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

 

Gross profit

 

 

388,089

 

52,023

 

 

440,112

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

300,473

 

36,891

 

 

337,364

 

Depreciation and amortization

 

 

9,173

 

915

 

 

10,088

 

Income from operations

 

 

78,443

 

14,217

 

 

92,660

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

Floor plan interest expense

 

 

(18,990

)

(1,411

)

 

(20,401

)

Other interest expense

 

 

(19,014

)

(3,029

)

 

(22,043

)

Other income, net

 

 

2,353

 

220

 

 

2,573

 

Equity in earnings of subsidiaries

 

31,557

 

6,248

 

 

(37,805

)

 

Total other expense, net

 

31,557

 

(29,403

)

(4,220

)

(37,805

)

(39,871

)

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

31,557

 

49,040

 

9,997

 

(37,805

)

52,789

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

 

16,047

 

3,749

 

 

19,796

 

Income from continuing operations

 

31,557

 

32,993

 

6,248

 

(37,805

)

32,993

 

 

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations, net of tax

 

 

(1,436

)

 

 

(1,436

)

Net income

 

$

31,557

 

$

31,557

 

$

6,248

 

$

(37,805

)

$

31,557

 

 

20




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

 

 

Parent
Company

 

Guarantor
Subsidiaries

 

Non-guarantor
Subsidiaries

 


Eliminations

 


Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

 

$

2,383,543

 

$

316,840

 

$

(3,708

)

$

2,696,675

 

Cost of sales

 

 

2,026,099

 

270,328

 

(3,708

)

2,292,719

 

Gross profit

 

 

357,444

 

46,512

 

 

403,956

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

285,006

 

33,546

 

 

318,552

 

Depreciation and amortization

 

 

8,770

 

690

 

 

9,460

 

Income from operations

 

 

63,668

 

12,276

 

 

75,944

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

Floor plan interest expense

 

 

(13,208

)

(780

)

 

(13,988

)

Other interest expense

 

 

(17,400

)

(2,469

)

 

(19,869

)

Other income, net

 

 

861

 

15

 

 

876

 

Equity in earnings of subsidiaries

 

25,627

 

5,493

 

 

(31,120

)

 

Total other expense, net

 

25,627

 

(24,254

)

(3,234

)

(31,120

)

(32,981

)

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

25,627

 

39,414

 

9,042

 

(31,120

)

42,963

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

 

12,719

 

3,392

 

 

16,111

 

Income from continuing operations

 

25,627

 

26,695

 

5,650

 

(31,120

)

26,852

 

 

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations, net of tax

 

 

(1,068

)

(157

)

 

(1,225

)

Net income

 

$

25,627

 

$

25,627

 

$

5,493

 

$

(31,120

)

$

25,627

 

 

21




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

 

 

Parent
Company

 

Guarantor
Subsidiaries

 

Non-guarantor
Subsidiaries

 


Eliminations

 


Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

$

 

$

103,598

 

$

2,087

 

$

 

$

105,685

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow from investing activities:

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(22,103

)

(1,196

)

 

(23,299

)

Acquisitions

 

 

 

 

 

 

Other investing activities

 

 

44,475

 

19

 

 

44,494

 

Net cash provided by (used in) investing activities

 

 

22,372

 

(1,177

)

 

21,195

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow from financing activities:

 

 

 

 

 

 

 

 

 

 

 

Floor plan borrowings — non-manufacturer affiliated

 

 

1,047,401

 

225,776

 

 

1,273,177

 

Floor plan repayments — non-manufacturer affiliated

 

 

(1,148,521

)

(222,837

)

 

(1,371,358

)

Proceeds from borrowings

 

 

987

 

 

 

987

 

Repayments of debt

 

 

(2,214

)

(12

)

 

(2,226

)

Intercompany financing

 

 

3,837

 

(3,837

)

 

 

Other financing activities

 

 

4,443

 

 

 

4,443

 

Net cash used in financing activities

 

 

(94,067

)

(910

)

 

(94,977

)

Net increase in cash and cash equivalents

 

 

31,903

 

 

 

31,903

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

 

57,194

 

 

 

57,194

 

Cash and cash equivalents, end of period

 

$

 

$

89,097

 

$

 

$

 

$

89,097

 

 

22




Condensed Consolidating Statement of Cash Flows
For the Six Months Ended June 30, 2005
(In thousands)

 

 

Parent
Company

 

Guarantor
Subsidiaries

 

Non-guarantor
Subsidiaries

 


Eliminations

 


Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash used in operating activities

 

$

 

$

(68,431

)

$

(9,265

)

$

 

$

(77,696

)

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow from investing activities:

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(34,707

)

(471

)

 

(35,178

)

Acquisitions

 

 

(11,562

)

 

 

(11,562

)

Other investing activities

 

 

9,705

 

1

 

 

9,706

 

Net cash used in investing activities

 

 

(36,564

)

(470

)

 

(37,034

)

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow from financing activities:

 

 

 

 

 

 

 

 

 

 

 

Floor plan borrowings—non-manufacturer affiliated

 

 

1,474,852

 

278,263

 

 

1,753,115

 

Floor plan repayments—non-manufacturer affiliated

 

 

(1,356,316

)

(273,327

)

 

(1,629,643

)

Proceeds from borrowings

 

 

20,734

 

 

 

20,734

 

Repayments of debt

 

 

(41,983

)

(6

)

 

(41,989

)

Intercompany financing

 

 

(4,805

)

4,805

 

 

 

Other financing activities

 

 

(4,531

)

 

 

(4,531

)

Net cash provided by financing activities

 

 

87,951

 

9,735

 

 

97,686

 

Net decrease in cash and cash equivalents

 

 

(17,044

)

 

 

(17,044

)

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

 

28,093

 

 

 

28,093

 

Cash and cash equivalents, end of period

 

$

 

$

11,049

 

$

 

$

 

$

11,049

 

 

16.  SUBSEQUENT EVENTS

On July 31, 2006, our Board of Directors declared a quarterly dividend of $0.20 per common share payable on August 24, 2006 to shareholders of record as of August 11, 2006.

23




 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have reviewed the accompanying condensed consolidated balance sheet of Asbury Automotive Group, Inc. and subsidiaries (the “Company”) as of June 30, 2006, and the related condensed consolidated statements of income for the three and six-month periods ended June 30, 2006 and 2005, and statements of cash flows for the six-month periods ended June 30, 2006 and 2005. 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, 2005, 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, 2006, 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, 2005 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

 

 

August 7, 2006

 

 

 

24




 

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 119 franchises (86 dealership locations) in 21 metropolitan markets within 10 states as of June 30, 2006. We offer 33 different brands of new vehicles, including four heavy truck brands. We also operate 24 collision repair centers that serve our markets.

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 gross profit 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 months (“same store”).

We have grown our business through the acquisition of large dealership groups and numerous “tuck-in” acquisitions. “Tuck-in” acquisitions refer to the purchase of dealerships in the market areas in which we have existing dealerships. We use “tuck-in” acquisitions to increase the number of vehicle brands we offer in a particular market area to create a larger gross profit base over which to spread overhead costs.

Our retail network is currently 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.

Our gross profit margin varies with our revenue mix. The sale of vehicles generally results in lower gross profit percentages than our fixed operations. As a result, when fixed operations revenue increases as a percentage of total revenue, we expect our overall gross profit margin to increase.

Selling, general and administrative (“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.  In January 2006, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 123R “Share-Based Payment” under the modified prospective transition method and decided to issue restricted stock units to our employees in lieu of stock options.  As a result, we have recorded stock-based compensation expense under the fair value method for the three and six months ended June 30, 2006.  Prior to January 2006, including the three and six months ended June 30, 2005, we accounted for stock-based compensation expense under the intrinsic value method.

Sales of vehicles (particularly new vehicles) have historically fluctuated with general macroeconomic conditions, including consumer confidence, availability of consumer credit and fuel prices. Although these factors may impact our business, we believe that any future negative trends will be mitigated by (i) our advantageous brand mix, which is weighted towards luxury and mid-line import brands, (ii) increased used vehicle sales, (iii) stability of our fixed operations, (iv) our variable cost structure and (v) our regional diversity. We believe that, historically, we have been less affected by market volatility than the U.S. automobile industry as a whole as a result of our brand mix. 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 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. Generally, the seasonal variations in our operations are caused by many factors, including weather conditions, changes in manufacturer incentive programs, model changeovers and consumer buying patterns. Over the past several years, certain automobile manufacturers have used a

25




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 in the future. In addition, we will continue to expand our service capacity in order to meet anticipated future demand, as we expect the recent increases in market share of the mid-line import and luxury import brands and our focused effort on creating and maintaining customer relationships will drive future service demand at our dealership locations.

Interest rates have continued to increase through the first half of 2006. We do not believe that changes in interest rates significantly impact customer overall buying patterns, as changes in interest rates do not dramatically increase the monthly payment of a financed vehicle. For example, the monthly payment for a typical vehicle financing transaction in which a customer finances $25,000 at 8.5% over 60 months increases by approximately $6.05 with each 50 basis-point increase in short-term interest rates.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2006, Compared to the Three Months Ended June 30, 2005

 

 

 

For the Three Months Ended June 30,

 

 

 

 

 

 

 

2006

 

% of
Gross
Profit

 

2005

 

% of
Gross
Profit

 

Increase
(Decrease)

 

%
Change

 

 

 

(Dollars in thousands, except per share data)

 

 

 

 

 

REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

 

New Vehicle

 

$

918,116

 

 

 

$

872,308

 

 

 

$

45,808

 

5

%

Used Vehicle

 

384,561

 

 

 

348,416

 

 

 

36,145

 

10

%

Parts, service and collision repair

 

172,036

 

 

 

157,999

 

 

 

14,037

 

9

%

Finance and insurance, net

 

43,224

 

 

 

39,064

 

 

 

4,160

 

11

%

Total revenues

 

1,517,937

 

 

 

1,417,787

 

 

 

100,150

 

7

%

COST OF SALES

 

1,289,155

 

 

 

1,208,328

 

 

 

80,827

 

7

%

GROSS PROFIT

 

228,782

 

100

%

209,459

 

100

%

19,323

 

9

%

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

171,715

 

75

%

160,185

 

76

%

11,530

 

7

%

Depreciation and amortization

 

5,113

 

2

%

4,768

 

2

%

345

 

7

%

Income from operations

 

51,954

 

23

%

44,506

 

21

%

7,448

 

17

%

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

 

 

 

 

 

 

Floor plan interest expense

 

(11,239

)

(5

)%

(7,458

)

(4

)%

3,781

 

51

%

Other interest expense

 

(11,139

)

(5

)%

(10,269

)

(5

)%

870

 

8

%

Interest and other income, net

 

1,502

 

1

%

503

 

%

999

 

199

%

Total other expense

 

(20,876

)

(9

)%

(17,224

)

(9

)%

3,652

 

21

%

Income before income taxes

 

31,078

 

14

%

27,282

 

13

%

3,796

 

14

%

INCOME TAX EXPENSE

 

11,654

 

5

%

10,231

 

5

%

1,423

 

14

%

INCOME FROM CONTINUING OPERATIONS

 

19,424

 

9

%

17,051

 

8

%

2,373

 

14

%

DISCONTINUED OPERATIONS, net of tax

 

(420

)

%

(1,065

)

(1

)%

645

 

61

%

NET INCOME

 

$

19,004

 

9

%

$

15,986

 

7

%

$

3,018

 

19

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EARNINGS PER COMMON SHARE (DILUTED):

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing Operations

 

$

0.58

 

 

 

$

0.52

 

 

 

$

0.06

 

12

%

Discontinued Operations

 

(0.02

)

 

 

(0.03

)

 

 

 

 

 

 

Net income

 

$

0.56

 

 

 

$

0.49

 

 

 

$

0.07

 

14

%

 

Net income increased 19%, or $0.07 per diluted share, to $19.0 million, or $0.56 per diluted share, for the three months ended June 30, 2006, from $16.0 million, or $0.49 per diluted share, for the three months ended June 30, 2005.

Income from continuing operations increased 14%, or $0.06 per diluted share, to $19.4 million, or $0.58 per diluted share, for the three months ended June 30, 2006, from $17.1 million, or $0.52 per diluted share, for the three months ended June 30, 2005.  Income from continuing operations for the three months ended June 30, 2006, includes (i) a $2.1 million (net of tax) gain related to the sale of our remaining interest in a pool of extended service contracts (“corporate generated F&I gain”), (ii) $0.9 million (net of tax) of costs associated with our decision to abandon certain strategic projects, and (iii) $0.6 million (net of tax) of stock-based compensation expense.  Excluding these items, adjusted income from continuing

26




operations increased 10% to $18.8 million for the three months ended June 30, 2006, from $17.1 million for the three months ended June 30, 2005.  We believe that excluding these items provides a more accurate representation of our year over year financial performance.

The increase in adjusted income from continuing operations resulted from several factors, including: (i) a 20% increase in used retail gross profit and an 8% increase in fixed operations gross profit as a result of our focused investments in our high margin businesses; (ii) a 6% increase in new retail gross profit despite a challenging new vehicle sales environment and a highly incentivized environment in the prior period; (iii) several expense control initiatives, including our regional reorganization in 2005 and new vehicle advertising, both of which contributed to a 140 basis point improvement in our adjusted SG&A expenses as a percentage of adjusted gross profit. These factors were partially offset by a 51% increase in floor plan interest expense resulting primarily from a 200 basis point increase in short-term interest rates.

Total revenues increased 7% to $1.5 billion for the three months ended June 30, 2006, from $1.4 billion for the three months ended June 30, 2005.  The increase in total revenues was a result of a 5% increase in new vehicle revenue and a 10%  ncrease in used vehicle revenue.  We expect total revenue to increase as we (i) continue to benefit from our brand mix as mid-line import and luxury brands continue to increase their market share, (ii) continue to expand our service capacity, (iii) benefit from improved performance of our high margin businesses as a result of our focused investments in these areas and (iv) acquire dealerships.

Total gross profit increased 9% to $228.8 million for the three months ended June 30, 2006, from $209.5 million for the three months ended June 30, 2005. Total gross profit, excluding the corporate generated F&I gain, increased 8% to $225.4 million for the three months ended June 30, 2006, from $209.5 million for the three months ended June 30, 2005.  The increase in gross profit was driven by solid performances in new retail, used retail and fixed operations, led by a 20% increase in used retail gross profit.

 

 

 

For the Three Months Ended June 30,

 

 

 

Increase

 

%

 

New Vehicle —

 

2006

 

 

 

2005

 

 

 

(Decrease)

 

Change

 

 

 

(Dollars in thousands, except PVR data)

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

New retail revenues—same store(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

Luxury

 

$

262,800

 

30

%

$

272,594

 

32

%

$

(9,794

)

(4

)%

Mid-line import

 

366,909

 

42

%

328,809

 

39

%

38,100

 

12

%

Mid-line domestic

 

124,224

 

14

%

148,769

 

18

%

(24,545

)

(16

)%

Value

 

19,759

 

2

%

22,290

 

3

%

(2,531

)

(11

)%

Heavy trucks

 

103,262

 

12

%

66,523

 

8

%

36,739

 

55

%

Total new retail revenues—same store(1)

 

876,954

 

100

%

838,985

 

100

%

37,969

 

5

%

New retail revenues—acquisitions

 

10,114

 

 

 

 

 

 

 

 

 

 

Total new retail revenues

 

887,068

 

 

 

838,985

 

 

 

48,083

 

6

%

Fleet revenues—same store(1)

 

30,639

 

 

 

33,323

 

 

 

(2,684

)

(8

)%

Fleet revenues—acquisitions

 

409

 

 

 

 

 

 

 

 

 

 

Total fleet revenues

 

31,048

 

 

 

33,323

 

 

 

(2,275)

 

(7

)%

New vehicle revenues, as reported

 

$

918,116

 

 

 

$

872,308

 

 

 

$

45,808

 

5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New retail units:

 

 

 

 

 

 

 

 

 

 

 

 

 

New retail units—same store(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

Luxury

 

5,803

 

21

%

6,155

 

22

%

(352

)

(6

)%

Mid-line import

 

15,107

 

54

%

13,700

 

50

%

1,407

 

10

%

Mid-line domestic

 

4,403

 

16

%

5,233

 

20

%

(830

)

(16

)%

Value

 

975

 

3

%

1,142

 

4

%

(167

)

(15

)%

Heavy trucks

 

1,698

 

6

%

1,219

 

4

%

479

 

39

%

Total new retail units—same store(1)

 

27,986

 

100

%

27,449

 

100

%

537

 

2

%

New retail units—acquisitions

 

343

 

 

 

 

 

 

 

 

 

 

Retail units—actual

 

28,329

 

 

 

27,449

 

 

 

880

 

3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New revenue PVR—same store(1)

 

$

31,335

 

 

 

$

30,565

 

 

 

$

770

 

3

%

New revenue PVR—actual

 

$

31,313

 

 

 

$

30,565

 

 

 

$

748

 

2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 


(1)             Same store amounts include the results of dealerships for the identical months for each period presented in the comparison, commencing with the first full month in which the dealership was owned by us.

 

27




 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended June 30,

 

Increase

 

%

 

 

 

2006

 

 

 

2005

 

 

 

(Decrease)

 

Change

 

 

 

(Dollars in thousands, except PVR data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

New retail gross profit—same store(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

Luxury

 

$

19,938

 

32

%

$

20,647

 

35

%

$

(709

)

(3

)%

Mid-line import

 

25,224

 

42

%

21,694

 

37

%

3,530

 

16

%

Mid-line domestic

 

8,928

 

14

%

10,159

 

17

%

(1,231

)

(12

)%

Value

 

1,210

 

2

%

2,035

 

3

%

(825

)

(41

)%

Heavy trucks

 

6,462

 

10

%

4,605

 

8

%

1,857

 

40

%

Total new retail gross profit—same store(1)

 

61,762

 

100

%

59,140

 

100

%

2,622

 

4

%

New retail gross profit—acquisitions

 

704

 

 

 

 

 

 

 

 

 

 

Total retail gross profit

 

62,466

 

 

 

59,140

 

 

 

3,326

 

6

%

Fleet gross profit—same store(1)

 

1,240

 

 

 

829

 

 

 

411

 

50

%

Fleet gross profit—acquisitions

 

20

 

 

 

 

 

 

 

 

 

 

Total fleet gross profit

 

1,260

 

 

 

829

 

 

 

431

 

52

%

New vehicle gross profit, as reported

 

$

63,726

 

 

 

$

59,969

 

 

 

$

3,757

 

6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New gross profit PVR—same store(1)

 

$

2,207

 

 

 

$

2,155

 

 

 

$

52

 

2

%

New gross profit PVR—actual

 

$

2,205

 

 

 

$

2,155

 

 

 

$

50

 

2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New retail gross margin—same store(1)

 

7.0

%

 

 

7.0

%

 

 

%

%

New retail gross margin—actual

 

7.0

%

 

 

7.0

%

 

 

%

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 


(1)             Same store amounts include the results of dealerships for the identical months for each period presented in the comparison, commencing with the first full month in which the dealership was owned by us.

New vehicle revenues increased 5% to $918.1 million for the three months ended June 30, 2006, from $872.3 million for the three months ended June 30, 2005. The increase in new vehicle revenues is a result of a 3% increase in new retail unit sales driven by our mid-line import brands, which increased 10%.  In addition, new revenue PVR increased 2%, driven by an 11% increase from our heavy trucks business in Atlanta, Georgia.  Our brand mix, heavily weighted toward luxury and mid-line import, continues to help us outperform the industry in new vehicle unit sales as these brands continue to take market share.  As a result, we experienced flat passenger vehicle unit sales (excluding heavy trucks) despite a 5% decline in U.S. passenger vehicle unit sales.  In addition, we have seen a significant increase in our heavy truck business as we believe future changes in emission laws on heavy trucks has created a significant current period demand.

New vehicle gross profit increased 6% to $63.7 million for the three months ended June 30, 2006, from $60.0 million for the three months ended June 30, 2005.  The increase in new vehicle gross profit was driven by a $3.5 million, or 16% increase in mid-line import retail gross profit as these brands continue their strong performance, and a $1.9 million, or 40% increase, from our heavy trucks business.  These increases were offset by the performance of our mid-line domestic brands, which were down $1.2 million, or 12%.  During the second quarter 2005 the employee pricing sales campaign was introduced by the domestic manufacturers, which created a significant demand for domestic vehicles, particularly General Motors.

28




 

 

 

For the Three Months Ended June 30,

 

Increase

 

%

 

Used Vehicle —

 

2006

 

2005

 

(Decrease)

 

Change

 

 

 

(Dollars in thousands, except PVR data)

 

Revenues:

 

 

 

 

 

 

 

 

 

Retail revenues—same store(1)

 

$

295,268

 

$

265,220

 

$

30,048

 

11

%

Retail revenues—acquisitions

 

 

 

 

 

 

 

Total used retail revenues

 

295,268

 

265,220

 

30,048

 

11

%

Wholesale revenues—same store(1)

 

89,293

 

83,196

 

6,097

 

7

%

Wholesale revenues—acquisitions

 

 

 

 

 

 

 

Total wholesale revenues

 

89,293

 

83,196

 

6,097

 

7

%

Used vehicle revenues, as reported

 

$

384,561

 

$

348,416

 

$

36,145

 

10

%

Gross Profit:

 

 

 

 

 

 

 

 

 

Retail gross profit—same store(1)

 

$

35,897

 

$

29,818

 

$

6,079

 

20

%

Retail gross profit—acquisitions

 

 

 

 

 

 

 

Total used retail gross profit

 

35,897

 

29,818

 

6,079

 

20

%

Wholesale gross profit—same store(1)

 

(1,259

)

119

 

(1,378

)

NM

 

Wholesale gross profit—acquisitions

 

 

 

 

 

 

 

Total wholesale gross profit

 

(1,259

)

119

 

(1,378

)

NM

 

Used vehicle gross profit, as reported

 

$

34,638

 

$

29,937

 

$

4,701

 

16

%

 

 

 

 

 

 

 

 

 

 

Used retail units—same store(1)

 

16,414

 

15,425

 

989

 

6

%

Used retail units—acquisitions

 

 

 

 

 

 

 

Used retail units—actual

 

16,414

 

15,425

 

989

 

6

%

 

 

 

 

 

 

 

 

 

 

Used revenue PVR—same store(1)

 

$

17,989

 

$

17,194

 

$

795

 

5

%

Used revenue PVR—actual

 

$

17,989

 

$

17,194

 

$

795

 

5

%

 

 

 

 

 

 

 

 

 

 

Used gross profit PVR—same store(1)

 

$

2,187

 

$

1,933

 

$

254

 

13

%

Used gross profit PVR—actual

 

$

2,187

 

$

1,933

 

$

254

 

13

%

 

 

 

 

 

 

 

 

 

 

Used retail gross margin—same store(1)

 

12.2

%

11.2

%

1.0

%

9

%

Used retail gross margin—actual

 

12.2

%

11.2

%

1.0

%

9

%

 

 

 

 

 

 

 

 

 

 


(1)             Same store amounts include the results of dealerships for the identical months for each period presented in the comparison, commencing with the first full month in which the dealership was owned by us.

Used vehicle revenues increased 10% to $384.6 million for the three months ended June 30, 2006, from $348.4 million for the three months ended June 30, 2005.  The increase in used vehicle revenues was a result of a 5% and 6% increase in used revenue PVR and used retail unit sales, respectively.  The strength of the used vehicle market during the second quarter, our sharing of internal best practices, including centralized used car teams, and our used vehicle merchandising initiatives have continued to result in increased used vehicle unit sales and improved used revenue PVR.

Used vehicle gross profit increased 16% to $34.6 million for the three months ended June 30, 2006, from $29.9 million for the three months ended June 30, 2005.  Used retail gross profit increased 20% to $35.9 million as a result of our investment in new software to better value trade-ins, improved inventory management and the execution by our regional management teams dedicated to the used vehicle business. 

29




 

 

 

For the Three Months Ended June 30,

 

Increase

 

%

 

Fixed Operations —

 

2006

 

2005

 

(Decrease)

 

Change

 

 

 

(Dollars in thousands)

 

Revenues:

 

 

 

 

 

 

 

 

 

Revenues—same store(1)

 

 

 

 

 

 

 

 

 

Parts and service

 

$

153,942

 

$

142,040

 

$

11,902

 

8

%

Collision repair

 

16,811

 

15,959

 

852

 

5

%

Total revenues—same store(1)

 

170,753

 

157,999

 

12,754

 

8

%

Revenues—acquisitions

 

1,283

 

 

 

 

 

 

Parts, service and collision repair revenues, as reported

 

$

172,036

 

$

157,999

 

$

14,037

 

9

%

 

 

 

 

 

 

 

 

 

 

Gross Profit:

 

 

 

 

 

 

 

 

 

Gross profit—same store(1)

 

 

 

 

 

 

 

 

 

Parts and service

 

$

77,148

 

$

71,628

 

$

5,520

 

8

%

Collision repair

 

9,379

 

8,861

 

518

 

6

%

Total gross profit—same store(1)

 

86,527

 

80,489

 

6,038

 

8

%

Gross profit—acquisitions

 

667

 

 

 

 

 

 

Parts, service and collision repair gross profit, as reported

 

$

87,194

 

$

80,489

 

$

6,705

 

8

%

 

 

 

 

 

 

 

 

 

 

Parts and service gross margin—same store(1)

 

50.1

%

50.4

%

(0.3

)

(1

)%

Collision repair gross margin—same store(1)

 

55.8

%

55.5

%

0.3

 

1

%

 

 

 

 

 

 

 

 

 

 


(1)             Same store amounts include the results of dealerships for the identical months for each period presented in the comparison, commencing with the first full month in which the dealership was owned by us.

Fixed operations revenues increased 9% to $172.0 million for the three months ended June 30, 2006, from $158.0 million for the three months ended June 30, 2005.  Fixed operations revenues increased primarily due to an 11% increase in our “customer pay” parts and service businesses. The growth in our “customer pay” business is a result of facility expansion, increased capacity utilization, equipment upgrades and continued focus on customer retention initiatives. Our warranty business continued its positive performance driven by the increase in retail unit sales and increased work on imported vehicles, which typically generate higher revenue than domestic brands.  We will continue to add service stalls and service technicians during 2006 in order to meet anticipated future demand, as we expect the recent increases in market share of the mid-line import and luxury import brands to continue to provide increased service work.

Fixed operations gross profit increased 8% to $87.2 million for the three months ended June 30, 2006, from $80.5 million for the three months ended June 30, 2005.  The increase in fixed operations gross profit is primarily a result of increased gross profit from our “customer pay” parts and service businesses.

 

30




 

 

 

 

For the Three Months
Ended June 30,

 

Increase

 

%

 

Finance and Insurance, net—

 

2006

 

2005

 

(Decrease)

 

Change

 

 

 

(Dollars in thousands, except PVR data)

 

Dealership generated F&I, net—same store(1)

 

$

38,840

 

$

37,697

 

$

1,143

 

3

%

Dealership generated F&I, net—acquisitions

 

292

 

 

 

 

 

 

Dealership generated F&I, net

 

39,132

 

37,697

 

1,435

 

4

%

Corporate generated F&I

 

692

 

1,367

 

(675

)

(49

)%

Corporate generated F&I gain

 

3,400

 

 

 

 

 

 

Finance and insurance, net as reported

 

$

43,224

 

$

39,064

 

$

4,160

 

11

%

 

 

 

 

 

 

 

 

 

 

Dealership generated F&I PVR—same store (1) (2)

 

$

875

 

$

879

 

$

(4

)

(1

)%

Dealership generated F&I PVR—actual (2)

 

$

875

 

$

879

 

$

(4

)

(1

)%

F&I PVR—actual

 

$

966

 

$

911

 

$

55

 

6

%


(1)             Same store amounts include the results of dealerships for the identical months for each period presented in the comparison, commencing with the first full month in which the dealership was owned by us.

(2)             Refer to “Reconciliation of Non-GAAP Financial Information” for further discussion regarding dealership generated F&I PVR.

F&I increased 11% to $43.2 million for the three months ended June 30, 2006, from $39.1 million for the three months ended June 30, 2005. Included in F&I was a $3.4 million gain related to the sale of our remaining interest in a pool of extended service contracts.  This pool of contracts had been the source of our corporate generated F&I.  Excluding this item F&I increased 2% to $39.8 million. The increase in F&I was primarily a result of the 4% increase in retail units sales as dealership generated F&I PVR was relatively flat at $875.  We anticipate F&I will increase in the near future as a result of (i) our expectation of growth of new and used retail vehicle sales (ii) the implementation of new corporate-sponsored programs and (iii) improvement of the F&I operations at our under-performing franchises. Dealership generated F&I excludes retrospective commissions from contracts negotiated by our corporate office, which are attributable to retail units sold during prior periods and the corporate generated F&I gain.  Corporate generated F&I was $0.7 million for the three months ended June 30, 2006 and $1.4 million for the three months ended June 30, 2005.  As a result of the aforementioned sale of our remaining interest in a pool of extended service contracts, we do not anticipate recognizing any significant corporate generated F&I in the future.

 

31




 

Selling, General and Administrative —

 

 

For the Three Months Ended
June 30,

 

 

 

 

 

 

 

2006

 

% of Gross
Profit

 

2005

 

% of Gross
Profit

 

Increase
(Decrease)

 

%
Change

 

 

 

(Dollars in thousands)

 

Personnel costs

 

$

78,561

 

34.3

%

$

73,372

 

35.0

%

$

5,189

 

7

%

Sales compensation

 

26,712

 

11.7

%

24,091

 

11.5

%

2,621

 

11

%

Stock-based compensation

 

927

 

0.4

%

 

%

927

 

100

%

Outside services

 

14,561

 

6.4

%

13,831

 

6.6

%

730

 

5

%

Advertising

 

12,913

 

5.6

%

13,780

 

6.6

%

(867

)

(6

)%

Rent

 

13,434

 

5.9

%

11,814

 

5.6

%

1,620

 

14

%

Utilities

 

4,380

 

1.9

%

4,014

 

1.9

%

366

 

9

%

Insurance

 

3,845

 

1.7

%

3,675

 

1.8

%

170

 

5

%

Other

 

16,382

 

7.2

%

15,608

 

7.5

%

774

 

5

%

Selling, general and administrative

 

$

171,715

 

75.1

%

$

160,185

 

76.5

%

$

11,530

 

7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Abandoned strategic project expenses

 

(1,417

)

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

(927

)

 

 

 

 

 

 

 

 

 

Adjusted selling, general and administrative

 

$

169,371

 

75.1

%

$

160,185

 

76.5

%

$

9,186

 

6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Profit

 

$

228,782

 

 

 

$

209,459

 

 

 

$

19,323

 

9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate generated F&I gain

 

(3,400

)

 

 

 

 

 

 

 

 

 

Adjusted gross profit

 

$

225,382

 

 

 

$

209,459

 

 

 

$

15,923

 

8

%

SG&A expenses increased 7% to $171.7 million for the three months ended June 30, 2006, from $160.2 million for the three months ended June 30, 2005.  SG&A expenses include $0.9 million of stock-based compensation expense and $1.4 million of abandoned strategic project expenses during the three months ended June 30, 2006.  Excluding these items, adjusted SG&A expense increased 6% to $169.4 million for the three months ended June 30, 2006, from $160.2 million for the three months ended June 30, 2005.  Adjusted SG&A expense as a percentage of adjusted gross profit (excluding the $3.4 million corporate generated F&I gain) for the three months ended June 30, 2006 improved 140 basis points to 75.1%, from 76.5% for the three months ended June 30, 2005.  The improvement in adjusted SG&A as a percentage of adjusted gross profit is a result of several strategic expense control initiatives including our regional reorganization in 2005 and our advertising expense initiatives, which focus on the most effective use of our resources.  These improvements were offset by increased rent resulting from our strategy to reduce our ownership of real estate through the use of sale-leaseback transactions.  During 2005, we sold approximately $33.1 million of real estate in connection with seven sale-leaseback transactions.  We estimate the incremental annualized rent expense from these seven sale-leaseback transactions will be approximately $3.0 million.

In January 2006, we adopted SFAS No. 123R under the modified prospective transition method and decided to issue restricted stock units to our employees in lieu of stock options.  As a result, we have recorded stock-based compensation expense of $0.9 million under the fair value method for the three months ended June 30, 2006. Prior to January 2006, including the three month period ended June 30, 2005, we accounted for stock-based compensation awards under the intrinsic value method.  We expect stock-based compensation expense to total approximately $5.1 million, or $0.10 per diluted share, for the year ending December 31, 2006.  Certain of our stock-based awards have conditions based on our performance that may affect the number of awards ultimately issued.  Therefore, the amount of stock-based compensation expense recorded may differ from our current estimate.

Depreciation and Amortization—

Depreciation and amortization expense increased 7% to $5.1 million for the three months ended June 30, 2006, from $4.8 million for the three months ended June 30, 2005.  This increase is primarily related to property and equipment acquired between July 1, 2005 and June 30, 2006.  We expect to continue to incur capital expenditures to  remodel and upgrade our facilities and expand our service capacity and therefore expect depreciation expense to increase in the future.

Other Income (Expense)—

Floor plan interest expense increased 51% to $11.2 million for the three months ended June 30, 2006 from $7.5 million for the three months ended June 30, 2005. This increase was the result of a 200 basis point increase in short-term

 

32




 

interest rates.

During the first quarter of 2006, two of our cash flow swaps on our floor plan notes payable expired.  As a result, we will recognize additional floor plan interest expense of approximately $0.7 million during 2006.  We expect further increases in floor plan interest in 2006 due to increases in short-term interest rates.

Other interest expense increased 8% to $11.1 million for the three months ended June 30, 2006, from $10.3 million for the three months ended June 30, 2005.  The increase in other interest expense is a result of a higher effective interest rate on our 8% Senior Subordinated Notes (“8% Notes”) due to the expiration of a fair value swap on the 8% Notes.  As a result, our 8% Notes, which had a variable rate while the fair value swap was in place, are now fixed at 8% until maturity in 2014.  We anticipate that the expiration of the swap will increase our other interest expense by approximately $5.4 million in 2006.

Income Tax Expense—

Income tax expense increased 14% to $11.7 million for the three months ended June 30, 2006, from $10.2 million for the three months ended June 30, 2005.  Our effective tax rate for the three months ended June 30, 2006 and 2005 was 37.5%. As we operate nationally, our effective tax rate is dependent upon our geographic revenue mix.  We evaluate our effective tax rate periodically based on our revenue sources. We will continue to evaluate our effective tax rate in the future, and expect that our future annual effective tax rate will fluctuate between 37% and 38%.

 

33




 

Discontinued Operations—

 

 

For the Three Months Ended
June 30, 2006

 

For the Three Months Ended
June 30, 2005

 

 

 

Sold

 

Pending
Disposition

 

Total

 

Sold(b)

 

Pending
Disposition(a)

 

Total

 

 

 

(Dollars in thousands)

 

Franchises

 

3

 

1

 

4

 

14

 

1

 

15

 

Ancillary businesses

 

 

1

 

1

 

1

 

1

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

$

(3,152

)

$

611

 

$

(2,541

)

$

(598

)

$

470

 

$

(128

)

Other expense, net

 

(273

)

(32

)

(305

)

(1,183

)

(17

)

(1,200

)

Gain (loss) on disposition of discontinued operations

 

2,564

 

 

2,564

 

(376

)

 

(376

)

Income tax benefit (expense)

 

79

 

(217

)

(138

)

809

 

(170

)

639

 

Discontinued operations, net of tax

 

$

(782

)

$

362

 

$

(420

)

$

(1,348

)

$

283

 

$

(1,065

)


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

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

During the three months ended June 30, 2006, we sold three franchises (three dealership locations), and as of June 30, 2006, we were actively pursuing the sale of one franchise and one ancillary business. The $0.4 million loss from discontinued operations is primarily attributable to operating losses of the four franchises mentioned above offset by the $2.6 million gain ($1.6 million, net of tax) on the sale of three franchises during the three months ended June 30, 2006. The $1.1 million loss from discontinued operations for the three months ended June 30, 2005 is a result of operating losses of the franchises mentioned above and franchises and an ancillary business sold between April 2005 and March 2006 and a $0.4 million ($0.2 million, net of tax) net loss on the sale of two franchises (one dealership location) sold during the second quarter of 2005.

We continuously evaluate the financial and operating results of our franchises, specifically the 10% contributing the least amount of operating income, and we will look to divest dealerships that do not meet our expectations.  Based on the performance of our current brand mix, we do not anticipate a significant amount of divestitures in the near future.

 

34




 

Six Months Ended June 30, 2006, Compared to the Six Months Ended June 30, 2005

 

 

For the Six Months Ended
June 30,

 

 

 

 

 

 

 

2006

 

% of Gross
Profit

 

2005

 

% of Gross
Profit

 

Increase
(Decrease)

 

%
Change

 

 

 

(Dollars in thousands, except per share data)

 

REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

 

New Vehicle

 

$

1,739,153

 

 

 

$

1,643,577

 

 

 

$

95,576

 

6

%

Used Vehicle

 

742,667

 

 

 

668,872

 

 

 

73,795

 

11

%

Parts, service and collision repair

 

341,924

 

 

 

309,672

 

 

 

32,252

 

10

%

Finance and insurance, net

 

78,844

 

 

 

74,554

 

 

 

4,290

 

6

%

Total revenues

 

2,902,588

 

 

 

2,696,675

 

 

 

205,913

 

8

%

COST OF SALES

 

2,462,476

 

 

 

2,292,719

 

 

 

169,757

 

7

%

GROSS PROFIT

 

440,112

 

100

%

403,956

 

100

%

36,156

 

9

%

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

337,364

 

77

%

318,552

 

79

%

18,812

 

6

%

Depreciation and amortization

 

10,088

 

2

%

9,460

 

2

%

628

 

7

%

Income from operations

 

92,660

 

21

%

75,944

 

19

%

16,716

 

22

%

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

 

 

 

 

 

 

Floor plan interest expense

 

(20,401

)

(5

)%

(13,988

)

(3

)%

6,413

 

46

%

Other interest expense

 

(22,043

)

(5

)%

(19,869

)

(5

)%

2,174

 

11

%

Interest and other income, net

 

2,573

 

1

%

876

 

%

1,697

 

194

%

Total other expense

 

(39,871

)

9

%

(32,981

)

(8

)%

6,890

 

21

%

Income before income taxes

 

52,789

 

12

%

42,963

 

11

%

9,826

 

23

%

INCOME TAX EXPENSE

 

19,796

 

5

%

16,111

 

5

%

3,685

 

23

%

INCOME FROM CONTINUING OPERATIONS

 

32,993

 

7

%

26,852

 

6

%

6,141

 

23

%

DISCONTINUED OPERATIONS, net of tax

 

(1,436

)

%

(1,225

)

%

(211

)

(17

)%

NET INCOME

 

$

31,557

 

7

%

$

25,627

 

6

%

$

5,930

 

23

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EARNINGS PER COMMON SHARE (DILUTED):

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing Operations

 

$

0.98

 

 

 

$

0.82

 

 

 

$

0.16

 

20

%

Discontinued Operations

 

(0.04

)

 

 

(0.04

)

 

 

 

 

 

 

Net income

 

$

0.94

 

 

 

$

0.78

 

 

 

$

0.16

 

21

%

 

Net income increased 23%, or $0.16 per diluted share, to $31.6 million, or $0.94 per diluted share, for the six months ended June 30, 2006, from $25.6 million, or $0.78 per diluted share, for the six months ended June 30, 2005.

Income from continuing operations increased 23%, or $0.16 per diluted share, to $33.0 million, or $0.98 per diluted share, for the six months ended June 30, 2006, from $26.9 million, or $0.82 per diluted share, for the six months ended June 30, 2005. Income from continuing operations for the six months ended June 30, 2006 includes (i) a $2.1 million (net of tax) gain related to the sale of our remaining interest in a pool of extended service contracts (“corporate generated F&I gain”), (ii) $1.0 million (net of tax) of costs associated with our decision to abandon certain strategic projects, and (iii) $1.4 million (net of tax) of stock-based compensation expense.  Income from continuing operations for the six months ended June 30, 2005 includes $2.2 million (net of tax) of costs associated with our regional reorganization.  Excluding these items, adjusted income from continuing operations increased 15% to $33.3 million for the six months ended June 30, 2006, from $29.1 million for the six months ended June 30, 2005.

The increase in adjusted income from continuing operations resulted from several factors, including: (i) a 15% increase in used vehicle gross profit and a 9% increase in fixed operations gross profit as a result of a strategic focus on our high margin businesses; (ii) the very solid performance of our new retail business, which delivered a 7% increase in gross profit; and (iii) several expense control initiatives, including our regional reorganization and new vehicle advertising, both of which contributed to a 170 basis point improvement in adjusted SG&A expenses as a percentage of adjusted gross profit (excluding the $3.4 million corporate generated F&I gain). These factors were partially offset by a 46% increase in floor plan interest expense as a result of a 200 basis point increase in short-term interest rates.

Total revenues increased 8% to $2.9 billion for the six months ended June 30, 2006, from $2.7 billion for the six months ended June 30, 2005.  The increase in total revenues was a result of a 6% increase in new vehicle revenue and an

 

35




 

11% increase in used vehicle revenue.

Total gross profit increased 9% to $440.1 million for the six months ended June 30, 2006, from $404.0 million for the six months ended June 30, 2005. Total gross profit, excluding the corporate generated F&I gain, increased 8% to $436.7 million for the six months ended June 30, 2006 from $404.0 million for the six months ended June 30, 2005.  The increase in total gross profit was driven by a $14.1 million, or 9% increase in fixed operations gross profit as well as almost $9.0 million increases in both used vehicle and new vehicle gross profit, representing a 15% and 8% increase, respectively.

New Vehicle  —

 

 

For the Six Months Ended
June 30,

 

 

 

Increase

 

%

 

 

 

2006

 

 

 

2005

 

 

 

(Decrease)

 

Change

 

 

 

(Dollars in thousands, except PVR data)

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

New retail revenues—same store(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

Luxury

 

$

510,935

 

31

%

$

507,112

 

32

%

$

3,823

 

1

%

Mid-line import

 

675,851

 

42

%

617,299

 

40

%

58,552

 

9

%

Mid-line domestic

 

240,142

 

15

%

273,430

 

17

%

(33,288

)

(12

)%

Value

 

37,442

 

2

%

39,580

 

3

%

(2,138

)

(5

)%

Heavy trucks

 

166,603

 

10

%

126,095

 

8

%

40,508

 

32

%

Total new retail revenues—same store(1)

 

1,630,973

 

100

%

1,563,516

 

100

%

67,457

 

4

%

New retail revenues—acquisitions

 

27,076

 

 

 

 

 

 

 

 

 

 

Total new retail revenues

 

1,658,049

 

 

 

1,563,516

 

 

 

94,533

 

6

%

Fleet revenues—same store(1)

 

80,285

 

 

 

80,061

 

 

 

224

 

%

Fleet revenues—acquisitions

 

819

 

 

 

 

 

 

 

 

 

 

Total fleet revenues

 

81,104

 

 

 

80,061

 

 

 

1,043

 

1

%

New vehicle revenues, as reported

 

$

1,739,153

 

 

 

$

1,643,577

 

 

 

$

95,576

 

6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New retail units:

 

 

 

 

 

 

 

 

 

 

 

 

 

New retail units—same store(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

Luxury

 

11,310

 

22

%

11,435

 

22

%

(125

)

(1

)%

Mid-line import

 

27,536

 

54

%

25,530

 

50

%

2,006

 

8

%

Mid-line domestic

 

8,493

 

16

%

9,599

 

19

%

(1,106

)

(12

)%

Value

 

1,798

 

3

%

2,006

 

4

%

(208

)

(10

)%

Heavy trucks

 

2,774

 

5

%

2,364

 

5

%

410

 

17

%

Total new retail units—same store(1)

 

51,911

 

100

%

50,934

 

100

%

977

 

2

%

New retail units—acquisitions

 

976

 

 

 

 

 

 

 

 

 

 

Retail units—actual

 

52,887

 

 

 

50,934

 

 

 

1,953

 

4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New revenue PVR—same store(1)

 

$

31,419

 

 

 

$

30,697

 

 

 

$

722

 

2

%

New revenue PVR—actual

 

$

31,351

 

 

 

$

30,697

 

 

 

$

654

 

2

%


(1)             Same store amounts include the results of dealerships for the identical months for each period presented in the comparison, commencing with the first full month in which the dealership was owned by us.

 

36




 

 

 

For the Six Months Ended
June 30,

 

 

 

Increase

 

%

 

 

 

2006

 

 

 

2005

 

 

 

(Decrease)

 

Change

 

 

 

(Dollars in thousands, except PVR data)

 

Gross Profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

New retail gross profit—same store(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

Luxury

 

$

38,249

 

33

%

$

39,054

 

35

%

$

(805

)

(2

)%

Mid-line import

 

46,991

 

40

%

40,098

 

36

%

6,893

 

17

%

Mid-line domestic

 

17,906

 

15

%

19,818

 

18

%

(1,912

)

(10

)%

Value

 

2,634

 

2

%

3,542

 

3

%

(908

)

(26

)%

Heavy trucks

 

11,824

 

10

%

8,832

 

8

%

2,992

 

34

%

Total new retail gross profit—same store(1)

 

117,604

 

100

%

111,344

 

100

%

6,260

 

6

%

New retail gross profit—acquisitions

 

1,837

 

 

 

 

 

 

 

 

 

 

Total retail gross profit

 

119,441

 

 

 

111,344

 

 

 

8,097

 

7

%

Fleet gross profit—same store(1)

 

2,069

 

 

 

1,388

 

 

 

681

 

49

%

Fleet gross profit—acquisitions

 

13

 

 

 

 

 

 

 

 

 

 

Total fleet gross profit

 

2,082

 

 

 

1,388

 

 

 

694

 

50

%

New vehicle gross profit, as reported

 

$

121,523

 

 

 

$

112,732

 

 

 

$

8,791

 

8

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New gross profit PVR—same store(1)

 

$

2,265

 

 

 

$

2,186

 

 

 

$

79

 

4

%

New gross profit PVR—actual

 

$

2,258

 

 

 

$

2,186

 

 

 

$

72

 

3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New retail gross margin—same store(1)

 

7.2

%

 

 

7.1

%

 

 

0.1

%

1

%

New retail gross margin—actual

 

7.2

%

 

 

7.1

%

 

 

0.1

%

1

%


(1)             Same store amounts include the results of dealerships for the identical months for each period presented in the comparison, commencing with the first full month in which the dealership was owned by us.

New vehicle revenues increased 6% to $1.7 billion for the six months ended June 30, 2006, from $1.6 billion for the six months ended June 30, 2005.  The increase in new vehicle revenues was a result of a 2% increase in new revenue PVR, led by a 13% increase from our heavy trucks business in Atlanta, Georgia. New retail unit sales increased 4% driven by our mid-line import brands, which increased 8%, as well as a 2% from franchises we acquired within the last nine months.

New vehicle gross profit increased 8% to $121.5 million for the six months ended June 30, 2006, from $112.7 million for the six months ended June 30, 2005.  New retail gross profit increased 7%, driven by a 17% increase in mid-line import gross profit as these brands continued their strong performance, and a 34% increase from our heavy trucks business.  These increases were offset by the performance of our mid-line domestic brands, which were down 10%, with the majority of the decrease as a result of the new vehicle incentive environment in the second quarter of 2005.

37




 

 

 

For the Six Months Ended

 

 

 

 

 

Used Vehicle —

 

June 30,

 

Increase

 

%

 

 

2006

 

2005

 

(Decrease)

 

Change

 

 

 

(Dollars in thousands, except PVR data)

 

Revenues:

 

 

 

 

 

 

 

 

 

Retail revenues—same store(1)

 

$

561,891

 

$

503,825

 

$

58,066

 

12

%

Retail revenues—acquisitions

 

3,523

 

 

 

 

 

 

Total used retail revenues

 

565,414

 

503,825

 

61,589

 

12

%

Wholesale revenues—same store(1)

 

176,373

 

165,047

 

11,326

 

7

%

Wholesale revenues—acquisitions

 

880

 

 

 

 

 

 

Total wholesale revenues

 

177,253

 

165,047

 

12,206

 

7

%

Used vehicle revenues, as reported

 

$

742,667

 

$

668,872

 

$

73,795

 

11

%

Gross Profit:

 

 

 

 

 

 

 

 

 

Retail gross profit—same store(1)

 

$

67,922

 

$

57,429

 

$

10,493

 

18

%

Retail gross profit—acquisitions

 

493

 

 

 

 

 

 

Total used retail gross profit

 

68,415

 

57,429

 

10,986

 

19

%

Wholesale gross profit—same store(1)

 

(883

)

1,210

 

(2,903

)

(173

)%

Wholesale gross profit—acquisitions

 

33

 

 

 

 

 

 

Total wholesale gross profit

 

(850

)

1,210

 

(2,060

)

(170

)%

Used vehicle gross profit, as reported

 

$

67,565

 

$

58,639

 

$

8,926

 

15

%

 

 

 

 

 

 

 

 

 

 

Used retail units—same store(1)

 

31,675

 

29,926

 

1,749

 

6

%

Used retail units—acquisitions

 

229

 

 

 

 

 

 

Used retail units—actual

 

31,904

 

29,926

 

1,978

 

7

%

 

 

 

 

 

 

 

 

 

 

Used revenue PVR—same store(1)

 

$

17,739

 

$

16,836

 

$

903

 

5

%

Used revenue PVR—actual

 

$

17,722

 

$

16,836

 

$

886

 

5

%

 

 

 

 

 

 

 

 

 

 

Used gross profit PVR—same store(1)

 

$

2,144

 

$

1,919

 

$

225

 

12

%

Used gross profit PVR—actual

 

$

2,144

 

$

1,919

 

$

225

 

12

%

 

 

 

 

 

 

 

 

 

 

Used retail gross margin—same store(1)

 

12.1

%

11.4

%

0.7

%

6

%

Used retail gross margin—actual

 

12.1

%

11.4

%

0.7

%

6

%


(1)             Same store amounts include the results of dealerships for the identical months for each period presented in the comparison, commencing with the first full month in which the dealership was owned by us.

Used vehicle revenues increased 11% to $742.7 million for the six months ended June 30, 2006, from $668.9 million for the six months ended June 30, 2005.  Used retail revenues increased 12% to $565.4 million for the six months ended June 30, 2006, as a result of a 7% and 5% increase in used retail unit sales and used revenue PVR, respectively.  The strength of the used vehicle market and our used vehicle merchandising initiatives have resulted in increased used vehicle sales and improved used revenue PVR.

Used vehicle gross profit increased 15% to $67.6 million for the six months ended June 30, 2006, from $58.6 million for the six months ended June 30, 2005.  Used retail gross profit increased 19% to $68.4 million primarily as a result of our investment in new software to better value trade-ins, improve inventory management and the execution by our regional management teams dedicated to the used vehicle business.

 

38




 

 

 

 

For the Six Months Ended

 

 

 

 

 

Fixed Operations —

 

June 30,

 

Increase

 

%

 

 

2006

 

2005

 

(Decrease)

 

Change

 

 

 

(Dollars in thousands)

 

Revenues:

 

 

 

 

 

 

 

 

 

Revenues—same store(1)

 

 

 

 

 

 

 

 

 

Parts and service

 

$

304,490

 

$

277,468

 

$

27,022

 

10

%

Collision repair

 

34,076

 

32,204

 

1,872

 

6

%

Total revenues—same store(1)

 

338,566

 

309,672

 

28,894

 

9

%

Revenues—acquisitions

 

3,358

 

 

 

 

 

 

Parts, service and collision repair revenues, as reported

 

$

341,924

 

$

309,672

 

$

32,252

 

10

%

 

 

 

 

 

 

 

 

 

 

Gross Profit:

 

 

 

 

 

 

 

 

 

Gross profit—same store(1)

 

 

 

 

 

 

 

 

 

Parts and service

 

$

151,470

 

$

140,071

 

$

11,399

 

8

%

Collision repair

 

18,986

 

17,960

 

1,026

 

6

%

Total gross profit—same store(1)

 

170,456

 

158,031

 

12,425

 

8

%

Gross profit—acquisitions

 

1,724

 

 

 

 

 

 

Parts, service and collision repair gross profit, as reported

 

$

172,180

 

$

158,031

 

$

14,149

 

9

%

 

 

 

 

 

 

 

 

 

 

Parts and service gross margin—same store(1)

 

49.7

%

50.5

%

(0.8

)%

(2

)%

Collision repair gross margin—same store(1)

 

55.7

%

55.8

%

(0.1

)%

%


(1)             Same store amounts include the results of dealerships for the identical months for each period presented in the comparison, commencing with the first full month in which the dealership was owned by us.

Fixed operations revenues increased 10% to $341.9 million for the six months ended June 30, 2006, from $309.7 million for the six months ended June 30, 2005.  Fixed operations gross profit increased 9% to $172.2 million for the six months ended June 30, 2006, from $158.0 million for the six months ended June 30, 2005.  Fixed operations revenues and gross profit increased primarily due to a 14% and 13% increase in our “customer pay” parts and service businesses, respectively.

 

 

 

For the Six Months Ended

 

 

 

 

 

Finance and Insurance, net—

 

June 30,

 

Increase

 

%

 

 

2006

 

2005

 

(Decrease)

 

Change

 

 

 

(Dollars in thousands, except PVR data)

 

 

 

 

 

 

 

 

 

 

 

Dealership generated F&I—same store(1)

 

$

72,700

 

$

71,984

 

$

716

 

1

%

Dealership generated F&I—acquisitions

 

1,059

 

 

 

 

 

 

Dealership generated F&I, net

 

73,759

 

71,984

 

1,775

 

2

%

Corporate generated F&I

 

1,685

 

2,570

 

(885

)

(34

)%

Corporate generated F&I gain

 

3,400

 

 

 

 

 

 

Finance and insurance, net as reported

 

$

78,844

 

$

74,554

 

$

4,290

 

6

%

 

 

 

 

 

 

 

 

 

 

Dealership generated F&I PVR–same store (1)(2)

 

$

870

 

$

890

 

$

(20

)

(2

)%

Dealership generated F&I PVR–actual(2)

 

$

870

 

$

890

 

$

(20

)

(2

)%

F&I PVR–actual

 

$

930

 

$

922

 

$

8

 

1

%


(1)             Same store amounts include the results of dealerships for the identical months for each period presented in the comparison, commencing with the first full month in which the dealership was owned by us.

(2)             Refer to “Reconciliation of Non-GAAP Financial Information” for further discussion regarding dealership generated F&I profit PVR.

F&I increased 6% to $78.8 million for the six months ended June 30, 2006, from $74.6 million for the six months ended June 30, 2005. Included in F&I was a $3.4 million gain related to sale of our remaining interest in a pool of extended service contracts.  Excluding this item, F&I increased 1% to $75.4 million for the six months ended June 30, 2006, from $74.6 million for the six months ended June 30, 2005. The increase in F&I was primarily a result of the 5% increase in retail

 

39




 

units sales as dealership F&I PVR decreased $20.  The decrease in dealership generated F&I PVR was primarily a result of the decrease of our captive finance company loan portfolio.  As of June 30, 2006, we had approximately $23.8 million of notes receivable outstanding compared to $35.0 million as of June 30, 2005.  We expect to maintain between $20.0 and $25.0 million of notes receivable.  Corporate generated F&I was $1.7 million for the six months ended June 30, 2006, and $2.6 million for the six months ended June 30, 2005.  As a result of the aforementioned sale of our remaining interest in a pool of extended service contracts, we do not anticipate to recognize any further corporate generated F&I in the future.

 

 

 

For the Six Months Ended

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

 

 

% of Gross

 

 

 

% of Gross

 

Increase

 

%

 

Selling, General and Administrative —

 

2006

 

Profit

 

2005

 

Profit

 

(Decrease)

 

Change

 

 

 

(Dollars in thousands)

 

Personnel costs

 

$

156,914

 

35.7

%

$

149,419

 

37.0

%

$

7,495

 

5

%

Sales compensation

 

50,177

 

11.4

%

45,654

 

11.3

%

4,523

 

10

%

Stock-based compensation

 

2,296

 

0.5

%

 

%

2,296

 

100

%

Outside services

 

27,983

 

6.4

%

27,425

 

6.8

%

558

 

2

%

Advertising

 

24,826

 

5.6

%

26,265

 

6.5

%

(1,439

)

(5

)%

Rent

 

26,628

 

6.1

%

23,765

 

5.9

%

2,863

 

12

%

Utilities

 

9,336

 

2.1

%

8,501

 

2.1

%

835

 

10

%

Insurance

 

7,798

 

1.8

%

7,205

 

1.8

%

593

 

8

%

Other

 

31,406

 

7.1

%

30,318

 

7.5

%

1,088

 

4

%

Selling, general and administrative

 

$

337,364

 

76.7

%

$

318,552

 

78.9

%

$

18,812

 

6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Abandoned strategic project expenses

 

(1,658

)

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

(2,296

)

 

 

 

 

 

 

 

 

 

Reorganization expenses

 

 

 

 

(3,566

)

 

 

 

 

 

 

Adjusted selling, general and administrative

 

$

333,410

 

76.3

%

$

314,986

 

78.0

%

$

18,424

 

6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Profit

 

$

440,112

 

 

 

$

403,956

 

 

 

$

36,156

 

9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate generated F&I gain

 

(3,400

)

 

 

 

 

 

 

 

 

 

Adjusted gross profit

 

$

436,712

 

 

 

$

403,956

 

 

 

$

32,756

 

8

%

SG&A expenses increased 6% to $337.4 million for the six months ended June 30, 2006, from $318.6 million for the six months ended June 30, 2005.  SG&A expenses includes $2.3 million of stock-based compensation expense and $1.7 million of abandoned strategic project expenses during the six months ended June 30, 2006, and $3.6 million of reorganization costs during the six months ended June 30, 2005.  Excluding these items, adjusted SG&A expense increased 6% to $333.4 million for the six months ended June 30, 2006, from $315.0 million for the six months ended June 30, 2005.  Adjusted SG&A expense as a percentage of adjusted gross profit (excluding the $3.4 million corporate generated F&I gain) for the six months ended June 30, 2006 improved 170 basis points to 76.3%, from 78.0% for the six months ended June 30, 2005.  The improvement in adjusted SG&A as a percentage of adjusted gross profit is a result of several strategic expense control initiatives including our regional reorganization and our advertising expense initiatives, which focus on the most effective use of our resources.  These improvements were offset by increased rent resulting from our strategy to reduce our ownership of real estate through the use of sale-leaseback transactions.

Depreciation and Amortization—

Depreciation and amortization expense increased 7% to $10.1 million for the six months ended June 30, 2006, from $9.5 million for the six months ended June 30, 2005.  This increase is primarily related to property and equipment acquired between July 1, 2005 and June 30, 2006.

Other Income (Expense)—

Floor plan interest expense increased 46% to $20.4 million for the six months ended June 30, 2006 from $14.0 million for the six months ended June 30, 2005. This increase was primarily a result of a 200 basis point increase in short-term interest rates.

Other interest expense increased 11% to $22.0 million for the six months ended June 30, 2006, from $19.9 million

 

40




 

for the six months ended June 30, 2005.  The increase in other interest expense is a result of a higher effective interest rate on our 8% Notes due to the expiration of a fair value swap.  As a result, our 8% Notes, which had a variable rate while the fair value swap was in place, are now fixed at 8% until maturity in 2014.

Income Tax Expense—

Income tax expense increased 23% to $19.8 million for the six months ended June 30, 2006, from $16.1 million for the six months ended June 30, 2005.  Our effective tax rate for the six months ended June 30, 2006 and 2005 was 37.5%.

Discontinued Operations—

 

 

For the Six Months Ended

 

For the Six Months Ended

 

 

 

June 30, 2006

 

June 30, 2005

 

 

 

 

 

Pending

 

 

 

 

 

Pending

 

 

 

 

 

Sold

 

Disposition

 

Total

 

Sold(b)

 

Disposition(a)

 

Total

 

 

 

(Dollars in thousands)

 

Franchises

 

6

 

1

 

7

 

16

 

1

 

17

 

Ancillary businesses

 

 

1

 

1

 

1

 

1

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 tax benefit (expense)

 

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 pending disposition as of June 30, 2006

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

During the six months ended June 30, 2006, we sold six franchises (five dealership locations), and as of June 30, 2006, we were actively pursuing the sale of one franchise and one ancillary business. The $1.4 million loss from discontinued operations is primarily attributable to operating losses of the seven franchises mentioned above, offset by the $2.6 million gain ($1.6 million, net of tax) on the sale of six franchises during 2006. The $1.2 million loss from discontinued operations for the six months ended June 30, 2005, was primarily a result of the operating losses of the franchises mentioned above and franchises sold in 2005.

41




 

LIQUIDITY AND CAPITAL RESOURCES

We require cash to fund working capital needs, finance acquisitions of new dealerships and fund capital expenditures. We believe that our cash and cash equivalents on hand as of June 30, 2006, our funds generated through future operations and the funds available for borrowings under our committed credit facility, floor plan financing agreements, mortgage notes payable and proceeds from sale-leaseback transactions will be sufficient to fund our debt service and working capital requirements, commitments and contingencies, acquisitions, current dividend commitments and any seasonal operating requirements for the foreseeable future.

As of June 30, 2006, we had cash and cash equivalents of $89.1 million and working capital of $389.9 million. In addition, we had $125.0 million available for borrowings under our committed credit facility for working capital, general corporate purposes and acquisitions.

Committed Credit Facility

In March 2005, we entered into a committed credit facility (the “Committed Credit Facility”) with JPMorgan Chase Bank, N.A., and 17 other financial institutions (the “Syndicate”), which provided us with $150.0 million of working capital borrowing capacity and $650.0 million of new and used vehicle inventory financing at all of our dealerships except our Ford, Lincoln, Mercury, Mazda, Volvo and Rover dealerships (“Ford Trustmark”) and General Motors dealerships. In addition, Ford Motor Credit Corporation (“FMCC”) and General Motors Acceptance Corporation (“GMAC”) provide us with $150.0 million and $100.0 million, respectively, of floor plan financing outside of the Syndicate to finance inventory at our Ford Trustmark and General Motors dealerships.

In March 2006, we amended our Committed Credit Facility to include DaimlerChrysler Financial Services (“DCFS”) in the Syndicate and extend the maturity of the Committed Credit Facility from March 2008 to March 2009. In addition, DCFS agreed to provide a maximum of $120.0 million of floor plan financing outside of the Syndicate to finance inventory purchases at our Mercedes-Benz, Chrysler, Dodge and Jeep dealerships (“DaimlerChrysler Dealerships”). Pursuant to the signing 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 facility has no stated termination date and borrowings will accrue interest based on LIBOR. Further, we reduced our working capital borrowing capacity from $150.0 million to $125.0 million and reduced the commitment of the Syndicate to finance our inventory purchases from $650.0 million to $425.0 million. In total, these commitments give us $125.0 million of working capital borrowing capacity and $795.0 million of floor plan borrowing capacity.

Floor Plan Financing-

We finance substantially all of our new vehicle inventory and, at our option, have the ability to finance a portion of our used vehicle inventory. We consider floor plan notes payable to a party that is affiliated with vehicle manufacturers from which we purchase new vehicle inventory “floor plan notes payable — manufacturer affiliated” and all other floor plan notes payable “floor plan notes payable — non-manufacturer affiliated.”  As of June 30, 2006, total borrowing capacity under the floor plan financing agreements with our vehicle floor plan providers totaled $795.0 million. In addition, as of June 30, 2006, we had total borrowing capacity of $56.0 million under ancillary floor plan financing agreements with Comerica Bank and Navistar Financial for our heavy trucks business in Atlanta, Georgia. As of June 30, 2006, we had $660.0 million, including $2.6 million classified as Liabilities Associated with Assets Held for Sale, outstanding to lenders affiliated and non-affiliated with the vehicle manufacturers from which we purchase our vehicle inventory.

During the first quarter of 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 our accompanying Condensed Consolidated Statements of Cash Flows.

Acquisitions and Acquisition Financing-

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

 

42




 

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. We plan to use our available cash, borrowings under our Committed Credit Facility or proceeds from future sale-leaseback transactions to finance future acquisitions.  Each year we expect to acquire dealerships that would add approximately $200.0 million of annualized revenues; however, we do not expect to achieve this target in 2006.

Sale-Leaseback Transactions

During the six months ended June 30, 2006, we completed one sale-leaseback transaction resulting in the sale of $11.0 million of real estate and construction improvements and the commencement of long-term operating leases for the assets sold.  During the six months ended June 30, 2005, we completed two sale-leaseback transactions, which resulted in the sale of approximately $15.7 million of real estate and construction improvements and the commencement of long-term operating leases for the assets sold.

Debt Covenants-

We are subject to certain financial covenants in connection with our debt and lease agreements, including the financial covenants described below. Our Committed Credit Facility includes certain financial ratios with the following requirements: (i) an adjusted current ratio of at least 1.2 to 1, of which our ratio was approximately 1.6 to 1 as of June 30, 2006; (ii) a fixed charge coverage ratio of at least 1.2 to 1, of which our ratio was approximately 1.5 to 1 as of June 30, 2006; (iii) an adjusted leverage ratio of not more than 4.5 to 1, of which our ratio was approximately 3.1 to 1 as of June 30, 2006 and (iv) a minimum adjusted net worth of not less than $350.0 million, of which our adjusted net worth was approximately $506.9 million as of June 30, 2006. A breach of these covenants could cause an acceleration of repayment of our Committed Credit Facility if not otherwise waived or cured. Certain of our lease agreements include financial ratios with the following requirements: (i) a liquidity ratio of at least 1.2 to 1, of which our ratio was approximately 1.5 to 1 as of June 30, 2006 and (ii) an EBITDA based coverage ratio of at least 1.5 to 1, of which our ratio was approximately 3.3 to 1 as of June 30, 2006. A breach of these covenants would give rise to certain lessor remedies under our various lease agreements, the most severe of which include the following: (a) termination of the applicable lease, (b) termination of certain of the tenant’s lease rights, such as renewal rights and rights of first offer or negotiation relating to the purchase of the premises, and/or (c) a liquidated damages claim equal to the extent to which the accelerated rents under the applicable lease for the remainder of the lease term exceed the fair market rent over the same periods. As of June 30, 2006, we were in compliance with all our debt and lease agreement covenants.

Cash Flows for the Six Months Ended June 30, 2006 Compared to the Six Months Ended June 30, 2005

Floor plan borrowings are required by all vehicle manufacturers for the purchase of new vehicles, and our agreements with our floor plan providers require us to repay amounts borrowed for the purchase of a vehicle immediately after the vehicle is sold. As a result, changes in floor plan notes payable are directly linked to changes in new vehicle inventory and therefore are an integral part of understanding changes in our working capital and operating cash flow. Consequently, we have provided a reconciliation of cash flow from operating activities and financing activities, as if all changes in floor plan notes payable were classified as an operating activity.

 

 

For the Six Months Ended

 

 

 

June 30,

 

(In thousands)

 

2006

 

2005

 

Reconciliation of cash provided by (used in) operating activities to adjusted cash provided by operating activities

 

 

 

 

 

Cash provided by (used in) operating activities

 

$

105,685

 

$

(77,696

)

Floor plan notes payable — non-manufacturer affiliated, net

 

(98,181

)

123,472

 

Cash provided by operating activities — as adjusted

 

$

7,504

 

$

45,776

 

 

 

 

 

 

 

Reconciliation of cash (used in) provided by financing activities to adjusted cash provided by (used in) financing activities

 

 

 

 

 

Cash (used in) provided by financing activities

 

$

(94,977

)

$

97,686

 

Floor plan borrowings — non-manufacturer affiliated

 

(1,273,177

)

(1,753,115

)

Floor plan repayments — non-manufacturer affiliated

 

1,371,358

 

1,629,643

 

Cash provided by (used in) financing activities — as adjusted

 

$

3,204

 

$

(25,786

)

 

43




 

Operating Activities-

Net cash provided by operating activities totaled $105.7 million for the six months ended June 30, 2006. Net cash used in operating activities totaled $77.7 million for the six months ended June 30, 2005. Net cash provided by operating activities, as adjusted, totaled $7.5 million for the six months ended June 30, 2006, and $45.8 million for the six months ended June 30, 2005. Cash provided by operating activities, as adjusted, includes net income adjusted for non-cash items and changes in working capital, including changes in floor plan notes payable related to vehicle inventory. The $38.3 million decrease in our cash provided by operating activities, as adjusted, for the six months ended June 30, 2006, compared to the six months ended June 30, 2005, was primarily attributable to (i) $50.8 million related to the timing of inventory purchases and repayments of floor plan notes payable (including $21.0 million of repayments associated with six franchise divestitures discussed below); and (ii) $28.4 million related to the timing of payments of accounts payable and accrued liabilities and prepaid assets, including a $13.7 million payment associated with the expiration of three interest rate swaps, offset by $33.0 million related to the timing of collection of accounts receivable and contracts-in-transit.

We borrowed $6.8 million from our floor plan facilities for the purchase of inventory in connection with one franchise acquisition during the six months ended June 30, 2005.  We did not complete any acquisitions during the six months ended June 30, 2006.  In connection with six and four franchise divestitures, we repaid $21.0 million and $4.7 million of floor plan notes payable during the six months ended June 30, 2006 and 2005, respectively. Acquisition and divestiture activity decreased our cash provided by operating activities, as adjusted, by $21.0 million for the six months ended June 30, 2006.  Acquisition and divestiture activity increased our cash provided by operating activities, as adjusted, by $2.1 million for the six months ended June 30, 2005.

Investing Activities—

Net cash provided by investing activities totaled $21.2 million for the six months ended June 30, 2006.  Net cash used in investing activities totaled $37.0 million for the six months ended June 30, 2005. Cash flows from investing activities relate primarily to capital expenditures, acquisition and divestiture activity, sale of property and equipment and construction reimbursements from lessors in connection with our sale-leaseback agreements.

Capital expenditures were $23.3 million for the six months ended June 30, 2006, and $35.2 million for the six months ended June 30, 2005.  During the six months ended June 30, 2006 and 2005, $7.1 million and $18.2 million, respectively, of capital expenditures were financed or were pending financing through sale-leaseback agreements or mortgage notes payable. Our capital expenditures consisted of upgrades to our existing facilities and construction of new facilities. Future capital expenditures will relate primarily to upgrading existing dealership facilities and operational improvements that we expect will provide us with acceptable rates of return on our investments. During the six months ended June 30, 2006 and 2005, we received $3.1 million and $2.6 million, respectively, of construction reimbursements from lessors in connection with our sale-leaseback agreements. We expect that capital expenditures during 2006 will total between $60.0 million and $70.0 million, of which we intend to finance approximately 40% to 50% principally through sale-leaseback agreements.

Cash used for acquisitions totaled $11.6 million for the six months ended June 30, 2005.  We did not complete any acquisitions during the six months ended June 30, 2006.

Proceeds from the sale of assets totaled $42.1 million for the six months ended June 30, 2006, and $8.0 million for the six months ended June 30, 2005. Included in proceeds from the sale of assets is the sale of six franchises (five dealership locations) during the six months ended June 30, 2006 and four franchises (two dealership locations) during the six months ended June 30, 2005. We completed the sale of the two remaining Thomason dealerships in Portland, Oregon in April 2006, for which we received approximately $14.6 million of net proceeds (approximately $22.2 million of gross proceeds less approximately $7.6 million of floor plan repayments). We continuously monitor the profitability and market value of our dealerships, specifically the 10% contributing the least amount of operating income, and may strategically divest non-profitable dealerships.

Financing Activities—

Net cash used in financing activities totaled $95.0 million for the six months ended June 30, 2006. Net cash provided by financing activities totaled $97.7 million for the six months ended June 30, 2005. Net cash provided by financing activities, as adjusted, totaled $3.2 million for the six months ended June 30, 2006. Net cash used in financing activities, as adjusted, totaled $25.8 million for the six months ended June 30, 2005.

During the six months ended June 30, 2006 and 2005, we repaid debt of $2.2 million and $42.0 million, respectively. The majority of repayments during the six months end June 30, 2005, resulted from our decision to repay approximately $29.0 million of our variable rate mortgage notes payable.

 

44




 

During the six months ended June 30, 2006 and 2005, we received proceeds from the exercise of stock options of $3.9 million and $0.4 million, respectively.

During the six months ended June 30, 2006 and 2005, proceeds from borrowings amounted to $1.0 million and $20.7 million, respectively, which related primarily to mortgage financing associated with the construction of dealership facilities.

Off-Balance Sheet Transactions

We had no material off-balance sheet transactions during the periods presented other than those disclosed in Note 14 of our Condensed Consolidated financial statements.

Stock Repurchase and Dividend Restrictions

Pursuant to the indentures governing our 9% Senior Subordinated Notes due 2012, our 8% Senior Subordinated Notes due 2014 and our Committed Credit Facility, our ability to repurchase shares of our common stock or pay cash dividends is limited. As of June 30, 2006, our ability to repurchase shares or pay cash dividends was limited to an aggregate purchase price of $76.1 million due to these restrictions. We did not repurchase any shares of our common stock during 2006 or 2005.  On July 31, 2006, our Board of Directors declared a quarterly dividend of $0.20 per common share payable on August 24, 2006 to shareholders of record as of August 11, 2006.

CRITICAL ACCOUNTING ESTIMATES

Preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and reported amounts of revenues and expenses during the periods presented. Actual amounts could differ from those estimates. On an ongoing basis, management evaluates its estimates and assumptions and the effects of revisions are reflected in the financial statements in the period in which they are determined to be necessary. The accounting policies described below are those that most frequently require management to make estimates and judgments, and therefore are critical to understanding our results of operations. Senior management has discussed the development and selection of these accounting estimates and the related disclosures with the audit committee of our board of directors.

Inventories—

Our inventories are stated at the lower of cost or market. We use the specific identification method to value our vehicle inventories and the “first-in, first-out” method (“FIFO”) to account for our parts inventories. We maintain a reserve for specific inventory units where cost basis exceeds fair value. In assessing lower of cost or market for new and used vehicles, we consider (i) the aging of new and used vehicles, (ii) loss histories of new and used vehicles, (iii) the timing of annual and model changeovers of new vehicles and (iv) current market conditions. We very rarely sell new vehicles that have been in inventory for less than 300 days at a loss. Our new vehicle loss histories have indicated that our losses range between 1 to 4% of our new vehicle inventory that exceeded 300 days old. As of June 30, 2006, our new vehicle loss reserve was $0.3 million or 2.7% of new vehicle inventory over 300 days old. Each 1% change in our estimate would change our new vehicle reserve approximately $0.1 million. Our used vehicle loss histories have indicated that our losses range between 2 to 4% of our used vehicle inventory. As of June 30, 2006, our used vehicle loss reserve was $4.1 million or 3.3% of used vehicle inventory. A 1% change in our estimate of used vehicle losses would change Used Vehicle Cost of Sales by approximately $1.2 million.

Notes Receivable—Finance Contracts—

As of June 30, 2006 and December 31, 2005, we had outstanding notes receivable from finance contracts of $23.8 million and $27.2 million, respectively. These notes have initial terms ranging from 12 to 60 months, and are collateralized by the related vehicles. The assessment of our allowance for credit losses considers historical loss ratios and the performance of the current portfolio with respect to past due accounts. We continually analyze our current portfolio against our historical performance. In addition, we attribute minimal value to the underlying collateral in our assessment of the reserve. Our loss histories indicate our future credit losses will be approximately 14% of notes receivable. Our allowance for credit losses was $3.3 million and $3.5 million as of June 30, 2006 and December 31, 2005, respectively. A 1% change in our estimate of notes

 

45




 

receivable losses during the three and six months ended June 30, 2006 would change our Finance and Insurance, net by approximately $0.2 million.

F&I Chargeback Reserve—

We receive commissions from the sale of vehicle service contracts, credit life insurance and disability insurance to customers. In addition, we receive commissions from financing institutions for arranging customer financing. We may be charged back (“chargebacks”) for finance, insurance or vehicle service contract 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. This data is evaluated on a product-by-product basis. Our loss histories vary depending on the product but generally range between 7% and 18%. Our chargeback reserves were $14.0 million and $12.6 million as of June 30, 2006 and December 31, 2005, respectively. A 1% change in chargebacks of all our products during the three and six months ended June 30, 2006 would change Finance and Insurance, net by approximately $0.8 million.

Self Insurance Reserves—

We are self insured for certain employee medical, workers compensation and general liability claims. We maintain stop loss insurance for individual and aggregate claims. We maintain and frequently review claim and loss histories to help us assess our future liability for these claims. In addition, we use professional service providers such as account administrators and actuaries to help us accumulate and assess this information. As of June 30, 2006, we had $5.7 million of insurance reserves for both known and unknown employee medical, workers compensation and general liability claims.

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 teams, 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 attributable 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.

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.

46




 

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. This Staff Position 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.

RECONCILIATION OF NON-GAAP FINANCIAL INFORMATION

Adjusted cash provided by (used in) operating and financing activities

Floor plan borrowings are required by all vehicle manufacturers for the purchase of new vehicles, and our agreements with our floor plan providers require us to repay amounts borrowed for the purchase of a vehicle immediately after the vehicle is sold. As a result, changes in floor plan notes payable are directly linked to changes in new vehicle inventory and therefore are an integral part of understanding changes in our working capital and operating cash flow. Consequently, we have provided a reconciliation of cash flow from operating activities and financing activities, as if all changes in floor plan notes payable were classified as an operating activity.

 

 

For the Six Months Ended
June 30,

 

(In thousands)

 

2006

 

2005

 

Reconciliation of cash provided by (used in) operating activities to adjusted cash provided by operating activities

 

 

 

 

 

Cash provided by (used in) operating activities

 

$

105,685

 

$

(77,696

)

Floor plan notes payable — non-manufacturer affiliated, net

 

(98,181

)

123,472

 

Cash provided by operating activities — as adjusted

 

$

7,504

 

$

45,776

 

 

 

 

 

 

 

Reconciliation of cash (used in) provided by financing activities to adjusted cash provided by (used in) financing activities

 

 

 

 

 

Cash (used in) provided by financing activities

 

$

(94,977

)

$

97,686

 

Floor plan borrowings — non-manufacturer affiliated

 

(1,273,177

)

(1,753,115

)

Floor plan repayments — non-manufacturer affiliated

 

1,371,358

 

1,629,643

 

Cash provided by (used in) financing activities — as adjusted

 

$

3,204

 

$

(25,786

)

 

Dealership generated F&I -

We evaluate our F&I performance on a Per Vehicle Retailed (“PVR”) basis by dividing our total F&I commissions by the number of retail vehicles sold. During 2003, we renegotiated a contract with a third party F&I product provider, which resulted in the recognition of income in 2006 and 2005 that was not attributable to retail vehicles sold during 2006 and 2005 (referred to as “corporate generated F&I”).  During the second quarter of 2006, we decided to sell our remaining interest in the pool of extended service contracts that had been the source of our corporate generated F&I, which resulted in the recognition of a $3.4 million gain on the sale (“corporate generated F&I gain”).  We believe that dealership generated F&I, which excludes the additional revenue derived from this contract, provides a more accurate measure of our F&I operating performance.

47




 

The following table reconciles Finance and insurance, net to dealership generated F&I, and provides the necessary components to calculate dealership generated F&I PVR:

 

 

For the Three Months Ended
June 30,

 

(Dollars in thousands, except per vehicle data)

 

 

 

2006

 

2005

 

Reconciliation of Finance and insurance, net to dealership generated F&I:

 

 

 

 

 

Finance and insurance, net

 

$

43,224

 

$

39,064

 

Less: corporate generated F&I

 

(692

)

(1,367

)

Less: corporate generated F&I gain

 

(3,400

)

 

Dealership generated F&I

 

$

39,132

 

$

37,697

 

 

 

 

 

 

 

Dealership generated F&I PVR

 

$

875

 

$

879

 

 

 

 

 

 

 

Retail units sold:

 

 

 

 

 

New retail units

 

28,329

 

27,449

 

Used retail units

 

16,414

 

15,425

 

Total retail units

 

44,743

 

42,874

 

 

 

 

For the Six Months Ended
June 30,

 

(Dollars in thousands, except per vehicle data)

 

 

 

2006

 

2005

 

Reconciliation of Finance and insurance, net to dealership generated F&I:

 

 

 

 

 

Finance and insurance, net

 

$

78,844

 

$

74,554

 

Less: corporate generated F&I

 

(1,685

)

(2,570

)

Less: corporate generated F&I gain

 

(3,400

)

 

Dealership generated F&I

 

$

73,759

 

$

71,984

 

 

 

 

 

 

 

Dealership generated F&I PVR

 

$

870

 

$

890

 

 

 

 

 

 

 

Retail units sold:

 

 

 

 

 

New retail units

 

52,887

 

50,934

 

Used retail units

 

31,904

 

29,926

 

Total retail units

 

84,791

 

80,860

 

 

Adjusted SG&A Expenses as a percentage of adjusted gross profit

(Dollars in thousands)

 

For the Three Months Ended
June 30,

 

 

 

2006

 

2005

 

Adjusted SG&A expenses as a percentage of adjusted gross profit:

 

 

 

 

 

SG&A expenses

 

$

171,715

 

$

160,185

 

Abandoned strategic project expenses

 

(1,417

)

 

Stock-based compensation expense

 

(927

)

 

Adjusted SG&A expenses

 

$

169,371

 

$

160,185

 

 

 

 

 

 

 

Gross profit

 

$

228,782

 

$

209,459

 

Corporate generated F&I gain

 

(3,400

)

 

 

 

$

225,382

 

$

209,459

 

 

 

 

 

 

 

Adjusted SG&A expenses as a percentage of adjusted gross profit

 

75.1

%

76.5

%

 

48




 

(Dollars in thousands)

 

For the Six Months Ended
June 30,

 

 

 

2006

 

2005

 

Adjusted SG&A expenses as a percentage of adjusted gross profit:

 

 

 

 

 

SG&A expenses

 

$

337,364

 

$

318,552

 

Reorganization expenses

 

 

(3,566

)

Abandoned strategic project expenses

 

(1,658

)

 

Stock-based compensation expense

 

(2,296

)

 

Adjusted SG&A expenses

 

$

333,410

 

$

314,986

 

 

 

 

 

 

 

Gross profit

 

$

440,112

 

$

403,956

 

Corporate generated F&I gain

 

(3,400

)

 

 

 

$

436,712

 

$

403,956

 

 

 

 

 

 

 

Adjusted SG&A expenses as a percentage of adjusted gross profit

 

76.3

%

78.0

%

 

Adjusted income from continuing operations

(In thousands)

 

For the Three Months Ended
June 30,

 

 

 

2006

 

2005

 

Adjusted income from continuing operations:

 

 

 

 

 

Net income

 

$

19,004

 

$

15,986

 

Discontinued operations, net of tax

 

420

 

1,065

 

Income from continuing operations

 

19,424

 

17,051

 

 

 

 

 

 

 

Corporate generated F&I gain, net of tax

 

(2,125

)

 

Abandoned strategic project expenses, net of tax

 

886

 

 

Stock-based compensation expense, net of tax

 

579

 

 

Adjusted income from continuing operations

 

$

18,764

 

$

17,051

 

 

(In thousands)

 

For the Six Months Ended
June 30,

 

 

 

2006

 

2005

 

Adjusted income from continuing operations:

 

 

 

 

 

Net income

 

$

31,557

 

$

25,627

 

Discontinued operations, net of tax

 

1,436

 

1,225

 

Income from continuing operations

 

32,993

 

26,852

 

 

 

 

 

 

 

Corporate generated F&I gain, net of tax

 

(2,125

)

 

Reorganization expenses, net of tax

 

 

2,229

 

Abandoned strategic project expenses, net of tax

 

1,036

 

 

Stock-based compensation expense, net of tax

 

1,435

 

 

Adjusted income from continuing operations

 

$

33,339

 

$

29,081

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

We are exposed to market risk from changes in interest rates on a significant portion of our outstanding indebtedness. Based on $697.0 million of total variable rate debt (including floor plan notes payable) outstanding as of June 30, 2006, a 1% change in interest rates would result in a change of approximately $7.0 million to our annual interest expense. Conversely, based on fixed-rate debt of $469.2 million (excluding $9.2 million of our fair value hedge which reduces the book value of our 8% Subordinated Notes due 2014) a 1% change in interest would mean we would not experience the impact of a $4.7 million change in our annual interest expense.

49




 

We received $14.3 million of interest credit assistance from certain automobile manufacturers during the six months ended June 30, 2006. Interest credit assistance reduced new vehicle cost of sales from continuing operations for the six months ended June 30, 2006 by $13.5 million and reduced new vehicle inventory by $4.2 million and $3.6 million as of June 30, 2006 and December 31, 2005, respectively. Although we can provide no assurance as to the amount of future interest credit assistance, based on historical data, it is our expectation that an increase in prevailing interest rates would result in some increase in interest credit assistance from certain (mainly domestic) automobile manufacturers.

Interest Rate Hedges

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 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.

Item 4. Controls and Procedures

As of the end of the period covered by this report, the Company conducted an evaluation, under the supervision and with the participation of the Company’s chief executive officer and chief financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation, the Company’s chief executive officer and chief financial officer concluded that as of the end of such period such disclosure controls and procedures (i) were reasonably designed to ensure that information required to be disclosed by the Company in reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the rules and forms of the Securities and Exchange Commission and (ii) were effective.

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

---

Forward-Looking Statements

This report contains “forward-looking statements” as that term is defined in the Private Securities Litigation Reform Act of 1995. The forward-looking statements include statements relating to goals, plans and projections regarding our financial position, results of operations, market position, product development and business strategy. These statements are based on management’s current expectations and involve significant risks and uncertainties that may cause results to differ materially from those set forth in the statements. These risks and uncertainties include, among other things:

·                  market factors;

·                  our relationships with vehicle manufacturers and other suppliers;

·                  the amount of our indebtedness;

·                  risks related to pending and potential future acquisitions;

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·                  general economic conditions both nationally and locally;

·                  governmental regulations and legislation; and

·                  automotive retail industry trends.

There can be no guarantees that our plans for future operations will be successfully implemented or that they will prove to be commercially successful. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise.

PART II. OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security Holders

The results of the votes cast at the Company’s Annual Meeting on May 5, 2006 were as follows:

Election of Class I Directors:

 

For

 

Withheld

 

Janet M. Clarke

 

29,952,728

 

1,074,709

 

Michael J. Durham

 

29,880,285

 

1,147,152

 

Charles B. Tomm

 

29,961,727

 

1,065,710

 

 

Ratification of appointment of Deloitte & Touche L.L.P. as independent public accountants for 2006:

For

 

30,952,191

 

Against

 

72,646

 

Abstain

 

2,600

 

 

Item 5. Directors and Executive Officers

In connection with certain strategic projects that have subsequently been abandoned, on May 5, 2006, the Company’s Board of Directors formed a special committee comprised of the following independent directors:

Michael Durham, the special committee’s chairman, Janet M. Clarke, Philip F. Maritz and Vernon E. Jordan, Jr.  The members of the special committee each received the following compensation, as applicable: a one-time payment of $45,000 for Mr. Durham as the chairman of such committee and $30,000 for the other committee members.  In addition, each was entitled to payment of $1,500 per meeting of the special committee; and payment of $1,500 for each day during which a special committee member focused significant attention on the business of the special committee, plus, in all cases, his or her reasonable out-of-pocket expenses.

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Item 6. Exhibits

Exhibits required to be filed by Item 601 of Regulation S-K:

15.1

 

Awareness letter from Deloitte & Touche LLP.

 

 

 

31.1

 

Certificate of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August 7, 2006.

 

 

 

31.2

 

Certificate of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August 7, 2006.

 

 

 

32.1

 

Certificate of Chief Executive Officer pursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated August 7, 2006.

 

 

 

32.2

 

Certificate of Chief Financial Officer pursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated August 7, 2006.


*                    Incorporated by reference

 

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Asbury Automotive Group, Inc.
(Registrant)

 

 

 

 

 

Date: August 7, 2006

By:

/s/ KENNETH B. GILMAN

 

 

 

Name: Kenneth B. Gilman

 

 

Title: Chief Executive Officer and President

 

 

 

 

 

 

Date: August 7, 2006

By:

/s/ J. GORDON SMITH

 

 

 

Name:

J. Gordon Smith

 

 

Title:

Senior Vice President and Chief Financial Officer

 

 

 

(Principal Financial Officer)

 

 

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INDEX TO EXHIBITS

 

Exhibit Number

 

Description of Documents

 

 

 

15.1

 

Awareness letter from Deloitte & Touche LLP.

 

 

 

31.1

 

Certificate of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August 7, 2006.

 

 

 

31.2

 

Certificate of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August 7, 2006.

 

 

 

32.1

 

Certificate of Chief Executive Officer pursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated August 7, 2006.

 

 

 

32.2

 

Certificate of Chief Financial Officer pursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated August 7, 2006.


* Incorporated by reference

 

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