Form 10-Q
Table of Contents

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 September 30, 2007

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number: 001-31262

 


ASBURY AUTOMOTIVE GROUP, INC.

(Exact name of Registrant as specified in its charter)

 

Delaware   01-0609375
(State or other jurisdiction of
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  ¨

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  ¨                     Accelerated Filer  x                    Non-Accelerated Filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    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 November 5, 2007, was 31,580,200 (net of 4,677,261 treasury shares).

 



Table of Contents

ASBURY AUTOMOTIVE GROUP, INC.

INDEX

 

PART I — Financial Information
Item 1.    Condensed Consolidated Financial Statements (unaudited)   
   Condensed Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006    2
   Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2007 and 2006    3
   Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2007 and 2006    4
   Notes to Condensed Consolidated Financial Statements    5
   Report of Independent Registered Public Accounting Firm    23
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations    24
Item 3.    Quantitative and Qualitative Disclosures About Market Risk    47
Item 4.    Controls and Procedures    47
PART II — Other Information
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds    48
Item 6.    Exhibits    49
   Signatures    50
   Index to Exhibits    51

 

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Table of Contents

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)

 

     September 30,
2007
    December 31,
2006
 
ASSETS     

CURRENT ASSETS:

    

Cash and cash equivalents

   $ 40,794     $ 129,170  

Contracts-in-transit

     98,102       126,012  

Accounts receivable (net of allowance of $669 and $648, respectively)

     143,387       167,562  

Inventories

     745,428       775,313  

Deferred income taxes

     13,961       13,961  

Prepaid and other current assets

     76,120       55,099  

Assets held for sale

     20,228       25,947  
                

Total current assets

     1,138,020       1,293,064  

PROPERTY AND EQUIPMENT, net

     210,688       202,584  

GOODWILL

     468,123       447,996  

OTHER LONG-TERM ASSETS

     98,526       87,193  
                

Total assets

   $ 1,915,357     $ 2,030,837  
                
LIABILITIES AND SHAREHOLDERS’ EQUITY     

CURRENT LIABILITIES:

    

Floor plan notes payable—manufacturer affiliated

   $ 183,329     $ 319,896  

Floor plan notes payable—non-manufacturer affiliated

     433,858       380,881  

Current maturities of long-term debt

     26,001       23,144  

Accounts payable

     48,822       63,951  

Accrued liabilities

     82,864       89,296  

Liabilities associated with assets held for sale

     1,377       3,887  
                

Total current liabilities

     776,251       881,055  

LONG-TERM DEBT

     465,671       454,010  

DEFERRED INCOME TAXES

     51,473       53,991  

OTHER LONG-TERM LIABILITIES

     34,776       29,948  

COMMITMENTS AND CONTINGENCIES (Note 12)

    

SHAREHOLDERS’ EQUITY:

    

Preferred stock, $.01 par value per share, 10,000,000 shares authorized

     —         —    

Common stock, $.01 par value per share, 90,000,000 shares authorized, 36,253,461 and 35,071,401 shares issued, including shares held in treasury, respectively

     363       351  

Additional paid-in capital

     439,193       431,725  

Retained earnings

     215,558       196,393  

Treasury stock, at cost; 4,295,161 and 1,536,706 shares held, respectively

     (65,770 )     (14,559 )

Accumulated other comprehensive loss

     (2,158 )     (2,077 )
                

Total shareholders’ equity

     587,186       611,833  
                

Total liabilities and shareholders’ equity

   $ 1,915,357     $ 2,030,837  
                

See Notes to Condensed Consolidated Financial Statements.

 

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ASBURY AUTOMOTIVE GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)

 

     For the Three Months
Ended September 30,
    For the Nine Months
Ended September 30,
 
     2007     2006     2007     2006  

REVENUES:

        

New vehicle

   $ 893,977     $ 901,783     $ 2,609,709     $ 2,618,109  

Used vehicle

     378,140       388,095       1,151,790       1,119,249  

Parts, service and collision repair

     176,707       170,246       527,168       509,476  

Finance and insurance, net

     42,210       40,590       124,470       118,446  
                                

Total revenues

     1,491,034       1,500,714       4,413,137       4,365,280  
                                

COST OF SALES:

        

New vehicle

     829,977       838,231       2,423,950       2,434,562  

Used vehicle

     348,391       351,941       1,051,375       1,016,381  

Parts, service and collision repair

     84,351       83,153       253,022       251,596  
                                

Total cost of sales

     1,262,719       1,273,325       3,728,347       3,702,539  
                                

GROSS PROFIT

     228,315       227,389       684,790       662,741  

OPERATING EXPENSES:

        

Selling, general and administrative

     176,067       172,568       526,078       505,317  

Depreciation and amortization

     5,385       5,056       16,061       15,104  
                                

Income from operations

     46,863       49,765       142,651       142,320  

OTHER INCOME (EXPENSE):

        

Floor plan interest expense

     (10,618 )     (10,123 )     (33,024 )     (30,067 )

Other interest expense

     (9,083 )     (11,225 )     (30,037 )     (33,268 )

Interest income

     900       1,523       3,906       3,271  

Loss on extinguishment of long-term debt

     —         (914 )     (18,523 )     (914 )

Other income, net

     343       399       1,032       1,223  
                                

Total other expense, net

     (18,458 )     (20,340 )     (76,646 )     (59,755 )
                                

Income before income taxes

     28,405       29,425       66,005       82,565  

INCOME TAX EXPENSE

     9,185       11,035       23,210       30,962  
                                

INCOME FROM CONTINUING OPERATIONS

     19,220       18,390       42,795       51,603  

DISCONTINUED OPERATIONS, net of tax

     (210 )     (1,211 )     (2,793 )     (2,867 )
                                

NET INCOME

   $ 19,010     $ 17,179     $ 40,002     $ 48,736  
                                

EARNINGS PER COMMON SHARE:

        

Basic—

        

Continuing operations

   $ 0.59     $ 0.55     $ 1.31     $ 1.56  

Discontinued operations

     —         (0.03 )     (0.09 )     (0.09 )
                                

Net income

   $ 0.59     $ 0.52     $ 1.22     $ 1.47  
                                

Diluted—

        

Continuing operations

   $ 0.58     $ 0.54     $ 1.27     $ 1.52  

Discontinued operations

     (0.01 )     (0.03 )     (0.08 )     (0.08 )
                                

Net income

   $ 0.57     $ 0.51     $ 1.19     $ 1.44  
                                

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:

        

Basic

     32,450       33,258       32,754       33,087  
                                

Diluted

     33,244       33,841       33,693       33,853  
                                

See Notes to Condensed Consolidated Financial Statements.

 

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ASBURY AUTOMOTIVE GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

     For the Nine Months
Ended September 30
 
     2007     2006  

CASH FLOW FROM OPERATING ACTIVITIES:

    

Net income

   $ 40,002     $ 48,736  

Adjustments to reconcile net income to net cash provided by operating activities-

    

Depreciation and amortization

     16,061       15,104  

Depreciation and amortization from discontinued operations

     35       269  

Share-based compensation

     4,706       3,258  

Amortization of deferred financing fees

     1,929       1,759  

Change in allowance for doubtful accounts

     21       (526 )

Loss (gain) on sale of discontinued operations, net

     2,001       (2,076 )

Loss on extinguishment of long-term debt

     18,523       914  

Deferred income taxes

     6,245       (1,221 )

Other adjustments

     10,464       5,403  

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

    

Contracts-in-transit

     27,910       27,028  

Accounts receivable

     8,734       534  

Proceeds from the sale of accounts receivable

     15,420       14,347  

Inventories

     76,646       11,413  

Prepaid and other current assets

     (28,610 )     (25,334 )

Floor plan notes payable—manufacturer affiliated, excluding divestitures, net

     (136,567 )     101,136  

Floor plan notes payable—manufacturer affiliated divestitures

     —         (11,252 )

Accounts payable and accrued liabilities

     (21,368 )     (4,800 )

Excess tax benefits from share-based payment arrangements

     (1,578 )     (1,723 )

Other long-term assets and liabilities

     (965 )     5,392  
                

Net cash provided by operating activities

     39,609       188,361  

CASH FLOW FROM INVESTING ACTIVITIES:

    

Capital expenditures—internally financed

     (25,389 )     (22,814 )

Capital expenditures—externally financed

     (15,614 )     (11,871 )

Construction reimbursements associated with sale-leaseback agreements

     11,405       3,383  

Acquisitions

     (70,485 )     —    

Proceeds from the sale of assets

     8,414       43,691  

Other investing activities

     (3,412 )     (1,297 )
                

Net cash (used in) provided by investing activities

     (95,081 )     11,092  

CASH FLOW FROM FINANCING ACTIVITIES:

    

Floor plan borrowings—non-manufacturer affiliated, excluding acquisitions

     2,059,553       1,838,366  

Floor plan borrowings—acquisitions

     22,406       —    

Floor plan repayments—non-manufacturer affiliated, excluding divestitures

     (2,026,108 )     (1,934,698 )

Floor plan repayments—non manufacturer affiliated divestitures

     (5,384 )     (11,335 )

Payment of dividends

     (20,558 )     (6,649 )

Proceeds from borrowings

     265,000       987  

Repayments of borrowings

     (267,264 )     (17,524 )

Debt issuance costs

     (7,949 )     —    

Sale of warrants

     8,924       —    

Purchase of treasury stock

     (49,507 )     —    

Purchase of convertible note hedge

     (19,309 )     —    

Proceeds from the exercise of stock options

     3,353       5,958  

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

     3,181       —    

Excess tax benefits from share-based payment arrangements

     1,578       1,723  

Purchase of treasury stock associated with share-based payment arrangements

     (820 )     —    
                

Net cash used in financing activities

     (32,904 )     (123,172 )
                

Net (decrease) increase in cash and cash equivalents

     (88,376 )     76,281  

CASH AND CASH EQUIVALENTS, beginning of period

     129,170       57,194  
                

CASH AND CASH EQUIVALENTS, end of period

   $ 40,794     $ 133,475  
                

See Note 11 for supplemental cash flow information.

See Notes to Condensed Consolidated Financial Statements.

 

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ASBURY AUTOMOTIVE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. DESCRIPTION OF BUSINESS

Asbury Automotive Group, Inc. is a national automotive retailer, operating 122 franchises (92 dealership locations) in 21 metropolitan markets within 10 states as of September 30, 2007. We offer an extensive range of automotive products and services, including new and used vehicles, vehicle maintenance, replacement parts, collision repair services, and financing, insurance and service contracts. We offer 35 domestic and foreign brands of new vehicles, including six heavy truck brands. We also operate 23 collision repair centers that serve our markets.

Our retail network is currently organized into four regions and includes nine dealership groups, each marketed under different local brands: (i) Florida (comprising our Coggin dealerships, operating primarily in Jacksonville, Fort Pierce and Orlando, and our Courtesy dealerships operating in Tampa), (ii) West (comprising our McDavid dealerships operating throughout Texas, our California dealerships operating in Los Angeles, Sacramento and Fresno and our North Point dealerships operating in Little Rock, Arkansas), (iii) Mid-Atlantic (comprising our Crown dealerships operating in North Carolina, South Carolina and Virginia) and (iv) South (comprising our Nalley dealerships operating in Atlanta, Georgia). Our Plaza dealerships operating in St. Louis, Missouri and our Gray Daniels dealerships operating in Jackson, Mississippi remain standalone operations.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Accordingly, actual results could differ from these estimates. Estimates and assumptions are reviewed quarterly and the effects of revisions are reflected in the condensed consolidated financial statements in the period they are determined to be necessary. Refer to “Critical Accounting Estimates” in Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more information on our critical estimates.

In the opinion of management, all adjustments (consisting only of normal, recurring adjustments) considered necessary for a fair presentation of the unaudited interim condensed consolidated financial statements as of September 30, 2007, and for the three and nine months ended September 30, 2007 and 2006 have been included. The results of operations for the three and nine months ended September 30, 2007 are not necessarily indicative of the results that may be expected for the full year. Our interim unaudited condensed consolidated financial statements should be read together with our consolidated financial statements and the notes thereto contained in our Annual Report on Form 10-K/A for the year ended December 31, 2006.

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” certain amounts reflected in the accompanying Condensed Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006, have been classified as Assets Held for Sale and Liabilities Associated with Assets Held for Sale. In addition, the accompanying Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2006, have been reclassified to reflect the status of our discontinued operations as of September 30, 2007.

Revenue Recognition

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

We receive commissions from third party lending and insurance institutions for arranging customer financing and for the sale of vehicle service contracts, credit life insurance and disability insurance to customers (collectively “F&I”). We may be charged back (“chargebacks”) for F&I commissions in the event a contract is terminated prior to maturity. F&I

 

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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 are responsible for customer-facing activities, including inventory management, advertising and personnel decisions, and have the flexibility to respond to local market conditions. The corporate management team, with input from the regional management teams, is responsible for infrastructure and general strategy decisions.

The fair market value of our manufacturer franchise rights is determined at the acquisition date through discounting the projected cash flows specific to each franchise. We have determined that manufacturer franchise rights have an indefinite life as there are no legal, contractual, economic or other factors that limit their useful lives and they are expected to generate cash flows indefinitely due to the historically long lives of the manufacturers’ brand names. Due to the fact that manufacturer franchise rights are specific to the location in which we acquire a dealership, we have determined that the dealership is the reporting unit for purposes of testing for impairment.

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

Derivative Instruments and Hedging Activities

We utilize derivative financial instruments to manage our capital structure and interest rate risk. 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 loss. Amounts in accumulated other comprehensive 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 minor ineffectiveness during the nine months ended September 30, 2007 and 2006.

Statements of Cash Flows —

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

In November 2006, General Motors sold 51% of its financing subsidiary, General Motors Acceptance Corporation (“GMAC”), to an investment consortium led by Cerberus FIM Investors, LLC. Prior to this transaction, borrowings from and repayments to GMAC were classified net as an operating activity on our statement of cash flows as this activity was with a manufacturer affiliated lender. Subsequent to this transaction, General Motors no longer has a majority ownership of or controls GMAC, and therefore, beginning in December 2006, borrowings from and repayments to GMAC are classified separately as a financing activity on the statement of cash flows. Floor plan notes payable related to vehicles financed after

 

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this change in control are classified as “Floor plan notes payable—non-manufacturer affiliated” on the accompanying Condensed Consolidated Balance Sheets. Floor plan notes payable related to vehicles financed prior to this change in control continue to be classified as “Floor plan notes payable—manufacturer affiliated” on the accompanying Condensed Consolidated Balance Sheets, with subsequent repayments classified as an operating activity, since these borrowings occurred while General Motors had control of GMAC.

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

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

Proceeds from the sale of dealership facilities and the related real estate previously owned and subsequently leased back in connection with sale-leaseback agreements are reflected as financing activities in the accompanying 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 share-based awards that are fully vested prior to the adoption of SFAS No. 123R are included as cash inflows from financing activities on the accompanying Condensed Consolidated Statements of Cash Flows. Excess tax benefits related to share-based awards that are partially vested upon or granted after the adoption of SFAS No. 123R are included as cash inflows from financing activities on the accompanying Condensed Consolidated Statements of Cash Flows.

Recent Accounting Pronouncements

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

We adopted the provisions of FIN 48 effective January 1, 2007, and did not make any adjustments to our liability for unrecognized tax benefits as a result of this adoption. As of January 1, 2007, we had $3.6 million of total unrecognized tax benefits. Of that amount, $2.4 million, net of the federal effect, if recognized would favorably impact our effective rate in future periods. We do not expect these amounts to change materially in the next twelve months.

In connection with the adoption of FIN 48, we analyzed our filing positions in all of the federal and state jurisdictions where we are required to file tax returns, as well as all open years in these jurisdictions. We have uncertain tax positions in certain of the states in which we do business; however, none of the states individually constitute a “major” tax jurisdiction, as defined in FIN 48. Years subject to audit range as far back as 2003. The Internal Revenue Service commenced examinations of our consolidated federal returns for the years 2004 and 2005 in the first quarter of 2007, and certain of our subsidiary returns for 2003, 2004 and 2005 in the fourth quarter 2006. In addition, we have various state audits for years 2003, 2004 and 2005 being performed as of September 30, 2007. To date, no material adjustments have been proposed and we do not anticipate that these examinations will result in a material change to our financial position or results of operations.

We recognize interest and penalties related to income tax matters in income tax expense. As of September 30, 2007, we had approximately $0.7 million of accrued interest related to uncertain tax positions and no accrual for penalties. We do not expect the amount of accrued interest related to uncertain tax positions to change materially in the next twelve months.

 

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3. INVENTORIES

Inventories consist of the following:

 

     As of

(In thousands)

   September 30,
2007
   December 31,
2006

New vehicles

   $ 581,160    $ 616,275

Used vehicles

     118,817      115,927

Parts and accessories

     45,451      43,111
             

Total inventories

   $ 745,428    $ 775,313
             

The lower of cost or market reserves reduced total inventory cost by $5.2 million and $4.8 million as of September 30, 2007 and December 31, 2006, respectively. In addition to the inventories shown above, we had $1.6 million and $4.8 million of inventory associated with franchises held for sale as of September 30, 2007 and December 31, 2006, respectively, classified as Assets Held for Sale on the accompanying Condensed Consolidated Balance Sheets.

 

4. ACQUISITIONS

During the nine months ended September 30, 2007, we acquired eight franchises (six dealership locations), including two heavy truck franchises, for an aggregate purchase price of $70.5 million. We are actively pursuing the sale of one of the franchises we acquired in the third quarter of 2007. In connection with the purchase of one franchise, additional consideration may be paid to the seller if the franchise achieves specified net income levels in future periods. The additional consideration is distributable annually beginning January 1, 2009 through January 1, 2015 and we estimate the additional consideration to total approximately $2.5 million. We financed these acquisitions through the use of $48.1 million of cash and $22.4 million of floor plan borrowings from our Committed Credit Facility for the purchase of new vehicle inventory.

The allocation of purchase price for acquisitions is as follows:

 

      For the Nine Months
Ended September 30,

(In thousands)

   2007    2006

Inventory

   $ 24,794    $ —  

Property and equipment

     13,339      —  

Goodwill

     21,102      —  

Franchise rights

     11,250      —  
             

Total purchase price

   $ 70,485    $ —  
             

The allocation of purchase price to assets acquired for current 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.

 

5. GOODWILL AND MANUFACTURER FRANCHISE RIGHTS

The changes in the carrying amount of goodwill for the nine months ended September 30, 2007 are as follows:

 

(In thousands)

   For the Nine Months
Ended September 30, 2007
 

Balance, December 31, 2006

   $ 447,996  

Current year acquisitions

     21,102  

Current year divestitures

     (975 )
        

Balance, September 30, 2007

   $ 468,123  
        

 

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The changes in the carrying amount of manufacturer franchise rights, which are included in Other Long-Term Assets on the accompanying Condensed Consolidated Balance Sheets, are as follows:

 

(In thousands)

   For the Nine Months
Ended September 30, 2007
 

Balance, December 31, 2006

   $ 39,518  

Acquisitions

     11,250  

Divestitures

     (2,300 )
        

Balance, September 30, 2007

   $ 48,468  
        

During the nine months ended September 30, 2007, we sold two franchises (two dealership locations) resulting in the removal of $1.0 million of goodwill and $2.3 million of manufacturer franchise rights from our Condensed Consolidated Balance Sheets.

During the nine months ended September 30, 2007, we acquired eight franchises (six dealership locations), including two heavy truck franchises, resulting in the allocation of $21.1 million to goodwill and $11.3 million to manufacturer franchise rights.

 

6. ASSETS AND LIABILITIES HELD FOR SALE

Assets and liabilities classified as held for sale include (i) assets and liabilities associated with discontinued operations held for sale at each balance sheet date, and (ii) costs of completed construction projects and related reimbursements during the construction period associated with pending sale-leaseback transactions.

As of September 30, 2007, assets and liabilities associated with discontinued operations included one franchise (one dealership location). As of December 31, 2006, assets and liabilities associated with discontinued operations included two franchises (two dealership locations). Assets associated with discontinued operations totaled $9.1 million and $5.1 million as of September 30, 2007 and December 30, 2006, respectively. Liabilities associated with discontinued operations totaled $1.4 million and $3.9 million as of September 30, 2007 and December 31, 2006, respectively. During the nine months ended September 30, 2007, we sold the two franchises (two dealership locations) that had been held for sale as of December 31, 2006 and are actively pursuing the sale of one franchise (one dealership location).

Assets associated with pending sale-leaseback transactions as of December 31, 2006, include two completed construction projects totaling $9.7 million. During the nine months ended September 30, 2007, we received a final reimbursement of $9.9 million associated with these two completed construction projects and completed the related sale-leaseback transactions. In addition, we completed one additional sale-leaseback transaction during 2007 and received a final reimbursement of $1.5 million. There were no completed construction projects associated with pending sale-leaseback transactions as of September 30, 2007.

Assets held for sale includes real estate of former dealership locations not currently used in our operations totaling $11.1 million as of September 30, 2007 and December 31, 2006.

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

 

     As of

(In thousands)

   September 30,
2007
   December 31,
2006

Assets:

     

Inventories

   $ 1,624    $ 4,808

Property and equipment, net

     18,604      21,139
             

Total assets

   $ 20,228    $ 25,947
             

Liabilities:

     

Floor plan notes payable

     1,377      3,887
             

Total liabilities

     1,377      3,887
             

Net assets held for sale

   $ 18,851    $ 22,060
             

Included in Prepaid and Other Current Assets on the accompanying Condensed Consolidated Balance Sheets are costs associated with construction projects which we have definitive agreements to sell through sale-leaseback transactions but have not been completed, and therefore are not available for sale. In connection with these construction projects, we have entered into sale-leaseback agreements whereby an unaffiliated third party purchased the land and is reimbursing us for the cost of construction of dealership facilities being constructed on the land. We capitalize the cost of the construction during the construction period and record a corresponding liability equal to the amount of any construction reimbursements. Upon

 

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completion of the construction and receipt of the final reimbursement, we remove the cost of construction and the related liability from our Condensed Consolidated Balance Sheets and commence long-term operating leases for the assets sold. The book value of assets associated with construction projects that have not been completed as of September 30, 2007 and December 31, 2006, totaled $20.4 million and $4.4 million, respectively. As of September 30, 2007 and December 31, 2006, there were no liabilities associated with these construction projects.

 

7. LONG-TERM DEBT

Long-term debt consists of the following:

 

     As of  

(In thousands)

   September 30,
2007
    December 31,
2006
 

9% Senior Subordinated Notes due 2012

   $ —       $ 250,000  

8% Senior Subordinated Notes due 2014 ($179.4 million and $182.4 million face value, respectively, net of hedging activity of $6,927 and $7,848, respectively)

     172,503       174,582  

7.625% Senior Subordinated Notes due 2017

     150,000       —    

3% Senior Subordinated Convertible Notes Due 2012

     115,000       —    

Mortgage notes payable

     26,087       26,837  

Notes payable collateralized by loaner vehicles

     24,218       21,279  

Capital lease obligations

     3,202       3,552  

Other notes payable

     662       904  
                
     491,672       477,154  

Less-current portion

     (26,001 )     (23,144 )
                

Long-term debt

   $ 465,671     $ 454,010  
                

Long-term Debt Refinancing

During the nine months ended September 30, 2007, we completed a refinancing of our long-term debt, which included (i) a repurchase of all of our $250.0 million 9% Senior Subordinated Notes due 2012 (the “9% Notes”), (ii) the issuance of $115.0 million of 3% Senior Subordinated Convertible Notes due 2012 (the “3% Notes”), which have an initial conversion price of $33.99, (iii) the issuance of $150.0 million of 7.625% Senior Subordinated Notes due 2017 (the “7.625% Notes”) and (iv) the repurchase of $3.0 million of our 8% Senior Subordinated Notes due 2014 (the “8% Notes”).

We recognized an $18.5 million loss in connection with our long-term debt refinancing. The $18.5 million loss includes (i) a $12.9 million premium on the repurchase of the 9% Notes and 8% Notes, (ii) $5.5 million of costs associated with a pro-rata write-off of unamortized debt issuance costs associated with the 9% Notes and 8% Notes, and (iii) $0.1 million of costs associated with a pro-rata write-off of the unamortized value of our terminated fair value swap associated with the 8% Notes.

In connection with the sale of our 3% Notes, we entered into convertible note hedge transactions with respect to our common stock with Goldman, Sachs & Co. and Deutsche Bank AG, London Branch (collectively, the “Counterparties”). The convertible note hedge transaction requires the Counterparties to deliver to us, subject to customary anti-dilution adjustments, all shares issuable upon conversion of the 3% Notes.

We also entered into separate warrant transactions whereby we sold to the Counterparties warrants to acquire, subject to customary anti-dilution adjustments, shares of our common stock at an initial strike price of $45.09 per share, which was a 62.50% premium over the market price of our common stock at the time of pricing. The strike price was adjusted to $45.0385 in the third quarter of 2007 as a result of our decision to increase our quarterly dividend to $0.225. On exercise of the warrants, we are obligated to deliver a number of shares of our common stock based on the excess of the market price over the strike price.

The convertible note hedge and warrant transactions are separate contracts and are not part of the terms of the 3% Notes and will not affect the holders’ rights under the 3% Notes. Holders of the 3% Notes will not have any rights with respect to the convertible note hedge and warrant transactions. The convertible hedge and warrant transactions will generally have the effect of increasing the conversion price of the 3% Notes to $45.0385. The convertible note hedge and warrant transactions are expected to offset the potential dilution upon conversion of the 3% Notes in the event that the market value per share of our common stock at the time of exercise is between $33.99 and $45.0385.

 

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

3% Senior Subordinated Convertible Notes due 2012—

In March 2007, we issued $115.0 million in aggregate principal amount of our 3% Notes, receiving net proceeds of $111.1 million. The sale of the notes was exempt from registration pursuant to Rule 144A under the Securities Act. During the second quarter of 2007, we filed a shelf registration statement with the Securities and Exchange Commission (the “SEC”) covering the resale of the notes and the underlying common stock. The costs related to the issuance of these notes were capitalized and are being amortized to other interest expense over the term of the notes. We pay interest on these notes on March 15 and September 15 of each year until their maturity on September 15, 2012. If and when these notes are converted, we will pay cash for the principal amount of each note and, if applicable, shares of our common stock based on a daily conversion value calculated on a proportionate basis for each volume weighted average price (“VWAP”) trading day (as defined in the notes) of the relevant 30 VWAP trading day observation period. The initial conversion rate for the notes is 29.4172 shares of common stock per $1,000 principal amount of notes, which is equivalent to an initial conversion price of $33.99 per share. The conversion rate will be subject to adjustment in some events but will not be adjusted for accrued interest.

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

7.625% Senior Subordinated Notes due 2017—

In March 2007, we issued $150.0 million of our 7.625% Notes, receiving net proceeds of $146.0 million. The sale of the notes was exempt from registration pursuant to Rule 144A and Regulation S under the Securities Act. During the second quarter of 2007, we filed a registration statement with the SEC in connection with an exchange offer to exchange the notes for new notes with substantially identical terms that are registered under the Securities Act and, therefore, will generally be freely transferable. This exchange offer was closed in the third quarter of 2007. The costs related to the issuance of these notes were capitalized and are being amortized to other interest expense over the term of the notes. We pay interest on these notes on March 15 and September 15 of each year until their maturity on March 15, 2017. At any time during the term of the 7.625% Notes we may, at our option, choose to redeem all or a portion of these notes at a price equal to 100% of their principal amount plus the applicable premium set forth in the 7.625% Notes indenture. On or before March 15, 2010, we may, at our option, use the net proceeds of one or more equity offerings to redeem up to 35% of the aggregate principal amount of these notes at a redemption price equal to 107.625% of their principal amount plus accrued and unpaid interest thereon.

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

 

8. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITY

In November 2006, we entered into an interest rate swap agreement with a notional principal amount of $150.0 million as a hedge against the changes in interest rates of our variable rate floor plan notes payable for a period of two years beginning in November 2006. The swap agreement was designated and qualifies as a cash flow hedge of future changes in interest rates of our variable rate floor plan notes payable and is not expected to contain any ineffectiveness. As of September 30, 2007, the swap agreement had a fair value of $0.8 million, which was included in Other Long-Term Liabilities on the accompanying Condensed Consolidated Balance Sheet.

We have an interest rate swap with a current notional principal amount of $13.7 million. The swap was designed to provide a hedge against changes in interest rates of our variable rate mortgage notes payable through maturity in June 2011. This interest rate swap qualifies for cash flow hedge accounting treatment and will contain minor ineffectiveness. Under the terms of the swap agreement, we make payments based on a fixed rate of 6.08% and receive a variable rate cash flows based on one-month LIBOR. As of September 30, 2007 and December 31, 2006, the swap agreement had a fair value of $0.1 million and $0.3 million, respectively, which was included in Other Long-Term Assets on the accompanying Condensed Consolidated Balance Sheets.

Three interest rate swap agreements terminated in March 2006, which resulted in a cash payment of $13.7 million, which equaled the fair market value of the swap agreements. Included in Accumulated Other Comprehensive Loss on our

 

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Condensed Consolidated Balance Sheet as of September 30, 2007, was $2.7 million ($1.7 million, net of tax) of unrecognized amortization related to our two terminated cash flow swaps, which are being amortized through March 2014 as a component of Floor Plan Interest Expense on the accompanying Condensed Consolidated Statements of Income. Amortization of these terminated cash flow swaps will total $0.9 million for the year ended December 31, 2007. In addition, included as a reduction to our 8% Notes as of September 30, 2007, was $6.9 million of unrecognized amortization related to our terminated fair value swap, which is being amortized through March 2014 as a component of Other Interest Expense on the accompanying Condensed Consolidated Statements of Income. Amortization of this terminated fair value swap will total $1.1 million for the year ended December 31, 2007.

 

9. COMPREHENSIVE INCOME

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

 

     For the Three Months
Ended September 30,
    For the Nine Months
Ended September 30,
 

(In thousands)

   2007     2006     2007     2006  

Net income

   $ 19,010     $ 17,179     $ 40,002     $ 48,736  

Other comprehensive income:

        

Change in fair value of cash flow swaps

     (1,363 )     (326 )     (835 )     1,862  

Amortization of expired cash flow swaps

     224       239       672       557  

Income tax expense associated with cash flow swaps

     441       33       82       (906 )
                                

Comprehensive income

   $ 18,312     $ 17,125     $ 39,921     $ 50,249  
                                

 

10. DISCONTINUED OPERATIONS

During 2007, we sold two franchises (two dealership locations). As of September 30, 2007, one franchise (one dealership) was pending disposition. The accompanying Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2006, have been reclassified to reflect the status of our discontinued operations as of September 30, 2007. The following table provides further information regarding our discontinued operations as of September 30, 2007, and includes the results of businesses sold prior to September 30, 2007:

 

      For the Three Months
Ended September 30, 2007
    For the Three Months
Ended September 30, 2006
 

(Dollars in thousands)

   Sold     Pending
Disposition
    Total     Sold     Pending
Disposition (a)
   Total  

Franchises:

             

Mid-line Domestic

     —         —         —         3       —        3  

Mid-line Import

     —         1       1       —         —        —    

Value

     —         —         —         2       —        2  

Luxury

     —         —         —         1       —        1  
                                               

Total

     —         1       1       6       —        6  
                                               

Ancillary Businesses

     —         —         —         1       —        1  
                                               

Revenues

   $ —       $ 315     $ 315     $ 22,413     $ —      $ 22,413  

Cost of sales

     —         274       274       18,884       —        18,884  
                                               

Gross profit

     —         41       41       3,529       —        3,529  

Operating expenses

     371       54       425       4,786       —        4,786  
                                               

Loss from operations

     (371 )     (13 )     (384 )     (1,257 )     —        (1,257 )

Other income (expense), net

     52       (3 )     49       (140 )     —        (140 )

Gain (loss) on disposition of discontinued operations, net

     —         —         —         (541 )     —        (541 )
                                               

Loss before income taxes

     (319 )     (16 )     (335 )     (1,938 )     —        (1,938 )

Income tax benefit

     119       6       125       727       —        727  
                                               

Discontinued operations, net of tax

   $ (200 )   $ (10 )   $ (210 )   $ (1,211 )   $ —      $ (1,211 )
                                               

(a) The franchise pending disposition as of September 30, 2007, was acquired in the third quarter of 2007, and immediately placed into discontinued operations; therefore, no prior year results are included in discontinued operations.

 

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      For the Nine Months
Ended September 30, 2007
    For the Nine Months
Ended September 30, 2006
 

(Dollars in thousands)

   Sold     Pending
Disposition
    Total     Sold     Pending
Disposition (a)
   Total  

Franchises:

             

Mid-line Domestic

     —         —         —         6       —        6  

Mid-line Import

     —         1       1       2       —        2  

Value

     —         —         —         3       —        3  

Luxury

     —         —         —         1       —        1  
                                               

Total

     —         1       1       12       —        12  
                                               
             

Ancillary Businesses

     —         —         —         1       —        1  
                                               
             

Revenues

   $ 1,530     $ 315     $ 1,845     $ 100,910     $ —      $ 100,910  

Cost of sales

     1,478       274       1,752       84,249       —        84,249  
                                               

Gross profit

     52       41       93       16,661       —        16,661  

Operating expenses

     2,338       54       2,392       21,731       —        21,731  
                                               

Loss from operations

     (2,286 )     (13 )     (2,299 )     (5,070 )     —        (5,070 )

Other expense, net

     (48 )     (3 )     (51 )     (1,202 )     —        (1,202 )

(Loss) gain on disposition of discontinued operations, net

     (2,001 )     —         (2,001 )     2,076       —        2,076  
                                               

Loss before income taxes

     (4,335 )     (16 )     (4,351 )     (4,196 )     —        (4,196 )

Income tax benefit

     1,552       6       1,558       1,329       —        1,329  
                                               

Discontinued operations, net of tax

   $ (2,783 )   $ (10 )   $ (2,793 )   $ (2,867 )   $ —      $ (2,867 )
                                               

(a) The franchise pending disposition as of September 30, 2007, was acquired in the third quarter of 2007, and immediately placed into discontinued operations; therefore, no prior year results are included in discontinued operations.

 

11. SUPPLEMENTAL CASH FLOW INFORMATION

During the nine months ended September 30, 2007 and 2006, we made interest payments, net of amounts capitalized, totaling $66.0 million and $60.6 million, respectively. During the nine months ended September 30, 2006, we received $0.5 million of proceeds associated with our interest rate swap agreement that was entered into in December 2003 in connection with the issuance of our 8% Notes.

During the nine months ended September 30, 2007 and 2006, we made income tax payments totaling $14.2 million and $18.5 million, respectively.

During 2007, we paid two $0.20 per share dividends totaling $13.2 million and one $0.225 per share dividend totaling $7.4 million. During 2007, we purchased 1.9 million shares of our common stock for $49.5 million.

 

12. COMMITMENTS AND CONTINGENCIES

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

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

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

 

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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.

In connection with the purchase of one franchise, additional consideration may be paid to the seller if the franchise achieves specified net income levels in future periods. The additional consideration is distributable annually beginning January 1, 2009 through January 1, 2015 and we estimate the additional consideration to total approximately $2.5 million.

 

13. STOCK-BASED COMPENSATION

A summary of options outstanding and exercisable under the Plans as of September 30, 2007, and changes during the nine months then ended is presented below:

 

     Stock
Options
    Weighted Average
Exercise Price
   Weighted Average
Remaining
Contractual Term
   Aggregate Intrinsic
Value*

Options outstanding-December 31, 2006

   1,528,179     $ 14.57      

Granted

   —       $ —        

Exercised

   (406,637 )   $ 15.10      

Expired / Forfeited

   (13,404 )   $ 14.12      
              

Options outstanding-September 30, 2007

   1,108,138     $ 14.37    5.9    $ 6,028,271
              

Options exercisable-September 30, 2007

   1,067,966     $ 14.39    5.8    $ 5,788,376
              

* Based on the closing price of our common stock on September 28, 2007, which was $19.81 per share.

Net cash received from option exercises for the nine months ended September 30, 2007, was $3.4 million. The actual intrinsic value of options exercised during the nine months ended September 30, 2007, was $5.1 million. The actual tax benefit from option exercises totaled $1.9 million for the nine months ended September 30, 2007.

A summary of performance share units and restricted stock as of September 30, 2007, and changes during the nine months ended is presented below:

 

     Shares     Weighted Average
Grant Date Fair Value

Performance Share Units - December 31, 2006

   468,125     $ 20.15

Granted

   215,000     $ 27.09

Performance estimate

   (48,594 )   $ 22.98

Vested

   —       $ —  

Forfeited (including 2,813 of performance estimates)

   (15,063 )   $ 20.64
        

Performance Share Units - September 30, 2007*

   619,468     $ 22.28
        

* Includes an estimate of 42,218 out of a maximum of 461,800 issuable upon attaining certain performance metrics

Each performance share unit provides an opportunity for the employee to receive a number of shares of our common stock based on our performance during a three-year period as measured against objective performance goals as determined by the compensation committee of our board of directors. The actual number of shares earned may range from 0% to 180% of the target number of shares depending upon achievement of the performance goals.

 

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     Shares     Weighted Average
Grant Date Fair Value

Restricted Stock - December 31, 2006

   29,728     $ 21.65

Granted

   58,909     $ 28.07

Vested

   (6,665 )   $ 21.40

Forfeited

   (2,500 )   $ 19.81
        

Restricted Stock - September 30, 2007

   79,472     $ 26.49
        

 

14. CONDENSED CONSOLIDATING FINANCIAL INFORMATION

Our 8% Notes, 7.625% Notes and 3% Notes are guaranteed by all of our current subsidiaries and all of our future domestic restricted subsidiaries. The following tables set forth, on a condensed consolidating basis, our balance sheets, statements of income and statements of cash flows, for the parent company and guarantor subsidiaries for all financial statement periods presented in our interim condensed consolidated financial statements.

Condensed Consolidating Balance Sheet

As of September 30, 2007

(In thousands)

 

     Parent
Company
   Guarantor
Subsidiaries
   Eliminations     Condensed
Consolidated
ASSETS           

CURRENT ASSETS:

          

Cash and cash equivalents

   $ —      $ 40,794    $ —       $ 40,794

Inventories

     —        745,428      —         745,428

Other current assets

     —        331,570      —         331,570

Assets held for sale

     —        20,228      —         20,228
                            

Total current assets

     —        1,138,020      —         1,138,020

PROPERTY AND EQUIPMENT, net

     —        210,688      —         210,688

GOODWILL

     —        468,123      —         468,123

OTHER LONG-TERM ASSETS

     11,625      86,901      —         98,526

INVESTMENT IN SUBSIDIARIES

     1,014,283      —        (1,014,283 )     —  
                            

Total assets

   $ 1,025,908    $ 1,903,732    $ (1,014,283 )   $ 1,915,357
                            
LIABILITIES AND SHAREHOLDERS’ EQUITY           

CURRENT LIABILITIES:

          

Floor plan notes payable—manufacturer affiliated

   $ —      $ 183,329    $ —       $ 183,329

Floor plan notes payable—non-manufacturer affiliated

     —        433,858      —         433,858

Other current liabilities

     1,219      156,468      —         157,687

Liabilities associated with assets held for sale

     —        1,377      —         1,377
                            

Total current liabilities

     1,219      775,032      —         776,251

LONG-TERM DEBT

     437,503      28,168      —         465,671

OTHER LONG-TERM LIABILITIES

     —        86,249      —         86,249

SHAREHOLDERS’ EQUITY

     587,186      1,014,283      (1,014,283 )     587,186
                            

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 1,025,908    $ 1,903,732    $ (1,014,283 )   $ 1,915,357
                            

 

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Table of Contents

Condensed Consolidating Balance Sheet

As of December 31, 2006

(In thousands)

 

     Parent
Company
   Guarantor
Subsidiaries
   Eliminations     Condensed
Consolidated
ASSETS           

CURRENT ASSETS:

          

Cash and cash equivalents

   $ —      $ 129,170    $ —       $ 129,170

Inventories

     —        775,313      —         775,313

Other current assets

     —        362,634      —         362,634

Assets held for sale

     —        25,947      —         25,947
                            

Total current assets

     —        1,293,064      —         1,293,064

PROPERTY AND EQUIPMENT, net

     —        202,584      —         202,584

GOODWILL

     —        447,996      —         447,996

OTHER LONG-TERM ASSETS

     10,211      76,982      —         87,193

INVESTMENT IN SUBSIDIARIES

     1,031,399      —        (1,031,399 )     —  
                            

Total assets

   $ 1,041,610    $ 2,020,626    $ (1,031,399 )   $ 2,030,837
                            
LIABILITIES AND SHAREHOLDERS’ EQUITY           

CURRENT LIABILITIES:

          

Floor plan notes payable—manufacturer affiliated

   $ —      $ 319,896    $ —       $ 319,896

Floor plan notes payable—non-manufacturer affiliated

     —        380,881      —         380,881

Other current liabilities

     5,195      171,196      —         176,391

Liabilities associated with assets held for sale

     —        3,887      —         3,887
                            

Total current liabilities

     5,195      875,860      —         881,055

LONG-TERM DEBT

     424,582      29,428      —         454,010

OTHER LONG-TERM LIABILITIES

     —        83,939      —         83,939

SHAREHOLDERS’ EQUITY

     611,833      1,031,399      (1,031,399 )     611,833
                            

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 1,041,610    $ 2,020,626    $ (1,031,399 )   $ 2,030,837
                            

 

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Table of Contents

Condensed Consolidating Statement of Income

For the Three Months Ended September 30, 2007

(In thousands)

 

     Parent
Company
    Guarantor
Subsidiaries
    Eliminations     Condensed
Consolidated
 

REVENUES

   $ —       $ 1,491,034     $ —       $ 1,491,034  

COST OF SALES

     —         1,262,719       —         1,262,719  
                                

GROSS PROFIT

     —         228,315       —         228,315  

OPERATING EXPENSES:

        

Selling, general and administrative

     —         176,067       —         176,067  

Depreciation and amortization

     —         5,385       —         5,385  
                                

Income from operations

     —         46,863       —         46,863  

OTHER INCOME (EXPENSE):

        

Floor plan interest expense

     —         (10,618 )     —         (10,618 )

Other interest expense

     (7,886 )     (1,197 )     —         (9,083 )

Other income, net

     —         1,243       —         1,243  
                                

Total other expense, net

     (7,886 )     (10,572 )     —         (18,458 )
                                

(Loss) income before income taxes

     (7,886 )     36,291       —         28,405  

INCOME TAX EXPENSE

     —         9,185       —         9,185  

EQUITY IN EARNINGS OF SUBSIDIARIES, net of tax

     26,896       —         (26,896 )     —    
                                

INCOME FROM CONTINUING OPERATIONS

     19,010       27,106       (26,896 )     19,220  

DISCONTINUED OPERATIONS, net of tax

     —         (210 )     —         (210 )
                                

NET INCOME

   $ 19,010     $ 26,896     $ (26,896 )   $ 19,010  
                                

 

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Condensed Consolidating Statement of Income

For the Three Months Ended September 30, 2006

(In thousands)

 

     Parent
Company
    Guarantor
Subsidiaries
    Eliminations     Condensed
Consolidated
 

REVENUES

   $ —       $ 1,500,714     $ —       $ 1,500,714  

COST OF SALES

     —         1,273,325       —         1,273,325  
                                

GROSS PROFIT

     —         227,389       —         227,389  

OPERATING EXPENSES:

        

Selling, general and administrative

     —         172,568       —         172,568  

Depreciation and amortization

     —         5,056       —         5,056  
                                

Income from operations

     —         49,765       —         49,765  

OTHER INCOME (EXPENSE):

        

Floor plan interest expense

     —         (10,123 )     —         (10,123 )

Other interest expense

     (10,156 )     (1,069 )     —         (11,225 )

Other (expense) income, net

     (914 )     1,922       —         1,008  
                                

Total other expense, net

     (11,070 )     (9,270 )     —         (20,340 )
                                

(Loss) income before income taxes

     (11,070 )     40,495       —         29,425  

INCOME TAX EXPENSE

     —         11,035       —         11,035  

EQUITY IN EARNINGS OF SUBSIDIARIES, net of tax

     28,249       —         (28,249 )     —    
                                

INCOME FROM CONTINUING OPERATIONS

     17,179       29,460       (28,249 )     18,390  

DISCONTINUED OPERATIONS, net of tax

     —         (1,211 )     —         (1,211 )
                                

NET INCOME

   $ 17,179     $ 28,249     $ (28,249 )   $ 17,179  
                                

 

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Condensed Consolidating Statement of Income

For the Nine Months Ended September 30, 2007

(In thousands)

 

     Parent
Company
    Guarantor
Subsidiaries
    Eliminations     Condensed
Consolidated
 

REVENUES

   $ —       $ 4,413,137     $ —       $ 4,413,137  

COST OF SALES

     —         3,728,347       —         3,728,347  
                                

GROSS PROFIT

     —         684,790       —         684,790  

OPERATING EXPENSES:

        

Selling, general and administrative

     —         526,078       —         526,078  

Depreciation and amortization

     —         16,061       —         16,061  
                                

Income from operations

     —         142,651       —         142,651  

OTHER INCOME (EXPENSE):

        

Floor plan interest expense

     —         (33,024 )     —         (33,024 )

Other interest expense

     (25,909 )     (4,128 )     —         (30,037 )

Other (expense) income, net

     (18,523 )     4,938       —         (13,585 )
                                

Total other expense, net

     (44,432 )     (32,214 )     —         (76,646 )
                                

(Loss) income before income taxes

     (44,432 )     110,437       —         66,005  

INCOME TAX EXPENSE

     —         23,210       —         23,210  

EQUITY IN EARNINGS OF SUBSIDIARIES, net of tax

     84,434       —         (84,434 )     —    
                                

INCOME FROM CONTINUING OPERATIONS

     40,002       87,227       (84,434 )     42,795  

DISCONTINUED OPERATIONS, net of tax

     —         (2,793 )     —         (2,793 )
                                

NET INCOME

   $ 40,002     $ 84,434     $ (84,434 )   $ 40,002  
                                

 

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Condensed Consolidating Statement of Income

For the Nine Months Ended September 30, 2006

(In thousands)

 

     Parent
Company
    Guarantor
Subsidiaries
    Eliminations     Condensed
Consolidated
 

REVENUES

   $ —       $ 4,365,280     $ —       $ 4,365,280  

COST OF SALES

     —         3,702,539       —         3,702,539  
                                

GROSS PROFIT

     —         662,741       —         662,741  

OPERATING EXPENSES:

        

Selling, general and administrative

     —         505,317       —         505,317  

Depreciation and amortization

     —         15,104       —         15,104  
                                

Income from operations

     —         142,320       —         142,320  

OTHER INCOME (EXPENSE):

        

Floor plan interest expense

     —         (30,067 )     —         (30,067 )

Other interest expense

     (30,202 )     (3,066 )     —         (33,268 )

Other (expense) income, net

     (914 )     4,494       —         3,580  
                                

Total other expense, net

     (31,116 )     (28,639 )     —         (59,755 )
                                

(Loss) income before income taxes

     (31,116 )     113,681       —         82,565  

INCOME TAX EXPENSE

     —         30,962       —         30,962  

EQUITY IN EARNINGS OF SUBSIDIARIES, net of tax

     79,852       —         (79,852 )     —    
                                

INCOME FROM CONTINUING OPERATIONS

     48,736       82,719       (79,852 )     51,603  

DISCONTINUED OPERATIONS, net of tax

     —         (2,867 )     —         (2,867 )
                                

NET INCOME

   $ 48,736     $ 79,852     $ (79,852 )   $ 48,736  
                                

 

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Condensed Consolidating Statement of Cash Flows

For the Nine Months Ended September 30, 2007

(In thousands)

 

     Parent
Company
    Guarantor
Subsidiaries
    Condensed
Consolidated
 

CASH FLOW FROM OPERATING ACTIVITIES

   $ (29,885 )   $ 69,494     $ 39,609  

CASH FLOW FROM INVESTING ACTIVITIES

      

Capital expenditures

     —         (41,003 )     (41,003 )

Other investing activities

     —         (54,078 )     (54,078 )
                        

Net cash used in investing activities

     —         (95,081 )     (95,081 )

CASH FLOW FROM FINANCING ACTIVITIES

      

Floor plan borrowings — non-manufacturer affiliated

     —         2,081,959       2,081,959  

Floor plan repayments — non-manufacturer affiliated

     —         (2,031,492 )     (2,031,492 )

Proceeds from borrowings

     265,000       —         265,000  

Payment of dividends

     —         (20,558 )     (20,558 )

Debt issuance costs

     (7,949 )     —         (7,949 )

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

     —         3,181       3,181  

Repayments of borrowings

     (265,898 )     (1,366 )     (267,264 )

Contributions/(distributions)

     38,732       (38,732 )     —    

Other financing activities

     —         (55,781 )     (55,781 )
                        

Net cash provided by financing activities

     29,885       (62,789 )     (32,904 )
                        

Net decrease in cash and cash equivalents

     —         (88,376 )     (88,376 )

Cash and cash equivalents, beginning of period

     —         129,170       129,170  
                        

Cash and cash equivalents, end of period

   $ —       $ 40,794     $ 40,794  
                        

 

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Table of Contents

Condensed Consolidating Statement of Cash Flows

For the Nine Months Ended September 30, 2006

(In thousands)

 

     Parent
Company
    Guarantor
Subsidiaries
    Condensed
Consolidated
 

CASH FLOW FROM OPERATING ACTIVITIES

   $ (28,627 )   $ 216,988     $ 188,361  

CASH FLOW FROM INVESTING ACTIVITIES

     —        

Capital expenditures

     —         (34,685 )     (34,685 )

Other investing activities

     —         45,777       45,777  
                        

Net cash provided by investing activities

     —         11,092       11,092  

CASH FLOW FROM FINANCING ACTIVITIES

      

Floor plan borrowings — non-manufacturer affiliated

     —         1,838,366       1,838,366  

Floor plan repayments — non-manufacturer affiliated

     —         (1,946,033 )     (1,946,033 )

Proceeds from borrowings

     —         987       987  

Payment of dividends

     —         (6,649 )     (6,649 )

Repayments of borrowings

     (14,850 )     (2,674 )     (17,524 )

Contributions/(distributions)

     43,477       (43,477 )     —    

Other financing activities

     —         7,681       7,681  
                        

Net cash provided by (used in) financing activities

     28,627       (151,799 )     (123,172 )
                        

Net increase in cash and cash equivalents

     —         76,281       76,281  

Cash and cash equivalents, beginning of period

     —         57,194       57,194  
                        

Cash and cash equivalents, end of period

   $ —       $ 133,475     $ 133,475  
                        

 

15. SUBSEQUENT EVENTS

In October 2007, our board of directors declared a $0.225 per share cash dividend payable on November 19, 2007 to shareholders of record as of November 5, 2007.

In October 2007, we acquired one luxury franchise (one dealership location) for an aggregate purchase price of $45.6 million including $11.8 million of real estate. We financed the acquisition with $30.1 million of cash, $7.2 million of floor plan borrowings from our Committed Credit Facility and $8.3 million of mortgage borrowings. The acquisition of this franchise in Princeton, NJ increases our metropolitan markets to 22 and number of states to 11.

In October 2007, we signed an agreement with Toyota Motor Company, which allows our Toyota and Lexus subsidiaries to be guarantors of amounts borrowed under our Committed Credit Facility.

In connection with our current stock repurchase program, we have repurchased 0.4 million shares of our common stock for $7.5 million subsequent to September 30, 2007.

 

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Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

New York, New York

We have reviewed the accompanying condensed consolidated balance sheet of Asbury Automotive Group, Inc. and subsidiaries (the “Company”) as of September 30, 2007, and the related condensed consolidated statements of income for the three-month and nine-month periods ended September 30, 2007 and 2006, and of cash flows for the nine-month periods ended September 30, 2007 and 2006. These interim financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the 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 the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Asbury Automotive Group, Inc. and subsidiaries as of December 31, 2006, and the related consolidated statements of income, shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated March 8, 2007, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2006 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

 

/s/ DELOITTE & TOUCHE LLP
New York, New York
November 5, 2007

 

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Table of Contents
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 122 franchises (92 dealership locations) in 21 metropolitan markets within 10 states as of September 30, 2007. We offer an extensive range of automotive products and services, including new and used vehicles, vehicle maintenance, replacement parts, collision repair services, and financing, insurance and service contracts. We offer 35 domestic and foreign brands of new vehicles, including six heavy truck brands. We also operate 23 collision repair centers that serve our markets.

We developed our dealership portfolio through the acquisition of large, locally branded dealership groups operating throughout the United States. We complemented these large dealership groups with the purchase of numerous single point dealerships and small dealership groups in our existing market areas (referred to as “tuck-in acquisitions”). We continue to use tuck-in acquisitions to increase the number of vehicle brands we offer in a particular regional area and to create a larger gross profit base over which to spread overhead costs. Our retail network is currently organized into four regions and includes nine dealership groups: (i) Florida (comprising our Coggin dealerships, operating primarily in Jacksonville, Fort Pierce and Orlando, and our Courtesy dealerships operating in Tampa), (ii) West (comprising our McDavid dealerships operating throughout Texas, our California dealerships operating in Los Angeles, Sacramento and Fresno and our North Point dealerships operating in Little Rock, Arkansas), (iii) Mid-Atlantic (comprising our Crown dealerships operating in North Carolina, South Carolina and Virginia), and (iv) South (comprising our Nalley dealerships operating in Atlanta, Georgia). Our Plaza dealerships operating in St. Louis, Missouri and our Gray Daniels dealerships operating in Jackson, Mississippi, remain standalone operations.

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

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

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

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

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

 

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RESULTS OF OPERATIONS

Three Months Ended September 30, 2007, Compared to the Three Months Ended September 30, 2006

 

     For the Three Months Ended
September 30,
             
     2007     % of
Gross
Profit
    2006     % of
Gross
Profit
    Increase
(Decrease)
    % Change  
     (In thousands except per share data)  

REVENUES:

            

New vehicle

   $ 893,977       $ 901,783       $ (7,806 )   (1 )%

Used vehicle

     378,140         388,095         (9,955 )   (3 )%

Parts, service and collision repair

     176,707         170,246         6,461     4 %

Finance and insurance, net

     42,210         40,590         1,620     4 %
                        

Total revenues

     1,491,034         1,500,714         (9,680 )   (1 )%
                        

COST OF SALES

     1,262,719         1,273,325         (10,606 )   (1 )%
                        

GROSS PROFIT

     228,315     100 %     227,389     100 %     926     —   %

OPERATING EXPENSES:

            

Selling, general and administrative

     176,067     77 %     172,568     76 %     3,499     2 %

Depreciation and amortization

     5,385     2 %     5,056     2 %     329     7 %
                                

Income from operations

     46,863     21 %     49,765     22 %     (2,902 )   (6 )%

OTHER INCOME (EXPENSE):

            

Floor plan interest expense

     (10,618 )   (5 )%     (10,123 )   (5 )%     495     5 %

Other interest expense

     (9,083 )   (4 )%     (11,225 )   (5 )%     (2,142 )   (19 )%

Interest income

     900     —   %     1,523     1 %     (623 )   (41 )%

Loss on extinguishment of long-term debt

     —       —   %     (914 )   —   %     (914 )   (100 )%

Other income, net

     343     —   %     399     —   %     (56 )   (14 )%
                                

Total other expense, net

     (18,458 )   (8 )%     (20,340 )   (9 )%     (1,882 )   (9 )%
                                

Income before income taxes

     28,405     12 %     29,425     13 %     (1,020 )   (4 )%

INCOME TAX EXPENSE

     9,185     4 %     11,035     5 %     (1,850 )   (17 )%
                                

INCOME FROM CONTINUING OPERATIONS

     19,220         18,390         830     5 %

DISCONTINUED OPERATIONS, net of tax

     (210 )   8 %     (1,211 )   8 %     (1,001 )   (83 )%
                                

NET INCOME

   $ 19,010     8 %   $ 17,179     8 %   $ 1,831     11 %
                        

EARNINGS PER COMMON SHARE (DILUTED):

            

Continuing operations

   $ 0.58       $ 0.54       $ 0.04     7 %

Discontinued operations

   $ (0.01 )     $ (0.03 )       0.02     67 %
                        

Net income

   $ 0.57       $ 0.51       $ 0.06     12 %
                        

Net income increased $1.8 million (11%) during the 2007 period as a result of a $0.8 million increase in income from continuing operations and a $1.0 million decrease in net losses from discontinued operations. During the 2006 period, we recognized $0.8 million (net of tax) of costs associated with a secondary offering of our common stock, for which we received no proceeds and a $0.6 million (net of tax) loss on the extinguishment of long-term debt (collectively “the adjusting items”). Excluding the adjusting items, adjusted income from continuing operations decreased $0.6 million (3%).

The following discussion excludes the impact of the adjusting items as we believe that excluding these items provides a more accurate representation of our year over year financial performance. Please refer to “Reconciliation of Non-GAAP Financial Information” for more information. Despite a challenging retail sales and overall weak economic environment, our fixed operations and F&I businesses contributed incremental gross profit of $5.3 million (6%) and $1.6 million (4%), respectively. However, the results of our fixed operations and F&I businesses were offset by (i) the performance of our used vehicle business, which generated $6.4 million (18%) lower gross profit during a softening economic environment, and (ii) a 160 basis point increase in our adjusted selling, general and administrative expense (“SG&A”) as a percentage of gross profit. Included in the 160 basis point increase of adjusted SG&A as a percentage of gross profit was 80 basis points of increased outside service expense associated with (i) abandoned acquisition and real estate projects and (ii) legal settlement costs. In addition, our other interest expense decreased $2.1 million due to a lower average effective interest rate on our long-term debt as a result of our long-term debt refinancing, which was substantially completed during the first quarter of 2007 and finalized in the second quarter of 2007.

 

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The $9.7 million (1%) decrease in total revenues was a result of a $10.0 million (3%) decrease in used vehicle revenue, and a $7.8 million (1%) decrease in new vehicle revenue, partially offset by a $6.5 million (4%) increase in fixed operations revenue and a $1.6 million (4%) increase in F&I revenue. The decrease in used vehicle revenue includes a $16.6 million (6%) decrease in retail revenue, partially offset by a $6.7 million (8%) increase in wholesale revenue. The decrease in new vehicle revenue includes a $22.1 million (27%) decrease in heavy truck revenue, a $5.7 million (1%) decrease in new light vehicle retail revenue partially offset by $16.2 million of new vehicle revenue from acquisitions, and a $3.9 million (10%) increase in fleet revenue.

The $0.9 million increase in total gross profit was primarily a result of a $5.3 million (6%) increase in fixed operations gross profit, and a $1.6 million (4%) increase in F&I gross profit, partially offset by a $6.4 million (18%) decrease in used vehicle gross profit. Our total gross profit margin increased 10 basis points to 15.3% from 15.2%.

New Vehicles —

 

     For the Three Months Ended
September 30,
        

Increase

(Decrease)

   

%

Change

 

New Vehicle —

   2007          2006           
     (In thousands, except unit and PVR data)  

Revenue:

              

New retail revenue—same store(1)

              

Luxury

   $ 272,636    33 %   $ 264,410    31 %   $ 8,226     3 %

Mid-line import

     362,072    42 %     363,454    42 %     (1,382 )   —    

Mid-line domestic

     131,515    16 %     142,962    17 %     (11,447 )   (8 )%

Value

     9,777    1 %     10,914    1 %     (1,137 )   (10 )%
                      

Total light vehicle retail revenue- same store

     776,000        781,740        (5,740 )   (1 )%

Heavy trucks

     58,923    7 %     81,034    9 %     (22,111 )   (27 )%
                      

Total new retail revenue—same store(1)

     834,923    100 %     862,774    100 %     (27,851 )   (3 )%

New retail revenue—acquisitions

     16,166        —         
                      

Total new retail revenues

     851,089        862,774        (11,685 )   (1 )%
                      

Fleet revenue—same store(1)

     42,888        39,009        3,879     10 %

Fleet revenue—acquisitions

     —          —         
                      

Total fleet revenue

     42,888        39,009        3,879     10 %
                      

New vehicle revenue, as reported

   $ 893,977      $ 901,783      $ (7,806 )   (1 )%
                      

New retail units:

              

New retail units—same store(1)

              

Luxury

     5,885    22 %     5,993    22 %     (108 )   (2 )%

Mid-line import

     14,957    56 %     15,028    54 %     (71 )   —   %

Mid-line domestic

     4,407    16 %     4,956    18 %     (549 )   (11 )%

Value

     501    2 %     520    2 %     (19 )   (4 )%
                      

Total light vehicle retail units- same store

     25,750        26,497        (747 )   (3 )%

Heavy trucks

     964    4 %     1,288    5 %     (324 )   (25 )%
                      

Total new retail units—same store(1)

     26,714    100 %     27,785    100 %     (1,071 )   (4 )%

New retail units—acquisitions

     512        —         
                      

Retail units—actual

     27,226        27,785        (559 )   (2 )%

Fleet units—actual

     2,135        1,891        244     13 %
                      

Total new units—actual

     29,361        29,676        (315 )   (1 )%
                      

Total light vehicle units — same store(1)(2)

     27,885        28,388        (503 )   (2 )%

Total light vehicle units — acquisitions (2)

     512        —         
                      

Total light vehicle units — actual(2)

     28,397        28,388        9     —   %
                      

New revenue PVR—same store(1)

   $ 31,254      $ 31,052      $ 202     1 %
                      

New revenue PVR—actual

   $ 31,260      $ 31,052      $ 208     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.

 

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Table of Contents
(2) Includes light vehicle and fleet unit sales

 

     For the Three Months Ended
September 30,
         

Increase

(Decrease)

   

%

Change

 
     2007           2006            
     (In thousands, except PVR data)  

Gross Profit:

            

New retail gross profit—same store(1)

            

Luxury

   $ 21,370     34 %   $ 21,318     34 %   $ 52     —    

Mid-line import

     28,183     45 %     26,692     43 %     1,491     6 %

Mid-line domestic

     9,650     16 %     10,589     17 %     (939 )   (9 )%

Value

     584     1 %     822     1 %     (238 )   (29 )%
                        

Total light vehicle retail gross profit-same store

     59,787         59,421         366     1 %

Heavy trucks

     2,236     4 %     3,123     5 %     (887 )   (28 )%
                        

Total new retail gross profit—same store(1)

     62,023     100 %     62,544     100 %     (521 )   (1 )%

New retail gross profit—acquisitions

     1,291         —       —        
                        

Total retail gross profit

     63,314         62,544         770     1 %
                        

Fleet gross profit—same store(1)

     686         1,008         (322 )   (32 )%

Fleet gross profit—acquisitions

     —           —          
                        

Total fleet gross profit

     686         1,008         (322 )   (32 )%
                        

New vehicle gross profit, as reported

   $ 64,000       $ 63,552       $ 448     1 %
                        

New gross profit PVR—same store(1)

   $ 2,322       $ 2,251       $ 71     3 %
                        

New gross profit PVR—actual

   $ 2,325       $ 2,251       $ 74     3 %
                        

New retail gross margin—same store(1)

     7.4 %       7.2 %       0.2 %   3 %
                        

New retail gross margin—actual

     7.4 %       7.2 %       0.2 %   3 %
                        

(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.

The $7.8 million (1%) decrease in new vehicle revenues was primarily a result of a $22.1 million (27%) decrease in heavy truck revenue. The decrease in heavy truck revenue was as a result of lower unit sales and revenue PVR from (i) changes in emission laws in January 2007, which pulled forward demand for heavy trucks into 2006 and (ii) a weaker freight hauling market during 2007. Same store light vehicle revenue decreased $5.7 million (1%) during a challenging retail sales and overall weak economic environment, primarily as a result of an 11% decrease in unit sales from mid-line domestic brands as these brands continue to lose market share to mid-line import and luxury brands. Same store light vehicle revenue from our luxury brands increased $8.2 million (3%) with an increase in revenue PVR as a result of a shift towards higher priced luxury models as luxury brands continue to offer attractive products to customers that appeared to be less affected by the weak economic environment. Our total same store light vehicle unit sales decreased 2%, outperforming the overall U.S. light vehicle industry, which decreased 5%. This was a result of our strong brand mix, which is heavily weighted toward luxury and mid-line import brands that continue to increase their market share.

The $0.4 million (1%) increase in new vehicle gross profit was due to a $1.5 million (6%) increase in same store gross profit from the sale of mid-line import vehicles despite flat unit sales as a result of our ability to capitalize on manufacturer incentive programs. The increase in same store gross profit from our mid-line import brands was partially offset by a $0.9 million (28%) decrease in gross profit from the sale of heavy trucks and a $0.9 million (9%) decrease in gross profit from the sale of mid-line domestic vehicles as these brands experienced an 11% decline in retail unit sales. Our retail gross margin improved 20 basis points in part due to a shift in the mix of unit sales away from heavy trucks, which have a lower gross margin than light vehicles.

We expect our light vehicle unit sales, revenue and gross profit to outperform industry-wide U.S. light retail unit sales as we believe the luxury and mid-line import brands will continue to increase market share. However, we expect heavy trucks unit sales, revenue and gross profit to continue to decrease significantly over the remainder of 2007 and into the first quarter of 2008 as compared to the prior year period as a result of the adverse impact of the new emission laws on heavy truck demand and a weaker freight hauling market.

 

27


Table of Contents

Used Vehicles —

 

     For the Three Months
Ended September 30,
   

Increase

(Decrease)

   

%

Change

 

Used Vehicle —

   2007     2006      
     (In thousands, except unit and PVR data)  

Revenue:

        

Retail revenues—same store(1)

   $ 278,514     $ 300,752     $ (22,238 )   (7 )%

Retail revenues—acquisitions

     5,589       —        
                    

Total used retail revenues

     284,103       300,752       (16,649 )   (6 )%
                    

Wholesale revenues—same store(1)

     91,010       87,343       3,667     4 %

Wholesale revenues—acquisitions

     3,027       —        
                    

Total wholesale revenues

     94,037       87,343       6,694     8 %
                    

Used vehicle revenue, as reported

   $ 378,140     $ 388,095     $ (9,955 )   (3 )%
                    

Gross Profit:

        

Retail gross profit—same store(1)

   $ 30,660     $ 36,332     $ (5,672 )   (16 )%

Retail gross profit—acquisitions

     577       —        
                    

Total used retail gross profit

     31,237       36,332       (5,095 )   (14 )%
                    

Wholesale gross profit—same store(1)

     (1,425 )     (178 )     (1,247 )   NM  

Wholesale gross profit—acquisitions

     (63 )     —        
                    

Total wholesale gross profit

     (1,488 )     (178 )     (1,310 )   NM  
                    

Used vehicle gross profit, as reported

   $ 29,749     $ 36,154     $ (6,405 )   (18 )%
                    

Used retail units—same store(1)

     15,172       16,941       (1,769 )   (10 )%

Used retail units—acquisitions

     282       —        
                    

Used retail units—actual

     15,454       16,941       (1,487 )   (9 )%
                    

Used revenue PVR—same store(1)

   $ 18,357     $ 17,753     $ 604     3 %
                    

Used revenue PVR—actual

   $ 18,384     $ 17,753     $ 631     4 %
                    

Used gross profit PVR—same store(1)

   $ 2,021     $ 2,145     $ (124 )   (6 )%
                    

Used gross profit PVR—actual

   $ 2,021     $ 2,145     $ (124 )   (6 )%
                    

Used retail gross margin—same store(1)

     11.0 %     12.1 %     (1.1 )%   (9 )%
                    

Used retail gross margin—actual

     11.0 %     12.1 %     (1.1 )%   (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.

The $10.0 million (3%) decrease in used vehicle revenues was a result of a $22.2 million (7%) decrease in same store retail revenue, partially offset by a $6.7 million (8%) increase in wholesale revenues. The $6.4 million (18%) decrease in used vehicle gross profit was a result of a $5.1 million (14%) decrease in retail gross profit and a $1.3 million decrease in wholesale gross profit. Our comparison from the prior year continues to be difficult as we have benefited in recent years from (i) targeted initiatives, including the building of experienced used vehicle teams in each of our regions and our investments in technology to better value trade-ins and improve inventory management and (ii) strong used vehicle sales in the 2006 period in Houston and Mississippi in the aftermath of hurricane Katrina.

The very strong used vehicle wholesale environment during the second quarter had the impact of significantly increasing the cost to acquire used vehicle inventory, increasing pressure on our used retail margins and used retail unit sales in the third quarter. In addition, we believe used vehicle customers were attracted to competitively priced mid-line import and mid-line domestic new vehicles as a result of manufacturer incentive programs. We are closely managing our sub-prime business and continue to believe there is opportunity to improve our used vehicle profitability by offering appropriately priced used vehicle inventory.

 

28


Table of Contents

During the third quarter of 2007, we began a strategic initiative to lower our used vehicle inventory in preparation for the slower automotive retail selling season and realigned our inventory to serve the broader used vehicle market. Although we experienced increased wholesale losses during the 2007 period while lowering our used vehicle inventory, we believe we have improved the quality of our used vehicle inventory. We expect that this improvement in our used vehicle inventory should mitigate the impact of the slower automotive retail selling season on our used vehicle performance. We expect used vehicle revenues and gross profit to be flat to negative as compared to the prior year and into the first quarter of 2008.

Fixed Operations —

 

     For the Three Months Ended
September 30,
   

Increase

(Decrease)

   

%

Change

 

Fixed Operations —

   2007     2006      
     (In thousands)  

Revenue:

        

Revenues—same store(1)

        

Parts and service

   $ 155,298     $ 153,031     $ 2,267     1 %

Collision repair

     18,177       17,215       962     6 %
                    

Total revenue—same store(1)

     173,475       170,246       3,229     2 %

Revenues—acquisitions

     3,232       —        
                    

Parts, service and collision repair revenue, as reported

   $ 176,707     $ 170,246     $ 6,461     4 %
                    

Gross Profit:

        

Gross profit—same store(1)

        

Parts and service

   $ 80,344     $ 77,367     $ 2,977     4 %

Collision repair

     10,223       9,726       497     5 %
                    

Total gross profit—same store(1)

     90,567       87,093       3,474     4 %

Gross profit—acquisitions

     1,789       —        
                    

Parts, service and collision repair gross profit, as reported

   $ 92,356     $ 87,093     $ 5,263     6 %
                    

Parts and service gross margin—same store(1)

     51.7 %     50.6 %     1.1 %   2 %
                    

Collision repair gross margin—same store(1)

     56.2 %     56.5 %     (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.

The $6.5 million (4%) increase in fixed operations revenues and $5.3 million (6%) increase in fixed operations gross profit was primarily due to a 9% and 11% increase in our “customer pay” parts and service revenue and gross profit, respectively. We continue to experience decreases in our warranty business as warranty revenue decreased $1.4 million (4%) as a result of improvements in the quality of vehicles produced in recent years, which has decreased our higher margin repair work. As a result, we have focused on our customer pay business and expect our fixed operations sales to continue to grow as we (i) continue to invest in additional service capacity, (ii) upgrade equipment, (iii) expand our product offerings, (iv) capitalize on our regional training programs and (v) add service advisors and skilled technicians to meet anticipated future demand, especially from the increased market share of the luxury import and mid-line import brands.

 

29


Table of Contents

Finance and Insurance, net —

 

     For the Three Months Ended
September 30,
  

Increase

(Decrease)

  

%

Change

 

Finance and Insurance, net—

   2007    2006      
     (In thousands, except PVR data)  

Finance and insurance, net—same store(1)

   $ 41,543    $ 40,590    $ 953    2 %

Finance and insurance, net—acquisitions

     667      —        
                   

Finance and insurance, net as reported

   $ 42,210    $ 40,590    $ 1,620    4 %
                   

F&I PVR-same store (1)

   $ 992    $ 908    $ 84    9 %
                   

F&I PVR-actual

   $ 989    $ 908    $ 81    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.

The $1.6 million (4%) increase in F&I as a result of the $84 (9%) increase in same store F&I PVR. The increase in same store F&I PVR was attributable to (i) increased penetration rates on sales of our aftermarket products and services and (ii) lengthening in finance contract terms during 2007. We anticipate F&I will increase in the future as a result of (i) increased retail unit sales, (ii) the maturation of F&I retrospective programs, (iii) improvement of the F&I operations at our lower-performing franchises and (iv) as we continue to refine and enhance the menu of products we offer our customers.

Selling, General and Administrative (SG&A) —

 

    

For the Three Months Ended

September 30,

   

% of
Gross

Profit
Increase
(Decrease)

   

% of

Gross
Profit %
Change

 

Selling, General and Administrative —

   2007    % of
Gross
Profit
    2006     % of
Gross
Profit
     
     (In thousands)                    

Personnel costs

   $ 78,304    34.3 %   $ 78,969     34.7 %   (0.4 )%   (1.2 )%

Sales compensation

     25,094    11.0 %     26,520     11.7 %   (0.7 )%   (6.0 )%

Share-based compensation

     1,192    0.5 %     962     0.4 %   0.1 %   25.0 %

Outside services

     16,985    7.4 %     14,541     6.4 %   1.0 %   15.6 %

Advertising

     13,437    5.9 %     12,794     5.6 %   0.3 %   5.4 %

Rent

     14,648    6.4 %     13,675     6.0 %   0.4 %   6.7 %

Utilities

     4,842    2.1 %     4,628     2.0 %   0.1 %   5.0 %

Insurance

     4,602    2.0 %     3,684     1.6 %   0.4 %   25.0 %

Other

     16,963    7.4 %     16,795     7.4 %   0.0 %   0.0 %
                       

Selling, general and administrative

   $ 176,067    77.1 %   $ 172,568     75.9 %   1.2 %   2 %

Adjustments to SG&A:

             

Secondary offering expenses

     —          (846 )      
                       

Adjusted selling, general and administrative

   $ 176,067    77.1 %   $ 171,722     75.5 %   1.6 %   2 %
                       

Gross profit

   $ 228,315      $ 227,389        
                       

SG&A expense as a percentage of gross profit was 77.1% during the 2007 period as compared to 75.9% during the 2006 period. SG&A expenses during the 2006 period include $0.8 million of costs associated with a secondary offering of our common stock from which we did not receive any proceeds. Excluding this item, adjusted SG&A expense as a percentage of gross profit increased 160 basis points to 77.1% during the 2007 period. Approximately $1.7 million (80 basis points) of the increase in adjusted SG&A expenses during the 2007 period was the result of (i) increased outside service expense associated with abandoned acquisition and real estate projects and (ii) legal settlement costs. The remaining 80 basis point deterioration in adjusted SG&A as a percentage of adjusted gross profit was primarily a result of the performance of our used vehicle business, which generated $6.4 million less used vehicle gross profit than the 2006 period. Our SG&A results,

 

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however, were partially offset by several expense control initiatives, predominantly in the area of personnel and sales compensation. We anticipate that we will lower our SG&A expense as a percentage of gross profit in the future as we continue to consolidate certain back office functions and continue to leverage our fixed cost structure, partially offset by increased rent expense as we continue to expand our service capacity with financing through sale-leaseback transactions.

Depreciation and Amortization—

The $0.3 million (2%) increase in depreciation and amortization expense was a result of property and equipment acquired during 2007 and 2006. We expect depreciation and amortization to increase in the future as a result of previous and future capital expenditure projects to remodel and upgrade our facilities and expand our service capacity.

Other Income (Expense)—

The $0.5 million (5%) increase in floor plan interest expense was attributable to higher average inventory levels and higher interest rates, partially offset by increased equity in our vehicle inventory. We expect floor plan expense to fluctuate with changes in our inventory levels and LIBOR rates in the near future.

The $2.1 million (19%) decrease in other interest expense was primarily attributable to a lower effective rate on our long-term debt as a result of our long-term debt refinancing, which was substantially completed in the first quarter of 2007 and finalized in the second quarter of 2007. In the third quarter of 2006 we had $185.0 million of 8% Senior Subordinated Notes due 2014 (“8% Notes”) and $250.0 million of our 9% Notes. In connection with our long-term debt refinancing, we issued $115.0 million of 3% Convertible Notes due 2012 and $150.0 million of 7.625% Senior Subordinated Notes due 2017, and repurchased all of our 9% Notes and as of September 30, 2007 have repurchased $20.6 million of our 8% Notes. Our board of directors has authorized us to repurchase up to an additional $19.4 million of our Senior Subordinated Notes.

The $0.9 million loss on extinguishment of long-term debt during the 2006 period was a result of repurchase of $15.0 million of our 8% Notes. Included in the $0.9 million loss is a $0.7 million write-off of a portion of the unamortized value of our terminated fair value swap and a $0.4 million write-off of a portion of the unamortized debt issuance costs associated with the 8% Notes, offset by a $0.2 million market discount on the 8% Notes.

Income Tax Expense—

The $1.9 million (17%) decrease in income tax expense was a result of (i) a $1.0 million (4%) decrease in our income before income taxes, (ii) $0.6 million related to the reversal of a deferred tax asset valuation allowance related to a tax benefit we now expect to realize, (iii) $0.6 million related to tax credits recognized for employing individuals in the Katrina affected areas and (iv) the effect of reducing our estimated annual effective tax rate 20 basis points from 37.5% to 37.3% in the second quarter of 2007, principally as a result of a reorganization of our legal entities in Texas. 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 be between 37% and 38%.

Discontinued Operations—

 

     For the Three Months Ended
September 30,
 
     2007     2006  
     (In thousands)  

Franchises

     1       6  
                

Net operating losses from sold or closed franchises, net of tax

   $ (200 )   $ (765 )

Net operating losses from franchises held for sale, net of tax

     (10 )     —    

Net divestiture (expense) income including net gain (loss) on sale of franchises, net of tax

     —         (446 )
                

Discontinued operations, net of tax

   $ (210 )   $ (1,211 )
                

During the three months ended September 30, 2007, we did not sell any franchises and placed one mid-line import franchise into discontinued operations. The $0.2 million loss from discontinued operations for the 2007 period primarily includes rent expense on idle or subleased properties associated with sold franchises and legal expenses associated with sold franchises or ancillary businesses. The $1.2 million loss from discontinued operations for the 2006 period is a result of (i) $0.4 million, net of tax, of divestiture losses primarily associated with the sale of an ancillary business during the third quarter of 2006 and (ii) $0.8 million, net of tax, of net operating losses of franchises sold in 2007 and the last three months of 2006.

 

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We continuously evaluate the financial and operating results of our dealerships, specifically the 10% contributing the lowest level of return on invested capital, and we will look to divest dealerships that do not meet our expectations.

Nine Months Ended September 30, 2007, Compared to the Nine Months Ended September 30, 2006

 

    

For the Nine Months Ended

September 30,

    Increase
(Decrease)
    %
Change
 
     2007     % of Gross
Profit
    2006     % of Gross
Profit
     
     (In thousands, except per share data)  

REVENUES:

            

New vehicle

   $ 2,609,709       $ 2,618,109       $ (8,400 )   —   %

Used vehicle

     1,151,790         1,119,249         32,541     3 %

Parts, service and collision repair

     527,168         509,476         17,692     4 %

Finance and insurance, net

     124,470         118,446         6,024     5 %
                        

Total revenues

     4,413,137         4,365,280         47,857     1 %
                        

COST OF SALES

     3,728,347         3,702,539         25,808     1 %
                        

GROSS PROFIT

     684,790     100 %     662,741     100 %     22,049     3 %

OPERATING EXPENSES:

            

Selling, general and administrative

     526,078     77 %     505,317     76 %     20,761     4 %

Depreciation and amortization

     16,061     2 %     15,104     2 %     957     6 %
                        

Income from operations

     142,651     22 %     142,320     22 %     331     —   %

OTHER INCOME (EXPENSE):

            

Floor plan interest expense

     (33,024 )   (5 )%     (30,067 )   (5 )%     2,957     10 %

Other interest expense

     (30,037 )   (4 )%     (33,268 )   (5 )%     (3,231 )   (10 )%

Interest income

     3,906     1 %     3,271     1 %     635     19 %

Loss on extinguishment of long-term debt

     (18,523 )   (3 )%     (914 )   —   %     17,609     NM  

Other income, net

     1,032     —   %     1,223     —   %     (191 )   (16 )%
                        

Total other expense, net

     (76,646 )   (11 )%     (59,755 )   (9 )%     16,891     28 %
                        

Income before income taxes

     66,005     10 %     82,565     13 %     (16,560 )   (20 )%

INCOME TAX EXPENSE

     23,210     3 %     30,962     5 %     (7,752 )   (25 )%
                        

INCOME FROM CONTINUING OPERATIONS

     42,795         51,603         (8,808 )   (17 )%

DISCONTINUED OPERATIONS, net of tax

     (2,793 )   —   %     (2,867 )   —   %     (74 )   (3 )%
                        

NET INCOME

   $ 40,002     6 %   $ 48,736     7 %   $ (8,734 )   (18 )%
                        

EARNINGS PER COMMON SHARE (DILUTED):

            

Continuing Operations

   $ 1.27       $ 1.52       $ (0.25 )   (16 )%

Discontinued Operations

     (0.08 )       (0.08 )       —       —   %
                        

Net income

   $ 1.19       $ 1.44       $ (0.25 )   (17 )%
                        

Net income and income from continuing operations decreased $8.7 million (18%) and $8.8 million (17%), respectively, during the 2007 period. Included in net income and income from continuing operations during the 2007 period was (i) $11.6 million (net of tax) of costs associated with the repurchase of all $250.0 million of our 9% Notes and $3.0 million of our 8% Notes, (ii) $1.9 million of retirement benefits expense associated with the retirement of our former CEO and (iii) $0.3 million of costs (net of tax) associated with a secondary offering of our common stock from which we did not receive any proceeds. During the 2006 period we recognized (i) a $2.1 million (net of tax) gain from the sale of our interest in a pool of extended service contracts, (ii) $0.8 million of costs (net of tax) associated with a secondary offering of our common stock from which we did not receive any proceeds, (iii) $0.6 million of costs associated with the repurchase of $15.0 million of our 8% Notes, and (iv) $1.0 million (net of tax) of costs associated with abandoned strategic projects (the adjusting items for the 2007 and

 

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2006 period being collectively referred to “the adjusting items”). Excluding the adjusting items mentioned above, adjusted income from continuing operations increased $4.6 million (9%).

The following discussion excludes the impact of the adjusting items as we believe that excluding these items provides a more accurate representation of our year over year financial performance. Please refer to “Reconciliation of Non-GAAP Financial Information” for more information. The $4.6 million (9%) increase in adjusted income from continuing operations was primarily a result of (i) the performance of our fixed operations and F&I businesses, which generated $16.3 million (6%) and $9.4 million (8%), respectively, of incremental adjusted gross profit during the 2007 period and (ii) a 10 basis point improvement in our adjusted selling, general and administrative expenses (“SG&A”) as a percentage of adjusted gross profit.

The $47.9 million (1%) increase in total revenues was a result of a $32.5 million (3%) increase in used vehicle revenue, a $17.7 million (3%) increase in fixed operations revenue and $6.0 million (5%) increase in F&I revenue, partially offset by an $8.4 million decrease in new vehicle revenue. The increase in used vehicle revenue was primarily attributable to a $21.9 million (3%) increase in used retail revenue. The decrease in new vehicle revenue was primarily attributable to a $73.3 million (30%) decrease in heavy truck revenue.

Total gross profit increased $22.0 million (3%) and total adjusted gross profit increased $25.4 million (4%). The increase in total adjusted gross profit was a result of a $16.3 million (6%) increase in fixed operations gross profit and a $6.0 million (5%) increase in F&I gross profit, both of which contributed to an overall 40 basis point increase in our total adjusted gross profit margin.

 

     For the Nine Months Ended September 30,         

Increase

(Decrease)

   

%

Change

 

New Vehicle —

   2007          2006           
     (In thousands, except unit and PVR data)  

Revenues:

              

New retail revenues—same store(1)

              

Luxury

   $ 819,431    34 %   $ 775,199    31 %   $ 44,232     6 %

Mid-line import

     1,044,378    43 %     1,047,199    42 %     (2,821 )   —   %

Mid-line domestic

     371,945    15 %     396,547    16 %     (24,602 )   (6 )%

Value

     31,511    1 %     32,341    1 %     (803 )   (3 )%
                      

Total light vehicle retail revenues—same store(1)

     2,267,265        2,251,286        15,979     1 %

Heavy trucks

     174,623    7 %     247,915    10 %     (73,292 )   (30 )%
                      

Total new retail revenue—same store(1)

     2,441,888    100 %     2,499,201    100 %     (57,313 )   (2 )%

New retail revenues—acquisitions

     28,240        —         
                      

Total new retail revenues

     2,470,128        2,499,201        (29,073 )   (1 )%
                      

Fleet revenues—same store(1)

     139,581        118,908        20,673     17 %

Fleet revenues—acquisitions

     —          —         
                      

Total fleet revenues

     139,581        118,908        20,673     17 %
                      

New vehicle revenues, as reported

   $ 2,609,709      $ 2,618,109      $ (8,400 )   —   %
                      

New retail units:

              

New retail units—same store(1)

              

Luxury

     17,403    22 %     17,303    22 %     100     1 %

Mid-line import

     43,032    55 %     42,899    54 %     133     —   %

Mid-line domestic

     12,800    17 %     13,896    17 %     (1,096 )   (8 )%

Value

     1,595    2 %     1,530    2 %     65     4 %
                      

Total light vehicle retail units—same store(1)

     74,830        75,628        (798 )   (1 )%

Heavy trucks

     2,956    4 %     4,062    5 %     (1,106 )   (27 )%
                      

Total new retail units—same store(1)

     77,786    100 %     79,690    100 %     (1,904 )   (2 )%

New retail units—acquisitions

     910        —         
                      

Retail units—actual

     78,696        79,690        (994 )   (1 )%

Fleet units—actual

     6,807        6,184        623     10 %
                      

Total new units—actual

     85,503        85,874        (371 )   —   %
                      

Total light vehicle units – same store(1)(2)

     81,637        81,812        (175 )   —   %

Total light vehicle units – acquisitions(2)

     910        —         
                      

Total light vehicle units – actual(2)

     82,547        81,812        735     1 %
                      

New revenue PVR—same store(1)

   $ 31,392      $ 31,362      $ 31     —   %<