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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended September 30, 2003
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)
Three Landmark Square, Suite 500, Stamford, Connecticut 06901, (203) 356-4400
- -------------------------------------------------------------------------------
(Address of, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices)
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 Exchange 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 (applicable only to corporate
registrants): The number of shares of common stock outstanding as of November
10, 2003 was 32,430,649 net of 1,590,013 treasury shares).
ASBURY AUTOMOTIVE GROUP, INC.
Form 10-Q Quarterly Report
Table of Contents
Part I - Financial Information
Page
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of
September 30, 2003 (Unaudited) and December 31, 2002.................1
Consolidated Statements of Income for the Three Months and
Nine Months Ended September 30, 2003 and 2002 (Unaudited)............2
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2003 and 2002 (Unaudited) ...........3
Notes to Consolidated Financial Statements (Unaudited)...............4
Independent Accountants' Report ....................................10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...........................................11
Item 3. Quantitative and Qualitative Disclosures About Market Risk..........21
Item 4. Controls and Procedures.............................................21
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K....................................22
Signatures..........................................................23
Index to Exhibits...................................................25
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
ASBURY AUTOMOTIVE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
September 30, December 31,
ASSETS 2003 2002
------ ------------- ------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents .................................................. $ 48,804 $ 22,613
Contracts-in-transit ....................................................... 86,380 91,190
Current portion of restricted marketable securities ........................ 1,591 1,499
Accounts receivable (net of allowance of $2,218 and $2,122) ................ 112,050 96,090
Inventories ................................................................ 560,268 591,839
Deferred income taxes ...................................................... 8,565 9,044
Prepaid and other current assets ........................................... 38,840 37,314
----------- -----------
Total current assets .......................................... 856,498 849,589
PROPERTY AND EQUIPMENT, net .................................................... 259,553 257,305
GOODWILL ....................................................................... 464,763 402,133
RESTRICTED CASH AND MARKETABLE SECURITIES ...................................... 2,974 4,892
OTHER ASSETS ................................................................... 62,620 61,866
ASSETS HELD FOR SALE ........................................................... 29,685 29,859
----------- -----------
Total assets .................................................. $ 1,676,093 $ 1,605,644
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Floor plan notes payable ................................................... $ 488,502 $ 528,591
Current maturities of long-term debt ....................................... 31,855 36,412
Accounts payable ........................................................... 40,924 40,120
Accrued liabilities ........................................................ 86,910 77,325
----------- -----------
Total current liabilities ..................................... 648,191 682,448
LONG-TERM DEBT ................................................................. 503,949 438,740
DEFERRED INCOME TAXES .......................................................... 32,170 29,972
OTHER LIABILITIES .............................................................. 15,658 15,580
LIABILITIES ASSOCIATED WITH ASSETS HELD FOR SALE ............................... 21,596 11,953
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 10,000,000 shares authorized .............. -- --
Common stock, $.01 par value, 90,000,000 shares authorized, 34,019,147 and
34,000,000 shares issued, including shares held in treasury, respectively 340 340
Additional paid-in capital ................................................. 411,016 410,718
Retained earnings .......................................................... 58,259 22,645
Treasury stock, at cost; 1,590,013 and 772,824 shares held, respectively ... (15,064) (6,630)
Accumulated other comprehensive loss ....................................... (22) (122)
----------- -----------
Total stockholders' equity .................................... 454,529 426,951
----------- -----------
Total liabilities and stockholders' equity .................... $ 1,676,093 $ 1,605,644
=========== ===========
See Notes to Consolidated Financial Statements.
1
ASBURY AUTOMOTIVE GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------------- --------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
REVENUES:
New vehicle ..................................... $ 786,042 $ 722,851 $ 2,184,833 $ 2,007,252
Used vehicle .................................... 319,028 306,033 915,845 887,247
Parts, service and collision repair ............. 143,032 128,429 411,858 373,941
Finance and insurance, net ...................... 37,366 33,289 100,497 87,721
----------- ----------- ----------- -----------
Total revenues .............................. 1,285,468 1,190,602 3,613,033 3,356,161
COST OF SALES:
New vehicle ..................................... 729,376 665,833 2,024,555 1,842,927
Used vehicle .................................... 291,316 278,866 833,003 806,393
Parts, service and collision repair ............. 66,701 61,437 193,939 176,996
----------- ----------- ----------- -----------
Total cost of sales ......................... 1,087,393 1,006,136 3,051,497 2,826,316
----------- ----------- ----------- -----------
GROSS PROFIT ....................................... 198,075 184,466 561,536 529,845
OPERATING EXPENSES:
Selling, general and administrative ............. 150,559 139,148 437,419 403,284
Depreciation and amortization ................... 5,141 4,549 15,007 14,280
----------- ----------- ----------- -----------
Income from operations ...................... 42,375 40,769 109,110 112,281
OTHER INCOME (EXPENSE):
Floor plan interest expense ..................... (4,633) (4,368) (14,263) (13,059)
Other interest expense .......................... (10,087) (10,074) (30,038) (28,748)
Interest income ................................. 188 283 450 945
Net losses from unconsolidated affiliates ....... -- -- -- (100)
Loss on sale of assets, net ..................... (95) (45) (454) (48)
Other, net ...................................... (79) 224 10 (114)
----------- ----------- ----------- -----------
Total other expense, net .................... (14,706) (13,980) (44,295) (41,124)
----------- ----------- ----------- -----------
Income before income taxes and discontinued
operations ............................... 27,669 26,789 64,815 71,157
INCOME TAX EXPENSE:
Income tax expense .............................. 10,503 10,695 25,287 22,732
Tax adjustment upon conversion from a L.L.C. to a
corporation .................................. -- -- -- 11,553
----------- ----------- ----------- -----------
Total income tax expense .................... 10,503 10,695 25,287 34,285
----------- ----------- ----------- -----------
Income from continuing operations ........... 17,166 16,094 39,528 36,872
DISCONTINUED OPERATIONS, net of tax ................ (922) (1,450) (3,914) (4,286)
----------- ----------- ----------- -----------
Net income .................................. $ 16,244 $ 14,644 $ 35,614 32,586
=========== =========== ===========
PRO FORMA TAX (BENEFIT) EXPENSE:
Pro forma income tax expense .................... 5,588
Tax adjustment upon conversion from a L.L.C. to a
corporation .................................. (11,553)
-----------
Tax affected pro forma net income ........... $ 38,551
===========
EARNINGS PER COMMON SHARE:
Basic ........................................... $ 0.50 $ 0.43 $ 1.09 $ 0.99
=========== =========== =========== ===========
Diluted ......................................... $ 0.50 $ 0.43 $ 1.09 $ 0.99
=========== =========== =========== ===========
PRO FORMA EARNINGS PER COMMON SHARE:
Basic ........................................... $ 1.17
===========
Diluted ......................................... $ 1.17
===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic ........................................... 32,419 34,000 32,721 32,813
=========== =========== =========== ===========
Diluted ......................................... 32,612 34,001 32,761 32,834
=========== =========== =========== ===========
See Notes to Consolidated Financial Statements.
2
ASBURY AUTOMOTIVE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For the Nine Months
Ended September 30,
-----------------------
2003 2002
---------- ----------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income ...................................................................... $ 35,614 $ 32,586
Adjustments to reconcile net income to net cash provided by operating activities-
Depreciation and amortization ................................................ 15,007 14,280
Depreciation and amortization from discontinued operations ................... 1,271 3,218
Change in allowance for doubtful accounts .................................... 96 (78)
(Gain) loss on sale of discontinued operations ............................... (297) 966
Deferred income taxes ........................................................ 2,618 14,754
Loss from unconsolidated affiliates, net ..................................... -- 100
Loss on sale of assets ....................................................... 454 48
Amortization of deferred finance fees ........................................ 3,933 3,212
Change in operating assets and liabilities, net of effects from acquisitions and
divestitures-
Contracts-in-transit ......................................................... 4,810 12,441
Accounts receivable, net ..................................................... (30,938) (25,731)
Proceeds from the sale of accounts receivable ................................ 15,023 12,597
Inventories .................................................................. 60,517 14,030
Floor plan notes payable ..................................................... (62,525) (30,823)
Accounts payable and accrued liabilities ..................................... 16,860 14,274
Other ........................................................................ 5,621 4,007
---------- ----------
Net cash provided by operating activities ............................ 68,064 69,881
---------- ----------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures ............................................................ (33,434) (38,102)
Proceeds from the sale of assets ................................................ 682 1,380
Proceeds from the sale of discontinued operations ............................... 7,845 4,838
Acquisitions .................................................................... (72,378) (14,588)
Maturity of restricted marketable securities .................................... 1,826 1,826
Purchase of restricted asset .................................................... (750) --
Net issuance of finance contracts ............................................... (2,818) (276)
Other investing activities ...................................................... -- (752)
---------- ----------
Net cash used in investing activities .................................. (99,027) (45,674)
---------- ----------
CASH FLOW FROM FINANCING ACTIVITIES:
Distributions to members ........................................................ (3,010) (11,680)
Contributions ................................................................... -- 800
Repayments of debt .............................................................. (32,339) (352,362)
Proceeds from borrowings ........................................................ 100,689 272,629
Proceeds from initial public offering, net ...................................... -- 65,415
Payment of debt issuance costs .................................................. -- (7,875)
Proceeds from the exercise of stock options ..................................... 248 --
Purchase of treasury stock ...................................................... (8,434) --
---------- ----------
Net cash provided by (used in) financing activities .................... 57,154 (33,073)
---------- ----------
Net increase (decrease) in cash and cash equivalents ................... 26,191 (8,866)
CASH AND CASH EQUIVALENTS, beginning of period ...................................... 22,613 60,506
---------- ----------
CASH AND CASH EQUIVALENTS, end of period ............................................ $ 48,804 $ 51,640
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for-
Interest ...................................................................... $ 35,826 $ 32,639
========== ==========
Income taxes .................................................................. $ 13,287 $ 15,534
========== ==========
See Notes to Consolidated Financial Statements.
3
ASBURY AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation:
The consolidated balance sheet at September 30, 2003, the consolidated
statements of income for the three-month and nine-month periods ended September
30, 2003 and 2002, and the consolidated statements of cash flows for the
nine-month periods ended September 30, 2003 and 2002, are unaudited. In the
opinion of management, all adjustments necessary to present fairly the financial
position, results of operations and cash flows for the interim periods were
made. Certain items in the prior year's financial statements were reclassified
to conform to the current financial statement presentation. Due to seasonality
and other factors, the results of operations for interim periods are not
necessarily indicative of the results that would be realized for the entire
year. All significant intercompany balances and transactions have been
eliminated in consolidation.
Certain information and footnote disclosures, normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America, were omitted. Accordingly, these consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's annual report
on Form 10-K for the year ended December 31, 2002.
2. INVENTORIES:
Inventories consisted of the following:
(In thousands) September 30, 2003 December 31, 2002
------------------ -----------------
New vehicles $422,818 $464,501
Used vehicles 95,142 86,392
Parts, accessories and other 42,308 40,946
-------- --------
$560,268 $591,839
======== ========
3. EARNINGS PER SHARE:
Basic earnings per share is computed by dividing net income by the weighted
average common shares outstanding during the period. Diluted earnings per share
is computed by dividing net income by the weighted average common shares and
common share equivalents outstanding during the period.
The following table sets forth the computation of basic and diluted earnings per
common share:
For the Three Months For the Nine Months
(In thousands, except per share data) Ended September 30, Ended September 30,
------------------------- ------------------------
2003 2002 2003 2002
----------- ----------- ----------- ---------
Net income applicable to common shares:
Continuing operations ............................... $ 17,166 $ 16,094 $ 39,528 $ 36,872
Discontinued operations ............................. (922) (1,450) (3,914) (4,286)
---------- ---------- ---------- ---------
$ 16,244 $ 14,644 $ 35,614 $ 32,586
========== ========== ========== =========
Earnings per share:
Basic-
Continuing operations ............................. $ 0.53 $ 0.47 $ 1.21 $ 1.12
Discontinued operations ........................... (0.03) (0.04) (0.12) (0.13)
---------- ---------- ---------- ---------
$ 0.50 $ 0.43 $ 1.09 $ 0.99
========== ========== ========== =========
4
For the Three Months For the Nine Months
(In thousands, except per share data) Ended September 30, Ended September 30,
------------------------- ------------------------
2003 2002 2003 2002
----------- ----------- ----------- ---------
Diluted-
Continuing operations ............................. $ 0.53 $ 0.47 $ 1.21 $ 1.12
Discontinued operations ........................... (0.03) (0.04) (0.12) (0.13)
---------- ---------- ---------- ---------
$ 0.50 $ 0.43 $ 1.09 $ 0.99
========== ========== ========== =========
Common shares and common share equivalents outstanding:
Basic weighted average common shares ................ 32,419 34,000 32,721 32,813
Dilutive effect of common share equivalents
(stock options) ................................... 193 1 40 21
---------- ---------- ---------- ---------
Diluted weighted average common shares .............. 32,612 34,001 32,761 32,834
========== ========== ========== =========
4. INTANGIBLE ASSETS AND GOODWILL:
Intangible assets consist of the following (included in other assets on the
accompanying consolidated balance sheets):
September 30, December 31,
(In thousands) 2003 2002
------------- ------------
Amortizable intangible assets:
Noncompete agreements $ 5,331 $ 5,331
Lease agreements (amortization is included
in rent expense) 6,527 6,527
-------- --------
Total 11,858 11,858
Less - Accumulated amortization (8,350) (7,369)
-------- --------
Intangible assets, net $ 3,508 $ 4,489
======== ========
Unamortizable intangible assets - franchise rights $ 8,000 $ 8,000
======== ========
Amortization expense, net of discontinued operations, was $0.2 million and
$0.3 million for the three months ended September 30, 2003 and 2002,
respectively, and $0.7 million and $0.8 million for the nine months ended
September 30, 2003 and 2002, respectively.
The changes in the carrying amounts of goodwill for the period ended
September 30, 2003 are as follows:
(In thousands)
Balance as of December 31, 2002 $402,133
Additions related to current year acquisitions 64,503
Goodwill associated with divestitures (1,873)
--------
Balance as of September 30, 2003 $464,763
========
5
5. COMPREHENSIVE INCOME:
For the Three Months For the Nine Months
(In thousands) Ended September 30, Ended September 30,
--------------------- ---------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net income ...................................... $ 16,244 $ 14,644 $ 35,614 $ 32,586
Other comprehensive income, net of tax:
Change in fair value of interest rate swaps ... -- -- -- (1,985)
Income tax expense ............................ -- -- -- 127
-------- -------- --------- ---------
-- -- -- (1,858)
Reclassification adjustment of loss on interest
rate swaps included in net income ........... 46 54 159 72
Income tax expense ............................ (13) (17) (59) (24)
--------- --------- --------- ---------
Comprehensive income ............................ $ 16,277 $ 14,681 $ 35,714 $ 30,776
========= ========= ========= =========
6. EQUITY-BASED COMPENSATION:
The Company accounts for equity-based compensation issued to employees in
accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees." APB 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. The Company makes disclosures of pro
forma net earnings and earnings per share as if the fair-value-based method of
accounting had been applied as required by Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" and as
amended by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition
Disclosure."
A reconciliation of the Company's net earnings to pro forma net earnings, and
the related pro forma earnings per share amounts, is as follows:
For the Three Months For the Nine Months
(In thousands, except per share data) Ended September 30, Ended September 30,
------------------------- -------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net income ............................................... $ 16,244 $ 14,644 $ 35,614 $ 32,586
Adjustment to net earnings for:
Stock-based compensation expense included in net
earnings, net of tax ............................... 12 13 30 58
Pro forma stock-based compensation expense, net of tax (1,001) (1,439) (2,817) (4,061)
----------- ----------- ----------- -----------
Pro forma net income ..................................... $ 15,255 $ 13,218 $ 32,827 $ 28,583
=========== =========== =========== ===========
Earnings per share:
Basic - as reported .................................. $ 0.50 $ 0.43 $ 1.09 $ 0.99
=========== =========== =========== ===========
Basic - pro forma .................................... $ 0.47 $ 0.39 $ 1.00 $ 0.87
=========== =========== =========== ===========
Diluted - as reported ................................ $ 0.50 $ 0.43 $ 1.09 $ 0.99
=========== =========== =========== ===========
Diluted - pro forma .................................. $ 0.47 $ 0.39 $ 1.00 $ 0.87
=========== =========== =========== ===========
7. DISCONTINUED OPERATIONS:
During the first nine months of 2003, the Company classified as discontinued
operations eight full-service dealership locations (nine franchises), 10
used-only dealership locations and one ancillary business. Five full service
dealerships were divested during the first nine months of the year and three
dealerships were held for sale as of September 30, 2003. As of September 30,
2003, all of the 10 used-only dealership locations and the ancillary business
had been closed. The results of operations of these entities are accounted for
as discontinued operations in the consolidated
6
statements of income. Summary statement of income information relating to the
discontinued operations is as follows:
For the Three Months For the Nine Months
(In thousands) Ended September 30, Ended September 30,
--------------------- ---------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Revenues ............................................ $ 8,382 $ 35,371 $ 54,611 $ 92,700
Cost of sales ....................................... 7,306 31,210 48,338 80,043
--------- --------- --------- ---------
Gross profit ................................... 1,076 4,161 6,273 12,657
Operating expenses .................................. 2,553 6,481 12,832 17,828
--------- --------- --------- ---------
Loss from operations ........................... (1,477) (2,320) (6,559) (5,171)
Other, net .......................................... (5) (146) (240) (502)
--------- --------- --------- ---------
Net loss ....................................... (1,482) (2,466) (6,799) (5,673)
Gain (loss) on disposition of discontinued operations (32) 27 297 (966)
--------- --------- --------- ---------
Loss before income taxes ....................... (1,514) (2,439) (6,502) (6,639)
Related tax benefit ................................. 592 989 2,588 2,353
--------- --------- --------- ---------
Discontinued operations ........................ $ (922) $ (1,450) $ (3,914) $ (4,286)
========= ========= ========= =========
8. PROPERTY AND EQUIPMENT AND REAL ESTATE OPERATING LEASES:
During the nine months ended September 30, 2003, the Company sold, in connection
with six sale/leaseback agreements, certain land and building assets for $23.0
million. Under the terms of these agreements, the Company is leasing the
properties from the purchaser for periods ranging from 15 to 22 years. Under one
of these sale/leaseback agreements, the Company sold land to an existing
president of one of the Company's platforms, who is also a member of its Board
of Directors. The sale price of the land of approximately $0.8 million was equal
to the purchase price paid for the land in January 2003. The Company believes
that this transaction was comparable to terms that would be obtained from an
unaffiliated third party. The Company is accounting for all of these sale/
leaseback transactions as operating leases. The estimated annual rental expense
under these agreements will be approximately $2.4 million.
During the nine months ended September 30, 2003, in connection with current year
acquisitions, the Company entered into two agreements to lease land and building
facilities. The Company is accounting for these transactions as operating
leases. The leases have 15-year initial terms and the estimated annual rental
expense under these agreements will be approximately $1.1 million.
9. ASSETS AND LIABILITIES HELD FOR SALE:
Assets and liabilities classified as held for sale as of September 30, 2003 and
December 31, 2002 include dealerships held for sale, real estate held for sale
and certain land and buildings which the Company intends to sell under sale/
leaseback agreements in the future, as discussed below. A summary of balance
sheet information related to assets and liabilities held for sale is as follows:
September 30, December 31,
(In thousands) 2003 2002
------------- ------------
Inventories ............................. $ 4,636 $12,952
------- -------
Total current assets ........... 4,636 12,952
Property and equipment, net ............. 25,049 16,867
Other ................................... -- 40
------- -------
Total assets ................... $29,685 $29,859
======= =======
Floor plan notes payable ................ $ 3,815 $11,828
------- -------
Total current liabilities....... 3,815 11,828
Other liabilities ....................... 17,781 125
------- -------
Total liabilities .............. $21,596 $11,953
======= =======
7
In connection with the construction and future sale/leaseback of dealership
facilities, the Company has entered into agreements to sell land to an
unaffiliated third party in the future. Under these agreements, the purchaser of
the properties advanced funds equal to the book value of the land currently
owned by the Company and advances the cost of construction for the dealership
facilities based on costs incurred by the Company to date. The Company
capitalized the cost of the land and continues to capitalize the cost of
construction as Assets Held for Sale on the accompanying balance sheet. In
addition, the Company records a corresponding liability equal to the amount of
the advanced funds, included in Liabilities Associated with Assets Held for Sale
on the accompanying balance sheet. The Company capitalizes the rent paid to the
third party, under the terms of the agreements, during the construction period.
The book value of the land and construction totaled $18.8 million and $8.3
million as of September 30, 2003 and December 31, 2002, respectively. Upon
completion of construction, the Company will execute the sale/leaseback
agreements with this third party and transfer the ownership of the land and
building assets, satisfying the related obligations. The estimated annual rental
expense under these agreements, based on advances made through September 30,
2003, will be approximately $1.6 million.
10. ACQUISITIONS:
For the nine months ended September 30, 2003, the Company made four acquisitions
(ten franchises) for approximately $72.4 million in cash, which were funded
under the Company's existing credit facility. The purchase price was allocated
to the underlying assets and liabilities based upon their estimated fair values.
The resulting preliminary estimate of goodwill and intangibles assets from these
transactions was approximately $64.5 million. The results of operations for
these acquisitions are included in the Company's consolidated results from the
dates of acquisition.
The seller of one of the dealerships was the existing president of one of the
Company's platforms. The Company believes that this transaction involves terms
that would be comparable to terms obtained from an unaffiliated third party.
11. NON-CASH INVESTING AND FINANCING ACTIVITY:
During the nine months ended September 30, 2003, the Company entered into a
capital lease for land and buildings in the amount of approximately $2.4
million. The lease has an initial term of 15 years.
In connection with the divestitures mentioned in Note 7, approximately $5.7
million of the proceeds were paid directly to the Company's lenders during the
nine months ended September 30, 2003.
In connection with the sale/leaseback transactions mentioned in Notes 8 and 9,
approximately $27.1 million of the sales proceeds were paid directly to the
Company's lenders during the nine months ended September 30, 2003. Of that
amount, approximately $5.5 million related to proceeds for the sale of assets
that were excluded from capital expenditures as shown on the consolidated
statement of cash flows for the period ended September 30, 2003.
12. COMMITMENTS AND CONTINGENCIES:
A significant portion of the Company's vehicle business involves the sale of
vehicles, parts or vehicles composed of parts that are manufactured outside the
United States. As a result, the Company's 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 or the countries from which the Company's 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 the Company to implement costly capital improvements to
dealerships as a condition for renewing the Company's 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 the Company to divert its financial resources to capital projects from
uses that management believes may be of higher long-term value to the Company,
such as acquisitions.
Substantially all of the Company's 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 does the Company expect such
compliance to have, any material effect upon the capital expenditures, net
earnings, financial condition, liquidity or competitive position of the Company.
8
Management believes that its current practices and procedures for the control
and disposition of such materials comply with applicable federal, state and
local requirements.
The Company is involved in legal proceedings and claims which arise in the
ordinary course of its business and, with respect to certain of these claims,
the sellers of previously acquired dealerships have indemnified the Company. In
the opinion of management of the Company, the amount of ultimate liability with
respect to these actions will not materially affect the financial condition,
liquidity or the results of operations of the Company.
The dealerships operated by the Company hold franchise agreements with a number
of vehicle manufacturers. In accordance with the individual franchise
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 franchise agreement could have a
negative impact on the Company's operating results.
13. SUBSEQUENT EVENT
Subsequent to September 30, 2003, a decision was rendered in the arbitration
proceedings with the estate of Brian E. Kendrick, the Company's former Chief
Executive Officer. The arbitration panel unanimously concluded that the Company
had fully satisfied its obligation under Mr. Kendrick's employment agreement
when it tendered the 2001 bonus payment of $0.5 million and 17,876 shares of the
Company's common stock in early 2002, and no further amounts are due the estate.
This decision will have no impact on the Company's future results of
operations, as all amounts related to the arbitration were properly accrued in
a prior period.
9
INDEPENDENT ACCOUNTANTS' REPORT
To the Shareholders of Asbury Automotive Group, Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of Asbury
Automotive Group, Inc. and subsidiaries ("the Company") as of September 30,
2003, and the related condensed consolidated statements of income for the
three-month and nine-month periods ended September 30, 2003 and 2002, and of
cash flows for the nine-month periods ended September 30, 2003 and 2002. These
interim financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. 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
auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to such condensed consolidated interim financial statements for them to
be in conformity with accounting principles generally accepted in the United
States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
Asbury Automotive Group, Inc. and subsidiaries as of December 31, 2002, 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 February
25, 2003 (which includes an explanatory paragraph regarding the adoption of
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets"), we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 31, 2002 is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
/s/ Deloitte & Touche LLP
Stamford, Connecticut
October 30, 2003
10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion should be read in conjunction with the unaudited
consolidated financial statements and notes thereto included in Item 1 of this
report. In addition, reference should be made to our audited consolidated
financial statements and notes thereto and related Management's Discussion and
Analysis of Financial Condition and Results of Operations included in our most
recent Annual Report on Form 10-K.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2003, Compared to Three Months Ended
September 30, 2002
Net income for the third quarter of 2003 was $16.2 million compared with $14.6
million in the corresponding period last year. Net income includes the results
of discontinued operations, the majority of which consisted of certain now
closed non-core businesses, including the closing costs associated with our
Price 1 pilot program. Basic and diluted earnings per share, including
discontinued operations, were $0.50 for the three months ended September 30,
2003 versus $0.43 for the same period in 2002.
Net income from continuing operations for the third quarter of 2003 was $17.2
million compared with $16.1 million in the corresponding period a year ago.
Basic and diluted earnings per share from continuing operations for the third
quarter of 2003 were $0.53 compared to $0.47 in the prior year period.
Income from continuing operations before income taxes totaled $27.7 million for
the three months ended September 30, 2003, up 3% from $26.8 million for the same
period last year. The increase is primarily attributable to strong finance and
insurance ("F&I") and parts, service and collision repair ("fixed operations")
performance and the impact of acquisitions.
Revenues-
For the Three Months
(In thousands, except for unit and per vehicle data) Ended September 30,
----------------------- Increase %
2003 2002 (Decrease) Change
----------- ---------- ---------- -------
New Vehicle Data:
Retail revenues - same store (1) .................. $ 741,220 $ 712,039 $ 29,181 4%
Retail revenues - acquisitions .................... 37,492 --
---------- ----------
Total new retail ............................. 778,712 712,039 66,673 9%
Fleet revenues - same store (1) ................... 7,133 10,812 (3,679) (34%)
Fleet revenues -acquisitions ...................... 197 --
---------- ----------
Total new fleet revenues ..................... 7,330 10,812 (3,482) (32%)
---------- ----------
New vehicle revenue, as reported ............. $ 786,042 $ 722,851 $ 63,191 9%
========== ==========
New retail units - same store (1) ................. 25,597 26,755 (1,158) (4%)
New retail units - actual ........................ 26,867 26,755 112 0%
Used Vehicle Data:
Retail revenues - same store (1) .................. $ 228,338 $ 233,763 $ (5,425) (2%)
Retail revenues - acquisitions .................... 11,474 --
---------- ----------
Total used retail revenues ................... 239,812 233,763 6,049 3%
Wholesale revenues - same store (1) ............... 75,372 72,270 3,102 4%
Wholesale revenues - acquisitions ................. 3,844 --
---------- ----------
Total wholesale revenues ..................... 79,216 72,270 6,946 10%
---------- ----------
Used vehicle revenue, as reported ............ $ 319,028 $ 306,033 $ 12,995 4%
========== ==========
Used retail units - same store (1) ................ 15,124 15,119 5 0%
Used retail units - actual ........................ 15,774 15,119 655 4%
11
For the Three Months
(In thousands, except for unit and per vehicle data) Ended September 30,
----------------------- Increase %
2003 2002 (Decrease) Change
----------- ---------- ---------- -------
Parts, Service and Collision Repair:
Revenues - same store (1) ......................... $ 135,671 $ 128,429 $ 7,242 6%
Revenues - acquisitions ........................... 7,361 --
---------- ----------
Parts, service and collision repair
revenue, as reported ...................... $ 143,032 $ 128,429 $ 14,603 11%
========== ==========
Finance and Insurance:
Platform revenues - same store (1) ................ $ 34,749 $ 33,289 $ 1,460 4%
Corporate revenues ................................ 1,300 --
Revenues - acquisitions ........................... 1,317 --
---------- ----------
Finance and insurance revenue, as reported $ 37,366 $ 33,289 $ 4,077 12%
========== ==========
Total Revenue:
Same store (1) .................................... $1,222,483 $1,190,602 $ 31,181 3%
Corporate ......................................... 1,300 --
Acquisitions ...................................... 61,685 --
---------- ----------
Total revenue, as reported ................... $1,285,468 $1,190,602 $ 94,866 8%
========== ==========
(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 the Company.
Revenues of $1.3 billion for the three months ended September 30, 2003,
represented a $94.9 million or 8% increase over the three months ended September
30, 2002. Same store revenue grew $33.2 million or 3%, with the remaining
increase of $61.7 million derived from acquisitions. On a same store basis, our
new retail units were down 4% compared to the three months ended September 30,
2002. However, same store new vehicle retail revenues were up 4%, reflecting an
increase in our average selling price which was driven by our strong luxury and
midline import sales mix. Used retail vehicle unit sales were flat on a same
store basis compared to prior year period. Fixed operations revenues were up 6%
on a same store basis as strong import vehicle sales over the past several years
has resulted in incremental import customer pay and warranty work. Same store
F&I platform revenues grew 4% due to strong product sales, increased penetration
rates (the number of F&I contracts sold to the combined total of retail unit
sales), maturing of our preferred provider programs and our continued focus on
improvement of underperforming stores.
Gross Profit-
For the Three Months
(In thousands, except for unit and per vehicle data) Ended September 30,
----------------------- Increase %
2003 2002 (Decrease) Change
----------- ---------- ---------- -------
New Vehicle Data:
Retail gross profit - same store (1) ............... $ 53,780 $ 56,657 $ (2,877) (5%)
Retail gross profit - acquisitions ................. 2,587 --
-------- --------
Total new retail gross profit ................. 56,367 56,657 (290) (1%)
Fleet gross profit - same store (1) ................ 301 361 (60) (17%)
Fleet gross profit -acquisitions ................... (2) --
-------- --------
Total new fleet gross profit .................. 299 361 (62) (17%)
-------- --------
New vehicle gross profit, as reported.......... $ 56,666 $ 57,018 $ (352) (1%)
======== ========
New retail units - same store (1) ................. 25,597 26,755 (1,158) (4%)
New retail units - actual ......................... 26,867 26,755 112 0%
12
For the Three Months
(In thousands, except for unit and per vehicle data) Ended September 30,
----------------------- Increase %
2003 2002 (Decrease) Change
----------- ---------- ---------- -------
Used Vehicle Data:
Retail gross profit - same store (1) ................ $ 27,434 $ 28,916 $ (1,482) (5%)
Retail gross profit - acquisitions .................. 1,128 --
--------- ---------
Total used retail gross profit ................. 28,562 28,916 (354) (1%)
Wholesale gross profit - same store (1) ............. (857) (1,749) 892 51%
Wholesale gross profit - acquisitions ............... 7 --
--------- ---------
Total wholesale gross profit ................... (850) (1,749) 899 51%
--------- ---------
Used vehicle gross profit, as reported ......... $ 27,712 $ 27,167 $ 545 2%
========= =========
Used retail units - same store (1) .................. 15,124 15,119 5 0%
Used retail units - actual .......................... 15,774 15,119 655 4%
Parts, Service and Collision Repair:
Gross profit - same store (1) ....................... $ 72,525 $ 66,992 $ 5,533 8%
Gross profit - acquisitions ......................... 3,806 --
--------- ---------
Parts, service and collision repair
gross profit, as reported ................... $ 76,331 $ 66,992 $ 9,339 14%
========= =========
Finance and Insurance:
Platform gross profit - same store (1) .............. $ 34,749 $ 33,289 $ 1,460 4%
Corporate gross profit .............................. 1,300 --
Gross profit - acquisitions ......................... 1,317 --
--------- ---------
Finance and insurance gross profit, as reported $ 37,366 $ 33,289 $ 4,077 12%
========= =========
Platform gross profit per vehicle retailed -
same store (1) $ 853 $ 795 $ 58 7%
Platform gross profit per vehicle retailed - actual . $ 846 $ 795 $ 51 6%
Gross profit per vehicle retailed - actual .......... $ 876 $ 795 $ 81 10%
Total Gross Profit:
Gross profit - same store (1) ....................... $ 187,932 $ 184,466 $ 3,466 2%
Gross profit - corporate ............................ 1,300 --
Gross profit - acquisitions ......................... 8,843 --
--------- ---------
Total gross profit, as reported ................ $ 198,075 $ 184,466 $ 13,609 7%
========= =========
(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 the Company.
Gross profit for the quarter ended September 30, 2003, increased $13.6 million
or 7% over the quarter ended September 30, 2002. Same store retail gross profit
was up 3% for the same period. Consistent with our business model, we achieved
same store gross profit growth of 4% in F&I platform gross profit and increases
in same store fixed operations gross profit of 8% during the period. Same store
F&I platform gross profit per vehicle retailed ("PVR") increased 7%. F&I
platform gross profit provides an accurate measure of our finance and insurance
performance as it excludes revenue resulting from corporate negotiated contracts
which is not attributable to the retail units sold during the period. In
addition, wholesale losses during the quarter were in line with our third
quarter expectations, but significantly lower than the same quarter of the prior
year, during which used car auction prices were under significant pressure.
These items were offset by continued margin pressure on new and used vehicles.
Operating Expenses-
Selling, general and administrative ("SG&A) expenses for the quarter ended
September 30, 2003, increased $11.4 million or 8% over the quarter ended
September 30, 2002. Included in SG&A expenses for the quarter ended September
30, 2003 were $2.0 million of severance, relocation and hiring costs in
connection with management changes at our Oregon and Texas platforms and at the
13
corporate level. In addition, our insurance premiums were $5.2 million for the
quarter ended September 30, 2003, a $1.7 million increase compared to the same
quarter in the prior year, reflecting the current insurance environment.
Including the impact of these items, SG&A expenses as a percentage of gross
profit increased only 60 basis points to 76.0% for the quarter ended September
30, 2003, when compared to the same period in 2002.
Depreciation and Amortization-
Depreciation and amortization expense increased approximately $0.6 million to
$5.1 million for the quarter ended September 30, 2003, as compared to the same
period in 2002. The increase is primarily related to acquisitions.
Other Income (Expense)-
Floor plan interest expense increased to $4.6 million for the three months ended
September 30, 2003, from $4.4 million for the three months ended September 30,
2002. This 6% increase was primarily due to higher average inventory levels
during the 2003 quarter resulting primarily from acquisitions during 2003.
Non-floor plan interest expense remained essentially flat when compared to the
prior year quarter.
Income Tax Provision-
Income tax expense was $10.5 million for the three months ended September 30,
2003 compared to $10.7 million for the same quarter in the prior year. Our
effective tax rate for the three months ended September 30, 2003, was 38%
compared to 39.9% for the prior year quarter. As we operate nationally, our
effective tax rate is dependent upon our geographic revenue mix. We evaluate our
effective tax rate periodically based on our revenue sources. We will continue
to evaluate our effective tax rate in the future, and expect that our annual
effective tax rate will fluctuate between 38% and 39%.
Discontinued Operations-
The loss from discontinued operations of approximately $0.9 million for the
third quarter of 2003 included a loss associated with the sale of two "full
service" dealerships, the cost of closing our Price 1 pilot program and losses
incurred in the operation of three franchises which were classified as held for
sale as of September 30, 2003. Subsequent to the end of the quarter, we closed
one of the franchises that was held for sale and resigned the franchise. The
loss from discontinued operations for the third quarter ended September 30, 2002
was $1.5 million, including the operating losses from the stores mentioned
above, the operating losses generated during the quarter by the stores that were
sold or closed during the twelve-month period ended June 30, 2003, and the net
gain recognized on dealership and related real estate assets sold during the
quarter.
Nine Months Ended September 30, 2003, Compared to Nine Months Ended
September 30, 2002
Net income for the nine months ended September 30, 2003 was $35.6 million or
$1.09 per basic and diluted share, including a $3.9 million loss from
discontinued operations principally related to our Price 1 pilot program. Net
income for the nine months ended September 30, 2002 was $32.6 million or $0.99
per basic and diluted share. For the nine months ended September 30, 2002, tax
affected pro forma net income was $38.6 million or $1.17 per basic and diluted
share. Pro forma net income from continuing operations for the nine months ended
September 30, 2002 was $42.8 million or $1.26 per basic and diluted share. The
pro forma results for the prior year exclude a nonrecurring deferred income tax
provision required by Statement of Financial Accounting Standards ("SFAS") No.
109, "Accounting for Income Taxes" related to our change in tax status from a
limited liability company to a "C" corporation in conjunction with our March
2002 initial public offering ("IPO"). In addition, the pro forma results from
continuing operations also assume that we were a publicly traded "C" corporation
for the entire period. A reconciliation of pro forma net income from continuing
operations to GAAP net income from continuing operations follows - see
"Reconciliation of Non-GAAP Financial Information".
Income from continuing operations before income taxes totaled $64.8 million for
the nine months ended September 30, 2003, down 9% from $71.2 million for the
nine months ended September 30, 2002. The decrease is attributable to continued
vehicle margin pressure, deterioration of our expense structure in the first
quarter, weak performance in our Oregon platform and charges of $3.2 million in
connection with management changes at our Oregon and Texas platforms and at the
corporate level. These items were offset by improvement in expense controls in
the second and third quarters and the improved performance of the Arkansas
platform, which was underperforming during 2002.
14
Revenues-
For the Nine Months
(In thousands, except for unit and per vehicle data) Ended September 30,
----------------------- Increase %
2003 2002 (Decrease) Change
----------- ---------- ---------- -------
New Vehicle Data:
Retail revenues - same store (1) .................. $2,072,222 $1,973,987 $ 98,235 5%
Retail revenues - acquisitions .................... 75,594 310
---------- ----------
Total new retail ............................. 2,147,816 1,974,297 173,519 9%
Fleet revenues - same store (1) ................... 36,822 32,955 3,867 12%
Fleet revenues -acquisitions ...................... 195 --
---------- ----------
Total new fleet revenues ..................... 37,017 32,955 4,062 12%
---------- ----------
New vehicle revenue, as reported ............. $2,184,833 $2,007,252 $ 177,581 9%
========== ==========
New retail units - same store (1) ................. 72,638 73,060 (422) (1%)
New retail units - actual ......................... 75,141 73,072 2,069 3%
Used Vehicle Data:
Retail revenues - same store (1) .................. $ 678,158 $ 678,941 $ (783) 0%
Retail revenues - acquisitions .................... 25,401 268
---------- ----------
Total used retail revenues ................... 703,559 679,209 24,350 4%
Wholesale revenues - same store (1) ............... 204,357 208,036 (3,679) (2%)
Wholesale revenues - acquisitions ................. 7,929 2
---------- ----------
Total wholesale revenues ..................... 212,286 208,038 4,248 2%
---------- ----------
Used vehicle revenue, as reported ............ $ 915,845 $ 887,247 $ 28,598 3%
========== ==========
Used retail units - same store (1) ................ 44,616 44,463 153 0%
Used retail units - actual ........................ 46,145 44,479 1,666 4%
Parts, Service and Collision Repair:
Revenues - same store (1) ......................... $ 395,882 $ 373,854 $ 22,028 6%
Revenues - acquisitions ........................... 15,976 87
---------- ----------
Parts, service and collision repair
revenue, as reported ...................... $ 411,858 $ 373,941 $ 37,917 10%
========== ==========
Finance and Insurance:
Platform revenues - same store (1) ................ $ 96,385 $ 87,701 $ 8,684 10%
Corporate revenues ................................ 1,300 --
Revenues - acquisitions ........................... 2,812 20
---------- ----------
Finance and insurance revenue, as reported $ 100,497 $ 87,721 $ 12,776 15%
========== ==========
Total Revenue:
Same store (1) ................................... $3,483,826 $3,355,474 $ 128,352 4%
Corporate ........................................ 1,300 --
Acquisitions ..................................... 127,907 687
---------- ----------
Total revenue, as reported .................. $3,613,033 $3,356,161 $ 256,872 8%
========== ==========
(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 the Company.
Revenues of $3.6 billion for the nine months ended September 30, 2003,
represented a $256.9 million or 8% increase over the nine months ended September
30, 2002. Same store revenue grew $129.7 million or 4%, with the remainder
derived from acquisitions. On a same store basis, new retail units were down 1%.
However, same store new vehicle retail revenues were up 5% reflecting an
increase in our average selling price driven by our strong luxury and mid-line
import sales mix. Used retail vehicle unit sales were unchanged compared to the
15
same period of the prior year, as new vehicle incentives continued to adversely
affect used vehicle sales. With ongoing focus on fixed operations and platform
F&I, we achieved 6% and 10% same store growth, respectively, as we continue to
benefit from the sharing of best practices between our platforms in these areas.
Gross Profit-
For the Nine Months
(In thousands, except for unit and per vehicle data) Ended September 30,
----------------------- Increase %
2003 2002 (Decrease) Change
----------- ---------- ---------- -------
New Vehicle Data:
Retail gross profit - same store (1) ............... $ 154,121 $ 163,325 $ (9,204) (6%)
Retail gross profit - acquisitions ................. 5,282 20
--------- ---------
Total new retail gross profit ................. 159,403 163,345 (3,942) (2%)
Fleet gross profit - same store (1) ................ 877 980 (103) (11%)
Fleet gross profit -acquisitions ................... (2) --
--------- ---------
Total new fleet gross profit .................. 875 980 (105) (11%)
--------- ---------
New vehicle gross profit, as reported ......... $ 160,278 $ 164,325 $ (4,047) (2%)
========= =========
New retail units - same store (1) ................. 72,638 73,060 (422) (1%)
New retail units - actual ......................... 75,141 73,072 2,069 3%
Used Vehicle Data:
Retail gross profit - same store (1) ............... $ 80,996 $ 82,771 $ (1,775) (2%)
Retail gross profit - acquisitions ................. 2,549 32
--------- ---------
Total used retail gross profit ................ 83,545 82,803 742 1%
Wholesale gross profit - same store (1) ............ (632) (1,950) 1,318 68%
Wholesale gross profit - acquisitions .............. (71) 1
--------- ---------
Total wholesale gross profit .................. (703) (1,949) 1,246 64%
--------- ---------
Used vehicle gross profit, as reported......... $ 82,842 $ 80,854 $ 1,988 2%
========= =========
Used retail units - same store (1) ................. 44,616 44,463 153 0%
Used retail units - actual ......................... 46,145 44,479 1,666 4%
Parts, Service and Collision Repair:
Gross profit - same store (1) ...................... $ 208,570 $ 196,888 $ 11,682 6%
Gross profit - acquisitions ........................ 9,349 57
--------- ---------
Parts, service and collision repair
gross profit, as reported .................. $ 217,919 $ 196,945 $ 20,974 11%
========= =========
Finance and Insurance:
Platform gross profit - same store (1) ............. $ 96,385 $ 87,701 $ 8,684 10%
Gross profit - corporate ........................... 1,300 --
Gross profit - acquisitions ........................ 2,812 20
--------- ---------
Finance and insurance gross profit, as reported $ 100,497 $ 87,721 $ 12,776 15%
========= =========
Platform gross profit per vehicle retailed -
same store (1) $ 822 $ 746 $ 76 10%
Platform gross profit per vehicle retailed - actual $ 818 $ 746 $ 72 10%
Gross profit per vehicle retailed - actual ......... $ 829 $ 746 $ 83 11%
Total Gross Profit:
Gross profit - same store (1) ...................... $ 540,317 $ 529,715 $ 10,602 2%
Gross profit - corporate ........................... 1,300 --
Gross profit - acquisitions ........................ 19,919 130
--------- ---------
Total gross profit, as reported ............... $ 561,536 $ 529,845 $ 31,691 6%
========= =========
(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 the Company.
16
Gross profit for the nine months ended September 30, 2003, increased $31.7
million or 6% over the same period ended September 30, 2002. Same store gross
profit increased 2% year over year driven by significant growth in F&I and fixed
operations, at 10% and 6%, respectively. These increases were offset by same
store decreases in gross profit for new and used vehicles.
Operating Expenses-
SG&A expenses for the nine months ended September 30, 2003 were $437.4 million,
up 8.5% from $403.3 million for the nine months ended September 30, 2002. The
majority of the increase was due to expense deterioration in several platforms
in the first quarter and the severance, relocation and hiring costs discussed
above. We experienced significant improvement in the second and third quarter
with our successful expense reduction initiatives.
Depreciation and Amortization-
Depreciation and amortization expense increased approximately $0.7 million to
$15.0 million for the nine months ended September 30, 2003, as compared to the
same period in 2002. This increase is primarily related to acquisitions.
Other Income (Expense)-
Floor plan interest expense increased 9.2% to $14.3 million for the nine months
ended September 30, 2003. This increase was due to higher average inventory
levels during the first nine months of 2003 as compared to the corresponding
period in 2002. The increase in non-floor plan interest expense of $1.3 million
from the same period of the prior year was principally attributable to the
higher interest rate on our Senior Subordinated Notes issued in June 2002.
Income Tax Provision-
Income tax expense was $25.3 million for the nine months ended September 30,
2003 compared to $34.3 million for the nine-month period ended September 30,
2002. Our effective tax rate for the nine months ended September 30, 2003, was
39% compared to 39.9% for the prior year period. As we operate nationally, our
effective tax rate is dependent upon our geographic revenue mix. We evaluate our
effective tax rate periodically based on our revenue sources. We will continue
to evaluate our effective tax rate in the future, and expect that our annual
effective tax rate will fluctuate between 38% and 39%.
For the time period from January 1, 2002 through the date of our IPO, we were
structured as a limited liability company and only provided a tax provision in
accordance with SFAS No. 109 for the nine "C" corporations that we owned
directly or indirectly during that period. Effective with our IPO, which closed
March 19, 2002, we converted to a corporation and became subject to federal,
state and local income taxes. During the nine months ended September 30, 2002,
we recorded, in accordance with SFAS No. 109, a one-time non-recurring charge of
$11.6 million related to the establishment of a net deferred tax liability, in
connection with our conversion. This liability represented the difference
between the financial statement and tax basis of our assets and liabilities at
the conversion date.
Discontinued Operations-
During the first nine months of 2003, we completed the sale of five "full
service" dealerships, closed six "Thomason Select" used-only lots in Oregon and
closed our four Price 1 pilot program used vehicle stores. As of September 30,
2003, we were actively pursuing the sale of three full service dealerships, one
of which was closed subsequent to the end of the quarter. The $3.9 million loss
from discontinued operations includes the operating losses of the dealerships
mentioned above offset by a net gain on the sales of the stores sold in the
first nine months of the year. The loss from discontinued operations for the
nine months ended September 30, 2002 was $4.3 million, which included the
results of operations of the dealerships mentioned above and the operating
losses and net loss on the sale of four dealerships, and related real estate
assets, sold during the first nine months of 2002.
17
LIQUIDITY AND CAPITAL RESOURCES
We require cash to fund working capital needs, finance acquisitions of new
dealerships and fund capital expenditures. These requirements are met
principally from cash flow from operations, borrowings under the First Amended
and Restated Credit Agreement and the Floor Plan Facilities (as defined below),
mortgage notes and proceeds from sale/leaseback transactions. As of September
30, 2003 we had cash and cash equivalents of $48.8 million.
Credit Facilities-
On January 17, 2001, we entered into a committed financing agreement with Ford
Motor Credit Company, General Motors Acceptance Corporation and DaimlerChrysler
Services North America, LLC (the "Lenders") with total availability of $550
million. The committed financing agreement is used for acquisition financing and
working capital purposes. On June 6, 2003, we signed the First Amended and
Restated Credit Agreement (the "ARCA"), retaining all the essential provisions
of our original committed credit facility, but reducing the availability for
borrowings to $450 million and increasing our working capital borrowing capacity
from $25 million to $75 million. Our decision to amend the existing credit
facility was driven by our desire to reduce the commitment fee paid to the
Lenders, which is based on the unused portion of the facility, and to extend the
facility by one year through January 2006. All borrowings under the ARCA and our
original committed credit facility (collectively the "Committed Credit
Facility") bear interest at variable rates based on one-month LIBOR plus a
specified percentage that is dependent upon our adjusted debt level as of the
end of each quarter.
During the third quarter of 2002, we obtained consent from the Lenders for a
cash management sublimit of $75 million under our Committed Credit Facility. The
cash management sublimit allows us to repay up to $75 million of debt
outstanding under our Committed Credit Facility using cash that has been
centrally collected by our cash management system. The net amount repaid under
the cash management sublimit may be borrowed by us on short-term notice for
general corporate purposes. At September 30, 2003, approximately $306 million
was available for borrowings under the Committed Credit Facility, including $18
million under the cash management sublimit. Subsequent to September 30, 2003, we
repaid an additional $45 million under the cash management sublimit.
Floor Plan Financing-
We finance substantially all of our new vehicle inventory and a portion of our
used vehicle inventory under the floor plan financing credit facilities (the
"Floor Plan Facilities"). The Floor Plan Facilities provide used vehicle
financing up to a fixed percentage of the value of each financed used vehicle.
In connection with the ARCA, total availability under the floor plan facilities
was reduced from $750 million to $695 million. Amounts financed under the floor
plan arrangements bear interest at variable rates, which are typically tied to
LIBOR or the prime rate. As of September 30, 2003, we had $488.5 million
outstanding under all of our floor plan financing agreements.
Sale/Leaseback and Operating Lease Agreements-
During the nine months ended September 30, 2003, we sold, in connection with six
sale/leaseback agreements, certain land and building assets for approximately
$23 million. Under the terms of these agreements, we have committed to leaseback
the properties from the purchaser for periods ranging from 15 to 22 years. Under
one of these sale/leaseback agreements, we sold land to an existing president of
one of our platforms, who is also a member of our Board of Directors. The sale
price of the land of approximately $0.8 million was equal to the purchase price
paid for the land in January 2003. We believe that this transaction was
comparable to terms that would be obtained from an unaffiliated third party. We
are accounting for these transactions as operating leases. The estimated annual
rental expense under these agreements will be approximately $2.4 million.
In addition to the sale/leaseback agreements discussed above, in connection with
the construction and future sale/ leaseback of dealership facilities, we have
entered into agreements to sell additional land to an unaffiliated third party
in the future. Under these agreements, the purchaser of the properties advanced
funds equal to the book value of the land currently owned by us, and advances
the cost of construction for the dealership facilities based on costs incurred
to date. We capitalized the cost of the land and continue to capitalize the cost
of construction included in Assets Held for Sale on the accompanying balance
sheet and record a corresponding liability equal to the amount of the advanced
funds included in Liabilities Associated with Assets Held for Sale on the
accompanying balance sheet. In addition, we capitalize the rent paid to the
third party, under the terms of the agreements, during the construction period.
Upon completion of construction, we will enter into sale/ leaseback agreements
with this third party and transfer the ownership of the land and building
18
assets, satisfying the related obligations. The estimated annual rental expense
under these agreements, based on advances made through September 30, 2003, will
be approximately $1.6 million.
During the nine months ended September 30, 2003, in connection with current year
acquisitions, we entered into two agreements to lease land and building
facilities. We are accounting for these transactions as operating leases. The
leases have 15-year initial terms and the estimated annual rental expense under
these agreements will be approximately $1.1 million.
Acquisitions and Acquisition Financing-
For the nine months ended September 30, 2003, we made four acquisitions (ten
franchises) for approximately $72.4 million in cash, which were funded under our
Committed Credit Facility. The purchase price was allocated to the underlying
assets and liabilities based upon their estimated fair values. The resulting
preliminary estimate of goodwill and intangibles assets from these transactions
was approximately $64.5 million. The results of operations for these
acquisitions are included in our consolidated results from the dates of
acquisition.
The seller of one of the dealerships was the existing president of one of our
platforms. We believe that this transaction involves terms that would be
comparable to terms that would be obtained from an unaffiliated third party.
Capital Expenditure Financing
During the first nine months of 2003 and 2002, $7.2 million and $5.6 million,
respectively, of our capital expenditures were funded through collateralized
borrowings.
Cash Flow
Operating Activities-
Net cash provided by operating activities totaled $68.1 million for the nine
months ended September 30, 2003 consisting of net income of $35.6 million,
non-cash items of $23.1 million (primarily depreciation and amortization), and a
$9.4 million net increase in operating assets and liabilities. Operating assets
in the aggregate increased due to an increase in accrued liabilities primarily
driven by the timing of interest payments on our senior subordinated notes and
improved collections of contracts in transit, partially offset by increases in
accounts receivable due to normal seasonality.
Net cash provided by operating activities totaled $69.9 million for the nine
months ended September 30, 2002 consisting of net income of $32.6 million,
non-cash items of $36.5 million (primarily depreciation and amortization and
deferred income taxes) and a $0.8 million net increase in operating assets and
liabilities. This net increase was primarily the result of a reduction in
contracts in transit and inventory and increased accounts payable and accrued
liabilities, offset by increased payments on floor plan borrowings and increased
accounts receivable.
Investing Activities-
Net cash used in investing activities for the nine months ended September 30,
2003 was $99.0 million, as capital expenditures of $33.4 million, dealership
acquisitions of $72.4 million and the net issuance of finance contracts of $2.8
million was offset by the maturity of restricted marketable securities of $1.8
million and proceeds from the sale of discontinued operations of $7.8 million.
Net cash used in investing activities for the nine months ended September 30,
2002 was $45.7 million, as capital expenditures of $38.1 million and dealership
acquisitions of $14.6 million were offset by the maturity of restricted
marketable securities of $1.8 million, proceeds from the sale of discontinued
operations of $4.8 million and proceeds from the sale of fixed assets of $1.4
million.
Financing Activities-
Net cash provided by financing activities for the nine months ended September
30, 2003 was $57.2 million, as proceeds from borrowings of $100.7 million offset
debt repayments of $32.3 million, distributions to members in the first quarter
of $3.0 million (our final limited liability company distribution to our
members) and the repurchase of treasury stock of $8.4 million.
19
Net cash used in financing activities for the nine months ended September 30,
2002 was $33.1 million as proceeds from our initial public offering of $65.4
million and the net proceeds from borrowings of $264.8 million (mainly the
issuance of the Senior Subordinated Notes), were offset by repayments of debt of
$352.4 million (as we were required under our Committed Credit Facility to use
the majority of IPO proceeds and all subordinated debt proceeds to repay
existing debt), and distributions to members of $11.7 million.
Capital Expenditures
Capital spending other than for acquisitions, net of proceeds from and advances
associated with sale/leaseback transactions, is expected to total approximately
$44 million for the year ending December 31, 2003 and will be primarily related
to operational improvements and manufacturer-required spending to upgrade
existing dealership facilities.
Stock Repurchase
Pursuant to our Senior Subordinated Note indenture, we are permitted to
repurchase shares subject to the following restrictions: (i) up to $15 million
under a "Restricted Payments" building basket, plus (ii) up to $2 million per
fiscal year under our "Stock Repurchase" basket. The Restricted Payments
building basket equals the greater of $15 million, or 50% of the consolidated
net income beginning April 1, 2002 (less the cumulative amount of any Restricted
Payments since the Senior Subordinated Notes' inception). During 2002, we
repurchased 772,824 shares of our common stock for a purchase price of $6.6
million. During the nine months ended September 30, 2003, we repurchased an
additional 817,189 shares for an aggregate purchase price of $8.4 million.
Reconciliation of "Non-GAAP" Financial Information
For analysis purposes, in Management's Discussion and Analysis we discuss pro
forma net income from continuing operations and related earnings per share for
the nine months ended September 30, 2002. The consolidated statement of income
reconciles GAAP net income to tax affected pro forma net income by assuming that
we were taxed as a "C" corporation for all twelve months of 2002 and excluding
the one-time charge for our conversion from a limited liability company to a
corporation. The following table assumes that all discontinued entities were
sold prior to 2002 and all shares issued in our IPO were outstanding on January
1, 2002.
For the Nine
Months Ended
(In thousands, except for per share data) September 30, 2002
------------------
Tax affected pro forma net income ............................... $38,551
Discontinued operations ......................................... 4,286
-------
Pro forma net income from continuing operations ................. $42,837
=======
Pro forma earnings per share:
Basic ........................................................ $ 1.26
=======
Diluted ...................................................... $ 1.26
=======
Pro forma common shares and share equivalents:
Weighted average shares outstanding-
Basic ..................................................... 32,813
Adjustment for 4,500 shares offered March 14, 2002
as if offered on January 1, 2002 ....................... 1,187
-------
Pro forma basic shares .................................... 34,000
Dilutive effect of common share equivalents (stock options) 21
-------
Pro forma diluted shares .................................. 34,021
=======
20
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 $277.2 million of variable
rate long-term debt (including the current portion) outstanding at September 30,
2003, a 1% change in interest rates would result in a change of approximately
$2.8 million to our annual other interest expense. Based on floor plan amounts
outstanding at September 30, 2003, a 1% change in the interest rates would
result in a $4.9 million change to annual floor plan interest expense.
We receive interest credit assistance from certain automobile manufacturers,
which is reflected as a reduction in the cost of inventory on the balance sheet.
Although we can provide no assurance as to the amount of future floor plan
credits, 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.
Item 4. Controls and Procedures
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company conducted an
evaluation (under the supervision of and with the participation of the Company's
management, including the 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-15e and 15d-15e under the
Securities Exchange Act of 1934, as amended (the "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 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 periods
specified in the rules and forms of the Securities and Exchange Commission.
CHANGES IN INTERNAL CONTROLS
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 the
Company's financial position, results of operations, market position, product
development and business strategy. These statements are based on management's
current expectations and involve significant risks and uncertainties that may
cause results to differ materially from those set forth in the statements. These
risks and uncertainties include, among other things,
o market factors,
o the Company's relationships with vehicle manufacturers and other suppliers,
o risks associated with the Company's substantial indebtedness,
o risks related to pending and potential future acquisitions, and
o general economic conditions both nationally and locally and governmental
regulations and legislation.
There can be no guarantees the Company's plans for future operations will be
successfully implemented or that they will prove to be commercially successful.
We undertake no obligation to publicly update any forward-looking statement,
whether as a result of new information, future events or otherwise.
21
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
10.1 Sublease dated July 28, 2003 between Monster Worldwide, Inc.
and Asbury Automotive Group
10.2 Severance Agreement with Executive Vice President and Chief
Financial Officer J. Gordon Smith, dated September 29, 2003
10.3 Indemnification Agreement with Executive Vice President and Chief
Financial Officer J. Gordon Smith, dated September 29, 2003
31.1 Certificate of Chief Executive Officer pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certificate of Chief Financial Officer pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certificate of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certificate of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
b. Reports on Form 8-K
Report filed July 11, 2003, under Item 7, related to issuance of a press
release announcing that the Company has reached a mutual agreement with
Wal-Mart Stores, Inc. to end the pilot "Price 1" program.
Report filed July 30, 2003, under Item 9, related to the issuance of a
press release announcing that Michael Kane has been named President and CEO
of the Company's Texas platform.
Report dated July 31, 2003, filed under Item 9 and furnished under Item 12,
related to issuance of a press release announcing the Company's earnings
for the second quarter and six months ended June 30, 2003.
Report filed September 17, 2003, under Item 5, related to issuance of a
press release announcing that J. Gordon Smith has been named the new Chief
Financial Officer.
Report filed October 9, 2003, under Item 5, related to issuance of a press
release announcing that the Company is hosting a live "Investor Day" video
web cast on October 15, 2003.
Report filed October 15, 2003, under Item 5, related to issuance of a press
release announcing that it disclosed selected preliminary financial
information for the quarter ended September 30, 2003, in conjunction with
its live "Investor Day" video web cast.
Report furnished October 30, 2003, under Item 12, related to issuance of a
press release announcing the Company's earnings for the third quarter and
nine months ended September 30, 2003.
Report filed November 4, 2003, under Item 5, related to issuance of a press
release announcing that a decision has been rendered in the private
arbitration proceeding relating to amounts claimed by the estate of Brian
E. Kendrick.
<
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Asbury Automotive Group, Inc.
-----------------------------------------------
(Registrant)
Date: November 14, 2003 /s/ Kenneth B. Gilman
----------------------------------------------
Kenneth B. Gilman
Chief Executive Officer
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Asbury Automotive Group, Inc.
------------------------------------------------
(Registrant)
Date: November 14, 2003 /s/ J. Gordon Smith
------------------------------------------------
J. Gordon Smith
Senior Vice President and Chief Financial Officer
24
Index to Exhibits
Exhibit
Number Description
10.1 Sublease dated July 28, 2003 between Monster Worldwide, Inc. and
Asbury Automotive Group
10.2 Severance Agreement with Executive Vice President and Chief
Financial Officer J. Gordon Smith, dated September 29, 2003
10.3 Indemnification Agreement with Executive Vice President and Chief
Financial Officer J. Gordon Smith, dated September 29, 2003
31.1 Certificate of Chief Executive Officer pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
31.2 Certificate of Chief Financial Officer pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
32.1 Certificate of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certificate of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
25