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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 June 30, 2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number: 001-31262
ASBURY AUTOMOTIVE GROUP, INC.
(Exact name of Registrant as specified in its charter)
Delaware 01-0609375
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
622 Third Avenue, 37th Floor
New York, New York 10017
(Address of principal executive offices) (Zip Code)
(212) 885-2500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes |X| No |_|
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: The number of shares
of common stock outstanding as of August 4, 2004, was 32,550,359 (net of
1,586,587 treasury shares).
ASBURY AUTOMOTIVE GROUP, INC.
INDEX
Page
PART I - Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 2004 (Unaudited)
and December 31, 2003.......................................... 1
Consolidated Statements of Income for the Three and Six
Months Ended June 30, 2004 and 2003 (Unaudited)................ 2
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2004 and 2003 (Unaudited)....................... 3
Notes to Consolidated Financial Statements (Unaudited)........... 4
Report of Independent Registered Public Accounting Firm.......... 21
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk......... 35
Item 4. Controls and Procedures............................................ 36
PART II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders............... 37
Item 6. Exhibits and Reports on Form 8-K.................................. 37
Signatures........................................................ 39
Index to Exhibits................................................. 40
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
ASBURY AUTOMOTIVE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
June 30, December 31,
ASSETS 2004 2003
------------ ------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents ........................................................ $ 14,879 $ 106,711
Contracts-in-transit ............................................................. 96,363 93,881
Restricted investments ........................................................... 1,640 1,591
Accounts receivable (net of allowance of $2,044 and $2,371, respectively) ........ 140,062 114,201
Inventories ...................................................................... 746,284 650,397
Deferred income taxes ............................................................ 8,811 8,811
Prepaid and other assets ......................................................... 47,363 36,417
Assets held for sale ............................................................. 131,786 29,533
------------ ------------
Total current assets ........................................................ 1,187,188 1,041,542
PROPERTY AND EQUIPMENT, net ........................................................ 183,099 266,991
GOODWILL ........................................................................... 457,162 404,143
RESTRICTED INVESTMENTS, net of current portion ..................................... 2,012 2,974
OTHER ASSETS ....................................................................... 108,145 98,629
------------ ------------
Total assets ................................................................ $ 1,937,606 $ 1,814,279
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Floor plan notes payable ......................................................... $ 673,202 $ 602,167
Current maturities of long-term debt ............................................. 29,973 33,250
Accounts payable ................................................................. 49,842 42,882
Accrued liabilities .............................................................. 90,390 78,727
Liabilities associated with assets held for sale ................................ 89,722 24,732
------------ ------------
Total current liabilities ................................................... 933,129 781,758
LONG-TERM DEBT ..................................................................... 501,524 559,128
DEFERRED INCOME TAXES .............................................................. 19,461 22,179
OTHER LIABILITIES .................................................................. 27,901 17,507
COMMITMENTS AND CONTINGENCIES (Note 12)
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value per share, 10,000,000 shares authorized -- --
Common stock, $.01 par value per share, 90,000,000 shares authorized, 34,084,522
and 34,022,008 shares issued, including shares held in treasury, respectively 341 340
Additional paid-in capital ....................................................... 411,990 411,082
Retained earnings ................................................................ 62,944 37,832
Treasury stock, at cost, 1,586,587 and 1,590,013 shares held, respectively ....... (15,032) (15,064)
Accumulated other comprehensive loss ............................................. (4,652) (483)
------------ ------------
Total shareholders' equity .................................................. 455,591 433,707
------------ ------------
Total liabilities and shareholders' equity .................................. $ 1,937,606 $ 1,814,279
============ ============
See Notes to Consolidated Financial Statements.
1
ASBURY AUTOMOTIVE GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------------- --------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
REVENUES:
New vehicle .............................. $ 861,798 $ 755,097 $ 1,586,166 $ 1,379,172
Used vehicle ............................. 335,136 306,771 652,470 593,803
Parts, service and collision repair ...... 155,235 136,381 302,323 263,640
Finance and insurance, net ............... 39,015 33,249 71,831 61,714
----------- ----------- ----------- -----------
Total revenues ....................... 1,391,184 1,231,498 2,612,790 2,298,329
----------- ----------- ---------- -----------
COST OF SALES:
New vehicle .............................. 800,257 699,072 1,471,068 1,276,228
Used vehicle ............................. 306,544 279,600 595,752 539,085
Parts, service and collision repair ...... 73,034 64,459 143,978 124,645
----------- ----------- ----------- -----------
Total cost of sales .................. 1,179,835 1,043,131 2,210,798 1,939,958
----------- ----------- ----------- -----------
GROSS PROFIT ................................ 211,349 188,367 401,992 358,371
OPERATING EXPENSES:
Selling, general and administrative ...... 166,574 145,593 319,934 282,426
Depreciation and amortization ............ 5,407 4,985 10,543 9,722
----------- ----------- ----------- -----------
Income from operations ............... 39,368 37,789 71,515 66,223
----------- ----------- ---------- -----------
OTHER INCOME (EXPENSE):
Floor plan interest expense .............. (5,434) (4,799) (10,206) (9,022)
Other interest expense ................... (10,189) (9,996) (20,512) (19,950)
Interest income .......................... 112 80 387 260
Loss on sale of assets ................... (100) (47) (142) (338)
Other income, net ........................ 261 637 101 88
----------- ----------- ----------- -----------
Total other expense, net ............. (15,350) (14,125) (30,372) (28,962)
----------- ----------- ----------- -----------
Income before income taxes ........... 24,018 23,664 41,143 37,261
INCOME TAX EXPENSE: ......................... 8,830 9,418 15,252 14,830
----------- ----------- ----------- -----------
Income from continuing operations .... 15,188 14,246 25,891 22,431
DISCONTINUED OPERATIONS, net of tax ......... (440) (1,973) (779) (3,061)
----------- ----------- ----------- -----------
Net income ........................... $ 14,748 $ 12,273 $ 25,112 $ 19,370
=========== =========== =========== ===========
EARNINGS PER COMMON SHARE (basic and diluted) $ 0.45 $ 0.38 $ 0.77 $ 0.59
=========== =========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic .................................... 32,470 32,701 32,452 32,876
=========== =========== =========== ===========
Diluted .................................. 32,656 32,714 32,688 32,881
=========== =========== =========== ===========
See Notes to Consolidated Financial Statements.
2
ASBURY AUTOMOTIVE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For the Six Months
Ended June 30,
-----------------------
2004 2003
---------- ----------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income ....................................................................... $ 25,112 $ 19,370
Adjustments to reconcile net income to net cash provided by operating activities-
Depreciation and amortization .................................................. 10,543 9,722
Depreciation and amortization from discontinued operations ..................... 123 1,389
Amortization of deferred financing fees ........................................ 1,170 2,582
Change in allowance for doubtful accounts ...................................... (327) 437
Loss on sale of assets ......................................................... 142 338
Loss (gain) on sale of discontinued operations ................................. 474 (330)
Change in deferred income taxes ................................................ -- (1,810)
Other adjustments .............................................................. 3,401 1,996
Changes in operating assets and liabilities, net of acquisitions and divestitures-
Contracts-in-transit ........................................................... (2,482) (11,383)
Accounts receivable ............................................................ (35,511) (28,217)
Proceeds from the sale of accounts receivable .................................. 9,976 9,993
Inventories .................................................................... (63,735) (25,797)
Prepaid and other assets ....................................................... (5,862) (4,185)
Floor plan notes payable ....................................................... 52,471 45,850
Accounts payable and accrued liabilities ....................................... 16,578 18,161
Other assets and liabilities ................................................... 2,032 (5,172)
--------- ---------
Net cash provided by operating activities ................................... 14,105 32,944
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures ............................................................. (34,521) (26,530)
Payments for acquisitions ........................................................ (71,594) (39,537)
Proceeds from the sale of assets ................................................. 870 217
Proceeds from the sale of discontinued operations ................................ 834 2,271
Maturity of restricted investments ............................................... 913 913
Net issuance of finance contracts ................................................ (372) (2,878)
Other investing activities ....................................................... -- (750)
--------- ---------
Net cash used in investing activities ....................................... (103,870) (66,294)
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from borrowings ......................................................... 5,880 63,213
Repayments of debt ............................................................... (18,297) (18,474)
Proceeds from sale leaseback activity ............................................ 9,493 3,283
Purchase of treasury stock ....................................................... -- (9,700)
Distributions to members ......................................................... -- (3,010)
Proceeds from the exercise of stock options ...................................... 857 --
--------- ---------
Net cash (used in) provided by financing activities ......................... (2,067) 35,312
--------- ---------
Net (decrease) increase in cash and cash equivalents ........................ (91,832) 1,962
CASH AND CASH EQUIVALENTS, beginning of period ..................................... 106,711 22,613
--------- ---------
CASH AND CASH EQUIVALENTS, end of period ........................................... $ 14,879 $ 24,575
========= =========
See Note 11 for supplemental cash flow information
See Notes to Consolidated Financial Statements.
3
ASBURY AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. DESCRIPTION OF BUSINESS
Asbury Automotive Group, Inc. is a national automotive retailer,
operating 102 dealership locations (142 franchises) as of June 30, 2004. We
offer an extensive range of automotive products and services, including new and
used vehicles, financing and insurance, vehicle maintenance and repair services,
replacement parts and service contracts. We offer 35 domestic and foreign brands
of new vehicles, including four heavy truck brands. We also operate 23 collision
repair centers that serve our markets. Our retail network is organized into nine
regional dealership groups, or "platforms," which are located in 20 metropolitan
markets in the Southeastern, Midwestern, Southwestern and Northwestern United
States. In addition to our nine platforms, we operate two dealerships in two
metropolitan markets in Northern California and three dealerships in two
metropolitan markets in Southern California with the intention of expanding our
operations in each of these respective areas through additional acquisitions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited interim consolidated financial statements
reflect the consolidated accounts of Asbury Automotive Group, Inc. and our
wholly owned subsidiaries. All intercompany transactions have been eliminated in
consolidation. Certain prior year amounts have been reclassified to conform to
the current period presentation.
In the opinion of management, all adjustments (consisting only of
normal, recurring adjustments) considered necessary for a fair presentation of
the interim consolidated financial statements as of June 30, 2004, and for the
three and six months ended June 30, 2004 and 2003 have been included. The
results of operations for the three and six months ended June 30, 2004 are not
necessarily indicative of the results that may be expected for the full year.
Our interim consolidated financial statements should be read together with our
consolidated financial statements and the notes thereto contained in our Annual
Report on Form 10-K for the year ended December 31, 2003.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect amounts of assets and
liabilities and disclosures of contingent assets and liabilities as of the date
of the financial statements and reported amounts of revenues and expenses during
the periods presented. Actual results could differ from these estimates.
Estimates and assumptions are reviewed periodically and the effects of revisions
are reflected in the consolidated financial statements in the period they are
determined to be necessary.
Revenue Recognition
Revenue from the sale of new and used vehicles is recognized upon
delivery, passage of title, signing of the sales contract and approval of
financing. Revenue from the sale of parts and services is recognized upon
delivery of parts to the customer or at the time vehicle service work is
performed. Manufacturer vehicle incentives and rebates, including holdbacks, are
recognized when earned, generally at the time the related vehicles are sold.
We receive commissions from the sale of vehicle service contracts,
credit life insurance and disability insurance to customers. In addition, we
arrange financing for customers and receive commissions from financing
institutions. We may be charged back ("chargebacks") for financing fees,
insurance or vehicle service contract commissions in the event of early
termination of the contracts by customers. The revenues from financing fees and
commissions are recorded at the time the vehicles are sold and a reserve for
future chargebacks is established based on historical operating results and the
termination provisions of the applicable contracts. Finance, insurance and
vehicle service contract revenues, net of estimated chargebacks, are included in
Finance and Insurance, net in the accompanying Consolidated Statements of
Income.
Stock-Based Compensation
We account for stock-based compensation issued to employees in
accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees." APB No. 25 requires the use of the intrinsic
value method, which measures compensation cost as the excess, if any, of the
quoted market price of the stock at the measurement date over the amount an
employee must pay to acquire the stock. We have adopted the disclosure
provisions of Statement of Financial Accounting Standards ("SFAS") No. 148,
"Accounting for Stock-Based Compensation-Transition and Disclosure-An amendment
4
of FASB Statement No. 123." The following table illustrates the effect on net
income and net income per share had stock-based employee compensation been
recorded based on the fair value method under SFAS No. 123:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------- --------------------
(In thousands, except per share data) 2004 2003 2004 2003
-------- -------- -------- --------
Net income ................................................... $ 14,748 $ 12,273 $ 25,112 $ 19,370
Adjustments to net income:
Stock-based compensation expense included in net income, net
of tax ..................................................... 62 16 83 30
Pro forma stock-based compensation expense, net of tax ..... (1,413) (997) (2,602) (1,809)
-------- -------- -------- --------
Pro forma net income ......................................... $ 13,397 $ 11,292 $ 22,593 $ 17,591
======== ======== ======== ========
Net income per common share--basic and diluted (as reported) . $ 0.45 $ 0.38 $ 0.77 $ 0.59
======== ======== ======== ========
Pro forma net income per common share--basic ................. $ 0.41 $ 0.35 $ 0.70 $ 0.54
======== ======== ======== ========
Pro forma net income per common share--diluted ............... $ 0.41 $ 0.35 $ 0.69 $ 0.53
======== ======== ======== ========
The measure of fair value most often employed under SFAS No. 123, and
used by us, is the Black-Scholes option valuation model ("Black-Scholes").
Traded options, unlike our stock-based awards, are not subject to vesting
restrictions, are fully transferable and may use lower expected stock price
volatility measures than those assumed below. We estimated the fair value of
stock-based compensation issued to employees during each respective period using
Black-Scholes with the following assumptions:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------- -----------------------
2004 2003 2004 2003
-------- -------- --------- ---------
Risk free interest rate 3.6% 2.5% 2.3-3.6% 2.3-2.6%
Expected life of options 4 years 5 years 4 years 5 years
Expected stock price volatility 51% 65% 51-53% 61-65%
Expected dividend yield N/A N/A N/A N/A
Discontinued Operations
In accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," certain amounts reflected in the accompanying
Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003, have been
classified as Assets Held for Sale and Liabilities Associated with Assets Held
for Sale. In addition, the accompanying Consolidated Statements of Income for
the three and six months ended June 30, 2003, have been reclassified to reflect
the status of our discontinued operations as of June 30, 2004.
3. ACQUISITIONS
During the three months ended June 30, 2004, we acquired three
dealership locations (three franchises) in Southern California for a total
purchase price of $35.6 million, of which $33.4 million was paid in cash through
the use of available funds, with the remaining $2.2 million representing the
fair value of future payments associated with one of our acquisitions. During
the three months ended June 30, 2003, we acquired two dealership locations
(three franchises) for a total purchase price of $39.3 million through the use
of our committed credit facility.
During the six months ended June 30, 2004, we acquired six dealership
locations (six franchises) for an aggregate purchase price of $73.8 million, of
which $71.6 million was paid in cash through the use of available funds, with
the remaining $2.2 million representing the fair value of future payments
associated with one of our acquisitions. During the six months ended June 30,
2003 we acquired two dealership locations (three franchises) and one ancillary
business for an aggregate purchase price of $39.5 million, of which $0.3 million
was paid in cash through the use of available funds and $39.2 million was funded
through borrowings under our committed credit facility.
5
The allocation of purchase price for acquisitions is as follows:
For the Six Months
Ended June 30,
---------------------
(In thousands) 2004 2003
-------- --------
Working capital $ 5,155 $ 3,541
Fixed assets 3,774 1,884
Other assets 257 --
Goodwill 53,101 34,141
Franchise rights 11,500 --
Other liabilities -- (29)
------- -------
Total purchase price $73,787 $39,537
======= =======
The allocation of purchase price to assets acquired and liabilities
assumed for certain current and prior year acquisitions has been based on
preliminary estimates of fair value and may be revised as additional information
concerning valuation of such assets and liabilities becomes available.
4. INVENTORIES
Inventories consist of the following:
(In thousands) June 30, 2004 December 31, 2003
------------- -----------------
New vehicles $594,791 $517,227
Used vehicles 108,374 90,683
Parts and accessories 43,119 42,487
-------- --------
Total inventories $746,284 $650,397
======== ========
The lower of cost or market reserves for inventory were $5.1 million
and $4.6 million as of June 30, 2004 and December 31, 2003, respectively.
5. GOODWILL AND MANUFACTURER FRANCHISE RIGHTS
Goodwill represents the excess cost of businesses acquired over the
fair market value of the identifiable net assets. Goodwill is allocated to each
reporting unit at the platform level. The changes in the carrying amount of
goodwill for the six months ended June 30, 2004 are as follows:
(In thousands)
Balance, December 31, 2003 $404,143
Current year acquisitions 53,101
Adjustments associated with prior year acquisitions 343
Current year divestitures (425)
--------
Balance, June 30, 2004 $457,162
========
During the six months ended June 30, 2004, we allocated $11.5 million
of the purchase price of our acquisitions to manufacturer franchise rights.
Manufacturer franchise rights totaled $49.5 million and $38.0 million as of June
30, 2004 and December 31, 2003, respectively, and are included in Other Assets
on the accompanying Consolidated Balance Sheets.
6. ASSETS HELD FOR SALE
Assets and liabilities classified as held for sale as of June 30, 2004
include (1) assets and liabilities associated with discontinued operations, (2)
real estate owned as of June 30, 2004 and subsequently sold in a sale-leaseback
transaction in the third quarter of 2004, and (3) real estate of new dealership
6
locations where an unaffiliated third party purchased the land and is advancing
funds to us equal to the cost of construction of dealership facilities being
constructed on the land.
Assets and liabilities associated with the discontinued operations of
five dealership locations (six franchises) and real estate associated with two
former dealership locations are classified as held for sale as of June 30, 2004.
Assets and liabilities associated with the discontinued operations of two
dealership locations (three franchises) and real estate associated with two
former dealership locations are included in Assets Held for Sale as of December
31, 2003.
Assets held for sale as of June 30, 2004 include land and buildings
with a net book value of $100.6 million that were sold in the third quarter of
2004 for $116.0 million in a sale-leaseback transaction. The difference between
the net book value of the assets sold and the proceeds from the sale will be
deferred and amortized as a component of selling, general and administrative
expense over the lease terms. In addition, we classified $63.7 million of the
related mortgages as liabilities associated with assets held for sale as of June
30, 2004, which were repaid in the third quarter of 2004 with the proceeds from
the sale-leaseback transaction.
In connection with the construction of certain new dealership
locations, we have entered into sale-leaseback agreements whereby an
unaffiliated third party purchased the land and is advancing funds to us equal
to the cost of construction of dealership facilities being constructed on the
land. The agreements include an option for the third party to cancel the
agreement and require us to return the advanced funds in the event we fail to
complete construction of the facilities, among other customary conditions. As a
result we capitalize the cost of the land, facilities and rent during the
construction period and record a corresponding liability equal to the amount of
the advanced funds. Upon completion of the construction, we will execute the
sale-leaseback transaction, remove the cost of the land, facilities and the
related liability from our Consolidated Balance Sheets and amortize the
capitalized rent on a straight-line basis over the lease term. The book value of
the land and construction-in-progress and the related liabilities associated
with these assets held for sale each totaled $14.6 million and $22.8 million as
of June 30, 2004 and December 31, 2003, respectively.
A summary of assets and liabilities held for sale is as follows:
(In thousands) June 30, 2004 December 31, 2003
------------- -----------------
Assets:
Inventories $ 11,425 $ 2,116
Property and equipment, net 120,361 27,417
-------- --------
Total assets 131,786 29,533
Liabilities:
Floor plan notes payable 10,380 1,954
Long-term debt 63,706 --
Other liabilities 15,636 22,778
-------- --------
Total liabilities 89,722 24,732
-------- --------
Net assets held for sale $ 42,064 $ 4,801
======== ========
7. LONG-TERM DEBT
Long-term debt consists of the following:
(In thousands) June 30, 2004 December 31, 2003
------------- -----------------
9% Senior Subordinated Notes due 2012 $250,000 $250,000
8% Senior Subordinated Notes due 2014 200,000 200,000
Mortgage notes payable 51,301 116,664
Notes payable collateralized by
loaner vehicles 21,428 15,744
Capital lease obligations 3,896 4,226
Other notes payable 4,872 5,744
-------- --------
531,497 592,378
Less-current portion (29,973) (33,250)
-------- --------
Long-term debt $501,524 $559,128
======== ========
7
8. COMPREHENSIVE INCOME
The following table provides a reconciliation of net income to
comprehensive income:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------- --------------------
(In thousands) 2004 2003 2004 2003
-------- -------- -------- --------
Net income .............................................. $ 14,748 $ 12,273 $ 25,112 $ 19,370
Other comprehensive income:
Change in fair value of interest rate swaps .......... (4,631) -- (6,701) --
Income tax benefit associated with
interest rate swaps ................................ 1,737 -- 2,532 --
-------- -------- -------- --------
(2,894) -- (4,169) --
Reclassification adjustment of loss on interest
rate swaps included in net income .................. -- 56 -- 113
Income tax expense associated with interest rate swaps -- (22) -- (46)
-------- -------- -------- --------
Comprehensive income .................................... $ 11,854 $ 12,307 $ 20,943 $ 19,437
======== ======== ======== ========
In December 2003, we entered into two forward interest rate swaps with
a combined notional principal amount of $200.0 million, which will provide a
hedge against changes in the interest rates of our variable rate floor plan
notes payable for a period of eight years beginning in March 2006. During the
second quarter of 2004, we reduced the notional principal amount of these swap
agreements to $170.0 million. This transaction resulted in a gain of $0.4
million, which is included in Other Liabilities on our Consolidated Balance
Sheet and will be amortized on a straight-line basis as an offset to interest
expense over the swap period, beginning March 2006. The swap agreements were
designated and qualify as interest rate hedges of future changes in interest
rates of our variable rate floor plan indebtedness and we expect that these
hedges, which may contain minor ineffectiveness, will be highly effective during
the swap period from March 2006 through February 2014. As of June 30, 2004, the
swap agreements had a fair value of $2.0 million, which is included in Other
Assets and Accumulated Other Comprehensive Loss on the accompanying Consolidated
Balance Sheets.
During December 2003, we entered into an interest rate swap agreement
with a notional principal amount of $200.0 million as a hedge against changes in
the fair value of our 8% Senior Subordinated Notes due 2014. Under the terms of
this swap agreement, we are required to make variable rate payments based on
six-month LIBOR and receive a fixed rate of 8.0%. This swap agreement was
designated and qualifies as a fair value hedge of our fixed rate senior
subordinated debt and does not contain any ineffectiveness. As of June 30, 2004,
the swap agreement had a fair value of $9.4 million, which is included in Other
Liabilities and Accumulated Other Comprehensive Loss on the accompanying
Consolidated Balance Sheets.
9. DISCONTINUED OPERATIONS AND DISPOSITIONS
During the three months ended June 30, 2004, we sold one dealership
location (one franchise) that we placed into discontinued operations in the same
period. As of June 30, 2004, five dealership locations (six franchises) and real
estate associated with two former dealership locations were pending disposition.
The accompanying Consolidated Statements of Income for the three and six months
ended June 30, 2003 has been reclassified to reflect the status of our
discontinued operations as of June 30, 2004.
8
The following table provides further information regarding our
discontinued operations as of June 30, 2004, including businesses sold prior to
June 30, 2004, and businesses pending disposition as of June 30, 2004:
For the Three Months For the Three Months
Ended June 30, 2004 Ended June 30, 2003
--------------------------------- -------------------------------------
Pending Pending
(Dollars in thousands) Sold Disposition Total Sold* Disposition** Total
-------- ----------- --------- --------- ------------- ---------
Franchises ................................. 1 6 7 6 6 12
======= ======== ======== ======== ======= ========
Used-only locations ........................ -- -- -- 10 -- 10
======= ======== ======== ======== ======= ========
Ancillary businesses ....................... -- -- -- 2 -- 2
======= ======== ======== ======== ======= ========
Revenues ................................... $ 657 $ 12,559 $ 13,216 $ 18,134 $ 17,871 $ 36,005
Cost of sales .............................. 555 10,569 11,124 16,224 15,177 31,401
------- -------- -------- -------- -------- --------
Gross profit ...................... 102 1,990 2,092 1,910 2,694 4,604
Operating expenses ......................... 206 2,184 2,390 4,568 2,628 7,196
------- -------- -------- -------- -------- --------
Income (loss) from operations ..... (104) (194) (298) (2,658) 66 (2,592)
Other expense, net ......................... (5) (95) (100) (25) (168) (193)
------- -------- -------- -------- -------- --------
Net loss .......................... (109) (289) (398) (2,683) (102) (2,785)
Loss on disposition of discontinued
Operations ............................ (306) -- (306) (508) -- (508)
------- -------- -------- -------- -------- --------
Loss before income taxes .......... (415) (289) (704) (3,191) (102) (3,293)
Related tax benefit ........................ 156 108 264 1,281 39 1,320
------- -------- -------- -------- -------- --------
Discontinued operations, net of tax $ (259) $ (181) $ (440) $ (1,910) $ (63) $ (1,973)
======= ======== ======== ======== ======= ========
For the Six Months For the Six Months
Ended June 30, 2004 Ended June 30, 2003
--------------------------------- -------------------------------------
Pending Pending
(Dollars in thousands) Sold Disposition Total Sold* Disposition** Total
-------- ----------- --------- --------- ------------- ---------
Franchises ................................. 2 6 8 8 6 14
======== ======== ======== ======== ======== ========
Used-only locations ........................ -- -- -- 10 -- 10
======== ======== ======== ======== ======== ========
Ancillary businesses ....................... -- -- -- 2 -- 2
======== ======== ======== ======== ======== ========
Revenues ................................... $ 2,011 $ 27,672 $ 29,683 $ 39,939 $ 34,758 $ 74,697
Cost of sales .............................. 1,721 23,434 25,155 35,265 29,552 64,817
-------- -------- -------- -------- -------- --------
Gross profit ...................... 290 4,238 4,528 4,674 5,206 9,880
Operating expenses ......................... 466 4,631 5,097 9,646 5,212 14,858
-------- -------- -------- -------- -------- --------
Loss from operations .............. (176) (393) (569) (4,972) (6) (4,978)
Other expense, net ......................... (14) (189) (203) (138) (319) (457)
-------- -------- -------- -------- -------- --------
Net loss .......................... (190) (582) (772) (5,110) (325) (5,435)
(Loss) gain on disposition of discontinued
operations ............................ (474) -- (474) 330 -- 330
-------- -------- -------- -------- -------- --------
Loss before income taxes .......... (664) (582) (1,246) (4,780) (325) (5,105)
Related tax benefit ........................ 249 218 467 1,916 128 2,044
-------- -------- -------- -------- -------- --------
Discontinued operations, net of tax $ (415) $ (364) $ (779) $ (2,864) $ (197) $ (3,061)
======== ======== ======== ======== ======== ========
* Businesses were sold between April 1, 2003 and June 30, 2004
** Businesses pending disposition as of June 30, 2004
*** Businesses were sold between January 1, 2003 and June 30, 2004
9
10. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the
weighted-average common shares outstanding during the periods presented. Diluted
earnings per share is computed by dividing net income by the weighted-average
common shares and common share equivalents outstanding during the periods
presented.
The following table sets forth the computation of basic and diluted
earnings per share:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------- --------------------
(In thousands, except per share data) 2004 2003 2004 2003
-------- -------- -------- --------
Net income:
Continuing operations .............................. $ 15,188 $ 14,246 $ 25,891 $ 22,431
Discontinued operations ............................ (440) (1,973) (779) (3,061)
-------- -------- -------- --------
$ 14,748 $ 12,273 $ 25,112 $ 19,370
======== ======== ======== ========
Earnings per share - basic and diluted:
Continuing operations .............................. $ 0.47 $ 0.44 $ 0.79 $ 0.68
Discontinued operations ............................ (0.02) (0.06) (0.02) (0.09)
-------- -------- -------- --------
$ 0.45 $ 0.38 $ 0.77 $ 0.59
======== ======== ======== ========
Common shares and common share equivalents:
Weighted average common shares outstanding - basic . 32,470 32,701 32,452 32,876
Common share equivalents (stock options) ........... 186 13 236 5
-------- -------- -------- --------
Weighted average common shares outstanding - diluted 32,656 32,714 32,688 32,881
======== ======== ======== ========
11. SUPPLEMENTAL CASH FLOW INFORMATION
During the six months ended June 30, 2004 and 2003, we made interest
payments, net of amounts capitalized, totaling $29.8 million and $27.7 million,
respectively. During the six months ended June 30, 2004, we received $1.5
million of proceeds associated with our interest rate swap agreement that was
entered into in December 2003 in connection with the issuance of our 8% Senior
Subordinated Notes due 2014.
During the six months ended June 30, 2004 and 2003, we made income tax
payments totaling $9.3 million and $5.7 million, respectively.
During the six months ended June 30, 2003, approximately $5.1 million
of the proceeds from the sale of dealerships were paid directly to the lenders
of our committed credit facility. We received all proceeds from dealerships we
sold during the six months ended June 30, 2004 directly from the purchasers.
During the six months ended June 30, 2004, we executed a sale-leaseback
transaction, which resulted in the removal of approximately $17.6 million from
Assets Held for Sale and Liabilities Associated with Assets Held for Sale on our
Consolidated Balance Sheets. During the six months ended June 30, 2003,
approximately $26.3 million of the proceeds from sale-leaseback transactions
were paid directly to our lenders.
During the six months ended June 30, 2004 and 2003, we entered into
capital leases for land and buildings of $0.1 million and $1.2 million,
respectively.
During the six months ended June 30, 2004 and 2003, we borrowed $15.2
million and $9.5 million, respectively, under our loaner vehicle financing
arrangements in connection with the purchase of loaner vehicles.
10
12. COMMITMENTS AND CONTINGENCIES
Litigation
We are involved in legal proceedings and claims that have arisen in the
ordinary course of business, and with respect to certain of these claims, we
have been indemnified by the sellers of dealerships we have acquired. We do not
expect that the cost of resolving these legal proceedings and claims will
materially affect our financial condition, liquidity, results of operations or
financial statement disclosures.
Guarantees
We have guaranteed a loan made by a financial institution directly to a
non-consolidated entity controlled by a current platform executive, which
totaled approximately $3.0 million as of June 30, 2004. This loan was made by a
corporation we acquired in October 1998, and guarantees an industrial revenue
bond, which we are legally required to guarantee. The primary obligor of the
note is a non-dealership business entity and that entity's partners as
individuals.
Environmental Matters
Substantially all of our facilities are subject to federal, state and
local provisions regarding the discharge of materials into the environment.
Compliance with these provisions has not had, nor do we expect such compliance
to have, any material effect upon our financial condition, liquidity, results of
operations or financial statement disclosures. We believe that our current
practices and procedures for the control and disposition of such materials
comply with applicable federal, state and local requirements.
13. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
Our 8% Senior Subordinated Notes due 2014 are guaranteed by all of our
current subsidiaries, other than our current Toyota and Lexus dealership
subsidiaries, and all of our future domestic restricted subsidiaries, other than
our future Toyota and Lexus dealership facilities. The following tables set
forth, on a condensed consolidating basis, our balance sheets, statements of
income and statements of cash flows, for our guarantor and non-guarantor
subsidiaries for all financial statement periods presented in our interim
consolidated financial statements.
11
Condensed Consolidating Balance Sheet
As of June 30, 2004
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------------ ------------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ...................... $ -- $ -- $ 14,879 $ -- $ 14,879
Inventories .................................... -- 687,434 58,850 -- 746,284
Other current assets ........................... -- 263,627 42,165 (11,553) 294,239
Assets held for sale ........................... -- 131,786 -- -- 131,786
---------- ---------- ---------- ---------- ----------
Total current assets ..................... -- 1,082,847 115,894 (11,553) 1,187,188
Property and equipment, net ....................... -- 177,739 5,360 -- 183,099
Goodwill .......................................... -- 395,850 61,312 -- 457,162
Other assets ...................................... -- 95,645 14,512 -- 110,157
Investment in subsidiaries ........................ 455,591 74,219 -- (529,810) --
---------- ---------- ---------- ---------- ----------
Total assets ............................. $ 455,591 $1,826,300 $ 197,078 $ (541,363) $1,937,606
========== ========== ========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Floor plan notes payable ....................... $ -- $ 622,608 $ 50,594 $ -- $ 673,202
Other current liabilities ...................... -- 115,400 66,358 (11,553) 170,205
Liabilities associated with assets held for sale -- 89,722 -- -- 89,722
---------- ---------- ---------- ---------- ----------
Total current liabilities ................ -- 827,730 116,952 (11,553) 933,129
Long-term debt .................................... -- 501,480 44 -- 501,524
Other liabilities ................................. -- 41,499 5,863 -- 47,362
Shareholders' equity .............................. 455,591 455,591 74,219 (529,810) 455,591
---------- ---------- ---------- ---------- ----------
Total liabilities and shareholders' equity $ 455,591 $1,826,300 $ 197,078 $ (541,363) $1,937,606
========== ========== ========== ========== ==========
12
Condensed Consolidating Balance Sheet
As of December 31, 2003
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------------ ------------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ...................... $ -- $ 98,927 $ 7,784 $ -- $ 106,711
Inventories .................................... -- 601,923 48,474 -- 650,397
Other current assets ........................... -- 206,910 47,991 -- 254,901
Assets held for sale ........................... -- 29,533 -- -- 29,533
---------- ---------- ---------- ---------- ----------
Total current assets ..................... -- 937,293 104,249 -- 1,041,542
Property and equipment, net ....................... -- 262,450 4,541 -- 266,991
Goodwill .......................................... -- 342,831 61,312 -- 404,143
Other assets ...................................... -- 90,800 10,803 -- 101,603
Investment in subsidiaries ........................ 433,707 69,240 -- (502,947) --
---------- ---------- ---------- ---------- ----------
Total assets ............................. $ 433,707 $1,702,614 $ 180,905 $ (502,947) $1,814,279
========== ========== ========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Floor plan notes payable ....................... $ -- $ 558,586 $ 43,581 $ -- $ 602,167
Other current liabilities ...................... -- 93,064 61,795 -- 154,859
Liabilities associated with assets held for sale -- 24,732 -- -- 24,732
---------- ---------- ---------- ---------- ----------
Total current liabilities ................ -- 676,382 105,376 -- 781,758
Long-term debt .................................... -- 559,079 49 -- 559,128
Other liabilities ................................. -- 33,446 6,240 -- 39,686
Shareholders' equity .............................. 433,707 433,707 69,240 (502,947) 433,707
---------- ---------- ---------- ---------- ----------
Total liabilities and shareholders' equity $ 433,707 $1,702,614 $ 180,905 $ (502,947) $1,814,279
========== ========== ========== ========== ==========
13
Condensed Consolidating Statement of Income
For the Three Months Ended June 30, 2004
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------------ ------------- ------------ ------------
Revenues ................................. $ -- $1,222,312 $ 173,196 $ (4,324) $ 1,391,184
Cost of sales ............................ -- 1,033,743 150,416 (4,324) 1,179,835
---------- ---------- ---------- ---------- ----------
Gross profit .................... -- 188,569 22,780 -- 211,349
Operating expenses:
Selling, general and administrative ... -- 148,704 17,870 -- 166,574
Depreciation and amortization ......... -- 4,981 426 -- 5,407
---------- ---------- ---------- ---------- ----------
Income from operations .......... -- 34,884 4,484 -- 39,368
Other income (expense):
Floor plan interest expense ........... -- (5,061) (373) -- (5,434)
Other interest expense ................ -- (9,008) (1,181) -- (10,189)
Other income (expense) ................ -- 237 36 -- 273
Equity in earnings of subsidiaries .... 14,748 1,854 -- (16,602) --
---------- ---------- ---------- ---------- ----------
Total other expense, net 14,748 (11,978) (1,518) (16,602) (15,350)
---------- ---------- ---------- ---------- ----------
Income from continuing operations
before income taxes ........... 14,748 22,906 2,966 (16,602) 24,018
Income tax expense ....................... -- 7,718 1,112 -- 8,830
---------- ---------- ---------- ---------- ----------
Income from continuing operations 14,748 15,188 1,854 (16,602) 15,188
Discontinued operations, net of tax ...... -- (440) -- -- (440)
---------- ---------- ---------- ---------- ----------
Net income ...................... $ 14,748 $ 14,748 $ 1,854 $ (16,602) $ 14,748
========== ========== ========== ========== ==========
14
Condensed Consolidating Statement of Income
For the Three Months Ended June 30, 2003
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------------ ------------- ------------ ------------
Revenues ................................. $ -- $1,067,576 $ 167,810 $ (3,888) $1,231,498
Cost of sales ............................ -- 901,521 145,498 (3,888) 1,043,131
---------- ---------- ---------- ---------- ----------
Gross profit .................... -- 166,055 22,312 -- 188,367
Operating expenses:
Selling, general and administrative ... -- 128,704 16,889 -- 145,593
Depreciation and amortization ......... -- 4,561 424 -- 4,985
---------- ---------- ---------- ---------- ----------
Income from operations .......... -- 32,790 4,999 -- 37,789
Other income (expense):
Floor plan interest expense ........... -- (4,526) (273) -- (4,799)
Other interest expense ................ -- (9,150) (846) -- (9,996)
Other income (expense) ................ -- 606 64 -- 670
Equity in earnings of subsidiaries .... 12,273 2,374 -- (14,647) --
---------- ---------- ---------- ---------- ----------
Total other expense, net ........ 12,273 (10,696) (1,055) (14,647) (14,125)
---------- ---------- ---------- ---------- ----------
Income from continuing operations
before income taxes ........... 12,273 22,094 3,944 (14,647) 23,664
Income tax expense ....................... -- 7,848 1,570 -- 9,418
---------- ---------- ---------- ---------- ----------
Income from continuing operations 12,273 14,246 2,374 (14,647) 14,246
Discontinued operations, net of tax ...... -- (1,973) -- -- (1,973)
---------- ---------- ---------- ---------- ----------
Net income ...................... $ 12,273 $ 12,273 $ 2,374 $ (14,647) $ 12,273
========== ========== ========== ========== ==========
15
Condensed Consolidating Statement of Income
For the Six Months Ended June 30, 2004
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------------ ------------- ------------ ------------
Revenues ................................. $ -- $2,280,142 $ 340,407 $ (7,759) $2,612,790
Cost of sales ............................ -- 1,924,706 293,851 (7,759) 2,210,798
---------- ---------- ---------- ---------- ----------
Gross profit .................... -- 355,436 46,556 -- 401,992
Operating expenses:
Selling, general and administrative ... -- 285,100 34,834 -- 319,934
Depreciation and amortization ......... -- 9,718 825 -- 10,543
---------- ---------- ---------- ---------- ----------
Income from operations .......... -- 60,618 10,897 -- 71,515
Other income (expense):
Floor plan interest expense ........... -- (9,495) (711) -- (10,206)
Other interest expense ................ -- (18,264) (2,248) -- (20,512)
Other income (expense) ................ -- 318 28 -- 346
Equity in earnings of subsidiaries .... 25,112 4,979 -- (30,091) --
---------- ---------- ---------- ---------- ----------
Total other expense, net ........ 25,112 (22,462) (2,931) (30,091) (30,372)
---------- ---------- ---------- ---------- ----------
Income from continuing operations
before income taxes ........... 25,112 38,156 7,966 (30,091) 41,143
Income tax expense ....................... -- 12,265 2,987 -- 15,252
---------- ---------- ---------- ---------- ----------
Income from continuing operations 25,112 25,891 4,979 (30,091) 25,891
Discontinued operations, net of tax ...... -- (779) -- -- (779)
---------- ---------- ---------- ---------- ----------
Net income ...................... $ 25,112 $ 25,112 $ 4,979 $ (30,091) $ 25,112
========== ========== ========== ========== ==========
16
Condensed Consolidating Statement of Income
For the Six Months Ended June 30, 2003
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------------ ------------- ------------ ------------
Revenues ................................. $ -- $1,988,216 $ 317,180 $ (7,067) $2,298,329
Cost of sales ............................ -- 1,673,329 273,696 (7,067) 1,939,958
---------- ---------- ---------- ---------- ----------
Gross profit .................... -- 314,887 43,484 -- 358,371
Operating expenses:
Selling, general and administrative ... -- 249,571 32,855 -- 282,426
Depreciation and amortization ......... -- 8,851 871 -- 9,722
---------- ---------- ---------- ---------- ----------
Income from operations .......... -- 56,465 9,758 -- 66,223
Other income (expense):
Floor plan interest expense ........... -- (8,445) (577) -- (9,022)
Other interest expense ................ -- (18,093) (1,857) -- (19,950)
Other income (expense) ................ -- 91 (81) -- 10
Equity in earnings of subsidiaries .... 19,370 4,360 -- (23,730) --
---------- ---------- ---------- ---------- ----------
Total other expense, net ........ 19,370 (22,087) (2,515) (23,730) (28,962)
---------- ---------- ---------- ---------- ----------
Income from continuing operations
before income taxes ........... 19,370 34,378 7,243 (23,730) 37,261
Income tax expense ....................... -- 11,947 2,883 -- 14,830
---------- ---------- ---------- ---------- ----------
Income from continuing operations 19,370 22,431 4,360 (23,730) 22,431
Discontinued operations, net of tax ...... -- (3,061) -- -- (3,061)
---------- ---------- ---------- ---------- ----------
Net income ...................... $ 19,370 $ 19,370 $ 4,360 $ (23,730) $ 19,370
========== ========== ========== ========== ==========
17
Condensed Consolidating Statement of Cash Flows
For the Six Months Ended June 30, 2004
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------------ ------------- ------------ ------------
Net cash used in operating activities ........ $ -- $ (7,860) $ 21,965 $ -- $ 14,105
Cash flow from investing activities:
Capital expenditures ...................... -- (32,771) (1,750) -- (34,521)
Payments for acquisitions ................. -- (71,594) -- -- (71,594)
Other investing activities ................ -- 2,245 (11,553) 11,553 2,245
---------- ---------- --------- ---------- ----------
Net cash used in investing activities -- (102,120) (13,303) 11,553 (103,870)
Cash flow from financing activities:
Proceeds from borrowings .................. -- 17,433 -- (11,553) 5,880
Repayments of debt ........................ -- (16,730) (1,567) -- (18,297)
Proceeds from sale leaseback activity ..... -- 9,493 -- -- 9,493
Other financing activities ................ -- 857 -- -- 857
---------- ---------- --------- ---------- ----------
Net cash Provided by (used in)
financing activities .............. -- 11,053 (1,567) (11,553) (2,067)
---------- ---------- --------- ---------- ----------
Net (decrease) increase in cash and
cash equivalents .................. -- (98,927) 7,095 -- (91,832)
Cash and cash equivalents, beginning of period -- 98,927 7,784 -- 106,711
---------- ---------- --------- ---------- ----------
Cash and cash equivalents, end of period ..... $ -- $ -- $ 14,879 $ -- $ 14,879
========== ========== ========= ========== ==========
18
Condensed Consolidating Statement of Cash Flows
For the Six Months Ended June 30, 2003
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------------ ------------- ------------ ------------
Net cash used in operating activities ........ $ -- $ 32,743 $ 201 $ -- $ 32,944
Cash flow from investing activities:
Capital expenditures ...................... -- (26,173) (357) -- (26,530)
Payments for acquisitions ................. -- (39,537) -- -- (39,537)
Other investing activities ................ -- (227) -- -- (227)
---------- ---------- ---------- ---------- ----------
Net cash used in investing activities -- (65,937) (357) -- (66,294)
Cash flow from financing activities:
Proceeds from borrowings .................. -- 63,213 -- -- 63,213
Repayments of debt ........................ -- (17,127) (1,347) -- (18,474)
Proceeds from sale leaseback activity ..... -- 3,283 -- -- 3,283
Other financing activities ................ -- (12,710) -- -- (12,710)
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in)
financing activities .............. -- 36,659 (1,347) -- 35,312
---------- ---------- ---------- ---------- ----------
Net increase (decrease) in cash and
cash equivalents .................. -- 3,465 (1,503) -- 1,962
Cash and cash equivalents, beginning of period -- 18,779 3,834 -- 22,613
---------- ---------- ---------- ---------- ----------
Cash and cash equivalents, end of period ..... $ -- $ 22,244 $ 2,331 $ -- $ 24,575
========== ========== ========== ========== ==========
19
14. SUBSEQUENT EVENTS
Sale-Leaseback Transaction
During the third quarter of 2004, we executed a sale-leaseback
transaction, pursuant to which, among other things, we sold certain land and
buildings with a net book value of $100.6 million to an unaffiliated third party
for $116.0 million and entered into long-term operating leases for the related
facilities. The difference between the net book value of the assets sold and the
proceeds from the sale will be deferred and amortized as a component of selling,
general and administrative expense over the lease terms. The proceeds from this
transaction were used to repay the $63.7 million of the related mortgage
indebtedness. As of June 30, 2004, the related land and buildings sold in this
transaction were classified as Assets Held for Sale and the related mortgages
were classified as Liabilities Associated with Assets Held for Sale in the
accompanying Consolidated Balance Sheets.
Divestitures
During the third quarter of 2004, we sold three dealership locations
(four franchises) for net proceeds of $2.6 million, resulting in a gain of
approximately $0.7 million. This gain is net of estimated costs to complete
these transactions, which may be adjusted in the third quarter as additional
information becomes available.
20
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Asbury Automotive Group, Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of Asbury
Automotive Group, Inc. and subsidiaries (the "Company") as of June 30, 2004, and
the related condensed consolidated statements of income for the three-month and
six-month periods ended June 30, 2004 and 2003, and statements of cash flows for
the six-month periods ended June 30, 2004 and 2003. These interim financial
statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with standards
of the Public Company Accounting Oversight Board (United States), the objective
of which is the expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to such condensed consolidated interim financial statements for them to
be in conformity with accounting principles generally accepted in the United
States of America.
We have previously audited, in accordance with standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet of
the Company as of December 31, 2003, and the related consolidated statements of
income, shareholders' equity, and cash flows for the year then ended (not
presented herein); and in our report dated March 5, 2004 (which includes an
explanatory paragraph regarding the adoption of Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets"), we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 2003 is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
/s/ DELOITTE & TOUCHE LLP
New York, New York
July 26, 2004
21
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
We are a national automotive retailer, operating 102 dealership
locations (142 franchises) in 11 states and 24 metropolitan markets in the
United States as of June 30, 2004. We offer 35 different brands of new vehicles,
including four heavy truck brands. We also operate 23 collision repair centers
that serve our markets.
Our revenues are derived primarily from three basic offerings: (i) the
sale of new and used vehicles; (ii) maintenance and collision repair services
and the sale of automotive parts (collectively, "fixed operations"); and (iii)
the arrangement of vehicle financing and the sale of various insurance and
warranty products (collectively, "F&I"). We evaluate the results of our new and
used vehicle sales based on unit volumes and gross profit per vehicle retailed
("PVR"); our fixed operations based on aggregate gross profit; and F&I based on
gross profit PVR.
Since inception, we have grown our business through the acquisition of
nine "platforms" and numerous "tuck-in" acquisitions. "Tuck-in" acquisitions
refer to the purchase of dealerships in the market areas of our existing
platforms. We use "tuck-in" acquisitions to increase the number of vehicle
brands we offer in a particular market area and to create a larger gross profit
base over which to spread our "platform" overhead costs. In addition to our nine
established platforms, we operate two franchises in Northern California and
three franchises in Southern California, with the intention of expanding our
operations in each of these respective regions through additional acquisitions.
All acquisitions were accounted for using the purchase method of accounting, and
the operations of the acquired dealerships are included in the consolidated
statements of income commencing on the date acquired. We evaluate the organic
growth of our revenue and gross profit on a same store basis.
Our gross profit percentage varies with our revenue mix. The sale of
vehicles generally results in lower gross profit percentages than our fixed
operations. As a result, when vehicle sales decrease as a percentage of total
sales, we expect that our overall gross profit percentage would increase.
Selling, general and administrative expenses consist primarily of fixed
and incentive-based compensation, advertising, rent, insurance, utilities and
other typical operating expenses. A significant portion of our selling expenses
is variable (such as sales commissions), or controllable expenses (such as
advertising), generally allowing our cost structure to adapt in response to
trends in our business. We evaluate commissions paid to salespeople as a
percentage of retail vehicle gross profit and all other selling, general and
administrative expenses in the aggregate as a percentage of gross profit.
Sales of motor vehicles (particularly new vehicles) have historically
fluctuated with general macroeconomic conditions, including consumer confidence,
availability of consumer credit and fuel prices. Although these factors may
impact our business, we believe that any future negative trends may be mitigated
by the performance of our used vehicle sales, fixed operations, variable cost
structure, regional diversity and advantageous brand mix. Historically, our
brand mix, which is weighted towards luxury and mid-line imports, has tended to
be less affected by market volatility than the U.S. automobile industry as a
whole.
Our operations typically have been subject to modest seasonal
variations that have been somewhat offset by our regional diversity. We
typically generate more revenue and operating income in the second and third
quarters than in the first and fourth quarters. Generally, seasonality is based
upon, among other factors, weather conditions, manufacturer incentive programs,
model changeovers and consumer buying patterns.
Over the past several years, certain automobile manufacturers have used
a combination of vehicle pricing and financing incentive programs to stimulate
customer demand for new vehicles. These programs have served to increase
competition for late-model used vehicles. We anticipate the manufacturers will
continue to use these incentive programs in the future and, as a result, we will
continue to monitor and adjust our used vehicle inventory mix in order to
increase the percentage of used vehicle inventory that can be sold at lower
price points, thereby reducing competition with our new vehicle sales. In
addition, we expect to continue to expand our service capacity in order to meet
anticipated future demand, as the relatively high volume of new vehicle sales
resulting from the highly "incentivized" new vehicle market will drive service
demand in the future, as certain of our vehicle customers return to our
dealerships for service work.
We expect the industry-wide gain in market share of the luxury and
mid-line import brands to continue in the near future. We feel that our brand
mix, which is heavily weighted toward these brands, is well positioned to take
advantage of this continued shift in customer buying habits.
Interest rates over the past several years have been at historical
lows. We do not believe that changes in interest rates significantly impact
customer overall buying patterns, as changes in interest rates do not
dramatically increase the monthly payment of a financed vehicle. For example,
the monthly payment for a typical vehicle financing transaction in which a
customer finances $25,000 at 5.5% over 60 months increases by only $5.80 with
each 50-basis-point increase in interest rates.
22
RESULTS OF OPERATIONS
Three Months Ended June 30, 2004, Compared to Three Months Ended June 30, 2003
Net income increased $2.4 million, or $0.07 per basic share, to $14.7
million, or $0.45 per basic share, for the three months ended June 30, 2004,
from $12.3 million or $0.38 per basic share, for the three months ended June 30,
2003.
Income from continuing operations increased $1.0 million, or $0.03 per
basic share, to $15.2 million, or $0.47 per share, for the three months ended
June 30, 2004, from $14.2 million, or $0.44 per share, for the three months
ended June 30, 2003.
The increases in net income and income from continuing operations for
the three months ended June 30, 2004, compared to the three months ended June
30, 2003, resulted from several factors, including: (i) the operations of
franchises we acquired subsequent to March 31, 2003, (ii) the sale of
non-profitable dealerships and (iii) continued strong performance of our fixed
operations and F&I, which were partially offset by (i) lower gross profit on new
vehicles in order to maintain unit volumes in a challenging market, (ii) lower
unit volumes on used vehicles as manufacturer new vehicle incentives continued
to have an adverse impact on the used vehicle market, (iii) incremental
advertising costs incurred in an effort to increase new vehicle sales volume and
(iv) "start-up" costs associated with opening new dealership locations and our
entrance into the Southern California market.
Revenues
For the Three Months
(Dollars in thousands) Ended June 30,
----------------------- Increase %
2004 2003 (Decrease) Change
---------- ---------- ----------- ----------
New vehicle data:
Retail revenues-same store (1) .......................... $ 759,322 $ 738,921 $ 20,401 3%
Retail revenues-acquisitions ............................ 84,359 --
---------- ----------
Total new retail revenues .............................. 843,681 738,921 104,760 14%
Fleet revenues-same store (1) ........................... 17,882 16,176 1,706 11%
Fleet revenues-acquisitions ............................. 235 --
---------- ----------
Total fleet revenues ................................... 18,117 16,176 1,941 12%
---------- ----------
New vehicle revenue, as reported ....................... $ 861,798 $ 755,097 $ 106,701 14%
========== ==========
New retail units-same store (1) ......................... 25,661 25,669 (8) --
========== ==========
New retail units-actual ................................. 28,538 25,669 2,869 11%
========== ==========
Used vehicle data:
Retail revenues-same store (1) .......................... $ 225,843 $ 237,884 $ (12,041) (5)%
Retail revenues-acquisitions ............................ 22,998 --
---------- ----------
Total used retail revenues ............................. 248,841 237,884 10,957 5%
Wholesale revenues-same store (1) ....................... 77,623 68,887 8,736 13%
Wholesale revenues-acquisitions ......................... 8,672 --
---------- ----------
Total wholesale revenues ............................... 86,295 68,887 17,408 25%
---------- ----------
Used vehicle revenue, as reported ...................... $ 335,136 $ 306,771 $ 28,365 9%
========== ==========
Used retail units-same store (1) ........................ 14,806 15,448 (642) (4)%
========== ==========
Used retail units-actual ................................ 16,033 15,448 585 4%
========== ==========
23
For the Three Months
(Dollars in thousands) Ended June 30,
----------------------- Increase %
2004 2003 (Decrease) Change
---------- ---------- ----------- ----------
New vehicle data:
Parts, service and collision repair:
Revenues-same store (1) ................................. $ 140,025 $ 136,381 $ 3,644 3%
Revenues-acquisitions ................................... 15,210 --
---------- ----------
Parts, service and collision repair revenue, as reported $ 155,235 $ 136,381 $ 18,854 14%
========== ==========
Finance and insurance, net:
Platform revenues-same store (1) ........................ $ 34,189 $ 33,249 $ 940 3%
Platform revenues-acquisitions .......................... 2,920 --
---------- ----------
Platform finance and insurance revenue ................ 37,109 33,249 3,860 12%
Corporate revenues ...................................... 1,906 --
---------- ----------
Finance and insurance revenue, as reported ............ $ 39,015 $ 33,249 $ 5,766 17%
========== ==========
Total revenue:
Same store (1) .......................................... $1,254,884 $1,231,498 $ 23,386 2%
Corporate ............................................... 1,906 --
Acquisitions ............................................ 134,394 --
---------- ----------
Total revenue, as reported ............................. $1,391,184 $1,231,498 $ 159,686 13%
========== ==========
(1) Same store amounts include the results of dealerships for the
identical months for each period presented in the comparison,
commencing with the first full month in which the dealership was owned
by us.
Total revenues increased 13% to $1.4 billion for the three months ended
June 30, 2004, from $1.2 billion for the three months ended June 30, 2003. Same
store revenue grew $23.4 million, or 2%, to $1.3 billion for the three months
ended June 30, 2004, compared to the three months ended June 30, 2003. On a same
store basis, new retail units were relatively flat compared to the second
quarter of 2003; however, same store new vehicle retail revenues rose 3%,
reflecting our strong luxury and mid-line import sales mix. Same store used
vehicle retail revenue decreased 5%, to $225.8 million for the three months
ended June 30, 2004, from $237.9 million for the three months ended June 30,
2003, as manufacturer incentive programs on new vehicles continue to negatively
impact our used retail unit sales volume and sales revenue per used vehicle
retailed. We anticipate that manufacturer new vehicle incentives and the
forecasted expansion of the economy will continue to drive customers toward new
vehicles during the remainder of 2004. We expect that this environment will
continue to have a negative impact on the used vehicle retail market.
Fixed operations revenue increased 14%, 3% on a same store basis, for
the three months ended June 30, 2004, compared to the three months ended June
30, 2003, primarily due to an increase in our "customer pay" and warranty parts
and service businesses, collectively up approximately 9% on a same store basis.
The growth in our "customer pay" business is a result of our continued service
adviser training, expansion of our product offerings and the implementation of
more aggressive advertising campaigns. Our warranty business continued its
positive performance driven by continued manufacturer recall programs and
increased work on imported vehicles, which typically generates higher revenue
than domestic brands. We expect that manufacturer recall programs will continue
through the end of 2004. These improvements were offset by reduction in our
collision repair center business, which decreased 15% for the three months ended
June 30, 2004, compared to the three months ended June 30, 2003. The decrease in
our collision repair center business is primarily attributable to the Texas
region, where a major hailstorm in the second quarter of 2003 resulted in
incremental collision repair revenues.
Platform F&I increased $0.9 million to $34.2 million on a same store
basis for the three months ended June 30, 2004, compared to the three months
ended June 30, 2003, as we continued to benefit from increased product
offerings, the utilization of menus in the F&I sales process, the maturation of
our corporate-sponsored programs and the sharing of best practices among our
platforms. Also contributing to our same store Platform F&I results is the
improvement of the F&I operations at franchises we acquired in prior periods.
F&I revenues have historically continued to improve for several years after we
acquire a dealership. Platform F&I excludes revenue resulting from contracts
negotiated by our corporate office, which is attributable to retail units sold
during prior periods. F&I revenue, on an as reported basis, increased 17% to
$39.0 million for the three months ended June 30,2004, from $33.2 million for
the three months ended June 30, 2003.
We expect total revenue to increase as we continue to acquire
dealerships and expand our service capacity in order to meet anticipated future
demand. In addition, the relatively high volume of new vehicles sales over the
past several years, resulting from the highly "incentivized" new vehicle market,
will drive future service demand.
24
Gross Profit
For the Three Months
(Dollars in thousands, except for unit and per vehicle data) Ended June 30,
----------------------- Increase %
2004 2003 (Decrease) Change
---------- ---------- ----------- ----------
New vehicle data:
Retail gross profit-same store (1) ............................ $ 53,654 $ 55,797 $ (2,143) (4)%
Retail gross profit-acquisitions .............................. 7,216 --
--------- ---------
Total new retail gross profit ............................... 60,870 55,797 5,073 9%
Fleet gross profit-same store (1) ............................. 671 228 443 194%
Fleet gross profit-acquisitions ............................... -- --
--------- ---------
Total fleet gross profit .................................... 671 228 443 194%
--------- ---------
New vehicle gross profit, as reported ....................... $ 61,541 $ 56,025 $ 5,516 10%
========= =========
New retail units-same store (1) ............................... 25,661 25,669 (8) --
========= =========
New retail units-actual ....................................... 28,538 25,669 2,869 11%
========= =========
Used vehicle data:
Retail gross profit-same store (1) ............................ $ 26,969 $ 27,393 $ (424) (2)%
Retail gross profit-acquisitions .............................. 2,460 --
--------- ---------
Total used retail gross profit .............................. 29,429 27,393 2,036 7%
Wholesale gross profit-same store (1) ......................... (824) (222) (602) (271)%
Wholesale gross profit-acquisitions ........................... (13) --
--------- ---------
Total wholesale gross profit ................................ (837) (222) (615) (277)%
--------- ---------
Used vehicle gross profit, as reported ...................... $ 28,592 $ 27,171 $ 1,421 5%
========= =========
Used retail units-same store (1) .............................. 14,806 15,448 (642) (4)%
========= =========
Used retail units-actual ...................................... 16,033 15,448 585 4%
========= =========
Parts, service and collision repair:
Gross profit-same store (1) ................................... $ 74,760 $ 71,922 $ 2,838 4%
Gross profit-acquisitions ..................................... 7,441 --
--------- ---------
Parts, service and collision repair gross profit, as reported $ 82,201 $ 71,922 $ 10,279 14%
========= =========
Finance and insurance, net:
Platform gross profit-same store (1) .......................... $ 34,189 $ 33,249 $ 940 3%
Platform gross profit-acquisitions ............................ 2,920 --
--------- ---------
Platform finance and insurance gross profit (2) ............ 37,109 33,249 3,860 12%
Gross profit-corporate ........................................ 1,906 --
--------- ---------
Finance and insurance gross profit, as reported ............. $ 39,015 $ 33,249 $ 5,766 17%
========= =========
Platform gross profit PVR-same store (1) ...................... $ 845 $ 809 $ 36 4%
Platform gross profit PVR-actual (2) .......................... $ 833 $ 809 $ 24 3%
Gross profit PVR-actual ....................................... $ 875 $ 809 $ 66 8%
Total gross profit:
Same store (1) ................................................ $ 189,419 $ 188,367 $ 1,052 1%
Corporate ..................................................... 1,906 --
Acquisitions .................................................. 20,024 --
--------- ---------
Total gross profit, as reported ............................. $ 211,349 $ 188,367 $ 22,982 12%
========= =========
(1) Same store amounts include the results of dealerships for the identical
months for each period presented in the comparison, commencing with the
first full month in which the dealership was owned by us.
(2) Refer to "Reconciliation of Non-GAAP Financial Information" for further
discussion regarding platform finance and insurance gross profit PVR.
25
Gross profit increased 12% to $211.3 million for the three months ended
June 30, 2004, from $188.4 million for the three months ended June 30, 2003.
Same store gross profit increased 1% to $189.4 million for the three months
ended June 30, 2004, from $188.4 million for the three months ended June 30,
2003.
Same store gross profit on new retail vehicle sales decreased 4% for
the three months ended June 30, 2004, compared to the three months ended June
30, 2003. The deterioration in gross profit on new retail vehicle same store
sales was primarily due to general market conditions, which forced us to reduce
our gross profit per vehicle retailed in order to maintain unit sales volumes.
In addition, a major hailstorm hit our St. Louis platform in late May of 2004,
which resulted in damage to approximately 70% of the platform's inventory. As a
result, we incurred costs associated with insurance deductibles during the
second quarter of 2004 and lost several selling days, including Memorial Day
weekend. We began selling the more minimally damaged vehicles in June, at nearly
normal gross profit margins. We may experience a substantial reduction in our
gross margins during the third quarter as we begin to sell the remaining 500
vehicles that have sustained more substantial damage. Although the reduction in
gross margin is dependent on several factors, including the amount of insurance
proceeds received from our insurance providers for diminished inventory value,
we anticipate that we could lose up to $1.5 million in new vehicle retail gross
profit before insurance proceeds. We anticipate that the combined losses
associated with the hailstorm will be partially offset by incremental collision
repair gross profit resulting from additional customer work related to
hail-damaged vehicles.
Same store gross profit on used vehicle retail sales decreased 2% to
$27.0 million for the three months ended June 30, 2004, from $27.4 million for
the three months ended June 30, 2003. Despite higher gross profit per vehicle on
a same store basis for the three months ended June 30, 2004, compared to the
three months ended June 30, 2003, same store gross profit decreased as the
highly competitive used vehicle market and manufacturer incentives on new
vehicles, which encouraged many customers who otherwise would have purchased
used vehicles to purchase new vehicles instead, continued to negatively impact
used vehicle unit sales volumes.
Same store fixed operations increased 4% to $74.8 million for the three
months ended June 30, 2004, from $71.9 million for the three months ended June
30, 2003, resulting primarily from increased "customer pay" and warranty work in
both parts and service.
Selling, General and Administrative Expenses-
Selling, general and administrative expenses increased $21.0 million to
$166.6 million for the three months ended June 30, 2004, from $145.6 million for
the three months ended June 30, 2003. Selling, general and administrative
expenses as a percentage of gross profit for the three months ended June 30,
2004, increased to 78.8%, from 77.3% for the three months ended June 30, 2003.
Contributing to the increase in selling, general and administrative
expenses was $1.1 million of incremental same store advertising costs during the
second quarter of 2004, resulting from the previously mentioned aggressive
advertising strategy on new vehicles. Also, selling, general and administrative
costs as a percentage of gross profit increased due to "start-up" costs
associated with opening new store locations and integration costs associated
with the development of our presence in the Southern California market. During
the second quarter of 2004, we moved a Lexus store in the Atlanta market to a
new location and incurred incremental advertising costs associated with its
grand opening. In July 2004, we opened a large Honda store in the North Dallas
market, incurring preoperational costs in the second quarter of 2004, while
preparing to open the dealership. In April 2004, we acquired three dealerships
in Southern California, which we believe will be a strong market for us in the
future; however, these dealerships operated at a net loss during the second
quarter of 2004. In addition, the increase in selling, general and
administrative expenses are partially attributable additional rent expense
resulting from sale-leaseback transactions completed during 2003 and 2004.
We expect selling, general and administrative expenses in the aggregate
and as a percentage of gross profit to increase in the future as we incur
Sarbanes-Oxley Rule 404 costs and incremental rent costs resulting from
operating leases associated with the sale-leaseback transaction with an
unaffiliated third party that we completed in July 2004. We estimate that the
annualized rent associated with these leases will be approximately $8.0 million.
Depreciation and Amortization-
Depreciation and amortization expense increased $0.4 million to $5.4
million for the three months ended June 30, 2004, from $5.0 million for the
three months ended June 30, 2003. This increase is primarily related to the
addition of property and equipment acquired during 2003 and 2004, offset by a
reduction in property and equipment sold in sale-leaseback transactions
completed during 2003 and 2004.
We expect depreciation and amortization expense to decrease in the
future as a result of the sale-leaseback transaction in July 2004 with an
unaffiliated third party, pursuant to which, among other things, we sold certain
depreciable building assets with a historical cost of approximately $72.8
million.
26
Other Income (Expense)-
Floor plan interest expense increased $0.6 million to $5.4 million for
the three months ended June 30, 2004, from $4.8 million for the three months
ended June 30, 2003. This increase was attributable to higher average new
vehicle inventory levels during the second quarter of 2004, compared to the
second quarter of 2003, resulting primarily from the additional inventory of
acquired franchises. The overall increase in floor plan interest expense was
offset by a reduction in the average interest rates on our floor plan facilities
during the second quarter of 2004, compared to the second quarter of 2003.
Other interest expense increased $0.2 million to $10.2 million for the
three months ended June 30, 2004, from $10.0 million for the three months ended
June 30, 2003. The increase was principally attributable to the higher average
debt balances outstanding in the second quarter of 2004 as compared to 2003. The
overall increase in other interest expense was offset by a reduction in the
average interest rates on our variable rate borrowings during the second quarter
of 2004, compared to the second quarter of 2003. Other interest expense is
dependent upon increases or decreases in the interest rates on our variable debt
and the use of our committed credit facility to finance future acquisitions.
However, we expect that other interest expense will decrease in the future as a
result of the repayment of $63.7 million of our mortgage indebtedness with the
proceeds from the sale-leaseback transaction with an unaffiliated third party in
July 2004.
Income Tax Provision-
Income tax expense decreased $0.6 million to $8.8 million for the three
months ended June 30, 2004, from $9.4 million for the three months ended June
30, 2003, as the reduction of our effective tax rate more than offset the tax
impact of the $0.4 million increase in income from continuing operations before
taxes. Our effective tax rate was 36.8% for the three months ended June 30,
2004, compared to 39.8% for the three months ended June 30, 2003. During the
second quarter of 2004, we received a state tax benefit of $0.2 million, which
reduced our second quarter tax provision. We reduced our effective tax rate in
the second half of 2003, which resulted in an effective tax rate of 38.0% for
the year ended December 31, 2003, after adjusting for a goodwill impairment
charge at our Oregon platform and the related tax benefit. As we operate
nationally, our effective tax rate is dependent upon our geographic revenue mix,
and we evaluate our effective tax rate periodically based on our revenue
sources. We expect that our annual effective tax rate will be between 37.0% and
37.5% for the year ending December 31, 2004.
Discontinued Operations-
During the three months ended June 30, 2004, we sold one dealership
location (one franchise), and as of June 30, 2004, were actively pursuing the
sale of five dealership locations (six franchises) and real estate associated
with two former dealership locations. The $0.4 million loss from discontinued
operations is attributable to the loss on sale of the dealership sold during the
quarter and the operating losses of the franchises mentioned above. The loss
from discontinued operations for the three months ended June 30, 2003, of $2.0
million included the results of operations of the dealerships mentioned above
and three dealership locations (five franchises), ten used-only dealership
locations and two ancillary businesses that were sold or closed during 2003, and
the net loss on the sale of businesses during the three months ended June 30,
2003.
Six Months Ended June 30, 2004, Compared to Six Months Ended June 30, 2003
Net income increased $5.7 million, or $0.18 per basic share, to $25.1
million, or $0.77 per basic share, for the six months ended June 30, 2004, from
$19.4 million, or $0.59 per basic share, for the six months ended June30, 2003.
Income from continuing operations increased $3.5 million, or $0.11 per
basic share, to $25.9 million, or $0.79 per basic share, for the six months
ended June 30, 2004, from $22.4 million, or $0.68 per basic share, for the six
months ended June 30, 2003.
The increases in net income and income from continuing operations for
the six months ended June 30, 2004, compared to the six months ended June 30,
2003, resulted from several factors, including: (i) the operations of franchises
we acquired subsequent to December 31, 2002, (ii) the sale of non-profitable
dealerships (iii) continued strong performance of our fixed operations and F&I
which were offset by (i) gross margin pressure on new vehicle revenues and
decreased used vehicle unit volumes in a challenging retail vehicle market, (ii)
increases in selling and general administrative costs in the second quarter
including incremental advertising in an effort to increase new vehicle sales
volume and (iii) the costs associated with opening new locations and entering
new markets in the second quarter.
27
Revenues
For the Six Months
(Dollars in thousands) Ended June 30,
----------------------- Increase %
2004 2003 (Decrease) Change
---------- ---------- ----------- ----------
New Vehicle Data:
Retail revenues - same store (1) ........................ $1,406,109 $1,349,562 $ 56,547 4%
Retail revenues - acquisitions .......................... 147,074 --
---------- ----------
Total new retail revenues .............................. 1,553,183 1,349,562 203,621 15%
Fleet revenues - same store (1) ......................... 32,748 29,610 3,138 11%
Fleet revenues -acquisitions ............................ 235 --
---------- ----------
Total fleet revenues ................................... 32,983 29,610 3,373 11%
---------- ----------
New vehicle revenue, as reported ....................... $1,586,166 $1,379,172 $ 206,994 15%
========== ==========
New retail units - same store (1) ...................... 47,411 47,385 26 --
========== ==========
New retail units - actual .............................. 52,361 47,385 4,976 11%
========== ==========
Used Vehicle Data:
Retail revenues - same store (1) ........................ $ 442,152 $ 461,376 $ (19,224) (4)%
Retail revenues - acquisitions .......................... 45,771 --
---------- ----------
Total used retail revenues ............................. 487,923 461,376 26,547 6%
Wholesale revenues - same store (1) ..................... 148,808 132,427 16,381 12%
Wholesale revenues - acquisitions ....................... 15,739 --
---------- ----------
Total wholesale revenues ............................... 164,547 132,427 32,120 24%
---------- ----------
Used vehicle revenue, as reported ...................... $ 652,470 $ 593,803 $ 58,667 10%
========== ==========
Used retail units - same store (1) ...................... 29,339 30,183 (844) (3)%
========== ==========
Used retail units - actual .............................. 31,808 30,183 1,625 5%
========== ==========
Parts, Service and Collision Repair:
Revenues - same store (1) ............................... $ 273,873 $ 263,640 $ 10,233 4%
Revenues - acquisitions ................................. 28,450 --
---------- ----------
Parts, service and collision repair revenue, as reported $ 302,323 $ 263,640 $ 38,683 15%
========== ==========
Finance and Insurance:
Revenues - same store (1) ............................... $ 63,604 $ 61,714 $ 1,890 3%
Revenues - acquisitions ................................. 5,078 --
---------- ----------
Platform finance and insurance revenue ................ 68,682 61,714 6,968 11%
Corporate revenues ...................................... 3,149 --
---------- ----------
Finance and insurance revenue, as reported ... $ 71,831 $ 61,714 $ 10,117 16%
========== ==========
Total Revenue:
Same store (1) .......................................... $2,367,294 $2,298,329 $ 68,965 3%
Corporate ............................................... 3,149 --
Acquisitions ............................................ 242,347 --
---------- ----------
Total revenue, as reported ............................. $2,612,790 $2,298,329 $ 314,461 14%
========== ==========
(1) Same store amounts include the results of dealerships for the identical
months for each period presented in the comparison, commencing with the
first full month in which the dealership was owned by us.
Total revenues increased 14% to $2.6 billion for the six months ended
June 30, 2004, from $2.3 billion for the six months ended June 30, 2003. Same
store revenue grew 3% to $2.4 billion for the six months ended June 30, 2004,
from $2.3 billion for the six months ended June 30, 2003. Same store new vehicle
retail revenue grew $56.5 million, or 4%, during the first six months of 2004,
28
compared to the first six months of 2003, reflecting a shift in our sales mix
toward luxury and mid-line import sales. Same store used vehicle retail revenue
decreased $19.2 million, or 4%, to $442.2 million on 844 less units in the first
half of 2004, compared to the first half of 2003. The majority of our volume
loss was in the second quarter of 2004, as we were forced to focus on new
vehicle retail sales volumes during a period of declining demand and devoted
less effort on our used retail vehicle business.
Fixed operations revenue increased 15%, 4% on a same store basis, for
the six months ended June 30, 2004, compared to the three months ended June 30,
2003, as "customer pay" and warranty parts and service businesses, collectively
up approximately 8% on a same store basis, were offset by reduction in our
collision repair center business, which was off 8%, virtually all in the second
quarter. The growth in parts and service revenue resulted from our continued
focus on "customer pay" business, as previously mentioned. Our warranty business
continued its positive performance, driven by continued manufacturer recall
programs and increased work on import brands, which typically generate higher
revenues than domestic brands. The decrease in our collision repair center
business is primarily attributable to the Texas region, where a major hailstorm
in the second quarter of 2003 resulted in incremental collision repair revenue.
Platform F&I increased $1.9 million to $63.6 million on a same store
basis for the six months ended June 30, 2004, compared to the six months ended
June 30, 2003, as we continued to benefit from increased product offerings, the
utilization of menus in the F&I sales process, the maturation of our
corporate-sponsored programs and the sharing of best practices among our
platforms. Also contributing to our same store Platform F&I results is the
improvement of the F&I operations at franchises we acquired in prior periods.
F&I revenues have historically continued to improve for several years after we
acquire a dealership. F&I revenue on an as-reported basis, increased 16% to
$71.8 million for the six months ended June 30, 2004, compared to $61.7 million
for the six months ended June 30, 2003.
Gross Profit
For the Six Months
(Dollars in thousands, except for unit and per vehicle data) Ended June 30,
----------------------- Increase %
2004 2003 (Decrease) Change
---------- ---------- ----------- ----------
New Vehicle Data:
Retail gross profit-same store (1) ............................ $ 101,517 $ 102,364 $ (847) (1)%
Retail gross profit-acquisitions .............................. 12,536 --
---------- ----------
Total new retail gross profit ............................... 114,053 102,364 11,689 11%
Fleet gross profit-same store (1) ............................. 1,044 580 464 80%
Fleet gross profit-acquisitions ............................... 1 --
---------- ----------
Total fleet gross profit .................................... 1,045 580 465 80%
---------- ----------
New vehicle gross profit, as reported ....................... $ 115,098 $ 102,944 $ 12,154 12%
========== ==========
New retail units-same store (1) ............................... 47,411 47,385 26 --
========== ==========
New retail units-actual ....................................... 52,361 47,385 4,976 11%
========== ==========
Used vehicle data:
Retail gross profit-same store (1) ............................ $ 53,122 $ 54,658 $ (1,536) (3)%
Retail gross profit-acquisitions .............................. 4,941 --
---------- ----------
Total used retail gross profit .............................. 58,063 54,658 3,405 6%
Wholesale gross profit-same store (1) ......................... (1,266) 60 (1,326) (2,210)%
Wholesale gross profit-acquisitions ........................... (79) --
---------- ----------
Total wholesale gross profit ................................ (1,345) 60 (1,405) (2,342)%
---------- ----------
Used vehicle gross profit, as reported ...................... $ 56,718 $ 54,718 $ 2,000 4%
========== ==========
Used retail units-same store (1) .............................. 29,339 30,183 (844) (3)%
========== ==========
Used retail units-actual ...................................... 31,808 30,183 1,625 5%
========== ==========
Parts, service and collision repair:
Gross profit-same store (1) ................................... $ 144,132 $ 138,995 $ 5,137 4%
Gross profit-acquisitions ..................................... 14,213 --
---------- ----------
Parts, service and collision repair gross profit, as reported $ 158,345 $ 138,995 $ 19,350 14%
========== ==========
29
For the Six Months
(Dollars in thousands, except for unit and per vehicle data) Ended June 30,
----------------------- Increase %
2004 2003 (Decrease) Change
---------- ---------- ----------- ----------
Finance and insurance, net:
Platform gross profit-same store (1) .......................... $ 63,604 $ 61,714 $ 1,890 3%
Platform gross profit-acquisitions ............................ 5,078 --
---------- ----------
Platform finance and insurance gross profit (2) ............ 68,682 61,714 6,968 11%
Gross profit-corporate ........................................ 3,149 --
---------- ----------
Finance and insurance gross profit, as reported ............. $ 71,831 $ 61,714 $ 10,117 16%
========== ==========
Platform gross profit PVR-same store (1) ...................... $ 829 $ 796 $ 33 4%
Platform gross profit PVR-actual (2) .......................... $ 816 $ 796 $ 20 3%
Gross profit PVR-actual ....................................... $ 853 $ 796 $ 57 7%
Total gross profit:
Same store (1) ................................................ $ 362,153 $ 358,371 $ 3,782 1%
Corporate ..................................................... 3,149 --
Acquisitions .................................................. 36,690 --
---------- ----------
Total gross profit, as reported ............................. $ 401,992 $ 358,371 $ 43,621 12%
========== ==========
(1) Same store amounts include the results of dealerships for the
identical months for each period presented in the comparison,
commencing with the first full month in which the dealership was owned
by us.
(2) Refer to "Reconciliation of Non-GAAP Financial Information" for
further discussion regarding platform finance and insurance gross
profit PVR.
Gross profit increased 12% to $402.0 million for the six months ended
June 30, 2004, from $358.4 million for the six months ended June 30, 2003. Same
store gross profit increased 1% to $362.2 million for the six months ended June
30, 2004, from $358.4 million for the six months ended June 30, 2003.
Same store gross profit on new retail vehicle sales decreased 1% for
the six months ended June 30, 2004, compared to the six months ended June 30,
2003. The general market conditions, particularly in the second quarter, forced
us to reduce our gross profit per vehicle retailed in order to maintain unit
sales volumes.
Same store gross profit on used vehicle retail sales decreased 3% to
$53.1 million for the six months ended June 30, 2004 from $54.7 million for the
six months ended June 30, 2003, as the used vehicle market continued to be
affected by the use of new vehicle incentives by manufacturers and the general
expansion of the economy, encouraging many customers who otherwise would have
purchased used vehicles to purchase new vehicles instead.
Same store fixed operations increased 4% to $144.1 million for the six
months ended June 30, 2004, from $139.0 million for the six months ended June
30, 2003, resulting primarily from increased "customer pay" and warranty work in
both parts and service.
Selling, General and Administrative Expenses-
For the six months ended June 30, 2003, selling, general and
administrative expense increased $37.5 million to $319.9 million, from $282.4
million for the six months ended June 30, 2003. Selling, general and
administrative expenses as a percentage of gross profit for the six months ended
June 30, 2004 increased to 79.6%, from 78.8% for the six months ended June 30,
2003.
Contributing to the increase in selling, general and administrative
expenses was an incremental $2.0 million in same store advertising in an effort
to maintain new vehicle retail sales volume, "start-up" costs associated with
opening new store locations, integration costs associated with the development
of our presence in the Southern California market and additional rent expense
resulting from sale-leaseback transactions completed during 2003 and 2004.
Depreciation and Amortization-
Depreciation and amortization expense increased $0.8 million to $10.5
million for the six months ended June 30, 2004, from $9.7 million for the six
months ended June 30, 2003. This increase is primarily related to the addition
of property and equipment acquired during 2003 and 2004, offset by a reduction
in property and equipment sold in sale-leaseback transactions completed during
2003 and 2004.
30
Other Income (Expense)-
Floor plan interest expense increased $1.2 million to $10.2 million for
the six months ended June 30, 2004, from $9.0 million for the six months ended
June 30, 2003. This increase was attributable to higher average new vehicle
inventory levels during the first half of 2004, compared to the first half of
2003, resulting primarily from the additional inventory of acquired franchises.
The overall increase in floor plan interest expense was offset by a reduction in
the average interest rates on our floor plan facilities during the first half of
2004, compared to the first half of 2003.
Other interest expense increased $0.6 million to $20.5 million for the
six months ended June 30, 2004, as compared to the six months ended June 30,
2003. The increase was principally attributable to the higher average debt
balance outstanding during the first six months of 2004, as compared to the
first six months 2003. The overall increase in other interest expense was offset
by a reduction in the average interest rates on our variable rate borrowings
during the first half of 2004, compared to the first half of 2003.
Income Tax Provision-
Income tax expense increased $0.5 million to $15.3 million for the six
months ended June 30, 2004, compared to the six months ended June 30, 2003, as
the impact of the $3.9 million increase in income from continuing operations
before taxes for the six months ended June 30, 2004, offset the reduction of our
effective tax rate. Our effective tax rate for the six months ended June 30,
2004, was 37.1% compared to 39.8% for the six months ended June 30, 2003.
Discontinued Operations-
During the six month period ended June 30, 2004, we sold one dealership
locations (two franchises), and as of June 30, 2004, were actively pursuing the
sale of five dealership locations (six franchises) and real estate associated
with two former dealership locations. The $0.8 million loss from discontinued
operations is attributable to the loss on sale of the dealerships sold during
the six month period ended June 30, 2004 and the operating losses of the
franchises mentioned above. The loss from discontinued operations for the six
months ended June 30, 2003, of $3.1 million included the results of operations
of the dealerships mentioned above and four dealership locations (six
franchises), ten used-only dealership locations and two ancillary businesses
that were sold or closed during 2003, and the net loss on the sale of businesses
during the six months ended June 30, 2003.
LIQUIDITY AND CAPITAL RESOURCES
We require cash to fund working capital needs, finance acquisitions of
new dealerships and fund capital expenditures. We believe that our cash and cash
equivalents on hand as of June 30, 2004, our funds generated through future
operations and the funds available for borrowings under our committed credit
facility, floor plan financing agreements, mortgage notes and proceeds from
sale-leaseback transactions will be sufficient to fund our debt service and
working capital requirements, commitments and contingencies, acquisitions and
any seasonal operating requirements for the foreseeable future.
As of June 30, 2004, we had cash and cash equivalents of $14.9 million
and working capital of $254.1 million. In addition, we had $100.0 million
available for borrowings under our committed credit facility for acquisition
financing, of which we are permitted to borrow $75.0 million for general
corporate purposes. During the third quarter of 2004, we received proceeds of
$116.0 million from the sale of land and buildings in a sale-leaseback
transaction, of which we used $63.7 million to repay the related mortgage
indebtedness.
Floor Plan Financing-
We finance substantially our entire new vehicle inventory and a portion
of our used vehicle inventory under floor plan financing agreements. The floor
plan financing agreements also provide used vehicle financing up to a fixed
percentage of the value of each financed used vehicle. As of June 30, 2004, the
floor plan financing agreements with the Ford Motor Credit Company,
DaimlerChrysler Financial Services North America, L.L.C and General Motors
Acceptance Corporation totaled $695.0 million. In addition, we had total
availability of $32.2 million as of June 30, 2004, under ancillary floor plan
financing agreements with Comerica Bank and Navistar Financial for the heavy
trucks business operated by our Atlanta platform. As of June 30, 2004, we had
$673.2 million outstanding under all our floor plan financing agreements.
Acquisitions and Acquisition Financing-
During the three months ended June 30, 2004, we acquired three
dealership locations (three franchises) in Southern California for a total
purchase price of $35.6 million, of which $33.4 million was paid in cash through
the use of available funds, with the remaining $2.2 million representing the
fair value of future payments associated with one of our acquisitions.
31
During the six months ended June 30, 2004, we acquired six automotive
dealership locations (six franchises) for an aggregate purchase price of $73.8
million, of which $71.6 million was paid in cash through the use of available
funds, with the remaining $2.2 million representing the fair value of future
payments associated with one of our acquisitions.
We plan to use our available cash, borrowings under our committed
credit facility or proceeds from future sale-leaseback transactions to finance
future acquisitions. Subsequent to June 30, 2004, we permanently reduced the
amount available for acquisition financing under our committed credit facility
to $100.0 million.
Pending Acquisitions and Divestitures-
As of June 30, 2004, we had executed contracts to acquire two
dealership locations (two franchises) representing combined annual revenues of
approximately $87.0 million for approximately $25.0 million.
As of June 30, 2004, we were actively pursuing the divestiture of five
dealership locations (six franchises) and real estate associated with two former
dealership locations. During the third quarter of 2004, we sold three dealership
locations (four franchises) for net proceeds of $2.6 million resulting in a net
gain of approximately $0.4 million. This gain is net of estimated cost to
complete these transactions, which may be adjusted in the third quarter as
additional information becomes available.
Sales-Leaseback Transactions
During the third quarter of 2004, we executed a sale-leaseback
transaction, pursuant to which, among other things, which we sold certain land
and buildings with a net book value of $100.6 million to a third party for
$116.0 million and entered into long-term operating leases for these facilities.
The difference between the net book value of the assets sold and the proceeds
from the sale will be deferred and amortized as a component of selling, general
and administrative expense over the lease terms. We used $63.7 million of the
proceeds from this transaction to repay the related mortgage indebtedness.
Debt Covenants-
We are subject to certain financial covenants in connection with our
debt and lease agreements, including the financial covenants described below.
Our committed credit facility includes certain financial ratios with the
following requirements: (i) a current ratio of at least 1.2 to 1, of which our
ratio was approximately 1.3 to 1 as of June 30, 2004; (ii) a fixed charge
coverage ratio of at least 1.2 to 1, of which our ratio was approximately 1.3 to
1 as of June 30, 2004 and (iii) a leverage ratio of not more than 4.4 to 1, of
which our ratio was approximately 0.4 to 1 as of June 30, 2004. A breach of
these covenants could cause an acceleration of repayment and termination of the
facility by the Lenders. Certain of our lease agreements include financial
ratios with the following requirements: (i) a liquidity ratio of at least 1.2 to
1, of which our ratio was approximately 1.3 to 1 as of June 30, 2004 and (ii) an
EBITDA based coverage ratio of at least 1.5 to 1, of which our ratio was
approximately 2.8 to 1 as of June 30, 2004. A breach of these covenants would
give rise to certain lessor remedies under our various lease agreements, the
most severe of which include the following: (a) termination of the applicable
lease, (b) termination of certain of the tenant's lease rights, such as renewal
rights and rights of first offer or negotiation relating to the purchase of the
premises, and/or (c) a liquidated damages claim equal to the extent to which the
accelerated rents under the applicable lease for the remainder of the lease term
exceed the fair market rent over the same periods. As of June 30, 2004, we were
in compliance with all our debt and lease agreement covenants.
Cash Flows for the Six Months Ended June 30, 2004 Compared to the Six Months
Ended June 30, 2003
Operating Activities-
Net cash provided by operating activities totaled $14.1 million and
$32.9 million for the six months ended June 30, 2004, and 2003, respectively.
Cash flow from operating activities includes net income adjusted for non-cash
items and changes in working capital, including changes in floor plan notes
payable related to vehicle inventory.
The decrease in cash provided by operating activities for the six
months ended June 30, 2004, compared to the six months ended June 30, 2003, was
primarily attributable to differences in the timing of inventory purchases and
obtaining the related floor plan financing. These timing differences resulted in
net cash outflow of $11.3 million during the six months ended June 30, 2004 and
net cash inflow of $20.1 million for the six months ended June 30, 2003.
Investing Activities-
Net cash used in investing activities totaled $103.9 million and $66.3
million for the six months ended June 30, 2004 and 2003, respectively. Cash used
in investing activities relate primarily to capital expenditures and
acquisitions.
32
Capital expenditures totaled $34.5 million and $26.5 million for the
six months ended June 30, 2004 and 2003, respectively. Capital expenditures are
related to required improvements of our existing dealerships, upgrades of
existing facilities and construction of new facilities. Future capital
expenditures will be primarily related to operational improvements to maintain
our current operations or to provide us with acceptable rates of return on
investments and manufacturer-required spending to upgrade existing dealership
facilities. We expect that capital expenditures will total between $65.0 million
and $75.0 million during 2004.
Cash used to acquire dealerships totaled $71.6 million for the six
months ended June 30, 2004, compared to $39.5 million for the six months ended
June 30, 2003. During the six months ended June 30, 2004, we paid for the
acquisition of six dealership locations (six franchises) in cash using available
funds. During the six months ended June 30, 2003, we funded the acquisition of
two dealerships (three franchises) and one ancillary business, of which $0.3
million was paid in cash and $39.2 million was funded through borrowings under
our committed credit facility.
Financing Activities-
Cash used in financing activities totaled $2.1 million for the six
months ended June 30, 2004, and cash provided by financing activities totaled
$35.3 million for the six months ended June 30, 2003. Cash flow from financing
activities consisted primarily of proceeds from borrowings and repayments under
our committed credit facility and mortgages associated with our real estate,
proceeds from sale-leaseback activity and, during 2003, purchases of treasury
stock and distributions to our former members.
During the six months ended June 30, 2004, our borrowings of $5.9
million and repayments of debt of $18.3 million related primarily to mortgages
associated with our real estate. During the six months ended June 30, 2003, our
borrowings of $63.2 million related primarily to borrowings under our committed
credit facility for acquisitions and mortgages associated with our real estate,
and our repayments of debt of $18.5 million related primarily to mortgages.
During the six months ended June 30, 2004, we received $9.5 million of
proceeds from lessors in connection with sale-leaseback activity. During the six
months ended June 30, 2003, we received proceeds of $3.3 million from the sale
of assets under sales-leaseback transactions and advances from lessors in
connection with future sale-leaseback transactions. The advances from lessors
under our sale-leaseback transactions related primarily to facility construction
and improvement projects at our dealership locations.
During the 2003 period, we paid $9.7 million to repurchase shares of
our common stock. We have no immediate plans to repurchase additional shares of
our common stock.
We distributed $3.0 million to our former members (current
shareholders) during the 2003 period to cover their income tax liabilities. This
distribution represented our final limited liability company distribution to our
former members.
Off-Balance Sheet Transactions
We had no off-balance sheet transactions during the periods presented
other than those disclosed in Note 12 of our consolidated financial statements.
APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect amounts of assets and
liabilities and disclosures of contingent assets and liabilities as of the date
of the financial statements and reported amounts of revenues and expenses during
the periods presented. Actual amounts could differ from those estimates. On an
ongoing basis, management evaluates its estimates and assumptions and the
effects of revisions are reflected in the financial statements in the period in
which they are determined to be necessary. We have disclosed all significant
accounting policies in Note 2 to the consolidated financial statements included
in our Annual Report on Form 10-K for the year ended December 31, 2003. We have
identified the following policies, which were discussed with the Audit Committee
of our Board of Directors, as critical to understanding our results of
operations.
Inventories-
Our inventories are stated at the lower of cost or market. We use the
specific identification method to value our vehicle inventories and the
"first-in, first-out" method ("FIFO") to account for our parts inventories. We
maintain a reserve for specific inventory units that have a cost basis in excess
of fair value. These reserves were $5.1 million and $4.6 million as of June 30,
2004 and December 31, 2003, respectively. In assessing lower of cost or market
for new vehicles, we primarily consider the aging of vehicles along with the
33
timing of annual and model changeovers. The assessment of lower of cost or
market for used vehicles considers recent data and trends such as loss history,
current aging of the inventory and current market conditions.
Notes Receivable-Finance Contracts-
As of June 30, 2004 and December 31, 2003, we had outstanding notes
receivable from finance contracts of $33.5 million and $33.1 million,
respectively (net of an allowance for credit losses of $6.1 million and $4.7
million, respectively). These notes have initial terms ranging from 12 to 60
months, and are collateralized by the related vehicles. The assessment of our
allowance for credit losses considers historical loss ratios and the performance
of the current portfolio with respect to past due accounts. We continually
analyze our current portfolio against our historical performance. In addition,
we consider the value of the underlying collateral in our assessment of the
reserve.
Chargeback Reserve-
We receive commissions from the sale of various insurance and vehicle
service contracts to customers and through the arrangement of vehicle financing
for customers. We may be charged back ("chargeback") for such commissions in the
event of early termination of the contracts by customers. The revenues from
financing fees and commissions are recorded at the time of the sale of the
vehicles and a reserve for future chargebacks is established at that time. The
reserve considers our historical chargeback experience, including timing, as
well as national industry trends. This data is evaluated on a product-by-product
basis. These reserves totaled $11.7 million and $11.8 million as of June 30,
2004 and December 31, 2003, respectively.
Goodwill and Other Intangible Assets-
Our intangible assets relate primarily to goodwill and manufacturer
franchise rights associated with acquisitions of dealerships, which we account
for under the purchase method of accounting as required by SFAS No. 141,
"Business Combinations." In accordance with SFAS No. 142, "Goodwill and Other
Intangible Assets," we do not amortize goodwill and other intangible assets,
which are deemed to have indefinite lives, but test the value of these assets
for impairment at least annually, or more frequently if any event occurs or
circumstances change that indicate possible impairment. We have determined that
manufacturer franchise rights have an indefinite life as there are no legal,
contractual, economic or other factors that limit their useful lives and they
are expected to generate cash flows indefinitely due to the historically long
lives of the manufacturers' brand names. Goodwill and franchise rights are
allocated to each reporting unit at the platform and franchise level,
respectively. The fair market value of our manufacturer franchise rights is
determined at the acquisition date through discounting the projected cash flows
attributable to each manufacturer franchise right. Goodwill represents the
excess cost of the businesses acquired over the fair market value of the
identifiable net assets.
Upon adoption of SFAS No. 142 on January 1, 2002, we determined that
each of our platforms qualified as a reporting unit as we operated in one
segment, and our platforms are one level below our corporate level, discrete
financial information existed for each platform and the management of each
platform directly reviewed the platform's performance. We are continuously
adapting our operating structure and searching for ways to standardize policies,
share best practices and centralize administrative functions. In the future, if
we determine that our platforms no longer meet the requirements of a reporting
unit, we will reevaluate the reporting units with respect to the changes in our
reporting structure.
We review the value of platform goodwill and manufacturer franchise
rights for impairment during the fourth quarter of each year. The first step of
the impairment test identifies potential impairments by comparing the estimated
fair value of each reporting unit with its corresponding net book value,
including goodwill. If the net book value of a reporting unit exceeds its fair
value, the second step of the impairment test determines the potential
impairment loss by comparing the estimated fair value of goodwill with its
carrying amount. If the estimated fair value of goodwill is less than the
carrying amount, the carrying value of goodwill is adjusted to reflect its
estimated fair value.
All other intangible assets are deemed to have definite lives and are
amortized on a straight-line basis over the life of the asset ranging from 3-15
years and are tested for impairment when circumstances indicate that the
carrying value of the asset might be impaired.
RECONCILIATION OF NON-GAAP FINANCIAL INFORMATION
Platform Finance and Insurance Gross Profit PVR-
We evaluate our finance and insurance gross profit performance on a PVR
basis by dividing our total finance and insurance gross profit by the number of
retail vehicles sold. During 2003, our corporate office renegotiated a contract
with one of our third party finance and insurance product providers, which
resulted in the recognition of revenue during the three and six months ended
June 30, 2004, that was attributable to retail vehicles sold during prior
periods. We believe that platform finance and insurance, which excludes the
additional revenue derived from this contract, provides a more accurate measure
34
of our finance and insurance operating performance. The following table
reconciles finance and insurance gross profit to platform finance and insurance
gross profit, and provides the necessary components to calculate platform
finance and insurance gross profit PVR:
For the Three For the Six
(In thousands, except for unit and Months Ended Months Ended
per vehicle data) June 30, 2004 June 30, 2004
------------- -------------
Finance and insurance gross profit, net (as reported) $ 39,015 $ 71,831
Less: Corporate finance and insurance gross profit . (1,906) (3,149)
-------- --------
Platform finance and insurance gross profit ......... $ 37,109 $ 68,682
======== ========
Platform finance and insurance gross profit PVR ..... $ 833 $ 816
======== ========
Retail units sold:
New retail units .................................. 28,538 52,361
Used retail units ................................. 16,033 31,808
-------- --------
Total ............................................ 44,571 84,169
======== ========
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 $252.0 million of
variable rate long-term debt (including the current portion) outstanding at June
30, 2004, a 1% change in interest rates would result in a change of
approximately $2.5 million to our annual other interest expense. Based on floor
plan amounts outstanding at June 30, 2004, a 1% change in the interest rates
would result in a change of approximately $6.7 million to annual floor plan
interest expense.
We receive interest credit assistance from certain automobile
manufacturers, which is accounted for as a reduction in the cost of Inventories
on the accompanying Consolidated Balance Sheet and recognized as a reduction to
cost of sales upon the sale of the related inventory. For the six months ended
June 30, 2004, we recognized $12.3 million as a reduction to cost of sales
associated with interest credit assistance. Although we can provide no assurance
as to the amount of future interest credit assistance, it is our expectation,
based on historical data, that an increase in prevailing interest rates would
result in increased interest credit assistance from certain automobile
manufacturers.
Interest Rate Hedges
We use interest rate swaps to manage our capital structure. In December
2003, we entered into two forward interest rate swaps with a combined notional
principal amount of $200.0 million, which will provide a hedge against changes
in the interest rates of our variable rate floor plan notes payable for a period
of eight years beginning in March 2006. During the second quarter of 2004, we
reduced the notional principal amount of these swap agreements to $170 million.
This transaction resulted in a gain of $0.4 million, which is included in Other
Liabilities on the accompanying Consolidated Balance Sheet and will be amortized
on a straight-line basis as an offset to interest expense over the swap period,
beginning in March 2006. The swap agreements were designated and qualify as
interest rate hedges of future changes in interest rates of our variable rate
floor plan indebtedness and we expect that these hedges, which may contain minor
ineffectiveness, will be highly effective during the swap period from March 2006
through February 2014. As of June 30, 2004, the swap agreement had a fair value
of $2.0 million, which is included in Other Assets and Accumulated Other
Comprehensive Loss on the accompanying Consolidated Balance Sheets.
During December 2003, we entered into an interest rate swap agreement
with a notional principal amount of $200.0 million as a hedge against changes in
the fair value of our 8% Senior Subordinated Notes due 2014. Under the terms of
swap agreement, we are required to make variable rate payments based on
six-month LIBOR and receive a fixed rate of 8.0%. This swap agreement was
designated and qualifies as a fair value hedge of our fixed rate senior
subordinated debt and does not contain any ineffectiveness. As of June 30, 2004,
the swaps had a fair value of $9.4 million, which is included in Other
Liabilities and Accumulated Other Comprehensive Loss on the accompanying
Consolidated Balance Sheets.
35
Item 4. Controls and Procedures
Based on their evaluation of our disclosure controls and procedures and
internal control over financial reporting, our principal executive officer and
principal financial officer have concluded that (i) our disclosure controls and
procedures as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934 (the Exchange Act) were effective as of June 30, 2004, and
(ii) no change in internal control over financial reporting occurred during the
quarter ended June 30, 2004, that has materially affected, or is reasonably
likely to materially affect, such internal control over financial reporting.
---
Forward-Looking Statements
This report contains "forward-looking statements" as that term is
defined in the Private Securities Litigation Reform Act of 1995. The
forward-looking statements include statements relating to goals, plans and
projections regarding the Company's financial position, results of operations,
market position, product development and business strategy. These statements are
based on management's current expectations and involve significant risks and
uncertainties that may cause results to differ materially from those set forth
in the statements. These risks and uncertainties include, among other things,
o market factors,
o the Company's relationships with vehicle manufacturers and other suppliers,
o risks associated with the Company's substantial indebtedness,
o risks related to pending and potential future acquisitions,
o general economic conditions both nationally and locally, and
o governmental regulations and legislation.
There can be no guarantees the Company's plans for future operations
will be successfully implemented or that they will prove to be commercially
successful. We undertake no obligation to publicly update any forward-looking
statement, whether as a result of new information, future events or otherwise.
36
Item 4. Submission of Matters to a Vote of Security Holders
The results of the votes cast at the Company's Annual Meeting on June 3, 2004
were as follows:
Election of Class I Directors:
For Withheld
Phillip F. Maritz 27,381,908 57,810
John M. Roth 27,382,008 57,710
Ian K. Snow 27,353,087 86,631
Jeffery I. Wooley 27,060,250 379,468
Ratification of appointment of Deloitte & Touche L.L.P. as independent public
accountants for 2004:
For 27,388,075
Against 1,400
Abstain 50,243
Approval of amendments to the 2002 stock option plan:
For 24,766,026
Against 1,184,422
Abstain 455,949
Broker No Vote 1,033,321
Approval of Key Executive Incentive Compensation Plan:
For 25,854,161
Against 95,587
Abstain 456,649
Broker No Vote 1,033,321
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
31.1 Certificate of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a)
of the Securities Exchange Act of 1934, as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.2 Certificate of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a)
of the Securities Exchange Act of 1934, as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.1 Certificate of Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certificate of Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
37
b. Reports on Form 8-K
Report filed April 13, 2004, under Item 5, relating to the issuance of a
press release announcing the Company's financial results for the quarter
ended March 31, 2004.
Report filed May 3, 2004, under Item 5, relating to the completion of an
investigation into the facts and circumstances surrounding the Company's
sub-lease of its new headquarters in New York.
Report filed June 4, 2004, under Item 9, relating to the issuance of a
press release announcing that Thomas G. McCollum has been named President
and C.E.O. of the Company's Texas platform.
Report filed July 19, 2004, under Item 5, relating to the issuance of a
press release announcing that the Company would not proceed with the
proposed secondary offering of the registrant's common stock previously
announced on January 22, 2004, and that the registrants has withdrawn the
registration statement related to such proposed secondary offering,
originally filed with the Securities and Exchange Commission on January 22,
2004.
Report filed on July 26, 2004, under Item 5, relating to the issuance of a
press release announcing that Charles Robinson has been named Vice
President of Finance and Insurance.
Report filed on July 29, 2004, under Item 5, relating to the issuance of a
press release announcing the Company's financial results for the quarter
ended June 30, 2004.
38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Asbury Automotive Group, Inc.
(Registrant)
Date: August 6, 2004 By: /s/ KENNETH B. GILMAN
-------------------------------------------
Name: Kenneth B. Gilman
Title: Chief Executive Officer and President
Date: August 6, 2004 By: /s/ J. GORDON SMITH
-------------------------------------------
Name: J. Gordon Smith
Title: Senior Vice President and Chief Financial
Officer (Principal Financial Officer)
39
INDEX TO EXHIBITS
Exhibit
Number Description of Documents
- ------ ------------------------
31.1 Certificate of Chief Executive Officer pursuant to Rule 13a-14(a)/
15d-14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certificate of Chief Financial Officer pursuant to Rule 13a-14(a)/
15d-14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certificate of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
32.2 Certificate of Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002