Asbury Automotive Group, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Asbury operated 103 franchises at 84 dealership locations across 17 markets in nine states.
Financial performance
- Quarter: Revenue rose 14% to $1.716 billion; gross profit rose 11% to $272.7 million. Operating income increased 16% to $76.6 million. Net income was $51.1 million, or $1.96 diluted EPS, versus $32.5 million, or $1.08, a year earlier.
- Nine months: Revenue increased 13% to $4.948 billion; gross profit increased 11% to $800.4 million. Operating income rose 15% to $231.9 million. Net income increased 28% to $128.1 million, or $4.76 diluted EPS.
- Margins: Gross margin declined 30 basis points to 15.9% in Q3 and 40 basis points to 16.2% for the nine months. SG&A as a share of gross profit improved to 69.2% from 70.1% in Q3 and to 68.3% from 69.3% year to date.
- Operating drivers: Q3 revenue growth included new vehicles +17%, used vehicles +8%, parts and service +13%, and F&I +17%. Higher volumes and F&I and service gross profit helped, while competition pressured new- and used-vehicle margins. Q3 new-vehicle gross profit per unit fell 8% to $1,844; used retail gross margin eased to 8.0% from 8.2%.
- Cash flow: Nine-month GAAP operating cash flow was $145.0 million versus $158.6 million. Management’s adjusted operating cash flow measure, which includes specified non-trade floor-plan cash flows, was $259.5 million versus $103.1 million. Investing cash outflow was $67.8 million; financing cash outflow was $76.2 million.
- Balance sheet and liquidity: At September 30, cash was $3.9 million; total assets were $2.243 billion; shareholders’ equity was $314.5 million. Long-term debt was $747.9 million, excluding current maturities of $13.8 million. Trade and non-trade floor-plan notes totaled $837.9 million. Available liquidity was $216.6 million, including $164.7 million of revolver availability and $35.0 million under the used-vehicle facility. The company reported covenant compliance.
Changes, outlook and material items
- Q3 net income benefited materially from a $21.4 million pretax gain on divestitures ($13.1 million after tax); without it, reported profit growth would have been lower. The company sold franchises and a collision center and recorded $56.3 million in divestiture proceeds for the nine-month period.
- Asbury acquired two franchises for $69.4 million during the first nine months. It had four franchises pending disposition at quarter-end, classified with related assets and liabilities held for sale.
- The company repurchased 3.22 million shares for $259.8 million under its program during the first nine months, leaving $94.1 million authorized at September 30. Total cash used for repurchases, including employee share settlements, was $267.7 million.
- Management expected 2015 capital expenditures, excluding acquisitions, lease buyouts and real estate purchases, of approximately $70 million, and an effective tax rate of 38%–40%. It stated it expected sufficient liquidity for at least the next 12 months; no earnings or revenue guidance was provided.
- Management cited favorable vehicle demand, consumer credit availability and economic conditions, while warning that vehicle competition, economic and interest-rate changes, manufacturer relationships and incentives, financing access, recalls, regulation, litigation, and liquidity or covenant constraints could affect results. A 1% change in rates on $839 million of variable-rate debt could change annual interest expense by as much as $8.4 million.
- Warranty and parts-and-service growth benefited in part from manufacturer recall campaigns. The company noted that results are seasonal and interim results may not predict full-year performance. It reported disclosure controls as effective and no material change in internal control over financial reporting.
Key facts for investors to verify
- How much of earnings growth reflects recurring dealership operations versus the divestiture gain, and whether vehicle margins stabilize.
- Floor-plan and other debt balances, borrowing-base availability, covenant headroom, and sensitivity to interest rates.
- Cash generation after separating floor-plan financing effects and funding share repurchases, acquisitions, and planned capital expenditures.
- Completion and proceeds of pending dispositions, and the durability of recall-related service revenue and favorable consumer-credit conditions.