Asbury Automotive Group, Inc. — Q2 2017 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2017; comparisons are with the three and six months ended June 30, 2016. Asbury operated 96 new-vehicle franchises at 80 dealership locations, 24 collision centers, and two standalone used-vehicle stores across nine states. It reported 29 vehicle brands.
Key financial metrics
- Q2 revenue: $1.632 billion, up $4.4 million (less than 1%). New-vehicle revenue fell 2%; used-vehicle, parts and service, and finance and insurance (F&I) revenue rose 2%, 3%, and 6%, respectively.
- Q2 profitability: Gross profit was $267.1 million, down $0.5 million; gross margin was 16.4%, unchanged. Operating income decreased 8% to $71.6 million. Net income fell 13% to $31.9 million; diluted EPS was $1.52 versus $1.65.
- Six-month results: Revenue was $3.184 billion, up less than 1%; gross profit was $527.2 million, down $1.2 million, with margin unchanged at 16.6%. Operating income fell 2% to $143.9 million and net income fell 3% to $65.9 million. Diluted EPS increased 7% to $3.12, alongside a decline in diluted weighted-average shares to 21.1 million from 23.3 million.
- Cash flow, six months: GAAP operating cash flow was $118.3 million versus $69.8 million. Investing used $91.9 million, including $80.1 million for acquisitions; financing used $27.1 million. Cash ended at $2.7 million. Management’s non-GAAP “cash provided by operating activities, as adjusted” was $108.0 million, compared with $223.7 million; management cited inventory and working-capital changes as key reasons for the decline.
- Liquidity and debt: Total available liquidity was $355.4 million, including credit-facility availability and floor-plan offset funds. Long-term debt, including current maturities, was $919.4 million. Floor-plan debt, net, was $820.7 million ($129.4 million trade and $691.3 million non-trade). Cash was low relative to these obligations; liquidity relies substantially on revolving and floor-plan facilities.
- Other balance-sheet items: Total assets were $2.367 billion and shareholders’ equity $318.1 million at June 30, 2017. Inventory was $930.4 million, up from $894.9 million at year-end 2016.
Material changes versus prior comparable periods
- Q2 new-vehicle gross profit declined 14% to $41.0 million; same-store gross profit per new vehicle fell 13% to $1,625. Management attributed pressure to higher industry inventory, manufacturer incentives, and a less favorable sales mix. U.S. new-vehicle SAAR was 16.7 million, versus 17.1 million a year earlier.
- Used-vehicle revenue grew, but Q2 used-vehicle gross profit declined 4%; same-store used retail gross margin fell 90 basis points to 7.5%. Management cited increased off-lease supply and new-vehicle incentive pressure.
- Parts and service and F&I provided offsets. Q2 parts and service gross profit rose 3%; F&I revenue rose 6%, benefiting in part from accelerated commissions under an amended underwriter agreement effective in Q4 2016.
- SG&A rose to 69.5% of Q2 gross profit from 68.1%; for the first half it was 69.6% versus 68.8%. Management cited employee benefit costs and technology-related outside services.
Outlook, risks, contingencies, and unusual items
- Management expected approximately $50 million of 2017 capital expenditures and stated it believed liquidity would be sufficient for at least the next 12 months. No earnings or revenue guidance was provided.
- Management expected the effective tax rate to approximate 38% in the remaining quarters of 2017; the first-half rate was 37%, partly reflecting adoption of share-based compensation accounting guidance.
- Interest-rate exposure: $806.6 million of variable-rate debt; a 100-basis-point rate change could affect annual interest expense by as much as $8.1 million. Interest-rate swaps hedge a portion of exposure.
- Key risks include economic and vehicle-demand changes, competitive pricing and margin pressure, manufacturer incentives and franchise relationships, consumer credit availability, interest rates, debt covenant compliance, vehicle supply disruptions, regulation, litigation, and access to financing. The company reported covenant compliance at June 30, 2017.
- Unusual items included a $2.9 million lease-termination expense in the first half, partly offset by $0.8 million of other income and a $0.9 million legal-settlement gain. The company acquired two franchises, two dealership locations, and one collision center in Indianapolis for $80.1 million. It repurchased 493,996 shares under its program for $29.7 million in the first half, with $58.4 million of authorization remaining.
- Management reported no known claims expected to materially affect results, but cautioned that unfavorable outcomes could have a material effect. Letters of credit outstanding were $13.3 million; a $5.0 million surety bond line was also maintained.
Important facts for investors to verify
- Whether new- and used-vehicle gross-profit pressure and lower margins persist, and how manufacturer incentives and inventory levels evolve.
- How recurring F&I performance compares with the benefit from accelerated commissions under the amended underwriter agreement.
- Cash generation after acquisitions, buybacks, and capital expenditures; reconcile GAAP operating cash flow with management’s adjusted non-GAAP measure.
- Available borrowing capacity, floor-plan financing terms, variable-rate exposure, and compliance with debt covenants.
- Final purchase-price allocation and performance of the Indianapolis acquisition, and execution of the expected 2017 capital-spending plan.