Asbury Automotive Group, Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing is an annual report, not a standalone fourth-quarter filing; selected Q4 results are noted below. Dollar amounts are in millions unless stated otherwise.
Business context
Asbury operated 100 franchises across 80 dealership locations in 18 metropolitan markets and 10 states, with 24 collision repair centers. Its business includes new and used vehicle sales, parts and service, and financing and insurance (F&I). Luxury and mid-line import brands accounted for 86% of new vehicle sales.
Financial results and key metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Total revenue | $5,334.9 | $4,641.8 | +15% |
| Gross profit | $877.5 | $765.0 | +15% |
| Income from operations | $226.1 | $185.9 | +22% |
| Income from continuing operations | $101.1 | $83.3 | +21% |
| Net income | $109.1 | $82.2 | +33% |
| Diluted EPS, continuing operations | $3.25 | $2.64 | +23% |
- Revenue by business line: new vehicles $2,952.2 (+13%); used vehicles $1,564.2 (+20%); parts and service $611.6 (+8%); F&I $206.9 (+24%).
- Gross profit increased in every business line. Parts and service contributed 42.1% of gross profit and F&I 23.6%; new vehicles contributed 20.7%.
- Overall gross margin was 16.4%, down 10 basis points. SG&A was $619.3, up 11%, but declined to 70.6% of gross profit from 72.7%.
- Operating cash flow was $50.7, compared with cash use of $20.7 in 2012. Management’s non-GAAP adjusted operating cash flow was $72.6, down from $114.7; the filing cites inventory, working-capital and other current-asset increases as key factors.
- Investing cash use was $125.5 and financing cash provided was $74.0. Year-end cash was $5.4.
- Year-end liquidity was reported at $281.4: $5.4 cash, $231.7 revolving-credit availability and $44.3 in the floor-plan offset account. Working capital was $274.4.
- Debt excluding floor-plan notes was $554.4; floor-plan notes payable were $609.5. Shareholders’ equity was $490.6.
- Q4, unaudited: Revenue was $1,373.9 and net income $26.9, versus $1,219.2 and $22.8, respectively, in Q4 2012.
Material changes versus 2012
- Revenue and gross profit grew 15%, supported by higher new and used retail unit sales, acquisitions and gains in parts and service and F&I. New-vehicle SAAR rose to 15.6 million from 14.5 million.
- Same-store new-vehicle retail units rose 9%; used retail units rose 18%. Same-store new and used retail gross margins declined 30 and 60 basis points, respectively, while parts and service same-store gross margin improved 240 basis points.
- Net income included an $8.9 after-tax gain on the sale of one franchise, recorded in discontinued operations. Continuing-operations income is therefore a useful comparison alongside reported net income.
- Other operating expense rose to $7.8, including $5.5 of lease-termination charges and $1.8 of property and equipment disposal charges. A $6.8 loss was recorded on redemption of the 7.625% notes.
- Acquisitions of three franchises for $61.8 contributed to results. The company also repurchased $30.0 of common stock under its authorization.
Outlook, commentary and risks
- Management described the economic recovery as fragile, while citing favorable credit availability, improving consumer confidence and an aging vehicle fleet as supports for 2013 demand. It did not provide specific revenue or earnings guidance.
- Management expected 2014 capital expenditures of approximately $60.0, primarily for facilities, service capacity, technology and equipment, and estimated a 2014 effective tax rate of 38%–40%.
- Management believed liquidity would be sufficient for at least the next 12 months. The company reported compliance with its debt covenants at year-end.
- Interest-rate exposure is material: management estimated that a 1% increase in market rates could raise annual interest expense, including floor-plan interest, by as much as $6.1. Variable-rate debt, consumer financing availability and vehicle demand are key sensitivities.
- Other principal risks include manufacturer franchise renewals and vehicle allocations, brand and geographic concentration, competitive pricing and margins, consumer-credit access, covenant compliance, acquisition integration, regulatory and environmental requirements, litigation, and data-security incidents.
- The company issued an additional $100.0 of 8.375% senior subordinated notes and entered into a $75.0 real-estate term loan; proceeds helped redeem all $143.2 of 7.625% notes. The new notes mature in 2020. A January 2014 Greenville franchise acquisition was expected to add approximately $20.0 of annualized revenue.
- Known legal matters were not expected by management to have a material adverse effect, and the filing stated no material reasonably possible losses in excess of accrued amounts in aggregate; outcomes remain uncertain. Ernst & Young issued unqualified opinions on the financial statements and internal controls. Controls over three franchises acquired in 2013 were excluded from the internal-control evaluation.
Important facts for investors to verify
- How much of earnings growth reflects sustainable continuing operations versus the franchise-sale gain and other unusual charges?
- Whether operating cash generation and working-capital trends improve, given the decline in adjusted operating cash flow and growth in inventory.
- The company’s ability to manage floor-plan and other debt, interest-rate exposure, covenant headroom and refinancing needs.
- Whether used-vehicle and new-vehicle margins stabilize, and whether parts and service and F&I gains can be sustained.
- Progress and returns from acquisitions, planned capital spending, real-estate purchases and authorized share repurchases.