Asbury Automotive Group, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014; comparisons are to the corresponding 2013 periods. Unaudited results. Asbury operated 81 dealership locations and 102 franchises in 18 markets across 10 states, plus 24 collision centers and two Q auto used-vehicle stores.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | First nine months 2014 | First nine months 2013 |
|---|---|---|---|---|
| Revenue | $1,505.6 million | $1,390.3 million | $4,364.7 million | $3,961.0 million |
| Gross profit | $244.6 million | $225.3 million | $722.6 million | $653.9 million |
| Income from operations | $66.1 million | $58.0 million | $202.5 million | $168.0 million |
| Income from continuing operations | $32.4 million | $22.8 million | $100.1 million | $73.9 million |
| Net income | $32.5 million | $22.7 million | $99.8 million | $82.2 million |
| Diluted EPS, continuing operations | $1.08 | $0.73 | $3.29 | $2.38 |
- Q3 revenue rose 8%; gross profit rose 9%; net income increased 43%. Q3 gross margin was 16.2%, unchanged year over year. SG&A was 70.1% of gross profit versus 70.7%.
- For the first nine months, revenue rose 10%, gross profit 11%, and continuing-operations income 35%. Net income grew 21%, partly reflecting the prior-year discontinued-operations gain. Gross margin was 16.6% versus 16.5%; SG&A was 69.3% of gross profit versus 70.5%.
- Growth came across new and used vehicles, parts and service, and finance and insurance (F&I). Parts and service gross profit increased 12% in Q3 and 12% year to date. Used-vehicle retail gross margins faced pressure.
- Cash from operating activities was $158.6 million for the first nine months, versus $75.0 million in 2013. The company’s non-GAAP operating-cash-flow measure, adjusted for non-trade floor-plan activity, was $103.1 million versus $68.8 million; the filing cautions that this measure has limitations and may not be comparable across companies.
- Investing cash outflow was $83.0 million and financing cash outflow was $69.9 million. Cash at period-end was $11.1 million, up from $5.4 million at year-end 2013.
- At September 30, total available liquidity was $376.6 million: cash of $11.1 million, floor-plan offset-account availability of $122.0 million, revolver availability of $164.3 million, and used-vehicle floor-plan availability of $79.2 million.
- Long-term debt, including current maturities, was $605.6 million; floor-plan notes payable totaled $557.1 million. Long-term debt increased from $554.4 million at December 31, 2013, including new mortgage financing. The company was in compliance with debt covenants.
Material changes and unusual items
- Q3 income benefited from the absence of the prior-year $6.8 million loss on redemption of 7.625% notes and $2.1 million of prior-year real-estate-related charges. Lower other interest expense also contributed. Q3 SG&A rose $12.3 million, partly offsetting higher gross profit.
- For the first nine months of 2013, discontinued operations included an $8.9 million after-tax gain on a franchise sale; 2014 discontinued operations reported a $0.3 million loss. The prior-year period also included $7.3 million of pre-tax real-estate-related charges.
- 2014 acquisitions comprised a Greenville franchise and an Orlando dealership, for an aggregate purchase price of $21.9 million.
- The company repurchased 1.08 million shares for $69.2 million under its authorization in the first nine months, plus $6.3 million of employee shares related to equity-award net settlement. October board authorization increased total repurchase authority to $200 million, subject to financing restrictions; the indenture was the more restrictive limit after an October credit-agreement amendment.
Outlook, commentary and risks
- Management said the U.S. auto market continued to improve; Q3 new-vehicle SAAR was 16.8 million versus 15.7 million a year earlier. It also described the recovery as fragile and difficult to predict.
- Management expected a 2014 effective tax rate of 38%–40%. It estimated approximately $55 million of 2014 capital expenditures for existing facilities, service capacity, technology and equipment, and potential Q auto investment of up to $25 million.
- Management stated it expected sufficient liquidity for at least the next 12 months. In October, a $13.4 million fixed-rate real-estate mortgage was entered into, and Ford floor-plan financing was replaced with additional borrowing under the senior secured new-vehicle floor-plan facility.
- Key risks include vehicle demand and sales mix, margins and competition, consumer credit availability and interest rates, manufacturer incentives and franchise agreements, vehicle supply or recalls, regional economic conditions, access to floor-plan financing, debt covenants, and litigation or regulatory claims. A 1% rate change on $557.1 million of variable-rate debt, including floor-plan notes, could change annual floor-plan interest expense by as much as $5.6 million.
- The filing reports ordinary-course claims and contingencies, including manufacturer, lender, tax, employment and consumer-financing matters. Management said it had accrued probable and estimable losses and did not identify material reasonably possible losses in excess of accruals in aggregate, while noting outcomes cannot be predicted. Letters of credit outstanding were $10.7 million; a $5.0 million surety-bond line was also maintained.
Important facts for investors to verify
- How much of revenue and profit growth reflects same-store performance versus acquisitions, and whether vehicle unit growth persists.
- Whether used-vehicle margin pressure and wholesale losses continue, and whether parts-and-service gains—partly supported by recall work—are sustainable.
- Cash generation after considering floor-plan financing classification, the offset account, capital expenditures and share repurchases.
- Debt, interest-rate exposure, covenant capacity and the effect of the October financing changes on repurchase flexibility.
- Actual 2014 capital spending and tax rate versus management’s estimates, and developments in manufacturer, legal or regulatory matters.