Asbury Automotive Group, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Unaudited. Asbury operated 100 franchises at 80 dealership locations in 19 metropolitan markets across 10 states.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $1,072.7 million | $1,020.0 million | $3,187.2 million | $2,886.4 million |
| Gross profit | $183.0 million | $166.8 million | $541.2 million | $484.6 million |
| Income from operations | $34.3 million | $32.1 million | $93.5 million | $94.6 million |
| Income from continuing operations | $12.8 million | $10.8 million | $31.3 million | $32.8 million |
| Net income | $12.3 million | $12.5 million | $46.4 million | $32.7 million |
| Diluted EPS | $0.38 | $0.38 | $1.41 | $0.98 |
- Q3 total gross margin rose 70 basis points to 17.1%; nine-month gross margin rose 20 basis points to 17.0%. Q3 SG&A was 77.2% of gross profit, versus 77.5% a year earlier; nine-month SG&A was 76.8%, versus 77.4%.
- For the first nine months, GAAP operating cash flow was $70.4 million, compared with a $44.0 million outflow in 2010. Management’s adjusted operating cash flow measure was $101.7 million, versus a $41.9 million outflow; it includes specified floor-plan cash flows and is non-GAAP.
- Cash was $8.2 million at September 30, 2011, down from $21.3 million at December 31, 2010. Total current assets were $670.2 million and current liabilities $500.4 million.
- Long-term debt was $468.8 million, including current maturities of $26.3 million; debt before current maturities totaled $495.1 million. Trade and non-trade floor-plan notes totaled $294.6 million. Total reported available liquidity was $224.3 million, including cash, credit availability and floor-plan offset accounts.
Changes versus comparable periods
- Q3 revenue increased 5%, led by used vehicles (+15%) and finance and insurance (F&I; +19%); new-vehicle revenue was essentially flat. Gross profit increased 10%, but higher SG&A and other operating costs partly offset the improvement. Continuing-operations income rose 19%, while net income decreased 2% as discontinued operations shifted from $1.7 million of income to a $0.5 million loss.
- Nine-month revenue rose 10% and gross profit rose 12%. Continuing-operations income declined 5%, while net income increased 42%, primarily because of the after-tax gain on the heavy-truck business sale. Diluted continuing-operations EPS fell 4% to $0.95; diluted net EPS rose to $1.41 from $0.98.
- Used-vehicle retail volumes and F&I results strengthened. Same-store used-vehicle retail gross margin declined to 9.4% in Q3 from 10.7%; same-store F&I per vehicle increased 15% in Q3. Japanese vehicle supply disruption reduced availability and affected brand-level unit sales, while contributing to higher new-vehicle margins.
Outlook, significant items and risks
- Management expected U.S. new-vehicle sales to improve in 2011 versus 2010. It expected Japanese-related inventory shortages to subside by Q1 2012, but cautioned that timing was uncertain and Q3 new-vehicle margin benefits might not persist as supply normalized.
- Management estimated a 2011 effective tax rate of 38%–40% and approximately $28 million in 2011 capital expenditures excluding real estate purchases. It stated it expected sufficient liquidity for at least the next 12 months.
- On October 14, 2011, the company entered into a new senior secured credit agreement: $175 million revolving credit facility, $625 million new-vehicle floor-plan facility and $100 million used-vehicle floor-plan facility, subject to borrowing limits; facilities mature October 14, 2016. The company stated the new-vehicle facility was expected to yield about $2 million in annualized floor-plan interest savings based on September balances.
- Q3 and nine-month results included executive separation costs; nine-month results also included a $9 million accrual for legal claims and real-estate-related charges. The heavy-truck divestiture generated an approximately $25.7 million pretax gain and $15.8 million after-tax gain in discontinued operations for the nine-month period.
- An Arkansas class action settlement had preliminary court approval, subject to final approval; the company had accrued $9 million. Management said additional reasonably possible losses across known claims could be up to approximately $3 million beyond accrued amounts. A separate manufacturer-affiliate matter concerning alleged service-work overpayments was also accrued.
- Other material risks include interest-rate exposure, vehicle and parts supply disruptions, consumer credit availability, manufacturer relationships and franchise requirements, competition and litigation. The company estimated that a 1% rate change on $277.9 million of variable-rate debt, including floor-plan debt, could change annual other interest expense by as much as $2.8 million.
- Subsequent to quarter-end, the company sold one dealership franchise, repaid approximately $30 million of mortgage debt early, and repurchased 180,400 shares for $3.0 million. The company reported compliance with its covenants at September 30, 2011; new credit-agreement covenants applied beginning in Q4.
Key facts for investors to verify
- Whether operating cash generation remains robust after inventory and floor-plan balances normalize; the adjusted cash-flow measure is non-GAAP and differs from reported operating cash flow.
- Whether Q3 new-vehicle margin gains persist as Japanese inventory supply recovers, and whether used-vehicle margins stabilize.
- Final court approval and financial resolution of the Arkansas settlement, and the outcome of the separate manufacturer-related claim.
- Borrowing availability, covenant compliance and actual interest savings under the October 2011 credit agreement, alongside the 2012 convertible-note maturity.
- How much reported nine-month net-income growth reflects ongoing operations versus the one-time divestiture gain and other unusual costs.