Business Context and Reporting Period
Company: Asbury Automotive Group, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2002
Overview: Asbury is a national automotive retailer operating 131 franchises at 93 dealership locations across nine states and 18 markets. The company sells new and used vehicles, parts, and services, and arranges financing and insurance. In 2002, the company completed its Initial Public Offering (IPO) in March and converted from a limited liability company to a corporation. The company operates in a single segment.
Key Financial Metrics
| Metric | 2002 | 2001 |
|---|---|---|
| Total Revenues | $4,486.0 million | $4,193.9 million |
| Gross Profit | $706.9 million | $653.1 million |
| Net Income | $38.1 million | $44.2 million |
| Earnings Per Share (Diluted) | $1.15 | N/A (Pre-IPO) |
| Operating Cash Flow | $68.0 million | $96.5 million |
| Total Debt (Excl. Floor Plan) | $475.2 million | $538.3 million |
| Floor Plan Notes Payable | $540.4 million | $451.4 million |
| Working Capital | $156.9 million | $147.6 million |
| Cash and Cash Equivalents | $22.6 million | $60.5 million |
Revenue Mix (2002): New vehicles (59%), Used vehicles (27%), Parts/Service/Collision (11%), Finance/Insurance (3%).
Gross Profit Mix (2002): New vehicles (31%), Used vehicles (15%), Parts/Service/Collision (38%), Finance/Insurance (17%).
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 7% to $4.5 billion, driven by acquisitions and a shift to higher-priced vehicles (SUVs, light trucks) despite a 2% decline in same-store new retail units.
- Profitability: Net income decreased 14% to $38.1 million. This decline was primarily due to a one-time non-recurring charge of $11.6 million related to the establishment of a net deferred tax liability upon conversion to a corporation. Pro forma net income (excluding this charge and discontinued operations) was $46.1 million.
- Interest Expense: Floor plan interest expense decreased significantly to $17.9 million from $26.4 million due to lower interest rates. Non-floor plan interest expense decreased to $38.4 million.
- Goodwill Accounting: The company adopted SFAS No. 142 in 2002, ceasing the amortization of goodwill. This contributed to higher reported operating income compared to 2001, where $9.6 million in goodwill amortization was recorded.
- Discontinued Operations: The company recorded a $1.8 million loss from discontinued operations in 2002, reflecting the sale of dealerships.
Guidance, Outlook, Risks, and Unusual Items
Outlook and Acquisitions
The company signed a definitive agreement to acquire the Bob Baker Auto Group in San Diego for $88 million, pending manufacturer consents. The acquisition is expected to be accretive to earnings per share in 2003. Capital expenditures for 2003 are expected to be between $55 million and $60 million.
Material Risks and Contingencies
- Covenant Default: As of December 31, 2002, the company did not meet its fixed charge coverage ratio requirement (1.2 to 1) under its Committed Credit Facility. This was due to self-funded real estate projects. Lenders granted a waiver on February 5, 2003, requiring the company to demonstrate improvement monthly and achieve compliance by January 1, 2004. During the waiver period, the company is restricted from making acquisitions without lender consent and cannot repurchase stock.
- Manufacturer Dependence: The company faces risks regarding franchise renewals and acquisition consents. Specifically, Ford has indicated it does not intend to approve the acquisition of the Bob Baker Ford franchise, and discussions with Toyota regarding the same acquisition are ongoing.
- Legal Proceedings: The company is involved in an arbitration proceeding with the estate of its former CEO, Brian E. Kendrick, seeking damages in excess of $30 million. Management believes the claim is meritless.
- Price 1 Auto Stores: The company incurred a pre-tax loss of $7.3 million from its pilot program selling used vehicles at Wal-Mart locations. Evaluation of the program is ongoing.
Investor Verification Checklist
- Covenant Compliance: Verify the company's ability to meet the fixed charge coverage ratio of 1.2:1 by January 1, 2004, as required by the lender waiver.
- Acquisition Status: Monitor the status of manufacturer consents (specifically Ford and Toyota) for the Bob Baker Auto Group acquisition.
- Deferred Tax Liability: Assess the impact of the $11.6 million one-time tax charge and the ongoing deferred tax liability resulting from the corporate conversion.
- Price 1 Program: Review future updates on the profitability and strategic direction of the Price 1 Auto Stores pilot program.
- Legal Exposure: Track the resolution of the arbitration with the Kendrick estate regarding the alleged $30 million claim.