Asbury Automotive Group, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; comparisons are with the corresponding 2020 periods. Amounts are in millions except per-share data. The filing is unaudited.
Business context
Asbury operated 112 new-vehicle franchises across 91 dealership locations, 25 collision centers and one auto auction in 15 markets across nine states. It sells new and used vehicles, parts and service, and finance and insurance products. New-vehicle supply was constrained by semiconductor shortages and pandemic-related production disruption.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $2,406.0 | $1,845.4 | $7,182.9 | $4,897.8 |
| Gross profit | $480.0 | $335.9 | $1,359.9 | $851.1 |
| Gross margin | 20.0% | 18.2% | 18.9% | 17.4% |
| Income from operations | $201.0 | $119.1 | $555.7 | $236.3 |
| Net income | $147.0 | $96.2 | $391.9 | $165.3 |
| Diluted EPS | $7.54 | $4.96 | $20.10 | $8.56 |
Q3 revenue rose 30%, gross profit 43% and net income 53% year over year. For the first nine months, revenue increased 47%, gross profit 60% and net income 137%. New-vehicle gross profit benefited from higher per-unit economics: Q3 same-store gross profit per new vehicle was $4,808, up 97%. Used-vehicle retail revenue and parts-and-service revenue also increased. SG&A was $268.7 million in Q3 and $778.2 million year to date; as a share of gross profit, it declined to 56.0% and 57.2%, respectively.
Cash flow, balance sheet and liquidity
- Operating cash flow: $958.6 million for the first nine months, compared with $625.2 million in 2020. The company’s adjusted measure, which includes specified non-trade floor-plan cash flows, was $437.9 million versus $417.8 million. Inventory reductions materially supported reported operating cash flow.
- Investing and financing: Investing used $248.6 million, including $217.1 million to purchase previously leased real estate. Financing used $380.8 million. Cash increased by $329.2 million to $330.6 million.
- Debt: Total debt outstanding was $1,379.9 million at September 30, including $1,371.0 million of long-term debt including its current portion. Long-term debt on the balance sheet, net of current maturities, was $1,327.7 million. Net trade and non-trade floor-plan notes totaled $138.2 million.
- Liquidity: Management reported $776.6 million of total available liquidity, comprising cash, floor-plan offset funds and available facility capacity. The company said it expected sufficient liquidity for at least the next 12 months and was in compliance with debt covenants.
- Other balance-sheet changes: Total assets were $3,571.4 million and shareholders’ equity was $1,301.3 million. Inventory fell to $413.8 million from $875.2 million at year-end 2020, principally reflecting sharply lower new-vehicle inventory.
Changes versus the prior period and unusual items
- Q3 growth reflected higher revenue and gross profit across all reported business lines, alongside stronger vehicle gross profit per unit. New-vehicle inventory ended the quarter at about 12 days of supply, versus a company target of 70–75 days.
- Year-to-date comparisons include Park Place, acquired in August 2020; Park Place contributed $1.33 billion of revenue in the first nine months of 2021. Comparisons also reflect pandemic-related weakness in parts of 2020.
- 2020 included a $23.0 million franchise-rights impairment and a $20.6 million debt-extinguishment loss. 2020 dealership divestiture gains were $58.4 million, compared with $8.0 million in 2021; 2021 other operating income included gains from legal settlements and real estate transactions.
Outlook, transactions and risks
- Management expected 2021 capital expenditures of approximately $50.9 million, excluding real estate purchases, and an effective tax rate around 25% for 2021.
- On September 28, 2021, the company agreed to acquire the Larry H. Miller dealership businesses, related real estate and Total Care Auto for approximately $3.2 billion, including about $740 million of real estate and leasehold improvements. Closing was expected in Q4, subject to customary approvals and conditions. The transaction agreements were not subject to a financing condition.
- To finance the transaction, lenders committed to a $2.35 billion bridge facility and a $900 million 364-day bridge facility, subject to customary conditions and potential reductions upon specified financings or other events. As of September 30, the company was also under contract to acquire ten dealerships with combined annual revenue of approximately $900 million.
- In October 2021, after quarter-end, the company completed acquisitions of two dealership locations for approximately $59.9 million.
- Management cited semiconductor and other supply constraints, COVID-19 uncertainty, vehicle availability and pricing, competition, employee retention, interest rates, financing access, manufacturer relationships, and acquisition execution and integration as risks. It said it could not predict when vehicle production would normalize.
- Known legal and regulatory matters were not expected by management to materially affect results, but outcomes remain uncertain. The company had $10.8 million of letters of credit and an $8.6 million surety bond line outstanding.
Important facts for investors to verify
- Progress and final financing terms for the $3.2 billion Larry H. Miller and Total Care Auto transaction, including closing conditions, integration and resulting leverage.
- Whether new-vehicle supply recovers from approximately 12 days of quarter-end inventory and how any recovery affects unusually strong vehicle margins and used-vehicle demand.
- The sustainability of operating cash flow, considering the substantial inventory-related working-capital contribution and the difference between reported and adjusted operating cash flow.
- Debt, covenant headroom, floating-rate exposure and liquidity after planned acquisitions; management estimated a 100-basis-point rate change could affect annual interest expense by up to $1.0 million on the specified variable-rate debt.
- Actual 2021 capital expenditures and tax rate against management’s stated expectations, and any material developments in contingencies or acquisition commitments.