Asbury Automotive Group(ABG) - 2020 Q3 - Quarterly Report

PART I—Financial Information Condensed Consolidated Financial Statements (unaudited) The unaudited condensed consolidated financial statements for the period ended September 30, 2020, reflect significant asset growth, increased net income, and the impact of a franchise rights impairment charge Condensed Consolidated Balance Sheets Balance Sheet Highlights (in millions) | Account | Sep 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Total Current Assets | $1,298.0 | $1,602.6 | | Goodwill | $888.6 | $201.7 | | Total Assets | $3,530.6 | $2,911.3 | | Total Current Liabilities | $1,212.7 | $1,247.0 | | Long-Term Debt | $1,174.1 | $907.0 | | Total Liabilities | $2,718.7 | $2,265.0 | | Total Shareholders' Equity | $811.9 | $646.3 | - Goodwill significantly increased from $201.7 million at year-end 2019 to $888.6 million as of September 30, 2020, primarily due to acquisitions[5] Condensed Consolidated Statements of Income Q3 2020 vs Q3 2019 Performance (in millions, except EPS) | Metric | Q3 2020 | Q3 2019 | Change | | :--- | :--- | :--- | :--- | | Total Revenue | $1,845.4 | $1,842.0 | +0.2% | | Gross Profit | $335.9 | $293.1 | +14.6% | | Income from Operations | $119.1 | $82.2 | +44.9% | | Net Income | $96.2 | $45.0 | +113.8% | | Diluted EPS | $4.96 | $2.33 | +112.9% | Nine Months 2020 vs 2019 Performance (in millions, except EPS) | Metric | Nine Months 2020 | Nine Months 2019 | Change | | :--- | :--- | :--- | :--- | | Total Revenue | $4,897.8 | $5,316.3 | -7.9% | | Gross Profit | $851.1 | $867.3 | -1.9% | | Income from Operations | $236.3 | $245.9 | -3.9% | | Net Income | $165.3 | $140.8 | +17.4% | | Diluted EPS | $8.56 | $7.30 | +17.3% | - A pre-tax gain on dealership divestitures of $58.4 million was recognized in the first nine months of 2020, significantly contributing to net income[7] - A franchise rights impairment charge of $23.0 million was recorded in the first nine months of 2020, impacting income from operations[7] Condensed Consolidated Statements of Cash Flows Cash Flow Summary for Nine Months Ended Sep 30 (in millions) | Cash Flow Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $625.2 | $347.7 | | Net cash used in investing activities | ($818.1) | ($206.2) | | Net cash provided by (used in) financing activities | $193.5 | ($148.0) | - Cash used in investing activities increased significantly to $818.1 million, primarily due to acquisitions totaling $954.1 million, partially offset by proceeds from divestitures of $161.6 million[14] Notes to Condensed Consolidated Financial Statements - On August 24, 2020, the company completed the acquisition of the Park Place Dealership group for a purchase price of $889.9 million, financed through cash, debt, and seller financing, following the termination of a previous, larger acquisition agreement with the same group in March 2020[17][39] - Due to the adverse impact of the COVID-19 pandemic, the company performed impairment tests as of March 31, 2020, resulting in a $23.0 million pre-tax non-cash impairment charge on certain franchise rights[57][61] - In February 2020, the company redeemed its 6.00% Senior Subordinated Notes due 2024, recording a loss on extinguishment of $19.1 million, and issued new 4.50% Senior Notes due 2028 and 4.75% Senior Notes due 2030[68][69] - During the nine months ended September 30, 2020, the company sold eight franchises and two collision centers, recording a pre-tax gain of $58.4 million[49] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes strong Q3 2020 performance to increased vehicle gross profit margins and cost-cutting measures, while maintaining strong liquidity and completing the Park Place acquisition Impact of COVID-19 on Our Business - In response to the pandemic, the company furloughed employees, reduced store hours, suspended its 401(k) match, implemented temporary pay reductions, and made a permanent workforce reduction of approximately 1,300 employees[119] - Despite revenue declines in most streams on a same-store basis, new and used vehicle gross profit margins increased significantly in Q3 2020 due to new vehicle supply disruptions driving up demand[120] - The company recorded a $23.0 million non-cash impairment charge on intangible manufacturer franchise rights in Q1 2020 due to the pandemic's impact[123] Results of Operations - Q3 2020 vs Q3 2019 Q3 2020 vs Q3 2019 Key Metrics | Metric | Q3 2020 | Q3 2019 | Change | | :--- | :--- | :--- | :--- | | Total Revenue (M) | $1,845.4 | $1,842.0 | +0.2% | | Total Gross Profit (M) | $335.9 | $293.1 | +14.6% | | Net Income (M) | $96.2 | $45.0 | +113.8% | | Diluted EPS | $4.96 | $2.33 | +112.9% | | SG&A as % of Gross Profit | 61.5% | 68.9% | -7.4% | - Gross profit per new vehicle sold (as reported) increased by 73% to $2,468, driven by tight inventory levels[134] - Gross profit per used vehicle retailed (as reported) increased by 43% to $2,116, as the used vehicle market recovered strongly[138] - Same-store SG&A as a percentage of gross profit decreased by 670 basis points to 62.6%, reflecting broad cost-cutting measures and higher gross profits[145][146] Results of Operations - Nine Months 2020 vs 2019 Nine Months 2020 vs 2019 Key Metrics | Metric | Nine Months 2020 | Nine Months 2019 | Change | | :--- | :--- | :--- | :--- | | Total Revenue (M) | $4,897.8 | $5,316.3 | -7.9% | | Total Gross Profit (M) | $851.1 | $867.3 | -1.9% | | Net Income (M) | $165.3 | $140.8 | +17.4% | | Diluted EPS | $8.56 | $7.30 | +17.3% | | SG&A as % of Gross Profit | 65.0% | 68.5% | -3.5% | - Net income increased 17.4% despite a revenue decline, largely due to a $58.4 million gain on divestitures, a $20.6 million loss on debt extinguishment, and a $23.0 million franchise rights impairment charge[151][155] Liquidity and Capital Resources - As of September 30, 2020, the company had total available liquidity of $384.9 million, consisting of $4.1 million in cash, $39.8 million in floor plan offset accounts, and availability under its revolving credit facilities[178] - The company was in compliance with all debt covenants as of September 30, 2020, with restricted payments like dividends or share repurchases permitted as long as the Consolidated Total Leverage Ratio does not exceed 3.0 to 1.0[205][206] - No shares were repurchased under the Repurchase Program during the nine months ended September 30, 2020, with $66.3 million remaining authorization[208] Quantitative and Qualitative Disclosures About Market Risk The company manages interest rate risk on its variable-rate debt through interest rate swap agreements, mitigating potential impacts on annual interest expense - Based on $684.1 million of total variable interest rate debt outstanding as of September 30, 2020, a 100 basis point change in interest rates could result in a change of as much as $6.8 million to total annual interest expense[230] - The company uses four interest rate swap agreements to hedge against changes in variable rate cash flows related to the one-month LIBOR, with two initiated in July 2020[232][233] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2020, with no material changes to internal control over financial reporting during the quarter - The principal executive officer and principal financial officer concluded that as of September 30, 2020, the company's disclosure controls and procedures were effective[234] - There were no changes in internal control over financial reporting during the quarter ended September 30, 2020, that have materially affected, or are reasonably likely to materially affect, the company's internal control[235] PART II—Other Information Legal Proceedings The company is involved in various legal proceedings, but management does not anticipate any known claims will materially adversely affect its financial condition or operations - The company is subject to various claims and legal proceedings typical for the industry, including audits, litigation, and government proceedings[236] - Management does not currently expect any known claim to materially and adversely affect the company's financial condition, liquidity, or results of operations[237] Risk Factors The company faces material risks including the COVID-19 pandemic's impact, challenges in integrating the Park Place acquisition, economic downturn sensitivity, dependence on manufacturers, and substantial indebtedness - The COVID-19 pandemic is cited as a major risk, with potential adverse impacts on sales, supply chains, and financial results, already leading to a $23.0 million non-cash impairment charge on franchise rights in Q1 2020[239][240] - The integration of the Park Place acquisition presents numerous risks, including managing a significantly larger company, integrating different business cultures, and the possibility of unanticipated liabilities[240][241][242] - The business is highly dependent on vehicle manufacturers, with five manufacturers (Honda, Toyota, Ford, Nissan, Mercedes-Benz) accounting for 67% of new vehicle revenues for the nine months ended Sep 30, 2020[246][247] - The company's substantial indebtedness could impair its ability to obtain additional financing and requires a significant portion of cash flow for debt service, making it vulnerable to interest rate increases[249] Unregistered Sales of Equity Securities and Use of Proceeds The company did not repurchase shares under its formal program in Q3 2020, though it repurchased shares for equity award settlements, with $66.3 million remaining authorized - No shares were repurchased under the company's Repurchase Program in Q3 2020, with $66.3 million remaining available for repurchase under the program as of September 30, 2020[259] Mine Safety Disclosures This item is not applicable to the company - Not applicable[260] Exhibits This section lists exhibits filed with the Form 10-Q, including the Park Place acquisition agreement, debt agreements, and officer certifications Signatures The report was signed on November 3, 2020, by the Chief Executive Officer and Chief Financial Officer - The report was signed on November 3, 2020, by David W Hult, Chief Executive Officer and President, and Patrick J Guido, Senior Vice President and Chief Financial Officer[265]