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, 2007

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 May 4, 2007, was 32,414,542 (net of 2,836,706 treasury shares).

 




ASBURY AUTOMOTIVE GROUP, INC.
INDEX

PART I — Financial Information

 

 

 

 

 

Item 1.

 

Condensed Consolidated Financial Statements (unaudited)

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2007 and December 31, 2006

3

 

 

Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2007 and 2006

4

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2007 and 2006

5

 

 

Notes to Condensed Consolidated Financial Statements

6

 

 

Report of Independent Registered Public Accounting Firm

21

 

 

 

 

Item 2.

 

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

22

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

38

Item 4.

 

Controls and Procedures

39

 

 

 

 

PART II — Other Information

41

 

 

 

 

Item 6.

 

Exhibits

41

 

 

Signatures

42

 

 

Index to Exhibits

43

 

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,
2007

 

December 31,
2006

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

Cash and cash equivalents

 

$

94,497

 

$

129,170

 

Contracts-in-transit

 

115,720

 

126,012

 

Accounts receivable (net of allowance of $476 and $648, respectively)

 

141,312

 

167,562

 

Inventories

 

780,491

 

775,313

 

Deferred income taxes

 

13,961

 

13,961

 

Prepaid and other current assets

 

69,328

 

55,099

 

Assets held for sale

 

22,359

 

25,947

 

Total current assets

 

1,237,668

 

1,293,064

 

 

 

 

 

 

 

PROPERTY AND EQUIPMENT, net

 

204,782

 

202,584

 

GOODWILL

 

447,021

 

447,996

 

OTHER LONG-TERM ASSETS

 

88,741

 

87,193

 

Total assets

 

$

1,978,212

 

$

2,030,837

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

Floor plan notes payable—manufacturer affiliated

 

$

225,676

 

$

319,896

 

Floor plan notes payable—non-manufacturer affiliated

 

445,762

 

380,881

 

Current maturities of long-term debt

 

24,841

 

23,144

 

Accounts payable

 

67,149

 

63,951

 

Accrued liabilities

 

86,499

 

89,296

 

Liabilities associated with assets held for sale

 

 

3,887

 

Total current liabilities

 

849,927

 

881,055

 

 

 

 

 

 

 

LONG-TERM DEBT

 

477,880

 

454,010

 

DEFERRED INCOME TAXES

 

45,702

 

53,991

 

OTHER LONG-TERM LIABILITIES

 

35,345

 

29,948

 

COMMITMENTS AND CONTINGENCIES (Note 11)

 

 

 

 

 

 

 

 

 

 

 

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, 35,181,154 and 35,071,401 shares issued, including shares held in treasury, respectively

 

352

 

351

 

Additional paid-in capital

 

431,648

 

431,725

 

Retained earnings

 

190,118

 

196,393

 

Treasury stock, at cost; 2,836,706 and 1,536,706 shares held, respectively

 

(50,634

)

(14,559

)

Accumulated other comprehensive loss

 

(2,126

)

(2,077

)

Total shareholders’ equity

 

569,358

 

611,833

 

Total liabilities and shareholders’ equity

 

$

1,978,212

 

$

2,030,837

 

 

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 March 31,

 

 

 

2007

 

2006

 

REVENUES:

 

 

 

 

 

New vehicle

 

$

824,451

 

$

809,657

 

Used vehicle

 

378,147

 

352,415

 

Parts, service and collision repair

 

174,288

 

168,529

 

Finance and insurance, net

 

38,684

 

35,150

 

Total revenues

 

1,415,570

 

1,365,751

 

COST OF SALES:

 

 

 

 

 

New vehicle

 

764,914

 

752,607

 

Used vehicle

 

341,978

 

319,982

 

Parts, service and collision repair

 

84,615

 

84,243

 

Total cost of sales

 

1,191,507

 

1,156,832

 

GROSS PROFIT

 

224,063

 

208,919

 

OPERATING EXPENSES:

 

 

 

 

 

Selling, general and administrative

 

176,386

 

163,291

 

Depreciation and amortization

 

5,328

 

4,955

 

Income from operations

 

42,349

 

40,673

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

Floor plan interest expense

 

(11,216

)

(8,937

)

Other interest expense

 

(11,786

)

(10,903

)

Interest income

 

1,965

 

727

 

Loss on extinguishment of long-term debt

 

(17,737

)

 

Other income, net

 

292

 

344

 

Total other expense, net

 

(38,482

)

(18,769

)

Income before income taxes

 

3,867

 

21,904

 

INCOME TAX EXPENSE

 

1,458

 

8,214

 

INCOME FROM CONTINUING OPERATIONS

 

2,409

 

13,690

 

DISCONTINUED OPERATIONS, net of tax

 

(1,976

)

(1,137

)

 

 

 

 

 

 

NET INCOME

 

$

433

 

$

12,553

 

 

 

 

 

 

 

EARNINGS PER COMMON SHARE:

 

 

 

 

 

Basic—

 

 

 

 

 

Continuing operations

 

$

0.07

 

$

0.42

 

Discontinued operations

 

(0.06

)

(0.04

)

Net income

 

$

0.01

 

$

0.38

 

Diluted—

 

 

 

 

 

Continuing operations

 

$

0.07

 

$

0.41

 

Discontinued operations

 

(0.06

)

(0.04

)

Net income

 

$

0.01

 

$

0.37

 

 

 

 

 

 

 

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:

 

 

 

 

 

Basic

 

33,333

 

32,922

 

Diluted

 

34,161

 

33,584

 

 

See Notes to Condensed Consolidated Financial Statements.

4




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

 

 

For the Three Months
Ended March 31,

 

 

 

2007

 

2006

 

CASH FLOW FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

433

 

$

12,553

 

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

 

 

 

 

 

Depreciation and amortization

 

5,328

 

4,955

 

Depreciation and amortization from discontinued operations

 

27

 

84

 

Stock-based compensation

 

1,895

 

1,369

 

Amortization of deferred financing fees

 

627

 

573

 

Change in allowance for doubtful accounts

 

(172

)

(216

)

Loss (gain) on sale of discontinued operations, net

 

2,001

 

(53

)

Loss on extinguishment of long-term debt

 

17,737

 

 

Deferred income taxes

 

(903

)

 

Other adjustments

 

3,284

 

1,361

 

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

 

 

 

 

 

Contracts-in-transit

 

10,292

 

23,292

 

Accounts receivable

 

20,786

 

9,839

 

Proceeds from the sale of accounts receivable

 

5,636

 

4,649

 

Inventories

 

609

 

(63,645

)

Prepaid and other current assets

 

(17,397

)

(7,468

)

Floor plan notes payable—manufacturer affiliated

 

(94,219

)

98,695

 

Accounts payable and accrued liabilities

 

498

 

(15,058

)

Excess tax benefits from share-based payment arrangements

 

(891

)

(381

)

Other long-term assets and liabilities

 

69

 

3,137

 

Net cash (used in) provided by operating activities

 

(44,360

)

73,686

 

 

 

 

 

 

 

CASH FLOW FROM INVESTING ACTIVITIES:

 

 

 

 

 

Capital expenditures—internally financed

 

(10,230

)

(5,534

)

Capital expenditures—externally financed

 

(2,687

)

(6,410

)

Proceeds from the sale of assets

 

8,389

 

9,275

 

Other investing activities

 

(1,827

)

(529

)

Net cash used in investing activities

 

(6,355

)

(3,198

)

 

 

 

 

 

 

CASH FLOW FROM FINANCING ACTIVITIES:

 

 

 

 

 

Floor plan borrowings—non-manufacturer affiliated

 

663,002

 

677,249

 

Floor plan repayments—non-manufacturer affiliated

 

(602,008

)

(747,686

)

Proceeds from borrowings

 

265,000

 

902

 

Repayments of debt

 

(253,919

)

(1,554

)

Debt issuance costs

 

(7,250

)

 

Purchase of convertible note hedge

 

(19,309

)

 

Sale of warrants

 

8,924

 

 

Purchase of treasury stock

 

(36,075

)

 

Payment of dividends

 

(6,708

)

 

Proceeds from the sale of assets associated with sale-leaseback agreements

 

3,181

 

 

Proceeds from the exercise of stock options, net

 

313

 

2,900

 

Excess tax benefits from share-based payment arrangements

 

891

 

381

 

Net cash provided by (used in) financing activities

 

16,042

 

(67,808

)

Net (decrease) increase in cash and cash equivalents

 

(34,673

)

2,680

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, beginning of period

 

129,170

 

57,194

 

CASH AND CASH EQUIVALENTS, end of period

 

$

94,497

 

$

59,874

 

 

See Note 10 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 112 franchises (85 dealership locations) in 21 metropolitan markets within 10 states as of March 31, 2007. 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 23 collision repair centers that serve our markets.

Our retail network is currently organized into four regions and includes nine 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 California dealerships operating in Los Angeles, Sacramento and Fresno), (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 and our Gray Daniels dealerships operating in Jackson, Mississippi 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.  All intercompany transactions have been eliminated in consolidation.

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.

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, 2007, and for the three months ended March 31, 2007 and 2006 have been included. The results of operations for the three months ended March 31, 2007 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/A for the year ended December 31, 2006.

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, 2007 and December 31, 2006, have been classified as Assets Held for Sale and Liabilities Associated with Assets Held for Sale. In addition, the accompanying Condensed Consolidated Statement of Income for the three months ended March 31, 2006, has been reclassified to reflect the status of our discontinued operations as of March 31, 2007.

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 component of new vehicle cost of sales when earned, generally at the time the related vehicles are sold.

6




We receive commissions from third party lending and insurance institutions 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 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 are responsible for customer facing activities, including inventory management and advertising and personnel decisions; and have the flexibility to respond to local market conditions. The corporate management team, with input from the regional management teams, is responsible for infrastructure and general strategy decisions.

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.

In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” we do not amortize goodwill and other intangible assets that are deemed to have indefinite lives. We review goodwill and indefinite lived manufacturer franchise rights for impairment annually on October 1st of each year, or more often if events or circumstances indicate that impairment may have occurred. We are subject to financial statement risk to the extent that intangible assets become impaired due to decreases in the related fair market value of our underlying businesses.

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 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 Consolidated Statements of Income. We recognized minor ineffectiveness during the three months ended March 31, 2007, and no ineffectiveness during the three months ended March 31, 2006.

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.

In November 2006, General Motors sold 51% of their financing subsidiary, General Motors Acceptance Corporation (“GMAC”), to an investment consortium led by Cerberus FIM Investors, LLC. Prior to this transaction, the net change in

7




floor plan notes payable to GMAC was classified as an operating activity on the accompanying Consolidated Statements of Cash Flows as borrowings and repayments of floor plan notes payable at our General Motors dealerships were with a manufacturer affiliated lender. Floor plan notes payable related to vehicles financed prior to this change in control will continue to be classified as Floorplan notes payable—manufacturer affiliated on the accompanying Consolidated Balance Sheets, with subsequent repayments classified as an operating activity, since these GMAC borrowings occurred while General Motors had control of GMAC. Following the sale of GMAC, General Motors no longer has a majority ownership of or controls GMAC, and therefore, beginning in December 2006, floor plan notes payable related to vehicles financed after this change in control are classified as Floorplan notes payable—non-manufacturer affiliated on the accompanying Consolidated Balance Sheets, with the related borrowings and repayments presented separately as financing activities on the accompanying Consoldiated Statements of Cash Flows.

Loaner vehicle activity accounts for a significant portion of Prepaid and Other Current Assets on the accompanying Consolidated Statements of Cash Flows. We acquire loaner vehicles through borrowings with manufacturer affiliated lenders, therefore we classify the acquisition of loaner vehicles and the related borrowings as an operating activity in Prepaid and Other Current Assets in the accompanying Consolidated Statements of Cash Flows. When loaner vehicles are taken out of loaner status they are transferred to used vehicle inventory, which is reflected as a non-cash transfer in the accompanying Consolidated Statements of Cash Flows. The cash outflow to repay loaner vehicle loans are reflected in Prepaid and Other Current Assets and the cash inflow upon the sale of a loaner vehicle is reflected in Inventory on the accompanying Consolidated Statements of Cash Flows. Therefore, the net impact of loaner vehicle activity on the accompanying Consolidated Statements of Cash Flows is a cash outflow in Prepaid and Other Current Assets and a cash inflow in Inventory.

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.

Proceeds from the sale of dealership facilities and the related real estate previously owned and subsequently leased back in connection with sale-leaseback agreements are reflected as financing activities in the accompanying 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 share-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 share-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.

Net proceeds from share-based payment arrangements include payments from employees upon the exercise of stock options, net of payments of employee income taxes in connection with net share settlements of share-based awards.  Net share settlements of share-based awards result in (i) the issuance of shares of our common stock with a value equal to the employee’s intrinsic value and (ii) the payment of the income tax on behalf of the employee in lieu of issuing additional shares of common stock.

Recent Accounting Pronouncements

In June 2006, the FASB issued FASB Interpretation (“FIN”) No. 48 “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109”.  FIN 48 establishes a single model to address accounting for uncertain tax positions.  FIN 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized as well as providing guidance on derecognition, measurement classification, interest and penalties and disclosure. 

We adopted the provisions of FIN 48 effective January 1, 2007 and recognized no material adjustment in our liability for unrecognized tax benefits.   As of January 1, 2007, we had $3.6 million of total unrecognized tax benefits.  Of that amount $2.4 million, net of the federal effect, if recognized would favorably impact our effective rate in future periods.  We do not expect these amounts to change materially in the next twelve months.

8




In connection with the adoption of FIN 48, we analyzed our filing positions in all of the federal and state jurisdictions where we are required to file tax returns, as well as all open years in these jurisdictions.  We have uncertain tax positions in certain of the states in which we do business; however, none of the states individually constitute a “major” tax jurisdiction, as defined.  Years subject to audit range as far back as 2003.  The Internal Revenue Service commenced examinations of our consolidated federal returns for the years 2004 and 2005 in the first quarter of 2007, and certain of our subsidiary returns for 2003, 2004 and 2005 in the fourth quarter 2006.  In addition, we have various state audits for years 2003, 2004 and 2005, being performed as of March 31, 2007.  To date, no material adjustments have been proposed and we do not anticipate that these examinations will result in a material change to our financial position or results of operations.    

We recognize interest and penalties related to income tax matters in income tax expense.  As of March 31, 2007, we had approximately $0.7 million of accrued interest related to uncertain tax positions and no accrual for penalties.  We do not expect the amount of accrued interest to change materially in the next twelve months.

3. INVENTORIES

Inventories consist of the following:

 

 

As of

 

(In thousands)

 

March 31,
2007

 

December 31,
2006

 

 

 

 

 

 

 

New vehicles

 

$

606,054

 

$

616,275

 

Used vehicles

 

130,767

 

115,927

 

Parts and accessories

 

43,670

 

43,111

 

Total inventories

 

$

780,491

 

$

775,313

 

 

The lower of cost or market reserves reduced total inventory cost by $4.9 million and $4.8 million as of March 31, 2007 and December 31, 2006, respectively. In addition to the inventories shown above, we have $4.8 million of inventory as of December 31, 2006, classified as Assets Held for Sale on the accompanying Condensed Consolidated Balance Sheets as it is associated with franchises held for sale.  There was no inventory classified as Assets Held for Sale as of March 31, 2007.

4. GOODWILL AND MANUFACTURER FRANCHISE RIGHTS

During the three months ended March 31, 2007, we sold two franchises (two dealership locations) resulting in the removal of approximately $1.0 million of Goodwill and approximately $2.3 million of manufacturer franchise rights from our Condensed Consolidated Balance Sheets.  Manufacturer franchise rights totaled $37.2 million and $39.5 million as of March 31, 2007 and December 31, 2006, respectively, and are included in Other Long-term Assets on the accompanying Condensed Consolidated Balance Sheets.

5. 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, and (ii) costs of completed construction projects and related reimbursements during the construction period associated with pending sale-leaseback transactions.

As of December 31, 2006, assets and liabilities associated with discontinued operations included two franchises (two dealership locations) in Arkansas.  During the three months ended March 31, 2007, we sold the two franchises (two dealership locations) that had been held for sale as of December 31, 2006.  There were no assets or liabilities associated with discontinued operations as of March 31, 2007. 

Assets associated with pending sale-leaseback transactions as of March 31, 2007, and December 31, 2006, include three and two completed construction projects, respectively, totaling $11.3 million and $9.7 million, respectively. As of March 31, 2007, we had not received any reimbursements associated with these sale-leaseback transactions. We expect to expect to receive final reimbursement during 2007.

Assets held for sale include real estate not currently used in our operations totaling $11.1 million as of March 31, 2007 and December 31, 2006.

9




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

 

 

As of

 

(In thousands)

 

March 31,
2007

 

December 31,
2006

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

Inventories

 

$

 

$

4,808

 

Property and equipment, net

 

22,359

 

21,139

 

Total assets

 

22,359

 

25,947

 

Liabilities:

 

 

 

 

 

Floor plan notes payable

 

 

3,887

 

Total liabilities

 

 

3,887

 

Net assets held for sale

 

$

22,359

 

$

22,060

 

 

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 for the cost of construction of dealership facilities being constructed on the land. We capitalize the cost of the construction during the construction period and record a corresponding liability equal to the amount of the reimbursed funds. Upon completion of the construction and receipt of the final reimbursement, we 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, 2007 and December 31, 2006, totaled $4.7 million and $4.4 million, respectively. As of March 31, 2007 and December 31, 2006, there were no liabilities associated with these construction projects.

6. LONG-TERM DEBT

Long-term debt consists of the following:

 

 

As of

 

(In thousands)

 

March 31,
2007

 

December 31,
2006

 

 

 

 

 

 

 

9% Senior Subordinated Notes due 2012

 

$

11,908

 

$

250,000

 

8% Senior Subordinated Notes due 2014 ($179.4 million and $182.4 million face value, respectively, net of hedging activity of $7,455 and $7,848, respectively)

 

171,975

 

174,582

 

7.625% Senior Subordinated Notes due 2017

 

150,000

 

 

3% Senior Subordinated Convertible Notes Due 2012

 

115,000

 

 

Mortgage notes payable

 

26,587

 

26,837

 

Notes payable collateralized by loaner vehicles

 

23,000

 

21,279

 

Capital lease obligations

 

3,426

 

3,552

 

Other notes payable

 

825

 

904

 

 

 

502,721

 

477,154

 

Less—current portion

 

(24,841

)

(23,144

)

Long-term debt

 

$

477,880

 

$

454,010

 

 

Long-term Debt Refinancing

During the three months ended March 31, 2007, we initiated a refinancing of our long-term debt which included (i) a cash tender offer for all of our $250.0 million 9% Senior Subordinated Notes due 2012 (“9% Notes”), (ii) the issuance of $115.0 million of 3% Senior Subordinated Convertible Notes due 2012 (“3% Notes”), which have an initial conversion price of $33.99 and (iii) the issuance of $150.0 million of 7.625% Senior Subordinated Notes due 2017.  As of March 31, 2007, we had completed the issuance of our 3% Notes and 7.625% Notes and repurchased $238.1 million of our 9% Notes through our tender offer.  We plan to call the remaining $11.9 million of our 9% Notes on the first call date of June 15, 2007.  Upon completion of our long-term debt refinancing, we expect our annual interest expense will decrease by approximately $7.9 million.

During the three months ended March 31, 2007, we recognized a $17.7 million loss on the extinguishment of $238.1 million of our 9% Notes and $3.0 million of our 8% Notes.  Included in the $17.7 million loss are (i) a $12.4 million premium on the repurchase of the 9% Notes and 8% Notes, (ii) $5.2 million of costs associated with a pro-rata write-off of

10




unamortized debt issuance costs associated with the 9% Notes and 8% Notes, and (iii) $0.1 million of costs associated with a pro-rata write-off of the unamortized value of our terminated fair value swap associated with the 8% Notes.

In connection with the sale of our 3% Notes, we entered into convertible note hedge transactions with respect to our common stock, with Goldman, Sachs & Co. and Deutsche Bank AG, London Branch (collectively, the “counterparties”). The convertible note hedge transactions will cover, subject to customary anti-dilution adjustments, approximately 3.4 million shares of common stock at a strike price of $33.99 per share of common stock, which corresponds to the initial conversion price of the 3% Notes.

We also entered into separate warrant transactions whereby we sold to the counterparties warrants to acquire, subject to customary anti-dilution adjustments, approximately 3.4 million shares of our common stock at a strike price of $45.09 per share. On exercise of the warrants, we have the option to deliver cash or common stock equal to the difference between the then market price and strike price.

The convertible note hedge and warrant transactions are separate contracts and are not part of the terms of the 3% Notes and will not affect the holders’ rights under the 3% Notes.  Holders of the 3% Notes will not have any rights with respect to the convertible note hedge and warrant transactions. The convertible hedge and warrant transactions will generally have the effect of increasing the conversion price of the 3% Notes to $45.09, which is a 62.50% premium over the market price of our common stock at the time of pricing. The convertible note hedge transactions are expected to offset the potential dilution upon conversion of the 3% Notes in the event that the market value per share of our common stock at the time of exercise is greater than the strike price of the convertible note hedge transactions.

The warrant transactions and the underlying shares of common stock issuable upon exercise of the warrants have not been registered under the Securities Act or the securities laws of any other jurisdiction and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

3% Senior Subordinated Convertible Notes due 2012—

On March 16, 2007, we issued $115.0 million in aggregate principal amount of our 3% Notes, receiving net proceeds of $111.4 million.  The sale of the notes was exempt from registration pursuant to Rule 144A under the Securities Act of 1933.  During the second quarter of 2007, we expect to file a shelf registration statement with the Securities and Exchange Commission covering the resale of the notes and the underlying common stock.  The costs related to the issuance of these notes were capitalized and are being amortized to other interest expense over the term of the notes.  We pay interest on these notes on March 15 and September 15 of each year until their maturity on September 15, 2012.  If and when these notes are converted, we will pay cash for the principal amount of each note and, if applicable, shares of our common stock based on a daily conversion value calculated on a proportionate basis for each volume weighted average price (“VWAP”) trading day (as defined in the notes) and the relevant 30 VWAP trading day observation period. The initial conversion rate for the notes will be 29.4172 shares of common stock per $1,000 principal amount of notes, which is equivalent to an initial conversion price of $33.99 per share.   The conversion rate will be subject to adjustment in some events but will not be adjusted for accrued interest.

Our 3% Notes are guaranteed by all our wholly-owned current subsidiaries and all of our future domestic subsidiaries that have outstanding, incur or guarantee any other indebtedness. The terms of our 3% Notes, in certain circumstances, restrict our ability to, among other things, sell all or substantially all of our assets.

7.625% Senior Subordinated Notes due 2017—

On March 26, 2007, we issued $150.0 million of our 7.625% Notes, receiving net proceeds of $146.3 million.  The sale of the notes was exempt from registration pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended.  During the second quarter of 2007, we expect to file a registration statement with the Securities and Exchange Commission in connection with an exchange offer to exchange the notes for new notes with substantially identical terms that are registered under the Securities Act of 1933 and, therefore, will generally be freely transferable.  The costs related to the issuance of these notes were capitalized and are being amortized to other interest expense over the term of the notes.  We pay interest on these notes on March 15 and September 15 of each year until their maturity on March 15, 2017.  At any time during the term of the 7.625% Notes we may, at our option, choose to redeem all or a portion of these notes at a price equal to 100% of their principal amount plus the applicable premium set forth in the 7.625% Notes indenture.  On or before March 15, 2010, we may, at our option, use the net proceeds of one or more equity offerings to redeem up to 35% of the aggregate principal amount of these notes at a redemption price equal to 107.625% of their principal amount plus accrued and unpaid interest thereon.

11




Our 7.625% Notes are guaranteed by all of our wholly-owned current subsidiaries and all of our future domestic subsidiaries that have outstanding, incur or guarantee any other indebtedness. The terms of our 7.625% Notes, in certain circumstances, restrict our ability to, among other things, incur additional indebtedness, pay dividends, repurchase our common stock and merge or sell all or substantially all our assets.

7. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITY

In November 2006, we entered into an interest rate swap agreement with a notional principal amount of $150.0 million as a hedge against the changes in interest rates of our variable rate floor plan notes payable for a period of two years beginning in November 2006. The swap agreement was designated and qualifies as a cash flow hedge of future changes in interest rates of our variable rate floor plan notes payable and is not expected to contain any ineffectiveness. As of March 31, 2007, the swap agreement had a fair value of $0.4 million, which was included in Other Long-Term Liabilities on the accompanying Condensed Consolidated Balance Sheet.

Three of our interest rate swap agreements terminated 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, 2007, was $3.1 million ($2.0 million, net of tax) of unrecognized amortization related to our two terminated cash flow swaps, which are being amortized through March 2014 as a component of Floor Plan Interest Expense on the accompanying Condensed Consolidated Statements of Income. Amortization of these terminated cash flow swaps will total $0.9 million for the year ended December 31, 2007. In addition, included as a reduction to our 8% Notes as of March 31, 2007, was $7.5 million of unrecognized amortization related to our terminated fair value swap, which is being amortized through March 2014 as a component of Other Interest Expense on the accompanying Condensed Consolidated Statements of Income. Amortization of this terminated fair value swap will total $1.1 million for the year ended December 31, 2007.

We have an interest rate swap with a current notional principal amount of $14.0 million. The swap was designed to provide a hedge against changes in interest rates of our variable rate mortgage notes payable through maturity in June 2011. This interest rate swap qualifies for cash flow hedge accounting treatment and will contain minor ineffectiveness. Under the terms of the swap agreement, we make payments based on a fixed rate of 6.08% and receive a variable rate cash flows based on one-month LIBOR.  As of March 31, 2007 and December 31, 2006, 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.

8. COMPREHENSIVE INCOME

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

 

 

For the Three Months
Ended March 31,

 

(In thousands)

 

2007

 

2006

 

 

 

 

 

 

 

Net income

 

$

433

 

$

12,553

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

Change in fair value of cash flow swaps

 

(351

)

2,019

 

Amortization of expired cash flow swaps

 

224

 

80

 

Income tax benefit (expense) associated with cash flow swaps

 

78

 

(787

)

Comprehensive income

 

$

384

 

$

13,865

 

 

9. DISCONTINUED OPERATIONS

During the three months ended March 31, 2007, we sold two franchises (two dealership locations).  There were no franchises pending disposition as of March 31, 2007.  The accompanying Condensed Consolidated Statements of Income for the three months ended March 31, 2006, have been reclassified to reflect the status of our discontinued operations as of March 31, 2007.

The following table provides further information regarding our discontinued operations as of March 31, 2007, and includes the results of businesses sold prior to March 31, 2007:

12




 

 

For the Three Months
Ended March 31,

 

(Dollars in thousands)

 

2007

 

2006

 

 

 

 

 

 

 

Franchises:

 

 

 

 

 

Mid-line Domestic

 

 

6

 

Mid-line Import

 

 

2

 

Value

 

2

 

3

 

Luxury

 

 

1

 

Total

 

2

 

12

 

 

 

 

 

 

 

Ancillary Businesses

 

 

1

 

 

 

 

 

 

 

Revenues

 

$

1,396

 

$

51,439

 

Cost of sales

 

1,478

 

43,269

 

Gross profit

 

(82

)

8,170

 

Operating expenses

 

964

 

9,435

 

 

 

 

 

 

 

Loss from operations

 

(1,046

)

(1,265

)

Other expense, net

 

(20

)

(607

)

Gain (loss) on disposition of discontinued operations, net

 

(2,001

)

53

 

Loss before income taxes

 

(3,067

)

(1,819

)

Income tax benefit

 

1,091

 

682

 

Discontinued operations, net of tax

 

$

(1,976

)

$

(1,137

)

 

10. SUPPLEMENTAL CASH FLOW INFORMATION

During the three months ended March 31, 2007 and 2006, we made interest payments, net of amounts capitalized, totaling $26.6 million and $18.3 million, respectively.  During the three months ended March 31, 2006, we received $0.5 million of proceeds associated with our interest rate swap agreement that was entered into in December 2003 in connection with the issuance of our 8% Senior Subordinated Notes due 2014.

During the three months ended March 31, 2007 and 2006, we made income tax payments totaling $5.2 million and $5.5 million, respectively.

11. 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.

13




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.

12.  STOCK-BASED COMPENSATION

A summary of options outstanding and exercisable under the Plans as of March 31, 2007, 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, 2006

 

1,528,179

 

$

14.57

 

 

 

 

 

Granted

 

 

$

 

 

 

 

 

Exercised

 

(239,427

)

$

16.34

 

 

 

 

 

Expired / Forfeited

 

(11,669

)

$

14.01

 

 

 

 

 

Options outstanding - March 31, 2007

 

1,277,083

 

$

14.26

 

6.3

 

$

17,866,391

 

 

 

 

 

 

 

 

 

 

 

Options exercisable - March 31, 2007

 

1,037,949

 

$

14.23

 

6.1

 

$

14,552,045

 

 


* Based on the closing price of our common stock on March 30, 2007, which was $28.25 per share.

Net cash received from option exercises for the three months ended March 31, 2007 was $0.3 million. The actual intrinsic value of options exercised during the three months ended March 31, 2007 was $2.6 million. The actual tax benefit realized for the tax deductions from option exercises totaled $1.0 million for the three months ended March 31, 2007.

A summary of performance share units and restricted share units as of March 31, 2007, and changes during the three months ended is presented below:

 

 

Shares

 

Weighted Average
Grant Date Fair Value

 

Performance Share Units - December 31, 2006

 

468,125

 

$

20.15

 

Granted

 

199,000

 

$

26.98

 

Performance estimate

 

 

$

 

Vested

 

 

$

 

Forfeited (including 2,188 of performance estimates)

 

(10,938

)

$

20.09

 

Performance Share Units - March 31, 2007*

 

656,187

 

$

22.22

 

 


*    Includes an estimate of 91,437 out of a maximum of 292,600 issuable upon attaining certain performance metrics

 

 

Shares

 

Weighted Average
Grant Date Fair Value

 

Restricted Share Units - December 31, 2006

 

29,728

 

$

21.65

 

Granted

 

21,409

 

$

26.98

 

Vested

 

 

$

 

Forfeited

 

(2,500

)

$

22.98

 

Restricted Share Units - March 31, 2007

 

48,637

 

$

23.93

 

 

Each performance share 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 as measured against objective performance goals as determined by the compensation committee of our board of directors. 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.

14




13. CONDENSED CONSOLIDATING FINANCIAL INFORMATION

Our Committed Credit Facility is 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.

Condensed Consolidating Balance Sheet
As of March 31, 2007
(In thousands)

 

 

Parent
Company

 

Guarantor
Subsidiaries

 

Non-
guarantor
Subsidiaries

 

Eliminations

 

Condensed
Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

$

94,497

 

$

 

$

 

$

94,497

 

Inventories

 

 

724,200

 

56,291

 

 

780,491

 

Other current assets

 

 

291,556

 

48,765

 

 

340,321

 

Assets held for sale

 

 

22,359

 

 

 

22,359

 

Total current assets

 

 

1,132,612

 

105,056

 

 

1,237,668

 

Property and equipment, net

 

 

198,292

 

6,490

 

 

204,782

 

Goodwill

 

 

393,819

 

53,202

 

 

447,021

 

Other long-term assets

 

 

88,467

 

274

 

 

88,741

 

Investment in subsidiaries

 

569,358

 

93,667

 

 

(663,025

)

 

Total assets

 

$

569,358

 

$

1,906,857

 

$

165,022

 

$

(663,025

)

$

1,978,212

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Floor plan notes payable—manufacturer affiliated

 

$

 

$

225,676

 

$

 

$

 

$

225,676

 

Floor plan notes payable—non-manufacturer affiliated

 

 

399,960

 

45,802

 

 

445,762

 

Other current liabilities

 

 

152,976

 

25,513

 

 

178,489

 

Total current liabilities

 

 

778,612

 

71,315

 

 

849,927

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

477,841

 

39

 

 

477,880

 

Other long-term liabilities

 

 

81,046

 

1

 

 

81,047

 

Shareholders’ equity

 

569,358

 

569,358

 

93,667

 

(663,025

)

569,358

 

Total liabilities and shareholders’ equity

 

$

569,358

 

$

1,906,857

 

$

165,022

 

$

(663,025

)

$

1,978,212

 

 

15




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

 

 

Parent
Company

 

Guarantor
Subsidiaries

 

Non-
guarantor
Subsidiaries

 

Eliminations

 

Condensed
Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

$

129,170

 

$

 

$

 

$

129,170

 

Inventories

 

 

719,350

 

55,963

 

 

775,313

 

Other current assets

 

 

311,134

 

51,500

 

 

362,634

 

Assets held for sale

 

 

25,947

 

 

 

25,947

 

Total current assets

 

 

1,185,601

 

107,463

 

 

1,293,064

 

Property and equipment, net

 

 

196,017

 

6,567

 

 

202,584

 

Goodwill

 

 

394,794

 

53,202

 

 

447,996

 

Other assets

 

 

86,919

 

274

 

 

87,193

 

Investment in subsidiaries

 

611,833

 

83,198

 

 

(695,031

)

 

Total assets

 

$

611,833

 

$

1,946,529

 

$

167,506

 

$

(695,031

)

$

2,030,837

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Floor plan notes payable—manufacturer affiliated

 

$

 

$

319,896

 

$

 

$

 

$

319,896

 

Floor plan notes payable—non-manufacturer affiliated

 

 

330,026

 

50,855

 

 

380,881

 

Other current liabilities

 

 

142,983

 

33,408

 

 

176,391

 

Liabilities associated with assets held for sale

 

 

3,887

 

 

 

3,887

 

Total current liabilities

 

 

796,792

 

84,263

 

 

881,055

 

Long-term debt

 

 

453,966

 

44

 

 

454,010

 

Other liabilities

 

 

83,938

 

1

 

 

83,939

 

Shareholders’ equity

 

611,833

 

611,833

 

83,198

 

(695,031

)

611,833

 

Total liabilities and shareholders’ equity

 

$

611,833

 

$

1,946,529

 

$

167,506

 

$

(695,031

)

$

2,030,837

 

 

16




Condensed Consolidating Statement of Income
For the Three Months Ended March 31, 2007
(In thousands)

 

 

Parent
Company

 

Guarantor
Subsidiaries

 

Non-
guarantor
Subsidiaries

 

Eliminations

 

Condensed
Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

 

$

1,246,436

 

$

173,084

 

$

(3,950

)

$

1,415,570

 

Cost of sales

 

 

1,050,645

 

144,812

 

(3,950

)

1,191,507

 

Gross profit

 

 

195,791

 

28,272

 

 

224,063

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

156,724

 

19,662

 

 

176,386

 

Depreciation and amortization

 

 

4,880

 

448

 

 

5,328

 

Income from operations

 

 

34,187

 

8,162

 

 

42,349

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

Floor plan interest expense

 

 

(10,470

)

(746

)

 

(11,216

)

Other interest expense

 

 

(9,886

)

(1,900

)

 

(11,786

)

Other income (expense), net

 

 

(15,727

)

247

 

 

(15,480

)

Equity in earnings of subsidiaries

 

433

 

3,590

 

 

(4,023

)

 

Total other expense, net

 

433

 

(32,493

)

(2,399

)

(4,023

)

(38,482

)

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

433

 

1,694

 

5,763

 

(4,023

)

3,867

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax (benefit) expense

 

 

(715

)

2,173

 

 

1,458

 

Income from continuing operations

 

433

 

2,409

 

3,590

 

(4,023

)

2,409

 

 

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations, net of tax

 

 

(1,976

)

 

 

(1,976

)

Net income

 

$

433

 

$

433

 

$

3,590

 

$

(4,023

)

$

433

 

 

17




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

 

$

 

$

1,207,724

 

$

159,840

 

$

(1,813

)

$

1,365,751

 

Cost of sales

 

 

1,022,814

 

135,831

 

(1,813

)

1,156,832

 

Gross profit

 

 

184,910

 

24,009

 

 

208,919

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

145,623

 

17,668

 

 

163,291

 

Depreciation and amortization

 

 

4,513

 

442

 

 

4,955

 

Income from operations

 

 

34,774

 

5,899

 

 

40,673

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

Floor plan interest expense

 

 

(8,282

)

(655

)

 

(8,937

)

Other interest expense

 

 

(9,429

)

(1,474

)

 

(10,903

)

Other income, net

 

 

986

 

85

 

 

1,071

 

Equity in earnings of subsidiaries

 

12,553

 

2,409

 

 

(14,962

)

 

Total other expense, net

 

12,553

 

(14,316

)

(2,044

)

(14,962

)

(18,769

)

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

12,553

 

20,458

 

3,855

 

(14,962

)

21,904

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

 

6,768

 

1,446

 

 

8,214

 

Income from continuing operations

 

12,553

 

13,690

 

2,409

 

(14,962

)

13,690

 

 

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations, net of tax

 

 

(1,137

)

 

 

(1,137

)

Net income

 

$

12,553

 

$

12,553

 

$

2,409

 

$

(14,962

)

$

12,553

 

 

18




Condensed Consolidating Statement of Cash Flows
For the Three Months Ended March 31, 2007
(In thousands)

 

 

Parent
Company

 

Guarantor
Subsidiaries

 

Non-
guarantor
Subsidiaries

 

Eliminations

 

Condensed
Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash (used in) provided by operating activities

 

$

 

$

(76,477

)

$

32,117

 

$

 

$

(44,360

)

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow from investing activities:

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(12,537

)

(380

)

 

(12,917

)

Other investing activities

 

 

6,551

 

11

 

 

6,562

 

Net cash used in investing activities

 

 

(5,986

)

(369

)

 

(6,355

)

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow from financing activities:

 

 

 

 

 

 

 

 

 

 

 

Floor Plan Borrowings — non-manufacturer affiliated

 

 

553,361

 

109,641

 

 

663,002

 

Floor Plan Repayments — non-manufacturer affiliated

 

 

(487,313

)

(114,695

)

 

(602,008

)

Payment of dividends

 

 

(6,708

)

 

 

(6,708

)

Proceeds from borrowings

 

 

265,000

 

 

 

265,000

 

Payments of debt issuance costs

 

 

(7,250

)

 

 

(7,250

)

Sale-leaseback agreements

 

 

3,181

 

 

 

3,181

 

Repayments of debt

 

 

(253,914

)

(5

)

 

(253,919

)

Intercompany financing, net

 

 

26,689

 

(26,689

)

 

 

Other financing activities

 

 

(45,256

)

 

 

(45,256

)

Net cash provided by (used in) financing activities

 

 

47,790

 

(31,748

)

 

16,042

 

Net decrease in cash and cash equivalents

 

 

(34,673

)

 

 

(34,673

)

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

 

129,170

 

 

 

129,170

 

Cash and cash equivalents, end of period

 

$

 

$

94,497

 

$

 

$

 

$

94,497

 

 

19




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

 

$

 

$

71,459

 

$

2,227

 

$

 

$

73,686

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

3,281

 

 

 

3,281

 

Net cash used in financing activities

 

 

(66,240

)

(1,568

)

 

(67,808

)

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

 

 

14. SUBSEQUENT EVENTS

During the second quarter of 2007, we completed the acquisition of three franchises (three dealership locations) representing annual revenues of approximately $144.0 million for approximately $29.0 million (including $10.7 million borrowed from our floor plan facility for the purchase of inventory).

On May 4, 2007, our board of directors declared a $0.20 per share cash dividend. This was the fourth consecutive quarter that a $0.20 per share dividend was paid.

20




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Asbury Automotive Group, Inc.:

We have reviewed the accompanying condensed consolidated balance sheet of Asbury Automotive Group, Inc. and subsidiaries (the “Company”) as of March 31, 2007, and the related condensed consolidated statements of income and cash flow for the three-month periods ended March 31, 2007 and 2006. These interim financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of December 31, 2006, and the related consolidated statements of income, shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated March 15, 2007, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2006 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ DELOITTE & TOUCHE LLP

 

New York, New York

 

May 8, 2007

 

 

21




Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

We are one of the largest automotive retailers in the United States operating 112 franchises (85 dealership locations) in 21 metropolitan markets within 10 states as of March 31, 2007. 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 23 collision repair centers that serve our markets.

We developed our dealership portfolio through the acquisition of large, locally branded dealership groups operating throughout the United States. We complemented these large dealership groups with the purchase of numerous single point dealerships and small dealership groups in our existing market areas (referred to as “tuck-in acquisitions”). We continue to use tuck-in acquisitions to increase the number of vehicle brands we offer in a particular market area and to create a larger gross profit base over which to spread overhead costs. Our retail network is currently organized into four regions and includes nine dealership groups: (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 California dealerships operating in Los Angeles, Sacramento and Fresno), (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 and our Gray Daniels dealerships operating in Jackson, Mississippi, remain standalone operations.

Our revenues are derived primarily from four offerings: (i) the sale of new vehicles to individual retail customers (“new retail”) and the sale of new vehicles to commercial customers (“fleet”) (the terms “new retail” and “fleet” being collectively referred to as “new”); (ii) the sale of used vehicles to individual retail customers (“used retail”) and the sale of used vehicles to other dealers at auction (“wholesale”) (the terms “used retail” and “wholesale” being collectively referred to as “used”); (iii) maintenance and collision repair services and the sale of automotive parts (collectively referred to as “fixed operations”); and (iv) the arrangement of vehicle financing and the sale of various insurance and warranty products (collectively referred to as “F&I”). We evaluate the results of our new and used vehicle sales based on unit volumes and gross profit per vehicle retailed (“PVR”), our fixed operations based on aggregate gross profit, and F&I based on dealership generated F&I PVR. We assess the organic growth of our revenue and gross profit by comparing the year-to-year results of stores that we have operated for at least twelve full months.

The organic growth of our business is dependent upon the execution of our balanced automotive retailing and service business strategy, as well as our strong brand mix, which is heavily weighted towards luxury and mid-line import brands. Sales of vehicles (particularly new vehicles) have historically fluctuated with general macroeconomic conditions, including consumer confidence, availability of consumer credit and fuel prices. We believe that any future negative trends in new vehicle sales will be mitigated by (i) the stability of our fixed operations, (ii) increased used vehicle sales, (iii) our variable cost structure and (iv) our advantageous brand mix. Historically, our brand mix has been less affected by market volatility than the U.S. automobile industry as a whole. We expect the recent industry-wide gain in market share of the luxury and mid-line import brands to continue in the near future.

Our gross profit margin varies with our revenue mix. The sale of new vehicles generally results in lower gross profit margin than used vehicle sales and fixed operations. As a result, when used vehicles and fixed operations revenue increases as a percentage of total revenue, we expect our overall gross profit margin to increase. We continue to implement new initiatives specifically designed to accelerate the growth of our high margin businesses and to leverage our selling, general and administrative (“SG&A”) expense structure.

SG&A expenses consist primarily of fixed and incentive-based compensation, advertising, rent, insurance, utilities and other customary operating expenses. A significant portion of our selling expenses is variable (such as sales commissions), or controllable expenses (such as advertising), generally allowing our cost structure to adapt in response to trends in our business. We evaluate commissions paid to salespeople as a percentage of retail vehicle gross profit and all other SG&A expenses in the aggregate as a percentage of total gross profit.

Our operations are generally subject to seasonal variations as we tend to generate more revenue and operating income in the second and third quarters than in the first and fourth quarters of the calendar year. Generally, the seasonal variations in our operations are caused by factors relating to weather conditions, changes in manufacturer incentive programs, model changeovers and consumer buying patterns, among other things. Over the past several years, certain automobile manufacturers have used a combination of vehicle pricing and financing incentive programs to generate increased customer demand for new vehicles. We anticipate that the manufacturers will continue to use these incentive programs to drive demand for their product offerings.

22




RESULTS OF OPERATIONS

Three Months Ended March 31, 2007, Compared to the Three Months Ended March 31, 2006

 

 

For the Three Months Ended

 

 

 

 

 

 

 

March 31,

 

 

 

 

 

 

 

 

 

% of

 

 

 

% of

 

 

 

 

 

 

 

 

 

Gross

 

 

 

Gross

 

Increase

 

 

 

 

 

2007 

 

Profit

 

2006 

 

Profit

 

(Decrease)

 

% Change

 

 

 

(In thousands)

 

REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

 

New vehicle

 

$

824,451

 

 

 

$

809,657

 

 

 

$

14,794

 

2

%

Used vehicle

 

378,147

 

 

 

352,415

 

 

 

25,732

 

7

%

Parts, service and collision repair

 

174,288

 

 

 

168,529

 

 

 

5,759

 

3

%

Finance and insurance, net

 

38,684

 

 

 

35,150

 

 

 

3,534

 

10

%

Total revenues

 

1,415,570

 

 

 

1,365,751

 

 

 

49,819

 

4

%

COST OF SALES

 

1,191,507

 

 

 

1,156,832

 

 

 

34,675

 

3

%

GROSS PROFIT

 

224,063

 

100

%

208,919

 

100

%

15,144

 

7

%

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

176,386

 

79

%

163,291

 

79

%

13,095

 

8

%

Depreciation and amortization

 

5,328

 

2

%

4,955

 

2

%

373

 

8

%

Income from operations

 

42,349

 

19

%

40,673

 

19

%

1,676

 

4

%

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

 

 

 

 

 

 

Floor plan interest expense

 

(11,216

)

(5

)%

(8,937

)

(4

)%

2,279

 

26

%

Other interest expense

 

(11,786

)

(5

)%

(10,903

)

(5

)%

883

 

8

%

Interest income

 

1,965

 

1

%

727

 

%

1,238

 

170

%

Loss on extinguishment of long-term debt

 

(17,737

)

(8

)%

 

%

17,737

 

NM

 

Other income, net

 

292

 

%

344

 

%

(52

)

(15

)%

Total other expense, net

 

(38,482

)

(17

)%

(18,769

)

(9

)%

19,713

 

105

%

Income before income taxes

 

3,867

 

2

%

21,904

 

10

%

(18,037

)

(82

)%

INCOME TAX EXPENSE

 

1,458