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 June 30, 2005
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 August 3, 2005, was 32,745,053 (net of
1,586,587 treasury shares).
ASBURY AUTOMOTIVE GROUP, INC.
INDEX
PART I - Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 2005 (Unaudited)
and December 31, 2004 1
Consolidated Statements of Income for the Three and
Six Months Ended June 30, 2005 and 2004 (Unaudited) 2
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2005 and 2004 (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 37
Item 4. Controls and Procedures 37
PART II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders 39
Item 6. Exhibits 39
Signatures 40
Index to Exhibits 41
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
ASBURY AUTOMOTIVE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
June 30, December 31,
ASSETS 2005 2004
------ ----------- ------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents .................................... $ 11,049 $ 28,093
Contracts-in-transit ......................................... 112,432 105,360
Restricted investments ....................................... 1,813 1,645
Accounts receivable (net of allowance of
$2,224 and $2,073, respectively) ........................... 150,183 148,196
Inventories .................................................. 722,160 761,557
Deferred income taxes ........................................ 15,576 15,576
Prepaid and other current assets ............................. 58,512 56,831
Assets held for sale ......................................... 44,660 26,248
----------- -----------
Total current assets .................................... 1,116,385 1,143,506
PROPERTY AND EQUIPMENT, net ..................................... 205,982 195,788
GOODWILL ........................................................ 464,947 461,650
RESTRICTED INVESTMENTS, net of current portion .................. 3,282 2,478
OTHER LONG-TERM ASSETS .......................................... 97,903 94,537
----------- -----------
Total assets ............................................ $ 1,888,499 $ 1,897,959
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Floor plan notes payable ..................................... $ 613,137 $ 650,948
Current maturities of long-term debt ......................... 32,936 33,880
Accounts payable ............................................. 66,649 53,078
Accrued liabilities .......................................... 88,993 89,066
Liabilities associated with assets held for sale ............. 27,618 20,538
----------- -----------
Total current liabilities ............................... 829,333 847,510
LONG-TERM DEBT .................................................. 476,408 492,536
DEFERRED INCOME TAXES ........................................... 38,375 40,360
OTHER LONG-TERM LIABILITIES ..................................... 39,927 35,821
COMMITMENTS AND CONTINGENCIES (Note 13)
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 34,195,206 and 34,163,759 shares issued,
including shares held in treasury, respectively ............ 342 342
Additional paid-in capital ................................... 413,490 413,094
Retained earnings ............................................ 113,532 87,905
Treasury stock, at cost; 1,586,587 shares held ............... (15,032) (15,032)
Accumulated other comprehensive loss ......................... (7,876) (4,577)
----------- -----------
Total shareholders' equity .............................. 504,456 481,732
----------- -----------
Total liabilities and shareholders' equity .............. $ 1,888,499 $ 1,897,959
=========== ===========
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 Six Months
Ended June 30, Ended June 30,
-------------------------- --------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
REVENUES:
New vehicle ....................... $ 903,767 $ 814,427 $ 1,688,962 $ 1,494,018
Used vehicle ...................... 366,917 316,278 705,023 615,330
Parts, service and collision repair 164,529 146,085 322,696 283,933
Finance and insurance, net ........ 41,646 37,453 79,334 68,374
----------- ----------- ----------- -----------
Total revenues ................ 1,476,859 1,314,243 2,796,015 2,461,655
----------- ----------- ----------- -----------
COST OF SALES:
New vehicle ....................... 841,065 755,381 1,571,227 1,383,735
Used vehicle ...................... 335,403 289,033 643,015 561,044
Parts, service and collision repair 79,016 68,224 154,701 134,172
----------- ----------- ----------- -----------
Total cost of sales ........... 1,255,484 1,112,638 2,368,943 2,078,951
----------- ----------- ----------- -----------
GROSS PROFIT ......................... 221,375 201,605 427,072 382,704
OPERATING EXPENSES:
Selling, general and administrative 170,551 156,332 338,358 300,694
Depreciation and amortization ..... 5,102 5,084 10,037 9,947
----------- ----------- ----------- -----------
Income from operations ........ 45,722 40,189 78,677 72,063
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Floor plan interest expense ....... (7,977) (4,883) (14,973) (9,128)
Other interest expense ............ (10,131) (10,186) (19,619) (20,506)
Interest income ................... 235 109 491 381
Other income (expense), net ....... 186 152 158 (59)
----------- ----------- ----------- -----------
Total other expense, net ...... (17,687) (14,808) (33,943) (29,312)
----------- ----------- ----------- -----------
Income before income taxes .... 28,035 25,381 44,734 42,751
INCOME TAX EXPENSE ................... 10,513 9,341 16,775 15,855
----------- ----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS .... 17,522 16,040 27,959 26,896
DISCONTINUED OPERATIONS, net of tax .. (1,536) (1,292) (2,332) (1,784)
----------- ----------- ----------- -----------
Net income .................... $ 15,986 $ 14,748 $ 25,627 $ 25,112
=========== =========== =========== ===========
EARNINGS PER COMMON SHARE:
Basic ............................. $ 0.49 $ 0.45 $ 0.79 $ 0.77
=========== =========== =========== ===========
Diluted ........................... $ 0.49 $ 0.45 $ 0.78 $ 0.77
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:
Basic ............................. 32,604 32,470 32,596 32,452
=========== =========== =========== ===========
Diluted ........................... 32,725 32,656 32,753 32,688
=========== =========== =========== ===========
See Notes to Consolidated Financial Statements.
2
ASBURY AUTOMOTIVE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For the Six Months
Ended June 30,
----------------------
2005 2004
--------- ---------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income .......................................................................... $ 25,627 $ 25,112
Adjustments to reconcile net income to net cash provided by operating activities-
Depreciation and amortization ..................................................... 10,037 9,947
Depreciation and amortization from discontinued operations ........................ 552 719
Amortization of deferred financing fees ........................................... 1,013 1,170
Change in allowance for doubtful accounts ......................................... 151 (327)
(Gain) loss on sale of discontinued operations .................................... (10) 474
Other adjustments ................................................................. 2,993 3,543
Changes in operating assets and liabilities, net of acquisitions and divestitures-
Contracts-in-transit .............................................................. (7,072) (2,482)
Accounts receivable ............................................................... (10,375) (35,511)
Proceeds from the sale of accounts receivable ..................................... 8,126 9,976
Inventories ....................................................................... 31,705 (63,735)
Prepaid and other current assets .................................................. (14,027) (5,862)
Floor plan notes payable .......................................................... (19,777) 52,471
Accounts payable and accrued liabilities .......................................... 13,097 16,578
Other long-term assets and liabilities ............................................ 1,354 (7,422)
--------- ---------
Net cash provided by operating activities ...................................... 43,394 4,651
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures - non-financed ................................................. (16,942) (18,391)
Capital expenditures - financeable .................................................. (18,236) (16,130)
Construction advances associated with sale-leaseback agreements ..................... 2,595 9,493
Acquisitions ........................................................................ (4,692) (71,594)
Proceeds from the sale of property and equipment .................................... 477 870
Proceeds from the sale of discontinued operations ................................... 2,771 834
Purchases of restricted investments ................................................. (1,791) --
Maturities of restricted investments ................................................ 913 913
Net proceeds (issuance) of finance contracts ........................................ 253 (372)
--------- ---------
Net cash used in investing activities .......................................... (34,652) (94,377)
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from borrowings ............................................................ 20,734 3,850
Repayments of debt .................................................................. (41,989) (6,813)
Payments of debt issuance costs ..................................................... (4,927) --
Proceeds from the exercise of stock options ......................................... 396 857
--------- ---------
Net cash used in financing activities .......................................... (25,786) (2,106)
--------- ---------
Net decrease in cash and cash equivalents ...................................... (17,044) (91,832)
CASH AND CASH EQUIVALENTS, beginning of period ......................................... 28,093 106,711
--------- ---------
CASH AND CASH EQUIVALENTS, end of period ............................................... $ 11,049 $ 14,879
========= =========
See Note 12 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 94 dealership locations (129 franchises) as of June 30, 2005. 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 22 collision repair centers that serve our markets. Our retail network
is organized into regional dealership groups, formerly called "platforms," in 23
metropolitan markets, which are marketed under different local brands.
During the first quarter of 2005, we reorganized our platforms into
principally four regions: (i) Florida (comprising our Coggin dealerships,
operating primarily in Jacksonville and Orlando, and our Courtesy dealerships
operating in Tampa), (ii) West (comprising our McDavid dealerships operating
throughout Texas, our Thomason dealerships operating in Portland, Oregon, our
Spirit dealerships operating primarily in Los Angeles, California and our
Northern California Dealerships operating in Sacramento and Fresno, California),
(iii) Mid-Atlantic (comprising our Crown dealerships operating in North
Carolina, South Carolina and Southern Virginia) and (iv) South (comprising our
Nalley dealerships operating in Atlanta, Georgia, and our North Point
dealerships operating in Little Rock, Arkansas.) Our Plaza dealerships operating
in St. Louis, Missouri and our Gray Daniels dealerships operating in Jackson,
Mississippi remain standalone operations.
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 June 30, 2005, and for the
three and six months ended June 30, 2005 and 2004 have been included. The
results of operations for the three and six months ended June 30, 2005 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, 2004.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America ("GAAP") 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 as a component of new vehicle cost of sales
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
receive commissions from financing institutions for arranging customer
financing. 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.
4
Goodwill and Other Intangible Assets
Upon adoption of Statement of Financial Accounting Standards ("SFAS")
No. 142 "Goodwill and Other Intangible Assets," on January 1, 2002, we
determined that each of our platforms qualified as a reporting unit since we
operate in one segment, 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. In late 2004, we
began the process of reorganizing our platforms into four regions. Within this
more streamlined structure, we will evaluate our operations and financial
results by dealership in the aggregate, rather than by platform. The general
managers, with direction from a centralized management team, including corporate
and regional management, will continue to have the independence and flexibility
to respond effectively to local market conditions. Based on the changes in our
management, operational and reporting structure during the first quarter of
2005, we evaluate goodwill at the operating segment level.
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 SFAS No. 148, "Accounting for Stock-Based Compensation-Transition
and Disclosure-An amendment of FASB Statement No. 123."
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 Six Months
Ended June 30, Ended June 30,
-------------------- --------------------
(In thousands, except per share data) 2005 2004 2005 2004
-------- -------- -------- --------
Net income ....................................... $ 15,986 $ 14,748 $ 25,627 $ 25,112
Adjustments to net income:
Stock-based compensation expense included in
net income, net of tax ....................... -- 62 1 83
Pro forma stock-based compensation expense,
net of tax ................................... (674) (1,406) (1,340) (2,595)
-------- -------- -------- --------
Pro forma net income ............................. $ 15,312 $ 13,404 $ 24,288 $ 22,600
======== ======== ======== ========
Net income per common share--basic (as reported) . $ 0.49 $ 0.45 $ 0.79 $ 0.77
======== ======== ======== ========
Net income per common share--diluted (as reported) $ 0.49 $ 0.45 $ 0.78 $ 0.77
======== ======== ======== ========
Pro forma net income per common share--basic ..... $ 0.47 $ 0.41 $ 0.75 $ 0.70
======== ======== ======== ========
Pro forma net income per common share--diluted ... $ 0.47 $ 0.41 $ 0.74 $ 0.69
======== ======== ======== ========
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 weighted average assumptions:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------- ------------------
2005 2004 2005 2004
-------- -------- ------- -------
Risk free interest rate................ 3.7% 3.6% 3.8% 3.3%
Expected life of options............... 4 years 4 years 4 years 4 years
Expected stock price volatility........ 45% 51% 45% 51%
Expected dividend yield................ N/A N/A N/A N/A
5
Derivative Instruments and Hedging Activities
We utilize derivative financial instruments to manage our capital
structure. The types of risks hedged are those relating to the variability of
cash flows and changes in the fair value of our financial instruments caused by
movements in interest rates. We document our risk management strategy and assess
hedge effectiveness at the inception and during the term of each hedge.
Derivatives are reported at fair value on the accompanying Consolidated
Balance Sheets. The changes in fair value of the effective portion of "cash
flow" hedges are reported as a component of accumulated other comprehensive
income (loss). Amounts in accumulated other comprehensive income (loss) are
reclassified to interest expense to the extent the hedge becomes ineffective.
The change in fair value of "fair value" hedges are recorded as a component of
interest expense. Changes in the fair value of the associated hedged exposures
(i.e., notes payable) are also recorded as a component of interest expense.
Measurements of hedge ineffectiveness are based on comparisons between
the gains or losses of the actual interest rate swaps and the gains or losses of
hypothetical interest rate swaps which are designed to reflect the critical
terms of the defined hedged exposures. Ineffective portions of these interest
rate swaps are reported as a component of interest expense in the accompanying
Consolidated Statements of Income. We recognized minor ineffectiveness during
the three and six months ended June 30, 2005 and no ineffectiveness during the
three and six months ended June 30, 2004.
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 June 30, 2005 and December 31, 2004, 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 six months ended June 30, 2004, have been reclassified to reflect
the status of our discontinued operations as of June 30, 2005.
Statements of Cash Flows
The net change in floor plan financing of inventories is reflected as
an operating activity in the accompanying Consolidated Statements of Cash Flows.
The net change in service loaner vehicle financing is reflected as an
operating activity in the accompanying Consolidated Statements of Cash Flows.
Construction advances from third parties in connection with
sale-leaseback agreements for the construction of new dealership facilities or
leasehold improvements on our dealership facilities are included in investing
activities in the accompanying Consolidated Statements of Cash Flows, which is
the preferred presentation from a selection of alternatives.
Financeable capital expenditures include all expenditures that we have
financed during the reporting period or intend to finance in future reporting
periods through sale-leaseback transactions or mortgage financing. In addition,
in connection with the sale of one of our dealerships, we purchased the real
estate on which the dealership is located for approximately $5.4 million and the
buyer of our dealership has agreed to purchase the real estate from us for $5.4
million. We have classified this transaction as a financeable capital
expenditure in the accompanying Consolidated Statement of Cash Flows.
Non-financed capital expenditures include all capital expenditures that are not
included in financeable capital expenditures.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 123 (revised 2004), "Share-based Payment." This statement
requires compensation costs related to share-based payment transactions to be
recognized in the financial statements. With limited exceptions, the amount of
compensation cost will be measured based on the grant-date fair value of the
equity or liability instruments issued. Compensation cost will be recognized
over the period that an employee provides service in exchange for the award.
SFAS No. 123 (revised 2004) replaces SFAS No. 123, "Accounting for Stock-Based
Compensation," and supersedes APB Opinion No. 25, "Accounting for Stock Issued
to Employees." In April 2005, the Securities and Exchange Commission adopted a
new rule that amends the compliance dates for SFAS No. 123 (revised 2004).
Registrants would have been required to implement the standard as of the
beginning of the first interim or annual period that begins after June 15, 2005.
The Commission's new rule allows companies to implement SFAS No 123 (Revised
2004) at the beginning of their next fiscal year, instead of the next reporting
period, that begins after June 15, 2005. We are currently evaluating the effect
of this statement on our consolidated financial statements and related
disclosures.
6
3. INVENTORIES
Inventories consist of the following:
June 30, December 31,
(In thousands) 2005 2004
--------- ------------
New vehicles.................. $ 563,414 $ 619,098
Used vehicles................. 114,429 98,071
Parts and accessories......... 44,317 44,388
--------- ---------
Total inventories.......... $ 722,160 $ 761,557
========= =========
The lower of cost or market reserves for inventory totaled $4.4 million
and $4.9 million as of June 30, 2005 and December 31, 2004, respectively.
4. ACQUISITIONS
During the six months ended June 30, 2005, we acquired one dealership
location (one franchise) for an aggregate purchase price of $5.2 million, of
which $4.7 million was paid in cash through the use of available funds, with the
remaining $0.5 million representing the fair value of future payments. During
the six months ended June 30, 2004, we acquired six dealership locations (six
franchises) for an aggregate purchase price of $73.8 million, of which $71.6
million was paid in cash through the use of available funds, with the remaining
$2.2 million representing the fair value of future payments associated with one
of our acquisitions.
The allocation of purchase price for acquisitions is as follows:
For the Six Months
Ended June 30,
------------------
(In thousands) 2005 2004
------- -------
Working capital.................... $ 8 $ 5,155
Fixed assets....................... 278 3,774
Other assets....................... -- 257
Goodwill........................... 3,541 53,101
Franchise rights................... 1,350 11,500
------- -------
Total purchase price............. $ 5,177 $73,787
======= =======
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.
5. GOODWILL AND MANUFACTURER FRANCHISE RIGHTS
The changes in the carrying amount of goodwill for the six months ended
June 30, 2005 are as follows:
(In thousands)
Balance, December 31, 2004............................... $461,650
Current year acquisitions.............................. 3,541
Adjustments associated with prior year acquisitions.... 519
Current year divestitures.............................. (763)
--------
Balance, June 30, 2005................................... $464,947
========
7
The changes in the carrying amount of manufacturer franchise rights,
which are included in Other Long-Term Assets on the accompanying Consolidated
Balance Sheets, are as follows:
(In thousands)
Balance, December 31, 2004............................... $ 41,513
Current year acquisitions.............................. 1,350
Franchises held for sale............................... (1,236)
Other.................................................. (294)
--------
Balance, June 30, 2005................................... $ 41,333
========
During the six months ended June 30, 2005, we sold two dealership
locations (four franchises) resulting in the removal of $0.8 million of goodwill
from our Consolidated Balance Sheets. Two of the franchises sold had been
allocated a total of $0.5 million of manufacturer franchise rights, which were
also removed from our Consolidated Balance Sheets.
During the six months ended June 30, 2005, we acquired one dealership
location (one franchise) and allocated $1.4 million of the purchase price to
manufacturer franchise rights.
6. ASSETS AND LIABILITIES HELD FOR SALE
Assets and liabilities classified as held for sale include (i) assets
and liabilities associated with discontinued operations and real estate
associated with former dealership locations, (ii) costs of completed
construction projects included in pending sale-leaseback transactions where an
unaffiliated third party has advanced us or will advance us funds equal to the
cost of construction and (iii) costs of completed construction projects included
in pending sale-leaseback transactions where an unaffiliated third party has
agreed to purchase the assets from us upon completion of the construction.
Assets and liabilities associated with discontinued operations include
three dealership locations (five franchises) and real estate associated with one
former dealership location as of June 30, 2005, and two dealership locations
(four franchises) and real estate associated with two former dealership
locations as of December 31, 2004. During the three months ended June 30, 2005,
we sold real estate associated with one former dealership location with a book
value of $0.8 million for $0.9 million. Assets associated with discontinued
operations totaled $44.7 million and $11.8 million, and liabilities associated
with discontinued operations totaled $27.6 million and $7.5 million as of June
30, 2005 and December 31, 2004, respectively.
Included in Assets Held for Sale as of December 31, 2004 was $14.5
million of costs associated with one completed project included in a pending
sale-leaseback transaction. As of December 31, 2004, Liabilities Associated with
Assets Held for Sale included $13.1 million of funds advanced to us from an
unaffiliated third party associated with the completed construction project.
During the six months ended June 30, 2005, we received $1.4 million of funds
from the unaffiliated third party and completed this pending sale-leaseback
transaction, which resulted in the removal of $14.5 million of Assets Held for
Sale and Liabilities Associated with Assets Held for Sale from our Consolidated
Balance Sheets.
A summary of assets and liabilities held for sale is as follows:
June 30, December 31,
(In thousands) 2005 2004
-------- ------------
Assets:
Inventories .............................. $30,722 $ 7,846
Property and equipment, net .............. 12,702 17,902
Manufacturer franchise rights............. 1,236 500
------- -------
Total assets ............................. 44,660 26,248
Liabilities:
Floor plan notes payable ................. 27,618 7,456
Other liabilities ........................ -- 13,082
------- -------
Total liabilities ........................ 27,618 20,538
------- -------
Net assets held for sale .................... $17,042 $ 5,710
======= =======
Included in Prepaid and Other Current Assets on the accompanying
Consolidated Balance Sheets are costs associated with construction projects,
which we intend to sell through sale-leaseback transactions but have not been
completed and therefore are not available for sale. In connection with these
8
construction projects, we have entered into sale-leaseback agreements whereby an
unaffiliated third party purchased the land and is either advancing funds to us
equal to the cost of construction of dealership facilities being constructed on
the land or has agreed to purchase the assets from us upon completion of the
project. We capitalize the cost of the construction and lease payments 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 construction and the related
liability from our Consolidated Balance Sheets and amortize the capitalized
lease payments on a straight-line basis over the lease term. During the six
months ended June 30, 2005, we completed one sale-leaseback transaction
associated with a construction project that was completed subsequent to December
31, 2004, which resulted in the removal of $1.2 million of Assets Held for Sale
and Liabilities Associated with Assets Held for Sale from our Consolidated
Balance Sheets. The book value of assets associated with construction projects
that have not been completed as of June 30, 2005 and December 31, 2004 totaled
$10.2 million and $6.7 million, respectively. As of June 30, 2005 and December
31, 2004, the book value of liabilities associated with these construction
projects totaled $1.6 million.
7. LONG-TERM DEBT
Long-term debt consists of the following:
June 30, December 31,
(In thousands) 2005 2004
--------- ------------
9% Senior Subordinated Notes due 2012 ............. $ 250,000 $ 250,000
8% Senior Subordinated Notes due 2014
($200.0 million face value, net of hedging
activity of $446 and $2,736, respectively) ..... 199,554 197,264
Mortgage notes payable ............................ 24,727 49,732
Notes payable collateralized by loaner vehicles.... 22,810 21,627
Committed Credit Facility ......................... 5,000 --
Capital lease obligations ......................... 4,370 4,421
Other notes payable ............................... 2,883 3,372
--------- ---------
509,344 526,416
Less--current portion ............................. (32,936) (33,880)
--------- ---------
Long-term debt .................................... $ 476,408 $ 492,536
========= =========
During the three months ended June 30, 2005, we borrowed $15.0 million
from our committed credit facility, of which $8.2 million was used for the
purchase of real estate on which two of our dealerships are located. The
remainder of the borrowings was used for general corporate purposes. During the
three months ended June 30, 2005, we repaid $10.0 million of the amounts
borrowed from our committed credit facility and subsequent to the end of the
quarter we repaid the remaining $5.0 million.
8. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITY
We have entered into two forward interest rate swaps with a combined
notional principal amount of $170.0 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. The swap agreements were
designated and qualify as cash flow hedges of our variable rate floor plan notes
payable and will contain minor ineffectiveness. As of June 30, 2005 and December
31, 2004, the swaps had a fair value of $12.3 million and $7.1 million,
respectively, and are included in Other Long-term Liabilities on the
accompanying Consolidated Balance Sheets.
We have 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 the 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 8% Senior Subordinated Notes due 2014 and
did not contain any ineffectiveness. As a result our 8% Senior Subordinated
Notes due 2014 have been adjusted by the fair value of the related swap. As of
June 30, 2005 and December 31, 2004, the swap agreement had a fair value of $0.4
million and $2.7 million, respectively, and is included in Other Long-Term
Liabilities on the accompanying Consolidated Balance Sheets.
We have entered into an interest rate swap agreement with a notional
principal amount of $15.2 million as a hedge against future changes in the
interest rate of our variable rate mortgage notes payable. Under the terms of
the swap agreement, we are required to make payments at a fixed rate of 6.08%
and receive a variable rate based on LIBOR. This swap agreement was designated
and qualifies as a cash flow hedge of changes in the interest rate of our
variable rate mortgage notes payable and will contain minor ineffectiveness. As
9
of June 30, 2005 and December 31, 2004, the swap agreement had a fair value of
$0.2 million, which was included in Other Long-Term Liabilities on the
accompanying Consolidated Balance Sheets.
9. COMPREHENSIVE INCOME
The following table provides a reconciliation of net income to
comprehensive income:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------- --------------------
(In thousands) 2005 2004 2005 2004
-------- -------- -------- --------
Net income ............................... $ 15,986 $ 14,748 $ 25,627 $ 25,112
Other comprehensive income:
Change in fair value of cash flow hedges (8,368) (4,631) (5,279) (6,701)
Income tax benefit associated with
cash flow hedges ..................... 3,138 1,737 1,980 2,532
-------- -------- -------- --------
Comprehensive income ..................... $ 10,756 $ 11,854 $ 22,328 $ 20,943
======== ======== ======== ========
10. DISCONTINUED OPERATIONS
During the six months ended June 30, 2005, we sold two dealership
locations (four franchises) and real estate associated with one former
dealership location and placed three dealership locations (five franchises) into
discontinued operations. As of June 30, 2005, three dealership locations (five
franchises) and real estate associated with one former dealership location were
pending disposition. The accompanying Consolidated Statements of Income for the
three and six months ended June 30, 2004, have been reclassified to reflect the
status of our discontinued operations as of June 30, 2005.
The following table provides further information regarding our
discontinued operations as of June 30, 2005, and includes the results of
businesses sold prior to June 30, 2005, and businesses pending disposition as of
June 30, 2005:
For the Three Months For the Three Months
Ended June 30, 2005 Ended June 30, 2004
--------------------------------- ---------------------------------
Pending Pending
(Dollars in thousands) Sold Disposition Total Sold* Disposition** Total
-------- ----------- --------- -------- ------------- ---------
Franchises ................................. 2 5 7 17 5 22
======== ======== ======== ======== ======== ========
Revenues ................................... $ 3,212 $ 34,060 $ 37,272 $ 48,938 $ 39,358 $ 88,296
Cost of sales .............................. 2,790 29,404 32,194 41,554 34,418 75,972
-------- -------- -------- -------- -------- --------
Gross profit ...................... 422 4,656 5,078 7,384 4,940 12,324
Operating expenses ......................... 806 5,523 6,329 7,426 6,010 13,436
-------- -------- -------- -------- -------- --------
Loss from operations .............. (384) (867) (1,251) (42) (1,070) (1,112)
Other expense, net ......................... (92) (738) (830) (351) (298) (649)
-------- -------- -------- -------- -------- --------
Net loss .......................... (476) (1,605) (2,081) (393) (1,368) (1,761)
Loss on disposition of discontinued
operations ............................... (376) -- (376) (306) -- (306)
-------- -------- -------- -------- -------- --------
Loss before income taxes .......... (852) (1,605) (2,457) (699) (1,368) (2,067)
Income tax benefit ......................... 313 608 921 252 523 775
-------- -------- -------- -------- -------- --------
Discontinued operations, net of tax $ (539) $ (997) $ (1,536) $ (447) $ (845) $ (1,292)
======== ======== ======== ======== ======== ========
10
For the Six Months For the Six Months
Ended June 30, 2005 Ended June 30, 2004
--------------------------------- ---------------------------------
Pending Pending
(Dollars in thousands) Sold Disposition Total Sold*** Disposition** Total
-------- ----------- --------- -------- ------------- ---------
Franchises ................................. 4 5 9 18 5 23
======== ======== ======== ======== ======== ========
Revenues ................................... $ 8,884 $ 66,906 $ 75,790 $ 99,166 $ 74,801 $173,967
Cost of sales .............................. 7,560 57,453 65,013 84,068 65,074 149,142
-------- -------- -------- -------- -------- --------
Gross profit ...................... 1,324 9,453 10,777 15,098 9,727 24,825
Operating expenses ......................... 2,044 11,108 13,152 15,120 10,810 25,930
-------- -------- -------- -------- -------- --------
Loss from operations .............. (720) (1,655) (2,375) (22) (1,083) (1,105)
Other expense, net ......................... (211) (1,155) (1,366) (711) (564) (1,275)
-------- -------- -------- -------- -------- --------
Net loss .......................... (931) (2,810) (3,741) (733) (1,647) (2,380)
Gain (loss) on disposition of discontinued
operations ............................ 10 -- 10 (474) -- (474)
-------- -------- -------- -------- -------- --------
Loss before income taxes .......... (921) (2,810) (3,731) (1,207) (1,647) (2,854)
Income tax benefit ......................... 336 1,063 1,399 433 637 1,070
-------- -------- -------- -------- -------- --------
Discontinued operations, net of tax $ (585) $ (1,747) $ (2,332) $ (774) $ (1,010) $ (1,784)
======== ======== ======== ======== ======== ========
* Businesses were sold between April 1, 2004 and June 30, 2005
** Businesses pending disposition as of June 30, 2005
*** Businesses were sold between January 1, 2004 and June 30, 2005
11. 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 Six Months
Ended June 30, Ended June 30,
--------------------- ---------------------
(In thousands, except per share data) 2005 2004 2005 2004
-------- -------- -------- --------
Net income:
Continuing operations ................................. $ 17,522 $ 16,040 $ 27,959 $ 26,896
Discontinued operations ............................... (1,536) (1,292) (2,332) (1,784)
-------- -------- -------- --------
Net income ..................................... $ 15,986 $ 14,748 $ 25,627 $ 25,112
======== ======== ======== ========
Earnings per share - basic and diluted:
Continuing operations - basic ......................... $ 0.54 $ 0.49 $ 0.86 $ 0.83
Discontinued operations - basic ....................... (0.05) (0.04) (0.07) (0.06)
-------- -------- -------- --------
Net income ..................................... $ 0.49 $ 0.45 $ 0.79 $ 0.77
======== ======== ======== ========
Continuing operations - diluted ....................... $ 0.54 $ 0.49 $ 0.85 $ 0.82
Discontinued operations - diluted ..................... (0.05) (0.04) (0.07) (0.05)
-------- -------- -------- --------
Net income ..................................... $ 0.49 $ 0.45 $ 0.78 $ 0.77
======== ======== ======== ========
Common shares and common share equivalents:
Weighted average common shares outstanding - basic .... 32,604 32,470 32,596 32,452
Common share equivalents (stock options) .............. 121 186 157 236
-------- -------- -------- --------
Weighted average common shares outstanding - diluted .. 32,725 32,656 32,753 32,688
======== ======== ======== ========
11
12. SUPPLEMENTAL CASH FLOW INFORMATION
During the six months ended June 30, 2005 and 2004, we made interest
payments, net of amounts capitalized, totaling $36.3 million and $29.8 million,
respectively. During the six months ended June 30, 2005 and 2004, we received
$2.5 million and $1.5 million, respectively, 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 six months ended June 30, 2005 and 2004, we made income tax
payments totaling $8.2 million and $9.3 million, respectively.
During the six months ended June 30, 2005, we completed two
sale-leaseback transactions, which resulted in the sale of approximately $15.7
million of Assets Held for Sale and the removal of $15.7 million of Liabilities
Associated with Assets Held for Sale from our Consolidated Balance Sheets.
13. COMMITMENTS AND CONTINGENCIES
A significant portion of our vehicle business involves the sale of
vehicles, parts or vehicles composed of parts that are manufactured outside the
United States of America. As a result, our operations are subject to customary
risks of importing merchandise, including fluctuations in the relative values of
currencies, import duties, exchange controls, trade restrictions, work stoppages
and general political and socio-economic conditions in foreign countries. The
United States of America or the countries from which our products are imported
may, from time to time, impose new quotas, duties, tariffs or other
restrictions, or adjust presently prevailing quotas, duties or tariffs, which
may affect our operations and our ability to purchase imported vehicles and/or
parts at reasonable prices.
Manufacturers may direct us to implement costly capital improvements to
dealerships as a condition upon entering into franchise agreements with them.
Manufacturers also typically require that their franchises meet specific
standards of appearance. These factors, either alone or in combination, could
cause us to divert our financial resources to capital projects from uses that
management believes may be of higher long-term value, such as acquisitions.
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 capital expenditures, net earnings, financial
condition, liquidity or competitive position. We believe that our current
practices and procedures for the control and disposition of such materials
comply with applicable federal, state and local requirements.
From time to time, we and our dealerships are named in claims involving the
manufacture and sale or lease of motor vehicles, including but not limited to
the charging of administrative fees, the operation of dealerships, contractual
disputes and other matters arising in the ordinary course of our business. With
respect to certain of these claims, the sellers of our acquired dealerships have
indemnified us. We do not expect that any potential liability from these claims
will materially affect our financial condition, liquidity, results of operations
or financial statement disclosures.
Our dealerships hold dealer agreements with a number of vehicle
manufacturers. In accordance with the individual dealer agreements, each
dealership is subject to certain rights and restrictions typical of the
industry. The ability of the manufacturers to influence the operations of the
dealerships or the loss of a dealer agreement could have a negative impact on
our operating results.
We have guaranteed a loan made by a financial institution directly to a
non-consolidated entity controlled by a former executive, which totaled
approximately $2.1 million as of June 30, 2005. 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.
14. 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.
12
Condensed Consolidating Balance Sheet
As of June 30, 2005
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents .............. $ -- $ 11,049 $ -- $ -- $ 11,049
Inventories ............................ -- 668,522 53,638 -- 722,160
Other current assets ................... -- 282,270 56,246 -- 338,516
Assets held for sale ................... -- 44,660 -- -- 44,660
-------- ---------- -------- --------- ----------
Total current assets .............. -- 1,006,501 109,884 -- 1,116,385
Property and equipment, net ............... -- 200,708 5,274 -- 205,982
Goodwill .................................. -- 403,635 61,312 -- 464,947
Other assets .............................. -- 98,140 3,045 -- 101,185
Investment in subsidiaries ................ 504,456 132,159 -- (636,615) --
-------- ---------- -------- --------- ----------
Total assets ...................... $504,456 $1,841,143 $179,515 $(636,615) $1,888,499
======== ========== ======== ========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Floor plan notes payable ............... $ -- $ 570,793 $ 42,344 $ -- $ 613,137
Other current liabilities .............. -- 184,540 4,038 -- 188,578
Liabilities associated with assets held
for sale ............................. -- 27,618 -- -- 27,618
-------- ---------- -------- --------- ----------
Total current liabilities ......... -- 782,951 46,382 -- 829,333
Long-term debt ............................ -- 476,377 31 -- 476,408
Other liabilities ......................... -- 77,359 943 -- 78,302
Shareholders' equity ...................... 504,456 504,456 132,159 (636,615) 504,456
-------- ---------- -------- --------- ----------
Total liabilities and shareholders'
equity .......................... $504,456 $1,841,143 $179,515 $(636,615) $1,888,499
======== ========== ======== ========= ==========
13
Condensed Consolidating Balance Sheet
As of December 31, 2004
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents .............. $ -- $ 28,093 $ -- $ -- $ 28,093
Inventories ............................ -- 713,205 48,352 -- 761,557
Other current assets ................... -- 286,675 40,933 -- 327,608
Assets held for sale ................... -- 26,248 -- -- 26,248
-------- ---------- -------- --------- ----------
Total current assets .............. -- 1,054,221 89,285 -- 1,143,506
Property and equipment, net ............... -- 190,706 5,082 -- 195,788
Goodwill .................................. -- 400,338 61,312 -- 461,650
Other assets .............................. -- 78,935 18,080 -- 97,015
Investment in subsidiaries ................ 481,732 130,098 -- (611,830) --
-------- ---------- -------- --------- ----------
Total assets ...................... $481,732 $1,854,298 $173,759 $(611,830) $1,897,959
======== ========== ======== ========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Floor plan notes payable ............... $ -- $ 613,539 $ 37,409 $ -- $ 650,948
Other current liabilities .............. -- 170,227 5,797 -- 176,024
Liabilities associated with assets held
for sale ............................. -- 20,538 -- -- 20,538
-------- ---------- -------- --------- ----------
Total current liabilities ......... -- 804,304 43,206 -- 847,510
Long-term debt ............................ -- 492,499 37 -- 492,536
Other liabilities ......................... -- 75,763 418 -- 76,181
Shareholders' equity ...................... 481,732 481,732 130,098 (611,830) 481,732
-------- ---------- -------- --------- ----------
Total liabilities and shareholders'
equity .......................... $481,732 $1,854,298 $173,759 $(611,830) $1,897,959
======== ========== ======== ========= ==========
14
Condensed Consolidating Statement of Income
For the Three Months Ended June 30, 2005
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------- ------------ ------------
Revenues ................................ $ -- $1,284,148 $195,781 $ (3,070) $1,476,859
Cost of sales ........................... -- 1,090,200 168,354 (3,070) 1,255,484
-------- ---------- -------- --------- ----------
Gross profit .................... -- 193,948 27,427 -- 221,375
Operating expenses:
Selling, general and administrative .. -- 150,436 20,115 -- 170,551
Depreciation and amortization ........ -- 4,636 466 -- 5,102
-------- ---------- -------- --------- ----------
Income from operations .......... -- 38,876 6,846 -- 45,722
Other income (expense):
Floor plan interest expense .......... -- (7,477) (500) -- (7,977)
Other interest expense ............... -- (8,682) (1,449) -- (10,131)
Other income, net .................... -- 413 8 -- 421
Equity in earnings of subsidiaries ... 15,986 3,065 -- (19,051) --
-------- ---------- -------- --------- ----------
Total other income (expense), net 15,986 (12,681) (1,941) (19,051) (17,687)
-------- ---------- -------- --------- ----------
Income before income taxes ...... 15,986 26,195 4,905 (19,051) 28,035
Income tax expense ...................... -- 8,673 1,840 -- 10,513
-------- ---------- -------- --------- ----------
Income from continuing operations ....... 15,986 17,522 3,065 (19,051) 17,522
Discontinued operations, net of tax ..... -- (1,536) -- -- (1,536)
-------- ---------- -------- --------- ----------
Net income ...................... $ 15,986 $ 15,986 $ 3,065 $(19,051) $ 15,986
======== ========== ======== ========= ==========
15
Condensed Consolidating Statement of Income
For the Three Months Ended June 30, 2004
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------- ------------ ------------
Revenues ................................ $ -- $1,145,371 $173,196 $ (4,324) $1,314,243
Cost of sales ........................... -- 966,546 150,416 (4,324) 1,112,638
-------- ---------- -------- --------- ----------
Gross profit .................... -- 178,825 22,780 -- 201,605
Operating expenses:
Selling, general and administrative .. -- 138,462 17,870 -- 156,332
Depreciation and amortization ........ -- 4,658 426 -- 5,084
-------- ---------- -------- --------- ----------
Income from operations .......... -- 35,705 4,484 -- 40,189
Other income (expense):
Floor plan interest expense .......... -- (4,510) (373) -- (4,883)
Other interest expense ............... -- (9,005) (1,181) -- (10,186)
Other income, net .................... -- 225 36 -- 261
Equity in earnings of subsidiaries ... 14,748 1,854 -- (16,602) --
-------- ---------- -------- --------- ----------
Total other income (expense), net 14,748 (11,436) (1,518) (16,602) (14,808)
-------- ---------- -------- --------- ----------
Income before income taxes ...... 14,748 24,269 2,966 (16,602) 25,381
Income tax expense ...................... -- 8,229 1,112 -- 9,341
-------- ---------- -------- --------- ----------
Income from continuing operations ....... 14,748 16,040 1,854 (16,602) 16,040
Discontinued operations, net of tax ..... -- (1,292) -- -- (1,292)
-------- ---------- -------- --------- ----------
Net income ...................... $ 14,748 $ 14,748 $ 1,854 $(16,602) $ 14,748
======== ========== ======== ========= ==========
16
Condensed Consolidating Statement of Income
For the Six Months Ended June 30, 2005
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------- ------------ ------------
Revenues ................................ $ -- $2,433,434 $368,797 $ (6,216) $2,796,015
Cost of sales ........................... -- 2,058,827 316,332 (6,216) 2,368,943
-------- ---------- -------- --------- ----------
Gross profit .................... -- 374,607 52,465 -- 427,072
Operating expenses:
Selling, general and administrative .. -- 299,233 39,125 -- 338,358
Depreciation and amortization ........ -- 9,142 895 -- 10,037
-------- ---------- -------- --------- ----------
Income from operations .......... -- 66,232 12,445 -- 78,677
Other income (expense):
Floor plan interest expense .......... -- (14,055) (918) -- (14,973)
Other interest expense ............... -- (16,861) (2,758) -- (19,619)
Other income, net .................... -- 628 21 -- 649
Equity in earnings of subsidiaries ... 25,627 5,493 -- (31,120) --
-------- ---------- -------- --------- ----------
Total other income (expense), net 25,627 (24,795) (3,655) (31,120) (33,943)
-------- ---------- -------- --------- ----------
Income before income taxes ...... 25,627 41,437 8,790 (31,120) 44,734
Income tax expense ...................... -- 13,478 3,297 -- 16,775
-------- ---------- -------- --------- ----------
Income from continuing operations ....... 25,627 27,959 5,493 (31,120) 27,959
Discontinued operations, net of tax ..... -- (2,332) -- -- (2,332)
-------- ---------- -------- --------- ----------
Net income ...................... $ 25,627 $ 25,627 $ 5,493 $ (31,120) $ 25,627
======== ========== ======== ========= ==========
17
Condensed Consolidating Statement of Income
For the Six Months Ended June 30, 2004
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------- ------------ ------------
Revenues ................................ $ -- $2,129,007 $340,407 $ (7,759) $2,461,655
Cost of sales ........................... -- 1,792,859 293,851 (7,759) 2,078,951
-------- ---------- -------- --------- ----------
Gross profit .................... -- 336,148 46,556 -- 382,704
Operating expenses:
Selling, general and administrative .. -- 265,860 34,834 -- 300,694
Depreciation and amortization ........ -- 9,122 825 -- 9,947
-------- ---------- -------- --------- ----------
Income from operations .......... -- 61,166 10,897 -- 72,063
Other income (expense):
Floor plan interest expense .......... -- (8,417) (711) -- (9,128)
Other interest expense ............... -- (18,258) (2,248) -- (20,506)
Other income, net .................... -- 294 28 -- 322
Equity in earnings of subsidiaries ... 25,112 4,979 -- (30,091) --
-------- ---------- -------- --------- ----------
Total other income (expense), net 25,112 (21,402) (2,931) (30,091) (29,312)
-------- ---------- -------- --------- ----------
Income before income taxes ...... 25,112 39,764 7,966 (30,091) 42,751
Income tax expense ...................... -- 12,868 2,987 -- 15,855
-------- ---------- -------- --------- ----------
Income from continuing operations ....... 25,112 26,896 4,979 (30,091) 26,896
Discontinued operations, net of tax ..... -- (1,784) -- -- (1,784)
-------- ---------- -------- --------- ----------
Net income ...................... $ 25,112 $ 25,112 $ 4,979 $ (30,091) $ 25,112
======== ========== ======== ========= ==========
18
Condensed Consolidating Statement of Cash Flows
For the Six Months Ended June 30, 2005
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------- ------------ ------------
Net cash provided by (used in) operating
activities ............................... $ -- $ 47,723 $ (4,329) $ -- $ 43,394
Cash flow from investing activities:
Capital expenditures ..................... -- (34,707) (471) -- (35,178)
Acquisitions ............................. -- (4,692) -- -- (4,692)
Other investing activities ............... -- 5,217 1 -- 5,218
-------- -------- -------- -------- --------
Net cash used in investing activities -- (34,182) (470) -- (34,652)
Cash flow from financing activities:
Proceeds from borrowings ................. -- 20,734 -- -- 20,734
Repayments of debt ....................... -- (41,983) (6) -- (41,989)
Intercompany financing ................... -- (4,805) 4,805 -- --
Other financing activities ............... -- (4,531) -- -- (4,531)
-------- -------- -------- -------- --------
Net cash (used in) provided by
financing activities .............. -- (30,585) 4,799 -- (25,786)
-------- -------- -------- -------- --------
Net decrease in cash and cash
equivalents ....................... -- (17,044) -- -- (17,044)
Cash and cash equivalents, beginning of
period ................................... -- 28,093 -- -- 28,093
-------- -------- -------- -------- --------
Cash and cash equivalents, end of period .... $ -- $ 11,049 $ -- $ -- $ 11,049
======== ======== ======== ======== ========
19
Condensed Consolidating Statement of Cash Flows
For the Six Months Ended June 30, 2004
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------- ------------ ------------
Net cash used in operating activities ....... $ -- $(15,752) $ 20,403 $ -- $ 4,651
Cash flow from investing activities: --
Capital expenditures ..................... -- (32,771) (1,750) -- (34,521)
Payments for acquisitions ................ -- (71,594) -- -- (71,594)
Other investing activities ............... -- 11,738 -- -- 11,738
-------- -------- -------- -------- --------
Net cash used in investing activities -- (92,627) (1,750) -- (94,377)
Cash flow from financing activities:
Proceeds from borrowings ................. -- 3,850 -- -- 3,850
Repayments of debt ....................... -- (6,808) (5) -- (6,813)
Intercompany financing ................... -- 26,432 (26,432) -- --
Other financing activities ............... -- 857 -- -- 857
-------- -------- -------- -------- --------
Net cash (used in) financing
activities ........................ -- 24,331 (26,437) -- (2,106)
-------- -------- -------- -------- --------
Net decrease in cash and cash
equivalents ....................... -- (84,048) (7,784) -- (91,832)
Cash and cash equivalents, beginning of
period ................................... -- 98,927 7,784 -- 106,711
-------- -------- -------- -------- --------
Cash and cash equivalents, end of period .... $ -- $ 14,879 $ -- $ -- $ 14,879
======== ======== ======== ======== ========
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 consolidated balance sheet of Asbury
Automotive Group, Inc. and subsidiaries (the "Company") as of June 30, 2005,
and the related consolidated statements of income for the three and six-month
periods ended June 30, 2005 and 2004, and statements of cash flows for the
six-month periods ended June 30, 2005 and 2004. 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 the
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 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, 2004, 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 14, 2005 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, 2004 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
August 4, 2005
21
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
We are one of the largest automotive retailers in the United States,
operating 94 dealership locations (129 franchises) in 23 metropolitan markets
within 11 states as of June 30, 2005. We offer 33 different brands of new
vehicles, including four heavy truck brands. We also operate 22 collision repair
centers that serve our markets.
We have grown our business through the acquisition of large dealership
groups formerly referred to as "platforms" and numerous "tuck-in" acquisitions.
"Tuck-in" acquisitions refer to the purchase of dealerships in the market areas
in which we have existing dealerships. 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 overhead costs.
During the first quarter of 2005, we reorganized our dealerships into
principally four regions: (i) Florida (comprising our Coggin dealerships,
operating primarily in Jacksonville and Orlando, and our Courtesy dealerships
operating in Tampa), (ii) West (comprising our McDavid dealerships operating
throughout Texas, our Thomason dealerships operating in Portland, Oregon, our
Spirit dealerships operating primarily in Los Angeles, California and our
Northern California Dealerships operating in Sacramento and Fresno, California),
(iii) Mid-Atlantic (comprising our Crown dealerships operating in North
Carolina, South Carolina and Southern Virginia) and (iv) South (comprising our
Nalley dealerships operating in Atlanta, Georgia and our North Point dealerships
operating in Little Rock, Arkansas). Our Plaza dealerships operating in St.
Louis, Missouri and our Gray Daniels dealerships operating in Jackson,
Mississippi remain standalone operations. Within this more streamlined
structure, we will evaluate our operations and financial results by dealership
in the aggregate, rather than by platform. The general managers, with direction
from a centralized management team, including corporate and regional management,
will continue to have the independence and flexibility to respond effectively to
local market conditions. We expect a significant improvement in management
effectiveness as a result of this reorganization, as well as added operating and
cost efficiencies. During the six months ended June 30, 2005, we incurred $3.6
million in severance and other costs related to our regional reorganization. We
expect to complete the final phases of our reorganization during the remainder
of 2005. Currently, we estimate that the regional reorganization will have a
negative impact on income from continuing operations of $0.03 per diluted share
during 2005 and will improve income from continuing operations by approximately
$3.0 million or $0.10 per diluted share each year beginning in 2006.
Our revenues are derived primarily from four offerings: (i) the sale
of new vehicles to individual retail customers ("new retail") and the sale of
new vehicles to commercial customers ("fleet") (the terms "new retail" and
"fleet" being collectively referred to as "new"); (ii) the sale of used vehicles
to individual retail customers ("used retail") and the sale of used vehicles to
other dealers at auction ("wholesale") (the terms "used retail" and "wholesale"
being collectively referred to as "used"); (iii) maintenance and collision
repair services and the sale of automotive parts (collectively referred to as
"fixed operations"); and (iv) the arrangement of vehicle financing and the sale
of various insurance and warranty products (collectively referred to as "F&I").
We evaluate the results of our new and used vehicle sales based on unit volumes
and gross profit per vehicle retailed ("PVR"), our fixed operations based on
aggregate gross profit, and F&I based on gross profit PVR. We assess the organic
growth of our revenue and gross profit by comparing the year-to-year results of
stores that we have operated for at least twelve months ("same store").
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 fixed operations revenue increases as a percentage
of total revenue, we expect our overall gross profit percentage to increase.
Selling, general and administrative ("SG&A") expenses consist
primarily of fixed and incentive-based compensation, advertising, rent,
insurance, utilities and other customary operating expenses. A significant
portion of our 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 total 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 increased used vehicle sales, stability in our fixed operations,
our variable cost structure, our regional diversity and our advantageous brand
mix. Historically, our brand mix, which is weighted towards luxury and mid-line
import brands, has been less affected by market volatility than the U.S.
automobile retailing industry as a whole. We expect the recent industry-wide
gain in market share of the luxury and mid-line import brands to continue in the
near future.
Our operations are generally subject to modest seasonal variations as
we tend to generate more revenue and operating income in the second and third
quarters than in the first and fourth quarters of a calendar year. Historically,
the seasonal variations in our operations have been caused by factors relating
to weather conditions, model changeovers and consumer buying patterns, among
other things. Over the past several years, certain automobile manufacturers have
used a combination of vehicle pricing and financing incentive programs to
22
generate increased customer demand for new vehicles. In addition to the
traditional manufacturer incentive programs, domestic manufacturers have begun
to offer customers "employee discount pricing". The extensive use of
manufacturer incentive programs and pricing promotions has impacted the
historical cyclicality of new vehicle sales in the United States as customers
have been conditioned to postpone the purchase of a vehicle until a manufacturer
program or promotion is available.
The manufacturer incentive programs on new vehicles have also served
to increase competition with late-model used vehicles. We anticipate that 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 response to these programs. In addition, we will continue to expand our
service capacity in order to meet anticipated future demand as we expect 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.
Interest rates over the past several years have been at historic 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 7.0% over 60 months increases by approximately $5.90 with each 0.5%
increase in interest rates.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2005, Compared to Three Months Ended June 30, 2004
Net income increased $1.3 million to $16.0 million, or $0.49 per
diluted share, for the three months ended June 30, 2005, from $14.7 million, or
$0.45 per diluted share, for the three months ended June 30, 2004.
Income from continuing operations increased $1.5 million to $17.5
million, or $0.54 per diluted share, for the three months ended June 30, 2005,
from $16.0 million, or $0.49 per diluted share, for the three months ended June
30, 2004.
The 8% increase in net income and 9% increase in income from continuing
operations resulted from several factors, including: (i) increases in new and
used vehicle sales volumes, (ii) an improvement in the average gross profit of
used vehicles, (iii) substantial increases in our fixed operations gross profit,
(iv) significant increases in same store F&I revenue resulting from a
combination of an increase in platform F&I PVR and an increase in new and used
retail vehicle sales and (v) a significant improvement in our wholesale
business. These factors were partially offset by the following: (i) margin
pressure on new vehicle retail sales and (ii) increased floor plan expense due
to rising interest rates.
Revenues-
For the Three Months
Ended June 30,
----------------------- Increase %
(Dollars in thousands) 2005 2004 (Decrease) Change
---------- ---------- ---------- ------
New vehicle data:
Retail revenues-same store (1) ..................... $ 848,376 $ 798,482 $ 49,894 6%
Retail revenues-acquisitions ....................... 30,826 --
---------- ----------
Total new retail revenues ..................... 879,202 798,482 80,720 10%
Fleet revenues-same store (1) ...................... 23,346 15,945 7,401 46%
Fleet revenues-acquisitions ........................ 1,219 --
---------- ----------
Total fleet revenues .......................... 24,565 15,945 8,620 54%
---------- ----------
New vehicle revenue, as reported .............. $ 903,767 $ 814,427 $ 89,340 11%
========== ==========
New retail units-same store (1) .................... 27,866 27,114 752 3%
========== ==========
New retail units-actual ............................ 29,094 27,114 1,980 7%
========== ==========
23
For the Three Months
Ended June 30,
----------------------- Increase %
(Dollars in thousands) 2005 2004 (Decrease) Change
---------- ---------- ---------- ------
Used vehicle data:
Retail revenues-same store (1) ..................... $ 272,140 $ 234,321 $ 37,819 16%
Retail revenues-acquisitions ....................... 7,311 --
---------- ----------
Total used retail revenues .................... 279,451 234,321 45,130 19%
Wholesale revenues-same store (1) .................. 84,552 81,957 2,595 3%
Wholesale revenues-acquisitions .................... 2,914 --
---------- ----------
Total wholesale revenues ...................... 87,466 81,957 5,509 7%
---------- ----------
Used vehicle revenue, as reported ............. $ 366,917 $ 316,278 $ 50,639 16%
========== ==========
Used retail units-same store (1) ................... 16,005 15,072 933 6%
========== ==========
Used retail units-actual ........................... 16,520 15,072 1,448 10%
========== ==========
Parts, service and collision repair:
Revenues-same store (1) ............................ $ 162,302 $ 146,085 $ 16,217 11%
Revenues-acquisitions .............................. 2,227 --
---------- ----------
Parts, service and collision repair
revenue, as reported ........................ $ 164,529 $ 146,085 $ 18,444 13%
========== ==========
Finance and insurance, net:
Platform revenues-same store (1) ................... $ 38,715 $ 35,547 $ 3,168 9%
Platform revenues-acquisitions ..................... 1,564 --
---------- ----------
Platform finance and insurance revenue ........ 40,279 35,547 4,732 13%
Corporate revenues ................................. 1,367 1,906
---------- ----------
Finance and insurance revenue, as reported .... $ 41,646 $ 37,543 $ 4,193 11%
========== ==========
Total revenue:
Same store (1) ..................................... $1,429,431 $1,312,337 $117,094 9%
Corporate .......................................... 1,367 1,906
Acquisitions ....................................... 46,061 --
---------- ----------
Total revenue, as reported .................... $1,476,859 $1,314,243 $162,616 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.
Total revenues increased 12% to $1.5 billion for the three months ended
June 30, 2005, from $1.3 billion for the three months ended June 30, 2004. Same
store revenues increased 9% to $1.4 billion for the three months ended June 30,
2005, from $1.3 billion for the three months ended June 30, 2004.
Same store new retail revenue increased 6% for the three months ended
June 30, 2005, compared to the prior year period, reflecting a 3% increase in
new retail unit sales due to the "employee pricing programs" and an increase in
the percentage of luxury and mid-line import sales, which on average have a
higher selling price. Same store used vehicle retail revenue increased 16% to
$272.1 million, compared to $234.3 million for the prior year period. Our
same-store used retail unit sales increased 6% due to the strength of the used
vehicle market during the quarter. We anticipate that the manufacturer
incentives on new vehicles will continue to drive customers toward new vehicles
during 2005, which may create a challenging used vehicle retail market in the
near future. However, we do believe that opportunities to increase unit sales
exist in the used vehicle retail market, especially with respect to customers
interested in lower priced inventory, which we view as a separate market from
higher priced used and new vehicle inventory.
Fixed operations revenue increased 13%, to $164.5 million for the three
months ended June 30, 2005, from $146.1 million for the three months ended June
30, 2004. Same store fixed operations revenue increased 11%, for the three
months ended June 30, 2005, compared to the three months ended June 30, 2004,
where we had substantial growth across each line of our fixed business (9%
increase in parts, 16% increase in service and 7% increase in collision repair)
24
driven by "customer pay" and warranty work. The growth in our "customer pay"
business is a result of (i) our continued service adviser training, (ii)
expansion of our product offerings and (iii) 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 due to customer
retention. We expect fixed operations to continue to grow as we expand our
service capacity in 2005 with the addition of approximately 100 service stalls,
the hiring of 200 to 250 technicians and a focused effort on more rigorous and
consistent training of our service advisors.
Platform F&I revenue increased 9% to $38.7 million on a same store
basis for the three months ended June 30, 2005, compared to the three months
ended June 30, 2004. The increase in Platform F&I is attributable to (i)
increased service contract penetration, (ii) utilization of menus in the F&I
sales process and (iii) maturation of our corporate-sponsored programs. Platform
F&I excludes revenue resulting from contracts negotiated by our corporate
office, which is attributable to retail units sold during prior periods.
Corporate F&I revenue was $1.4 million for the three month periods ended June
30, 2005, compared to $1.9 million for the prior year period. We expect this
revenue to decrease significantly over the next few years and ultimately be zero
by 2008 as the portfolio runs off.
We expect total revenue to increase as we continue to acquire
dealerships, expand our service capacity and improve our platform F&I PVR.
However, future revenue growth will rely heavily on our performance in the
vehicle retail business, in particular our ability to maintain or improve upon
our sales volumes of new and used vehicles.
Gross Profit-
For the Three Months
Ended June 30,
----------------------- Increase %
(Dollars in thousands, except for per vehicle data) 2005 2004 (Decrease) Change
---------- ---------- ---------- ------
New vehicle data:
Retail gross profit-same store (1) ................. $ 59,975 $ 58,397 $ 1,578 3%
Retail gross profit-acquisitions ................... 1,928 --
---------- ----------
Total new retail gross profit ................. 61,903 58,397 3,506 6%
Fleet gross profit-same store (1) .................. 808 649 159 24%
Fleet gross profit-acquisitions .................... (9) --
---------- ----------
Total fleet gross profit ...................... 799 649 150 23%
---------- ----------
New vehicle gross profit, as reported ......... $ 62,702 $ 59,046 $ 3,656 6%
========== ==========
New retail units-same store (1) .................... 27,866 27,114 752 3%
========== ==========
New retail units-actual ............................ 29,094 27,114 1,980 7%
========== ==========
Used vehicle data:
Retail gross profit-same store (1) ................. $ 30,763 $ 28,050 $ 2,713 10%
Retail gross profit-acquisitions ................... 724 --
---------- ----------
Total used retail gross profit ................ 31,487 28,050 3,437 12%
Wholesale gross profit-same store (1) .............. 52 (805) 857 106%
Wholesale gross profit-acquisitions ................ (25) --
---------- ----------
Total wholesale gross profit .................. 27 (805) 832 103%
---------- ----------
Used vehicle gross profit, as reported ........ $ 31,514 $ 27,245 $ 4,269 16%
========== ==========
Used retail units-same store (1) ................... 16,005 15,072 933 6%
========== ==========
Used retail units-actual ........................... 16,520 15,072 1,448 10%
========== ==========
Parts, service and collision repair:
Gross profit-same store (1) ........................ $ 84,015 $ 77,861 $ 6,154 8%
Gross profit-acquisitions .......................... 1,498 --
---------- ----------
Parts, service and collision repair gross
profit, as reported ......................... $ 85,513 $ 77,861 $ 7,652 10%
========== ==========
25
For the Three Months
Ended June 30,
----------------------- Increase %
(Dollars in thousands, except for per vehicle data) 2005 2004 (Decrease) Change
---------- ---------- ---------- ------
Finance and insurance, net:
Platform gross profit-same store (1) ............... $ 38,715 $ 35,547 $ 3,168 9%
Platform gross profit-acquisitions ................. 1,564 --
---------- ----------
Platform finance and insurance gross profit (2) 40,279 35,547 4,732 13%
Gross profit-corporate ............................. 1,367 1,906
---------- ----------
Finance and insurance gross profit, as reported $ 41,646 $ 37,453 $ 4,193 11%
========== ==========
Platform gross profit PVR-same store (1) ........... $ 882 $ 843 $ 39 5%
========== ==========
Platform gross profit PVR-actual (2) ............... $ 883 $ 843 $ 40 5%
========== ==========
Gross profit PVR-actual ............................ $ 913 $ 888 $ 25 3%
========== ==========
Total gross profit:
Same store (1) ..................................... $ 214,328 $ 199,699 $14,629 7%
Corporate .......................................... 1,367 1,906
Acquisitions ....................................... 5,680 --
---------- ----------
Total gross profit, as reported ............... $ 221,375 $ 201,605 $19,770 10%
========== ==========
(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 10% to $221.4 million for the three months ended
June 30, 2005, from $201.6 million for the three months ended June 30, 2004.
Same store gross profit increased 7% to $214.3 million for the three months
ended June 30, 2005, compared to the three months ended June 30, 2004.
Same store gross profit on new retail vehicle sales increased $1.5
million to $60.0 million for the three months ended June 30, 2005, compared to
the three months ended June 30, 2004. The overall increase in same store gross
profit on new retail vehicle sales was directly attributable to a 3% increase in
unit sales. We expect that margins on new vehicles will continue to be under
pressure for the foreseeable future, as the automotive manufacturers continue
offer incentive programs and pricing promotions to contend with overcapacity in
their factories.
Same store gross profit on used vehicle retail sales increased $2.7
million to $30.8 million for the three months ended June 30, 2005, compared to
the three months ended June 30, 2004. Due to a strong market during the first
part of the quarter, we were able to increase average gross profit dollars
earned per vehicle retailed by 3% over the prior year period. In addition, the
strength of the used vehicle market enabled us to generate a modest profit in
our wholesale business, compared to a wholesale loss of $0.8 million for the
three months ended June 30, 2004.
Same store gross profit from fixed operations increased 8% to $84.0
million for the three months ended June 30, 2005, from $77.9 million for the
three months ended June 30, 2004, resulting primarily from "customer pay" and
warranty work.
Same-store platform F&I PVR revenue increased 5% to $882 for the three
months ended June 30, 2005, from $843 for the three months ended June 30, 2004.
The increase in F&I PVR is attributable to (i) increased service contract
penetration, (ii) utilization of menus in the F&I sales process and (iii)
maturation of our corporate-sponsored programs. We anticipate that the positive
trends in platform F&I PVR will continue in the future as we focus on improving
F&I PVR levels at our lowest performing stores and continue to add new products.
Selling, General and Administrative Expenses-
SG&A expenses increased $14.3 million to $170.6 million for the three
months ended June 30, 2005, from $156.3 million for the three months ended June
30, 2004. SG&A expenses as a percentage of gross profit for the three months
ended June 30, 2005, improved slightly to 77.0%, from 77.5% for the prior year
period. SG&A expenses for the three months ended June 30, 2005, includes
incremental rent of $2.3 million resulting from the refinancing of 20 of our
dealerships using a sale-leaseback transaction early in the third quarter of
26
2004. Excluding rent expense from both periods, SG&A expenses as a percentage of
gross profit decreased to 71.4% for the three months ended June 30, 2005,
compared to 73.2% for the three months ended June 30, 2004. The improvement in
SG&A expense as a percentage of gross profit, after adjusting for the
incremental rent expense, was attributable to the reorganization of the company
into regions largely completed during the first quarter of 2005, a strategic
reduction in new vehicle advertising and lower insurance costs principally in
the area of workman's compensation.
Although there are many variables which impact the ratio of SG&A
expenses as a percentage of gross profit, including the seasonality of the
automotive retail business, we believe our regional reorganization demonstrates
our commitment to reducing our fixed cost structure and, absent other factors,
will result in a decrease in SG&A expenses as a percentage of gross profit in
future periods. During the first six months of 2005 we incurred approximately
$3.6 million in severance and other costs related to our regional
reorganization. We expect to incur between $0.8 million and $1.0 million of
additional reorganization costs during the remainder of 2005. Currently, we
estimate that our regional reorganization will reduce SG&A expenses by
approximately $5.0 million annually, beginning in 2006.
Depreciation and Amortization-
Depreciation and amortization expense totaled $5.1 million for the
three months ended June 30, 2005 and 2004, as depreciation and amortization
expense related to property and equipment additions and dealership facilities
purchased during 2004, were offset by reductions in property and equipment sold
in a sale-leaseback transaction completed in the third quarter of 2004.
We expect depreciation and amortization expense to increase in the
future as we continue to upgrade our facilities, expand our service centers and
acquire additional dealerships.
Other Income (Expense)-
Floor plan interest expense increased $3.1 million to $8.0 million for
the three months ended June 30, 2005, from $4.9 million for the three months
ended June 30, 2004. The increase in floor plan interest expense over the prior
year period is principally attributable to higher interest rates. We expect
interest rates to continue to rise in the future.
Other interest expense decreased $0.1 million to $10.1 million for the
three months ended June 30, 2005, from $10.2 million for the three months ended
June 30, 2004. The decrease was principally attributable to the repayment of
$63.7 million of mortgage notes payable with the proceeds from a sale-leaseback
transaction in the third quarter of 2004 and the repayment of approximately
$29.0 million of variable rate mortgage notes payable during the six months
ended June 30, 2005. We expect that our outstanding debt balances will remain
relatively consistent for the near future, as we anticipate our next several
acquisitions will be funded with our available cash. Fluctuations in other
interest expense during the remainder of 2005 will be affected by potential
changes in interest rates on $236.2 million of variable rate debt.
Income Tax Expense-
Income tax expense increased $1.2 million to $10.5 million for the
three months ended June 30, 2005, from $9.3 million for the three months ended
June 30, 2004, due to a $2.7 million increase in income before income taxes for
the three months ended June 30, 2005, compared to the three months ended June
30, 2004. In addition, our effective tax rate for the six months ended June 30,
2005, was 37.5% compared to 36.8% for the six months ended June 30, 2004, as we
received a state tax benefit of $0.2 million during the second quarter of 2004,
which reduced our tax provision. As a result of operating 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 approximately 37.5% for the year ending
December 31, 2005.
Discontinued Operations-
During the three months ended June 30, 2005, we sold one dealership
location (two franchises), and as of June 30, 2005, we were actively pursuing
the sale of three dealership locations (five franchises) and real estate
associated with one former dealership location. The $1.5 million loss from
discontinued operations is attributable to the net loss on the sale of
dealerships and real estate associated with one former dealership location
during the quarter and the operating losses of the franchises mentioned above.
The loss from discontinued operations for the three months ended June 30, 2004,
of $1.3 million included the results of operations of the dealerships mentioned
above; eleven dealership locations (fifteen franchises) that were sold or closed
between April 1, 2004 and March 31, 2005; and the net loss on the sale of
businesses during the three months ended June 30, 2004.
27
Six Months Ended June 30, 2005, Compared to Six Months Ended June 30, 2004
Net income increased $0.5 million to $25.6 million, or $0.78 per
diluted share, for the six months ended June 30, 2005, from $25.1 million, or
$0.77 per diluted share, for the six months ended June 30, 2004.
Income from continuing operations increased $1.1 million to $28.0
million, or $0.85 per diluted share, for the six months ended June 30, 2005,
from $26.9 million, or $0.82 per diluted share, for the six months ended June
30, 2004.
The 2% increase in net income and 4% increase in income from continuing
operations resulted from several factors, including: (i) increases in new and
used vehicle sales volumes, (ii) an improvement in the average gross profit of
used vehicles, (iii) substantial increases in our fixed operations gross profit,
(iv) significant increases in same store F&I revenue resulting from a
combination of an increase in platform F&I PVR and an increase in new and used
retail vehicle sales and (v) a significant improvement in our wholesale
business. These factors were partially offset by the following: (i) margin
pressure on new vehicle retail sales and (ii) increased floor plan expense due
to rising interest rates.
Revenues-
For the Six Months
Ended June 30,
----------------------- Increase %
(Dollars in thousands) 2005 2004 (Decrease) Change
---------- ---------- ---------- ------
New vehicle data:
Retail revenues-same store (1) ..................... $1,567,930 $1,467,999 $ 99,931 7%
Retail revenues-acquisitions ....................... 71,122 --
---------- ----------
Total new retail revenues ..................... 1,639,052 1,467,999 171,053 12%
Fleet revenues-same store (1) ...................... 48,418 26,019 22,399 86%
Fleet revenues-acquisitions ........................ 1,492 --
---------- ----------
Total fleet revenues .......................... 49,910 26,019 23,891 92%
---------- ----------
New vehicle revenue, as reported .............. $1,688,962 $1,494,018 $194,944 13%
========== ==========
New retail units-same store (1) .................... 51,264 49,692 1,572 3%
========== ==========
New retail units-actual ............................ 53,997 49,692 4,305 9%
========== ==========
Used vehicle data:
Retail revenues-same store (1) ..................... $ 514,403 $ 458,351 $ 56,052 12%
Retail revenues-acquisitions ....................... 17,528 --
---------- ----------
Total used retail revenues .................... 531,931 458,351 73,580 16%
Wholesale revenues-same store (1) .................. 165,545 156,979 8,566 5%
Wholesale revenues-acquisitions .................... 7,547 --
---------- ----------
Total wholesale revenues ...................... 173,092 156,979 16,113 10%
---------- ----------
Used vehicle revenue, as reported ............. $ 705,023 $ 615,330 $ 89,693 15%
========== ==========
Used retail units-same store (1) ................... 30,908 29,795 1,113 4%
========== ==========
Used retail units-actual ........................... 32,027 29,795 2,232 7%
========== ==========
Parts, service and collision repair:
Revenues-same store (1) ............................ $ 313,819 $ 283,933 $ 29,886 11%
Revenues-acquisitions .............................. 8,877 --
---------- ----------
Parts, service and collision repair revenue, as
reported .................................... $ 322,696 $ 283,933 $ 38,763 14%
========== ==========
28
For the Six Months
Ended June 30,
----------------------- Increase %
(Dollars in thousands) 2005 2004 (Decrease) Change
---------- ---------- ---------- ------
Finance and insurance, net:
Platform revenues-same store (1) ................... $ 73,487 $ 65,225 $ 8,262 13%
Platform revenues-acquisitions ..................... 3,277 --
---------- ----------
Platform finance and insurance revenue ........ 76,764 65,225 11,539 18%
Corporate revenues ................................. 2,570 3,149
---------- ----------
Finance and insurance revenue, as reported .... $ 79,334 $ 68,374 $ 10,960 16%
========== ==========
Total revenue:
Same store (1) ..................................... $2,683,602 $2,458,506 $225,096 9%
Corporate .......................................... 2,570 3,149
Acquisitions ....................................... 109,843 --
---------- ----------
Total revenue, as reported .................... $2,796,015 $2,461,655 $334,360 14%
========== ==========
(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 14% to $2.8 billion for the six months ended
June 30, 2005, from $2.5 billion for the six months ended June 30, 2004. Same
store revenue grew 9% to $2.7 billion for the six months ended June 30, 2005,
from $2.5 billion for the six months ended June 30, 2004.
Same store new vehicle retail revenue grew $99.9 million, or 7%, during
the first six months of 2005, compared to the first six months of 2004,
reflecting a 3% increase in new retail unit sales and an increase in our sales
mix toward luxury and mid-line import sales. Same store used vehicle retail
revenue increased $56.1 million, or 12%, to $514.4 million on a 4% increase in
unit sales and 8% increase in average selling price per vehicle retailed in the
first six months of 2005, compared to the same period of 2004.
Fixed operations revenue increased 14%, 11% on a same store basis, for
the six months ended June 30, 2005, compared to the six months ended June 30,
2004. 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.
Platform F&I increased $8.3 million to $73.5 million on a same store
basis for the six months ended June 30, 2005, compared to the six months ended
June 30, 2004. Corporate F&I revenue was $2.6 million for the six month periods
ended June 30, 2005, compared to $3.1 million for the prior year period.
Gross Profit-
For the Six Months
Ended June 30,
----------------------- Increase %
(Dollars in thousands, except for per vehicle data) 2005 2004 (Decrease) Change
---------- ---------- ---------- ------
New vehicle data:
Retail gross profit-same store (1) ................. $ 111,467 $ 109,268 $ 2,199 2%
Retail gross profit-acquisitions ................... 4,868 --
---------- ----------
Total new retail gross profit ................. 116,335 109,268 7,067 6%
Fleet gross profit-same store (1) .................. 1,404 1,015 389 38%
Fleet gross profit-acquisitions .................... (4) --
---------- ----------
Total fleet gross profit ...................... 1,400 1,015 385 38%
---------- ----------
New vehicle gross profit, as reported ......... $ 117,735 $ 110,283 $ 7,452 7%
========== ==========
New retail units-same store (1) .................... 51,264 49,692 1,572 3%
========== ==========
New retail units-actual ............................ 53,997 49,692 4,305 9%
========== ==========
29
For the Six Months
Ended June 30,
----------------------- Increase %
(Dollars in thousands, except for per vehicle data) 2005 2004 (Decrease) Change
---------- ---------- ---------- ------
Used vehicle data:
Retail gross profit-same store (1) ................. $ 59,150 $ 55,179 $ 3,971 7%
Retail gross profit-acquisitions ................... 1,720 --
---------- ----------
Total used retail gross profit ................ 60,870 55,179 5,691 10%
Wholesale gross profit-same store (1) .............. 1,125 (893) 2,018 226%
Wholesale gross profit-acquisitions ................ 13 --
---------- ----------
Total wholesale gross profit .................. 1,138 (893) 2,031 227%
---------- ----------
Used vehicle gross profit, as reported ........ $ 62,008 $ 54,286 $ 7,722 14%
========== ==========
Used retail units-same store (1) ................... 30,908 29,795 1,113 4%
========== ==========
Used retail units-actual ........................... 32,027 29,795 2,232 7%
========== ==========
Parts, service and collision repair:
Gross profit-same store (1) ........................ $ 163,134 $ 149,761 $13,373 9%
Gross profit-acquisitions .......................... 4,861 --
---------- ----------
Parts, service and collision repair gross
profit, as reported ......................... $ 167,995 $ 149,761 $18,234 12%
========== ==========
Finance and insurance, net:
Platform gross profit-same store (1) ............... $ 73,487 $ 65,225 $ 8,262 13%
Platform gross profit-acquisitions ................. 3,277 --
---------- ----------
Platform finance and insurance gross profit (2) 76,764 65,225 11,539 18%
Gross profit-corporate ............................. 2,570 3,149
---------- ----------
Finance and insurance gross profit, as reported $ 79,334 $ 68,374 $10,960 16%
========== ==========
Platform gross profit PVR-same store (1) ........... $ 894 $ 821 $ 73 9%
========== ==========
Platform gross profit PVR-actual (2) ............... $ 892 $ 821 $ 71 9%
========== ==========
Gross profit PVR-actual ............................ $ 922 $ 860 $ 62 7%
========== ==========
Total gross profit:
Same store (1) ..................................... $ 409,767 $ 379,555 $30,212 8%
Corporate .......................................... 2,570 3,149
Acquisitions ....................................... 14,735 --
---------- ----------
Total gross profit, as reported ............... $ 427,072 $ 382,704 $44,368 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.
(2) Refer to "Reconciliation of Non-GAAP Financial Information" for
further discussion regarding platform finance and insurance gross
profit PVR.
Gross profit increased 12% to $427.1 million for the six months ended
June 30, 2005, from $382.7 million for the six months ended June 30, 2004. Same
store gross profit increased 8% to $409.8 million for the six months ended June
30, 2005, from $379.6 million for the six months ended June 30, 2004.
Same store gross profit on new retail vehicle sales increased 2% for
the six months ended June 30, 2005, compared to the six months ended June 30,
2004 due to a 3% increase in unit sales.
Same store gross profit on used vehicle retail sales increased 7% to
$59.2 million for the six months ended June 30, 2005, from $55.2 million for the
six months ended June 30, 2004, due to a strong used vehicle market in the
during the first half of 2005.
Same store gross profit from fixed operations increased 9% to $163.1
million for the six months ended June 30, 2005, from $149.8 million for the six
months ended June 30, 2004, resulting primarily from increased "customer pay"
and warranty work in both parts and service.
30
Same-store platform F&I PVR revenue increased 9% to $894 for the six
months ended June 30, 2005, from $821 for the six months ended June 30, 2004.
The increase in F&I PVR is attributable to (i) increased service contract
penetration, (ii) utilization of menus in the F&I sales process and (iii)
maturation of our corporate-sponsored programs.
Selling, General and Administrative Expenses-
For the six months ended June 30, 2005, SG&A expenses increased $37.7
million to $338.4 million, from $300.7 million for the six months ended June 30,
2004. SG&A expenses as a percentage of gross profit for the six months ended
June 30, 2005 increased to 79.2%, from 78.6% for the six months ended June 30,
2004. Excluding the $3.6 million of reorganization costs, SG&A expenses as a
percentage of gross profit for the six months ended June 30, 2005, improved to
78.4%, from 78.6% for the prior year period. In addition, SG&A expenses for the
six months ended June 30, 2005, includes incremental rent of $4.6 million
resulting from the refinancing of 20 of our dealerships using a sale-leaseback
transaction in the third quarter of 2004. Excluding rent expense from both
periods, as well as the previously discussed reorganization costs, SG&A expenses
as a percentage of gross profit decreased to 72.5 % for the three months ended
June 30, 2005, compared to 74.1% for the prior year period. The improvement in
SG&A expense as a percentage of gross profit, after adjusting for reorganization
costs and rent expense, was attributable to the reorganization of the company
into regions, a reduction in advertising expense PVR and lower insurance costs
principally in the area of workman's compensation.
Depreciation and Amortization-
Depreciation and amortization expense increased $0.1 million to $10.0
million for the six months ended June 30, 2005, from $9.9 million for the six
months ended June 30, 2004. The slight increase in depreciation and amortization
was primarily related to the addition of property and equipment acquired during
2004 and 2005, offset by a reduction in property and equipment sold in
sale-leaseback transactions completed during 2004 and 2005.
Other Income (Expense)-
Floor plan interest expense increased $5.9 million to $15.0 million for
the six months ended June 30, 2005, from $9.1 million for the six months ended
June 30, 2004. This increase was attributable to higher average interest rates
on our floor plan note payable.
Other interest expense decreased $0.9 million to $19.6 million for the
six months ended June 30, 2005, as compared to the six months ended June 30,
2004, as a result of our decision to repay approximately $29.0 million of our
variable rate mortgage notes payable during 2005.
Income Tax Provision-
Income tax expense increased $0.9 million to $16.8 million for the six
months ended June 30, 2005, compared to the six months ended June 30, 2004, due,
in part, to the $2.0 million increase in income from continuing operations
before taxes for the six months ended June 30, 2005, compared to the six months
ended June 30, 2004. In addition, our effective tax rate for the six months
ended June 30, 2005, was 37.5% compared to 37.1% for the six months ended June
30, 2004.
Discontinued Operations-
During the six months ended June 30, 2005, we sold two dealership
locations (four franchises), and as of June 30, 2005, we were actively pursuing
the sale of three dealership locations (five franchises) and real estate
associated with one former dealership location. The $2.3 million loss from
discontinued operations is attributable to the net gain on sale of dealerships
and real estate associated with one former dealership location sold during the
six months ended June 30, 2005, and the operating losses of the franchises
mentioned above. The loss from discontinued operations for the six months ended
June 30, 2004, of $1.8 million includes the net operating losses of the
dealerships mentioned above; ten dealership locations (fourteen franchises),
that were sold during 2004, and the net loss on the sale of businesses during
the six months ended June 30, 2004.
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 June 30, 2005, our funds generated through future
operations and the funds available for borrowings under our committed credit
facility, floor plan financing agreements, mortgage notes payable 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.
31
As of June 30, 2005, we had cash and cash equivalents of $11.0 million
and working capital of $287.1 million. In addition, we had $145.0 million
available for borrowings under our committed credit facility for working
capital, general corporate purposes and acquisitions.
Committed Credit Facility
On March 23, 2005, we entered into a committed credit facility (the
"Committed Credit Facility") with JPMorgan Chase, N.A., 17 other financial
institutions (the "Syndicate") and Ford Motor Credit Corporation ("FMCC"),
collectively the Lenders. Concurrently with entering into the Committed Credit
Facility we terminated our First Amended and Restated Credit Agreement with
FMCC, General Motors Acceptance Corporation ("GMAC") and DaimlerChrysler
Financial Services North America LLC. The Committed Credit Facility provides us
with $650.0 million of new and used vehicle inventory financing ("Floor Plan
Tranche") and $150.0 million of working capital borrowing capacity ("Working
Capital Tranche"). In addition, FMCC and GMAC have committed $150.0 million and
$100.0 million, respectively, of floor plan financing outside of the Syndicate
to finance inventory at our "Ford Family" (Ford, Lincoln Mercury, Mazda, Volvo,
Jaguar and Land Rover) and General Motors' dealerships. In total, these
commitments give us $150.0 million of working capital borrowing capacity and
$900.0 million of floor plan borrowing capacity.
During the three months ended June 30, 2005, we borrowed $15.0 million
from our Committed Credit Facility, of which $8.2 million was used for the
purchase of real estate on which two of our dealerships are located. The
remainder of the borrowings was used for general corporate purposes. During the
three months ended June 30, 2005, we repaid $10.0 million of the amounts
borrowed from our Committed Credit Facility and subsequent to the end of the
quarter we repaid the remaining $5.0 million.
Floor Plan Financing-
We finance substantially all of our new vehicle inventory and a portion
of our used vehicle inventory. As of June 30, 2005, total borrowing capacity
under the floor plan financing agreements with our vehicle floor plan providers
totaled $900.0 million. In addition, as of June 30, 2005, we had total borrowing
capacity of $32.2 million under ancillary floor plan financing agreements with
Comerica Bank and Navistar Financial for our heavy trucks business in Atlanta,
Georgia. As of June 30, 2005, we had $613.1 million outstanding under all our
floor plan financing agreements.
Acquisitions and Acquisition Financing-
During the second quarter of 2005, we acquired one dealership location
(one franchise) in Arkansas for a total purchase price of $5.2 million, of which
$4.7 million was paid in cash through the use of our working capital, with the
remaining $0.5 million representing the fair value of future payments. We
estimate annual revenues of the acquired franchises will total approximately
$35.0 million, based on historical performance. We plan to use our available
cash, borrowings under our Committed Credit Facility or proceeds from future
sale-leaseback transactions to finance future acquisitions.
Sale-Leaseback Transactions
During the six months ended June 30, 2005, we completed two
sale-leaseback transactions, which resulted in the sale of approximately $15.7
million of real estate and construction improvements and the commencement of
long-term operating leases for the assets sold.
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) an adjusted current ratio of at least 1.2 to 1, of
which our ratio was approximately 1.5 to 1 as of June 30, 2005; (ii) a fixed
charge coverage ratio of at least 1.2 to 1, of which our ratio was approximately
1.5 to 1 as of June 30, 2005; (iii) an adjusted leverage ratio of not more than
4.5 to 1, of which our ratio was approximately 3.6 to 1 as of June 30, 2005 and
(iv) a minimum adjusted net worth of not less than $350.0 million, of which our
adjusted net worth was approximately $464.3 million as of June 30, 2005. A
breach of these covenants could cause an acceleration of repayment of our
Committed Credit Facility if not otherwise waived or cured. 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 June 30, 2005 and (ii) an EBITDA based coverage ratio of at least 1.5
to 1, of which our ratio was approximately 2.8 to 1 as of June 30, 2005. 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
32
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 June 30, 2005, we were in compliance with all our debt and lease
agreement covenants.
Cash Flows for the Six Months Ended June 30, 2005 Compared to the Six Months
Ended June 30, 2004
Operating Activities-
Net cash provided by operating activities totaled $43.4 million and
$4.7 million for the six months ended June 30, 2005, and 2004, 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 increase in our cash flow from operating activities for the six
months ended June 30, 2005, compared to the six months ended June 30, 2004, was
primarily attributable to (i) the timing of collection of accounts receivable,
(ii) the timing of inventory purchases resulting from changes in the equity of
our inventory and increased sales activity in June 2005 compared to June 2004,
which caused contracts-in-transit to increase compared to June of last year and
(iii) timing of payments of accounts payable and accrued liabilities and timing
differences in prepaid assets and other assets and liabilities.
As of June 30, 2005, we had approximately $64.7 million of equity in
our vehicle inventory (vehicle inventory in excess of floor plan borrowings), as
compared to $66.2 million as of December 31, 2004. Had we maintained the same
level of equity in our vehicle inventory as of June 30, 2005 as we had as of
December 31, 2004, our cash flow from operations for the six months ended June
30, 2005, would have increased by approximately $2.1 million. As of June 30,
2004, we had approximately $30.0 million of equity in our vehicle inventory, as
compared to $5.7 million as of December 31, 2003. Had we maintained the same
level of equity in our vehicle inventory as of June 30, 2004 as we had as of
December 31, 2003, our cash flow from operations for the six months ended June
30, 2004 would have improved by approximately $23.3 million.
Investing Activities--
Net cash used in investing activities totaled $34.7 million and $94.4
million for the six months ended June 30, 2005 and 2004, respectively. Cash
flows from investing activities relate primarily to capital expenditures,
acquisition and divestiture activity, sale of property and equipment and
construction advances from lessors in connection with our sale-leaseback
agreements.
Capital expenditures were $35.2 million and $34.5 million for the six
months ended June 30, 2005 and 2004, respectively, of which $18.2 million and
$16.1 million, were financed or were pending financing through sale-leaseback
agreements or mortgage notes payable for the six months ended June 30, 2005 and
2004, respectively. Our capital investments consisted of upgrades of our
existing facilities and construction of new facilities. Future capital
expenditures will relate primarily to upgrading existing dealership facilities
and operational improvements that we expect will provide us with acceptable
rates of return on our investments. During the six months ended June 30, 2005
and 2004, we received $2.6 million and $9.5 million, respectively, in
construction advances from lessors in connection with our sale-leaseback
agreements. We expect that capital expenditures during 2005 will total between
$80.0 million and $90.0 million, of which we intend to finance between 60% and
70% principally through sale-leaseback agreements.
Cash used for acquisitions totaled $4.7 million and $71.6 million for
the six months ended June 30, 2005 and 2004, respectively. We anticipate that we
will spend between $25.0 million to $50.0 million on acquisitions in 2005.
Proceeds from the sale of discontinued operations totaled $2.8 million
and $0.8 million for the six months ended June 30, 2005 and 2004, respectively.
We continuously monitor the profitability and market value of our dealerships
and, under certain conditions, may strategically divest non-profitable
dealerships.
Financing Activities--
Net cash used in financing activities totaled $25.8 million and $2.1
million for the six months ended June 30, 2005 and 2004, respectively. During
the six months ended June 30, 2005 and 2004, proceeds from borrowings amounted
to $20.7 million and $3.9 million, which was used to finance construction on our
dealership facilities and general corporate purposes. In addition, we incurred
$4.9 million of debt issuance costs associated with our Committed Credit
Facility.
During the six months ended June 30, 2005 and 2004, we repaid debt of
$42.0 million and $6.8 million, respectively. During the six months ended June
30, 2005, we repaid $30.7 million of our outstanding mortgage notes payable the
majority of which resulted from our decision to repay approximately $29.0
million of our variable rate mortgage notes payable.
33
Off-Balance Sheet Transactions
We had no material off-balance sheet transactions during the periods
presented other than those disclosed in Note 13 of our consolidated financial
statements.
Stock Repurchase Restrictions
Pursuant to the indentures governing our 9% Senior Subordinated Notes
due 2012, our 8% Senior Subordinated Notes due 2014 and our Committed Credit
Facility, our ability to repurchase shares of our common stock is limited. As of
June 30, 2005, our ability to repurchase shares was limited to an aggregate
purchase price of $29.6 million due to these restrictions. We did not repurchase
any shares of our common stock during 2005 or 2004.
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. The accounting policies described
below are those that most frequently require management to make estimates and
judgments, and therefore are critical to understanding our results of
operations. Senior management has discussed the development and selection of
these accounting estimates and the related disclosures with the audit committee
of our board of directors.
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 vehicles where cost basis exceeds fair
value and for parts that we believe are excess or obsolete. In assessing lower
of cost or market for new vehicles, we primarily consider the aging of vehicles
and loss histories, 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 histories, current aging of the inventory and current
market conditions. The assessment of excess and obsolete parts considers the
sales activity of specific parts over the last twelve months. These reserves
were $4.4 million and $4.9 million as of June 30, 2005 and December 31, 2004,
respectively.
Notes Receivable--Finance Contracts--
As of June 30, 2005 and December 31, 2004, we had outstanding notes
receivable from finance contracts of $30.4 million and $30.9 million,
respectively (net of an allowance for credit losses of $4.6 million and $6.3
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 attribute minimal value to the underlying collateral in our assessment of the
reserve.
F&I Chargeback Reserve--
We receive commissions from the sale of vehicle service contracts,
credit life insurance and disability insurance to customers. In addition, we
receive commissions from financing institutions for arranging customer
financing. 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. This data is evaluated on a product-by-product basis. These reserves
were $12.0 million as of June 30, 2005 and December 31, 2004.
Equity-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 SFAS No. 148, "Accounting for Stock-Based Compensation-Transition
and Disclosure-An amendment of FASB Statement No. 123." See also "Recent
34
Accounting Pronouncements" below for a discussion of the impact on our financial
statements from the adoption of SFAS No. 123 (revised 2004), "Share-based
Payment."
Goodwill and Other Intangible Assets--
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 142, "Goodwill and Other Intangible Assets," we do not amortize goodwill and
other intangible assets that are deemed to have indefinite lives. We test 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 is allocated at the
entity level and manufacturer franchise rights are allocated to each individual
dealership franchise, respectively. Goodwill represents the excess cost of the
businesses acquired over the fair market value of the identifiable net assets.
The fair market value of our manufacturer franchise rights is determined at the
acquisition date through discounting the projected cash flows attributable to
each franchise.
Upon adoption of SFAS No. 142 "Goodwill and Other Intangible Assets,"
on January 1, 2002, we determined that each of our platforms qualified as a
reporting unit since we operate in one segment, 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. In late 2004, we began the process of reorganizing our platforms
into four regions. Within this more streamlined structure, we will evaluate our
operations and financial results by dealership in the aggregate, rather than by
platform. The general managers, with direction from a centralized management
team, including corporate and regional management, will continue to have the
independence and flexibility to respond effectively to local market conditions.
Based on the changes in our management, operational and reporting structure
during the first quarter of 2005, we evaluate goodwill at the operating segment
level.
We review goodwill and indefinite lived manufacturer franchise rights
for impairment annually on October 1st of each year, or more often if events or
circumstances indicate that impairment may have occurred. We are subject to
financial statement risk to the extent that intangible assets become impaired
due to decreases in the related fair market value of our underlying businesses
or entity.
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 to
15 years and are tested for impairment when circumstances indicate that the
carrying value of the asset might be impaired.
Accrued Expenses--
Payments owed to our various service providers are expensed during the
month in which the applicable service is performed. The amount of these expenses
is dependent upon information provided by our internal systems and processes.
Due to the length of time necessary to receive accurate information, estimates
of amounts due are necessary in order to record monthly expenses. In subsequent
months, expenses are reconciled and adjusted where necessary. We continue to
refine the estimation process based on an increased understanding of the time
requirements and close working relationships with our service providers.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 123 (revised 2004), "Share-based Payment." This statement
requires compensation costs related to share-based payment transactions to be
recognized in the financial statements. With limited exceptions, the amount of
compensation cost will be measured based on the grant-date fair value of the
equity or liability instruments issued. Compensation cost will be recognized
over the period that an employee provides service in exchange for the award.
SFAS No. 123 (revised 2004) replaces SFAS No. 123, "Accounting for Stock-Based
Compensation," and supersedes APB Opinion No. 25, "Accounting for Stock Issued
to Employees." In April 2005, the Securities and Exchange Commission adopted a
new rule that amends the compliance dates for SFAS No. 123 (revised 2004).
Registrants would have been required to implement the standard as of the
beginning of the first interim or annual period that begins after June 15, 2005.
The Commission's new rule allows companies to implement SFAS No 123 (Revised
2004) at the beginning of their next fiscal year, instead of the next reporting
period, that begins after June 15, 2005. We are currently evaluating the effect
of this statement on our consolidated financial statements and related
disclosures.
35
RECONCILIATION OF NON-GAAP FINANCIAL INFORMATION
Platform Finance and Insurance Gross Profit PVR-
We evaluate our finance and insurance gross profit performance on a Per
Vehicle Retailed ("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 six months ended June 30, 2005 and 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.
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 Months
Ended June 30,
---------------------
(In thousands, except for unit and per vehicle data) 2005 2004
--------- ---------
Reconciliation of Finance and Insurance Gross Profit
to Platform Finance and Insurance Gross
Profit:
Finance and insurance gross profit, net (as reported) $ 41,646 $ 37,453
Less: Corporate finance and insurance gross profit (1,367) (1,906)
-------- --------
Platform finance and insurance gross profit ......... $ 40,279 $ 35,547
======== ========
Platform finance and insurance gross profit PVR ....... $ 883 $ 843
======== ========
Retail units sold:
New retail units .................................... 29,094 27,114
Used retail units ................................... 16,520 15,072
-------- --------
Total ............................................... 45,614 42,186
======== ========
For the Six Months
Ended June 30,
---------------------
(In thousands, except for unit and per vehicle data) 2005 2004
--------- ---------
Reconciliation of Finance and Insurance Gross Profit
to Platform Finance and Insurance Gross
Profit:
Finance and insurance gross profit, net (as reported) $ 79,334 $ 68,374
Less: Corporate finance and insurance gross profit (2,570) (3,149)
-------- --------
Platform finance and insurance gross profit ......... $ 76,764 $ 65,225
======== ========
Platform finance and insurance gross profit PVR ....... $ 892 $ 821
======== ========
Retail units sold:
New retail units .................................... 53,997 49,692
Used retail units ................................... 32,027 29,795
-------- --------
Total ............................................... 86,024 79,487
======== ========
Adjusted SG&A Expense-
Our operating income was largely impacted by reorganization costs
incurred during the first six months of 2005 and incremental rent expense
associated with a sale-leaseback transaction that was entered into in the third
quarter of 2004. During the first six months of 2005, we incurred severance
costs of $3.6 million associated with the reorganization of our regional
structure. We believe that excluding the reorganization costs and rent expense
from the selling, general and administrative expense provides a more meaningful
36
basis to measure the results of our operations compared to that of the prior
year period. A reconciliation of our adjusted selling, general and
administrative expense is presented below.
For the Three Months
Ended June 30,
---------------------
2005 2004
--------- ---------
Reconciliation of SG&A Expense to Adjusted SG&A Expense:
SG&A expense ........................................ $170,551 $156,332
Less: Rent expense ................................. (12,544) (8,811)
-------- --------
Adjusted SG&A expense ............................... $158,007 $147,521
======== ========
Gross Profit ........................................ $221,375 $201,605
======== ========
Adjusted SG&A expense as a percentage of Gross Profit 71.4% 73.2%
======== ========
For the Six Months
Ended June 30,
---------------------
2005 2004
--------- ---------
Reconciliation of SG&A Expense to Adjusted SG&A Expense:
SG&A expense ........................................ $338,358 $300,694
Less: Reorganization costs ......................... (3,566) --
-------- --------
SG&A, net of reorganization costs ................... 334,792 300,694
Less: Rent expense ................................. (25,299) (16,993)
-------- --------
Adjusted SG&A expense ............................... $309,493 $283,701
======== ========
Gross Profit ........................................ $427,072 $382,704
======== ========
SG&A, net of reorganization costs, as a percentage
of Gross Profit .................................. 78.4% 78.6%
======== ========
Adjusted SG&A expense as a percentage of Gross
Profit ........................................... 72.5% 74.1%
======== ========
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 $236.2 million of
variable rate long-term debt (including the current portion) outstanding at June
30, 2005, a 1% change in interest rates would result in a change of
approximately $2.4 million to our annual other interest expense. Conversely,
based on fixed-rate debt of $273.6 million a 1% change in interest would mean we
would not experience the impact of a $2.7 million change in interest expense.
Based on floor plan amounts outstanding at June 30, 2005, a 1% change in the
interest rates would result in a change of approximately $6.1 million to annual
floor plan interest expense.
We received $14.0 million of interest credit assistance from certain
automobile manufacturers during the six months ended June 30, 2005. Interest
credit assistance reduced new vehicle cost of sales for the six months ended
June 30, 2005 by $13.7 million and reduced new vehicle inventory by $4.2 million
and $3.9 million as of June 30, 2005 and December 31, 2004, respectively.
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 have entered into two forward interest rate swaps with a combined
notional principal amount of $170.0 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. The swap agreements were
designated and qualify as cash flow hedges of our variable rate floor plan notes
payable and will contain minor ineffectiveness. As of June 30, 2005 and December
31, 2004, the swaps had a fair value of $12.3 million and $7.1 million,
respectively, and are included in Other Long-term Liabilities on the
accompanying Consolidated Balance Sheets
We have 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 the 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 8% Senior Subordinated Notes due 2014 and
did not contain any ineffectiveness. As a result our 8% Senior Subordinated
Notes due 2014 have been written down by the fair value of the related swap. As
of June 30, 2005 and December 31, 2004, the swap agreement had a fair value of
$0.4 million and $2.7 million, respectively, and is included in Other Long-Term
Liabilities on the accompanying Consolidated Balance Sheets.
37
We have entered into an interest rate swap agreement with a notional
principal amount of $15.2 million as a hedge against future changes in the
interest rate of our variable rate mortgage notes payable. Under the terms of
the swap agreement, we are required to make payments at a fixed rate of 6.08%
and receive a variable rate based on LIBOR. This swap agreement was designated
and qualifies as a cash flow hedge of changes in the interest rate of our
variable rate mortgage notes payable and will contain minor ineffectiveness. As
of June 30, 2005 and December 31, 2004, the swap agreement had a fair value of
$0.2 million, which was included in Other Long-Term Liabilities on the
accompanying Consolidated Balance Sheets.
Item 4. Controls and Procedures
As of the end of the period covered by this report, the Company
conducted an evaluation, under the supervision and with the participation of the
Company's chief executive officer and chief financial officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended ("Exchange Act"). Based on this evaluation, the
Company's chief executive officer and chief financial officer concluded that as
of the end of such period such disclosure controls and procedures (i) were
reasonably designed to ensure that information required to be disclosed by the
Company in reports it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time period specified in the rules
and forms of the Securities and Exchange Commission and (ii) were effective.
There have not been any changes in the Company's internal control over
financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) during the fiscal quarter to which this report relates
that have materially affected, or are reasonably likely to materially affect,
the Company's 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 our 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 our relationships with vehicle manufacturers and other suppliers;
o risks associated with our 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 that our 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.
38
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The results of the votes cast at the Company's Annual Meeting on April 28, 2005
were as follows:
Election of Class I Directors:
For Withheld
Timothy C. Collins 27,919,315 3,304,680
Kenneth B. Gilman 30,989,588 234,407
Vernon E. Jordan, Jr. 27,919,115 3,304,880
Thomas F. McLarty, III 30,946,203 277,792
Ratification of appointment of Deloitte & Touche L.L.P. as independent
public accountants for 2005:
For 31,217,012
Against 1,240
Abstain 5,743
Item 6. Exhibits
Exhibits required to be filed by Item 601 of Regulation S-K:
10.1 1999 Stock Option Plan, as amended.
10.2 Severance Pay Agreement of Charles B. Tomm, dated as of June 10, 2005.
10.3 Compensation Plan of Charles B. Tomm
31.1 Certificate of the 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,
dated August 4, 2005.
31.2 Certificate of the 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,
dated August 4, 2005.
32.1 Certificate of Chief Executive Officer pursuant to Rule
13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, dated August 4, 2005.
32.2 Certificate of Chief Financial Officer pursuant to Rule
13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, dated August 4, 2005.
39
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: August 4, 2005 By: /s/ KENNETH B. GILMAN
--------------------------------------------
Name: Kenneth B. Gilman
Title: Chief Executive Officer and President
Date: August 4, 2005 By: /s/ J. GORDON SMITH
--------------------------------------------
Name: J. Gordon Smith
Title: Senior Vice President and Chief Financial
Officer
(Principal Financial Officer)
40
INDEX TO EXHIBITS
Exhibit
Number Description of Documents
- ------ ------------------------
10.1 1999 Stock Option Plan, as amended.
10.2 Severance Pay Agreement of Charles B. Tomm, dated as of June 10, 2005.
10.3 Compensation Plan of Charles B. Tomm
31.1 Certificate of the 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, dated August 4,
2005.
31.2 Certificate of the 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, dated August 4,
2005.
32.1 Certificate of Chief Executive Officer pursuant to Rule 13a-14(b)/
15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, dated August 4, 2005.
32.2 Certificate of Chief Financial Officer pursuant to Rule 13a-14(b)/
15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, dated August 4, 2005.