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ABG > SEC Filings for ABG > Form 10-K on 25-Feb-2014All Recent SEC Filings

Show all filings for ASBURY AUTOMOTIVE GROUP INC

Form 10-K for ASBURY AUTOMOTIVE GROUP INC


25-Feb-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW
We are one of the largest automotive retailers in the United States, operating 100 franchises (80 dealership locations) in 18 metropolitan markets within 10 states as of December 31, 2013. We offer an extensive range of automotive products and services, including new and used vehicles; vehicle maintenance, replacement parts and collision repair services; and financing, insurance and service contracts. As of December 31, 2013, we offered 29 domestic and foreign brands of new vehicles. Our current brand mix is weighted 86% towards luxury and mid-line import brands, with the remaining 14% consisting of domestic brands. We also operate 24 collision repair centers that serve customers in our local markets.
Our retail network is made up of dealerships operating primarily under the following locally-branded dealership groups:

Coggin dealerships, operating primarily in Jacksonville, Fort Pierce and Orlando, Florida;

Courtesy dealerships operating in Tampa, Florida;

Crown dealerships operating in New Jersey, North Carolina, South Carolina and Virginia;

Nalley dealerships operating in metropolitan Atlanta, Georgia;

McDavid dealerships operating in Austin, Dallas and Houston, Texas;

North Point dealerships operating in the Little Rock, Arkansas area;

Plaza dealerships operating in metropolitan St. Louis, Missouri; and

Gray-Daniels dealerships operating in the Jackson, Mississippi area.

Our revenues are derived primarily from: (i) the sale of new vehicles to individual retail customers ("new vehicle retail") and commercial customers ("fleet") (the terms "new vehicle retail" and "fleet" being together referred to as "new"); (ii) the sale of used vehicles to individual retail customers ("used retail") and to other dealers at auction ("wholesale") (the terms "used retail" and "wholesale" being together referred to as "used"); (iii) maintenance and collision repair services and the sale of automotive parts (together referred to as "parts and service"); and (iv) the arrangement of vehicle financing and the sale of a number of aftermarket products, such as insurance and service contracts (collectively referred to as "F&I"). We evaluate the results of our new and used vehicle sales based on unit volumes and gross profit per vehicle sold, our parts and service operations based on aggregate gross profit, and F&I based on dealership generated F&I gross profit per vehicle sold. We assess the organic growth of our revenue and gross profit by comparing the year-to-year results of stores that we have operated for at least twelve full months ("same store").
Our organic growth is dependent upon the execution of our balanced automotive retailing and service business strategy, the continued strength of our brand mix and the production of desirable vehicles by automobile manufacturers whose brands we sell. Our vehicle sales have historically fluctuated with product availability as well as local and national economic conditions, including consumer confidence, availability of consumer credit, fuel prices and employment levels. We believe that the impact on our business of any future negative trends in new vehicle sales would be partially mitigated by (i) the expected relative stability of our parts and service operations over the long-term, (ii) the variable nature of significant components of our cost structure and (iii) our brand mix. Historically, our brand mix has been less affected by market volatility than the U.S. automobile industry as a whole. We believe that our new vehicle revenue brand mix, which included approximately 48% of revenue from mid-line import brands and 38% of revenue from luxury brands for 2013, is well positioned for growth over the long term.

Our operating results are generally subject to changes in the economic environment as well as seasonal variations. Historically, we have generated more revenue and operating income in the second and third quarters than in the first and fourth quarters of the calendar year. Generally, the seasonal variations in our operations are caused by factors related to weather conditions, changes in manufacturer incentive programs, model changeovers and consumer buying patterns, among other things.
Our gross profit margin varies with our revenue mix. The sale of new vehicles generally results in lower gross profit margin than used vehicle sales and sales of parts and service. As a result, when used vehicle and parts and service revenue increase as a percentage of total revenue, we expect our overall gross profit margin to increase.
Selling, general and administrative ("SG&A") expenses consist primarily of fixed and incentive-based compensation, advertising, rent, insurance, utilities and other customary operating expenses. A significant portion of our cost structure is variable (such as sales commissions), or controllable (such as advertising), generally allowing us to adapt to changes in the retail environment over the long-term. We evaluate commissions paid to salespeople as a percentage of retail vehicle gross


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profit and all other SG&A expenses in the aggregate as a percentage of total gross profit, with the exception of advertising expense, which we evaluate on a per vehicle retailed ("PVR") basis.

The United States automotive retail market showed continued improvement in 2013, with new vehicle SAAR increasing to 15.6 million as compared to 14.5 million in 2012. We continued to benefit from improving economic conditions in 2013, which we attribute to improved consumer confidence, the continued availability of credit at terms favorable to consumers resulting primarily from the current low interest rate environment, gradually improving unemployment, stable fuel prices and the increasing age of the U.S. automotive fleet. We believe that the overall economic recovery will continue to be fragile, and may be subject to further changes based on consumer confidence, interest rates, unemployment levels and other macro-economic factors as the long-term prospects for, and the timing of, a return to a stronger economy continue to be difficult to predict. We had total available liquidity of $281.4 million as of December 31, 2013, which consisted of cash and cash equivalents of $5.4 million, borrowing availability of $231.7 million under our revolving credit facilities and $44.3 million of availability under our floor plan offset account. For further discussion of our liquidity, please refer to "Liquidity and Capital Resources" below.


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RESULTS OF OPERATIONS

The Year Ended December 31, 2013 Compared to the Year Ended December 31, 2012

                                              For the Year Ended December 31,         Increase          %
                                                 2013                 2012           (Decrease)       Change
                                                      (Dollars in millions, except per share data)
REVENUES:
New vehicle                               $       2,952.2       $       2,608.3     $     343.9          13  %
Used vehicle                                      1,564.2               1,301.6           262.6          20  %
Parts and service                                   611.6                 565.3            46.3           8  %
Finance and insurance, net                          206.9                 166.6            40.3          24  %
Total revenues                                    5,334.9               4,641.8           693.1          15  %
GROSS PROFIT:
New vehicle                                         181.3                 166.5            14.8           9  %
Used vehicle                                        120.1                 104.1            16.0          15  %
Parts and service                                   369.2                 327.8            41.4          13  %
Finance and insurance, net                          206.9                 166.6            40.3          24  %
Total gross profit                                  877.5                 765.0           112.5          15  %
OPERATING EXPENSES:
Selling, general and administrative                 619.3                 556.1            63.2          11  %
Depreciation and amortization                        24.3                  22.6             1.7           8  %
Other operating expense, net                          7.8                   0.4             7.4          NM
Income from operations                              226.1                 185.9            40.2          22  %
OTHER EXPENSES:
Floor plan interest expense                         (12.5 )               (11.6 )           0.9           8  %
Other interest expense, net                         (39.0 )               (35.6 )           3.4          10  %
Swap interest expense                                (2.5 )                (5.0 )          (2.5 )       (50 )%
Convertible debt discount amortization                  -                  (0.4 )          (0.4 )       100  %
Loss on extinguishment of long-term debt             (6.8 )                   -             6.8          NM
Total other expense, net                            (60.8 )               (52.6 )           8.2          16  %
Income before income taxes                          165.3                 133.3            32.0          24  %
INCOME TAX EXPENSE                                   64.2                  50.0            14.2          28  %
INCOME FROM CONTINUING OPERATIONS                   101.1                  83.3            17.8          21  %
DISCONTINUED OPERATIONS, net of tax                   8.0                  (1.1 )           9.1          NM
NET INCOME                                $         109.1       $          82.2     $      26.9          33  %
Income from continuing operations per
common share-Diluted                      $          3.25       $          2.64     $      0.61          23  %
Net income per common share-Diluted       $          3.51       $          2.61     $      0.90          34  %


______________________________
NM-Not Meaningful


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                                                For the Year Ended December 31,
                                                    2013                 2012
REVENUE MIX PERCENTAGES:
New vehicles                                         55.3  %               56.2  %
Used retail vehicles                                 25.8  %               23.7  %
Used vehicle wholesale                                3.5  %                4.3  %
Parts and service                                    11.5  %               12.2  %
Finance and insurance, net                            3.9  %                3.6  %
Total revenue                                       100.0  %              100.0  %
GROSS PROFIT MIX PERCENTAGES:
New vehicles                                         20.7  %               21.8  %
Used retail vehicles                                 13.8  %               13.7  %
Used vehicle wholesale                               (0.2 )%               (0.1 )%
Parts and service                                    42.1  %               42.8  %
Finance and insurance, net                           23.6  %               21.8  %
Total gross profit                                  100.0  %              100.0  %
SG&A EXPENSES AS A PERCENTAGE OF GROSS PROFIT        70.6  %               72.7  %

Net income and income from continuing operations increased by $26.9 million (33%) and $17.8 million (21%), respectively, during 2013 as compared to 2012. The increase in income from continuing operations was primarily the result of a $112.5 million (15%) increase in gross profit, which was partially offset by (i) a $63.2 million (11%) increase in SG&A expenses, (ii) a $6.8 million loss on the redemption of our 7.625% Senior Subordinated Notes due 2017 (the "7.625% Notes") and (iii) a $7.4 million increase in other operating expenses due primarily to real estate related charges. Net income for 2013 was positively impacted by the sale of one franchise (one dealership location), which resulted in an $8.9 million net-of-tax gain, which is included in discontinued operations, net. Gross profit increased across all four of our business lines and was driven by
(i) a $41.4 million (13%) increase in parts and service gross profit, (ii) a $40.3 million (24%) increase in F&I gross profit, (iii) a $16.0 million (15%) increase in used vehicle gross profit and (iv) a $14.8 million (9%) increase in new vehicle gross profit. Our total gross profit margin decreased 10 basis points to 16.4%, primarily as a result of (i) a 30 basis point decrease in our same store new vehicle retail gross margin and (ii) a 60 basis point decrease in our same store used vehicle retail gross margin, which was partially offset by a 240 basis point increase in our same store parts and service gross margin. The $693.1 million (15%) increase in total revenue was primarily a result of (i) a $343.9 million (13%) increase in new vehicle revenue and (ii) a $262.6 million (20%) increase in used vehicle revenue.


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New Vehicle-
                                              For the Year Ended December 31,       Increase           %
                                                    2013              2012         (Decrease)        Change
                                                    (Dollars in millions, except for per vehicle data)
Revenue:
New vehicle revenue-same store(1)
Luxury                                       $        1,097.3     $    963.6     $       133.7          14  %
Mid-line import                                       1,384.0        1,270.4             113.6           9  %
Mid-line domestic                                       407.1          374.3              32.8           9  %
Total new vehicle revenue-same store(1)               2,888.4        2,608.3             280.1          11  %
New vehicle revenue-acquisitions                         63.8              -
New vehicle revenue, as reported             $        2,952.2     $  2,608.3     $       343.9          13  %
Gross profit:
New vehicle gross profit-same store(1)
Luxury                                       $           79.5     $     73.4     $         6.1           8  %
Mid-line import                                          71.3           67.9               3.4           5  %
Mid-line domestic                                        26.5           25.2               1.3           5  %
Total new vehicle gross profit-same store(1)            177.3          166.5              10.8           6  %
New vehicle gross profit-acquisitions                     4.0              -
New vehicle gross profit, as reported        $          181.3     $    166.5     $        14.8           9  %

                                              For the Year Ended December 31,       Increase           %
                                                    2013              2012         (Decrease)        Change
New vehicle units:
New vehicle retail units-same store(1)
Luxury                                                 21,994         19,429             2,565          13  %
Mid-line import                                        51,632         48,136             3,496           7  %
Mid-line domestic                                      11,082         10,147               935           9  %
Total new vehicle retail units-same store(1)           84,708         77,712             6,996           9  %
Fleet vehicles                                          1,258          2,365            (1,107 )       (47 )%
Total new vehicle units-same store(1)                  85,966         80,077             5,889           7  %
New vehicle units-acquisitions                          1,993              -
New vehicle units-actual                               87,959         80,077             7,882          10  %



New Vehicle Metrics-
                                                   For the Year Ended December 31,                                    %
                                                      2013                 2012          Increase (Decrease)       Change
Revenue per new vehicle sold-same store(1)      $       33,599       $       32,572     $          1,027               3  %
Gross profit per new vehicle sold-same store(1) $        2,062       $        2,079     $            (17 )            (1 )%
New vehicle gross margin-same store(1)                     6.1 %                6.4 %               (0.3 )%           (5 )%


______________________________


(1) Same store amounts consist of information from dealerships for the identical months of each period presented in the comparison, commencing with the first full month in which the dealership was owned by us.

The $343.9 million (13%) increase in new vehicle revenue was primarily a result of a 7% increase in same store new vehicle unit sales, combined with a 3% increase in same store revenue per new vehicle sold. Our total new vehicle revenue also benefited from $63.8 million derived from acquisitions. Same store unit volumes for our luxury, mid-line import and domestic brands increased 13%, 7%, and 9%, respectively, reflecting (i) a general increase in consumer demand,
(ii) the continued availability of credit at terms favorable to our customers and (iii) an improvement in the availability of new vehicle inventory


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from which to choose. New vehicle SAAR increased by 8% to 15.6 million in 2013 as compared to 14.5 million in 2012, which contributed to the unit volume increases in each of our three brand segments.
Total new vehicle gross profit increased by $14.8 million (9%), driven by the 7% increase in same store new vehicle unit sales as well as $4.0 million in gross profit derived from acquisitions. Partially offsetting these increases was a 30 basis point (5%) decrease in our same store new vehicle gross profit margin. Our same store gross profit per new vehicle sold decreased by $17 (1%) overall, largely driven by our luxury brands. Our margins in the near future are expected to be primarily dependent upon market-based forces of supply and demand.

Used Vehicle-
                                               For the Year Ended December 31,             Increase            %
                                                  2013                  2012              (Decrease)        Change
                                                       (Dollars in millions, except for per vehicle data)
Revenue:
Used vehicle retail revenues-same store(1) $       1,340.3       $       1,102.0       $      238.3            22  %
Used vehicle retail revenues-acquisitions             34.6                     -
Total used vehicle retail revenues                 1,374.9               1,102.0              272.9            25  %

Used vehicle wholesale revenues-same
store(1)                                             186.3                 199.6              (13.3 )          (7 )%
Used vehicle wholesale
revenues-acquisitions                                  3.0                     -
Total used vehicle wholesale revenues                189.3                 199.6              (10.3 )          (5 )%
Used vehicle revenue, as reported          $       1,564.2       $       1,301.6       $      262.6            20  %
Gross profit:
Used vehicle retail gross profit-same
store(1)                                   $         119.9       $         104.5       $       15.4            15  %
Used vehicle retail gross
profit-acquisitions                                    2.2                     -
Total used vehicle retail gross profit               122.1                 104.5               17.6            17  %

Used vehicle wholesale gross profit-same
store(1)                                              (2.0 )                (0.4 )             (1.6 )          NM
Used vehicle wholesale gross
profit-acquisitions                                      -                     -
Total used vehicle wholesale gross profit             (2.0 )                (0.4 )             (1.6 )          NM
Used vehicle gross profit, as reported     $         120.1       $         104.1       $       16.0            15  %
Used vehicle retail units:
Used vehicle retail units-same store(1)             67,768                57,434             10,334            18  %
Used vehicle retail units-acquisitions               1,686                     -
Used vehicle retail units-actual                    69,454                57,434             12,020            21  %



Used Vehicle Metrics-
                                               For the Year Ended December 31,                                     %
                                                  2013                 2012           Increase (Decrease)       Change
Revenue per used vehicle retailed-same
store(1)                                    $       19,778       $       19,187     $           591                 3  %
Gross profit per used vehicle retailed-same
store(1)                                    $        1,769       $        1,819     $           (50 )              (3 )%
Used vehicle retail gross margin-same

store(1) 8.9 % 9.5 % (0.6 )% (6 )%



(1) Same store amounts consist of information from dealerships for the identical months of each period presented in the comparison, commencing with the first full month in which the dealership was owned by us.

NM-Not Meaningful

The $262.6 million (20%) increase in used vehicle revenue was the result of an 18% increase in same store used vehicle retail unit sales, a 3% increase in same store revenue per used vehicle retailed and $37.6 million derived from acquisitions. These increases were partially offset by a $10.3 million (5%) decrease in used vehicle wholesale revenue. The 18% increase in


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same store used vehicle retail unit sales reflects increased consumer demand, the continued availability of credit at terms favorable to the customer and the ongoing impact of our "Asbury 1-2-1" program, a volume-driven initiative with a goal of retailing one used vehicle for every new vehicle retailed. This program is designed to drive not only used retail volume, but to increase revenues from associated parts and service reconditioning and F&I as well.
The $17.6 million (17%) increase in used vehicle retail gross profit was driven primarily by higher unit volumes, partially offset by a 60 basis point decrease in our same store used vehicle retail gross margin. The decrease in our same store used vehicle gross margin can be partially attributed to margin pressures created by the general increase in the supply of used vehicles as a result of customer trade-ins and vehicles coming off lease. During 2013, we also increased our focus on selling more used vehicles as retail units instead of wholesale units as a result of our ongoing Asbury 1-2-1 program, which primarily accounts for the $13.3 million (7%) decrease in same store wholesale revenue. We believe that our used vehicle inventory continues to be well-aligned with current consumer demand, with approximately 38 days of supply in our inventory as of December 31, 2013.

Parts and Service-
                                                 For the Year Ended December 31,          Increase         %
                                                   2013                   2012           (Decrease)      Change
                                                                    (Dollars in millions)
Revenue:
Parts and service revenue-same store(1)     $         600.3         $         565.3     $     35.0           6 %
Parts and service revenues-acquisitions                11.3                       -
Parts and service revenue, as reported      $         611.6         $         565.3     $     46.3           8 %

Gross profit:
Parts and service gross profit-same
store(1)
Customer pay                                $         211.9         $         202.8     $      9.1           4 %
Reconditioning and preparation                         83.2                    66.9           16.3          24 %
Warranty                                               47.7                    39.0            8.7          22 %
Wholesale parts                                        19.5                    19.1            0.4           2 %
Total parts and service gross profit-same
store(1)                                              362.3                   327.8           34.5          11 %
Parts and service gross profit-acquisitions             6.9                       -
Parts and service gross profit, as reported $         369.2         $         327.8     $     41.4          13 %
Parts and service gross margin-same
store(1)                                               60.4 %                  58.0 %          2.4 %         4 %


______________________________


(1) Same store amounts consist of information from dealerships for the identical months of each period presented in the comparison, commencing with the first full month in which the dealership was owned by us.

The $46.3 million (8%) increase in parts and service revenue was primarily due to (i) an $18.4 million (5%) increase in same store customer pay revenue, (ii) a $13.0 million (16%) increase in same store warranty revenue and (iii) $11.3 million derived from acquisitions. The 240 basis point increase in our same store parts and service gross margin was primarily the result of increases in our higher margin parts and service businesses, including a 24% increase in gross profit from reconditioning and preparation of vehicles, a 22% increase in warranty gross profit and a 4% increase in our customer pay parts and service gross profit. The $16.3 million increase in reconditioning and preparation gross profit was primarily driven by an 18% increase in our same store used vehicle retail unit sales and a 7% increase in our same store new vehicle retail unit sales. Gross profit associated with warranty work increased by $8.7 million (22%), partially due to certain manufacturer recalls that occurred during 2013, as well as increased units in operation as sales of new vehicles in the United States have continued to increase over the past few years.

We continue to focus on increasing our parts and service revenue, and specifically our customer pay business, over the long-term by (i) continuing to invest in additional service capacity, where appropriate, (ii) upgrading equipment, (iii) focusing on improving customer retention and customer satisfaction and (iv) capitalizing on our dealer training programs.


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Finance and Insurance, net-
                                           For the Year Ended December 31,      Increase          %
                                                  2013             2012        (Decrease)       Change
                                                (Dollars in millions, except for per vehicle data)
. . .
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