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, 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 x   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  x                          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  x

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 August 4, 2006, was 33,197,382 (net of 1,586,587 treasury shares).

 

 




ASBURY AUTOMOTIVE GROUP, INC.
INDEX

 

PART I — Financial Information

 

 

 

 

 

 

 

Item 1.

 

Condensed Consolidated Financial Statements (unaudited)

 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005

 

3

 

 

Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2006 and 2005

 

4

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2006 and 2005

 

5

 

 

Notes to Condensed Consolidated Financial Statements

 

6

 

 

Report of Independent Registered Public Accounting Firm

 

24

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

25

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

49

Item 4.

 

Controls and Procedures

 

50

 

 

 

 

 

 

 

PART II — Other Information

 

 

 

 

 

 

 

Item 4.

 

Submission of Matters to a Vote of Security Holders

 

51

Item 5.

 

Directors and Executive Officers

 

51

Item 6.

 

Exhibits

 

52

 

 

Signatures

 

53

 

 

Index to Exhibits

 

54

 

 

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)

 

 

June 30,
2006

 

December 31,
2005

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

Cash and cash equivalents

 

$

89,097

 

$

57,194

 

Contracts-in-transit

 

102,696

 

122,250

 

Accounts receivable (net of allowance of $811 and $1,216, respectively)

 

162,468

 

167,203

 

Inventories

 

779,817

 

709,791

 

Deferred income taxes

 

19,825

 

19,825

 

Prepaid and other current assets

 

57,390

 

57,419

 

Assets held for sale

 

19,677

 

51,498

 

Total current assets

 

1,230,970

 

1,185,180

 

 

 

 

 

 

 

PROPERTY AND EQUIPMENT, net

 

198,825

 

193,457

 

GOODWILL

 

450,362

 

457,405

 

OTHER LONG-TERM ASSETS

 

94,130

 

94,758

 

Total assets

 

$

1,974,287

 

$

1,930,800

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

Floor plan notes payable—manufacturer affiliated

 

$

331,025

 

$

204,044

 

Floor plan notes payable—non-manufacturer affiliated

 

326,303

 

410,338

 

Current maturities of long-term debt

 

26,257

 

24,522

 

Accounts payable

 

65,620

 

72,432

 

Accrued liabilities

 

86,228

 

100,043

 

Liabilities associated with assets held for sale

 

5,659

 

26,847

 

Total current liabilities

 

841,092

 

838,226

 

 

 

 

 

 

 

LONG-TERM DEBT

 

470,743

 

472,427

 

DEFERRED INCOME TAXES

 

44,403

 

44,287

 

OTHER LONG-TERM LIABILITIES

 

30,419

 

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, 34,709,443 and 34,435,252 shares issued, including shares held in treasury, respectively

 

347

 

344

 

Additional paid-in capital

 

423,795

 

417,055

 

Retained earnings

 

180,543

 

148,986

 

Treasury stock, at cost; 1,586,587 shares held

 

(15,032

)

(15,032

)

Accumulated other comprehensive loss

 

(2,023

)

(3,587

)

Total shareholders’ equity

 

587,630

 

547,766

 

Total liabilities and shareholders’ equity

 

$

1,974,287

 

$

1,930,800

 

 

See Notes to Condensed Consolidated Financial Statements.

3




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

 

 

For the Three Months
Ended June 30,

 

For the Six Months
Ended June 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

REVENUES:

 

 

 

 

 

 

 

 

 

New vehicle

 

$

918,116

 

$

872,308

 

$

1,739,153

 

$

1,643,577

 

Used vehicle

 

384,561

 

348,416

 

742,667

 

668,872

 

Parts, service and collision repair

 

172,036

 

157,999

 

341,924

 

309,672

 

Finance and insurance, net

 

43,224

 

39,064

 

78,844

 

74,554

 

Total revenues

 

1,517,937

 

1,417,787

 

2,902,588

 

2,696,675

 

 

 

 

 

 

 

 

 

 

 

COST OF SALES:

 

 

 

 

 

 

 

 

 

New vehicle

 

854,390

 

812,339

 

1,617,630

 

1,530,845

 

Used vehicle

 

349,923

 

318,479

 

675,102

 

610,233

 

Parts, service and collision repair

 

84,842

 

77,510

 

169,744

 

151,641

 

Total cost of sales

 

1,289,155

 

1,208,328

 

2,462,476

 

2,292,719

 

GROSS PROFIT

 

228,782

 

209,459

 

440,112

 

403,956

 

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

171,715

 

160,185

 

337,364

 

318,552

 

Depreciation and amortization

 

5,113

 

4,768

 

10,088

 

9,460

 

Income from operations

 

51,954

 

44,506

 

92,660

 

75,944

 

 

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

 

 

Floor plan interest expense

 

(11,239

)

(7,458

)

(20,401

)

(13,988

)

Other interest expense

 

(11,139

)

(10,269

)

(22,043

)

(19,869

)

Interest income

 

1,021

 

171

 

1,748

 

435

 

Other income, net

 

481

 

332

 

825

 

441

 

Total other expense, net

 

(20,876

)

(17,224

)

(39,871

)

(32,981

)

Income before income taxes

 

31,078

 

27,282

 

52,789

 

42,963

 

 

 

 

 

 

 

 

 

 

 

INCOME TAX EXPENSE

 

11,654

 

10,231

 

19,796

 

16,111

 

INCOME FROM CONTINUING OPERATIONS

 

19,424

 

17,051

 

32,993

 

26,852

 

DISCONTINUED OPERATIONS, net of tax

 

(420

)

(1,065

)

(1,436

)

(1,225

)

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

$

19,004

 

$

15,986

 

$

31,557

 

$

25,627

 

 

 

 

 

 

 

 

 

 

 

EARNINGS PER COMMON SHARE:

 

 

 

 

 

 

 

 

 

Basic—

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.59

 

$

0.52

 

$

1.00

 

$

0.82

 

Discontinued operations

 

(0.02

)

(0.03

)

(0.04

)

(0.03

)

Net income

 

$

0.57

 

$

0.49

 

$

0.96

 

$

0.79

 

 

 

 

 

 

 

 

 

 

 

Diluted—

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.58

 

$

0.52

 

$

0.98

 

$

0.82

 

Discontinued operations

 

(0.02

)

(0.03

)

(0.04

)

(0.04

)

Net income

 

$

0.56

 

$

0.49

 

$

0.94

 

$

0.78

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:

 

 

 

 

 

 

 

 

 

Basic

 

33,077

 

32,604

 

33,000

 

32,596

 

Diluted

 

33,709

 

32,725

 

33,680

 

32,753

 

 

See Notes to Condensed Consolidated Financial Statements.

4




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

 

 

For the Six Months
Ended June 30,

 

 

 

2006

 

2005

 

CASH FLOW FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

31,557

 

$

25,627

 

Adjustments to reconcile net income to net cash provided by (used in) operating activities-

 

 

 

 

 

Depreciation and amortization

 

10,088

 

9,460

 

Depreciation and amortization from discontinued operations

 

175

 

1,129

 

Stock-based compensation

 

2,296

 

 

Amortization of deferred financing fees

 

1,158

 

1,013

 

Change in allowance for doubtful accounts

 

(405

)

151

 

Gain on sale of discontinued operations, net

 

(2,617

)

(10

)

Deferred income taxes

 

(860

)

 

Other adjustments

 

4,222

 

2,993

 

Changes in operating assets and liabilities, net of acquisitions and divestitures-

 

 

 

 

 

Contracts-in-transit

 

19,554

 

(7,072

)

Accounts receivable

 

(5,221

)

(10,375

)

Proceeds from the sale of accounts receivable

 

9,318

 

8,126

 

Inventories

 

(65,565

)

31,705

 

Prepaid and other current assets

 

(9,156

)

(13,190

)

Floor plan notes payable—manufacturer affiliated

 

126,981

 

(141,120

)

Accounts payable and accrued liabilities

 

(19,371

)

13,097

 

Excess tax benefits from share-based payment arrangements

 

(519

)

 

Other long-term assets and liabilities

 

4,050

 

770

 

Net cash provided by (used in) operating activities

 

105,685

 

(77,696

)

 

 

 

 

 

 

CASH FLOW FROM INVESTING ACTIVITIES:

 

 

 

 

 

Capital expenditures—internally financed

 

(16,184

)

(16,942

)

Capital expenditures—externally financed

 

(7,115

)

(18,236

)

Construction reimbursements associated with sale-leaseback agreements

 

3,118

 

2,595

 

Acquisitions

 

 

(11,562

)

Proceeds from the sale of assets

 

42,122

 

7,989

 

Other investing activities

 

(746

)

(878

)

Net cash provided by (used in) investing activities

 

21,195

 

(37,034

)

 

 

 

 

 

 

CASH FLOW FROM FINANCING ACTIVITIES:

 

 

 

 

 

Floor plan borrowings—non-manufacturer affiliated

 

1,273,177

 

1,753,115

 

Floor plan repayments—non-manufacturer affiliated

 

(1,371,358

)

(1,629,643

)

Proceeds from borrowings

 

987

 

20,734

 

Repayments of debt

 

(2,226

)

(41,989

)

Payments of debt issuance costs

 

 

(4,927

)

Proceeds from the exercise of stock options

 

3,924

 

396

 

Excess tax benefits from share-based payment arrangements

 

519

 

 

Net cash (used in) provided by financing activities

 

(94,977

)

97,686

 

Net increase (decrease) in cash and cash equivalents

 

31,903

 

(17,044

)

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, beginning of period

 

57,194

 

28,093

 

CASH AND CASH EQUIVALENTS, end of period

 

$

89,097

 

$

11,049

 

 

See Note 13 for supplemental cash flow information

See Notes to Condensed Consolidated Financial Statements

5




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 119 franchises (86 dealership locations) in 21 metropolitan markets within 10 states as of June 30, 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 ten 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 and our Spirit dealership 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.

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 quarterly and the effects of revisions are reflected in the condensed consolidated financial statements in the period they are determined to be necessary.  Refer to “Critical Accounting Estimates” in Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more information on our critical estimates.  All intercompany transactions have been eliminated in consolidation.

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 June 30, 2006, and for the three and six months ended June 30, 2006 and 2005 have been included. The results of operations for the three and six months ended June 30, 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 June 30, 2006 and December 31, 2005, have been classified as Assets Held for Sale and Liabilities Associated with Assets Held for Sale for operations held for sale at each balance sheet date. In addition, the accompanying Condensed Consolidated Statements of Income for the three and six months ended June 30, 2005, have been reclassified to reflect the status of our discontinued operations as of June 30, 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, floor plan interest assistance and certain advertising assistance, are recognized as a reduction of new vehicle cost of sales when earned, generally at the time the related vehicles are sold.

6




 

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 in conjunction with our 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 2006, we adopted SFAS No. 123R “Share-Based Payment” under the modified prospective transition method and therefore we record stock-based 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 2006, including the three and six months ended June 30, 2005, we recorded stock-based 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 six months ended June 30, 2006 and minor ineffectiveness during the six months ended June 30, 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 accompanying Condensed Consolidated Statements of Cash Flows.

7




 

The net change in service loaner vehicle obligations 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 in connection with sale-leaseback agreements for the construction of new dealership facilities or leasehold improvements to our existing 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 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 on 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 on the accompanying Condensed Consolidated Statements of Cash Flows.

Recent Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation (“FIN”) No. 48 “Accounting for Uncertainty in Income Taxes.”  FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109 “Accounting for Income Taxes.”  FIN No. 48 prescribes a recognition threshold and measurement of a tax position taken or expected to be taken in a tax return.  FIN No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.  FIN No. 48 is effective for fiscal years beginning after December 15, 2006. Earlier application is encouraged if the enterprise has not yet issued financial statements, including interim financial statements, in the period of adoption.  We are currently evaluating the impact of FIN No. 48 on our condensed consolidated financial statements and disclosures.

 In October 2005, the 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. FSP No. FAS 13-1 is effective for reporting periods beginning after December 15, 2005.  Accordingly, we adopted the provisions of FSP No. FAS 13-1 in January 2006 and currently expense all rent obligations incurred during the construction period.

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. Stock options generally vest ratably over three years from the date of grant and expire ten years from the date of grant.  Restricted stock units generally vest after two to three years from the date of grant and also expire ten years from the date of grant. We have granted a total of 4,310,954 non-qualified stock options and in January 2006, we granted 175,500 restricted stock units to certain of our key employees and officers.  As of June 30, 2006, there were 2,636,362 non-qualified stock options and 175,500 restricted stock units outstanding.  In addition, there were approximately 2,213,000 stock-based awards available for grant under our stock-based compensation plans as of June 30, 2006.  We expect to continue to issue restricted stock units in lieu of non-qualified stock options.

Effective January 2006, we adopted SFAS No. 123R under the modified prospective transition method.  As a result we have recorded stock-based compensation expense for the three and six months ended June 30, 2006, under the fair value method.  Prior to January 2006, including the three and six months ended June 30, 2005, we accounted for stock-based awards under the intrinsic value method in accordance with APB Opinion No. 25.  During the six months ended June 30, 2006, the adoption of SFAS No. 123R resulted in incremental stock-based compensation expense of $1.5 million (excluding $0.8 million associated with our decision to issue restricted stock units).  The incremental stock-based compensation expense decreased income before income taxes by $1.5 million, net income by $0.9 million and basic and diluted earnings per common share by $0.03 per share.  Net cash provided by operating activities decreased and net cash used in financing activities decreased by $0.5 million related to excess tax benefits from stock-based payment arrangements.

8




 

The fair value of each option award is estimated on the date of grant using the Black Scholes option valuation model.  The fair value of each restricted stock unit is estimated using the market price of our common stock on the date of grant.  Expected volatilities are based on the historical volatility of our common stock.  We use historical data to estimate the rate of option exercises 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.

We recorded $0.9 million in compensation expense and an associated tax benefit of $0.3 million for the three months ended June 30, 2006; and $2.3 million in compensation expense and an associated tax benefit of $0.9 million for the six months ended June 30, 2006.  We did not recognize any material stock-based compensation expense during the six months ended June 30, 2005.  As of June 30, 2006, there was $4.6 million of total unrecognized stock-based compensation expense related to non-vested stock-based awards granted under the Plans.  That cost is expected to be recognized over a weighted average period of 0.8 years.  The following table illustrates the effect on net income and net income per share had our stock-based awards been recorded using the fair value method of SFAS No. 123R for the three and six months ended June 30, 2005:

 

For the Three
Months Ended
June 30,

 

For the Six
Months Ended
June 30,

 

(In thousands, except per share data)

 

2005

 

2005

 

 

 

 

 

 

 

Net income

 

$

15,986

 

$

25,627

 

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

 

(674

)

(1,340

)

Pro forma net income

 

$

15,312

 

$

24,288

 

 

 

 

 

 

 

Net income per common share—basic (as reported)

 

$

0.49

 

$

0.79

 

 

 

 

 

 

 

Net income per common share—diluted (as reported)

 

$

0.49

 

$

0.78

 

 

 

 

 

 

 

Pro forma net income per common share—basic

 

$

0.47

 

$

0.75

 

 

 

 

 

 

 

Pro forma net income per common share—diluted

 

$

0.47

 

$

0.74

 

 

A summary of options outstanding and exercisable under the Plans as of June 30, 2006, and changes during the six 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

 

(274,191

)

$

14.31

 

 

 

 

 

Expired / Forfeited

 

(30,709

)

$

15.09

 

 

 

 

 

Options outstanding—June 30, 2006

 

2,636,362

 

$

15.46

 

5.1

 

$

14,447,263

 

 

 

 

 

 

 

 

 

 

 

Options exercisable—June 30, 2006

 

2,219,822

 

$

15.57

 

4.6

 

$

11,920,444

 


*                    Based on the closing price of our common stock on June 30, 2006

Cash received from option exercises for the six months ended June 30, 2006 was $3.9 million.  The actual intrinsic value of options exercised during the six months ended June 30, 2006 was $1.5 million. The actual tax benefit realized for the tax deductions from option exercises totaled $0.6 million for the six months ended June 30, 2006.

9




A summary of restricted stock units as of June 30, 2006, and changes during the six 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

 

43,875

 

$

16.86

 

Vested

 

 

$

 

Forfeited

 

 

$

 

Restricted Stock Units—June 30, 2006*

 

219,375

 

$

16.86

 


*                    Includes an estimate of 43,875 out of a maximum of 140,400 issuable upon attaining certain performance metrics

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% to 180% of the target number of shares depending upon achievement of the performance goals during the Performance Cycle.  We currently estimate that we will achieve 125% of our performance goals.

4.  INVENTORIES

Inventories consist of the following:

 

 

As of

 

(In thousands)

 

June 30,
2006

 

December 31,
2005

 

 

 

 

 

 

 

New vehicles

 

$

613,807

 

$

556,141

 

Used vehicles

 

124,380

 

111,000

 

Parts and accessories

 

41,630

 

42,650

 

Total inventories

 

$

779,817

 

$

709,791

 

 

The lower of cost or market reserves for inventory totaled $5.3 million and $4.3 million as of June 30, 2006 and December 31, 2005, respectively. In addition to the inventories shown above, we have $3.4 million and $18.9 million of inventory as of June 30, 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 at each balance sheet date.

5.  ACQUISITIONS

We did not acquire any franchises during the six months ended June 30, 2006.  During the six months ended June 30, 2005, we acquired one franchise (one dealership location) for an aggregate purchase price of $12.0 million, of which $4.7 million was paid in cash through the use of available funds; $6.8 million was borrowed from our floor plan facilities, with the remaining $0.5 million representing the fair value of future payments.

The allocation of purchase price for acquisitions is as follows:

 

For the Six 
Months
Ended June 30,

 

(In thousands)

 

2005

 

 

 

 

 

Inventories

 

$

6,878

 

Fixed assets

 

278

 

Goodwill

 

3,539

 

Franchise rights

 

1,352

 

Total purchase price

 

$

12,047

 

 

10




 

The allocation of purchase price to assets acquired and liabilities assumed for certain current and prior year acquisitions was based on preliminary estimates of fair value and may be revised as additional information concerning valuation of such assets and liabilities becomes available.

6.  GOODWILL AND MANUFACTURER FRANCHISE RIGHTS

During the six months ended June 30, 2006, we sold six franchises (five dealership locations) resulting in the removal of approximately $7.0 million of Goodwill from our Condensed Consolidated Balance Sheets. There were no manufacturer franchise rights associated with these franchises at the time of sale as these franchises were purchased prior to the adoption of SFAS No. 142 “Goodwill and Other Intangibles.”  Manufacturer franchise rights totaled $41.8 million as of June 30, 2006 and December 31, 2005, and are included in Other Long-term Assets on the accompanying Condensed Consolidated Balance Sheets.

7.  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 reimburses us during construction or will reimburse us upon completion of the transaction.

Assets and liabilities associated with discontinued operations include one franchise in North Carolina and one ancillary business in Florida as of June 30, 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 six months ended June 30, 2006, we sold the franchises that had been held for sale as of December 31, 2005 as well as two additional franchises (one dealership location) in Florida for proceeds of $42.0 million, resulting in a net gain of $2.6 million. Assets associated with discontinued operations totaled $17.2 million and $39.6 million, and liabilities associated with discontinued operations totaled $3.5 million and $16.8 million as of June 30, 2006 and December 31, 2005, respectively.

Included in Assets Held for Sale as of June 30, 2006 was $2.5 million of costs associated with one completed project included in a pending sale-leaseback transaction.  Included in Assets Held for Sale as of December 31, 2005, was $11.9 million of costs associated with two completed projects included in pending sale-leaseback transactions.  As of June 30, 2006 and December 31, 2005, Liabilities Associated with Assets Held for Sale included $2.2 million and $10.0 million, respectively, of reimbursements associated with completed construction projects. During the six months ended June 30, 2006 we completed one sale-leaseback transaction resulting in (i) the sale of $11.0 million of assets; (ii) the receipt of the remaining $3.1 million of reimbursements and (iii) the commencement of long-term operating leases for the assets sold.  We expect to receive the final reimbursement of costs related to the remaining completed construction project and complete the associated sale-leaseback transaction during the second half of 2006.

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

 

 

As of

 

(In thousands)

 

June 30,
2006

 

December 31,
2005

 

Assets:

 

 

 

 

 

Inventories

 

$

3,369

 

$

18,940

 

Property and equipment, net

 

15,241

 

32,558

 

Other assets

 

1,067

 

 

Total assets

 

19,677

 

51,498

 

Liabilities:

 

 

 

 

 

Floor plan notes payable

 

2,629

 

16,775

 

Other liabilities

 

3,030

 

10,072

 

Total liabilities

 

5,659

 

26,847

 

Net assets held for sale

 

$

14,018

 

$

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 reimbursing us, or will reimburse us, for the cost of construction of dealership facilities being constructed on the land. We capitalize the cost of the construction

11




 

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 June 30, 2006 and December 31, 2005 totaled $7.3 million and $2.9 million, respectively. As of June 30, 2006 and December 31, 2005, there were no liabilities associated with these construction projects.

8.  LONG-TERM DEBT

Long-term debt consists of the following:

 

 

As of

 

(In thousands)

 

June 30,
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 $9,188 and $8,028, respectively)

 

190,812

 

191,972

 

Mortgage notes payable

 

27,321

 

26,764

 

Loaner vehicle obligations

 

24,110

 

21,676

 

Capital lease obligations

 

3,843

 

4,548

 

Other notes payable

 

914

 

1,989

 

 

 

497,000

 

496,949

 

Less—current portion

 

(26,257

)

(24,522

)

Long-term debt

 

$

470,743

 

$

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.

9.  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, floor plan notes payable at our DaimlerChrysler Dealerships are included in floor plan notes payable — manufacturer affiliated on the accompanying Condensed Consolidated Balance Sheets as of June 30, 2006.  Floor plan notes payable at our DaimlerChrysler Dealerships totaled $91.3 million and $95.4 million as of June 30, 2006 and December 31, 2005, respectively. In addition, during the six months ended June 30, 2006, our floor plan repayments — non-manufacturer affiliated and floor plan notes payable — manufacturer affiliated each increased by $85.4 million on the accompanying Condensed Consolidated Statements of Cash Flows.

As of June 30, 2006 and December 31, 2005, we had $660.0 million and $631.2 million of floor plan notes payable outstanding, respectively, including $2.6 million and $16.8 million classified as Liabilities Associated with Assets Held for Sale on the accompanying Condensed Consolidated Balance Sheets.

10.  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 June 30, 2006 was $2.4 million of unrecognized amortization related to our two expired cash flow swaps, which are 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 (“8 % Notes”) as of June 30, 2006 was $9.2 million of unrecognized amortization related to our

12




 

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 an interest rate swap agreement with a notional principal amount of $14.4 million as of June 30, 2006, as a hedge against future changes in the interest rate of our variable rate mortgage notes payable. Under the terms of the swap agreement, we are required to make payments at a fixed rate of 6.08% and receive a variable rate based on LIBOR. This swap agreement was designated and qualifies as a cash flow hedge of changes in the interest rate of our variable rate mortgage notes payable and will contain minor ineffectiveness. As of June 30, 2006 and December 31, 2005, the swap agreement had a fair value of $0.7 million and $0.3 million, respectively, which is included in Other Long-Term Assets on the accompanying Condensed Consolidated Balance Sheets.

11.  COMPREHENSIVE INCOME

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

 

 

For the Three Months
Ended June 30,

 

For the Six Months
Ended June 30,

 

(In thousands)

 

2006

 

2005

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

19,004

 

$

15,986

 

$

31,557

 

$

25,627

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

Change in fair value of cash flow swaps

 

164

 

(8,368

)

2,185

 

(5,279

)

Amortization of expired cash flow swaps

 

239

 

 

318

 

 

Income tax expense (benefit) associated with cash flow swaps

 

(151

)

3,138

 

(939

)

1,980

 

Comprehensive income

 

$

19,256

 

$

10,756

 

$

33,121

 

$

22,328

 

 

12.  DISCONTINUED OPERATIONS

During the six months ended June 30, 2006, we placed three franchises (one dealership location) and one ancillary business into discontinued operations and sold six franchises (five dealership locations) for proceeds of approximately $42.0 million, resulting in a net gain of $2.6 million.  As of June 30, 2006, one franchise and one ancillary business were pending disposition.  The accompanying Condensed Consolidated Statements of Income for the three and six months ended June 30, 2005, have been reclassified to reflect the status of our discontinued operations as of June 30, 2006.

The following table provides further information regarding our discontinued operations as of June 30, 2006, and includes the results of businesses sold between January 1, 2005 and June 30, 2006, and businesses pending disposition as of June 30, 2006:

 

 

For the Three Months
Ended June 30, 2006

 

For the Three Months
Ended June 30 2005

 

(Dollars in thousands)

 

Sold

 

Pending
Disposition

 

Total

 

Sold(a)

 

Pending
Disposition(b)

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Franchises:

 

 

 

 

 

 

 

 

 

 

 

 

 

Mid-line Domestic

 

1

 

 

1

 

9

 

 

9

 

Mid-line Import

 

1

 

 

1

 

3

 

 

3

 

Value

 

1

 

 

1

 

2

 

 

2

 

Luxury

 

 

1

 

1

 

 

1

 

1

 

Total

 

3

 

1

 

4

 

14

 

1

 

15

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ancillary Businesses

 

 

1

 

1

 

1

 

1

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

5,431

 

$

4,231

 

$

9,662

 

$

105,178

 

$

3,382

 

$

108,560

 

Cost of sales

 

5,059

 

1,990

 

7,049

 

90,173

 

1,084

 

91,257

 

Gross profit

 

372

 

2,241

 

2,613

 

15,005

 

2,298

 

17,303

 

Operating expenses

 

3,524

 

1,630

 

5,154

 

15,603

 

1,828

 

17,431

 

Income (loss) from operations

 

(3,152

)

611

 

(2,541

)

(598

)

470

 

(128

)

Other expense, net

 

(273

)

(32

)

(305

)

(1,183

)

(17

)

(1,200

)

 

13




 

Gain (Loss) on disposition of discontinued operations, net

 

2,564

 

 

2,564

 

(376

)

 

(376

)

Income (loss) before income taxes

 

(861

)

579

 

(282

)

(2,157

)

453

 

(1,704

)

Income tax (expense) benefit

 

79

 

(217

)

(138

)

809

 

(170

)

639

 

Discontinued operations, net of tax

 

$

(782

)

$

362

 

$

(420

)

$

(1,348

)

$

283

 

$

(1,065

)


(a)             Businesses were sold between April 1, 2005 and June 30, 2006.

(b)            Businesses were pending disposition as of June 30, 2006.

 

 

For the Six Months
Ended June 30, 2006

 

For the Six Months
Ended June 30, 2005

 

(Dollars in thousands)

 

Sold

 

Pending
Disposition

 

Total

 

Sold(a)

 

Pending
Disposition(b)

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Franchises:

 

 

 

 

 

 

 

 

 

 

 

 

 

Mid-line Domestic

 

3

 

 

3

 

10

 

 

10

 

Mid-line Import

 

2

 

 

2

 

3

 

 

3

 

Value

 

1

 

 

1

 

2

 

 

2

 

Luxury

 

 

1

 

1

 

1

 

1

 

2

 

Total

 

6

 

1

 

7

 

16

 

1

 

17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ancillary Businesses

 

 

1

 

1

 

1

 

1

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

33,415

 

$

8,127

 

$

41,542

 

$

205,282

 

$

6,441

 

$

211,723

 

Cost of sales

 

29,329

 

3,841

 

33,170

 

175,044

 

1,917

 

176,961

 

Gross profit

 

4,086

 

4,286

 

8,372

 

30,238

 

4,524

 

34,762

 

Operating expenses

 

8,937

 

3,353

 

12,290

 

31,049

 

3,608

 

34,657

 

Income (loss) from operations

 

(4,851

)

933

 

(3,918

)

(811

)

916

 

105

 

Other expense, net

 

(542

)

(65

)

(607

)

(2,045

)

(31

)

(2,076

)

Gain on disposition of discontinued operations, net

 

2,617

 

 

2,617

 

10

 

 

10

 

Income (loss) before income taxes

 

(2,776

)

868

 

(1,908

)

(2,846

)

885

 

(1,961

)

Income tax (expense) benefit

 

797

 

(325

)

472

 

1,068

 

(332

)

736

 

Discontinued operations, net of tax

 

$

(1,979

)

$

543

 

$

(1,436

)

$

(1,778

)

$

553

 

$

(1,225

)


(a)             Businesses were sold between January 1, 2005 and June 30, 2006.

(b)            Businesses were pending disposition as of June 30, 2006.

13.  SUPPLEMENTAL CASH FLOW INFORMATION

During the six months ended June 30, 2006 and 2005, we made interest payments, net of amounts capitalized, totaling $41.4 million and $36.3 million, respectively. During the six months ended June 30, 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 connection with the issuance of our 8% Notes.

During the six months ended June 30, 2006 and 2005, we made income tax payments totaling $13.5 million and $8.2 million, respectively.

During the six months ended June 30, 2006 and 2005, we completed sale-leaseback transactions resulting in the sale of $11.0 million and $15.7 million of Assets Held for Sale and the removal of the corresponding liabilities from our Condensed Consolidated Balance Sheets, 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

14




 

restrictions, work stoppages and general political and socio-economic conditions in foreign countries. The United States of America or the countries from which our products are imported may, from time to time, impose new quotas, duties, tariffs or other restrictions, or adjust presently prevailing quotas, duties or tariffs, which may affect our operations and our ability to purchase imported vehicles and/or parts at reasonable prices.

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

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

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

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

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, for our guarantor and non-guarantor subsidiaries for all financial statement periods presented in our interim Condensed Consolidated financial statements.

15




Condensed Consolidating Balance Sheet
As of June 30, 2006
(In thousands)

 

 

 

Parent
Company

 

Guarantor
Subsidiaries

 

Non-guarantor
Subsidiaries

 


Eliminations

 


Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

$

89,097

 

$

 

$

 

$

89,097

 

Inventories

 

 

721,105

 

58,712

 

 

779,817

 

Other current assets

 

 

309,252

 

33,127

 

 

342,379

 

Assets held for sale

 

 

19,677

 

 

 

19,677

 

Total current assets

 

 

1,139,131

 

91,839

 

 

1,230,970

 

Property and equipment, net

 

 

192,348

 

6,477

 

 

198,825

 

Goodwill

 

 

397,160

 

53,202

 

 

450,362

 

Other assets

 

 

93,857

 

273

 

 

94,130

 

Investment in subsidiaries

 

587,630

 

78,021

 

 

(665,651

)

 

Total assets

 

$

587,630

 

$

1,900,517

 

$

151,791

 

$

(665,651

)

$

1,974,287

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Floor plan notes payable — manufacturer affiliated

 

$

 

$

331,025

 

$

 

$

 

$

331,025

 

Floor plan notes payable — non–manufacturer affiliated

 

 

281,240

 

45,063

 

 

326,303

 

Other current liabilities

 

 

149,453

 

28,652

 

 

178,105

 

Liabilities associated with assets held for sale

 

 

5,659

 

 

 

5,659

 

Total current liabilities

 

 

767,377

 

73,715

 

 

841,092

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

470,688

 

55

 

 

470,743

 

Other liabilities

 

 

74,822

 

 

 

74,822

 

Shareholders’ equity

 

587,630

 

587,630

 

78,021

 

(665,651

)

587,630

 

Total liabilities and shareholders’ equity

 

$

587,630

 

$

1,900,517

 

$

151,791

 

$

(665,651

)

$

1,974,287

 

 

16




 

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

 

 

17




 

Condensed Consolidating Statement of Income
For the Three Months Ended June 30, 2006
(In thousands)

 

 

 

Parent
Company

 

Guarantor
Subsidiaries

 

Non-guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

 

$

1,334,558

 

$

187,293

 

$

(3,914

)

$

1,517,937

 

Cost of sales

 

 

1,133,790

 

159,279

 

(3,914

)

1,289,155

 

Gross profit

 

 

200,768

 

28,014

 

 

228,782

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

152,492

 

19,223

 

 

171,715

 

Depreciation and amortization

 

 

4,640

 

473

 

 

5,113

 

Income from operations

 

 

43,636

 

8,318

 

 

51,954

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

Floor plan interest expense

 

 

(10,483

)

(756

)

 

(11,239

)

Other interest expense

 

 

(9,584

)

(1,555

)

 

(11,139

)

Other income, net

 

 

1,367

 

135

 

 

1,502

 

Equity in earnings of subsidiaries

 

19,004

 

3,839

 

 

(22,843

)

 

Total other expense, net

 

19,004

 

(14,861

)

(2,176

)

(22,843

)

(20,876

)

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

19,004

 

28,775

 

6,142

 

(22,843

)

31,078

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

 

9,351

 

2,303

 

 

11,654

 

Income from continuing operations

 

19,004

 

19,424

 

3,839

 

(22,843

)

19,424

 

 

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations, net of tax

 

 

(420

)

 

 

(420

)

Net income

 

$

19,004

 

$

19,004

 

$

3,839

 

$

(22,843

)

$

19,004

 

 

18




 

Condensed Consolidating Statement of Income
For the Three Months Ended June 30, 2005
(In thousands)

 

 

 

Parent
Company

 

Guarantor
Subsidiaries

 

Non-guarantor
Subsidiaries

 


Eliminations

 


Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

 

$

1,251,003

 

$

168,612

 

$

(1,828

)

$

1,417,787

 

Cost of sales

 

 

1,065,858

 

144,298

 

(1,828

)

1,208,328

 

Gross profit

 

 

185,145

 

24,314

 

 

209,459

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

143,038

 

17,147

 

 

160,185

 

Depreciation and amortization

 

 

4,413

 

355

 

 

4,768

 

Income from operations

 

 

37,694

 

6,812

 

 

44,506

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

Floor plan interest expense

 

 

(7,029

)

(429

)

 

(7,458

)

Other interest expense

 

 

(8,968

)

(1,301

)

 

(10,269

)

Other income, net

 

 

498

 

5

 

 

503

 

Equity in earnings of subsidiaries

 

15,986

 

3,065

 

 

(19,051

)

 

Total other expense, net

 

15,986

 

(12,434

)

(1,725

)

(19,051

)

(17,224

)

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

15,986

 

25,260

 

5,087

 

(19,051

)

27,282

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

 

8,322

 

1,909

 

 

10,231

 

Income from continuing operations

 

15,986

 

16,938

 

3,178

 

(19,051

)

17,051

 

 

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations, net of tax

 

 

(952

)

(113

)

 

(1,065

)

Net income

 

$

15,986

 

$

15,986

 

$

3,065

 

$

(19,051

)

$

15,986

 

 

 

19




Condensed Consolidating Statement of Income
For the Six Months Ended June 30, 2006
(In thousands)

 

 

Parent
Company

 

Guarantor
Subsidiaries

 

Non-guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

 

$

2,561,182

 

$

347,133

 

$

(5,727

)

$

2,902,588

 

Cost of sales

 

 

2,173,093

 

295,110

 

(5,727

)

2,462,476