Back to GetFilings.com
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
Commission file number: 1-13461
GROUP 1 AUTOMOTIVE, INC.
(Exact name of Registrant as specified in its charter)
Delaware 76-0506313
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
950 Echo Lane, Suite 100
Houston, Texas 77024
(Address of principal executive offices) (Zip code)
(713) 647-5700
(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 the number of shares outstanding of each of the registrant's
classes of common stock, as of July 31, 2002.
Title Outstanding
----- -----------
Common stock, par value $.01 23,146,840
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
JUNE 30, DECEMBER 31,
2002 2001
------------ --------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash ...................................................... $ 25,334 $ 16,861
Contracts-in-transit ...................................... 127,429 130,351
Accounts and notes receivable, net ........................ 53,863 43,684
Inventories, net .......................................... 519,073 454,961
Deferred income taxes ..................................... 10,341 10,721
Other assets .............................................. 5,643 5,354
----------- -----------
Total current assets ............................... 741,683 661,932
----------- -----------
PROPERTY AND EQUIPMENT, net ................................. 94,569 83,011
INTANGIBLE ASSETS, net ...................................... 297,126 282,527
INVESTMENTS AND DEFERRED COSTS
FROM REINSURANCE ACTIVITIES ............................... 22,671 21,187
OTHER ASSETS ................................................ 14,354 5,768
----------- -----------
Total assets ....................................... $ 1,170,403 $ 1,054,425
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Floorplan notes payable ................................... $ 434,537 $ 364,954
Current maturities of long-term debt ...................... 1,611 1,687
Accounts payable .......................................... 79,375 73,089
Accrued expenses .......................................... 66,275 67,489
----------- -----------
Total current liabilities .......................... 581,798 507,219
----------- -----------
DEBT, net of current maturities ............................. 9,599 10,497
SENIOR SUBORDINATED NOTES ................................... 78,816 85,002
DEFERRED INCOME TAXES ....................................... 12,986 9,982
OTHER LIABILITIES ........................................... 24,173 20,776
----------- -----------
Total liabilities before deferred revenues ......... 707,372 633,476
----------- -----------
DEFERRED REVENUES FROM INSURANCE POLICY
AND VEHICLE SERVICE CONTRACT SALES ........................ 29,235 28,706
STOCKHOLDERS' EQUITY:
Preferred stock, 1,000,000 shares authorized, none
issued or outstanding ................................... -- --
Common stock, $.01 par value, 50,000,000 shares
authorized, 23,125,031 and 23,029,853 issued ............ 231 230
Additional paid-in capital ................................ 253,154 251,145
Retained earnings ......................................... 182,590 147,959
Accumulated other comprehensive income (loss) ............. (1,948) (807)
Treasury stock, at cost, 12,732 and 343,345 shares ........ (231) (6,284)
----------- -----------
Total stockholders' equity ......................... 433,796 392,243
----------- -----------
Total liabilities and stockholders' equity ......... $ 1,170,403 $ 1,054,425
=========== ===========
The accompanying notes are an integral part
of these consolidated financial statements.
2
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- -----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
REVENUES:
New vehicles.......................................... $ 613,355 $ 592,897 $ 1,164,027 $ 1,130,339
Used vehicles......................................... 284,940 289,702 552,199 564,360
Parts and service..................................... 95,511 88,910 187,202 173,681
Finance and insurance, net............................ 39,298 35,062 75,750 67,055
------------ ------------ ------------ ------------
Total revenues................................. 1,033,104 1,006,571 1,979,178 1,935,435
COST OF SALES:
New vehicles.......................................... 568,006 547,091 1,077,957 1,045,163
Used vehicles......................................... 262,504 266,345 506,338 517,180
Parts and service..................................... 41,831 39,314 82,611 77,343
------------ ------------ ------------ ------------
Total cost of sales............................ 872,341 852,750 1,666,906 1,639,686
------------ ------------ ------------ ------------
GROSS PROFIT............................................ 160,763 153,821 312,272 295,749
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES.............................. 120,773 115,303 237,650 224,498
------------ ------------ ------------ ------------
Income from operations before non-cash
charges....................................... 39,990 38,518 74,622 71,251
DEPRECIATION AND
AMORTIZATION EXPENSE................................. 2,785 4,253 5,621 8,484
------------ ------------ ------------ ------------
Income from operations......................... 37,205 34,265 69,001 62,767
OTHER INCOME AND (EXPENSES):
Floorplan interest expense............................ (4,342) (7,830) (8,732) (17,137)
Other interest expense, net........................... (2,452) (3,722) (5,191) (7,922)
Other income (expense), net........................... (35) (18) (110) 20
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES.............................. 30,376 22,695 54,968 37,728
PROVISION FOR INCOME TAXES.............................. 11,239 8,625 20,338 14,337
------------ ------------ ------------ ------------
NET INCOME.............................................. $ 19,137 $ 14,070 $ 34,630 $ 23,391
============ ============ ============ ============
EARNINGS PER SHARE:
Basic................................................. $ 0.83 $ 0.72 $ 1.50 $ 1.19
Diluted............................................... $ 0.78 $ 0.68 $ 1.42 $ 1.15
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic................................................. 23,111,843 19,479,775 23,011,086 19,585,027
Diluted............................................... 24,503,067 20,719,924 24,322,647 20,365,291
The accompanying notes are an integral part
of these consolidated financial statements.
3
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
SIX MONTHS ENDED
JUNE 30,
----------------------------
2002 2001
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................................ $ 34,630 $ 23,391
Adjustments to reconcile net income to net cash provided .................
by operating activities:
Depreciation and amortization ........................................... 5,621 8,484
Deferred income taxes ................................................... 4,033 (342)
Non-cash compensation ................................................... 193 --
Provision for doubtful accounts and uncollectible notes ................. 406 603
Loss (Gain) on sale of assets ........................................... 102 (28)
Gain on sale of franchises .............................................. (414) --
--------- ---------
Net cash provided by operating activities, before changes
in assets and liabilities .......................................... 44,571 32,108
--------- ---------
Changes in assets and liabilities:
Accounts receivable ................................................. (5,013) (3,080)
Inventories ......................................................... (52,858) 22,688
Other assets ........................................................ (10,783) (2,062)
Floorplan notes payable ............................................. 26,812 (22,802)
Accounts payable and accrued expenses ............................... 8,201 27,249
--------- ---------
Net asset and liability changes ................................... (33,641) 21,993
--------- ---------
Net cash provided by operating activities ................. 10,930 54,101
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in notes receivable ............................................. (6,578) (1,496)
Collections on notes receivable .......................................... 678 568
Purchases of property and equipment ...................................... (19,488) (6,741)
Proceeds from sales of property and equipment ............................ 570 357
Proceeds from sales of franchises ........................................ 7,430 3,973
Cash paid in acquisitions, net of cash received .......................... (21,502) (600)
--------- ---------
Net cash used by investing activities ..................... (38,890) (3,939)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on revolving credit facility .............................. 32,764 (14,750)
Principal payments of long-term debt ..................................... (995) (683)
Borrowings of long-term debt ............................................. -- 154
Purchase of senior subordinated notes .................................... (6,128) (5,000)
Proceeds from issuance of common stock to benefit plans, including
tax benefit ........................................................ 7,870 1,247
Purchase of treasury stock, amounts based on settlement date ............. -- (21,432)
--------- ---------
Net cash provided (used) by financing activities .......... 33,511 (40,464)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS ................................... 5,551 9,698
CASH AND CASH EQUIVALENTS, beginning of period .............................. 147,212 140,878
--------- ---------
CASH AND CASH EQUIVALENTS, end of period .................................... $ 152,763 $ 150,576
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for -
Interest ........................................................... $ 14,873 $ 26,932
Taxes .............................................................. $ 12,891 $ 1,954
The accompanying notes are an integral part
of these consolidated financial statements.
4
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Group 1 Automotive, Inc., a Delaware corporation, is a specialty
retailer in the automotive industry. Group 1 Automotive, Inc. is a holding
company with no independent assets or operations other than its investments in
its subsidiaries, which are located in California, Colorado, Florida, Georgia,
Louisiana, Massachusetts, New Mexico, Oklahoma and Texas. These subsidiaries
sell new and used cars and light trucks through their dealerships and Internet
sites; arrange related financing, vehicle service and insurance contracts;
provide maintenance and repair services; and sell replacement parts. Group 1
Automotive, Inc. and its subsidiaries are herein collectively referred to as the
"Company" or "Group 1".
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
All acquisitions of dealerships completed during the periods presented
have been accounted for using the purchase method of accounting and their
results of operations are included from the effective dates of the closings of
the acquisitions. The allocations of purchase price to the assets acquired and
liabilities assumed are initially assigned and recorded based on preliminary
estimates of fair value and may be revised as additional information concerning
the valuation of such assets and liabilities becomes available. All significant
intercompany balances and transactions have been eliminated in consolidation.
Interim Financial Information
These interim financial statements are unaudited, and certain
information normally included in financial statements prepared in accordance
with generally accepted accounting principles has not been included herein. In
the opinion of management, all adjustments necessary to fairly present the
financial position, results of operations and cash flows with respect to the
interim financial statements, have been properly included and are of a normal
recurring nature. Due to seasonality and other factors, the results of
operations for the interim periods are not necessarily indicative of the results
that will be realized for the entire fiscal year.
Recent Accounting Pronouncements
In June 2001, Statement of Financial Accounting Standards ("SFAS") No.
142, "Goodwill and Other Intangible Assets" was issued. SFAS No. 142 changes the
treatment of goodwill by no longer amortizing goodwill; however, other
identifiable intangible assets are to be separately recognized and amortized, as
applicable. The statement requires, at least annually, an assessment for
impairment of goodwill and other indefinite life intangible assets by applying a
fair-value based test. A portion of the Company's intangible assets relate to
franchise value, which is considered to have an indefinite life, with goodwill
accounting for the remainder. The carrying amount of the franchise value
intangible assets was $18.7 million at June 30, 2002. The Company adopted this
statement effective January 1, 2002. The adoption of the statement resulted in
the elimination of approximately $7.5 million of goodwill amortization,
annually, subsequent to December 31, 2001. Adoption did not result in an
impairment of any intangible assets, based on the fair-value based test;
however, changes in the facts and circumstances surrounding this estimate could
result in an impairment of intangible assets in the future.
In August 2001, SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" was issued. SFAS No. 144 supercedes SFAS No. 121
and Accounting Principles Board Opinion ("APB") No. 30, "Reporting the Results
of Operations - Reporting the Effects of the Disposal of a Segment Business and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS
No. 144 establishes a single accounting model for assets to be disposed of by
sale whether previously held and used or newly acquired. SFAS No. 144 retains
the provisions of APB No. 30 for presentation of discontinued operations in the
income statement, but broadens the presentation to include a component of
5
an entity. The Company adopted this statement effective January 1, 2002, and
adoption did not have a material impact on the consolidated results of
operations or financial position.
3. EARNINGS PER SHARE:
SFAS No. 128, "Earnings per Share" requires the presentation of basic
earnings per share and diluted earnings per share in financial statements of
public enterprises. Under the provisions of this statement, basic earnings per
share is computed based on weighted average shares outstanding and excludes
dilutive securities. Diluted earnings per share is computed including the
impacts of all potentially dilutive securities. The following table sets forth
the shares outstanding for the earnings per share calculations:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- -----------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Common stock outstanding, beginning of period ........... 23,120,924 19,716,069 23,029,853 21,260,227
Weighted average common stock issued -
Employee Stock Purchase Plan ....................... 37,964 81,218 51,208 116,937
Stock options exercised ............................ 61,238 23,260 204,857 20,821
Less: Weighted average treasury shares held and
weighted average shares repurchased and cancelled ... (108,283) (340,772) (274,832) (1,812,958)
---------- ---------- ---------- ----------
Shares used in computing basic earnings per share ....... 23,111,843 19,479,775 23,011,086 19,585,027
Dilutive effect of stock options, net of assumed
repurchase of treasury stock ....................... 1,391,224 1,240,149 1,311,561 780,264
---------- ---------- ---------- ----------
Shares used in computing diluted earnings per share ..... 24,503,067 20,719,924 24,322,647 20,365,291
========== ========== ========== ==========
4. BUSINESS COMBINATIONS AND DISPOSITIONS:
During the first six months of 2002, the Company acquired five
automobile dealership franchises. The acquisitions were accounted for as
purchases. The aggregate consideration paid in completing the acquisitions
included approximately $21.5 million in cash, net of cash received, and the
assumption of an estimated $15.6 million of inventory financing. The
consolidated balance sheet includes preliminary allocations of the purchase
price of the acquisitions, which are subject to final adjustment. These
allocations resulted in recording approximately $13.7 million of franchise value
intangible assets and $4.6 million of goodwill. Additionally, during the first
six months of 2002, the Company sold three dealership franchises, with goodwill
balances totaling $4.2 million, for $7.4 million in cash. A gain of $0.4 million
was recognized on these sales and is recorded in Other Income (Expense), net.
5. SENIOR SUBORDINATED NOTES:
The Company completed the offering of $100 million of its 10 7/8%
Senior Subordinated Notes due 2009 (the "Notes") on March 5, 1999. The Notes pay
interest semi-annually on March 1 and September 1, each year. The Company may
redeem all or part of the Notes at redemption prices of 105.438%, 103.625%,
101.813% and 100.000% of the principal amount plus accrued interest during the
twelve-month periods beginning March 1, of 2004, 2005, 2006, and 2007 and
thereafter, respectively. The Notes are jointly and severally and fully and
unconditionally guaranteed, on an unsecured senior subordinated basis, by all
subsidiaries of the Company (the "Subsidiary Guarantors"), other than certain
minor subsidiaries. All of the Subsidiary Guarantors are wholly-owned
subsidiaries of the Company. Certain manufacturers have minimum working capital
guidelines, which may limit a subsidiary's ability to make distributions to the
parent company.
6
6. COMPREHENSIVE INCOME:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
2002 2001 2002 2001
-------- -------- -------- --------
(dollars in thousands)
Net income .......................................................... $ 19,137 $ 14,070 $ 34,630 $ 23,391
Other comprehensive income:
Change in fair value of interest rate swaps, net of tax.......... (2,063) -- (1,141) --
-------- -------- -------- --------
Comprehensive income ................................................ $ 17,074 $ 14,070 $ 33,489 $ 23,391
======== ======== ======== ========
7. IMPACT OF CHANGE IN ACCOUNTING FOR INTANGIBLE ASSETS:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
2002 2001 2002 2001
---------- ------- ---------- -------
(dollars in thousands)
Net income ................................................. $ 19,137 $14,070 $ 34,630 $23,391
Goodwill amortization expense, net of tax .................. -- 1,412 -- 2,736
---------- ------- ---------- -------
Pro forma net income ....................................... $ 19,137 $15,482 $ 34,630 $26,127
========== ======= ========== =======
Pro forma earnings per share:
Basic .................................................. $ 0.83 $ 0.79 $ 1.50 $ 1.33
Diluted ................................................ $ 0.78 $ 0.75 $ 1.42 $ 1.28
8. SUBSEQUENT EVENTS:
Effective August 1, 2002, the Company completed the acquisition of six
automobile dealership franchises in California, with annual revenues of
approximately $400 million, in exchange for consideration consisting of $59.3
million in cash, the assumption of approximately $41.0 million of inventory
financing and $3.5 million of other debt.
On August 8, 2002, the Company announced that the Board of Directors
authorized the repurchase of up to $25 million of the Company's common stock.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following should be read in conjunction with the response to Part
I, Item 1 of this Report and our other filings with the Securities and Exchange
Commission ("SEC").
OVERVIEW
We are a specialty retailer in the $1 trillion automotive industry.
Through a series of acquisitions we now operate 109 dealership franchises in
California, Colorado, Florida, Georgia, Louisiana, Massachusetts, New Mexico,
Oklahoma and Texas. Through our dealerships and Internet sites, we sell new and
used cars and light trucks; arrange related financing, vehicle service and
insurance contracts; provide maintenance and repair services; and sell
replacement parts. We also operate 24 collision service centers.
We have diverse sources of revenues, including: new car and truck
sales, used car and truck sales, manufacturer remarketed vehicle sales, parts
sales, service sales, collision repair service sales, finance fees, vehicle
service contract fees, insurance fees, documentary fees and after-market product
sales. Sales revenues from new and used vehicle and parts and service include
sales to retail customers, other dealerships and wholesalers. Finance and
insurance includes revenues from arranging financing, vehicle service and
insurance contracts and documentary fees, net of a provision for anticipated
chargebacks.
Our total gross margin varies as our merchandise mix (the mix between
new vehicle sales, used vehicle sales, parts and service sales, collision repair
service sales and finance and insurance) changes. Our gross margin on the sale
of products and services generally varies significantly, with new vehicle sales
generally resulting in the lowest gross margin and finance and insurance
generally resulting in the highest gross margin. When our new vehicle sales
increase or decrease at a rate greater than our other revenue sources, our gross
margin responds inversely. Factors such as seasonality, weather, cyclicality and
manufacturers' advertising and incentives may impact our merchandise mix and,
therefore, influence our gross margin.
Selling, general and administrative expenses consist primarily of
incentive-based compensation for sales, administrative, finance and general
management personnel, rent, marketing, insurance and utilities. We believe that
approximately 60% of our selling, general and administrative expenses are
variable, allowing us to adjust our cost structure based on business trends.
Interest expense consists of interest charges on interest-bearing debt,
including floorplan inventory financing, net of interest income earned. We
receive interest assistance from various of our manufacturers. This assistance,
which is reflected as a reduction of cost of sales of new vehicles, generally
equals between 70% and 100% of our floorplan interest expense, which mitigates
the impact of interest rate changes on our financial results. At times, based on
interest rate changes, the interest assistance may be greater than our total
floorplan interest expense.
SELECTED OPERATIONAL AND FINANCIAL DATA FOR THE THREE MONTH PERIODS ENDED
JUNE 30, 2002 AND JUNE 30, 2001
NEW VEHICLE DATA
(dollars in thousands, INCREASE/ PERCENT
except per unit amounts) 2002 2001 (DECREASE) CHANGE
-------- -------- ---------- -------
Retail unit sales........................... 23,486 22,884 602 2.6%
Retail sales revenues....................... $613,355 $592,897 $20,458 3.5%
Gross profit................................ $45,349 $45,806 $(457) (1.0)%
Average gross profit per retail unit sold... $1,931 $2,002 $(71) (3.5)%
Gross margin................................ 7.4% 7.7% (0.3)%
8
USED VEHICLE DATA
(dollars in thousands, INCREASE/ PERCENT
except per unit amounts) 2002 2001 (DECREASE) CHANGE
-------- -------- ---------- -------
Retail unit sales........................... 16,221 17,028 (807) (4.7)%
Total revenues.............................. $284,940 $289,702 $ (4,762) (1.6)%
Retail sales revenues (1)................... $228,909 $239,204 $(10,295) (4.3)%
Gross profit................................ $ 22,436 $ 23,357 $ (921) (3.9)%
Average gross profit per retail unit sold... $ 1,383 $ 1,372 $ 11 0.8 %
Retail gross margin (2)..................... 9.8% 9.8% 0.0 %
Total gross margin (2)...................... 7.9% 8.1% (0.2)%
- ------------------
(1) Excludes used vehicle wholesale revenues, as these transactions
facilitate retail vehicle sales and are not expected to generate
profit.
(2) Retail gross margin equals gross profit divided by retail sales
revenues. Total gross margin equals gross profit divided by total
revenues.
PARTS AND SERVICE DATA
PERCENT
(dollars in thousands) 2002 2001 INCREASE CHANGE
------- ------- -------- -------
Sales revenues.............................. $95,511 $88,910 $6,601 7.4%
Gross profit................................ $53,680 $49,596 $4,084 8.2%
Gross margin................................ 56.2% 55.8% 0.4%
FINANCE AND INSURANCE, NET
(dollars in thousands) INCREASE/ PERCENT
(except per unit amounts) 2002 2001 (DECREASE) CHANGE
------- ------- ----------- --------
Retail new and used unit sales.............. 39,707 39,912 (205) (0.5)%
Retail sales revenues....................... $39,298 $35,062 $4,236 12.1 %
Finance and insurance, net per
retail unit sold.......................... $ 990 $ 878 $ 112 12.8 %
SAME STORE REVENUES COMPARISON (1)
INCREASE/ PERCENT
(dollars in thousands) 2002 2001 (DECREASE) CHANGE
-------- -------- ----------- --------
New vehicle................................. $584,439 $585,317 $(878) (0.1)%
Used vehicle................................ 269,861 282,977 (13,116) (4.6)%
Parts and service........................... 87,784 87,869 (85) (0.1)%
Finance and insurance, net.................. 36,033 34,408 1,625 4.7 %
-------- -------- --------- ------
Total revenues.............. $978,117 $990,571 $(12,454) (1.3)%
- ------------------
(1) Includes only those dealerships owned during all of the months of both
periods in the comparison.
9
THREE MONTHS ENDED JUNE 30, 2002 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2001
REVENUES. Revenues increased $26.5 million, or 2.6%, to $1,033.1
million for the three months ended June 30, 2002, from $1,006.6 million for the
three months ended June 30, 2001. New vehicle revenues increased primarily due
to an increase in the number of units sold. The increase in units is driven by
the dealership operations acquired during 2001 and 2002. The decline in used
vehicle revenues was attributable to weakness in the used vehicle market in
general, due to the aggressive pricing of new vehicles by the manufacturers. The
increase in parts and service revenues was due primarily to the additional
dealership operations acquired. Finance and insurance revenues increased
primarily due to new product offerings, continued sales training, company-wide
benchmarking, a favorable interest rate environment and annual incentives earned
on our finance and insurance programs.
GROSS PROFIT. Gross profit increased $7.0 million, or 4.6%, to $160.8
million for the three months ended June 30, 2002, from $153.8 million for the
three months ended June 30, 2001. The increase was attributable to increased
revenues and an increase in gross margin from 15.3% for the three months ended
June 30, 2001, to 15.6% for the three months ended June 30, 2002. The gross
margin increased as higher margin parts and service, and finance and insurance
revenues increased as a percentage of total revenues. Additionally, a higher
parts and service gross margin contributed to the overall gross margin increase.
These increases were partially offset by declines in the gross margins on new
and used vehicles. New vehicle margins are lower partially due to a decline in
floorplan assistance paid by the manufacturers, which is recorded as a reduction
of cost of sales, as interest rates have fallen significantly from prior year
levels. While our gross margin on retail used vehicle sales was consistent with
the prior year, the decrease in the overall used vehicle gross margin was due
primarily to increased wholesale sales, because of softness in the retail used
vehicle market due to aggressive pricing of new vehicles by the manufacturers.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $5.5 million, or 4.8%, to $120.8 million for
the three months ended June 30, 2002, from $115.3 million for the three months
ended June 30, 2001. The increase was primarily attributable to the additional
dealership operations acquired and increased variable expenses, including
incentive pay to employees.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense decreased $1.5 million, or 34.9%, to $2.8 million for the three months
ended June 30, 2002, from $4.3 million for the three months ended June 30, 2001.
The decline was due to the implementation of SFAS No. 142, which resulted in the
elimination of goodwill amortization expense.
INTEREST EXPENSE. Floorplan and other interest expense, net, decreased
$4.8 million, or 41.4%, to $6.8 million for the three months ended June 30,
2002, from $11.6 million for the three months ended June 30, 2001. The decrease
was due to a decline in interest rates and the amount of debt outstanding.
During the quarter there was a 268 basis point rate reduction of the average
interest rate paid on our floorplan notes payable as compared to the prior year
period. The decrease in debt outstanding, as compared to the prior year period,
was primarily attributable to the use of the proceeds from our October 2001
stock offering, of approximately $100 million, to pay down floorplan debt, and a
reduction in the average inventory levels as compared to the prior year. The
$100 million used to pay down the floorplan notes payable may be reborrowed in
the future to complete acquisitions or for working capital or other corporate
purposes. Subsequent to June 30, 2002, approximately $53 million was reborrowed
to complete an acquisition.
10
SELECTED OPERATIONAL AND FINANCIAL DATA FOR THE SIX MONTH PERIODS ENDED
JUNE 30, 2002 AND JUNE 30, 2001
NEW VEHICLE DATA
(dollars in thousands, INCREASE/ PERCENT
except per unit amounts) 2002 2001 (DECREASE) CHANGE
---------- ---------- ---------- -------
Retail unit sales........................... 44,255 43,610 645 1.5 %
Retail sales revenues....................... $1,164,027 $1,130,339 $33,688 3.0 %
Gross profit................................ $ 86,070 $ 85,176 $ 894 1.0 %
Average gross profit per retail unit sold... $ 1,945 $ 1,953 $ (8) (0.4)%
Gross margin................................ 7.4% 7.5% (0.1)%
USED VEHICLE DATA
(dollars in thousands, INCREASE/ PERCENT
except per unit amounts) 2002 2001 (DECREASE) CHANGE
-------- -------- ---------- --------
Retail unit sales........................... 32,380 33,528 (1,148) (3.4)%
Total revenues.............................. $552,199 $564,360 $(12,161) (2.2)%
Retail sales revenues (1)................... $445,100 $464,303 $(19,203) (4.1)%
Gross profit................................ $ 45,861 $ 47,180 $ (1,319) (2.8)%
Average gross profit per retail unit sold... $ 1,416 $ 1,407 $ 9 0.6 %
Retail gross margin (2)..................... 10.3% 10.2% 0.1 %
Total gross margin (2)...................... 8.3% 8.4% (0.1)%
- ------------------
(1) Excludes used vehicle wholesale revenues, as these transactions
facilitate retail vehicle sales and are not expected to generate
profit.
(2) Retail gross margin equals gross profit divided by retail sales
revenues. Total gross margin equals gross profit divided by total
revenues.
PARTS AND SERVICE DATA
PERCENT
(dollars in thousands) 2002 2001 INCREASE CHANGE
-------- -------- --------- -------
Sales revenues.............................. $187,202 $173,681 $13,521 7.8%
Gross profit................................ $104,591 $ 96,338 $ 8,253 8.6%
Gross margin................................ 55.9% 55.5% 0.4%
FINANCE AND INSURANCE, NET
(dollars in thousands, INCREASE/ PERCENT
except per unit amounts) 2002 2001 (DECREASE) CHANGE
------- ------- ---------- ------
Retail new and used unit sales.............. 76,635 77,138 (503) (0.7)%
Retail sales revenues....................... $75,750 $67,055 $8,695 13.0 %
Finance and insurance, net per
retail unit sold.......................... $ 988 $ 869 $ 119 13.7 %
11
SAME STORE REVENUES COMPARISON (1)
INCREASE/ PERCENT
(dollars in thousands) 2002 2001 (DECREASE) CHANGE
---------- ---------- ----------- -------
New vehicle................................. $1,114,440 $1,110,168 $4,272 0.4 %
Used vehicle................................ 524,321 548,617 (24,296) (4.4)%
Parts and service........................... 173,280 170,752 2,528 1.5 %
Finance and insurance, net.................. 69,604 65,867 3,737 5.7 %
----------- ----------- ----------- ----------
Total revenues.............. $1,881,645 $1,895,404 $(13,759) (0.7)%
- ------------------
(1) Includes only those dealerships owned during all of the months of both
periods in the comparison.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2001
REVENUES. Revenues increased $43.8 million, or 2.3%, to $1,979.2
million for the six months ended June 30, 2002, from $1,935.4 million for the
six months ended June 30, 2001. New vehicle revenues increased due to the
increase in new vehicle units sold and because our average sales price increased
1.5%. The decline in used vehicle revenues was primarily attributable to
weakness in the used vehicle market in general, due to the aggressive pricing of
new vehicles by the manufacturers. The increase in parts and service revenues
was due to same store sales growth in several of our markets, coupled with the
additional dealership operations acquired, partially offset by declines in
Austin, Atlanta and Dallas. Finance and insurance revenues increased primarily
due to new product offerings, continued sales training, company-wide
benchmarking, a favorable interest rate environment and annual incentives earned
on our finance and insurance programs.
GROSS PROFIT. Gross profit increased $16.6 million, or 5.6%, to $312.3
million for the six months ended June 30, 2002, from $295.7 million for the six
months ended June 30, 2001. The increase was attributable to increased revenues
and an increase in gross margin from 15.3% for the six months ended June 30,
2001, to 15.8% for the six months ended June 30, 2002. The gross margin
increased as higher margin parts and service, and finance and insurance revenues
increased as a percentage of total revenues. Additionally, a higher parts and
service gross margin contributed to the overall gross margin increase. These
increases were partially offset by declines in the gross margins on new and used
vehicles. New vehicle margins are lower partially due to a decline in floorplan
assistance paid by the manufacturers, which is recorded as a reduction of cost
of sales, as interest rates have fallen significantly from prior year levels.
While our gross margin on retail used vehicle sales was up slightly compared to
the prior year, the decrease in the overall used vehicle gross margin was due
primarily to increased wholesale sales, because of softness in the retail used
vehicle market due to aggressive pricing of new vehicles by the manufacturers.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $13.2 million, or 5.9%, to $237.7 million for
the six months ended June 30, 2002, from $224.5 million for the six months ended
June 30, 2001. The increase was primarily attributable to the additional
dealership operations acquired and increased variable expenses, including
incentive pay to employees.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense decreased $2.9 million, or 34.1%, to $5.6 million for the six months
ended June 30, 2002, from $8.5 million for the six months ended June 30, 2001.
The decline was due to the implementation of SFAS No. 142, which resulted in the
elimination of goodwill amortization expense.
INTEREST EXPENSE. Floorplan and other interest expense, net, decreased
$11.2 million, or 44.6%, to $13.9 million for the six months ended June 30,
2002, from $25.1 million for the six months ended June 30, 2001. The decrease
was due to a decline in interest rates and the amount of debt outstanding.
During the six-month period there was a 333 basis point rate reduction of the
average interest rate paid on our floorplan notes payable as compared to the
prior year period. The decrease in debt outstanding, as compared to the prior
year period, was primarily attributable to the use of the proceeds from our
12
October 2001 stock offering, of approximately $100 million, to pay down
floorplan debt, and a reduction in the average inventory levels as compared to
the prior year. The $100 million used to pay down the floorplan notes payable
may be reborrowed in the future to complete acquisitions or for working capital
or other corporate purposes.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity are cash on hand, cash from
operations, our credit facility, which includes the floorplan tranche and the
acquisition tranche, and equity and debt offerings.
CASH FLOWS
OPERATING ACTIVITIES. During the first six months of 2002 we generated
cash flow from operations, excluding asset and liability changes, of
approximately $44.6 million, an increase of $12.5 million compared to the same
period in the prior year. After considering asset and liability changes, cash
flows from operating activities decreased $43.2 million over the prior year
period, primarily due to pay downs on the floorplan debt.
INVESTING ACTIVITIES. During the first six months of 2002 we used
approximately $38.9 million in investing activities. We paid $19.5 million for
purchases of property and equipment, of which $14.6 million was used for the
purchase of land and construction of facilities for new or expanded operations.
We have used $21.5 million in the acquisition of five franchises and received
$7.4 million from the sale of three franchises, for which $0.4 million in gains
were recognized.
FINANCING ACTIVITIES. During the first six months of 2002 we obtained
approximately $33.5 million from financing activities, primarily from borrowings
on our credit facility to fund acquisitions and issuances of stock to our
benefit plans. These proceeds were partially offset by the utilization of cash
to buy back a portion of our senior subordinated notes and for scheduled
principal payments on our debt.
WORKING CAPITAL. At June 30, 2002, we had working capital of $159.9
million, which is approximately $80.0 million higher than we believe we need to
operate our business, excluding future acquisitions. We expect to use this
excess working capital to fund acquisitions and anticipated capital
expenditures. Historically, we have funded our operations with internally
generated cash flow and borrowings. Certain manufacturers have minimum working
capital guidelines, which may limit a subsidiary's ability to make distributions
to the parent company. While we cannot guarantee it, based on current facts and
circumstances, we believe we have adequate cash flows coupled with borrowing
capacity under our credit facility to fund our current operations, anticipated
capital expenditures and acquisitions. If our acquisition plans, as outlined
below, change, we may access the private or public capital markets to obtain
additional funding.
CREDIT FACILITY
We have a $900 million credit facility, which matures in December 2003.
The credit facility consists of two tranches: the floorplan and acquisition
tranches. The acquisition tranche totals $198.0 million and, as of July 31,
2002, $198.0 million was available, subject to a cash flow calculation and the
maintenance of certain financial ratios and various covenants.
CAPITAL EXPENDITURES
Our capital expenditures include expenditures to extend the useful life
of current facilities and expenditures to start or expand operations.
Historically, our annual capital expenditures, exclusive of new or expanded
operations, have approximately equaled our annual depreciation charge.
Expenditures relating to the construction or expansion of dealership facilities,
generally, are driven by new franchises being awarded to us by a manufacturer or
significant growth in sales at an existing facility.
13
ACQUISITIONS AND ACQUISITION FINANCING
Effective August 1, 2002, we completed our acquisition of six
automobile dealership franchises in California, with annual revenues of
approximately $400 million, in exchange for consideration consisting of $59.3
million in cash, the assumption of approximately $41.0 million of inventory
financing and $3.5 million of other debt.
We anticipate acquiring approximately $800 million in revenues during
2002, including pending and closed acquisitions, consisting of both platform and
tuck-in acquisitions. We expect the cash needed to complete our acquisitions
will come from excess working capital, operating cash flows of our dealerships
and borrowings under our current credit facility.
STOCK REPURCHASE
The board of directors has authorized us to repurchase up to $25
million of our stock, subject to management's judgment and the restrictions of
our various debt agreements. Our agreements, subject to other covenants, allow
us to spend approximately 33% of our cumulative net income to repurchase stock.
We allocate resources based on a risk-adjusted analysis of expected returns. As
such, we may repurchase shares of our common stock if market conditions allow us
to receive an acceptable return on investment.
DISCUSSION OF CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally
accepted accounting principles requires us to make estimates and assumptions in
determining the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. The
significant estimates made by us in the accompanying consolidated financial
statements relate to reserves for inventory valuations and future chargebacks on
finance and vehicle service contract fees, and valuation of intangible assets.
Actual results could differ from those estimates.
Critical accounting policies are those that are both most important to
the portrayal of a company's financial position and results of operations, and
require management's most difficult, subjective or complex judgments. Below is a
discussion of what we believe are our critical accounting policies. For
additional discussion regarding our accounting policies see Note 2 to our
consolidated financial statements included in our Annual Report on Form 10-K for
the year ended December 31, 2001.
INVENTORIES
New, used and demonstrator vehicles are stated at the lower of cost or
market, determined on a specific-unit basis. Vehicle inventory cost consists of
the amount paid to acquire the inventory, plus reconditioning cost, cost of
equipment added and transportation cost. Additionally, we receive interest
assistance from most of our manufacturers. The assistance is accounted for as a
purchase discount and is reflected as a reduction to the inventory cost on the
balance sheet and as a reduction to cost of sales in the income statement as the
vehicles are sold. Parts and accessories are stated at the lower of cost
(determined on a first-in, first-out basis) or market. As the market value of
our inventories typically declines with the passage of time, valuation reserves
are provided against the inventory balances based on the agings of the
inventories and market trends.
FINANCE AND SERVICE CONTRACT INCOME RECOGNITION
We arrange financing for customers through various institutions and
receive financing fees based on the difference between the loan rates charged to
customers over predetermined financing rates set by the financing institution.
In addition, we receive fees from the sale of vehicle service contracts to
customers.
14
We may be charged back ("chargebacks") for unearned financing fees or
vehicle service contract fees in the event of early termination of the contracts
by customers. The revenues from financing fees and vehicle service contract fees
in administrator-obligor states are recorded at the time of the sale of the
vehicles and a reserve for future chargebacks is established based on historical
operating results and the termination provisions of the applicable contracts. In
dealer-obligor states, revenues from vehicle service contract fees and related
direct costs are deferred and recognized over the life of the contracts. Finance
and vehicle service contract revenues, net of estimated chargebacks, are
included in finance and insurance in the accompanying consolidated financial
statements.
INTANGIBLE ASSETS
The following are recently issued statements by the Financial
Accounting Standards Board that we believe could have a significant impact on
our reported financial condition or statement of operations.
In June 2001, SFAS No. 141, "Business Combinations" was issued. SFAS
No. 141 eliminates the use of the pooling-of-interests method of accounting for
business combinations and establishes the purchase method as the only acceptable
method. We adopted this statement effective July 1, 2001. Acquired intangible
assets, if any, are separately recognized if, among other things, the benefit is
obtained through contractual or other legal rights, such as franchise
agreements. Goodwill is recorded only to the extent the purchase price for an
entity exceeds the fair value of the net tangible assets and identifiable
intangible assets acquired.
In June 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" was
issued. SFAS No. 142 changes the treatment of goodwill by no longer amortizing
goodwill; however, other identifiable intangible assets are to be separately
recognized and amortized, as applicable. The statement requires, at least
annually, an assessment for impairment of goodwill and other indefinite life
intangible assets by applying a fair-value based test. A portion of our
intangible assets relate to franchise value, which is considered to have an
indefinite life, with goodwill accounting for the remainder. We adopted this
statement effective January 1, 2002. The adoption of the statement resulted in
the elimination of approximately $7.5 million of goodwill amortization,
annually, subsequent to December 31, 2001. Adoption did not result in an
impairment of any intangible assets, based on the new fair-value based test;
however, changes in the facts and circumstances surrounding this estimate could
result in an impairment of intangible assets in the future.
CAUTIONARY STATEMENT ABOUT FORWARD LOOKING STATEMENTS
This quarterly report includes certain "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. These statements include statements
regarding our plans, goals, beliefs or current expectations, including those
plans, goals, beliefs and expectations of our officers and directors with
respect to, among other things:
o the completion of pending and future acquisitions
o operating cash flows and availability of capital
o future stock repurchases
o capital expenditures
o business trends, including incentives, product cycles and interest
rates
o impact of new accounting standards
Any such forward-looking statements are not assurances of future
performance and involve risks and uncertainties. Actual results may differ
materially from anticipated results in the forward-looking statements for a
number of reasons, including:
o the future economic environment, including consumer confidence,
interest rates and manufacturer incentives, may affect the demand
for new and used vehicles and parts and service sales
o regulatory environment, adverse legislation, or unexpected
litigation
15
o our principal automobile manufacturers, especially Ford, Toyota
and GM may not continue to produce or make available to us
vehicles that are in high demand by our customers
o requirements imposed on us by our manufacturers may affect our
acquisitions and capital expenditures related to our dealership
facilities
o our dealership operations may not perform at expected levels or
achieve expected improvements
o we may not achieve expected future cost savings and our future
costs could be higher than we expected
o available capital resources and various debt agreements may limit
our ability to repurchase shares. Any repurchases of our stock may
be made, from time to time, in accordance with applicable
securities laws, in the open market or in privately negotiated
transactions at such time and in such amounts, as we consider
appropriate
o available capital resources may limit our ability to complete
acquisitions
o available capital resources may limit our ability to complete
construction of new or expanded facilities
o our cost of financing could increase significantly
o new accounting standards could materially impact our earnings per
share
o pending acquisitions may not be completed due to failure to
satisfy closing conditions
o we may not reach agreement with additional acquisition candidates
This information and additional factors that could affect our operating
results and performance are described in our filings with the SEC. We urge you
to carefully consider those factors.
All forward-looking statements attributable to us are qualified in
their entirety by this cautionary statement.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following information about our market sensitive financial
instruments updates the information provided as of December 31, 2001, in our
Annual Report on Form 10-K and constitutes a "forward-looking statement". Our
major market risk exposure is changing interest rates. Our policy is to manage
interest rates through use of a combination of fixed and floating rate debt.
Interest rate swaps may be used to adjust interest rate exposures, when
appropriate, based upon market conditions. These swaps are entered into with
financial institutions with investment grade credit ratings, thereby minimizing
the risk of credit loss. All items described are non-trading.
Since December 31, 2001, our floorplan notes payable have increased,
primarily due to increases in inventory levels. As of June 30, 2002, there were
no amounts outstanding under the acquisition portion of our credit facility.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, our dealerships are named in claims involving the
manufacture of automobiles, contractual disputes and other matters arising in
the ordinary course of business. Currently, no legal proceedings are pending
against or involve us that, in our opinion, based on current known facts and
circumstances, could reasonably be expected to have a material adverse effect on
our financial position.
ITEM 2. CHANGES IN SECURITIES
None.
16
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the May 22, 2002, Annual Meeting of Stockholders, our stockholders
voted on one matter.
Election of one Director:
The stockholders elected one nominee as a director for a
three-year term based on the following voting results:
VOTES CAST:
------------------------------------
AGAINST OR
NOMINEE ELECTED FOR WITHHELD
- ------------------------------- --------------- ----------------
Stephen D. Quinn 21,214,147 164,732
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS:
11.1 Statement re: computation of earnings per share is included
under Note 3 to the financial statements.
99.1 Certificate of Chief Executive Officer.
99.2 Certificate of Chief Financial Officer.
B. REPORTS ON FORM 8-K:
On May 13, 2002, the Company filed a Current Report on Form 8-K
reporting under Item 4 and including exhibits under Item 7 thereof.
On May 15, 2002, the Company filed a Current Report on Form 8-K/A
reporting under Item 4 and including exhibits under Item 7 thereof.
On May 23, 2002, the Company filed a Current Report on Form 8-K
reporting under Item 5 and including exhibits under Item 7 thereof.
On July 9, 2002, the Company filed a Current Report on Form 8-K
reporting under Item 5 and including exhibits under Item 7 thereof.
On July 26, 2002, the Company filed a Current Report on Form 8-K
reporting under Item 9 and including exhibits under Item 7 thereof.
On August 8, 2002, the Company filed a Current Report on Form 8-K
reporting under Item 9 and including exhibits under Item 7 thereof.
On August 9, 2002, the Company filed a Current Report on Form 8-K
reporting under Item 9 and including exhibits under Item 7 thereof.
On August 13, 2002, the Company filed a Current Report on Form 8-K
reporting under Item 2 and including exhibits under Item 7 thereof.
17
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.
Group 1 Automotive, Inc.
August 13, 2002 By: /s/ Scott L. Thompson
- --------------- ----------------------------------------
Date Scott L. Thompson, Executive Vice President,
Chief Financial Officer and Treasurer
EXHIBIT INDEX
Exhibit
No. Description
------- -----------
11.1 Statement re: computation of earnings per share is included
under Note 3 to the financial statements.
99.1 Certificate of Chief Executive Officer.
99.2 Certificate of Chief Financial Officer.