Asbury Automotive Group(ABG) - 2020 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION This section provides the unaudited condensed consolidated financial statements for Asbury Automotive Group, Inc. as of March 31, 2020, and for the three-month period then ended, along with management's discussion and analysis of financial condition and results of operations Item 1. Condensed Consolidated Financial Statements This section presents the unaudited condensed consolidated financial statements for Asbury Automotive Group, Inc. as of March 31, 2020, and for the three-month period then ended, including balance sheets, statements of income, comprehensive income, shareholders' equity, and cash flows, along with accompanying notes Condensed Consolidated Balance Sheets The balance sheet as of March 31, 2020, shows a significant increase in cash and cash equivalents to $388.6 million from $3.5 million at year-end 2019, primarily driven by increased borrowings. Total assets grew to $3.07 billion, while long-term debt also increased substantially to $1.12 billion Condensed Consolidated Balance Sheet Highlights (in millions) | Balance Sheet Item | March 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $388.6 | $3.5 | | Inventories | $1,059.7 | $985.0 | | Total current assets | $1,753.2 | $1,602.6 | | Total assets | $3,069.2 | $2,911.3 | | Liabilities & Equity | | | | Total current liabilities | $1,181.9 | $1,247.0 | | Long-term debt | $1,117.5 | $907.0 | | Total liabilities | $2,408.3 | $2,265.0 | | Total shareholders' equity | $660.9 | $646.3 | Condensed Consolidated Statements of Income For the first quarter of 2020, total revenues decreased by 3.8% to $1.61 billion compared to the same period in 2019. Net income saw a significant drop of 52.3% to $19.5 million, largely due to a $23.0 million franchise rights impairment charge and a $20.6 million loss on debt extinguishment, partially offset by a $33.7 million gain on dealership divestitures Q1 2020 vs Q1 2019 Income Statement (in millions, except per share data) | Metric | Q1 2020 | Q1 2019 | | :--- | :--- | :--- | | Total Revenue | $1,607.3 | $1,670.8 | | Gross Profit | $272.4 | $279.2 | | Income from Operations | $35.0 | $77.8 | | Franchise rights impairment | $23.0 | $0.0 | | Loss on extinguishment of long-term debt, net | $20.6 | $0.0 | | Gain on dealership divestitures, net | $(33.7) | $0.0 | | Net Income | $19.5 | $40.9 | | Diluted EPS | $1.01 | $2.11 | Condensed Consolidated Statements of Cash Flows For the three months ended March 31, 2020, net cash from operating activities nearly doubled to $127.7 million from $65.2 million in the prior year period. Investing activities provided $45.2 million in cash, a reversal from a $127.0 million use of cash in 2019, mainly due to proceeds from divestitures. Financing activities provided $212.2 million, primarily from new debt proceeds used for debt redemption and to bolster liquidity Cash Flow Summary (in millions) | Cash Flow Activity | Q1 2020 | Q1 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $127.7 | $65.2 | | Net cash provided by (used in) investing activities | $45.2 | $(127.0) | | Net cash provided by financing activities | $212.2 | $64.4 | | Net increase in cash and cash equivalents | $385.1 | $2.6 | Notes to Condensed Consolidated Financial Statements The notes provide details on significant accounting policies, acquisitions and divestitures, debt refinancing, and the impact of COVID-19. Key events include the acquisition of three franchises in Denver, the divestiture of seven franchises, the termination of the Park Place acquisition, a $23.0 million franchise rights impairment charge, and significant debt restructuring - As of March 31, 2020, the company operated 102 new vehicle franchises across 83 dealership locations and 24 collision centers The new vehicle revenue mix was 43% imports, 34% luxury, and 23% domestic[14] - In Q1 2020, the company acquired three franchises in Denver for $63.6 million and sold seven franchises in Georgia and Mississippi, recording a pre-tax gain of $33.7 million[37][42] - The company terminated the planned acquisition of Park Place Dealerships on March 24, 2020, resulting in a $10.0 million liquidated damages payment, recorded as an operating expense[44] - Due to the adverse impact of the COVID-19 pandemic, the company performed impairment tests and recognized a $23.0 million pre-tax non-cash impairment charge on certain franchise rights[52][57] - The company redeemed its $600 million 6.00% Notes due 2024, incurring a $19.1 million loss on extinguishment It also issued new 4.50% Notes due 2028 and 4.75% Notes due 2030, and subsequently completed a special mandatory redemption of a portion of these new notes following the termination of the Park Place acquisition[65][66][68] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the significant negative impact of the COVID-19 pandemic on Q1 2020 results, particularly in late March. The report details a 4% decline in total revenue and a 52% drop in net income year-over-year. Key events analyzed include a franchise rights impairment, a gain on divestitures, and major debt refinancing. The company also outlines its response to the pandemic, including cost-cutting measures and actions to enhance liquidity, such as drawing down on credit facilities Impact of COVID-19 and Company Response The COVID-19 pandemic severely impacted business operations in late March, causing significant declines in vehicle sales and service traffic. In response, management furloughed approximately 2,300 employees, reduced store hours, implemented temporary pay reductions, and suspended the 401(k) match. To preserve liquidity, the company also reduced marketing expenses, deferred capital expenditures, and drew down an additional $237 million from its Revolving Credit Facility and $110 million from its Used Vehicle Floor Plan Facility - The pandemic led to significant declines in new and used vehicle sales in late March, with the new vehicle SAAR for the month dropping to 11.4 million[112][119] - In response to the downturn, the company took actions including furloughing ~2,300 employees, reducing pay for all employees and directors, and suspending the 401(k) match[113] - As a precautionary measure, the company borrowed an additional $237 million under its Revolving Credit Facility and $110 million under its Used Vehicle Floor Plan Facility[116] - A $23.0 million non-cash impairment charge was recorded on intangible manufacturer franchise rights due to the pandemic's impact[115] Results of Operations Q1 2020 total revenue decreased 4% to $1.61 billion, while gross profit fell 2% to $272.4 million. New vehicle revenue dropped 6% on a 9% unit decline, though gross profit per unit increased. Used vehicle revenue fell 3%, with gross profit down 11%. Parts and service revenue grew 2%, but gross profit was flat. SG&A expenses increased to 71.5% of gross profit, up from 68.4% in the prior year, reflecting the decline in gross profit Revenue by Segment (in millions) | Segment | Q1 2020 | Q1 2019 | % Change | | :--- | :--- | :--- | :--- | | New vehicle | $822.1 | $871.8 | (6)% | | Used vehicle | $493.2 | $509.9 | (3)% | | Parts and service | $221.6 | $217.6 | 2% | | Finance and insurance, net | $70.4 | $71.5 | (2)% | | Total Revenue | $1,607.3 | $1,670.8 | (4)% | Gross Profit by Segment (in millions) | Segment | Q1 2020 | Q1 2019 | % Change | | :--- | :--- | :--- | :--- | | New vehicle | $36.4 | $37.9 | (4)% | | Used vehicle | $30.7 | $34.5 | (11)% | | Parts and service | $134.9 | $135.3 | —% | | Finance and insurance, net | $70.4 | $71.5 | (2)% | | Total Gross Profit | $272.4 | $279.2 | (2)% | - SG&A as a percentage of gross profit increased by 310 basis points to 71.5%, primarily due to the decline in gross profit caused by the COVID-19 pandemic[141] - Other operating expense of $10.2 million included an $11.6 million charge related to the terminated Park Place acquisition[143] Liquidity and Capital Resources As of March 31, 2020, the company had total available liquidity of $581.1 million, consisting of $388.6 million in cash, $180.0 million in floor plan offset accounts, and $12.5 million in credit facility availability. The company terminated the Park Place acquisition, leading to a partial redemption of newly issued senior notes. Cash flow from operations increased to $127.7 million, and the company believes it has sufficient liquidity for the next twelve months - Total available liquidity was $581.1 million as of March 31, 2020, composed of cash, floor plan offset funds, and used vehicle facility availability[147] - The company terminated the Park Place acquisition and, as a result, conducted a special mandatory redemption of $245.0 million of its 2028 Notes and $280.0 million of its 2030 Notes[149][150] - Net cash provided by operating activities increased to $127.7 million for Q1 2020, compared to $65.2 million in Q1 2019[182] - The company did not repurchase any shares under its Repurchase Program in Q1 2020 It had $66.3 million remaining under the authorization as of March 31, 2020[175] Quantitative and Qualitative Disclosures About Market Risk The company is primarily exposed to interest rate risk on its variable-rate debt, which totaled $1.18 billion as of March 31, 2020. A 100 basis point change in interest rates could alter annual interest expense by approximately $11.8 million. To mitigate this risk, the company utilizes two interest rate swap agreements with a combined notional value of $130.3 million - The company has significant exposure to interest rate changes on $1.18 billion of variable-rate debt, including floor plan notes[195] - A hypothetical 100 basis point (1%) change in interest rates would result in an estimated $11.8 million change to annual interest expense[195] - The company uses two interest rate swap agreements to hedge against variable rate cash flow fluctuations, with notional values of $78.5 million and $51.8 million as of March 31, 2020[198][199] Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of March 31, 2020. There were no changes in internal control over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, these controls - The principal executive officer and principal financial officer concluded that disclosure controls and procedures were effective as of the end of the period[201] - No changes in internal control over financial reporting occurred during the quarter ended March 31, 2020, that materially affected or are likely to materially affect the company's internal controls[202] PART II. OTHER INFORMATION This section covers legal proceedings, risk factors, equity security sales, mine safety disclosures, and a list of exhibits filed with the report Legal Proceedings The company is involved in various routine claims and legal proceedings arising from its business operations. Management evaluates these claims and establishes reserves when losses are probable and estimable. Currently, the company does not anticipate that any known claim will have a material adverse effect on its financial condition, liquidity, or results of operations - The company is subject to various claims from its business, including audits by manufacturers and lenders, and litigation related to employment, financing, and other matters[203] - Management does not currently expect any known claim to materially and adversely affect the company's financial condition, liquidity, or results of operations[204] Risk Factors This section highlights that the COVID-19 global pandemic is a material risk factor expected to continue adversely impacting the business. The pandemic has disrupted operations, reduced consumer demand, and affected supply chains. It led to a franchise rights impairment charge in Q1 2020 and may result in additional charges. The full extent of the impact remains uncertain and depends on the pandemic's duration and severity - The COVID-19 global pandemic is identified as a significant risk factor with an expected continued material adverse impact on business, financial condition, and results of operations[206] - Risks include operational disruptions from 'shelter in place' orders, reduced consumer spending due to unemployment and fear, and supply chain interruptions from manufacturer production slowdowns[208][209][211] - The pandemic's impact on profitability and market capitalization increases the risk of future impairment charges, following the $23.0 million charge recorded in Q1 2020[212] Unregistered Sales of Equity Securities and Use of Proceeds During the first quarter of 2020, the company did not repurchase any shares of its common stock under its formal Repurchase Program. However, it did repurchase 53,915 shares for $5.0 million from employees to settle tax obligations related to equity-based awards. As of March 31, 2020, $66.3 million remained authorized for future repurchases under the program - No shares were repurchased under the formal Repurchase Program during the three months ended March 31, 2020[215] - The company repurchased 53,915 shares for $5.0 million from employees in connection with net share settlements of equity awards[215] - As of March 31, 2020, the company had $66.3 million remaining under its share repurchase authorization[215] Mine Safety Disclosures This item is not applicable to the company - Not applicable[216] Exhibits This section lists the exhibits filed with the Form 10-Q, including indentures for new senior notes, credit agreements, officer certifications required by the Sarbanes-Oxley Act, and XBRL data files - Lists various agreements and certifications filed as exhibits, including indentures for the 2028 and 2030 Senior Notes, credit agreements, and Sarbanes-Oxley certifications[218][223]