Asbury Automotive Group, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; comparisons are with the corresponding 2016 periods. Asbury operated 94 new-vehicle franchises across 80 dealership locations, 24 collision centers, and 17 metropolitan markets in nine states.
Financial performance
- Third quarter: Revenue was $1.602 billion, down 5%; gross profit was $260.3 million, down 2%; operating income was $69.7 million, down 1%; and net income was $30.7 million, down 5%. Diluted EPS was $1.48 versus $1.47.
- First nine months: Revenue was $4.786 billion, down 2%; gross profit was $787.5 million, down 1%; operating income was $213.6 million, down 2%; and net income was $96.6 million, down 3%. Diluted EPS increased to $4.60 from $4.37.
- Margins and mix: Gross margin was 16.2% in Q3 versus 15.8% a year earlier, and 16.5% for nine months versus 16.3%. SG&A was 70.1% of gross profit in Q3 and 69.7% for nine months, up from 69.9% and 69.2%, respectively.
- Segment trends: Q3 new-vehicle revenue fell 6% and gross profit fell 14%; new-vehicle gross profit per unit declined 8%. Used-vehicle revenue fell 4%, while retail gross margin declined to 7.2% from 7.5%. Parts and service gross profit was nearly flat for Q3, but increased 1% for nine months. F&I revenue increased 4% in Q3 and 5% for nine months; management cited accelerated commissions under an amended underwriter agreement.
- Cash flow: Nine-month GAAP operating cash flow was $243.2 million, versus $151.3 million. The company’s adjusted operating cash flow measure, which includes certain non-trade floor-plan cash flows, was $123.2 million versus $227.8 million. Investing cash outflow was $98.0 million and financing cash outflow was $145.8 million. Cash ended at $2.8 million.
- Balance sheet and liquidity: At September 30, total assets were $2.270 billion and shareholders’ equity was $347.3 million. Long-term debt, including current maturities, was $915.7 million; net floor-plan notes payable were $688.3 million. Reported total available liquidity was $406.4 million, including cash, floor-plan offset accounts and available credit facilities.
Changes, outlook and notable items
- Lower vehicle sales and weaker new- and used-vehicle unit economics pressured results; management attributed new-vehicle margin pressure to brand mix, elevated industry inventory and missed manufacturer sales-incentive targets. U.S. new-vehicle SAAR was 17.1 million for the first nine months, versus 17.4 million in 2016.
- Hurricanes Harvey and Irma temporarily closed dealerships in Texas, Florida and Georgia, adversely affecting Q3 sales and service. Locations had returned to full capacity; estimated property and inventory damage was under $0.5 million.
- Asbury acquired two franchises, two dealership locations and one collision center in Indianapolis for $80.1 million during the first nine months. It repurchased 584,696 shares under its program for $34.8 million; $53.3 million of authorization remained at quarter-end.
- Management expected 2017 capital expenditures of approximately $50 million. It stated that liquidity should be sufficient for at least the next 12 months. No specific earnings or revenue guidance was provided.
- Interest-rate exposure is material: $674.3 million of variable-rate debt was outstanding; a 100-basis-point rate change could affect annual interest expense by as much as $6.7 million. The company reported compliance with debt covenants.
- Other risks include competitive pricing and margin pressure, consumer credit and demand, manufacturer relationships and incentives, vehicle supply disruptions, debt and covenant obligations, litigation, and regulatory or trade changes. Management said known claims were not expected to materially affect results, but unfavorable outcomes could do so. Letters of credit outstanding were $13.3 million.
- Unusual expenses included approximately $1.5 million related to the CEO transition in SG&A. Nine-month other operating expenses included $2.9 million in lease-termination expense, partly offset by other income and a legal-settlement gain. Management was evaluating adoption impacts of new revenue and lease accounting standards; it expected lease right-of-use assets and liabilities to be material.
Important facts for investors to verify
- Whether vehicle unit volumes and per-vehicle gross profit stabilize, particularly for new vehicles and used-vehicle retail.
- How much F&I growth reflects the amended underwriter commission arrangement and whether that benefit is sustainable.
- Why adjusted operating cash flow fell sharply despite higher reported GAAP operating cash flow, including the impact of inventory and floor-plan financing movements.
- Debt, floor-plan financing availability, variable-rate exposure, and compliance with financial covenants as rates and operating conditions change.
- Realization of the stated capital-expenditure plan, integration and returns from the Indianapolis acquisition, and any further effects from storms, litigation, or manufacturer requirements.