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 March 31, 2006

OR

o        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 incorporation or organization)	(I.R.S. Employer Identification No.)
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 ý   No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act:

Large Accelerated Filer  o                          Accelerated Filer  ý                          Non-Accelerated Filer  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  o    No  ý

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: The number of shares of common stock outstanding as of May 5, 2006, was 33,053,611 (net of 1,586,587 treasury shares).

ASBURY AUTOMOTIVE GROUP, INC.
INDEX

PART I — Financial Information		Page
Item 1.	Condensed Consolidated Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets as of March 31, 2006 and December 31, 2005	3
	Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2006 and 2005	4
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2006 and 2005	5
	Notes to Condensed Consolidated Financial Statements	6
	Report of Independent Registered Public Accounting Firm	22
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37
Item 4.	Controls and Procedures	38
PART II — Other Information
Item 6.	Exhibits	39
	Signatures	40
	Index to Exhibits	41

 

2

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

ASBURY AUTOMOTIVE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)

 

		March 31, 2006			December 31, 2005
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	59,874		$	57,194
Contracts-in-transit		98,958			122,250
Restricted investments		—			913
Accounts receivable (net of allowance of $982 and $1,216, respectively)		151,670			167,203
Inventories		776,679			709,791
Deferred income taxes		19,825			19,825
Prepaid and other current assets		61,528			56,506
Assets held for sale		49,310			51,498
Total current assets		1,217,844			1,185,180
PROPERTY AND EQUIPMENT, net		194,621			193,457
GOODWILL		456,008			457,405
RESTRICTED INVESTMENTS, net of current portion		5,722			4,247
OTHER LONG-TERM ASSETS		89,561			90,511
Total assets		$	1,963,756		$	1,930,800
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Floor plan notes payable—manufacturer affiliated		$	298,581		$	204,044
Floor plan notes payable—non-manufacturer affiliated		348,211			410,338
Current maturities of long-term debt		24,687			24,522
Accounts payable		70,820			72,432
Accrued liabilities		84,975			100,043
Liabilities associated with assets held for sale		23,590			26,847
Total current liabilities		850,864			838,226
LONG-TERM DEBT		471,109			472,427
DEFERRED INCOME TAXES		45,074			44,287
OTHER LONG-TERM LIABILITIES		30,427			28,094
COMMITMENTS AND CONTINGENCIES (Note 14)
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, 34,637,684 and 34,435,252 shares issued, including shares held in treasury, respectively		349			344
Additional paid-in capital		421,701			417,055
Retained earnings		161,539			148,986
Treasury stock, at cost; 1,586,587 shares held		(15,032		)	(15,032		)
Accumulated other comprehensive loss		(2,275		)	(3,587		)
Total shareholders’ equity		566,282			547,766
Total liabilities and shareholders’ equity		$	1,963,756		$	1,930,800

 

See Notes to Condensed Consolidated Financial Statements.

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ASBURY AUTOMOTIVE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)

 

		For the Three Months Ended March 31,
		2006			2005
REVENUES:
New vehicle		$	823,164		$	772,444
Used vehicle		358,106			320,457
Parts, service and collision repair		170,051			151,843
Finance and insurance, net		35,648			35,511
Total revenues		1,386,969			1,280,255
COST OF SALES:
New vehicle		765,242			719,596
Used vehicle		325,179			291,755
Parts, service and collision repair		85,000			74,220
Total cost of sales		1,175,421			1,085,571
GROSS PROFIT		211,548			194,684
OPERATING EXPENSES:
Selling, general and administrative		165,714			158,426
Depreciation and amortization		4,975			4,693
Income from operations		40,859			31,565
OTHER INCOME (EXPENSE):
Floor plan interest expense		(9,204		)	(6,552		)
Other interest expense		(10,905		)	(9,601		)
Interest income		727			264
Other income, net		344			110
Total other expense, net		(19,038		)	(15,779		)
Income before income taxes		21,821			15,786
INCOME TAX EXPENSE		8,183			5,920
INCOME FROM CONTINUING OPERATIONS		13,638			9,866
DISCONTINUED OPERATIONS, net of tax		(1,085		)	(226		)
NET INCOME		$	12,553		$	9,640
EARNINGS PER COMMON SHARE:
Basic—
Continuing operations		$	0.41		$	0.30
Discontinued operations		(0.03		)	—
Net income		$	0.38		$	0.30
Diluted—
Continuing operations		$	0.41		$	0.30
Discontinued operations		(0.04		)	(0.01		)
Net income		$	0.37		$	0.29
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic		32,922			32,588
Diluted		33,584			32,781

 

See Notes to Condensed Consolidated Financial Statements.

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ASBURY AUTOMOTIVE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

 

		For the Three Months Ended March 31,
		2006			2005
CASH FLOW FROM OPERATING ACTIVITIES:
Net income		$	12,553		$	9,640
Adjustments to reconcile net income to net cash provided by (used in) operating activities-
Depreciation and amortization		4,975			4,693
Depreciation and amortization from discontinued operations		64			557
Stock-based compensation		1,369			—
Amortization of deferred financing fees		573			343
Change in allowance for doubtful accounts		(216		)	210
Gain on sale of discontinued operations, net		(53		)	(386		)
Other adjustments		1,361			1,315
Changes in operating assets and liabilities, net of acquisitions and divestitures-
Contracts-in-transit		23,292			3,522
Accounts receivable		9,839			(7,531		)
Proceeds from the sale of accounts receivable		4,649			4,157
Inventories		(63,645		)	(30,948		)
Prepaid and other current assets		(7,468		)	(6,190		)
Floor plan notes payable—manufacturer affiliated		98,695			(2,554		)
Accounts payable and accrued liabilities		(15,058		)	25,495
Excess tax benefits from share-based payment arrangements		(381		)	—
Other long-term assets and liabilities		3,137			(2,430		)
Net cash provided by (used in) operating activities		73,686			(107		)
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures—internally financed		(5,534		)	(9,198		)
Capital expenditures—externally financed		(6,410		)	(1,577		)
Construction reimbursements associated with sale-leaseback agreements		—			2,032
Proceeds from the sale of assets		9,275			3,272
Other investing activities		(529		)	(177		)
Net cash used in investing activities		(3,198		)	(5,648		)
CASH FLOW FROM FINANCING ACTIVITIES:
Floor plan borrowings—non-manufacturer affiliated		677,249			693,071
Floor plan repayments—non-manufacturer affiliated		(747,686		)	(654,598		)
Proceeds from borrowings		902			2,107
Repayments of debt		(1,554		)	(20,194		)
Debt issuance costs		—			(3,774		)
Proceeds from the exercise of stock options		2,900			303
Excess tax benefits from share-based payment arrangements		381			—
Net cash (used in) provided by financing activities		(67,808		)	16,915
Net increase in cash and cash equivalents		2,680			11,160
CASH AND CASH EQUIVALENTS, beginning of period		57,194			28,093
CASH AND CASH EQUIVALENTS, end of period		$	59,874		$	39,253

 

See Note 13 for supplemental cash flow information.

See Notes to Condensed Consolidated Financial Statements.

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ASBURY AUTOMOTIVE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. DESCRIPTION OF BUSINESS

Asbury Automotive Group, Inc. is a national automotive retailer, operating 122 franchises (89 dealership locations) in 22 metropolitan markets within 11 states as of March 31, 2006. We offer an extensive range of automotive products and services, including new and used vehicles, vehicle maintenance, replacement parts, collision repair services, and financing, insurance and service contracts. We offer 33 domestic and foreign brands of new vehicles, including four heavy truck brands. We also operate 24 collision repair centers that serve our markets.

Our retail network is organized into principally four regions and includes eleven dealership groups, each marketed under different local brands: (i) Florida (comprising our Coggin dealerships, operating primarily in Jacksonville and Orlando, and our Courtesy dealerships operating in Tampa), (ii) West (comprising our McDavid dealerships operating throughout Texas, our Thomason dealerships operating in Portland, Oregon and our Spirit dealerships operating in Los Angeles, California), (iii) Mid-Atlantic (comprising our Crown dealerships operating in North Carolina, South Carolina and Southern Virginia) and (iv) South (comprising our Nalley dealerships operating in Atlanta, Georgia, and our North Point dealerships operating in Little Rock, Arkansas). Our Plaza dealerships operating in St. Louis, Missouri, our Gray Daniels dealerships operating in Jackson, Mississippi and our Northern California dealerships operating in Sacramento and Fresno, California remain standalone operations. We sold our remaining two dealerships in Portland, Oregon in April 2006, which reduced the number of metropolitan markets in which we operate to 21.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), and reflect the condensed consolidated accounts of Asbury Automotive Group, Inc. and our wholly owned subsidiaries.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Accordingly, actual results could differ from these estimates. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the condensed consolidated financial statements in the period they are determined to be necessary. All intercompany transactions have been eliminated in consolidation, and 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 unaudited interim condensed consolidated financial statements as of March 31, 2006, and for the three months ended March 31, 2006 and 2005 have been included. The results of operations for the three months ended March 31, 2006 are not necessarily indicative of the results that may be expected for the full year. Our interim unaudited condensed 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, 2005.

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” certain amounts reflected in the accompanying Condensed Consolidated Balance Sheets as of March 31, 2006 and December 31, 2005, have been classified as Assets Held for Sale and Liabilities Associated with Assets Held for Sale. In addition, the accompanying Condensed Consolidated Statements of Income for the three months ended March 31, 2005, have been reclassified to reflect the status of our discontinued operations as of March 31, 2006.

Revenue Recognition

Revenue from the sale of new and used vehicles is recognized upon delivery, passage of title, signing of the sales contract and approval of financing. Revenue from the sale of parts, service and collision repair is recognized upon delivery of parts to the customer or at the time vehicle service or repair work is completed. Manufacturer incentives and rebates, including manufacturer holdbacks and floor plan interest assistance, are recognized as a reduction of new vehicle cost of sales when earned, generally at the time the related vehicles are sold.

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We receive commissions for arranging customer financing and for the sale of vehicle service contracts, credit life insurance and disability insurance to customers (collectively “F&I”). We may be charged back (“chargebacks”) for F&I commissions in the event a contract is terminated. F&I 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. F&I commissions, net of estimated chargebacks, are included in Finance and insurance, net in the accompanying Condensed Consolidated Statements of Income.

Goodwill and Other Intangible Assets

Goodwill represents the excess cost of the businesses acquired over the fair market value of the identifiable net assets. We have determined that based on how we operate our business, allocate resources, and regularly review our financial data and operating results that we qualify as a single reporting unit for purposes of testing goodwill for impairment. We evaluate our operations and financial results in the aggregate by dealership. The dealership general managers implement the strategy as determined by the corporate office and regional management team, and have the independence and flexibility to respond effectively to local market conditions.

The fair market value of our manufacturer franchise rights is determined at the acquisition date through discounting the projected cash flows specific to each franchise. 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. Due to the fact that manufacturer franchise rights are specific to the location in which we acquire a dealership, we have determined that the dealership is the reporting unit for purposes of testing for impairment.

Stock-Based Compensation

Effective January 1, 2006, we adopted SFAS No. 123R “Share-Based Payment” under the modified prospective transition method and therefore we record stock compensation expense under the fair value method on a straight-line basis over the vesting period. Accordingly, prior periods have not been restated. Prior to January 1, 2006, including the three month period ended March 31, 2005, we recorded stock compensation expense in accordance with Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.” APB Opinion No. 25 required 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.

Derivative Instruments and Hedging Activities

We utilize derivative financial instruments to manage our capital structure. The types of risks hedged are those relating to the variability of cash flows and changes in the fair value of our financial instruments caused by movements in interest rates. We document our risk management strategy and assess hedge effectiveness at the inception and during the term of each hedge. Derivatives are reported at fair value on the accompanying Condensed Consolidated Balance Sheets.

The changes in fair value of the effective portion of “cash flow” hedges are reported as a component of accumulated other comprehensive income (loss). Amounts in accumulated other comprehensive income (loss) are reclassified to interest expense to the extent the hedge becomes ineffective. The change in fair value of “fair value” hedges are recorded as a component of interest expense. Changes in the fair value of the associated hedged exposures are also recorded as a component of interest expense.

Measurements of hedge effectiveness are based on comparisons between the gains or losses of the actual interest rate swaps and the gains or losses of hypothetical interest rate swaps which are designed to reflect the critical terms of the defined hedged exposures. Ineffective portions of these interest rate swaps are reported as a component of interest expense in the accompanying Condensed Consolidated Statements of Income. We recognized no ineffectiveness during the three months ended March 31, 2006 and minor ineffectiveness during the three months ended March 31, 2005.

Statements of Cash Flows —

Borrowings and repayments of floor plan notes payable to a party unaffiliated with the manufacturer of a particular new vehicle, and all floor plan notes payable relating to pre-owned vehicles, are classified as financing activities on the accompanying Condensed Consolidated Statements of Cash Flows with borrowings reflected separately from repayments. The net change in floor plan notes payable to a party affiliated with the manufacturer of a particular new vehicle is classified as an operating activity on the Condensed Consolidated Statements of Cash Flows.

The net change in service loaner vehicle financing is reflected as an operating activity in the accompanying Condensed Consolidated Statements of Cash Flows, as these borrowings and repayments are with lenders affiliated with the vehicle manufacturer from which we purchase the related vehicles.

Construction reimbursements from third parties in connection with sale-leaseback agreements for the construction of new dealership facilities or leasehold improvements to our dealership facilities are included in investing activities in the accompanying Condensed Consolidated Statements of Cash Flows.

Externally financed capital expenditures include all expenditures that we have financed during the reporting period or intend to finance in future reporting periods through sale-leaseback transactions or mortgage financing. Internally financed

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capital expenditures include all capital expenditures which were paid using available cash and for which we do not intend to seek external financing.

Tax benefits related to stock-based awards that are fully vested prior to the adoption of SFAS No. 123R are included as cash inflows from financing activities and cash outflows from operating activities within the accompanying Condensed Consolidated Statements of Cash Flows.  Excess tax benefits related to stock-based awards that are partially vested upon or granted after the adoption of SFAS No. 123R are included as cash inflows from financing activities and cash outflows from operating activities within the accompanying Condensed Consolidated Statements of Cash Flows.

Recent Accounting Pronouncements

In October 2005, the Financial Accounting Standards Board (“FASB”) issued Staff Position (“FSP”) No. FAS 13-1, “Accounting for Rental Costs Incurred during a Construction Period,” which requires rental costs associated with ground or building operating leases that are incurred during a construction period to be recognized as rental expense. This Staff Position is effective for reporting periods beginning after December 15, 2005. Accordingly, we adopted the provisions of FSP No. FAS 13-1 on January 1, 2006 and currently expense all rent obligations incurred during the construction period.

In June 2005, the FASB ratified Emerging Issues Task Force (“EITF”) Issue No. 05-6, “Determining the Amortization Period for Leasehold Improvements.”  The consensus reached is that leasehold improvements acquired in a business combination or purchased subsequent to the inception of the lease should be amortized over the lesser of the useful life of the asset or the lease term that includes reasonably assured lease renewals as determined on the date of the acquisition of the leasehold improvement. We have adopted the provisions of EITF No. 05-6 and are amortizing leasehold improvements over the lesser of the useful life or the lease term, including reasonably assured renewal periods.

3.  STOCK-BASED COMPENSATION

We have established two stock-based compensation plans (the “Plans”) under which we may grant non-qualified stock options and restricted stock units to our directors, officers and employees at fair market value on the date of the grant. For both plans, the stock options and restricted stock units vest between two and three years from the date of grant and expire ten years from the date of grant. We have granted a total of 4,310,954 non-qualified stock options through December 31, 2005, and in January 2006, we granted 175,500 restricted stock units to certain of our key employees, directors and officers. As of March 31, 2006, there were 2,720,492 non-qualified stock options and 175,500 restricted stock units outstanding. In addition, there were approximately 2,201,000 stock-based awards available for grant under our stock-based compensation plans as of March 31, 2006. We expect to continue to issue restricted stock units instead of non-qualified stock options.

Effective January 1, 2006, we adopted SFAS No. 123R under the modified prospective transition method. As a result we have recorded stock compensation expense for the three months ended March 31, 2006, under the fair value method. Prior to January 1, 2006, including the three month period ended March 31, 2005, we recorded stock compensation expense under the intrinsic value method in accordance with APB Opinion No. 25. In the first quarter of 2006, the adoption of SFAS No. 123R resulted in incremental stock-based compensation expense of $0.9 million (excluding $0.5 million associated with our decision to issue restricted stock units).  The incremental stock-based compensation expense caused income before income taxes to decrease by $0.9 million, net income to decrease by $0.5 million and basic and diluted earnings per share to decrease by $0.02 per share.  Net cash provided by operating activities decreased and net cash used in financing activities decreased by $0.4 million related to excess tax benefits from stock-based payment arrangements.

The fair value of each option award is estimated on the date of grant using the Black Scholes option valuation model. Expected volatilities are based on the historical volatility of our common stock. We use historical data to estimate the rate of option exercise and employee turnover within the valuation model. The expected term of options granted represents the period of time that the related options are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

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We recorded $1.4 million ($0.02 per diluted share) in compensation expense and an associated tax benefit of $0.5 million for the three months ended March 31, 2006. We did not recognize any material stock-based compensation during the three months ended March 31, 2005. As of March 31, 2006, there was $6.2 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Plans. That cost is expected to be recognized over a weighted-average period of 0.9 years. The following table illustrates the effect on net income and net income per share had stock-based employee compensation been recorded using the fair value method of SFAS No. 123R for the three months ended March 31, 2005:

(In thousands, except per share data)		For the Three Months Ended March 31, 2005
Net income		$	9,640
Adjustments to net income:
Stock-based compensation expense included in net income, net of tax		1
Pro forma stock-based compensation expense, net of tax		(666		)
Pro forma net income		$	8,975
Net income per common share—basic (as reported)		$	0.30
Net income per common share—diluted (as reported)		$	0.29
Pro forma net income per common share—basic		$	0.28
Pro forma net income per common share—diluted		$	0.27

 

A summary of options outstanding and exercisable under the Plans as of March 31, 2006, and changes during the three months then ended is presented below:

		Stock Options		Weighted Average Exercise Price			Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value*
Options outstanding - December 31, 2005		2,941,262		$	15.35
Granted		—		—
Exercised		(202,432	)	14.33
Expired / Forfeited		(18,338	)	15.21
Options outstanding - March 31, 2006		2,720,492		15.43			5.1		$	11,670,911
Options exercisable - March 31, 2006		1,955,667		$	15.99		6.3		$	7,294,638

* Based on the closing price of our common stock on March 31, 2006

Cash received from option exercises for the three months ended March 31, 2006 was $2.9 million. The actual intrinsic value of options exercised during the three months ended March 31, 2006 was $1.0 million. The actual tax benefit realized for the tax deductions from option exercises totaled $0.4 million for the three months ended March 31, 2006.

A summary of restricted stock units as of March 31, 2006, and changes during the three months then ended is presented below:

		Shares		Weighted Average Grant Date Fair Value
Restricted Stock Units - December 31, 2005		—		$	—
Granted		175,500		16.86
Performance estimate		87,750		16.86
Vested		—		—
Forfeited		—		—
Restricted Stock Units - March 31, 2006*		263,250		$	16.86

*    Includes an estimate of 87,750 out of a maximum of 140,400 issuable upon attaining certain performance metrics

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Each restricted stock unit provides an opportunity for the employee to receive a number of shares of our common stock based on our performance during a three year period (the “Performance Cycle”) as measured against objective performance goals related to (1) new vehicle revenue growth as compared to peer companies, (2) used vehicle revenue growth as compared to peer companies, (3) finance and insurance revenue growth, (4) fixed operations gross profit and (5) earnings per share. Each equity award sets forth a target number of shares to be granted to the employee assuming the performance goals are met at the target level. The actual number of shares earned may range from 0% to180% of the target number of shares depending upon achievement of the performance goals during the Performance Cycle. We currently estimate that we will achieve 150% of our performance goals.

4. INVENTORIES

 

Inventories consist of the following:

		As of
(In thousands)		March 31, 2006			December 31, 2005
New vehicles		$	610,936		$	556,141
Used vehicles		124,535			111,000
Parts and accessories		41,208			42,650
Total inventories		$	776,679		$	709,791

 

The lower of cost or market reserves for inventory totaled $4.9 million and $4.3 million as of March 31, 2006 and December 31, 2005, respectively. In addition to the inventories shown above, we have $15.4 million and $18.9 million of inventory as of March 31, 2006 and December 31, 2005, respectively, classified as Assets Held for Sale on the accompanying Condensed Consolidated Balance Sheets as they are associated with franchises held for sale.

5. GOODWILL AND MANUFACTURER FRANCHISE RIGHTS

During the three months ended March 31, 2006, we sold three franchises (two dealership locations) resulting in the removal of approximately $1.4 million of Goodwill from our Condensed Consolidated Balance Sheets. There were no manufacturer franchise rights associated with these franchises at the time of sale. Manufacturer franchise rights totaled $41.8 million as of March 31, 2006 and December 31, 2005, and are included in Other Long-term Assets on the accompanying Condensed Consolidated Balance Sheets.

6. ASSETS AND LIABILITIES HELD FOR SALE

Assets and liabilities classified as held for sale include (i) assets and liabilities associated with discontinued operations held for sale at each balance sheet date, (ii) costs of completed construction projects included in pending sale-leaseback transactions where an unaffiliated third party has reimbursed us or will reimburse us for the cost of construction and (iii) costs of completed construction projects included in pending sale-leaseback transactions where an unaffiliated third party has agreed to purchase the assets from us upon completion of the transaction.

Assets and liabilities associated with discontinued operations include the two remaining franchises (two dealership locations) in Oregon, one franchise (one dealership location) in Southern California, and one ancillary business as of March 31, 2006. As of December 31, 2005, assets and liabilities associated with discontinued operations included two franchises (two dealership locations) in Oregon and two franchises (two dealership locations) in Southern California. During the three months ended March 31, 2006, we sold one franchise (one dealership location) that had been held for sale as of December 31, 2005. Assets associated with discontinued operations totaled $35.9 million and $39.6 million, and liabilities associated with discontinued operations totaled $13.5 million and $16.8 million as of March 31, 2006 and December 31, 2005, respectively.

Included in Assets Held for Sale as of March 31, 2006 and December 31, 2005 was $13.4 million and $11.9 million, respectively, of costs associated with two completed projects included in pending sale-leaseback transactions. As of March 31, 2006 and December 31, 2005, Liabilities Associated with Assets Held for Sale included $10.1 million of reimbursements from an unaffiliated third party associated with these completed construction projects. We expect to receive the final reimbursement from the unaffiliated third party and complete these sale-leaseback transactions in the second quarter of 2006.

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A summary of assets and liabilities held for sale is as follows:

		As of
(In thousands)		March 31, 2006			December 31, 2005
Assets:
Inventories		$	15,350		$	18,940
Property and equipment, net		32,672			32,558
Other assets		1,288			—
Total assets		49,310			51,498
Liabilities:
Floor plan notes payable		12,623			16,775
Other liabilities		10,967			10,072
Total liabilities		23,590			26,847
Net assets held for sale		$	25,720		$	24,651

 

Included in Prepaid and Other Current Assets on the accompanying Condensed Consolidated Balance Sheets are costs associated with construction projects, which we intend to sell through sale-leaseback transactions but have not been completed and therefore are not available for sale. In connection with these construction projects, we have entered into sale-leaseback agreements whereby an unaffiliated third party purchased the land and is either reimbursing us for the cost of construction of dealership facilities being constructed on the land or has agreed to purchase the assets from us upon completion of the project. We capitalize the cost of the construction during the construction period and record a corresponding liability equal to the amount of any reimbursed funds. Upon completion of the construction, we will execute the sale-leaseback transaction and remove the cost of construction and the related liability from our Condensed Consolidated Balance Sheets. The book value of assets associated with construction projects that have not been completed as of March 31, 2006 and December 31, 2005 totaled $6.9 million and $2.9 million, respectively. As of March 31, 2006 and December 31, 2005, there were no liabilities associated with these construction projects.

7. LONG-TERM DEBT

                Long-term debt consists of the following:

		As of
(In thousands)		March 31, 2006			December 31, 2005
9% Senior Subordinated Notes due 2012		$	250,000		$	250,000
8% Senior Subordinated Notes due 2014 ($200.0 million face value, net of hedging activity of $9,479 and $8,028, respectively)		190,521			191,972
Mortgage notes payable		27,467			26,764
Notes payable collateralized by loaner vehicles		22,612			21,676
Capital lease obligations		4,217			4,548
Other notes payable		979			1,989
		495,796			496,949
Less—current portion		(24,687		)	(24,522		)
Long-term debt		$	471,109		$	472,427

 

In March 2006, we amended our Committed Credit Facility to include DaimlerChrysler Financial Services (“DCFS”) as a lender and extended its maturity to March 2009. In addition, DCFS has agreed to provide a maximum of $120.0 million of floor plan financing outside of the Committed Credit Facility to finance inventory purchases at our Mercedes, Chrysler, Dodge and Jeep dealerships (“DaimlerChrysler Dealerships”). As a result of the execution of this amendment, floor plan borrowings from DCFS are now included in Floor Plan Notes Payable — Manufacturer Affiliated on our Condensed Consolidated Balance Sheets. The DCFS floor plan facility has no stated termination date. Borrowings will accrue interest based on LIBOR. Further, we reduced our working capital borrowing capacity of our Committed Credit Facility from $150.0 million to $125.0 million and reduced the floor plan borrowing capacity of our Committed Credit Facility from $650.0 million to $425.0 million.

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8. FLOOR PLAN NOTES PAYABLE

In connection with the amendment to our Committed Credit Facility in March 2006, we refinanced the floor plan notes payable at our DaimlerChrysler Dealerships through the repayment of $85.4 million of floor plan notes payable — non-manufacturer affiliated with borrowings from DCFS, a manufacturer affiliated lender. As a result, during the three months ended March 31, 2006, floor plan notes payable — non-manufacturer affiliated decreased by $85.4 million and floor plan notes payable — manufacturer affiliated increased by $85.4 million. In addition, during the three months ended March 31, 2006, our floor plan repayments — non-manufacturer affiliated and floor plan notes payable — manufacturer affiliated each increased by $85.4 million on our accompanying Condensed Consolidated Statements of Cash Flows.

As of March 31, 2006 and December 31, 2005, we had $659.4 million and $631.2 million of floor plan notes payable outstanding, respectively, including $12.6 million and $16.8 million classified as Liabilities Associated with Assets Held for Sale.

9. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITY

Three of our interest rate swap agreements expired in March 2006, which resulted in a cash payment of $13.7 million, which equaled the fair market value of the swap agreements. Included in Accumulated Other Comprehensive Loss on our Condensed Consolidated Balance Sheet as of March 31, 2006 was $2.6 million related to our two expired cash flow swaps, which is being amortized over eight years as a component of Floor Plan Interest Expense on the accompanying Condensed Consolidated Statements of Income. In addition, included as a reduction to our 8% Senior Subordinated Notes due 2014 as of March 31, 2006 was $9.5 million related to our expired fair value swap, which is being amortized over eight years as a component of Other Interest Expense on the accompanying Condensed Consolidated Statements of Income. The expiration of these three swap agreements will increase floor plan and other interest expense by $0.7 million and $1.0 million, respectively, during 2006.

We have entered into an interest rate swap agreement with a notional principal amount of $14.6 million as a hedge against future changes in the interest rate of our variable rate mortgage notes payable. Under the terms of the swap agreement, we are required to make payments at a fixed rate of 6.08% and receive a variable rate based on LIBOR. This swap agreement was designated and qualifies as a cash flow hedge of changes in the interest rate of our variable rate mortgage notes payable and will contain minor ineffectiveness. As of March 31, 2006, the swap agreement had a fair value of $0.5 million, which is included in Other Long-Term Assets on the accompanying Condensed Consolidated Balance Sheets. As of December 31, 2005, the swap agreement had a fair value of $0.3 million, which was included in Other Long-Term Assets on the accompanying Condensed Consolidated Balance Sheets.

10. COMPREHENSIVE INCOME

The following table provides a reconciliation of net income to comprehensive income:

		For the Three Months Ended March 31,
(In thousands)		2006			2005
Net income		$	12,553		$	9,640
Other comprehensive income:
Change in fair value of cash flow swaps		2,019			3,089
Amortization of expired cash flow swaps		80			—
Income tax expense associated with cash flow swaps		(787		)	(1,158		)
Comprehensive income		$	13,865		$	11,571

 

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11. DISCONTINUED OPERATIONS

During the three months ended March 31, 2006, we sold three franchises (two dealership locations) and placed two franchises (one dealership location) and one ancillary business into discontinued operations. As of March 31, 2006, three franchises (three dealership locations) and one ancillary business were pending disposition. The accompanying Condensed Consolidated Statements of Income for the three months ended March 31, 2005, have been reclassified to reflect the status of our discontinued operations as of March 31, 2006.

The following table provides further information regarding our discontinued operations as of March 31, 2006, and includes the results of businesses sold prior to March 31, 2006, and businesses pending disposition as of March 31, 2006:

		For the Three Months Ended March 31, 2006									For the Three Months Ended March 31, 2005
(Dollars in thousands)		Sold			Pending Disposition			Total			Sold(a)			Pending Disposition(b)			Total
Franchises:
Mid-line Domestic		2			1			3			9			1			10
Mid-line Import		1			1			2			2			1			3
Value		—			1			1			1			1			2
Luxury		—			—			—			1			—			1
Total		3			3			6			13			3			16
Ancillary Businesses		—			1			1			1			1			2
Revenues		$	7,277		$	24,078		$	31,355		$	74,081		$	29,645		$	103,726
Cost of sales		6,814			19,002			25,816			63,247			23,206			86,453
Gross profit		463			5,076			5,539			10,834			6,439			17,273
Operating expenses		1,118			5,871			6,989			10,684			6,483			17,167
Income (loss) from operations		(655		)	(795		)	(1,450		)	150			(44		)	106
Other income (expense), net		(173		)	(166		)	(339		)	(961		)	107			(854		)
Gain on disposition of discontinued operations, net		53			—			53			386			—			386
Income (loss) before income taxes		(775		)	(961		)	(1,736		)	(425		)	63			(362		)
Income tax benefit (expense)		291			360			651			159			(23		)	136
Discontinued operations, net of tax		$	(484	)	$	(601	)	$	(1,085	)	$	(266	)	$	40		$	(226	)

(a)             Businesses were sold between January 1, 2005 and March 31, 2006.

(b)            Businesses were pending disposition as of March 31, 2006.

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12. 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 Ended March 31,
(In thousands, except per share data)		2006			2005
Net income:
Continuing operations		$	13,638		$	9,866
Discontinued operations		(1,085		)	(226		)
Net income		$	12,553		$	9,640
Earnings per share — basic and diluted:
Continuing operations — basic		$	0.41		$	0.30
Discontinued operations— basic		(0.03		)	—
Net income		$	0.38		$	0.30
Continuing operations — diluted		$	0.41		$	0.30
Discontinued operations — diluted		(0.04		)	(0.01		)
Net income		$	0.37		$	0.29
Common shares and common share equivalents:
Weighted average common shares outstanding — basic		32,922			32,588
Common share equivalents (stock options and restricted stock units)		662			193
Weighted average common shares outstanding — diluted		33,584			32,781

 

13. SUPPLEMENTAL CASH FLOW INFORMATION

During the three months ended March 31, 2006 and 2005, we made interest payments, net of amounts capitalized, totaling $15.7 million and $16.0 million, respectively. During the three months ended March 31, 2006 and 2005, we received $0.5 million and $2.5 million, respectively, of proceeds associated with our interest rate swap agreement that was entered into in December 2003 in connection with the issuance of our 8% Senior Subordinated Notes due 2014.

During the three months ended March 31, 2006 and 2005, we made income tax payments totaling $5.5 million and $0.3 million, respectively.

14. COMMITMENTS AND CONTINGENCIES

A significant portion of our vehicle business involves the sale of vehicles, parts or vehicles composed of parts that are manufactured outside the United States of America. As a result, our operations are subject to customary risks of importing merchandise, including fluctuations in the relative values of currencies, import duties, exchange controls, trade restrictions, work stoppages and general political and socio-economic conditions in foreign countries. The United States of America or the countries from which our products are imported may, from time to time, impose new quotas, duties, tariffs or other restrictions, or adjust presently prevailing quotas, duties or tariffs, which may affect our operations and our ability to purchase imported vehicles and/or parts at reasonable prices.

Manufacturers may direct us to implement costly capital improvements to dealerships as a condition upon entering into franchise agreements with them. Manufacturers also typically require that their franchises meet specific standards of appearance. These factors, either alone or in combination, could cause us to divert our financial resources to capital projects from uses that management believes may be of higher long-term value, such as acquisitions.

Substantially all of our facilities are subject to federal, state and local provisions regarding the discharge of materials into the environment. Compliance with these provisions has not had, nor do we expect such compliance to have, any material effect upon our capital expenditures, net earnings, financial condition, liquidity or competitive position. We believe that our current practices and procedures for the control and disposition of such materials comply with applicable federal, state and local requirements.

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From time to time, we and our dealerships are named in claims involving the manufacture and sale or lease of motor vehicles, including but not limited to the charging of administrative fees, the operation of dealerships, contractual disputes and other matters arising in the ordinary course of our business. With respect to certain of these claims, the sellers of our acquired dealerships have indemnified us. We do not expect that any potential liability from these claims will materially affect our financial condition, liquidity, results of operations or financial statement disclosures.

Our dealerships hold dealer agreements with a number of vehicle manufacturers. In accordance with the individual dealer agreements, each dealership is subject to certain rights and restrictions typical of the industry. The ability of the manufacturers to influence the operations of the dealerships or the loss of a dealer agreement could have a negative impact on our operating results.

15. CONDENSED CONSOLIDATING FINANCIAL INFORMATION

Our 8% Senior Subordinated Notes due 2014 and our Committed Credit Facility 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, of our guarantor and non-guarantor subsidiaries for all financial statement periods presented in our interim condensed consolidated financial statements.

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Condensed Consolidating Balance Sheet
As of March 31, 2006
(In thousands)

		Parent Company			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminations			Condensed Consolidated
ASSETS
Current assets:
Cash and cash equivalents		$	—		$	59,874		$	—		$	—		$	59,874
Inventories		—			722,189			54,490			—			776,679
Other current assets		—			303,542			28,439			—			331,981
Assets held for sale		—			49,310			—			—			49,310
Total current assets		—			1,134,915			82,929			—			1,217,844
Property and equipment, net		—			187,994			6,627			—			194,621
Goodwill		—			402,806			53,202			—			456,008
Other long-term assets		—			95,008			275			—			95,283
Investment in subsidiaries		566,282			79,973			—			(646,255		)	—
Total assets		$	566,282		$	1,900,696		$	143,033		$	(646,255	)	$	1,963,756
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Floor plan notes payable—manufacturer affiliated		$	—		$	298,581		$	—		$	—		$	298,581
Floor plan notes payable—non-manufacturer affiliated		—			308,266			39,945			—			348,211
Other current liabilities		—			157,428			23,054			—			180,482
Liabilities associated with assets held for sale		—			23,590			—			—			23,590
Total current liabilities		—			787,865			62,999			—			850,864
Long-term debt		—			471,048			61			—			471,109
Other long-term liabilities		—			75,501			—			—			75,501
Shareholders’ equity		566,282			566,282			79,973			(646,255		)	566,282
Total liabilities and shareholders’ equity		$	566,282		$	1,900,696		$	143,033		$	(646,255	)	$	1,963,756

 

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Condensed Consolidating Balance Sheet
As of December 31, 2005
(In thousands)

		Parent Company			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminations			Condensed Consolidated
ASSETS
Current assets:
Cash and cash equivalents		$	—		$	57,194		$	—		$	—		$	57,194
Inventories		—			658,820			50,971			—			709,791
Other current assets		—			334,403			32,294			—			366,697
Assets held for sale		—			51,498			—			—			51,498
Total current assets		—			1,101,915			83,265			—			1,185,180
Property and equipment, net		—			187,077			6,380			—			193,457
Goodwill		—			404,203			53,202			—			457,405
Other assets		—			94,470			288			—			94,758
Investment in subsidiaries		547,766			71,809			—			(619,575		)	—
Total assets		$	547,766		$	1,859,474		$	143,135		$	(619,575	)	$	1,930,800
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Floor plan notes payable—manufacturer affiliated		$	—		$	204,044		$	—		$	—		$	204,044
Floor plan notes payable—non-manufacturer affiliated		—			368,213			42,125			—			410,338
Other current liabilities		—			167,929			29,068			—			196,997
Liabilities associated with assets held for sale		—			26,847			—			—			26,847
Total current liabilities		—			767,033			71,193			—			838,226
Long-term debt		—			472,359			68			—			472,427
Other liabilities		—			72,316			65			—			72,381
Shareholders’ equity		547,766			547,766			71,809			(619,575		)	547,766
Total liabilities and shareholders’ equity		$	547,766		$	1,859,474		$	143,135		$	(619,575	)	$	1,930,800

 

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Condensed Consolidating Statement of Income
For the Three Months Ended March 31, 2006
(In thousands)

		Parent Company			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminations			Condensed Consolidated
Revenues		$	—		$	1,228,942		$	159,840		$	(1,813	)	$	1,386,969
Cost of sales		—			1,041,403			135,831			(1,813		)	1,175,421
Gross profit		—			187,539			24,009			—			211,548
Operating expenses:
Selling, general and administrative		—			148,046			17,668			—			165,714
Depreciation and amortization		—			4,533			442			—			4,975
Income from operations		—			34,960			5,899			—			40,859
Other income (expense):
Floor plan interest expense		—			(8,549		)	(655		)	—			(9,204		)
Other interest expense		—			(9,431		)	(1,474		)	—			(10,905		)
Interest and other income, net		—			986			85			—			1,071
Equity in earnings of subsidiaries		12,553			2,409			—			(14,962		)	—
Total other expense, net		12,553			(14,585		)	(2,044		)	(14,962		)	(19,038		)
Income before income taxes		12,553			20,375			3,855			(14,962		)	21,821
Income tax expense		—			6,737			1,446			—			8,183
Income from continuing operations		12,553			13,638			2,409			(14,962		)	13,638
Discontinued operations, net of tax		—			(1,085		)	—			—			(1,085		)
Net income		$	12,553		$	12,553		$	2,409		$	(14,962	)	$	12,553

 

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Condensed Consolidating Statement of Income
For the Three Months Ended March 31, 2005
(In thousands)

		Parent Company			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminations			Condensed Consolidated
Revenues		$	—		$	1,133,907		$	148,228		$	(1,880	)	$	1,280,255
Cost of sales		—			961,421			126,030			(1,880		)	1,085,571
Gross profit		—			172,486			22,198			—			194,684
Operating expenses:
Selling, general and administrative		—			142,027			16,399			—			158,426
Depreciation and amortization		—			4,358			335			—			4,693
Income from operations		—			26,101			5,464			—			31,565
Other income (expense):
Floor plan interest expense		—			(6,201		)	(351		)	—			(6,552		)
Other interest expense		—			(8,433		)	(1,168		)	—			(9,601		)
Interest and other income, net		—			364			10			—			374
Equity in earnings of subsidiaries		9,640			2,428			—			(12,068		)	—
Total other expense, net		9,640			(11,842		)	(1,509		)	(12,068		)	(15,779		)
Income before income taxes		9,640			14,259			3,955			(12,068		)	15,786
Income tax expense		—			4,437			1,483			—			5,920
Income from continuing operations		9,640			9,822			2,472			(12,068		)	9,866
Discontinued operations, net of tax		—			(182		)	(44		)	—			(226		)
Net income		$	9,640		$	9,640		$	2,428		$	(12,068	)	$	9,640

 

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Condensed Consolidating Statement of Cash Flows
For the Three Months Ended March 31, 2006
(In thousands)

		Parent Company			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminations			Condensed Consolidated
Net cash provided by operating activities		$	—		$	71,840		$	2,227		$	—		$	74,067
Cash flow from investing activities:
Capital expenditures		—			(11,285		)	(659		)	—			(11,944		)
Other investing activities		—			8,746			—			—			8,746
Net cash used in investing activities		—			(2,539		)	(659		)	—			(3,198		)
Cash flow from financing activities:
Floor Plan Borrowings — non-manufacturer affiliated		—			575,672			101,577			—			677,249
Floor Plan Repayments — non-manufacturer affiliated		—			(643,929		)	(103,757		)	—			(747,686		)
Proceeds from borrowings		—			902			—			—			902
Repayments of debt		—			(1,547		)	(7		)	—			(1,554		)
Intercompany financing		—			(619		)	619			—			—
Other financing activities		—			2,900			—			—			2,900
Net cash used in financing activities		—			(66,621		)	(1,568		)	—			(68,189		)
Net increase in cash and cash equivalents		—			2,680			—			—			2,680
Cash and cash equivalents, beginning of period		—			57,194			—			—			57,194
Cash and cash equivalents, end of period		$	—		$	59,874		$	—		$	—		$	59,874

 

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