%, gross profit 12%, operating income 15%, and net income 15%.
- Management attributed the declines mainly to lower used-vehicle and F&I revenue and lower per-vehicle gross profit as unusually high vehicle margins eased. Q3 used retail units declined 17% company-wide; new-vehicle gross margin fell to 9.0% from 11.2%.
- Parts and service was comparatively resilient: nine-month same-store revenue rose 7%, supported by customer-pay and warranty demand, while total-company parts-and-service gross profit was nearly flat.
- Lower personnel costs and prior-year dealership divestitures reduced reported SG&A. The company recorded a $13.5 gain on a 2023 dealership divestiture, compared with $4.4 in the prior-year period.
- Share repurchases under the program totaled 1,070,126 shares for $210.7 during the first nine months. A new $250.0 repurchase authorization was approved in May; the full $250.0 remained available at September 30.
Outlook, transactions and risks
- Outlook: Management estimated 2023 capital expenditures of approximately $185.0 and a full-year effective tax rate of 24.9%. It stated it expected sufficient liquidity for at least the next 12 months and the foreseeable future. The filing does not provide specific revenue or earnings guidance.
- Pending acquisition: Asbury agreed to acquire substantially all assets of the Jim Koons dealership group for approximately $1.20 billion, including about $417.0 for real estate and leasehold improvements; vehicle and other inventory purchase price would be determined at closing. The deal, involving 20 dealerships and six collision centers, was expected to close in Q4 2023, subject to customary conditions and manufacturer approvals. Q3 SG&A included $1.8 of related professional fees.
- Credit facility: On October 20, 2023, after quarter-end, Asbury amended and restated its senior credit facility, increasing stated borrowing capacity from $2.55 billion to $2.80 billion and extending maturity to October 20, 2028. The agreement includes a $500 million revolver and vehicle floor-plan facilities.
- Operating and market risks: Management cited rising interest rates, inflation, consumer demand and credit availability, vehicle and parts supply constraints, uneven inventory by brand, and the September 2023 UAW strike affecting certain manufacturers. Other stated risks include manufacturer relationships, acquisition integration, competition, litigation, cybersecurity and regulatory changes.
- Controls and contingencies: Disclosure controls were not effective because of a previously reported material weakness involving user-access and segregation-of-duties controls at acquired LHM and TCA businesses. Management reported no resulting financial-statement misstatements and continued remediation, with full remediation expected in 2023 after testing. The company reported no known claims expected to materially affect results, while noting outcomes remain uncertain; it also had $14.0 of letters of credit and an $18.5 surety-bond line.
Important facts for investors to verify
- Whether used-vehicle volumes and per-vehicle margins, and new-vehicle margins, stabilize or continue to decline.
- How the Koons acquisition is financed, whether it closes on the anticipated terms and timing, and its impact on leverage, liquidity and earnings.
- Whether operating cash generation improves, given the sharp year-over-year decline in reported and adjusted operating cash flow.
- Progress in remediating the LHM/TCA internal-control material weakness and the outcome of management’s control testing.
- Actual capital expenditures, share repurchases and borrowing availability, including compliance with debt covenants and exposure to interest-rate changes.