UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended September 30, 2004 OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from __________ to
__________
Commission file number: 001-31262
ASBURY AUTOMOTIVE GROUP, INC.
(Exact name of Registrant as specified in its charter)
Delaware 01-0609375
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
622 Third Avenue, 37th Floor
New York, New York 10017
(Address of principal executive offices) (Zip Code)
(212) 885-2500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes |X| No |_|
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: The number of shares
of common stock outstanding as of November 2, 2004, was 32,551,858 (net of
1,586,587 treasury shares).
ASBURY AUTOMOTIVE GROUP, INC.
INDEX
Page
PART I - Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of September 30,
2004 (Unaudited) and December 31, 2003....................... 1
Consolidated Statements of Income for the Three and
Nine Months Ended September 30, 2004 and 2003 (Unaudited).... 2
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2004 and 2003 (Unaudited)................ 3
Notes to Consolidated Financial Statements (Unaudited)......... 4
Report of Independent Registered Public Accounting Firm........ 21
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk........ 38
Item 4. Controls and Procedures........................................... 38
PART II - Other Information
Item 6. Exhibits.......................................................... 40
Signatures........................................................ 41
Index to Exhibits................................................. 42
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
ASBURY AUTOMOTIVE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
September 30, December 31,
ASSETS 2004 2003
------ ------------- ------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents ........................................................ $ 18,255 $ 106,711
Contracts-in-transit ............................................................. 87,145 93,881
Restricted investments ........................................................... 1,623 1,591
Accounts receivable (net of allowance of $1,648 and $2,371, respectively) ........ 137,146 114,201
Inventories ...................................................................... 692,300 650,397
Deferred income taxes ............................................................ 10,792 8,811
Prepaid and other assets ......................................................... 45,518 36,417
Assets held for sale ............................................................. 46,517 29,533
----------- -----------
Total current assets ........................................................ 1,039,296 1,041,542
PROPERTY AND EQUIPMENT, net ........................................................ 191,078 266,991
GOODWILL ........................................................................... 455,184 404,143
RESTRICTED INVESTMENTS, net of current portion ..................................... 1,596 2,974
OTHER ASSETS ....................................................................... 106,763 98,629
----------- -----------
Total assets ................................................................ $ 1,793,917 $ 1,814,279
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Floor plan notes payable ......................................................... $ 557,181 $ 602,167
Current maturities of long-term debt ............................................. 33,760 33,250
Accounts payable ................................................................. 48,558 42,882
Accrued liabilities .............................................................. 94,430 78,727
Liabilities associated with assets held for sale ................................ 31,243 24,732
----------- -----------
Total current liabilities ................................................... 765,172 781,758
LONG-TERM DEBT ..................................................................... 497,355 559,128
DEFERRED INCOME TAXES .............................................................. 26,636 22,179
OTHER LIABILITIES .................................................................. 36,780 17,507
COMMITMENTS AND CONTINGENCIES (Note 12)
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value per share, 10,000,000 shares authorized .......... -- --
Common stock, $.01 par value per share, 90,000,000 shares authorized 34,137,779
and 34,022,008 shares issued, including shares held in treasury, respectively 341 340
Additional paid-in capital ....................................................... 412,692 411,082
Retained earnings ................................................................ 75,060 37,832
Treasury stock, at cost, 1,586,587 and 1,590,013 shares held, respectively ....... (15,032) (15,064)
Accumulated other comprehensive loss ............................................. (5,087) (483)
----------- -----------
Total shareholders' equity .................................................. 467,974 433,707
----------- -----------
Total liabilities and shareholders' equity .................................. $ 1,793,917 $ 1,814,279
=========== ===========
See Notes to Consolidated Financial Statements.
1
ASBURY AUTOMOTIVE GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------------- --------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
REVENUES:
New vehicle ............................ $ 862,863 $ 761,340 $ 2,421,645 $ 2,114,259
Used vehicle ........................... 329,998 309,371 965,355 887,701
Parts, service and collision repair .... 157,416 136,385 450,506 389,012
Finance and insurance, net ............. 39,749 35,923 110,569 96,241
----------- ----------- ----------- -----------
Total revenues ..................... 1,390,026 1,243,019 3,948,075 3,487,213
cost of sales:
New vehicle ............................ 802,562 706,314 2,248,480 1,958,751
Used vehicle ........................... 303,236 282,200 882,693 806,710
Parts, service and collision repair .... 75,985 63,817 214,890 181,804
----------- ----------- ----------- -----------
Total cost of sales ................ 1,181,783 1,052,331 3,346,063 2,947,265
----------- ----------- ----------- -----------
GROSS PROFIT .............................. 208,243 190,688 602,012 539,948
OPERATING EXPENSES:
Selling, general and administrative .... 168,836 144,474 481,344 419,596
Depreciation and amortization .......... 4,993 5,004 15,419 14,602
----------- ----------- ----------- -----------
Income from operations ............. 34,414 41,210 105,249 105,750
OTHER INCOME (EXPENSE):
Floor plan interest expense ............ (5,383) (4,207) (15,233) (12,871)
Other interest expense ................. (8,678) (10,088) (29,186) (30,030)
Interest income ........................ 228 190 613 436
Gain (loss) on sale of assets .......... 42 (94) (99) (432)
Other income (expense), net ............ 129 (78) 226 2
----------- ----------- ----------- -----------
Total other expense, net ........... (13,662) (14,277) (43,679) (42,895)
----------- ----------- ----------- -----------
Income before income taxes ......... 20,752 26,933 61,570 62,855
INCOME TAX EXPENSE: ....................... 7,782 10,214 22,912 24,507
----------- ----------- ----------- -----------
Income from continuing operations .. 12,970 16,719 38,658 38,348
DISCONTINUED OPERATIONS, net of tax ....... (854) (475) (1,430) (2,734)
----------- ----------- ----------- -----------
Net income ......................... $ 12,116 $ 16,244 $ 37,228 $ 35,614
=========== =========== =========== ===========
EARNINGS PER COMMON SHARE:
Basic .................................. $ 0.37 $ 0.50 $ 1.15 $ 1.09
=========== =========== =========== ===========
Diluted ................................ $ 0.37 $ 0.50 $ 1.14 $ 1.09
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic .................................. 32,540 32,419 32,482 32,721
=========== =========== =========== ===========
Diluted ................................ 32,647 32,612 32,675 32,761
=========== =========== =========== ===========
See Notes to Consolidated Financial Statements.
2
ASBURY AUTOMOTIVE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For the Nine Months
Ended September 30,
-----------------------
2004 2003
---------- ----------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income ....................................................................... $ 37,228 $ 35,614
Adjustments to reconcile net income to net cash provided by operating activities-
Depreciation and amortization .................................................. 15,419 14,602
Depreciation and amortization from discontinued operations ..................... 372 1,389
Amortization of deferred financing fees ........................................ 1,231 2,582
Change in allowance for doubtful accounts ...................................... (723) 96
Loss on sale of assets ......................................................... 99 432
Loss (gain) on sale of discontinued operations ................................. 737 (297)
Change in deferred income taxes ................................................ 5,550 2,617
Other adjustments .............................................................. 6,482 2,975
Changes in operating assets and liabilities, net of acquisitions and divestitures-
Contracts-in-transit ........................................................... 4,703 4,810
Accounts receivable ............................................................ (37,245) (30,938)
Proceeds from the sale of accounts receivable .................................. 14,222 15,023
Inventories .................................................................... (14,228) 72,934
Prepaid and other assets ....................................................... (25,013) (21,980)
Floor plan notes payable ....................................................... (52,231) (62,410)
Accounts payable and accrued liabilities ....................................... 19,245 18,084
Other assets and liabilities ................................................... (2,051) (999)
---------- ----------
Net cash (used in) provided by operating activities ......................... (26,203) 54,534
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures ............................................................. (56,590) (37,558)
Payments for acquisitions ........................................................ (71,594) (72,378)
Proceeds from the sale of assets ................................................. 503 774
Proceeds from the sale of discontinued operations ................................ 3,543 7,845
Purchase of restricted marketable securities ..................................... (517) (750)
Proceeds from the sale of restricted marketable securities ....................... 1,863 1,826
Net issuance of finance contracts ................................................ (533) (2,818)
---------- ----------
Net cash used in investing activities ....................................... (123,325) (103,059)
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from borrowings ......................................................... 46,357 115,393
Repayments of debt ............................................................... (108,655) (59,392)
Proceeds from sale-leaseback activity ............................................ 121,813 31,177
Purchase of treasury stock ....................................................... -- (9,700)
Distributions to members ......................................................... -- (3,010)
Proceeds from the exercise of stock options ...................................... 1,557 248
---------- ----------
Net cash provided by financing activities ................................... 61,072 74,716
---------- ----------
Net (decrease) increase in cash and cash equivalents ........................ (88,456) 26,191
CASH AND CASH EQUIVALENTS, beginning of period ..................................... 106,711 22,613
---------- ----------
CASH AND CASH EQUIVALENTS, end of period ........................................... $ 18,255 $ 48,804
========== ==========
See Note 11 for supplemental cash flow information
See Notes to Consolidated Financial Statements.
3
ASBURY AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. DESCRIPTION OF BUSINESS
Asbury Automotive Group, Inc. is a national automotive retailer,
operating 99 dealership locations (137 franchises) as of September 30, 2004. We
offer an extensive range of automotive products and services, including new and
used vehicles, financing and insurance, vehicle maintenance and collision repair
services, replacement parts and service contracts. We offer 33 domestic and
foreign brands of new vehicles, including four heavy truck brands. We also
operate 23 collision repair centers that serve our markets. Our retail network
is organized into nine regional dealership groups, or "platforms," which are
marketed under different regional brands. Our platforms encompass 20
metropolitan markets in the Southeastern, Midwestern, Southwestern and
Northwestern United States. In addition to our nine platforms, we operate two
dealerships in two metropolitan markets in Northern California and three
dealerships in two metropolitan markets in Southern California with the
intention of expanding our operations in each of these respective areas through
additional acquisitions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited interim consolidated financial statements
reflect the consolidated accounts of Asbury Automotive Group, Inc. and our
wholly owned subsidiaries. All intercompany transactions have been eliminated in
consolidation. Certain prior year amounts have been reclassified to conform to
the current period presentation.
In the opinion of management, all adjustments (consisting only of
normal, recurring adjustments) considered necessary for a fair presentation of
the interim consolidated financial statements as of September 30, 2004, and for
the three and nine months ended September 30, 2004 and 2003 have been included.
The results of operations for the three and nine months ended September 30,
2004, are not necessarily indicative of the results that may be expected for the
full year. Our interim consolidated financial statements should be read together
with our consolidated financial statements and the notes thereto contained in
our Annual Report on Form 10-K for the year ended December 31, 2003.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts of assets
and liabilities and disclosures of contingent assets and liabilities as of the
date of the financial statements and the reported amounts of revenues and
expenses during the periods presented. Actual results could differ from these
estimates. Estimates and assumptions are reviewed periodically and the effects
of revisions are reflected in the consolidated financial statements in the
period they are determined to be necessary.
Revenue Recognition
Revenue from the sale of new and used vehicles is recognized upon
delivery, passage of title, signing of the sales contract and approval of
financing. Revenue from the sale of parts, service and collision repair is
recognized upon delivery of parts to the customer or at the time vehicle service
or repair work is completed. Manufacturer vehicle incentives and rebates,
including holdbacks, are recognized when earned, generally at the time the
related vehicles are sold.
We receive commissions from the sale of vehicle service contracts,
credit life insurance and disability insurance to customers. In addition, we
arrange financing for customers and receive commissions from financing
institutions. We may be charged back ("chargebacks") for finance, insurance or
vehicle service contract commissions in the event a contract is terminated. The
revenues from financing fees and commissions are recorded at the time the
vehicles are sold and a reserve for future chargebacks is established based on
historical operating results and the termination provisions of the applicable
contracts. Finance, insurance and vehicle service contract commissions, net of
estimated chargebacks, are included in "Finance and insurance, net" in the
accompanying Consolidated Statements of Income.
Stock-Based Compensation
We account for stock-based compensation issued to employees in
accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees." APB Opinion No. 25 requires the use of the
intrinsic value method, which measures compensation cost as the excess, if any,
of the quoted market price of the stock at the measurement date over the amount
an employee must pay to acquire the stock. We have adopted the disclosure
provisions of Statement of Financial Accounting Standards ("SFAS") No. 148,
"Accounting for Stock-Based Compensation-Transition and Disclosure-An amendment
of FASB Statement No. 123."
4
The following table illustrates the effect on net income and net income per
share had stock-based employee compensation been recorded based on the fair
value method under SFAS No. 123 "Accounting for Stock-Based Compensation":
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------- -------------------------
(In thousands, except per share data) 2004 2003 2004 2003
----------- ----------- ----------- -----------
Net income ................................................... $ 12,116 $ 16,244 $ 37,228 $ 35,614
Adjustments to net income:
Stock-based compensation expense included in net income, net
of tax ..................................................... 3 12 86 42
Pro forma stock-based compensation expense, net of tax ..... (1,410) (1,002) (4,012) (2,811)
---------- ---------- ---------- ----------
Pro forma net income ......................................... $ 10,709 $ 15,254 $ 33,302 $ 32,845
========== ========== ========== ==========
Net income per common share--basic (as reported) ............. $ 0.37 $ 0.50 $ 1.15 $ 1.09
========== ========== ========== ==========
Net income per common share--diluted (as reported) ........... $ 0.37 $ 0.50 $ 1.14 $ 1.09
========== ========== ========== ==========
Pro forma net income per common share--basic ................. $ 0.33 $ 0.47 $ 1.03 $ 1.00
========== ========== ========== ==========
Pro forma net income per common share--diluted ............... $ 0.33 $ 0.47 $ 1.02 $ 1.00
========== ========== ========== ==========
We use the Black-Scholes option valuation model ("Black-Scholes"),
which is the measure of fair value most often utilized under SFAS No. 123.
Traded options, unlike our stock-based awards, are not subject to vesting
restrictions, are fully transferable and may use lower expected stock price
volatility measures than those assumed below. We estimated the fair value of
stock-based compensation issued to employees during each respective period using
Black-Scholes with the following assumptions:
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- -------------------
2004 2003 2004 2003
-------- -------- -------- --------
Risk free interest rate 3.1% 3.3% 2.3-3.6% 2.3-3.3%
Expected life of options 4 years 5 years 4 years 5 years
Expected stock price volatility 50% 62% 50-53% 1 - 65%
Expected dividend yield N/A N/A N/A N/A
Discontinued Operations
In accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," certain amounts reflected in the accompanying
Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003, have
been classified as Assets Held for Sale and Liabilities Associated with Assets
Held for Sale. In addition, the accompanying Consolidated Statements of Income
for the three and nine months ended September 30, 2003, have been reclassified
to reflect the status of our discontinued operations as of September 30, 2004.
3. ACQUISITIONS
We did not complete any acquisitions during the three months ended
September 30, 2004. During the three months ended September 30, 2003, we
acquired three dealership locations (seven franchises) for an aggregate purchase
price of $32.7 million, which was paid in cash through the use of available
funds.
During the nine months ended September 30, 2004, we acquired six
dealership locations (six franchises) for an aggregate purchase price of $74.2
million, of which $71.6 million was paid in cash through the use of available
funds, with the remaining $2.6 million representing the fair value of future
payments associated with our acquisitions. During the nine months ended
September 30, 2003, we acquired five dealership locations (ten franchises) and
one ancillary business for an aggregate purchase price of $72.4 million, of
which $0.3 million was paid in cash through the use of available funds and $72.1
million was funded through borrowings under our committed credit facility.
5
The allocation of purchase price for acquisitions is as follows:
For the Nine Months
Ended September 30,
-------------------
(In thousands) 2004 2003
-------- -------
Working capital $ 5,140 $ 4,597
Fixed assets 3,723 3,674
Other assets 257 -
Goodwill 53,555 64,496
Franchise rights 11,500 -
Other liabilities - (389)
------- -------
Total purchase price $74,175 $72,378
======= =======
The allocation of purchase price to assets acquired and liabilities
assumed for certain current and prior year acquisitions was based on preliminary
estimates of fair value and may be revised as additional information concerning
valuation of such assets and liabilities becomes available.
4. INVENTORIES
Inventories consist of the following:
(In thousands) September 30, 2004 December 31, 2003
-------------- ------------------ -----------------
New vehicles $550,504 $517,227
Used vehicles 98,298 90,683
Parts and accessories 43,498 42,487
-------- --------
Total inventories $692,300 $650,397
======== ========
The lower of cost or market reserves for inventory totaled $5.9 million
and $4.6 million as of September 30, 2004 and December 31, 2003, respectively.
5. GOODWILL AND MANUFACTURER FRANCHISE RIGHTS
Goodwill represents the excess cost of businesses acquired over the
fair market value of the identifiable net assets. The changes in the carrying
amount of goodwill for the nine months ended September 30, 2004 are as follows:
(In thousands)
Balance, December 31, 2003 $404,143
Current year acquisitions 53,555
Adjustments associated with prior year acquisitions (817)
Current year divestitures (1,697)
--------
Balance, September 30, 2004 $455,184
========
During the nine months ended September 30, 2004, we allocated $11.5
million of the purchase price of our current year acquisitions to manufacturer
franchise rights and increased manufacturer franchise rights $1.0 million
related to an acquisition completed during 2003. Manufacturer franchise rights
totaled $50.5 million and $38.0 million as of September 30, 2004 and December
31, 2003, respectively, and are included in Other Assets on the accompanying
Consolidated Balance Sheets.
6. ASSETS AND LIABILITIES HELD FOR SALE
Assets and liabilities classified as held for sale as of September 30,
2004 include (1) assets and liabilities associated with discontinued operations
and real estate associated with former dealership locations, (2) real estate of
new dealership locations where an unaffiliated third party purchased land and is
advancing funds to us equal to the cost of construction of dealership facilities
6
being constructed on the land and (3) leasehold improvements that an
unaffiliated third party has agreed to purchase upon completion of the
construction.
Assets and liabilities associated with discontinued operations included
four dealership locations (six franchises) and real estate associated with three
former dealership locations as of September 30, 2004, and two dealership
locations (three franchises) and real estate associated with two former
dealership locations as of December 31, 2003. Assets associated with
discontinued operations totaled $28.2 million and $6.7 million, and liabilities
associated with discontinued operations totaled $17.2 million and $2.0 million
as of September 30, 2004 and December 31, 2003, respectively.
In connection with the construction of certain new dealership
locations, we have entered into sale-leaseback agreements whereby an
unaffiliated third party purchased the land and is advancing funds to us equal
to the cost of construction of dealership facilities being constructed on the
land. The agreements include an option for the third party to cancel the
agreement and require us to return the advanced funds in the event we fail to
complete construction of the facilities, among other customary conditions. As a
result, we capitalize the cost of the land, facilities and rent during the
construction period and record a corresponding liability equal to the amount of
the advanced funds. Upon completion of the construction, we will execute the
sale-leaseback transaction, remove the cost of the land, facilities and the
related liability from our Consolidated Balance Sheets and amortize the
capitalized rent on a straight-line basis over the lease term. As of September
30, 2004, the book value of these assets held for sale and the related
liabilities totaled $15.7 million and $14.0 million, respectively. The book
value of these assets held for sale and the related liabilities each totaled
$22.8 million as of December 31, 2003.
During the three months ended September 30, 2004, we sold land and
buildings with a net book value of $102.5 million to an unaffiliated third party
for net proceeds of $114.9 million in a sale-leaseback transaction. The gain on
the transaction of $12.4 million, which is net of estimated deal costs, is being
amortized as a component of selling, general and administrative expense over the
lease terms. In addition, we repaid $63.7 million of the related mortgages with
the proceeds from the sale-leaseback transaction. Under the terms of the
sale-leaseback agreement, we have agreed to make certain leasehold improvements
and the unaffiliated third party has agreed to purchase those improvements upon
completion of the construction. The costs of construction for the leasehold
improvements are included in Assets Held for Sale on our Consolidated Balance
Sheets. We expect that the construction of these dealership facilities will be
substantially complete by December 31, 2005. The book value of the
construction-in-progress totaled $2.6 million as of September 30, 2004. We
estimate that the annualized rent associated with these leases will be
approximately $9.2 million, including the effects of the deferred gain
amortization and excluding estimated rent increases as a result of the
anticipated sale of leasehold improvements.
A summary of assets and liabilities held for sale is as follows:
(In thousands) September 30, 2004 December 31, 2003
------------------ -----------------
Assets:
Inventories $ 17,115 $ 2,116
Property and equipment, net 25,720 27,417
Other assets 3,682 -
-------- -------
Total assets 46,517 29,533
Liabilities:
Floor plan notes payable 15,767 1,954
Long-term debt 13 -
Other liabilities 15,463 22,778
-------- -------
Total liabilities 31,243 24,732
-------- -------
Net assets held for sale $ 15,274 $ 4,801
======== =======
7
7. LONG-TERM DEBT
Long-term debt consists of the following:
(In thousands) September 30, December 31,
2004 2003
------------- ------------
9% Senior Subordinated Notes due 2012 $250,000 $250,000
8% Senior Subordinated Notes due 2014 200,000 200,000
Mortgage notes payable 50,895 116,664
Notes payable collateralized by loaner
vehicles 22,156 15,744
Capital lease obligations 4,610 4,226
Other notes payable 3,454 5,744
-------- --------
531,115 592,378
Less--current portion (33,760) (33,250)
-------- --------
Long--term debt $497,355 $559,128
======== ========
8. COMPREHENSIVE INCOME
The following table provides a reconciliation of net income to
comprehensive income:
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- --------------------
(In thousands) 2004 2003 2004 2003
-------- -------- -------- --------
Net income .............................................. $ 12,116 $ 16,244 $ 37,228 $ 35,614
Other comprehensive income:
Change in fair value of interest rate swaps .......... (696) -- (7,397) --
Income tax benefit associated with
interest rate swaps .............................. 261 -- 2,793 --
-------- -------- -------- --------
(435) -- (4,604) --
Reclassification adjustment of loss on
interest rate swaps included in net income ........ -- 46 -- 159
Income tax expense associated with interest rate swaps -- (13) -- (59)
-------- -------- -------- --------
Comprehensive income .................................... $ 11,681 $ 16,277 $ 32,624 $ 35,714
======== ======== ======== ========
In December 2003, we entered into two forward interest rate swaps with
a combined notional principal amount of $200.0 million, which will provide a
hedge against changes in the interest rates of our variable rate floor plan
notes payable for a period of eight years beginning in March 2006. During the
second quarter of 2004, we reduced the notional principal amount of these swap
agreements to $170.0 million. This transaction resulted in a gain of $0.4
million, which is included in Other Liabilities on our Consolidated Balance
Sheet as of September 30, 2004, and will be amortized on a straight-line basis
as an offset to interest expense over the swap period, beginning in March 2006.
The swap agreements were designated and qualify as interest rate hedges of
future changes in interest rates of our variable rate floor plan indebtedness
and we expect that these hedges, which may contain minor ineffectiveness, will
be highly effective during the swap period from March 2006 through February
2014. As of September 30, 2004, the swap agreements had a fair value of $6.2
million, which is included in Other Liabilities on the accompanying Consolidated
Balance Sheets.
In December 2003, we entered into an interest rate swap agreement with
a notional principal amount of $200.0 million as a hedge against changes in the
fair value of our 8% Senior Subordinated Notes due 2014. Under the terms of this
swap agreement, we are required to make variable rate payments based on
six-month LIBOR and receive a fixed rate of 8.0%. This swap agreement was
designated and qualifies as a fair value hedge of our fixed rate senior
subordinated debt and does not contain any ineffectiveness. As of September 30,
2004, the swap agreement had a fair value of $1.9 million, which is included in
Other Liabilities on the accompanying Consolidated Balance Sheets.
9. DISCONTINUED OPERATIONS AND DISPOSITIONS
During the three months ended September 30, 2004, we sold five
dealership locations (six franchises), one of which was placed into discontinued
operations in the same period. In addition, during the three months ended
September 30, 2004, we placed three dealership locations (five franchises) into
8
discontinued operations. As of September 30, 2004, four dealership locations
(six franchises) and real estate associated with three former dealership
locations were pending disposition. The accompanying Consolidated Statements of
Income for the three and nine months ended September 30, 2003, have been
reclassified to reflect the status of our discontinued operations as of
September 30, 2004.
The following table provides further information regarding our
discontinued operations as of September 30, 2004, and includes the results of
businesses sold prior to September 30, 2004, and businesses pending disposition
as of September 30, 2004:
For the Three Months For the Three Months
Ended September 30, 2004 Ended September 30, 2003
-------------------------------- --------------------------------
Pending Pending
(Dollars in thousands) Sold Disposition Total Sold* Disposition** Total
-------- -------- -------- -------- -------- --------
Franchises ................................. 6 6 12 12 6 18
======== ======== ======== ======== ======== ========
Used-only locations ........................ -- -- -- 11 -- 11
======== ======== ======== ======== ======== ========
Ancillary businesses ....................... -- -- -- 2 -- 2
======== ======== ======== ======== ======== ========
Revenues ................................... $ 2,893 $ 29,945 $ 32,838 $ 20,854 $ 30,725 $ 51,579
Cost of sales .............................. 2,745 25,705 28,450 17,553 25,784 43,337
-------- -------- -------- -------- -------- --------
Gross profit ...................... 148 4,240 4,388 3,301 4,941 8,242
Operating expenses ......................... 858 4,435 5,293 4,226 4,550 8,776
-------- -------- -------- -------- -------- --------
Income (loss) from operations ..... (710) (195) (905) (925) 391 (534)
Other expense, net ......................... (13) (185) (198) (69) (143) (212)
-------- -------- -------- -------- -------- --------
Net income (loss) ................. (723) (380) (1,103) (994) 248 (746)
Loss on disposition of discontinued
Operations ............................ (263) -- (263) (32) -- (32)
-------- -------- -------- -------- -------- --------
Income (loss) before income taxes . (986) (380) (1,366) (1,026) 248 (778)
Income tax benefit (expense) ............... 370 142 512 399 (96) 303
-------- -------- -------- -------- -------- --------
Discontinued operations, net of tax $ (616) $ (238) $ (854) $ (627) $ 152 $ (475)
======== ======== ======== ======== ======== ========
For the Nine Months For the Nine Months
Ended September 30, 2004 Ended September 30, 2003
--------------------------------- --------------------------------
Pending Pending
(Dollars in thousands) Sold Disposition Total Sold* Disposition** Total
-------- -------- -------- -------- -------- --------
Franchises ................................. 8 6 14 14 6 20
======== ======== ======== ======== ======== ========
Used-only locations ........................ -- -- -- 11 -- 11
======== ======== ======== ======== ======== ========
Ancillary businesses ....................... -- -- -- 2 -- 2
======== ======== ======== ======== ======== ========
Revenues ................................... $ 27,459 $ 86,529 $113,988 $ 88,680 $ 90,458 $ 179,138
Cost of sales .............................. 23,396 73,454 96,850 76,202 75,705 151,907
-------- -------- -------- -------- -------- --------
Gross profit ...................... 4,063 13,075 17,138 12,478 14,753 27,231
Operating expenses ......................... 4,719 13,213 17,932 17,991 13,068 31,059
-------- -------- -------- -------- -------- --------
Income (loss) from operations ..... (656) (138) (794) (5,513) 1,685 (3,828)
Other expense, net ......................... (175) (582) (757) (513) (497) (1,010)
-------- -------- -------- -------- -------- --------
Net income (loss) ................. (831) (720) (1,551) (6,026) 1,188 (4,838)
(Loss) gain on disposition of discontinued
operations ............................ (737) -- (737) 297 -- 297
-------- -------- -------- -------- -------- --------
Income (loss) before income taxes . (1,568) (720) (2,288) (5,729) 1,188 (4,541)
Income tax benefit (expense) ............... 588 270 858 2,280 (473) 1,807
-------- -------- -------- -------- -------- --------
Discontinued operations, net of tax $ (980) $ (450) $ (1,430) $(3,449) $ 715 $ (2,734)
======== ======== ======== ======== ======== ========
* Businesses were sold between July 1, 2003 and September 30, 2004
** Businesses pending disposition as of September 30, 2004
*** Businesses were sold between January 1, 2003 and September 30, 2004
9
10. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the
weighted average common shares outstanding during the periods presented. Diluted
earnings per share is computed by dividing net income by the weighted average
common shares and common share equivalents outstanding during the periods
presented.
The following table sets forth the computation of basic and diluted
earnings per share:
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
--------------------- ---------------------
(In thousands, except per share data) 2004 2003 2004 2003
--------- --------- --------- ---------
Net income:
Continuing operations ..................................... $ 12,970 $ 16,719 $ 38,658 $ 38,348
Discontinued operations ................................... (854) (475) (1,430) (2,734)
--------- --------- --------- ---------
$ 12,116 $ 16,244 $ 37,228 $ 35,614
========= ========= ========= =========
Earnings per share - basic and diluted:
Continuing operations - basic ............................. $ 0.40 $ 0.52 $ 1.19 $ 1.17
Discontinued operations - basic............................ (0.03) (0.02) (0.04) (0.08)
--------- --------- --------- ---------
$ 0.37 $ 0.50 $ 1.15 $ 1.09
========= ========= ========= =========
Continuing operations - diluted ........................... $ 0.40 $ 0.51 $ 1.18 $ 1.17
Discontinued operations - diluted.......................... (0.03) (0.01) (0.04) (0.08)
--------- --------- --------- ---------
$ 0.37 $ 0.50 $ 1.14 $ 1.09
========= ========= ========= =========
Common shares and common share equivalents:
Weighted average common shares outstanding - basic ........ 32,540 32,419 32,482 32,721
Common share equivalents (stock options) .................. 107 193 193 40
--------- --------- --------- ---------
Weighted average common shares outstanding - diluted ...... 32,647 32,612 32,675 32,761
========= ========= ========= =========
11. SUPPLEMENTAL CASH FLOW INFORMATION
During the nine months ended September 30, 2004 and 2003, we made
interest payments, net of amounts capitalized, totaling $44.5 million and $35.8
million, respectively. During the nine months ended September 30, 2004, we
received $4.9 million of proceeds associated with our interest rate swap
agreement that was entered into in December 2003 in connection with the issuance
of our 8% Senior Subordinated Notes due 2014.
During the nine months ended September 30, 2004 and 2003, we made
income tax payments totaling $11.0 million and $13.3 million, respectively.
During the nine months ended September 30, 2004, we executed a
sale-leaseback transaction, which resulted in the sale of approximately $17.6
million of Assets Held for Sale and the removal of $17.6 million of Liabilities
Associated with Assets Held for Sale from our Consolidated Balance Sheets.
During the nine months ended September 30, 2004 and 2003, we entered
into capital leases totaling $1.1 million and $2.4 million, respectively.
12. COMMITMENTS AND CONTINGENCIES
Litigation
We are involved in legal proceedings and claims that have arisen in the
ordinary course of business, and with respect to certain of these claims, we
have been indemnified by the sellers of dealerships we have acquired. We do not
expect that the cost of resolving these legal proceedings and claims will
materially affect our financial condition, liquidity, results of operations or
financial statement disclosures.
10
Guarantees
We have guaranteed a loan made by a financial institution directly to a
non-consolidated entity controlled by a current platform executive, which
totaled approximately $2.7 million as of September 30, 2004. This loan was made
by a corporation we acquired in October 1998, and guarantees an industrial
revenue bond, which we are legally required to guarantee. The primary obligor of
the note is a non-dealership business entity and that entity's partners as
individuals.
Environmental Matters
Substantially all of our facilities are subject to federal, state and
local provisions regarding the discharge of materials into the environment.
Compliance with these provisions has not had, nor do we expect such compliance
to have, any material effect upon our financial condition, liquidity, results of
operations or financial statement disclosures. We believe that our current
practices and procedures for the control and disposition of such materials
comply with applicable federal, state and local requirements.
13. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
Our 8% Senior Subordinated Notes due 2014 are guaranteed by all of our
current subsidiaries, other than our current Toyota and Lexus dealership
subsidiaries, and all of our future domestic restricted subsidiaries, other than
our future Toyota and Lexus dealership facilities. The following tables set
forth, on a condensed consolidating basis, our balance sheets, statements of
income and statements of cash flows, for our guarantor and non-guarantor
subsidiaries for all financial statement periods presented in our interim
consolidated financial statements.
11
Condensed Consolidating Balance Sheet
As of September 30, 2004
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------------ ------------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ...................... $ -- $ -- $ 18,255 $ -- $ 18,255
Inventories .................................... -- 643,822 48,478 -- 692,300
Other current assets ........................... -- 254,083 39,685 (11,544) 282,224
Assets held for sale ........................... -- 46,517 -- -- 46,517
---------- ---------- ---------- ---------- ----------
Total current assets ..................... -- 944,422 106,418 (11,544) 1,039,296
Property and equipment, net ....................... -- 185,850 5,228 -- 191,078
Goodwill .......................................... -- 393,883 61,301 -- 455,184
Other assets ...................................... -- 91,882 16,477 -- 108,359
Investment in subsidiaries ........................ 467,974 76,829 -- (544,803) --
---------- ---------- ---------- ---------- ----------
Total assets ............................. $ 467,974 $1,692,866 $ 189,424 $ (556,347) $1,793,917
========== ========== ========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Floor plan notes payable ....................... $ -- $ 518,588 $ 38,593 $ -- $ 557,181
Other current liabilities ...................... -- 115,286 73,006 (11,544) 176,748
Liabilities associated with assets held for sale -- 31,243 -- -- 31,243
---------- ---------- ---------- ---------- ----------
Total current liabilities ................ -- 665,117 111,599 (11,544) 765,172
Long-term debt .................................... -- 497,315 40 -- 497,355
Other liabilities ................................. -- 62,460 956 -- 63,416
Shareholders' equity .............................. 467,974 467,974 76,829 (544,803) 467,974
---------- ---------- ---------- ---------- ----------
Total liabilities and shareholders' equity $ 467,974 $1,692,866 $ 189,424 $ (556,347) $1,793,917
========== ========== ========== ========== ==========
12
Condensed Consolidating Balance Sheet
As of December 31, 2003
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------------ ------------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ...................... $ -- $ 98,927 $ 7,784 $ -- $ 106,711
Inventories .................................... -- 601,923 48,474 -- 650,397
Other current assets ........................... -- 206,910 47,991 -- 254,901
Assets held for sale ........................... -- 29,533 -- -- 29,533
---------- ---------- ---------- ---------- ----------
Total current assets ..................... -- 937,293 104,249 -- 1,041,542
Property and equipment, net ....................... -- 262,450 4,541 -- 266,991
Goodwill .......................................... -- 342,831 61,312 -- 404,143
Other assets ...................................... -- 90,800 10,803 -- 101,603
Investment in subsidiaries ........................ 433,707 69,240 -- (502,947) --
---------- ---------- ---------- ---------- ----------
Total assets ............................. $ 433,707 $1,702,614 $ 180,905 $ (502,947) $1,814,279
========== ========== ========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Floor plan notes payable ....................... $ -- $ 558,586 $ 43,581 $ -- $ 602,167
Other current liabilities ...................... -- 93,064 61,795 -- 154,859
Liabilities associated with assets held for sale -- 24,732 -- -- 24,732
---------- ---------- ---------- ---------- ----------
Total current liabilities ................ -- 676,382 105,376 -- 781,758
Long-term debt .................................... -- 559,079 49 -- 559,128
Other liabilities ................................. -- 33,446 6,240 -- 39,686
Shareholders' equity .............................. 433,707 433,707 69,240 (502,947) 433,707
---------- ---------- ---------- ---------- ----------
Total liabilities and shareholders' equity $ 433,707 $1,702,614 $ 180,905 $ (502,947) $1,814,279
========== ========== ========== ========== ==========
13
Condensed Consolidating Statement of Income
For the Three Months Ended September 30, 2004
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------------ ------------- ------------ ------------
Revenues .......................................... $ -- $1,219,721 $ 173,374 $ (3,069) $1,390,026
Cost of sales...................................... -- 1,036,552 148,300 (3,069) 1,181,783
---------- ---------- ---------- ---------- ----------
Gross profit.............................. -- 183,169 25,074 -- 208,243
Operating expenses:
Selling, general and administrative ............ -- 149,855 18,981 -- 168,836
Depreciation and amortization .................. -- 4,517 476 -- 4,993
---------- ---------- ---------- ---------- ----------
Income from operations ................... -- 28,797 5,617 -- 34,414
Other income (expense):
Floor plan interest expense .................... -- (4,998) (385) -- (5,383)
Other interest expense ......................... -- (7,609) (1,069) -- (8,678)
Other income, net .............................. -- 384 15 -- 399
Equity in earnings of subsidiaries ............. 12,116 2,611 -- (14,727) --
---------- ---------- ---------- ---------- ----------
Total other income (expense), net 12,116 (9,612) (1,439) (14,727) (13,662)
---------- ---------- ---------- ---------- ----------
Income from continuing operations
before income taxes .................... 12,116 19,185 4,178 (14,727) 20,752
Income tax expense ................................ -- 6,215 1,567 -- 7,782
---------- ---------- ---------- ---------- ----------
Income from continuing operations......... 12,116 12,970 2,611 (14,727) 12,970
Discontinued operations, net of tax ............... -- (854) -- -- (854)
---------- ---------- ---------- ---------- ----------
Net income ............................... $ 12,116 $ 12,116 $ 2,611 $ (14,727) $ 12,116
========== ========== ========== ========== ==========
14
Condensed Consolidating Statement of Income
For the Three Months Ended September 30, 2003
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------------ ------------- ------------ ------------
Revenues .......................................... $ -- $1,074,121 $ 171,700 $ (2,802) $1,243,019
Cost of sales ..................................... -- 908,351 146,782 (2,802) 1,052,331
---------- ---------- ---------- ---------- ----------
Gross profit ............................. -- 165,770 24,918 -- 190,688
Operating expenses:
Selling, general and administrative ............ -- 126,778 17,696 -- 144,474
Depreciation and amortization .................. -- 4,723 281 -- 5,004
---------- ---------- ---------- ---------- ----------
Income from operations ................... -- 34,269 6,941 -- 41,210
Other income (expense):
Floor plan interest expense .................... -- (3,651) (556) -- (4,207)
Other interest expense ......................... -- (9,809) (279) -- (10,088)
Other income (expense), net .................... -- 60 (42) -- 18
Equity in earnings of subsidiaries ............. 16,244 3,755 -- (19,999) --
---------- ---------- ---------- ---------- ----------
Total other income (expense), net......... 16,244 (9,645) (877) (19,999) (14,277)
---------- ---------- ---------- ---------- ----------
Income from continuing operations
before income taxes .................... 16,244 24,624 6,064 (19,999) 26,933
Income tax expense ................................ -- 7,905 2,309 -- 10,214
---------- ---------- ---------- ---------- ----------
Income from continuing operations......... 16,244 16,719 3,755 (19,999) 16,719
Discontinued operations, net of tax ............... -- (475) -- -- (475)
---------- ---------- ---------- ---------- ----------
Net income ............................... $ 16,244 $ 16,244 $ 3,755 $ (19,999) $ 16,244
========== ========== ========== ========== ==========
15
Condensed Consolidating Statement of Income
For the Nine Months Ended September 30, 2004
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------------ ------------- ------------ ------------
Revenues .......................................... $ -- $3,452,881 $ 506,022 $ (10,828) $3,948,075
Cost of sales ..................................... -- 2,922,499 434,392 (10,828) 3,346,063
---------- ---------- ---------- ---------- ----------
Gross profit ............................. -- 530,382 71,630 -- 602,012
Operating expenses:
Selling, general and administrative ............ -- 427,529 53,815 -- 481,344
Depreciation and amortization .................. -- 14,118 1,301 -- 15,419
---------- ---------- ---------- ---------- ----------
Income from operations ................... -- 88,735 16,514 -- 105,249
Other income (expense):
Floor plan interest expense .................... -- (14,137) (1,096) -- (15,233)
Other interest expense ......................... -- (25,869) (3,317) -- (29,186)
Other income, net .............................. -- 697 43 -- 740
Equity in earnings of subsidiaries ............. 37,228 7,590 -- (44,818) --
---------- ---------- ---------- ---------- ----------
Total other income (expense), net......... 37,228 (31,719) (4,370) (44,818) (43,679)
---------- ---------- ---------- ---------- ----------
Income from continuing operations
before income taxes .................... 37,228 57,016 12,144 (44,818) 61,570
Income tax expense ................................ -- 18,358 4,554 -- 22,912
---------- ---------- ---------- ---------- ----------
Income from continuing operations......... 37,228 38,658 7,590 (44,818) 38,658
Discontinued operations, net of tax ............... -- (1,430) -- -- (1,430)
---------- ---------- ---------- ---------- ----------
Net income ............................... $ 37,228 $ 37,228 $ 7,590 $ (44,818) $ 37,228
========== ========== ========== ========== ==========
16
>
Condensed Consolidating Statement of Income
For the Nine Months Ended September 30, 2003
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------------ ------------- ------------ ------------
Revenues .......................................... $ -- $3,008,202 $ 488,880 $ (9,869) $3,487,213
Cost of sales ..................................... -- 2,536,656 420,478 (9,869) 2,947,265
---------- ---------- ---------- ---------- ----------
Gross profit ............................. -- 471,546 68,402 -- 539,948
Operating expenses:
Selling, general and administrative ............ -- 369,045 50,551 -- 419,596
Depreciation and amortization .................. -- 13,450 1,152 -- 14,602
---------- ---------- ---------- ---------- ----------
Income from operations ................... -- 89,051 16,699 -- 105,750
Other income (expense):
Floor plan interest expense .................... -- (11,738) (1,133) -- (12,871)
Other interest expense ......................... -- (27,894) (2,136) -- (30,030)
Other income (expense), net .................... -- 129 (123) -- 6
Equity in earnings of subsidiaries ............. 35,614 8,115 -- (43,729) --
---------- ---------- ---------- ---------- ----------
Total other income (expense), net......... 35,614 (31,388) (3,392) (43,729) (42,895)
---------- ---------- ---------- ---------- ----------
Income from continuing operations
before income taxes .................... 35,614 57,663 13,307 (43,729) 62,855
Income tax expense ................................ -- 19,315 5,192 -- 24,507
---------- ---------- ---------- ---------- ----------
Income from continuing operations......... 35,614 38,348 8,115 (43,729) 38,348
Discontinued operations, net of tax ............... -- (2,734) -- -- (2,734)
---------- ---------- ---------- ---------- ----------
Net income ............................... $ 35,614 $ 35,614 $ 8,115 $ (43,729) $ 35,614
========== ========== ========== ========== ==========
17
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2004
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------------ ------------- ------------ ------------
Net cash (used in) provided by operating
activities ................................... $ -- $ (52,918) $ 26,715 $ -- $ (26,203)
Cash flow from investing activities:
Capital expenditures ........................... -- (54,492) (2,098) -- (56,590)
Payments for acquisitions ...................... -- (71,594) -- -- (71,594)
Other investing activities ..................... -- 4,859 (11,544) 11,544 4,859
---------- ---------- ---------- ---------- ----------
Net cash used in investing activities..... -- (121,227) (13,642) 11,544 (123,325)
Cash flow from financing activities:
Proceeds from borrowings ....................... -- 57,901 -- (11,544) 46,357
Repayments of debt ............................. -- (105,660) (2,995) -- (108,655)
Proceeds from sale-leaseback activity .......... -- 121,420 393 -- 121,813
Other financing activities ..................... -- 1,557 -- -- 1,557
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in)
financing activities ................... -- 75,218 (2,602) (11,544) 61,072
---------- ---------- ---------- ---------- ----------
Net (decrease) increase in cash and
cash equivalents ....................... -- (98,927) 10,471 -- (88,456)
Cash and cash equivalents, beginning of period..... -- 98,927 7,784 -- 106,711
---------- ---------- ---------- ---------- ----------
Cash and cash equivalents, end of period .......... $ -- $ -- $ 18,255 $ -- $ 18,255
========== ========== ========== ========== ==========
18
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2003
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------------ ------------- ------------ ------------
Net cash provided by operating activities ......... $ -- $ 53,438 $ 1,096 $ -- $ 54,534
Cash flow from investing activities:
Capital expenditures ........................... -- (37,037) (521) -- (37,558)
Payments for acquisitions ...................... -- (72,378) -- -- (72,378)
Other investing activities ..................... -- 6,877 -- -- 6,877
---------- ---------- ---------- ---------- ----------
Net cash used in investing activities..... -- (102,538) (521) -- (103,059)
Cash flow from financing activities:
Proceeds from borrowings ....................... -- 111,624 3,769 -- 115,393
Repayments of debt ............................. -- (56,057) (3,335) -- (59,392)
Proceeds from sale-leaseback activity .......... -- 31,177 -- -- 31,177
Distributions to members ....................... -- (3,010) -- -- (3,010)
Purchase of treasury stock ..................... -- (9,700) -- -- (9,700)
Other financing activities ..................... -- 248 -- -- 248
---------- ---------- ---------- ---------- ----------
Net cash provided by financing
activities ............................. -- 74,282 434 -- 74,716
---------- ---------- ---------- ---------- ----------
Net increase in cash and cash
equivalents ............................ -- 25,182 1,009 -- 26,191
Cash and cash equivalents, beginning of period..... -- 18,779 3,834 -- 22,613
---------- ---------- ---------- ---------- ----------
Cash and cash equivalents, end of period .......... $ -- $ 43,961 $ 4,843 $ -- $ 48,804
========== ========== ========== ========== ==========
19
14. SUBSEQUENT EVENTS
Divestitures
During the fourth quarter of 2004, we sold one dealership location (one
franchise) for net proceeds of $1.7 million, resulting in a gain of
approximately $0.9 million. This gain is net of estimated costs to complete
these transactions, which may be adjusted in the fourth quarter as additional
information becomes available.
20
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Asbury Automotive Group, Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of Asbury
Automotive Group, Inc. and subsidiaries (the "Company") as of September 30,
2004, and the related condensed consolidated statements of income for the
three-month and nine-month periods ended September 30, 2004 and 2003, and
statements of cash flows for the nine-month periods ended September 30, 2004 and
2003. These interim financial statements are the responsibility of the Company's
management.
We conducted our reviews in accordance with standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with standards
of the Public Company Accounting Oversight Board (United States), the objective
of which is the expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to such condensed consolidated interim financial statements for them to
be in conformity with accounting principles generally accepted in the United
States of America.
We have previously audited, in accordance with standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet of
the Company as of December 31, 2003, and the related consolidated statements of
income, shareholders' equity, and cash flows for the year then ended (not
presented herein); and in our report dated March 5, 2004 (which includes an
explanatory paragraph regarding the adoption of Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets"), we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 2003 is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
/s/ DELOITTE & TOUCHE LLP
New York, New York
November 8, 2004
21
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
We are a national automotive retailer, operating 99 dealership
locations (137 franchises) in 11 states and 24 metropolitan markets in the
United States as of September 30, 2004. We offer 33 different brands of new
vehicles, including four heavy truck brands. We also operate 23 collision repair
centers that serve our markets.
Our revenues are derived primarily from three basic offerings: (i) the
sale of new and used vehicles; (ii) maintenance and collision repair services
and the sale of automotive parts (collectively, "fixed operations"); and (iii)
the arrangement of vehicle financing and the sale of various insurance and
warranty products (collectively, "F&I"). We evaluate the results of our new and
used vehicle sales based on unit volumes and gross profit per vehicle retailed
("PVR"); our fixed operations based on aggregate gross profit; and F&I based on
gross profit PVR.
Since inception, we have grown our business through the acquisition of
nine "platforms" and numerous "tuck-in" acquisitions. "Tuck-in" acquisitions
refer to the purchase of dealerships in the market areas of our existing
platforms. We use "tuck-in" acquisitions to increase the number of vehicle
brands we offer in a particular market area and to create a larger gross profit
base over which to spread our "platform" overhead costs. In addition to our nine
established platforms, we operate two franchises in Northern California and
three franchises in Southern California, with the intention of expanding our
operations in each of these regions through additional acquisitions. All
acquisitions were accounted for using the purchase method of accounting, and the
operations of the acquired dealerships are included in the Consolidated
Statements of Income commencing on the date acquired. We evaluate the organic
growth of our revenue and gross profit on a same store basis.
Our gross profit percentage varies with our revenue mix. The sale of
vehicles generally results in lower gross profit percentages than our fixed
operations. As a result, when vehicle sales decrease as a percentage of total
sales, we expect that our overall gross profit percentage would increase.
Selling, general and administrative ("SG&A") expenses consist primarily
of fixed and incentive-based compensation, advertising, rent, insurance,
utilities and other typical operating expenses. A significant portion of our
selling expenses is variable (such as sales commissions), or controllable
expenses (such as advertising), generally allowing our cost structure to adapt
in response to trends in our business. We evaluate commissions paid to
salespeople as a percentage of retail vehicle gross profit and all other SG&A
expenses in the aggregate as a percentage of gross profit.
Sales of vehicles (particularly new vehicles) have historically
fluctuated with general macroeconomic conditions, including consumer confidence,
availability of consumer credit and fuel prices. Although these factors may
impact our business, we believe that any future negative trends will be
mitigated by the performance of our used vehicle sales, fixed operations,
variable cost structure, regional diversity and advantageous brand mix.
Historically, our brand mix, which is weighted towards luxury and mid-line
imports, has tended to be less affected by market volatility than the U.S.
automobile industry as a whole.
Our operations typically have been subject to modest seasonal
variations that have been somewhat offset by our regional diversity. We
typically generate more revenue and operating income in the second and third
quarters than in the first and fourth quarters. Generally, seasonality is based
upon, among other factors, weather conditions, manufacturer incentive programs,
model changeovers and consumer buying patterns.
Over the past several years, certain automobile manufacturers have used
a combination of vehicle pricing and financing incentive programs to stimulate
customer demand for new vehicles. These programs have served to increase
competition with late-model used vehicles. We anticipate the manufacturers will
continue to use these incentive programs in the future and, as a result, we will
continue to monitor and adjust our used vehicle inventory mix in order to
increase the percentage of used vehicle inventory that can be sold at lower
price points, thereby reducing competition with our new vehicle sales. In
addition, we expect to continue to expand our service capacity in order to meet
anticipated future demand, as the relatively high volume of new vehicle sales
resulting from the highly "incentivized" new vehicle market will drive future
service demand at our dealership locations.
We expect the industry-wide gain in market share of the luxury and
mid-line import brands to continue in the near future. We feel that our brand
mix, which is heavily weighted toward these brands, is well positioned to take
advantage of this continued shift in customer buying habits.
Interest rates over the past several years have been at historical
lows. We do not believe that changes in interest rates significantly impact
customer overall buying patterns, as changes in interest rates do not
dramatically increase the monthly payment of a financed vehicle. For example,
the monthly payment for a typical vehicle financing transaction in which a
customer finances $25,000 at 5.5% over 60 months increases by only $5.80 with
each 50-basis-point increase in interest rates.
22
RESULTS OF OPERATIONS
Three Months Ended September 30, 2004, Compared to Three Months Ended September
30, 2003
Net income decreased $4.1 million, or $0.13 per diluted share, to $12.1
million, or $0.37 per diluted share, for the three months ended September 30,
2004, from $16.2 million, or $0.50 per diluted share, for the three months ended
September 30, 2003.
Income from continuing operations decreased $3.7 million, or $0.11 per
diluted share, to $13.0 million, or $0.40 per diluted share, for the three
months ended September 30, 2004, from $16.7 million, or $0.51 per diluted share,
for the three months ended September 30, 2003.
The decrease in net income and income from continuing operations for
the three months ended September 30, 2004, compared to the three months ended
September 30, 2003, resulted from several factors, including: (i) the impact of
four major hurricanes on our Florida operations, which resulted in damage to
several of our facilities and to our inventory, caused business interruptions at
many of our dealerships for extended periods of time; and, to a lesser extent,
the storms caused general disruption of our operations in Georgia, North
Carolina and Mississippi, (ii) a decline in used retail unit volumes as the
manufacturer incentives on new vehicles continue to have an adverse impact on
the used vehicle market, (iii) lower gross profit levels on new vehicles and
incremental advertising costs incurred in an effort to maintain new vehicle
sales volumes and (iv) "start-up" costs associated with opening new dealership
locations and our entrance into the Southern California market. These factors
were partially offset by (i) the results of franchises we acquired subsequent to
June 30, 2003, (ii) the sale of non-profitable dealerships and (iii) the
continued strong performance of our fixed operations and F&I.
Revenues-
For the Three Months
(Dollars in thousands) Ended September 30,
----------------------- Increase %
2004 2003 (Decrease) Change
---------- ---------- ---------- ------
New vehicle data:
Retail revenues-same store (1) ............................... $ 763,799 $ 754,866 $ 8,933 1%
Retail revenues-acquisitions ................................. 81,315 --
---------- ----------
Total new retail revenues .............................. 845,114 754,866 90,248 12%
Fleet revenues-same store (1) ................................ 17,378 6,474 10,904 168%
Fleet revenues-acquisitions .................................. 371 --
---------- ----------
Total fleet revenues ................................... 17,749 6,474 11,275 174%
---------- ----------
New vehicle revenue, as reported ....................... $ 862,863 $ 761,340 $ 101,523 13%
========== ==========
New retail units-same store (1) .............................. 25,378 25,900 (522) (2)%
========== ==========
New retail units-actual ...................................... 28,411 25,900 2,511 10%
========== ==========
Used vehicle data:
Retail revenues-same store (1) ............................... $ 223,506 $ 232,717 $ (9,211) (4)%
Retail revenues-acquisitions ................................. 22,111 --
---------- ----------
Total used retail revenues ............................. 245,617 232,717 12,900 6%
Wholesale revenues-same store (1) ............................ 76,023 76,654 (631) (1)%
Wholesale revenues-acquisitions .............................. 8,358 --
---------- ----------
Total wholesale revenues ............................... 84,381 76,654 7,727 10%
---------- ----------
Used vehicle revenue, as reported ...................... $ 329,998 $ 309,371 $ 20,627 7%
========== ==========
Used retail units-same store (1) ............................. 14,379 15,202 (823) (5)%
========== ==========
Used retail units-actual ..................................... 15,645 15,202 443 3%
========== ==========
Parts, service and collision repair:
Revenues-same store (1) ...................................... $ 143,349 $ 136,385 $ 6,964 5%
Revenues-acquisitions ........................................ 14,067 --
---------- ----------
Parts, service and collision repair revenue, as reported $ 157,416 $ 136,385 $ 21,031 15%
========== ==========
23
For the Three Months
(Dollars in thousands) Ended September 30,
----------------------- Increase %
2004 2003 (Decrease) Change
---------- ---------- ---------- ------
Finance and insurance, net:
Platform revenues-same store (1) ............................. $ 35,208 $ 34,623 $ 585 2%
Platform revenues-acquisitions ............................... 3,133 --
---------- ----------
Platform finance and insurance revenue ................ 38,341 34,623 3,718 11%
Corporate revenues ........................................... 1,408 1,300
---------- ----------
Finance and insurance revenue, as reported ............ $ 39,749 $ 35,923 $ 3,826 11%
========== ==========
Total revenue:
Same store (1) ............................................... $1,259,263 $1,241,719 $ 17,544 1%
Corporate .................................................... 1,408 1,300
Acquisitions ................................................. 129,355 --
---------- ----------
Total revenue, as reported ............................. $1,390,026 $1,243,019 $ 147,007 12%
========== ==========
(1) Same store amounts include the results of dealerships for the identical
months for each period presented in the comparison, commencing with the
first full month in which the dealership was owned by us.
Revenues - Florida Operations (as reported and same store) -
For the Three Months
(Dollars in thousands) Ended September 30,
----------------------- Increase %
2004 2003 (Decrease) Change
---------- ---------- ---------- ------
New vehicle data:
New retail revenues ........................................... $ 229,771 $ 234,401 $ (4,630) (2)%
Fleet revenues ................................................ 9,095 2,787 6,308 226%
---------- ----------
New vehicle revenue ..................................... 238,866 237,188 $ 1,678 1%
Used vehicle data:
Used retail revenues .......................................... 71,084 83,658 $(12,574) (15)%
Wholesale revenues ............................................ 22,505 22,910 (405) (2)%
---------- ----------
Used vehicle revenue .................................... 93,589 106,568 $(12,979) (12)%
Parts, service and collision repair revenue....................... 38,172 36,201 $ 1,971 5%
Finance and insurance revenue .................................... 11,844 12,622 $ (778) (6)%
---------- ----------
Total revenue - Florida operations ............................... $ 382,471 $ 392,579 $(10,108) (3)%
========== ==========
New retail units .............................................. 8,196 8,580 (384) (4)%
========== ==========
Used retail units ............................................. 5,030 6,030 (1,000) (17)%
========== ==========
Total revenues increased 12% to $1.4 billion for the three months ended
September 30, 2004, from $1.2 billion for the three months ended September 30,
2003. Same store revenues were up 1% to $1.3 billion for the three months ended
September 30, 2004, compared to the three months ended September 30, 2003.
Revenues at our Florida dealerships were down $10.1 million, or 3% on a same
store basis, primarily as a result of the hurricanes in the third quarter of
2004. Same store new retail units were down 522 units as compared to the third
quarter of 2003, with the majority of the decrease, 384 units, coming from our
Florida operations; however, same store new vehicle retail revenues were up 1%
reflecting a shift in our sales mix toward luxury and mid-line import sales.
Same store used vehicle retail revenue decreased 4% to $223.5 million for the
three months ended September 30, 2004, from $232.7 million for the three months
ended September 30, 2003, as manufacturer incentive programs on new vehicles
continue to negatively impact our used retail unit sales volume and sales
revenue per used vehicle retailed. Same store used retail units were down 823
units for the three months ended September 30, 2004, as compared to the prior
year quarter, with our Florida operations down 1,000 units. We anticipate that
manufacturer incentives on new vehicles will continue to drive customers toward
new vehicles during the remainder of 2004. We expect that this environment will
continue to have a negative impact on the used vehicle retail market.
Fixed operations revenue increased 15%, 5% on a same store basis, for
the three months ended September 30, 2004, compared to the three months ended
September 30, 2003, primarily due to an increase in our "customer pay" and
24
warranty parts and service businesses, collectively up approximately 9% on a
same store basis. The growth in our "customer pay" business is a result of our
continued service adviser training, expansion of our product offerings and the
implementation of more aggressive advertising campaigns. Our warranty business
continued its positive performance driven by continued manufacturer recall
programs and increased work on imported vehicles, which typically generates
higher revenue than domestic brands. We expect existing manufacturer recalls
will continue through the end of 2004. These improvements were offset by
reduction in our collision repair center business, which decreased 9% for the
three months ended September 30, 2004, compared to the three months ended
September 30, 2003. The decrease in our collision repair center business is
primarily attributable to the Texas region, where a major hailstorm in the
second quarter of 2003 resulted in incremental collision repair revenues in the
third quarter of 2003.
Platform F&I increased $0.6 million to $35.2 million on a same store
basis for the three months ended September 30, 2004, compared to the three
months ended September 30, 2003, despite a $0.8 million decrease in F&I revenues
from our Florida operations. This increase is attributable to additional product
offerings, the utilization of menus in the F&I sales process, the maturation of
our corporate-sponsored programs and the sharing of best practices among our
platforms. Also contributing to our same store Platform F&I results is the
improvement of the F&I operations at franchises we acquired in prior periods, as
F&I revenues have historically continued to improve for several years after we
acquire a dealership. Platform F&I excludes revenue resulting from contracts
negotiated by our corporate office, which is attributable to retail units sold
during prior periods. Total F&I revenue increased 11% to $39.7 million for the
three months ended September 30, 2004, from $35.9 million for the three months
ended September 30, 2003.
We expect total revenue to increase as we continue to acquire
dealerships and expand our service capacity in order to meet anticipated future
demand. In addition, the relatively high volume of new vehicles sales over the
past several years, resulting from the highly "incentivized" new vehicle market,
will drive future service demand.
Gross Profit-
For the Three Months
(Dollars in thousands, except for per vehicle data) Ended September 30,
----------------------- Increase %
2004 2003 (Decrease) Change
---------- ---------- ---------- ------
New vehicle data:
Retail gross profit-same store (1) ........................... $ 52,986 $ 54,734 $ (1,748) (3)%
Retail gross profit-acquisitions ............................. 6,693 --
--------- ---------
Total new retail gross profit .......................... 59,679 54,734 4,945 9%
Fleet gross profit-same store (1) ............................ 620 291 329 113%
Fleet gross profit-acquisitions .............................. 2 --
--------- ---------
Total fleet gross profit ............................... 622 291 331 114%
--------- ---------
New vehicle gross profit, as reported .................. $ 60,301 $ 55,025 $ 5,276 10%
========= =========
New retail units-same store (1) .............................. 25,378 25,900 (522) (2)%
========= =========
New retail units-actual ...................................... 28,411 25,900 2,511 10%
========= =========
Used vehicle data:
Retail gross profit-same store (1) ........................... $ 25,763 $ 27,992 $ (2,229) (8)%
Retail gross profit-acquisitions ............................. 2,315 --
--------- ---------
Total used retail gross profit ......................... 28,078 27,992 86 --
Wholesale gross profit-same store (1) ........................ (1,064) (821) (243) (30)%
Wholesale gross profit-acquisitions .......................... (252) --
--------- ---------
Total wholesale gross profit ........................... (1,316) (821) (495) (60)%
--------- ---------
Used vehicle gross profit, as reported ................. $ 26,762 $ 27,171 $ (409) (2)%
========= =========
Used retail units-same store (1) ............................. 14,379 15,202 (823) (5)%
========= =========
Used retail units-actual ..................................... 15,645 15,202 443 3%
========= =========
Parts, service and collision repair:
Gross profit-same store (1) .................................. $ 74,440 $ 72,569 $ 1,871 3%
Gross profit-acquisitions .................................... 6,991 --
--------- ---------
Parts, service and collision repair gross profit,
as reported ........................................ $ 81,431 $ 72,569 $ 8,862 12%
========= =========
25
For the Three Months
(Dollars in thousands, except for per vehicle data) Ended September 30,
----------------------- Increase %
2004 2003 (Decrease) Change
---------- ---------- ---------- ------
Finance and insurance, net:
Platform gross profit-same store (1) ......................... $ 35,208 $ 34,623 $ 585 2%
Platform gross profit-acquisitions ........................... 3,133 --
--------- ---------
Platform finance and insurance gross profit (2) ........ 38,341 34,623 3,718 11%
Gross profit-corporate ....................................... 1,408 1,300
--------- ---------
Finance and insurance gross profit, as reported ........ $ 39,749 $ 35,923 $ 3,826 11%
========= =========
Platform gross profit PVR-same store (1) ..................... $ 886 $ 842 $ 44 5%
Platform gross profit PVR-actual (2) ......................... $ 870 $ 842 $ 28 3%
Gross profit PVR-actual ...................................... $ 902 $ 874 $ 28 3%
Total gross profit:
Same store (1) ............................................... $ 187,953 $ 189,388 $ (1,435) (1)%
Corporate .................................................... 1,408 1,300
Acquisitions ................................................. 18,882 --
--------- ---------
Total gross profit, as reported ........................ $ 208,243 $ 190,688 $ 17,555 9%
========= =========
(1) Same store amounts include the results of dealerships for the identical
months for each period presented in the comparison, commencing with the
first full month in which the dealership was owned by us.
(2) Refer to "Reconciliation of Non-GAAP Financial Information" for further
discussion regarding platform finance and insurance gross profit PVR.
Gross Profit - Florida Operations (as reported and same store) -
For the Three Months
(Dollars in thousands) Ended September 30,
----------------------- Increase %
2004 2003 (Decrease) Change
---------- ---------- ---------- ------
New vehicle data:
New retail gross profit ..................................... $ 16,464 $ 17,807 $ (1,343) (8)%
Fleet gross profit .......................................... 431 332 99 30%
--------- ---------
New vehicle gross profit .............................. 16,895 18,139 $ (1,244) (7)%
Used vehicle data:
Total used retail gross profit .............................. 9,714 10,895 $ (1,181) (11)%
Total wholesale gross profit ................................ (652) (210) (442) (210)%
--------- ---------
Used vehicle gross profit ............................. 9,062 10,685 $ (1,623) (15)%
Parts, service and collision repair gross profit................ 21,409 21,574 $ (165) (1)%
Finance and insurance gross profit ............................ 11,844 12,622 $ (778) (6)%
--------- ---------
Total gross profit - Florida operations ....................... $ 59,210 $ 63,020 $ (3,810) (6)%
========= =========
New retail units ........................................... 8,196 8,580 (384) (4)%
========= =========
Used retail units .......................................... 5,030 6,030 (1,000) (17)%
========= =========
Platform gross profit PVR .................................. $ 896 $ 864 $ 32 4%
Gross profit PVR ........................................... $ 896 $ 864 $ 32 4%
Gross profit increased 9% to $208.2 million for the three months ended
September 30, 2004, from $190.7 million for the three months ended September 30,
2003. Same store gross profit decreased $1.4 million to $188.0 million for the
three months ended September 30, 2004, from $189.4 million for the three months
ended September 30, 2003, with our Florida operations down $3.8 million.
Same store gross profit on new retail vehicle sales decreased $1.7
million for the three months ended September 30, 2004 to $53.0 million, compared
to the three months ended September 30, 2003, with the majority of the decrease,
$1.3 million, coming from our Florida operations. Excluding our Florida
operations, same store gross profit increased 2% for the three months ended
26
September 30, 2004, compared to the prior year period. The remaining
deterioration in gross profit on new retail vehicle same store sales was
primarily due to general market conditions, which forced us to reduce our gross
profit PVR in order to maintain unit sales volumes.
Same store gross profit on used vehicle retail sales decreased $2.2
million to $25.8 million for the three months ended September 30, 2004, from
$28.0 million for the three months ended September 30, 2003. Approximately $1.2
million of this decrease was attributable to our Florida operations. Same store
gross profit decreased as the highly competitive used vehicle market and
manufacturer incentives on new vehicles, which encouraged many customers who
otherwise would have purchased used vehicles to purchase new vehicles instead,
continued to negatively impact used vehicle unit sales volumes.
Same store gross profit from fixed operations increased 3% to $74.4
million for the three months ended September 30, 2004, from $72.6 million for
the three months ended September 30, 2003, despite a $0.2 million decrease from
our Florida operations. The increases in fixed operations gross profit resulted
primarily from increased "customer pay" and warranty work in both parts and
service.
Selling, General and Administrative Expenses-
SG&A expenses increased $24.3 million to $168.8 million for the three
months ended September 30, 2004, from $144.5 million for the three months ended
September 30, 2003. SG&A expenses as a percentage of gross profit for the three
months ended September 30, 2004, increased to 81.1%, from 75.8% for the three
months ended September 30, 2003.
Contributing to the increase in SG&A expenses as percentage of gross
profit was (i) the performance of our Florida operations as a result of the
severe weather during the quarter, (ii) additional rent expense resulting from
the sale-leaseback transaction completed in the third quarter of 2004 and (iii)
"start-up" operations. SG&A expense as a percentage of gross profit of our
Florida operations increased to 79.2% for the third quarter of 2004 from 69.8%
for the same period in 2003. Additional rent resulting from a sale-leaseback
transaction completed during the quarter accounted for 2.0% of the increase. In
addition, SG&A expenses continued to increase as percentage of gross profit
during the quarter as compared to last year as a result of our entrance into
the Southern California market and our new Honda location in North Dallas.
These four locations incurred $7.5 million of SG&A expenses during the quarter
while only contributing $6.3 million of gross profit. In addition, advertising
expense continued to rise as a percentage of gross profit as we continued an
aggressive advertising strategy aimed at maintaining our vehicle market share.
We expect SG&A expenses to increase in the future as we incur
incremental rent costs resulting from operating leases associated with the
sale-leaseback transaction with an unaffiliated third party that we completed in
July 2004. We estimate that the annualized rent expense associated with these
leases will be approximately $9.2 million.
Depreciation and Amortization-
Depreciation and amortization expense was flat at $5.0 million for the
three months ended September 30, 2004, as compared to the three months ended
September 30, 2003; as increased depreciation and amortization from property and
equipment additions were offset primarily by reductions in property and
equipment sold in sale-leaseback transactions completed in the third quarter of
2004.
We expect depreciation and amortization expense to increase slightly in
the future due to ongoing capital improvement projects and dealership
acquisitions.
Other Income (Expense)-
Floor plan interest expense increased $1.2 million to $5.4 million for
the three months ended September 30, 2004, from $4.2 million for the three
months ended September 30, 2003. This increase was attributable to higher
average floor plan notes payable levels during the third quarter of 2004,
compared to the third quarter of 2003, resulting primarily from the additional
inventory of acquired franchises, which was off-set by our decision to use the
proceeds from a sale-leaseback transaction in July 2004 to repay a portion of
our floor plan notes payable. In addition, interest rates on our floor plan
notes payable were higher in the third quarter of 2004 as compared to 2003.
Other interest expense decreased $1.4 million to $8.7 million for the
three months ended September 30, 2004, from $10.1 million for the three months
ended September 30, 2003. The decrease was principally attributable to the
repayment of $63.7 million of our mortgage indebtedness with the proceeds from a
sale-leaseback transaction in July 2004 and the effect of capitalized interest
on a higher level of construction in progress in the third quarter of 2004 as
compared to 2003. Other interest expense is dependent upon increases or
decreases in the interest rates on our variable debt and the use of our
committed credit facility to finance future acquisitions. However, we expect
that other interest expense will remain relatively consistent for the near
future, as we anticipate our next several acquisitions will be funded with our
available cash.
27
Income Tax Provision-
Income tax expense decreased $2.4 million to $7.8 million for the three
months ended September 30, 2004, from $10.2 million for the three months ended
September 30, 2003, due, in part, to a $6.2 million decrease in income from
continuing operations before taxes for the three months ended September 30,
2004, compared to the three months ended September 30, 2003. In addition, our
effective tax rate was 37.5% for the three months ended September 30, 2004,
compared to 37.9% for the three months ended September 30, 2003. We reduced our
effective tax rate in the second half of 2003, which resulted in an effective
tax rate of 38.0% for the year ended December 31, 2003, after adjusting for a
goodwill impairment charge at our Oregon platform and the related tax benefit.
As we operate nationally, our effective tax rate is dependent upon our
geographic revenue mix, and we evaluate our effective tax rate periodically
based on our revenue sources. We expect that our annual effective tax rate will
be between 37.0% and 37.5% for the year ending December 31, 2004.
Discontinued Operations-
During the three months ended September 30, 2004, we sold five
dealership locations (six franchises), and as of September 30, 2004, we were
actively pursuing the sale of four dealership locations (six franchises) and
real estate associated with three former dealership locations. The $0.9 million
loss from discontinued operations is attributable to the loss on sale of
dealerships sold during the quarter and the operating losses of the franchises
mentioned above. The loss from discontinued operations for the three months
ended September 30, 2003, of $0.5 million included the results of operations of
the dealerships mentioned above; one dealership location (two franchises) that
was sold during the first six months of 2004; three dealership locations (four
franchises), eleven used-only dealership locations and two ancillary businesses
that were sold during 2003; and the net loss on the sale of businesses during
the three months ended September 30, 2003.
Nine Months Ended September 30, 2004, Compared to Nine Months Ended
September 30, 2003
Net income increased $1.6 million, or $.05 per diluted share, to $37.2
million, or $1.14 per diluted share, for the nine months ended September 30,
2004, from $35.6 million, or $1.09 per diluted share, for the nine months ended
September 30, 2003.
Income from continuing operations increased $0.4 million, or $0.01 per
diluted share, to $38.7 million, or $1.18 per diluted share, for the nine months
ended September 30, 2004, from $38.3 million, or $1.17 per diluted share, for
the nine months ended September 30, 2003.
The increases in net income and income from continuing operations for
the nine months ended September 30, 2004, compared to the nine months ended
September 30, 2003, resulted from several factors, including: (i) the operations
of franchises we acquired subsequent to December 31, 2002, (ii) the sale of
non-profitable dealerships and (iii) continued strong performance of our fixed
operations and F&I; which were offset by (i) the impact of the hurricanes in
Florida during the third quarter of 2004, (ii) gross margin pressure on new
vehicle sales and decreased used vehicle unit volumes in a challenging retail
vehicle market, (iii) increases in SG&A expenses in the second and third
quarters including incremental advertising in an effort to increase new vehicle
sales volume and (iv) the costs associated with opening new locations and
entering new markets.
Revenues-
For the Nine Months
(Dollars in thousands) Ended September 30,
----------------------- Increase %
2004 2003 (Decrease) Change
---------- ---------- ---------- ------
New vehicle data:
Retail revenues - same store (1) ............................. $2,147,385 $2,079,269 $ 68,116 3%
Retail revenues - acquisitions ............................... 228,389 --
---------- ----------
Total new retail revenues .............................. 2,375,774 2,079,269 296,505 14%
Fleet revenues - same store (1) .............................. 45,266 34,990 10,276 29%
Fleet revenues -acquisitions ................................. 605 --
---------- ----------
Total fleet revenues ................................... 45,871 34,990 10,881 31%
---------- ----------
New vehicle revenue, as reported ....................... $2,421,645 $2,114,259 $ 307,386 15%
========== ==========
New retail units - same store (1) ............................ 71,996 72,327 (331) --
========== ==========
New retail units - actual .................................... 79,979 72,327 7,652 11%
========== ==========
28
For the Nine Months
(Dollars in thousands) Ended September 30,
----------------------- Increase %
2004 2003 (Decrease) Change
---------- ---------- ---------- ------
Used vehicle data:
Retail revenues - same store (1) ............................. $ 652,780 $ 682,182 $ (29,402) (4)%
Retail revenues - acquisitions ............................... 67,882 --
---------- ----------
Total used retail revenues ............................. 720,662 682,182 38,480 6%
Wholesale revenues - same store (1) .......................... 220,596 205,519 15,077 7%
Wholesale revenues - acquisitions ............................ 24,097 --
---------- ----------
Total wholesale revenues ............................... 244,693 205,519 39,174 19%
---------- ----------
Used vehicle revenue, as reported ...................... $ 965,355 $ 887,701 $ 77,654 9%
========== ==========
Used retail units - same store (1) ........................... 42,799 44,470 (1,671) (4)%
========== ==========
Used retail units - actual ................................... 46,534 44,470 2,064 5%
========== ==========
Parts, service and collision repair:
Revenues - same store (1) .................................... $ 407,990 $ 389,012 $ 18,978 5%
Revenues - acquisitions ...................................... 42,516 --
---------- ----------
Parts, service and collision repair revenue, as reported $ 450,506 $ 389,012 $ 61,494 16%
========== ==========
Finance and insurance:
Platform revenues - same store (1) ........................... $ 97,801 $ 94,941 $ 2,860 3%
Platform revenues - acquisitions ............................. 8,212 --
---------- ----------
Platform finance and insurance revenue ................ 106,013 94,941 11,072 12%
Corporate revenues ........................................... 4,556 1,300
---------- ----------
Finance and insurance revenue, as reported ............ $ 110,569 $ 96,241 $ 14,328 15%
========== ==========
Total revenue:
Same store (1) ............................................... $3,571,818 $3,485,913 $ 85,905 2%
Corporate .................................................... 4,556 1,300
Acquisitions ................................................. 371,701 --
---------- ----------
Total revenue, as reported ............................. $3,948,075 $3,487,213 $ 460,862 13%
========== ==========
(1) Same store amounts include the results of dealerships for the identical
months for each period presented in the comparison, commencing with the
first full month in which the dealership was owned by us.
Total revenues increased 13% to $3.9 billion for the nine months ended
September 30, 2004, from $3.5 billion for the nine months ended September 30,
2003. Same store revenue grew 2% to $3.6 billion for the nine months ended
September 30, 2004, from $3.5 billion for the nine months ended September 30,
2003, despite a 3% decrease in revenue from our Florida operations, which
resulted primarily from the hurricanes during the third quarter of 2004. Same
store new vehicle retail revenue grew $68.1 million, or 3%, during the first
nine months of 2004, compared to the first nine months of 2003, reflecting a
shift in our sales mix toward luxury and mid-line import sales. Same store used
vehicle retail revenue decreased $29.4 million, or 4%, to $652.8 million on
1,671 less units in the first nine months of 2004, compared to the same period
of 2003. The majority of our volume loss was in the second quarter of 2004, as
we were forced to focus on new vehicle retail sales volumes during a period of
declining demand and devoted less effort to our used retail vehicle business.
Fixed operations revenue increased 16%, 5% on a same store basis, for
the nine months ended September 30, 2004, compared to the nine months ended
September 30, 2003, as "customer pay" and warranty parts and service businesses,
collectively up approximately 8% on a same store basis, were offset by an 8%
decrease in our collision repair center business, virtually all in the
second and third quarters, especially at our Texas platform. Our warranty
business continued its positive performance, driven by continued manufacturer
recall programs and increased work on import brands, which typically generate
higher revenues than domestic brands. The decrease in our collision repair
center business is primarily attributable to the Texas platform, where a major
hailstorm in the second quarter of 2003 resulted in incremental collision repair
revenues in the second and third quarters of 2003.
Platform F&I increased $2.9 million to $97.8 million on a same store
basis for the nine months ended September 30, 2004, compared to the nine months
ended September 30, 2003, as we continued to benefit from increased product
offerings, the utilization of menus in the F&I sales process, the maturation of
our corporate-sponsored programs and the sharing of best practices among our
platforms. Also contributing to our same store Platform F&I results is the
improvement of the F&I operations at franchises we acquired in prior periods.
29
Total F&I revenue increased 15% to $110.6 million for the nine months ended
September 30, 2004, compared to $96.2 million for the nine months ended
September 30, 2003.
Gross Profit-
For the Nine Months
(Dollars in thousands, except for unit and per vehicle data) Ended September 30,
----------------------- Increase %
2004 2003 (Decrease) Change
---------- ---------- ---------- ------
New vehicle data:
Retail gross profit-same store (1) ....................... $ 152,310 $ 154,643 $ (2,333) (2)%
Retail gross profit-acquisitions ......................... 19,228 --
--------- ---------
Total new retail gross profit ...................... 171,538 154,643 16,895 11%
Fleet gross profit-same store (1) ........................ 1,624 865 759 88%
Fleet gross profit-acquisitions .......................... 3 --
--------- ---------
Total fleet gross profit ........................... 1,627 865 762 88%
--------- ---------
New vehicle gross profit, as reported .............. $ 173,165 $ 155,508 $ 17,657 11%
========= =========
New retail units-same store (1) .......................... 71,996 72,327 (331) --
========= =========
New retail units-actual .................................. 79,979 72,327 7,652 11%
========= =========
Used vehicle data:
Retail gross profit-same store (1) ....................... $ 77,987 $ 81,670 $ (3,683) (5)%
Retail gross profit-acquisitions ......................... 7,255 --
--------- ---------
Total used retail gross profit ..................... 85,242 81,670 3,572 4%
Wholesale gross profit-same store (1) .................... (2,250) (679) (1,571) (231)%
Wholesale gross profit-acquisitions ...................... (330) --
--------- ---------
Total wholesale gross profit ....................... (2,580) (679) (1,901) (280)%
--------- ---------
Used vehicle gross profit, as reported ............. $ 82,662 $ 80,991 $ 1,671 2%
========= =========
Used retail units-same store (1) ......................... 42,799 44,470 (1,671) (4)%
========= =========
Used retail units-actual ................................. 46,534 44,470 2,064 5%
========= =========
Parts, service and collision repair:
Gross profit-same store (1) .............................. $ 214,413 $ 207,208 $ 7,205 3%
Gross profit-acquisitions ................................ 21,203 --
--------- ---------
Parts, service and collision repair
gross profit, as reported ....................... $ 235,616 $ 207,208 $ 28,408 14%
========= =========
Finance and insurance, net:
Platform gross profit-same store (1) ..................... $ 97,801 $ 94,941 $ 2,860 3%
Platform gross profit-acquisitions ....................... 8,212 --
--------- ---------
Platform finance and insurance gross profit (2) ......... 106,013 94,941 11,072 12%
Gross profit-corporate ................................... 4,556 1,300
--------- ---------
Finance and insurance gross profit, as reported .... $ 110,569 $ 96,241 $ 14,328 15%
========= =========
Platform gross profit PVR-same store (1) ................. $ 852 $ 813 $ 39 5%
Platform gross profit PVR-actual (2) ..................... $ 838 $ 813 $ 25 3%
Gross profit PVR-actual .................................. $ 874 $ 824 $ 50 6%
Total gross profit:
Same store (1) ........................................... $ 541,885 $ 538,648 $ 3,237 1%
Corporate ................................................ 4,556 1,300
Acquisitions ............................................. 55,571 --
--------- ---------
Total gross profit, as reported .................... $ 602,012 $ 539,948 $ 62,064 11%
========= =========
30
(1) Same store amounts include the results of dealerships for the
identical months for each period presented in the comparison,
commencing with the first full month in which the dealership was owned
by us.
(2) Refer to "Reconciliation of Non-GAAP Financial Information" for
further discussion regarding platform finance and insurance gross
profit PVR.
Gross profit increased 11% to $602.0 million for the nine months ended
September 30, 2004, from $539.9 million for the nine months ended September 30,
2003. Same store gross profit increased 1% to $541.9 million for the nine months
ended September 30, 2004, from $538.6 million for the nine months ended
September 30, 2003.
Same store gross profit on new retail vehicle sales decreased 2% for
the nine months ended September 30, 2004, compared to the nine months ended
September 30, 2003, driven primarily by a 6% decrease in same store gross profit
from our Florida operations during the third quarter of 2004 compared to the
same period of the prior year. In addition, the general market conditions,
particularly in the second and third quarters of 2004, forced us to reduce our
gross profit PVR in order to maintain unit sales volumes.
Same store gross profit on used vehicle retail sales decreased 5% to
$78.0 million for the nine months ended September 30, 2004, from $81.7 million
for the nine months ended September 30, 2003, as the used vehicle market
continued to be affected by the use of new vehicle incentives by manufacturers,
encouraging many customers who otherwise would have purchased used vehicles to
purchase new vehicles instead.
Same store gross profit from fixed operations increased 3% to $214.4
million for the nine months ended September 30, 2004, from $207.2 million for
the nine months ended September 30, 2003, resulting primarily from increased
"customer pay" and warranty work in both parts and service.
Selling, General and Administrative Expenses-
For the nine months ended September 30, 2004, SG&A expenses increased
$61.7 million to $481.3 million, from $419.6 million for the nine months ended
September 30, 2003. SG&A expenses as a percentage of gross profit for the nine
months ended September 30, 2004 increased to 80.0%, from 77.7% for the nine
months ended September 30, 2003.
SG&A expenses as a percentage of gross profit increased, in particular
in the third quarter of 2004, as the result of (i) the hurricanes in Florida,
(ii) the impact of a new store opening in Texas and our entrance into the
Southern California market, (iii) increased rent resulting from a sale-leaseback
transaction completed in July 2004 and (iv) increased advertising expense in the
second and third quarters in an effort to maintain retail unit volumes.
Depreciation and Amortization-
Depreciation and amortization expense increased $0.8 million to $15.4
million for the nine months ended September 30, 2004, from $14.6 million for the
nine months ended September 30, 2003. This increase is primarily related to the
addition of property and equipment acquired during 2003 and 2004, offset by a
reduction in property and equipment sold in sale-leaseback transactions
completed during 2003 and 2004.
Other Income (Expense)-
Floor plan interest expense increased $2.3 million to $15.2 million for
the nine months ended September 30, 2004, from $12.9 million for the nine months
ended September 30, 2003. This increase was attributable to higher average new
vehicle inventory levels during the first nine months of 2004, compared to the
same period in 2003, resulting primarily from the additional inventory of
acquired franchises, and higher average interest rates on our floor plan note
payable. These factors were offset by our decision to use the proceeds from a
sale-leaseback transaction to repay a portion of our floor plan notes payable.
Other interest expense decreased $0.8 million to $29.2 million for the
nine months ended September 30, 2004, as compared to the nine months ended
September 30, 2003. The decrease was attributable to the $63.7 million repayment
of mortgage debt in connection with a sale-leaseback transaction in July 2004
and the effect of capitalized interest on a higher level of construction in
progress during the 2004 period, compared to the 2003 period. These factors were
offset by a higher average debt balance during the nine months ended September
30, 2004, compared to the prior year period.
Income Tax Provision-
Income tax expense decreased $1.6 million to $22.9 million for the nine
months ended September 30, 2004, compared to the nine months ended September 30,
31
2003, due, in part, to the $1.3 million decrease in income from continuing
operations before taxes for the nine months ended September 30, 2004, compared
to the nine months ended September 30, 2003. In addition, our effective tax rate
for the nine months ended September 30, 2004, was 37.2% compared to 39.0% for
the nine months ended September 30, 2003. During the second quarter of 2004, we
received a state tax benefit of $0.2 million, which had the effect of reducing
our effective tax rate for the nine months ended September 30, 2004, from 37.5%
to 37.2%.
Discontinued Operations-
During the nine months ended September 30, 2004, we sold six dealership
locations (eight franchises), and as of September 30, 2004, we were actively
pursuing the sale of four dealership locations (six franchises) and real estate
associated with three former dealership locations. The $1.4 million loss from
discontinued operations is attributable to the loss on sale of dealerships sold
during the nine months ended September 30, 2004 and the operating losses of the
franchises mentioned above. The loss from discontinued operations for the nine
months ended September 30, 2003, of $2.7 million includes the net operating
losses of the dealerships mentioned above and five dealership locations (six
franchises), eleven used-only dealership locations and two ancillary businesses
that were sold during 2003, offset by the net gain on the sale of businesses
during the nine months ended September 30, 2003.
LIQUIDITY AND CAPITAL RESOURCES
We require cash to fund working capital needs, finance acquisitions of
new dealerships and fund capital expenditures. We believe that our cash and cash
equivalents on hand as of September 30, 2004, our funds generated through future
operations and the funds available for borrowings under our committed credit
facility, floor plan financing agreements, mortgage notes and proceeds from
sale-leaseback transactions will be sufficient to fund our debt service and
working capital requirements, commitments and contingencies, acquisitions and
any seasonal operating requirements for the foreseeable future.
As of September 30, 2004, we had cash and cash equivalents of $18.3
million and working capital of $274.1 million. In addition, we had $100.0
million available for borrowings under our committed credit facility for
acquisition financing, of which we are permitted to borrow $75.0 million for
general corporate purposes. During the third quarter of 2004, we received net
proceeds of approximately $114.9 million from the sale of land and buildings in
a sale-leaseback transaction, of which we used $63.7 million to repay the
related mortgage indebtedness.
Floor Plan Financing-
We finance substantially our entire new vehicle inventory and a portion
of our used vehicle inventory under floor plan financing agreements. The floor
plan financing agreements provide used vehicle financing up to a fixed
percentage of the value of each financed used vehicle. As of September 30, 2004,
availability under the floor plan financing agreements with the Ford Motor
Credit Company, DaimlerChrysler Financial Services North America, L.L.C and
General Motors Acceptance Corporation totaled $695.0 million. In addition, we
had total availability of $32.2 million as of September 30, 2004, under
ancillary floor plan financing agreements with Comerica Bank and Navistar
Financial for the heavy trucks business operated by our Atlanta platform. As of
September 30, 2004, we had $557.2 million outstanding under all our floor plan
financing agreements.
Acquisitions and Acquisition Financing-
During the nine months ended September 30, 2004, we acquired six
automotive dealership locations (six franchises) for an aggregate purchase price
of $74.2 million, of which $71.6 million was paid in cash through the use of
available funds, with the remaining $2.6 million representing the fair value of
future payments associated with our acquisitions.
We plan to use our available cash, borrowings under our committed
credit facility or proceeds from future sale-leaseback transactions to finance
future acquisitions.
Pending Acquisitions and Divestitures-
As of September 30, 2004, we had executed contracts to acquire three
dealership locations (three franchises) representing combined annual revenues of
approximately $135.0 million for approximately $36.0 million.
As of September 30, 2004, we were actively pursuing the divestiture of
four dealership locations (six franchises) and real estate associated with three
former dealership locations. During the fourth quarter of 2004, we sold one
dealership location (one franchise) for net proceeds of $1.7 million resulting
in a gain of approximately $0.9 million. This gain is net of estimated costs to
complete these transactions, which may be adjusted in future periods as
additional information becomes available.
32
Sale-Leaseback Transactions
During the third quarter of 2004, we executed a sale-leaseback
transaction, pursuant to which, among other things, we sold certain land and
buildings with a net book value of $102.5 million to a third party for $116.0
million and entered into long-term operating leases for these facilities. The
gain on the transaction of $12.4 million, which is net of estimated deal costs,
is being amortized as a component of SG&A expenses over the lease terms. We used
$63.7 million of the proceeds from this transaction to repay the related
mortgage indebtedness.
Debt Covenants-
We are subject to certain financial covenants in connection with our
debt and lease agreements, including the financial covenants described below.
Our committed credit facility includes certain financial ratios with the
following requirements: (i) a current ratio of at least 1.2 to 1, of which our
ratio was approximately 1.4 to 1 as of September 30, 2004; (ii) a fixed charge
coverage ratio of at least 1.2 to 1, of which our ratio was approximately 1.3 to
1 as of September 30, 2004 and (iii) a leverage ratio of not more than 4.4 to 1,
of which our ratio was approximately 0.4 to 1 as of September 30, 2004. A breach
of these covenants could cause an acceleration of repayment and termination of
the facility by the Lenders. Certain of our lease agreements include financial
ratios with the following requirements: (i) a liquidity ratio of at least 1.2 to
1, of which our ratio was approximately 1.4 to 1 as of September 30, 2004 and
(ii) an EBITDA based coverage ratio of at least 1.5 to 1, of which our ratio was
approximately 2.5 to 1 as of September 30, 2004. A breach of these covenants
would give rise to certain lessor remedies under our various lease agreements,
the most severe of which include the following: (a) termination of the
applicable lease, (b) termination of certain of the tenant's lease rights, such
as renewal rights and rights of first offer or negotiation relating to the
purchase of the premises, and/or (c) a liquidated damages claim equal to the
extent to which the accelerated rents under the applicable lease for the
remainder of the lease term exceed the fair market rent over the same periods.
As of September 30, 2004, we were in compliance with all our debt and lease
agreement covenants.
Cash Flows for the Nine Months Ended September 30, 2004 Compared to the Nine
Months Ended September 30, 2003
Operating Activities-
Net cash used in operating activities totaled $26.2 million and net
cash provided by operating activities totaled $54.5 million for the nine months
ended September 30, 2004, and 2003, respectively. Cash flow from operating
activities includes net income adjusted for non-cash items and changes in
working capital, including changes in floor plan notes payable related to
vehicle inventory.
The decrease in cash provided by operating activities for the nine
months ended September 30, 2004, compared to the nine months ended September 30,
2003, was primarily attributable to differences in the timing of inventory
purchases and obtaining the related floor plan financing and our decision to use
a portion of the cash proceeds from a sale-leaseback transaction in July 2004 to
repay floor plan notes payable. These timing differences and the repayment of
our floor plan note payable during the third quarter of 2004 resulted in net
cash outflow of $66.5 million during the nine months ended September 30, 2004
and net cash inflow of $10.5 million for the nine months ended September 30,
2003.
Investing Activities-
Net cash used in investing activities totaled $123.3 million and $103.1
million for the nine months ended September 30, 2004 and 2003, respectively.
Cash used in investing activities relate primarily to capital expenditures and
acquisitions.
Capital expenditures totaled $56.6 million and $37.6 million for the
nine months ended September 30, 2004 and 2003, respectively. We finance a
substantial portion of our capital expenditures through sale-leaseback
transactions. We received $10.1 million and $4.1 million in advances from
unaffiliated third party lessors under certain of our sale-leaseback agreements
during the nine months ended September 30, 2004 and 2003, respectively, which is
included in investing activities on our Consolidated Statements of Cash Flows.
In addition, under certain of our sale-leaseback agreements, we are constructing
facilities on property owned by an unaffiliated third party lessor, and will
sell the facilities to the lessor upon completion of the construction. As of
September 30, 2004, we had invested $2.6 million in the construction of these
facilities that is included in Assets Held for Sale on our Consolidated Balance
Sheets, which the lessor has committed to purchase. Capital expenditures are
related to manufacturer-required improvements of our existing dealerships,
upgrades of existing facilities and construction of new facilities. Future
capital expenditures will be primarily related to operational improvements to
maintain our current operations or to provide us with acceptable rates of return
on investments and manufacturer-required spending to upgrade existing dealership
facilities. We expect that capital expenditures will total between $70.0 million
and $75.0 million for 2004.
Cash used to acquire dealerships totaled $71.6 million for the nine
months ended September 30, 2004, compared to $72.4 million for the nine months
33
ended September 30, 2003. During the nine months ended September 30, 2004, we
paid for the acquisition of six dealership locations (six franchises) in cash
using available funds. During the nine months ended September 30, 2003, we
funded the acquisition of five dealerships (ten franchises) and one ancillary
business, of which $0.3 million was paid in cash and $72.1 million was funded
through borrowings under our committed credit facility.
Financing Activities-
Cash provided by financing activities totaled $61.1 million and $74.7
million for the nine months ended September 30, 2004, and 2003, respectively.
Cash flow from financing activities consisted primarily of proceeds from
mortgage notes payable, loaner vehicle financing and sale-leaseback
transactions. Cash flow used in financing activity consisted of payments under
our committed credit facility and mortgages associated with our real estate,
proceeds from sale-leaseback activity and, during 2003, purchases of treasury
stock and distributions to our former members.
During the nine months ended September 30, 2004, our borrowings of
$46.4 million and repayments of debt of $108.7 million related primarily to
mortgages associated with our real estate. During the nine months ended
September 30, 2003, our borrowings of $115.4 million related primarily to
borrowings under our committed credit facility for acquisitions and mortgages
associated with our real estate, and our repayments of debt of $59.4 million
related primarily to mortgages.
During the nine months ended September 30, 2004, we received $121.8
million of proceeds from lessors in connection with sale-leaseback activity. In
July 2004, we sold land and buildings under a sale-leaseback transaction for net
proceeds of approximately $114.9 million (net of $1.1 million in transactions
fees), of which we received cash of approximately $111.7 million during the
third quarter of 2004. We expect to receive the additional $3.2 million upon
satisfaction of the terms of the agreement in the fourth quarter of 2004. The
remaining proceeds from sale-leaseback transactions relate to advances from
lessors for facility construction and improvement projects at our dealership
locations. During the nine months ended September 30, 2003, we received proceeds
of $31.2 million from the sale of assets under sale-leaseback transactions and
advances from lessors in connection with future sale-leaseback transactions. The
advances from lessors under our sale-leaseback transactions during 2003 related
primarily to facility construction and improvement projects at our dealership
locations.
During the nine months ended September 30, 2003, we paid $9.7 million
to repurchase shares of our common stock. We have no immediate plans to
repurchase additional shares of our common stock.
We distributed $3.0 million to our former members (current
shareholders) during the 2003 period to cover their income tax liabilities. This
distribution represented our final limited liability company distribution to our
former members.
Off-Balance Sheet Transactions
We had no off-balance sheet transactions during the periods presented
other than those disclosed in Note 12 of our consolidated financial statements.
APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect amounts of assets and
liabilities and disclosures of contingent assets and liabilities as of the date
of the financial statements and reported amounts of revenues and expenses during
the periods presented. Actual amounts could differ from those estimates. On an
ongoing basis, management evaluates its estimates and assumptions and the
effects of revisions are reflected in the financial statements in the period in
which they are determined to be necessary. We have disclosed all significant
accounting policies in Note 2 to the consolidated financial statements included
in our Annual Report on Form 10-K for the year ended December 31, 2003. We have
identified the following policies, which were discussed with the Audit Committee
of our Board of Directors, as critical to understanding our results of
operations.
Inventories-
Our inventories are stated at the lower of cost or market. We use the
specific identification method to value our vehicle inventories and the
"first-in, first-out" method ("FIFO") to account for our parts inventories. We
maintain a reserve for specific inventory units that have a cost basis in excess
of fair value. These reserves were $5.9 million and $4.6 million as of September
30, 2004 and December 31, 2003, respectively. In assessing lower of cost or
market for new vehicles, we primarily consider the aging of vehicles along with
the timing of annual and model changeovers. The assessment of lower of cost or
market for used vehicles considers recent data and trends such as loss history,
current aging of the inventory and current market conditions.
34
Notes Receivable-Finance Contracts-
As of September 30, 2004 and December 31, 2003, we had outstanding
notes receivable from finance contracts of $32.2 million and $33.1 million,
respectively (net of an allowance for credit losses of $6.0 million and $4.7
million, respectively). These notes have initial terms ranging from 12 to 60
months, and are collateralized by the related vehicles. The assessment of our
allowance for credit losses considers historical loss ratios and the performance
of the current portfolio with respect to past due accounts. We continually
analyze our current portfolio against our historical performance. In addition,
we consider the value of the underlying collateral in our assessment of the
reserve.
Chargeback Reserve-
We receive commissions from the sale of various insurance and vehicle
service contracts to customers and through the arrangement of vehicle financing
for customers. We may be charged back ("chargeback") for such commissions in the
event of early termination of the contracts by customers. The revenues from
financing fees and commissions are recorded at the time of the sale of the
vehicles and a reserve for future chargebacks is established at that time. The
reserve considers our historical chargeback experience, including timing, as
well as national industry trends. This data is evaluated on a product-by-product
basis. These reserves totaled $10.8 million and $11.8 million as of September
30, 2004 and December 31, 2003, respectively.
Goodwill and Other Intangible Assets-
Our intangible assets relate primarily to goodwill and manufacturer
franchise rights associated with acquisitions of dealerships, which we account
for under the purchase method of accounting as required by SFAS No. 141,
"Business Combinations." In accordance with SFAS No. 142, "Goodwill and Other
Intangible Assets," we do not amortize goodwill and other intangible assets,
which are deemed to have indefinite lives, but test the value of these assets
for impairment at least annually, or more frequently if any event occurs or
circumstances change that indicate possible impairment. We have determined that
manufacturer franchise rights have an indefinite life as there are no legal,
contractual, economic or other factors that limit their useful lives and they
are expected to generate cash flows indefinitely due to the historically long
lives of the manufacturers' brand names. Goodwill and franchise rights are
allocated to each reporting unit at the platform and franchise level,
respectively. The fair market value of our manufacturer franchise rights is
determined at the acquisition date through discounting the projected cash flows
attributable to each manufacturer franchise right. Goodwill represents the
excess cost of the businesses acquired over the fair market value of the
identifiable net assets.
Upon adoption of SFAS No. 142 on January 1, 2002, we determined that
each of our platforms qualified as a reporting unit as we operated in one
segment, and our platforms are one level below our corporate level, discrete
financial information existed for each platform and the management of each
platform directly reviewed the platform's performance. We are continuously
adapting our operating structure and searching for ways to standardize policies,
share best practices and centralize administrative functions. In the future, if
we determine that our platforms no longer meet the requirements of a reporting
unit, we will reevaluate the reporting units with respect to the changes in our
reporting structure.
We review the value of platform goodwill and manufacturer franchise
rights for impairment during the fourth quarter of each year. The first step of
the impairment test identifies potential impairments by comparing the estimated
fair value of each reporting unit with its corresponding net book value,
including goodwill. If the net book value of a reporting unit exceeds its fair
value, the second step of the impairment test determines the potential
impairment loss by comparing the estimated fair value of goodwill with its
carrying amount. If the estimated fair value of goodwill is less than the
carrying amount, the carrying value of goodwill is adjusted to reflect its
estimated fair value.
All other intangible assets are deemed to have definite lives and are
amortized on a straight-line basis over the life of the asset ranging from 3-15
years and are tested for impairment when circumstances indicate that the
carrying value of the asset might be impaired.
RECONCILIATION OF NON-GAAP FINANCIAL INFORMATION
Platform Finance and Insurance Gross Profit PVR-
We evaluate our finance and insurance gross profit performance on a PVR
basis by dividing our total finance and insurance gross profit by the number of
retail vehicles sold. During 2003, our corporate office renegotiated a contract
with one of our third party finance and insurance product providers, which
resulted in the recognition of revenue during the three and nine months ended
September 30, 2004, that was attributable to retail vehicles sold during prior
periods. We believe that platform finance and insurance, which excludes the
additional revenue derived from this contract, provides a more accurate measure
of our finance and insurance operating performance.
35
The following table reconciles finance and insurance gross profit to platform
finance and insurance gross profit, and provides the necessary components to
calculate platform finance and insurance gross profit PVR:
For the Three For the Nine
Months Ended Months Ended
(In thousands, except for unit and per vehicle data) September 30, 2004 September 30, 2004
------------------ ------------------
Finance and insurance gross profit, net (as reported) $ 39,749 $110,569
Less: Corporate finance and insurance gross profit . (1,408) (4,556)
-------- --------
Platform finance and insurance gross profit ......... $ 38,341 $106,013
======== ========
Platform finance and insurance gross profit PVR ..... $ 870 $ 838
======== ========
Retail units sold:
New retail units .................................. 28,411 79,979
Used retail units ................................. 15,645 46,534
-------- --------
Total ............................................ 44,056 126,513
======== ========
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We are exposed to market risk from changes in interest rates on a
significant portion of our outstanding indebtedness. Based on $263.0 million of
variable rate long-term debt (including the current portion) outstanding at
September 30, 2004, a 1% change in interest rates would result in a change of
approximately $2.6 million to our annual other interest expense. Based on floor
plan amounts outstanding at September 30, 2004, a 1% change in the interest
rates would result in a change of approximately $5.6 million to annual floor
plan interest expense.
We receive interest credit assistance from certain automobile
manufacturers, which is accounted for as a reduction in the cost of Inventories
on the accompanying Consolidated Balance Sheet and recognized as a reduction to
cost of sales upon the sale of the related inventory. For the nine months ended
September 30, 2004, we recognized $18.9 million as a reduction to cost of sales
associated with interest credit assistance. Although we can provide no assurance
as to the amount of future interest credit assistance, it is our expectation,
based on historical data that an increase in prevailing interest rates would
result in increased interest credit assistance from certain automobile
manufacturers.
Interest Rate Hedges
We use interest rate swaps to manage our capital structure. In December
2003, we entered into two forward interest rate swaps with a combined notional
principal amount of $200.0 million, which will provide a hedge against changes
in the interest rates of our variable rate floor plan notes payable for a period
of eight years beginning in March 2006. During the second quarter of 2004, we
reduced the notional principal amount of these swap agreements to $170.0
million. This transaction resulted in a gain of $0.4 million, which is included
in Other Liabilities on the accompanying Consolidated Balance Sheets and will be
amortized on a straight-line basis as an offset to interest expense over the
swap period, beginning in March 2006. The swap agreements were designated and
qualify as interest rate hedges of future changes in interest rates of our
variable rate floor plan indebtedness and we expect that these hedges, which may
contain minor ineffectiveness, will be highly effective during the swap period
from March 2006 through February 2014. As of September 30, 2004, the swap
agreements had a fair value of $6.2 million, which is included in Other
Liabilities on the accompanying Consolidated Balance Sheets.
During December 2003, we entered into an interest rate swap agreement
with a notional principal amount of $200.0 million as a hedge against changes in
the fair value of our 8% Senior Subordinated Notes due 2014. Under the terms of
swap agreement, we are required to make variable rate payments based on
six-month LIBOR and receive a fixed rate of 8.0%. This swap agreement was
designated and qualifies as a fair value hedge of our fixed rate senior
subordinated debt and does not contain any ineffectiveness. As of September 30,
2004, the swap had a fair value of $1.9 million, which is included in Other
Liabilities on the accompanying Consolidated Balance Sheets.
36
Item 4. Controls and Procedures
Based on their evaluation of our disclosure controls and procedures and
internal control over financial reporting, our principal executive officer and
principal financial officer have concluded that (i) our disclosure controls and
procedures as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934 (the Exchange Act) were effective as of September 30, 2004,
and (ii) no change in internal control over financial reporting occurred during
the quarter ended September 30, 2004, that has materially affected, or is
reasonably likely to materially affect, such internal control over financial
reporting.
---
Forward-Looking Statements
This report contains "forward-looking statements" as that term is
defined in the Private Securities Litigation Reform Act of 1995. The
forward-looking statements include statements relating to goals, plans and
projections regarding the Company's financial position, results of operations,
market position, product development and business strategy. These statements are
based on management's current expectations and involve significant risks and
uncertainties that may cause results to differ materially from those set forth
in the statements. These risks and uncertainties include, among other things,
o market factors,
o the Company's relationships with vehicle manufacturers and other suppliers,
o risks associated with the Company's substantial indebtedness,
o risks related to pending and potential future acquisitions,
o general economic conditions both nationally and locally, and
o governmental regulations and legislation.
There can be no guarantees the Company's plans for future operations
will be successfully implemented or that they will prove to be commercially
successful. We undertake no obligation to publicly update any forward-looking
statement, whether as a result of new information, future events or otherwise.
37
Item 6. Exhibits
a. Exhibits
31.1 Certificate of Chief Executive Officer pursuant to Rule 13a-14(a)/
15d-14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certificate of Chief Financial Officer pursuant to Rule 13a-14(a)/
15d-14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certificate of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certificate of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Asbury Automotive Group, Inc.
(Registrant)
Date: November 8, 2004 By: /s/ KENNETH B. GILMAN
--------------------------------------
Name: Kenneth B. Gilman
Title: Chief Executive Officer
and President
Date: November 8, 2004 By: /s/ J. GORDON SMITH
---------------------------------------
Name: J. Gordon Smith
Title: Senior Vice President and Chief
Financial Officer
(Principal Financial Officer)
39
INDEX TO EXHIBITS
Exhibit
Number Description of Documents
- ------ ------------------------
31.1 Certificate of Chief Executive Officer pursuant to Rule 13a-14(a)/
15d-14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certificate of Chief Financial Officer pursuant to Rule 13a-14(a)/
15d-14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certificate of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certificate of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
40