Asbury Automotive Group, Inc. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011; unaudited. Asbury operated 99 franchises at 80 dealership locations in 19 metropolitan markets across 10 states.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $1,086.2 million | $999.3 million | $2,135.8 million | $1,887.8 million |
| Gross profit | $188.9 million | $166.4 million | $361.8 million | $321.0 million |
| Gross margin | 17.4% | 16.7% | 16.9% | 17.0% |
| Operating income | $37.5 million | $34.6 million | $59.9 million | $62.8 million |
| Continuing-operations income | $14.2 million | $13.1 million | $18.9 million | $22.1 million |
| Net income | $14.2 million | $12.8 million | $34.1 million | $20.2 million |
| Diluted EPS | $0.43 | $0.39 | $1.03 | $0.62 |
- Q2 comparison: Revenue rose 9%, gross profit 14%, and net income 11%. Growth in gross profit across business lines was partly offset by higher SG&A, other operating expense, and interest expense. Continuing-operations income rose 8%.
- Six-month comparison: Revenue rose 13% and gross profit 13%, but operating income fell 5% and continuing-operations income fell 14%. Net income increased 69%, largely reflecting discontinued-operations gains from divestitures rather than stronger continuing earnings.
- Business mix: For the first half, new-vehicle revenue increased 12%, used-vehicle revenue 18%, parts and service 5%, and finance and insurance (F&I) 24%. F&I and parts/service contributed strongly to gross-profit growth. Used-vehicle retail volumes increased, while same-store used retail gross margin declined to 10.5% from 10.9% in the first half.
- Cash flow: First-half GAAP operating cash flow was negative $6.8 million, versus negative $37.1 million a year earlier. Management’s adjusted operating cash flow measure was positive $14.6 million versus negative $50.6 million; this non-GAAP measure includes specified floor-plan cash flows. Investing cash flow was positive $50.6 million, including $91.9 million of asset-sale proceeds; financing cash flow was negative $41.9 million. Cash ended at $23.2 million.
- Balance sheet and liquidity: Total assets were $1.338 billion and shareholders’ equity $311.2 million. Long-term debt, including current maturities, was $543.8 million; floor-plan notes payable totaled $271.4 million. Available liquidity was $282.1 million, including cash, $153.4 million of revolving and used-vehicle facility availability, and $105.5 million in floor-plan offset accounts. The company reported covenant compliance.
Material changes, outlook, and risks
- During the first half, Asbury sold its Atlanta heavy-truck business, one dealership franchise, and an ancillary business. The heavy-truck sale generated an approximately $25.7 million pretax gain; discontinued operations contributed $15.2 million of net income for the six months. The sale proceeds included repayment of related floor-plan and mortgage debt.
- Management expected U.S. new-vehicle sales to continue improving in 2011. First-half industry SAAR was 12.6 million, versus 11.2 million a year earlier. The filing provides no company earnings or revenue guidance.
- Japanese natural disasters disrupted supply from certain manufacturers. Asbury expected the largest inventory-shortage impact in Q3 2011, potentially extending through year-end and materially affecting earnings and operations. Q2 supply constraints supported new-vehicle margins, which management cautioned might not be sustainable as production recovered. The company planned to mitigate effects through used-vehicle sales, inventory management, and margin initiatives.
- Management expected a 2011 effective tax rate of 38%–40% and approximately $35 million of 2011 capital expenditures, excluding real-estate purchases. It believed liquidity would be sufficient for at least the next 12 months. Revolving facilities mature in August 2012; management intended to seek extensions or replacements, with no assurance of acceptable terms.
- Unusual costs included a $9.0 million accrual for an Arkansas class action in Q1, approximately $5.0 million of first-half executive separation expense, and real-estate-related charges. The company expected up to $2.0 million of additional executive separation expense during the rest of 2011. The Arkansas case was remanded for further proceedings; management did not believe material additional losses were reasonably possible at the filing date.
- In July 2011, Asbury repurchased $8.8 million face value of its 3% convertible notes, reducing the outstanding principal to $20.7 million and recognizing a $0.4 million extinguishment loss in Q3. The board also increased remaining common-stock repurchase authorization to $45.0 million.
- Interest-rate exposure remains relevant: $304.5 million of variable-rate debt, including floor-plan notes, was outstanding; a 1% rate change could affect annual interest expense by up to $3.0 million. The filing also cites consumer credit, vehicle demand, manufacturer relationships, litigation, and potential U.S. interest-rate increases as risks.
Important facts for investors to verify
- Whether Japanese vehicle and parts supply disruptions materially affected Q3 results and whether Q2 new-vehicle margin gains persisted.
- How much of first-half net income came from continuing operations versus divestiture-related discontinued operations.
- Operating cash generation after considering floor-plan financing, inventory movements, and the limitations of management’s adjusted cash-flow measure.
- Liquidity, refinancing plans for the August 2012 credit facilities, and repayment or refinancing of the remaining convertible notes due September 2012.
- Further developments and potential exposure in the Arkansas class action, along with additional separation costs and other unusual charges.