Asbury Automotive Group, Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012; comparisons are with the corresponding 2011 periods. Dollar amounts are in millions unless otherwise noted. The company operated 97 franchises at 77 dealership locations across 10 states.
Financial performance
| Metric | Q3 2012 | Q3 2011 | First 9 months 2012 | First 9 months 2011 |
|---|---|---|---|---|
| Revenue | $1,197.9 | $1,047.2 | $3,444.1 | $3,108.1 |
| Gross profit | $195.1 | $178.9 | $573.6 | $528.8 |
| Income from operations | $49.4 | $33.5 | $138.4 | $90.9 |
| Income from continuing operations | $22.8 | $12.3 | $61.2 | $29.8 |
| Net income | $20.7 | $12.3 | $59.4 | $46.4 |
| Diluted EPS, continuing operations | $0.72 | $0.38 | $1.94 | $0.90 |
| Diluted EPS, net income | $0.66 | $0.38 | $1.88 | $1.41 |
- Q3 revenue increased 14%; gross profit rose 9%, and net income rose 68%. Nine-month revenue increased 11%; gross profit rose 8%, and income from continuing operations more than doubled. Nine-month net income rose 28%, partly because 2011 included a $16.6 million after-tax gain on discontinued operations.
- Gross margin was 16.3% in Q3, down 80 basis points, and 16.7% for the nine months, down 30 basis points. Management attributed the Q3 decline primarily to a greater share of lower-margin new-vehicle sales; the nine-month decline also reflected weaker used-vehicle retail margin.
- Q3 revenue growth was led by new vehicles (+22%) and finance and insurance (F&I; +22%). New-vehicle retail units rose 26% same-store, while same-store gross profit per new vehicle fell 14%. Nine-month F&I rose 21%; used-vehicle retail units rose 8%, but same-store used-vehicle retail gross profit per unit fell 6%.
- Parts and service gross profit rose 4% in Q3 and 5% year to date; same-store gross margin improved 170 and 200 basis points, respectively. SG&A increased 2% in Q3 and 3% year to date, while SG&A as a share of gross profit improved to 72.3% and 73.1%, respectively.
Cash flow, balance sheet and liquidity
- For the first nine months, GAAP operating cash flow was $16.6 million, versus $70.4 million in 2011. Management’s non-GAAP adjusted operating cash flow, which includes certain non-trade floor-plan changes, was $72.1 million versus $47.3 million. The company cautions that this measure has limitations and may not be comparable across companies.
- Investing activities used $44.6 million, compared with $28.5 million provided in 2011. Financing activities provided $22.5 million, versus $112.0 million used in 2011. Cash decreased $5.5 million to $5.9 million.
- At September 30, total assets were $1,490.2 million; shareholders’ equity was $385.4 million. Long-term debt was $431.9 million, with $2.8 million current maturities. Trade and non-trade floor-plan notes payable totaled $463.5 million on the balance sheet.
- Reported available liquidity was $265.3 million: $5.9 million cash, $210.2 million revolving-credit availability and $49.2 million in a floor-plan offset account. No revolving-credit borrowings were outstanding. Management said liquidity should be sufficient for at least the next 12 months; the company was in compliance with debt covenants.
- The remaining $15.1 million principal of 3% convertible notes matured and was repaid in September 2012. The company also repaid approximately $41.0 million of mortgage debt early and obtained $34.1 million of new mortgage notes. Management reported no long-term debt maturities until October 2015.
Outlook, commentary and risks
- Management described the recovery as fragile and difficult to predict. It cited improving consumer confidence, credit availability and U.S. new-vehicle SAAR: 14.3 million for the first nine months of 2012 versus 12.6 million in 2011. Near-term new-vehicle margins were expected to depend principally on supply and demand; no earnings guidance was provided.
- Management expected a 2012 effective tax rate of 38%–39% and approximately $55 million of 2012 capital expenditures, excluding real estate purchases.
- Q3 included a $2.3 million non-cash impairment charge: $2.0 million in discontinued operations and $0.3 million in other operating expense. Discontinued operations produced a $2.1 million after-tax loss in Q3 and a $1.8 million after-tax loss year to date; 2011’s year-to-date discontinued-operations income included the heavy-truck business sale gain.
- Key exposures include economic and consumer-credit conditions, vehicle supply and manufacturer incentives, competition and margin pressure, interest rates, access to floor-plan financing, manufacturer franchise agreements, and litigation or regulatory matters. A 1 percentage-point rate change on $535.7 million of variable-rate debt, including floor-plan debt, could change annual interest expense by as much as $5.4 million; manufacturer floor-plan assistance may partly offset rate increases.
- The company was discussing alleged service-work overpayments with a manufacturer affiliate and had accrued its best estimate of probable, reasonably estimable exposure. It said additional losses across known claims could be up to approximately $0.6 million above accrued amounts; outcomes remain uncertain. Letters of credit totaled $14.6 million.
Most important facts for investors to verify
- Whether continued unit growth and F&I performance can offset lower new-vehicle and used-vehicle margins.
- How GAAP operating cash flow reconciles to management’s adjusted measure, and the effects of inventory, loaner vehicles and floor-plan financing.
- Liquidity, covenant headroom, floor-plan availability and the cost and timing of debt maturities and capital spending.
- The resolution and final cost of the manufacturer overpayment matter, pending dispositions and held-for-sale asset impairments.
- Whether the stated 2012 tax-rate and capital-expenditure expectations remain applicable; the filing provides no full-year earnings forecast.