Asbury Automotive Group, Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012; financial statements are unaudited. Asbury operated 98 franchises at 77 dealership locations across 10 states.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $1,191.0 million | $1,068.9 million | $2,290.5 million | $2,103.5 million |
| Gross profit | $196.4 million | $186.3 million | $385.9 million | $356.7 million |
| Income from operations | $48.2 million | $37.1 million | $91.0 million | $59.1 million |
| Income from continuing operations | $21.6 million | $14.0 million | $39.6 million | $18.5 million |
| Net income | $21.1 million | $14.2 million | $38.7 million | $34.1 million |
| Diluted EPS | $0.67 | $0.43 | $1.22 | $1.03 |
Q2 revenue rose 11%, operating income 30%, and net income 49% year over year. Gross profit increased 5%, but gross margin fell 90 basis points to 16.5%, mainly due to a greater share of lower-margin new vehicle sales and weaker used-vehicle retail margins. Q2 used-vehicle retail gross profit per unit fell 13% to $1,752; new-vehicle gross profit per unit declined 10% to $2,066. F&I revenue rose 21% to $42.8 million, supported by higher retail volumes and F&I per vehicle. Parts-and-service gross profit rose 4% to $85.0 million.
For the first half, revenue rose 9% and income from continuing operations more than doubled. Net income rose only 13%, in part because first-half 2011 included a $15.8 million after-tax gain from selling the heavy-truck business. The 2011 continuing-results comparison also included legal claims and executive-separation and real-estate charges.
Cash flow, debt and liquidity
- Cash was $8.7 million at June 30, down from $11.4 million at year-end 2011. Six-month GAAP operating cash flow was negative $17.9 million, versus negative $6.8 million a year earlier. Management’s adjusted operating cash flow measure, which includes specified non-trade floor-plan activity, was positive $73.8 million versus negative $23.2 million; this is a non-GAAP measure and is not directly comparable across companies.
- Investing cash outflow was $26.3 million and financing cash inflow was $41.5 million. Capital expenditures excluding real estate were $18.9 million; management expected approximately $60 million for 2012, excluding real-estate purchases.
- Reported total available liquidity was $241.5 million: $8.7 million cash, $214.8 million available under revolving credit facilities, and $18.0 million in the floor-plan offset account. Management expected sufficient liquidity for at least 12 months.
- Long-term debt, including current maturities, was $416.1 million, compared with $458.6 million at December 31, 2011. The company repaid approximately $41 million of mortgage debt early during the first half. Separately, floor-plan notes payable were $509.7 million at June 30, including $49.5 million trade and $460.2 million non-trade.
- The $15.1 million principal amount of 3% convertible notes was due September 15, 2012; management planned to repay it from available liquidity. The company reported compliance with all covenants at June 30.
Management outlook, risks and notable items
- Management cited improved consumer confidence, credit availability, and new-vehicle demand; U.S. new-vehicle SAAR was 14.3 million in Q2 2012 versus 12.6 million in Q2 2011. It cautioned that the economic recovery remained fragile and that vehicle margins depend on supply and demand as inventory availability normalizes.
- Management expected a 2012 effective tax rate of 38%–40%. No full-year earnings or revenue guidance was provided. Seasonal patterns typically make the second and third quarters stronger.
- Key risks include economic and consumer-credit conditions, interest rates, vehicle supply and manufacturer incentives, competition and margin pressure, floor-plan financing availability, debt and covenant obligations, and the ability to renew manufacturer franchise agreements. A 1% interest-rate change could affect annual interest expense by as much as $5.4 million, based on variable-rate debt including floor-plan notes.
- The company was discussing alleged service-work overpayments with a manufacturer affiliate and had accrued its best estimate of probable exposure. Possible losses above recorded reserves for known claims were estimated at up to approximately $1.5 million in aggregate; management did not expect known claims to materially affect results, but noted outcomes are uncertain.
- Letters of credit outstanding were $14.6 million, and a $7.5 million surety-bond line was maintained. The company repurchased 324,700 shares for $8.5 million during Q2 and had $38.4 million remaining under its repurchase authorization at June 30.
Important facts for investors to verify
- Whether operating cash flow and working-capital trends remain sustainable, particularly given higher inventory and the difference between GAAP and adjusted cash flow.
- How the September 2012 convertible-note repayment affected liquidity and subsequent borrowing availability.
- Whether new- and used-vehicle gross margins stabilize as vehicle supply normalizes, and whether F&I and parts-and-service gains persist.
- Developments in the manufacturer overpayment matter, other claims, and any impact on reserves or financial results.
- Actual 2012 capital spending, covenant headroom, and the effects of interest-rate changes on financing costs.