e10vq
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
September 30,
2010
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File Number: 1-13461
Group 1 Automotive,
Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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76-0506313
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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800 Gessner, Suite 500
Houston, Texas 77024
(Address of principal
executive offices) (Zip Code)
(713) 647-5700
(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
þ
No
o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this Chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes
o
No
o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in
Rule 12b-2
of the Exchange Act. (Check one):
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Large
accelerated
filer
o
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Accelerated
filer
þ
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Non-accelerated
filer
o
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Smaller
reporting
company
o
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes
o
No
þ
As of October 22, 2010, the registrant had
23,725,600 shares of common stock, par value $0.01,
outstanding.
GROUP 1
AUTOMOTIVE, INC. AND SUBSIDIARIES
TABLE OF
CONTENTS
2
PART I.
FINANCIAL INFORMATION
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Item 1.
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Financial
Statements
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GROUP 1
AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
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September 30,
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December 31,
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2010
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2009
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(Unaudited)
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(In thousands, except per share amounts)
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ASSETS
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CURRENT ASSETS:
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Cash and cash equivalents
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$
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96,162
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$
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13,221
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Contracts-in-transit
and vehicle receivables, net
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92,649
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86,500
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Accounts and notes receivable, net
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66,492
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62,496
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Inventories
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757,201
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596,743
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Deferred income taxes
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15,340
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14,653
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Prepaid expenses and other current assets
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37,520
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48,425
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Total current assets
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1,065,364
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822,038
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PROPERTY AND EQUIPMENT, net
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458,303
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475,828
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GOODWILL
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508,651
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500,426
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INTANGIBLE FRANCHISE RIGHTS
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158,736
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157,855
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OTHER ASSETS
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10,458
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13,267
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Total assets
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$
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2,201,512
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$
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1,969,414
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LIABILITIES AND STOCKHOLDERS’ EQUITY
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CURRENT LIABILITIES:
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Floorplan notes payable — credit facility
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$
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598,738
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$
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420,319
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Floorplan notes payable — manufacturer affiliates
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103,922
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115,180
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Current maturities of long-term debt
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14,304
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14,355
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Current liabilities from interest rate risk management activities
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4,357
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10,412
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Accounts payable
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84,864
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72,276
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Accrued expenses
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83,459
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86,271
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Total current liabilities
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889,644
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718,813
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LONG-TERM DEBT, net of current maturities
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431,643
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444,141
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DEFERRED INCOME TAXES
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56,376
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33,932
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LIABILITIES FROM INTEREST RATE RISK MANAGEMENT ACTIVITIES
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19,960
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20,151
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OTHER LIABILITIES
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29,585
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26,633
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DEFERRED REVENUES
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3,829
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5,588
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STOCKHOLDERS’ EQUITY:
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Preferred stock, $0.01 par value, 1,000 shares
authorized; none issued or outstanding
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—
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—
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Common stock, $0.01 par value, 50,000 shares
authorized; 26,308 and 26,219 issued, respectively
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263
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262
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Additional paid-in capital
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371,112
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346,055
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Retained earnings
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511,667
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471,932
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Accumulated other comprehensive loss
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(22,162
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(26,256
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)
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Treasury stock, at cost; 2,579 and 1,740 shares,
respectively
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(90,405
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)
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(71,837
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)
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Total stockholders’ equity
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770,475
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720,156
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Total liabilities and stockholders’ equity
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$
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2,201,512
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$
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1,969,414
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The accompanying notes are an integral part of these
consolidated financial statements.
3
GROUP 1
AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
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Three Months Ended
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Nine Months Ended
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September 30,
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September 30,
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2010
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2009
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2010
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2009
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(Unaudited, In thousands, except per share amounts)
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REVENUES:
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New vehicle retail sales
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$
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822,121
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$
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728,089
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$
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2,254,093
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$
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1,883,973
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Used vehicle retail sales
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340,625
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254,716
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960,376
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729,345
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Used vehicle wholesale sales
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58,463
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43,151
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156,653
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112,536
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Parts and service sales
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196,264
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183,254
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575,762
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547,224
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Finance, insurance and other, net
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44,282
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37,509
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124,533
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102,213
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Total revenues
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1,461,755
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1,246,719
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4,071,417
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3,375,291
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COST OF SALES:
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New vehicle retail sales
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775,046
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679,470
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2,122,533
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1,770,900
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Used vehicle retail sales
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310,055
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228,445
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870,823
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652,640
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Used vehicle wholesale sales
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58,158
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41,872
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153,565
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109,205
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Parts and service sales
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89,657
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84,911
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264,484
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256,756
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Total cost of sales
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1,232,916
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1,034,698
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3,411,405
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2,789,501
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GROSS PROFIT
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228,839
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212,021
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660,012
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585,790
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
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173,925
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162,466
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522,796
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466,813
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DEPRECIATION AND AMORTIZATION EXPENSE
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6,772
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6,666
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19,936
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19,541
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ASSET IMPAIRMENTS
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1,639
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|
702
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3,121
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2,837
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INCOME FROM OPERATIONS
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46,503
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42,187
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114,159
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96,599
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OTHER INCOME (EXPENSE):
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Floorplan interest expense
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(9,021
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)
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(7,523
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)
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(25,220
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)
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(24,342
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)
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Other interest expense, net
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(6,894
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)
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(7,318
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)
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(20,265
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)
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(21,857
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)
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Gain (loss) on redemption of long-term debt
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—
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598
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(3,872
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)
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8,211
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Other expense, net
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—
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|
(4
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)
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—
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(6
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)
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INCOME BEFORE INCOME TAXES
|
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30,588
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27,940
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64,802
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|
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58,605
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PROVISION FOR INCOME TAXES
|
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(11,603
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)
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(9,600
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)
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(25,067
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)
|
|
|
(21,808
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)
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NET INCOME
|
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$
|
18,985
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|
|
$
|
18,340
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$
|
39,735
|
|
|
$
|
36,797
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BASIC EARNINGS PER SHARE
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$
|
0.85
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$
|
0.80
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$
|
1.74
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|
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$
|
1.61
|
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|
Weighted average common shares outstanding
|
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22,419
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|
|
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22,965
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|
|
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22,877
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|
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|
22,833
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DILUTED EARNINGS PER SHARE
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$
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0.83
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|
$
|
0.78
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$
|
1.70
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|
|
$
|
1.58
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|
Weighted average common shares outstanding
|
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|
22,926
|
|
|
|
23,503
|
|
|
|
23,414
|
|
|
|
23,240
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
4
GROUP 1
AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
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|
|
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|
|
Nine Months Ended
|
|
|
|
|
September 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
(Unaudited, In thousands)
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
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|
|
|
|
|
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|
|
Net income
|
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$
|
39,735
|
|
|
$
|
36,797
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|
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
19,936
|
|
|
|
19,541
|
|
|
Deferred income taxes
|
|
|
22,224
|
|
|
|
23,078
|
|
|
Stock-based compensation
|
|
|
7,505
|
|
|
|
7,367
|
|
|
(Gain) loss on sale of assets
|
|
|
3,170
|
|
|
|
(709
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)
|
|
Amortization of debt discount and issue costs
|
|
|
6,336
|
|
|
|
5,413
|
|
|
(Gain) loss on redemption of long-term debt
|
|
|
3,872
|
|
|
|
(8,211
|
)
|
|
Asset Impairments
|
|
|
3,121
|
|
|
|
2,837
|
|
|
Tax effect from stock-based compensation
|
|
|
985
|
|
|
|
348
|
|
|
Other
|
|
|
(131
|
)
|
|
|
(504
|
)
|
|
Changes in operating assets and liabilities, net of effects of
acquisitions and dispositions:
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
|
(152,947
|
)
|
|
|
373,146
|
|
|
Contracts-in-transit
and vehicle receivables
|
|
|
(5,888
|
)
|
|
|
35,909
|
|
|
Accounts payable and accrued expenses
|
|
|
9,624
|
|
|
|
(15,478
|
)
|
|
Floorplan notes payable — manufacturer affiliates
|
|
|
(10,281
|
)
|
|
|
(39,454
|
)
|
|
Accounts and notes receivable
|
|
|
(4,747
|
)
|
|
|
20,865
|
|
|
Prepaid expenses and other assets
|
|
|
7,060
|
|
|
|
7,304
|
|
|
Deferred revenues
|
|
|
(1,759
|
)
|
|
|
(3,477
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
(52,185
|
)
|
|
|
464,772
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|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Cash paid in acquisitions, net of cash received
|
|
|
(34,431
|
)
|
|
|
(3,754
|
)
|
|
Proceeds from sales of franchises and related real estate
|
|
|
41,001
|
|
|
|
21,068
|
|
|
Purchases of property and equipment
|
|
|
(22,699
|
)
|
|
|
(11,711
|
)
|
|
Other
|
|
|
1,145
|
|
|
|
1,901
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(14,984
|
)
|
|
|
7,504
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Borrowings on credit facility — Floorplan Line
|
|
|
3,731,339
|
|
|
|
2,675,415
|
|
|
Repayments on credit facility — Floorplan Line
|
|
|
(3,552,920
|
)
|
|
|
(3,065,676
|
)
|
|
Repayments on credit facility — Acquisition Line
|
|
|
—
|
|
|
|
(139,000
|
)
|
|
Borrowings on credit facility — Acquisition Line
|
|
|
—
|
|
|
|
89,000
|
|
|
Borrowings on mortgage facility
|
|
|
—
|
|
|
|
29,133
|
|
|
Principal payments on mortgage facility
|
|
|
(35,284
|
)
|
|
|
(17,150
|
)
|
|
Proceeds from issuance of 3.00% Convertible Notes
|
|
|
115,000
|
|
|
|
—
|
|
|
Debt issue costs
|
|
|
(3,959
|
)
|
|
|
—
|
|
|
Purchase of equity calls
|
|
|
(45,939
|
)
|
|
|
—
|
|
|
Sale of equity warrants
|
|
|
29,309
|
|
|
|
—
|
|
|
Redemption of other long-term debt
|
|
|
(77,011
|
)
|
|
|
(20,859
|
)
|
|
Borrowings of other long-term debt
|
|
|
4,909
|
|
|
|
—
|
|
|
Principal payments of long-term debt related to real estate loans
|
|
|
(2,685
|
)
|
|
|
(34,049
|
)
|
|
Borrowings of long-term debt related to real estate
|
|
|
12,804
|
|
|
|
—
|
|
|
Principal payments of other long-term debt
|
|
|
(558
|
)
|
|
|
(397
|
)
|
|
Repurchases of common stock, amounts based on settlement date
|
|
|
(26,765
|
)
|
|
|
—
|
|
|
Proceeds from issuance of common stock to benefit plans
|
|
|
2,562
|
|
|
|
2,520
|
|
|
Debt extinguishment costs related to real estate loans
|
|
|
—
|
|
|
|
(534
|
)
|
|
Tax effect from stock-based compensation
|
|
|
(985
|
)
|
|
|
(348
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
149,817
|
|
|
|
(481,945
|
)
|
|
|
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATE CHANGES ON CASH
|
|
|
293
|
|
|
|
1,407
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
82,941
|
|
|
|
(8,262
|
)
|
|
CASH AND CASH EQUIVALENTS, beginning of period
|
|
|
13,221
|
|
|
|
23,144
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of period
|
|
$
|
96,162
|
|
|
$
|
14,882
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
5
GROUP 1
AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Losses)
|
|
|
Gains
|
|
|
Gains
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
on Interest
|
|
|
(Losses)
|
|
|
(Losses)
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Rate
|
|
|
on Marketable
|
|
|
on Currency
|
|
|
Treasury
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Swaps
|
|
|
Securities
|
|
|
Translation
|
|
|
Stock
|
|
|
Total
|
|
|
|
|
(Unaudited, In thousands)
|
|
|
|
|
BALANCE, December 31, 2009
|
|
|
26,219
|
|
|
$
|
262
|
|
|
$
|
346,055
|
|
|
$
|
471,932
|
|
|
$
|
(19,102
|
)
|
|
$
|
104
|
|
|
$
|
(7,258
|
)
|
|
$
|
(71,837
|
)
|
|
$
|
720,156
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
39,735
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
39,735
|
|
|
Interest rate swap adjustment, net of tax provision of $2,342
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,904
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,904
|
|
|
Unrealized loss on investments, net of tax benefit of $7
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(11
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(11
|
)
|
|
Unrealized gain on currency translation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
201
|
|
|
|
—
|
|
|
|
201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,829
|
|
|
Purchases of treasury stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(26,765
|
)
|
|
|
(26,765
|
)
|
|
Issuance of common and treasury shares to employee benefit plans
|
|
|
(226
|
)
|
|
|
(2
|
)
|
|
|
(9,156
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,197
|
|
|
|
(961
|
)
|
|
Proceeds from sales of common stock under employee benefit plans
|
|
|
112
|
|
|
|
1
|
|
|
|
2,561
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,562
|
|
|
Issuance of restricted stock
|
|
|
232
|
|
|
|
2
|
|
|
|
(2
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Forfeiture of restricted stock
|
|
|
(29
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
7,505
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,505
|
|
|
Tax effect from options exercised and the vesting of restricted
shares
|
|
|
—
|
|
|
|
—
|
|
|
|
(935
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(935
|
)
|
|
Purchase of equity calls, net of deferred tax benefit of $17,227
|
|
|
—
|
|
|
|
—
|
|
|
|
(28,712
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(28,712
|
)
|
|
Sale of equity warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
29,309
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
29,309
|
|
|
Equity component of 3.00% Covertible Note issuance, net of
deferred tax liability of $14,692
|
|
|
—
|
|
|
|
—
|
|
|
|
24,487
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
24,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, September 30, 2010
|
|
|
26,308
|
|
|
$
|
263
|
|
|
$
|
371,112
|
|
|
$
|
511,667
|
|
|
$
|
(15,198
|
)
|
|
$
|
93
|
|
|
$
|
(7,057
|
)
|
|
$
|
(90,405
|
)
|
|
$
|
770,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
6
GROUP 1
AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
1.
|
BUSINESS
AND ORGANIZATION
|
Group 1 Automotive, Inc., a Delaware corporation, through its
subsidiaries, is a leading operator in the automotive retailing
industry with operations in the states of Alabama, California,
Florida, Georgia, Kansas, Louisiana, Maryland, Massachusetts,
Mississippi, New Hampshire, New Jersey, New York, Oklahoma,
South Carolina and Texas in the United States of America (the
“U.S.”) and in the towns of Brighton, Farnborough,
Hailsham, Hindhead and Worthing in the United Kingdom (the
“U.K.”). Through their dealerships, these subsidiaries
sell new and used cars and light trucks; arrange related
financing, and sell vehicle service and insurance contracts;
provide maintenance and repair services; and sell replacement
parts. Group 1 Automotive, Inc. and its subsidiaries are herein
collectively referred to as the “Company” or
“Group 1.”
As of September 30, 2010, the Company’s retail network
consisted of the following three regions (with the number of
dealerships they comprised): (i) Eastern (42 dealerships in
Alabama, Florida, Georgia, Louisiana, Maryland, Massachusetts,
Mississippi, New Hampshire, New Jersey, New York and South
Carolina); (ii) Central (43 dealerships in Kansas, Oklahoma
and Texas); and (iii) Western (11 dealerships in
California). Each region is managed by a regional vice president
who reports directly to the Company’s Chief Executive
Officer and is responsible for the overall performance of their
regions, as well as for overseeing the market directors and
dealership general managers that report to them. Each region is
also managed by a regional chief financial officer who reports
directly to the Company’s Chief Financial Officer. The
Company has five dealerships in the U.K. that are also managed
locally with direct reporting responsibilities to the
Company’s corporate management team.
|
|
|
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
|
Basis
of Presentation
All acquisitions of dealerships completed during the periods
presented have been accounted for using the purchase method of
accounting and their results of operations are included from the
effective dates of the closings of the acquisitions. The
allocations of purchase price to the assets acquired and
liabilities assumed are assigned and recorded based on estimates
of fair value. All intercompany balances and transactions have
been eliminated in consolidation.
Interim
Financial Information
The accompanying unaudited Condensed Consolidated Financial
Statements have been prepared in accordance with accounting
principles generally accepted in the U.S. for interim
financial information and with the instructions to
Form 10-Q
and Article 10 of
Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted
in the U.S. for complete financial statements. In the
opinion of management, all adjustments of a normal and recurring
nature considered necessary for a fair presentation have been
included in the accompanying Consolidated Financial Statements.
Due to seasonality and other factors, the results of operations
for the interim period are not necessarily indicative of the
results that will be realized for the entire fiscal year. For
further information, refer to the Consolidated Financial
Statements and footnotes thereto included in the Company’s
Annual Report on
Form 10-K
for the year ended December 31, 2009 (“2009
Form 10-K”).
Statements
of Cash Flows
With respect to all new vehicle floorplan borrowings, the
manufacturers of the vehicles draft the Company’s credit
facilities directly with no cash flow to or from the Company.
With respect to borrowings for used vehicle financing, the
Company chooses which vehicles to finance and the funds flow
directly to the Company from the lender. All borrowings from,
and repayments to, lenders affiliated with the vehicle
manufacturers (excluding the cash flows from or to manufacturer
affiliated lenders participating in the Company’s
syndicated lending group) are presented within Cash Flows from
Operating Activities on the Consolidated Statements of Cash
Flows and all
7
GROUP 1
AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
borrowings from, and repayments to, the syndicated lending group
under the revolving credit facility (including the cash flows
from or to manufacturer affiliated lenders participating in the
facility) are presented within Cash Flows from Financing
Activities.
A reclassification was made within Cash Flows from Financing
Activities on the 2009 Consolidated Statement of Cash Flows to
reflect investments in the floorplan offset account related to
Floorplan Notes Payable — Credit Facility as
repayments on the credit facility and withdrawals from the
offset account as borrowings on the credit facility.
Income
Taxes
Currently, the Company operates in 15 different states in the
U.S. and in the U.K., each of which has unique tax rates
and payment calculations. As the amount of income generated in
each jurisdiction varies from period to period, the
Company’s estimated effective tax rate can vary based on
the proportion of taxable income generated in each jurisdiction.
The Company follows the liability method of accounting for
income taxes. Under this method, deferred income taxes are
recorded based on differences between the financial reporting
and tax basis of assets and liabilities and are measured using
the enacted tax rates and laws that will be in effect when the
underlying assets are realized or liabilities are settled. A
valuation allowance reduces deferred tax assets when it is more
likely than not that some or all of the deferred tax assets will
not be realized.
Fair
Value of Financial Assets and Liabilities
The Company’s financial instruments consist primarily of
cash and cash equivalents,
contracts-in-transit
and vehicle receivables, accounts and notes receivable,
investments in debt and equity securities, accounts payable,
credit facilities, long-term debt and interest rate swaps. The
fair values of cash and cash equivalents,
contracts-in-transit
and vehicle receivables, accounts and notes receivable, accounts
payable, and credit facilities approximate their carrying values
due to the short-term nature of these instruments or the
existence of variable interest rates. The Company’s
investments in debt and equity securities are classified as
available-for-sale
securities and thus are carried at fair market value. The
Company’s derivative financial instruments are recorded at
fair market value. See Note 8, “Derivative Instruments
and Risk Management Activities” and Note 10,
“Fair Value Measurements” for further details
regarding the Company’s derivative financial instruments
and fair value measurements. The Company carries its long-term
debt at face value, net of applicable discounts. As of
September 30, 2010, the face value of $115.0 million
of the Company’s outstanding 3.00% Convertible Senior
Notes due 2020 (the “3.00% Notes”) had a carrying
value, net of applicable discount, of $73.6 million, and a
fair value, based on quoted market prices, of
$110.9 million. The face value of $182.8 million of
the Company’s outstanding 2.25% Convertible Senior
Notes due 2036 (the “2.25% Notes”) had a carrying
value, net of applicable discount, as of September 30, 2010
and December 31, 2009 of $136.6 million and
$131.9 million, respectively, and a fair value, based on
quoted market prices, of $151.0 million and
$143.5 million, respectively.
Long-Lived
Assets
The Company reviews long-lived assets for impairment when
evidence exists that the carrying value of these assets may not
be recoverable (i.e., triggering events). This review consists
of comparing the carrying amount of the asset with its expected
future undiscounted cash flows without interest costs. If the
asset’s carrying amount is greater than the future
undiscounted cash flow estimate, then it is required to be
written down to its fair value, as applicable.
8
GROUP 1
AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Goodwill
The Company defines its reporting units as each of its three
regions in the U.S. and the U.K. Goodwill represents the
excess, at the date of acquisition, of the purchase price of the
business acquired over the fair value of the net tangible and
intangible assets acquired. Annually in the fourth quarter, the
Company performs a fair value and potential impairment
assessment of its goodwill. An impairment analysis is done more
frequently if certain events or circumstances arise that would
indicate a change in the fair value of the non-financial asset
has occurred (i.e., an impairment indicator). In evaluating its
goodwill, the Company compares the carrying value of the net
assets of each reporting unit to its respective fair value. This
represents the first step of the impairment test. If the fair
value of a reporting unit is less than the carrying value of its
net assets, the Company must proceed to step two of the
impairment test. Step two involves allocating the calculated
fair value to all of the tangible and identifiable intangible
assets of the reporting unit as if the calculated fair value was
the purchase price in a business combination. To the extent the
carrying value of the goodwill exceeds its implied fair value
under step two of the impairment test, an impairment charge
equal to the difference is recorded. During the nine months
ended September 30, 2010, the Company did not identify an
impairment indicator relative to its goodwill. As a result, the
Company was not required to conduct the first step of the
impairment test. However, if in future periods the Company
determines that the carrying amount of the net assets of one or
more of its reporting units exceeds the respective fair value as
a result of step one, the Company believes that the application
of step two of the impairment test could result in a material
impairment charge to the goodwill associated with the reporting
unit(s).
Intangible
Franchise Rights
The Company’s only significant identifiable intangible
assets, other than goodwill, are rights under franchise
agreements with manufacturers, which are recorded at an
individual dealership level. The Company expects these franchise
agreements to continue for an indefinite period and, when these
agreements do not have indefinite terms, the Company believes
that renewal of these agreements can be obtained without
substantial cost. As such, the Company believes that its
franchise agreements will contribute to cash flows for an
indefinite period and, therefore, the carrying amounts of the
franchise rights are not amortized. The Company evaluates these
franchise rights for impairment annually in the fourth quarter,
or more frequently if events or circumstances indicate possible
impairment has occurred. In performing its impairment
assessments, the Company tests the carrying value of each
individual franchise right that was recorded by using a direct
value method, discounted cash flow model. During the nine months
ended September 30, 2010, the Company did not identify an
impairment indicator relative to its capitalized value of
intangible franchise rights and, therefore, no impairment
evaluation was required.
Foreign
Currency Translation
The functional currency for the Company’s foreign
subsidiaries is the Pound Sterling. The financial statements of
all of the Company’s foreign subsidiaries have been
translated into U.S. dollars. All assets and liabilities of
foreign operations are translated into U.S. Dollars using
period-end exchange rates and all revenues and expenses are
translated at average rates during the respective period. The
U.S. Dollar results that arise from the translation of all
assets and liabilities are included in the cumulative currency
translation adjustments in accumulated other comprehensive
income/(loss) in stockholders’ equity and other
income/(expense), when applicable.
Accounting
for Convertible Debt
The Company separately accounts for the liability and equity
component of its convertible debt instrument in a manner that
reflects the issuer’s economic interest cost. Upon issuance
of a convertible debt instrument, the Company estimates the fair
value of the debt component. The resulting residual value is
determined to be the fair value of the equity component of the
Company’s convertible debt and is included in the
paid-in-capital
section of stockholder’s equity, net of applicable taxes,
on the Company’s Consolidated Balance Sheets. The value of
the equity component is treated as an original issue discount
for purposes of accounting for the debt component, which
9
GROUP 1
AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
is amortized as non-cash interest expense through the date that
the convertible debt is first able to be put to the Company. See
Note 7 “Long-term Debt” for further details on
the impact of this convertible debt accounting to the
Company’s financial statements.
Recent
Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update
(“ASU”)
No. 2010-06,
“Improving Disclosures about Fair Value Measurements”
(“ASU
2010-06”)
to require disclosure of: (1) amounts, and reasons why, of
significant transfers between Level 1 and Level 2 of
the fair value hierarchy (2) reasons for any transfers in
or out of Level 3 of the fair value hierarchy and
(3) information in the reconciliation of recurring
Level 3 measurements about purchases, sales, issuances and
settlements on a gross basis. In addition, ASU
2010-06
amended existing disclosure requirements of ASC Topic
No. 820, “Fair Value Measurements and
Disclosures” (“ASC 820”), to clarify that fair
value measurement disclosures should be provided by class of
assets and liabilities (rather than by each major category).
Except for requirement (3) above, all of the amendments to
ASC 820 made by ASU
2010-06
are
effective for interim and annual reporting periods beginning
after December 15, 2009. Requirement (3) above will be
effective for interim and annual reporting periods beginning
after December 15, 2010. The Company adopted the applicable
reporting requirements of ASU
2010-06
as
of January 1, 2010. The Company does not expect the
adoption of the amendments regarding requirement (3) to
have a material impact on its financial condition, results of
operations or cash flows. See Note 10, “Fair Value
Measurements” for further details regarding the
Company’s fair value measurements.
|
|
|
|
3.
|
STOCK-BASED
COMPENSATION PLANS
|
The Company provides compensation benefits to employees and
non-employee directors pursuant to its 2007 Long Term Incentive
Plan, as amended, as well as to employees pursuant to its 1998
Employee Stock Purchase Plan, as amended.
2007
Long Term Incentive Plan
The “Group 1 Automotive, Inc. 2007 Long Term Incentive
Plan,” (the “Incentive Plan”) was amended and
restated in May 2010 to increase the number of shares available
for issuance under the plan from 6.5 million to
7.5 million, for grants to non-employee directors, officers
and other employees of the Company and its subsidiaries of:
(1) options (including options qualified as incentive stock
options under the Internal Revenue Code of 1986 and options that
are non-qualified) the exercise price of which may not be less
than the fair market value of the common stock on the date of
the grant, and (2) stock appreciation rights, restricted
stock, performance awards, bonus stock and phantom stock awards,
each at the market price of the Company’s stock at the date
of grant. The Incentive Plan expires on March 8, 2017. The
terms of the awards (including vesting schedules) are
established by the Compensation Committee of the Company’s
Board of Directors. All outstanding option awards are
exercisable over a period not to exceed ten years and vest over
a period not to exceed five years. Certain of the Company’s
option awards are subject to graded vesting over a service
period. In those cases, the Company recognizes compensation cost
on a straight-line basis over the requisite service period for
the entire award. Forfeitures are estimated at the time of
valuation and reduce expense ratably over the vesting period.
This estimate is adjusted periodically based on the extent to
which actual forfeitures differ, or are expected to differ, from
the previous estimate. As of September 30, 2010, there were
1,606,926 shares available under the Incentive Plan for
future grants of these awards.
10
GROUP 1
AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Stock
Option Awards
No stock option awards have been granted since November 2005.
The following summary presents information regarding outstanding
options as of September 30, 2010, and the changes during
the nine months then ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
Number
|
|
|
Exercise Price
|
|
|
|
|
Options outstanding, December 31, 2009
|
|
|
122,894
|
|
|
$
|
29.61
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
Exercised
|
|
|
(7,540
|
)
|
|
|
16.02
|
|
|
Forfeited
|
|
|
(4,601
|
)
|
|
|
28.38
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, September 30, 2010
|
|
|
110,753
|
|
|
|
30.86
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested at September 30, 2010
|
|
|
110,753
|
|
|
|
30.86
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at September 30, 2010
|
|
|
110,753
|
|
|
$
|
30.86
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
Stock Awards
In 2005, the Company began granting non-employee directors and
certain employees, at no cost to the recipient, restricted stock
awards or, at their election, phantom stock awards, pursuant to
the Incentive Plan. In November 2006, the Company began to grant
certain employees, at no cost to the recipient, performance
awards pursuant to the Incentive Plan. Restricted stock awards
are considered outstanding at the date of grant, but are subject
to forfeiture provisions for periods ranging from nine months to
five years. The phantom stock awards will settle in shares of
common stock upon the termination of the grantees’
employment or directorship and vest over a period not to exceed
five years. Performance awards are considered outstanding at the
date of grant, with forfeiture provisions that lapse based on
time and the achievement of certain performance criteria
established by the Compensation Committee of the Board of
Directors. In the event the employee or director terminates his
or her employment or directorship with the Company prior to the
lapse of the restrictions, the shares, in most cases, will be
forfeited to the Company. Compensation expense for these awards
is calculated based on the price of the Company’s common
stock at the date of grant and recognized over the requisite
service period or as the performance criteria are met.
A summary of these awards as of September 30, 2010, and the
changes during the nine months then ended, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
Grant Date
|
|
|
|
|
Awards
|
|
|
Fair Value
|
|
|
|
|
Nonvested at December 31, 2009
|
|
|
1,406,882
|
|
|
$
|
20.71
|
|
|
Granted
|
|
|
241,826
|
|
|
|
28.39
|
|
|
Vested
|
|
|
(124,724
|
)
|
|
|
30.44
|
|
|
Forfeited
|
|
|
(28,800
|
)
|
|
|
27.25
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at September 30, 2010
|
|
|
1,495,184
|
|
|
$
|
21.06
|
|
|
|
|
|
|
|
|
|
|
|
Employee
Stock Purchase Plan
In September 1997, the Company adopted the Group 1 Automotive,
Inc. Employee Stock Purchase Plan, as amended (the
“Purchase Plan”). The Purchase Plan authorizes the
issuance of up to 3.5 million shares of common stock and
provides that no options to purchase shares may be granted under
the Purchase Plan after March 6, 2016.
11
GROUP 1
AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The Purchase Plan is available to all employees of the Company
and its participating subsidiaries and is a qualified plan as
defined by Section 423 of the Internal Revenue Code. At the
end of each fiscal quarter (the “Option Period”)
during the term of the Purchase Plan, the employee contributions
are used by the employee to acquire shares of common stock from
the Company at 85% of the fair market value of the common stock
on the first or the last day of the Option Period, whichever is
lower. As of September 30, 2010, there were
970,555 shares remaining in reserve for future issuance
under the Purchase Plan. During the nine months ended
September 30, 2010 and 2009, the Company issued 111,744 and
155,857 shares, respectively, of common stock to employees
participating in the Purchase Plan.
The weighted average fair value of employee stock purchase
rights issued pursuant to the Purchase Plan was $8.30 and $6.48
during the nine months ended September 30, 2010 and 2009,
respectively. The fair value of the stock purchase rights was
calculated as the sum of (a) the difference between the
stock price and the employee purchase price, (b) the value
of the embedded call option and (c) the value of the
embedded put option.
Stock-Based
Compensation
Total stock-based compensation cost was $2.3 million and
$1.9 million for the three months ended September 30,
2010 and 2009, respectively, and $7.5 million and
$7.4 million for the nine months ended September 30,
2010 and 2009. Cash received from option exercises and Purchase
Plan purchases was $2.6 million and $2.0 million for
the nine months ended September 30, 2010 and 2009,
respectively. Additional paid-in capital was reduced by
$0.9 million and $0.3 million for the nine months
ended September 30, 2010 and 2009, respectively, for the
effect of tax deductions for options exercised and vesting of
restricted shares that were less than the associated book
expense previously recognized. Total income tax benefit
recognized for stock-based compensation arrangements was
$2.1 million for both the nine months ended
September 30, 2010 and 2009.
The Company issues new shares when options are exercised or
restricted stock vests or uses treasury shares, if available.
With respect to shares issued under the Purchase Plan, the
Company’s Board of Directors has authorized specific share
repurchases to fund the shares issuable under the Purchase Plan.
Basic earnings per share (“EPS”) is computed based on
weighted average shares outstanding and excludes dilutive
securities. Diluted EPS is computed including the impact of all
potentially dilutive securities. The following table sets forth
the calculation of EPS for the three and nine months ended
September 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
(In thousands, except per share amounts)
|
|
|
|
|
Net income
|
|
$
|
18,985
|
|
|
$
|
18,340
|
|
|
$
|
39,735
|
|
|
$
|
36,797
|
|
|
Weighted average basic shares outstanding
|
|
|
22,419
|
|
|
|
22,965
|
|
|
|
22,877
|
|
|
|
22,833
|
|
|
Dilutive effect of stock options, net of assumed repurchase of
treasury stock
|
|
|
4
|
|
|
|
13
|
|
|
|
10
|
|
|
|
6
|
|
|
Dilutive effect of restricted stock and employee stock
purchases, net of assumed repurchase of treasury stock
|
|
|
503
|
|
|
|
525
|
|
|
|
527
|
|
|
|
401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted shares outstanding
|
|
|
22,926
|
|
|
|
23,503
|
|
|
|
23,414
|
|
|
|
23,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.85
|
|
|
$
|
0.80
|
|
|
$
|
1.74
|
|
|
$
|
1.61
|
|
|
Diluted
|
|
$
|
0.83
|
|
|
$
|
0.78
|
|
|
$
|
1.70
|
|
|
$
|
1.58
|
|
12
GROUP 1
AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The weighted average number of stock-based awards not included
in the calculation of the dilutive effect of stock-based awards
was 0.2 million for each of the three months ended
September 30, 2010 and 2009 and 0.2 million and
0.4 million for the nine months ended September 30,
2010 and 2009, respectively.
If the 2.25% Notes become convertible into common shares,
the Company will be required to include the dilutive effect of
the net shares issuable under the 2.25% Notes and the
warrants sold in connection with the 2.25% Notes (the
“2.25% Warrants”). Since the average price of the
Company’s common stock for the nine months ended
September 30, 2010 was less than $59.43, no net shares were
issuable under the 2.25% Notes or the 2.25% Warrants.
If the 3.00% Notes become convertible into common shares,
the Company will be required to include the dilutive effect of
the net shares issuable under the 3.00% Notes and the
warrants sold in connection with the 3.00% Notes (the
“3.00% Warrants”). Since the average price of the
Company’s common stock for the nine months ended
September 30, 2010 was less than $38.61, no net shares were
issuable under the 3.00% Notes or the 3.00% Warrants.
The Company is subject to U.S. federal income taxes and
income taxes in numerous states. In addition, the Company is
subject to income tax in the U.K. relative to its foreign
subsidiaries. The effective income tax rate of 37.9% of pretax
income for the three months ended September 30, 2010
differed from the federal statutory rate of 35.0% due primarily
to taxes provided for the taxable state jurisdictions in which
the Company operates.
For the nine months ended September 30, 2010, the
Company’s effective tax rate increased to 38.7% from 37.2%
for the same period in 2009. The change was primarily due to
changes in certain state tax laws and rates, and the mix of
pretax income from the taxable state jurisdictions in which the
Company operates, as well as the cumulative benefit of
$1.9 million recognized during the third quarter of 2009
resulting from a tax election.
As of September 30, 2010 and December 31, 2009, the
Company had no unrecognized tax benefits. Consistent with prior
practices, the Company recognizes interest and penalties related
to uncertain tax positions in income tax expense. The Company
did not incur any interest and penalties nor did it accrue any
interest for the nine months ended September 30, 2010.
Taxable years 2005 and subsequent remain open for examination by
the Company’s major taxing jurisdictions.
The Company has a $1.35 billion revolving syndicated credit
arrangement (the “Revolving Credit Facility”). The
Company also has a $150.0 million floorplan financing
arrangement with Ford Motor Credit Company (the “FMCC
Facility”), a $231.2 million real estate credit
facility for financing of real estate expansion, as well as,
arrangements with several other automobile manufacturers for
financing of a portion of its rental vehicle inventory. Within
the Company’s Consolidated Balance Sheets, Floorplan Notes
Payable — Credit Facility reflects amounts payable for
the purchase of specific new, used and rental vehicle inventory
(with the exception of new and rental vehicle purchases financed
through lenders affiliated with the respective manufacturer)
whereby financing is provided by the Revolving Credit Facility.
Floorplan Notes Payable — Manufacturer Affiliates
reflects amounts payable for the purchase of specific new
vehicles whereby financing is provided by the FMCC Facility, the
financing of new and used vehicles in the U.K. with BMW
Financial Services and the financing of rental vehicle inventory
with several other manufacturers. Payments on the floorplan
notes payable are generally due as the vehicles are sold. As a
result, these obligations are reflected on the accompanying
Consolidated Balance Sheets as current liabilities.
13
GROUP 1
AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Revolving
Credit Facility
The Revolving Credit Facility, which is comprised of 20
financial institutions, including four manufacturer-affiliated
finance companies, expires in March 2012 and consists of two
tranches: $1.0 billion for vehicle inventory floorplan
financing (the “Floorplan Line”) and
$350.0 million for working capital, including acquisitions
(the “Acquisition Line”). Up to half of the
Acquisition Line can be borrowed in either Euros or Pound
Sterling. The capacity under these two tranches can be
re-designated within the overall $1.35 billion commitment,
subject to the original limits of a minimum of $1.0 billion
for the Floorplan Line and maximum of $350.0 million for
the Acquisition Line. The Revolving Credit Facility can be
expanded to its maximum commitment of $1.85 billion,
subject to participating lender approval. The Acquisition Line
bears interest at the one-month London Inter Bank Offered Rate
(“LIBOR”) plus a margin that ranges from 150 to
250 basis points, depending on the Company’s leverage
ratio. The Floorplan Line bears interest at rates equal to LIBOR
plus 87.5 basis points for new vehicle inventory and LIBOR
plus 97.5 basis points for used vehicle inventory. In
addition, the Company pays a commitment fee on the unused
portion of the Acquisition Line, as well as the Floorplan Line.
The available funds on the Acquisition Line carry a commitment
fee ranging from 0.25% to 0.375% per annum, depending on the
Company’s leverage ratio, based on a minimum commitment of
$200.0 million. The Floorplan Line requires a 0.20%
commitment fee on the unused portion. In conjunction with the
amendment to the Revolving Credit Facility on March 19,
2007, the Company capitalized $2.3 million of related costs
that are being amortized over the term of the facility.
As of September 30, 2010, after considering outstanding
balances of $598.7 million, the Company had
$401.3 million of available floorplan capacity under the
Floorplan Line. Included in the $401.3 million available
balance under the Floorplan Line is $57.9 million of
immediately available funds. The weighted average interest rate
on the Floorplan Line was 1.1% as of September 30, 2010.
With regards to the Acquisition Line, no borrowings were
outstanding as of September 30, 2010. After considering the
$17.3 million of outstanding letters of credit, and other
factors included in the Company’s available borrowing base
calculation, there was $137.5 million of available
borrowing capacity under the Acquisition Line as of
September 30, 2010. The amount of available borrowing
capacity under the Acquisition Line may vary from time to time
based upon certain debt covenants. Amounts borrowed by the
Company under the Floorplan Line of the Revolving Credit
Facility must be repaid upon the sale of the specific vehicle
financed, and in no case may a borrowing for a vehicle remain
outstanding for greater than one year.
All of the Company’s domestic dealership-owning
subsidiaries are co-borrowers under the Revolving Credit
Facility. The Revolving Credit Facility contains a number of
significant covenants that, among other things, restrict the
Company’s ability to make disbursements outside of the
ordinary course of business, dispose of assets, incur additional
indebtedness, create liens on assets, make investments and
engage in mergers or consolidations. The Company is also
required to comply with specified financial tests and ratios
defined in the Revolving Credit Facility, such as fixed charge
coverage, current, total leverage, and senior secured leverage,
among others. Further, provisions of the Revolving Credit
Facility require the Company to maintain a minimum level of
stockholders’ equity (the “Required Stockholders’
Equity”), which effectively limits the amount of
disbursements (or “Restricted Payments”) that the
Company may make outside the ordinary course of business (e.g.,
cash dividends and stock repurchases). The Required
Stockholders’ Equity is defined as a base of
$520.0 million, plus 50% of cumulative adjusted net income,
plus 100% of the proceeds from any equity issuances and less
non-cash asset impairment charges. The amount by which adjusted
stockholders’ equity exceeds the Required
Stockholders’ Equity is the amount available for Restricted
Payments (the “Amount Available for Restricted
Payments”). For purposes of this covenant calculation, net
income and stockholders’ equity represents such amounts per
the consolidated financial statements, adjusted to exclude the
Company’s foreign operations and the impact of the adoption
of the accounting standard for convertible debt that became
effective on January 1, 2009 and was primarily codified in
ASC 470. As of September 30, 2010, the Amount
Available for Restricted Payments was $168.0 million.
As of September 30, 2010, the Company was in compliance
with all applicable covenants and ratios under the Revolving
Credit Facility. The Company’s obligations under the
Revolving Credit Facility are secured by essentially all of the
Company’s domestic personal property (other than equity
interests in dealership-owning
14
GROUP 1
AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
subsidiaries) including all motor vehicle inventory and proceeds
from the disposition of dealership-owning subsidiaries.
Ford
Motor Credit Company Facility
The FMCC Facility provides for the financing of, and is
collateralized by, the Company’s Ford, Lincoln and Mercury
new vehicle inventory. This arrangement provides for
$150.0 million of floorplan financing and is an evergreen
arrangement that may be cancelled with 30 days notice by
either party. As of September 30, 2010, the Company had an
outstanding balance of $52.8 million with an available
floorplan capacity of $97.2 million. This facility bears
interest at a rate of Prime plus 150 basis points minus
certain incentives; however, the prime rate is defined to be a
minimum of 4.0%. As of September 30, 2010, the interest
rate on the FMCC Facility was 5.5%, before considering the
applicable incentives.
Real
Estate Credit Facility
In 2007, the Company entered into a five-year term real estate
credit facility (the “Mortgage Facility”) that matures
in March 2012. The Mortgage Facility provides a maximum
commitment of $231.2 million of financing for real estate
expansion and is syndicated with nine financial institutions
including three manufacturer affiliates. The proceeds of the
Mortgage Facility are used for acquisitions of real property
associated with the Company’s dealerships and other
operations. At the Company’s option, any loan under the
Mortgage Facility will bear interest at a rate equal to
(i) one-month LIBOR plus 1.05% or (ii) the Base Rate
as defined in the facility agreement. The interest rate of the
Mortgage Facility as of September 30, 2010 was 1.3%. Prior
to the maturity of the Mortgage Facility, quarterly principal
payments are required for each loan outstanding under the
facility at an amount equal to one-eightieth of the original
principal amount, with any remaining unpaid principal amount due
at the end of the term. The Company capitalized
$1.3 million of related debt financing costs that are being
amortized over the term of the facility, of which
$0.9 million was amortized as of September 30, 2010.
The Mortgage Facility is guaranteed by the Company and
essentially all of the existing and future direct and indirect
domestic subsidiaries of the Company that guarantee or are
required to guarantee the Company’s Revolving Credit
Facility. Each loan is secured by real property (and
improvements related thereto) specified by the Company and
located at or near a vehicle dealership operated by a subsidiary
of the Company or otherwise used or to be used by a vehicle
dealership operated by a subsidiary of the Company.
As of September 30, 2010, the Company was entitled to
(i) sell any property subject to the facility on fair and
reasonable terms in an arm’s length transaction,
(ii) remove it from the facility, and (iii) repay in
full the entire outstanding balance of the loan relating to such
sold property. On July 13, 2010, the Mortgage Facility was
amended to require that repayments of outstanding loan balances,
other than scheduled principal payments, would immediately and
permanently reduce the total $235.0 million original
commitment. The Company paid down its Mortgage Facility with
$3.8 million of the aggregate $12.8 million borrowed
as part of its real estate related debt arrangements executed
during the three months ended September 30, 2010, thereby
permanently reducing the total commitment on the Mortgage
Facility from $235.0 million to $231.2 million at
September 30, 2010. These aforementioned real estate
related debt obligations range in term from three to five years
and contain financial covenant ratios, which are calculated on
similar terms to those contained in the Credit and Mortgage
Facilities.
During the nine months ended September 30, 2010, the
Company paid down $35.3 million in principal payments
against the Mortgage Facility. As of September 30, 2010,
borrowings under the facility totaled $157.4 million, with
$9.0 million recorded as a current maturity of long-term
debt in the accompanying Consolidated Balance Sheets, and
available borrowings from the Mortgage Facility totaled
$73.8 million.
The Mortgage Facility contains certain covenants, including
financial ratios that must be complied with: fixed charge
coverage; senior secured leverage; dispositions of financed
properties; ownership of equity interests in a
15
GROUP 1
AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
lessor subsidiary; and occupancy or sublease of any financed
property. As of September 30, 2010, the Company was in
compliance with all applicable covenants and ratios under the
Mortgage Facility.
Other
Credit Facilities
The Company has a credit facility with BMW Financial Services
for financing of the new, used and rental vehicle inventories of
its U.K. operations. This facility is an evergreen arrangement
that may be cancelled with notice by either party and bears
interest of a base rate, plus a surcharge that varies based upon
the type of vehicle being financed. As of September 30,
2010, the interest rates charged for borrowings under this
facility ranged from 1.1% to 4.5%.
Excluding rental vehicles financed through the Revolving Credit
Facility, financing for rental vehicles is typically obtained
directly from the automobile manufacturers. These financing
arrangements generally require small monthly payments and mature
in varying amounts throughout 2010 and 2011. As of
September 30, 2010, the interest rate charged on borrowings
related to the Company’s rental vehicle fleet ranged from
1.1% to 6.8%. Rental vehicles are typically moved to used
vehicle inventory when they are removed from rental service and
repayment of the borrowing is required at that time. The Company
also receives interest assistance from certain automobile
manufacturers. The assistance has ranged from 49.9% to 76.7% of
the Company’s floorplan interest expense over the past
three years.
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
(In thousands)
|
|
|
|
|
2.25% Convertible Senior Notes due 2036 (principal of
$182,753 at September 30, 2010 and December 31, 2009)
|
|
$
|
136,554
|
|
|
$
|
131,932
|
|
|
3.00% Convertible Senior Notes due 2020 (principal of
$115,000 at September 30, 2010)
|
|
|
73,645
|
|
|
|
—
|
|
|
8.25% Senior Subordinated Notes due 2013 (principal of
$74,600 at December 31, 2009)
|
|
|
—
|
|
|
|
73,267
|
|
|
Mortgage Facility (see Note 6)
|
|
|
157,443
|
|
|
|
192,727
|
|
|
Other Real Estate Related and Long-Term Debt
|
|
|
38,367
|
|
|
|
21,166
|
|
|
Capital lease obligations related to real estate, maturing in
varying amounts through August 2023 with a weighted average
interest rate of 3.3%
|
|
|
39,938
|
|
|
|
39,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
445,947
|
|
|
|
458,496
|
|
|
Less current maturities
|
|
|
14,304
|
|
|
|
14,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
431,643
|
|
|
$
|
444,141
|
|
|
|
|
|
|
|
|
|
|
|
2.25% Convertible
Senior Notes
The Company determined the fair value of its 2.25% Notes
using the estimated effective interest rate for similar debt
with no convertible features. The original effective interest
rate of 7.5% was estimated by comparing debt issuances from
companies with similar credit ratings during the same annual
period as the Company. The effective interest rate differs from
the 7.5%, due to the impact of underwriter fees associated with
this issuance that were capitalized as an additional discount to
the 2.25% Notes and are being amortized to interest expense
through 2016. The effective interest rate may change in the
future as a result of future repurchases of the
2.25% Notes. The
16
GROUP 1
AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Company utilized a ten-year term for the assessment of the fair
value of its 2.25% Notes. As of September 30, 2010 and
December 31, 2009 the carrying value of the
2.25% Notes, related discount and equity component
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
Carrying amount of equity component
|
|
$
|
65,270
|
|
|
$
|
65,270
|
|
|
Allocated underwriter fees, net of taxes
|
|
|
(1,475
|
)
|
|
|
(1,475
|
)
|
|
Allocated debt issuance cost, net of taxes
|
|
|
(58
|
)
|
|
|
(58
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total net equity component
|
|
$
|
63,737
|
|
|
$
|
63,737
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax component
|
|
$
|
16,417
|
|
|
$
|
18,037
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal amount of 2.25% Notes
|
|
$
|
182,753
|
|
|
$
|
182,753
|
|
|
Unamortized discount
|
|
|
(44,457
|
)
|
|
|
(48,905
|
)
|
|
Unamortized underwriter fees
|
|
|
(1,742
|
)
|
|
|
(1,916
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net carrying amount of liability component
|
|
$
|
136,554
|
|
|
$
|
131,932
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impact on retained
earnings
(1)
|
|
$
|
(36,483
|
)
|
|
$
|
(33,783
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized debt issuance cost
|
|
$
|
69
|
|
|
$
|
76
|
|
|
Effective interest rate of liability component
|
|
|
7.7
|
%
|
|
|
7.7
|
%
|
|
|
|
|
|
(1)
|
|
Represents the incremental impact
of the adoption of the accounting for convertible debt which
became effective Janaury 1, 2009 as primarily codified in
ASC 470.
|
For the nine months ended September 30, 2010 and 2009, the
contractual interest expense and the discount amortization,
which is recorded as interest expense in the accompanying
Consolidated Statements of Operations, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2010
|
|
2009
|
|
|
|
(In thousands)
|
|
|
|
Year-to-date
contractual interest expense
|
|
$
|
3,091
|
|
|
$
|
3,338
|
|
|
Year-to-date
discount
amortization
(1)
|
|
$
|
4,320
|
|
|
$
|
4,007
|
|
|
|
|
|
|
(1)
|
|
Represents the incremental impact
of the adoption of the accounting for convertible debt which
became effective Janaury 1, 2009 as primarily codified in
ASC 470.
|
There were no repurchases of the 2.25% Notes during the
nine months ended September 30, 2010, but during the nine
months ended September 30, 2009, the Company repurchased
$41.7 million par value of the 2.25% Notes for
$20.9 million in cash and realized a net gain of
$8.7 million, which is included in the Consolidated
Statements of Operations. In conjunction with the repurchases,
$12.6 million of unamortized discount, underwriters’
fees and debt issuance costs were written off. The unamortized
cost of the related purchased options (the “2.25% Purchased
Options”) acquired at the time the repurchased
2.25% Notes were issued, $13.4 million, which was
deductible as original issue discount for tax purposes, was
taken into account in determining the Company’s tax gain.
Accordingly, the Company recorded a proportionate reduction in
its deferred tax assets. In conjunction with these repurchases,
$0.4 million of the consideration was attributed to the
repurchase of the equity component of the 2.25% Notes and,
as such, was recognized as an adjustment to additional
paid-in-capital,
net of income taxes.
17
GROUP 1
AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
3.00% Convertible
Senior Notes
On March 16, 2010, the Company issued $100.0 million
aggregate principal amount of the 3.00% Notes at par in a
private offering to qualified institutional buyers pursuant to
Rule 144A under the Securities Act of 1933, as amended (the
“Securities Act”). On April 1, 2010, the
underwriters of the 3.00% Notes exercised their full
over-allotment
option, and the Company issued an additional $15.0 million
aggregate principal amount of 3.00% Notes. The
3.00% Notes will bear interest at a rate of 3.00% per annum
until maturity. Interest on the 3.00% Notes will accrue
from March 22, 2010. Interest will be payable semiannually
in arrears on March 15 and September 15 of each year, beginning
September 15, 2010. The 3.00% Notes mature on
March 15, 2020, unless earlier repurchased or converted in
accordance with their terms prior to such date.
The 3.00% Notes are convertible into cash and, if
applicable, common stock based on an initial conversion rate of
25.8987 shares of common stock per $1,000 principal amount
of the 3.00% Notes (which is equal to an initial conversion
price of approximately $38.61 per common share) subject to
adjustment, on the business day preceding September 15,
2019, under the following circumstances: (1) during any
fiscal quarter (and only during such fiscal quarter) beginning
after June 30, 2010, if the last reported sale price of the
Company’s common stock for at least 20 trading days in the
period of 30 consecutive trading days ending on the last trading
day of the immediately preceding fiscal quarter is equal to or
more than 130% of the applicable conversion price per share
(such threshold closing price initially being $50.193);
(2) during the five business day period after any ten
consecutive trading day period in which the trading price per
$1,000 principal amount of 3.00% Notes for each day of the
ten day trading period was less than 98% of the product of the
last reported sale price of the Company’s common stock and
the conversion rate of the 3.00% Notes on that day; and
(3) upon the occurrence of specified corporate transactions
set forth in the indenture, dated March 22, 2010, between
the Company and Wells Fargo Bank, N.A., as Trustee, which
governs the 3.00% Notes (the “Indenture”). Upon
conversion, a holder will receive an amount in cash and common
shares of the Company’s common stock, determined in the
manner set forth in the Indenture. Upon any conversion of the
3.00% Notes, the Company will deliver to converting holders
a settlement amount comprised of cash and, if applicable, shares
of the Company’s common stock, based on a conversion value
determined by multiplying the then applicable conversion rate by
a volume weighted price of the Company’s common stock on
each trading day in a specified 25 trading day observation
period. In general, as described more fully in the Indenture,
converting holders will receive, in respect of each $1,000
principal amount of notes being converted, the conversion value
in cash up to $1,000 and the excess, if any, of the conversion
value over $1,000 in shares of the Company’s common stock.
The Company may not redeem the 3.00% Notes prior to the
maturity date. Holders of the 3.00% Notes may require the
Company to repurchase all or a portion of the 3.00% Notes
on or after September 15, 2019. If the Company experiences
specified types of fundamental changes, as defined in the
Indenture, holders of 3.00% Notes may require the Company
to repurchase the 3.00% Notes. Any repurchase of the
3.00% Notes pursuant to this provision will be for cash at
a price equal to 100% of the principal amount of the
3.00% Notes to be repurchased plus any accrued and unpaid
interest to, but excluding, the purchase date. Additionally, in
the event of a make-whole fundamental change, as defined in the
Indenture, the holders of the 3.00% Notes may be entitled
to a make-whole premium in the form of an increase in the
conversion rate.
The net proceeds from the issuance of the 3.00% Notes were
used to redeem the Company’s then outstanding
8.25% Senior Subordinated Notes (the
“8.25% Notes”) which were redeemed on
March 30, 2010 at a redemption price of 102.75% plus
accrued interest, and to pay $16.6 million net cost of the
convertible note hedge transactions (after such cost is
partially offset by the proceeds to the Company from the sale of
the warrant transactions described below). Underwriters’
fees, recorded as a reduction of the 3.00% Notes balance,
totaled $3.5 million and are being amortized over a period
of ten years. The amount to be amortized each period is
calculated using the effective interest method. Debt issues
costs totaled $0.5 million and are also being amortized
over a period of ten years using the effective interest method.
18
GROUP 1
AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The 3.00% Notes rank equal in right of payment to all of
the Company’s other existing and future senior
indebtedness. The 3.00% Notes are not guaranteed by any of
the Company’s subsidiaries and, accordingly, are
structurally subordinated to all of the indebtedness and other
liabilities of the Company’s subsidiaries. The
3.00% Notes will also be effectively subordinated to all of
the Company’s secured indebtedness.
In connection with the issuance of the 3.00% Notes, the
Company purchased ten-year call options on its common stock (the
“3.00% Purchased Options”). Under the terms of the
3.00% Purchased Options, which become exercisable upon
conversion of the 3.00% Notes, the Company has the right to
purchase a total of 3.0 million shares of its common stock
at a purchase price of $38.61 per share. The total cost of the
3.00% Purchased Options was $45.9 million, which was
recorded as a reduction to additional
paid-in-capital
in the accompanying Consolidated Balance Sheet. The cost of the
3.00% Purchased Options will be deductible as original issue
discount for income tax purposes over the life of the
3.00% Notes (ten years); therefore, the Company has
established a deferred tax asset, with a corresponding increase
to additional paid-in capital, in the accompanying Consolidated
Balance Sheet.
In addition to the purchase of the 3.00% Purchased Options, the
Company sold warrants in separate transactions (the “3.00%
Warrants”). The 3.00% Warrants have a ten-year term and
enable the holders to acquire shares of the Company’s
common stock from the Company. The 3.00% Warrants are
exercisable for a maximum of 3.0 million shares of the
Company’s common stock at an exercise price of $56.74 per
share, subject to adjustment for quarterly dividends,
liquidation, bankruptcy, or a change in control of the Company
and other conditions, including a failure by the Company to
deliver registered securities to the purchasers upon exercise.
Subject to these adjustments, the maximum amount of shares of
the Company’s common stock that could be required to be
issued under the 3.00% Warrants is 5.3 million shares. On
exercise of the 3.00% Warrants, the Company will settle the
difference between the then market price and the strike price of
the 3.00% Warrants in shares of the Company’s common stock.
The proceeds from the sale of the 3.00% Warrants were
$29.3 million, which were recorded as an increase to
additional paid-in capital in the accompanying Consolidated
Balance Sheet at September 30, 2010.
The 3.00% Purchased Options and 3.00% Warrants transactions were
designed to increase the conversion price per share of the
Company’s common stock from $38.61 to $56.74 (an 80%
premium to the closing price of the Company’s common stock
on the date that the 3.00% Notes were priced to investors)
and, therefore, mitigate the potential dilution of the
Company’s common stock upon conversion of the
3.00% Notes, if any.
For dilutive earnings per share calculations, the Company will
be required to include the dilutive effect, if applicable, of
the net shares issuable under the 3.00% Notes and the 3.00%
Warrants. Since the average price of the Company’s common
stock from the date of issuance through September 30, 2010,
was less than $38.61, no net shares were issuable under the
3.00% Notes and the 3.00% Warrants. Although the 3.00%
Purchased Options have the economic benefit of decreasing the
dilutive effect of the 3.00% Notes, such shares are
excluded from Group 1’s dilutive shares outstanding as the
impact would be anti-dilutive.
The Company determined the fair value of its 3.00% Notes
using the estimated effective interest rate for similar debt
with no convertible features. The interest rate of 8.25% was
estimated by receiving a range of quotes from the underwriters
of the 3.00% Notes for the estimated rate that the Company
could reasonably expect to issue non-convertible debt for the
same tenure. The effective interest rate differs from the 8.25%,
due to the impact of underwriter fees associated with this
issuance that were capitalized as an additional discount to the
3.00% Notes and are being amortized to interest expense
through 2020. The effective interest rate may change in the
future as a result of future repurchases of the
3.00% Notes. The Company utilized a ten-year term for the
assessment of the fair value
19
GROUP 1
AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
of its 3.00% Notes. As of September 30, 2010, the
carrying value of the 3.00% Notes, related discount and
equity component consisted of the following:
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
2010
|
|
|
|
|
(Dollars in
|
|
|
|
|
thousands)
|
|
|
|
|
Carrying amount of equity component
|
|
$
|
25,359
|
|
|
Allocated underwriter fees, net of taxes
|
|
|
(760
|
)
|
|
Allocated debt issuance cost, net of taxes
|
|
|
(112
|
)
|
|
|
|
|
|
|
|
Total net equity component
|
|
$
|
24,487
|
|
|
|
|
|
|
|
|
Deferred income tax component
|
|
$
|
14,210
|
|
|
|
|
|
|
|
|
Principal amount of 3.00% Notes
|
|
$
|
115,000
|
|
|
Unamortized discount
|
|
|
(39,198
|
)
|
|
Unamortized underwriter fees
|
|
|
(2,157
|
)
|
|
|
|
|
|
|
|
Net carrying amount of liability component
|
|
$
|
73,645
|
|
|
|
|
|
|
|
|
Net impact on retained
earnings
(1)
|
|
$
|
(803
|
)
|
|
|
|
|
|
|
|
Effective interest rate of liability component
|
|
|
8.6
|
%
|
|
Year-to-date
contractual interest expense
|
|
$
|
1,822
|
|
|
Year-to-date
discount
amortization
(1)
|
|
$
|
1,285
|
|
|
Unamortized debt issuance cost
|
|
$
|
318
|
|
|
|
|
|
|
(1)
|
|
Represents the incremental impact
of the adoption of the accounting for convertible debt which
became effective Janaury 1, 2009 as primarily codified in
ASC 470.
|
8.25% Senior
Subordinated Notes
On March 30, 2010, the Company completed the redemption of
its then outstanding $74.6 million face value of
8.25% Notes at a redemption price of 102.75% of the
principal amount of the notes, utilizing proceeds from its
3.00% Notes offering. The Company incurred a
$3.9 million pretax charge in completing the redemption,
consisting primarily of a $2.1 million redemption premium,
a $1.5 million write-off of unamortized bond discount and
deferred costs and $0.3 million of other debt
extinguishment costs. Total cash used in completing the
redemption, excluding accrued interest of $0.8 million, was
$77.0 million.
|
|
|
|
8.
|
DERIVATIVE
INSTRUMENTS AND RISK MANAGEMENT ACTIVITIES
|
The periodic interest rates of the Revolving Credit Facility and
the Mortgage Facility are indexed to one-month LIBOR rates plus
an associated company credit risk rate. In order to stabilize
earnings exposure related to fluctuations in these rates, the
Company employs an interest rate hedging strategy, whereby it
enters into arrangements with various financial institutional
counterparties with investment grade credit ratings, swapping
its variable interest rate exposure for a fixed interest rate
over terms not to exceed the Revolving Credit Facility and the
Mortgage Facility.
The Company reflects the current fair value of all derivatives
on its Consolidated Balance Sheets. The Company measures its
interest rate derivative instruments utilizing an income
approach valuation technique, converting future amounts of cash
flows to a single present value in order to obtain a transfer
exit price within the bid and ask spread that is most
representative of the fair value of its derivative instruments.
In measuring fair value, the Company utilizes the option-pricing
Black-Scholes present value technique for all of its derivative
instruments. This option-pricing technique utilizes a LIBOR
forward yield curve, obtained from an independent external
service provider, matched to the identical maturity term of the
instrument being measured. Observable inputs utilized in the
income approach valuation technique incorporate identical
contractual notional amounts, fixed coupon rates, periodic terms
for interest payments and contract maturity. The Company has
determined the valuation
20
GROUP 1
AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
measurement inputs of these derivative instruments to maximize
the use of observable inputs that market participants would use
in pricing similar or identical instruments and market data
obtained from independent sources, which is readily observable
or can be corroborated by observable market data for
substantially the full term of the derivative instrument.
Further, the valuation measurement inputs minimize the use of
unobservable inputs. Accordingly, the Company has classified the
derivatives within Level 2 of the hierarchy framework as
described in ASC 820.
The related gains or losses on these interest rate derivatives
are deferred in stockholders’ equity as a component of
accumulated other comprehensive income or loss. These deferred
gains and losses are recognized in income in the period in which
the related items being hedged are recognized in expense.
However, to the extent that the change in value of a derivative
contract does not perfectly offset the change in the value of
the items being hedged, that ineffective portion is immediately
recognized in other income or expense. Monthly contractual
settlements of these swap positions are recognized as floorplan
or other interest expense in the Company’s accompanying
Consolidated Statements of Operations. All of the Company’s
interest rate hedges are designated as cash flow hedges.
As of September 30, 2010 and December 31, 2009, the
Company held interest rate swaps of $550.0 million in
notional value that fixed its underlying LIBOR rate at a
weighted average rate of 4.7%. At September 30, 2010, all
of the Company’s derivative contracts were determined to be
effective, and no significant ineffective portion was recognized
in income. For the three and nine months ended
September 30, 2010, the impact of these interest rate
hedges increased floorplan interest expense by $5.5 million
and $15.9 million, respectively; for the three and nine
months ended September 30, 2009, the impact of these
interest rate hedges increased floorplan interest expense by
$5.1 million and $15.7 million, respectively. Total
floorplan interest expense was $9.0 million and
$7.5 million for the three months ended September 30,
2010 and 2009, respectively, and $25.2 million and
$24.3 million for the nine months ended September 30,
2010 and 2009, respectively.
During the three months ended September 30, 2010, the
Company entered into an interest rate swap of $50.0 million
in notional value that will be effective in January 2011 and
will expire in August 2015, effectively locking in a rate of
1.7%. Included in its Consolidated Balance Sheets as liabilities
from interest rate risk management activities, the fair value of
the Company’s derivative financial instruments was
$24.3 million and $30.6 million as of
September 30, 2010 and December 31, 2009,
respectively. Three of the Company’s interest rate swaps
with aggregate notional amounts of $250.0 million expire in
December 2010, and one interest rate swap with notional amount
of $50.0 million expires in August 2011. As such, the fair
value of these instruments is classified as a current liability
in the accompanying Consolidated Balance Sheet. Included in
accumulated other comprehensive loss at September 30, 2010
and 2009 are unrealized losses, net of income taxes, totaling
$15.2 million and $23.4 million, respectively, related
to these hedges.
The following table presents the impact during the current and
comparative prior year period for the Company’s derivative
financial instruments on its Consolidated Statements of
Operations and Consolidated Balance Sheets. The Company had no
material gains or losses related to ineffectiveness or amounts
excluded from effectiveness testing recognized in the Statements
of Operations for either the nine months ended
September 30, 2010 or 2009, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain,
|
|
|
|
Net of Tax, Recognized
|
|
|
|
in OCI
|
Derivatives in Cash
|
|
Nine Months Ended September 30,
|
|
Flow Hedging Relationship
|
|
2010
|
|
2009
|
|
|
|
(In thousands)
|
|
|
|
Interest rate swap contracts
|
|
$
|
3,904
|
|
|
$
|
4,500
|
|
21
GROUP 1
AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Loss Reclassified from
|
|
|
|
OCI into Statements
|
Location of Loss
|
|
of Operations
|
Reclassified from OCI into
|
|
Nine Months Ended September 30,
|
|
Statements of Operations
|
|
2010
|
|
2009
|
|
|
|
(In thousands)
|
|
|
|
Floorplan interest expense
|
|
$
|
(15,887
|
)
|
|
$
|
(15,742
|
)
|
|
Other interest expense
|
|
|
(2,521
|
)
|
|
|
(2,220
|
)
|
The amount expected to be reclassified out of accumulated other
comprehensive income into earnings (through floorplan interest
expense or other interest expense) in the next twelve months is
$15.6 million.
|
|
|
|
9.
|
PROPERTY
AND EQUIPMENT
|
The Company’s property and equipment consists of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
|
Useful Lives
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
in Years
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
Land
|
|
|
—
|
|
|
$
|
154,662
|
|
|
$
|
155,623
|
|
|
Buildings
|
|
|
30 to 40
|
|
|
|
225,110
|
|
|
|
236,261
|
|
|
Leasehold improvements
|
|
|
up to 30
|
|
|
|
75,719
|
|
|
|
72,346
|
|
|
Machinery and equipment
|
|
|
7 to 20
|
|
|
|
53,915
|
|
|
|
54,311
|
|
|
Furniture and fixtures
|
|
|
3 to 10
|
|
|
|
52,144
|
|
|
|
49,502
|
|
|
Company vehicles
|
|
|
3 to 5
|
|
|
|
9,057
|
|
|
|
9,808
|
|
|
Construction in progress
|
|
|
—
|
|
|
|
4,830
|
|
|
|
6,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
575,437
|
|
|
|
584,356
|
|
|
Less accumulated depreciation and amortization
|
|
|
|
|
|
|
117,134
|
|
|
|
108,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
|
|
|
$
|
458,303
|
|
|
$
|
475,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the nine months ended September 30, 2010, the
Company incurred $13.2 million of capital expenditures for
the construction of new or expanded facilities and the purchase
of equipment and other fixed assets in the maintenance of the
Company’s dealerships and facilities. Also, during the nine
months ended September 30, 2010, the Company recognized a
pretax impairment charge of $1.5 million, primarily
associated with certain of its leasehold improvements.
In addition to the property and equipment described above, the
Company holds real estate investments, associated with
non-operational dealership facilities that qualified as
held-for-sale
assets and are classified as current assets in the accompanying
Consolidated Balance Sheet, totaling $23.6 million and
$30.4 million as of September 30, 2010 and
December 31, 2009, respectively. During the three months
ended September 30, 2010, the Company realized a
$1.3 million pretax gain from the sale of one of these
held-for-sale
assets.
|
|
|
|
10.
|
FAIR
VALUE MEASUREMENTS
|
Guidance primarily codified within ASC 820, defines fair
value as the price that would be received in the sale of an
asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date.
ASC 820 requires disclosure of the extent to which fair
value is used to measure financial and non-financial assets and
liabilities, the inputs utilized in calculating valuation
measurements, and the effect of the measurement of significant
unobservable inputs on earnings, or changes in net assets, as of
the measurement date. ASC 820
22
GROUP 1
AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
establishes a three-level valuation hierarchy based upon the
transparency of inputs utilized in the measurement and valuation
of financial assets or liabilities as of the measurement date:
|
|
|
|
|
|
•
|
Level 1
— unadjusted, quoted prices for
identical assets or liabilities in active markets;
|
|
|
|
|
•
|
Level 2
— quoted prices for similar assets
and liabilities in active markets, quoted prices for identical
or similar assets or liabilities in markets that are not active,
and inputs other than quoted market prices that are observable
or that can be corroborated by observable market data by
correlation; and
|
|
|
|
|
•
|
Level 3
— unobservable inputs based upon
the reporting entity’s internally developed assumptions
that market participants would use in pricing the asset or
liability.
|
The Company evaluated its financial and non-financial assets and
liabilities for those that met the criteria of the disclosure
requirements and fair value framework of ASC 820 as
discussed below. See Note 8, “Derivative Instruments
and Risk Management Activities” for disclosures related to
interest rate derivatives.
Marketable
Securities and Debt Instruments
The Company accounts for its investments in marketable
securities and debt instruments based on the guidance described
in ASC Topic No. 320, “Investments-Debt and Equity
Securities” (“ASC 320”), which established
standards of financial accounting and reporting for investments
in equity instruments that have readily determinable fair values
and for all investments in debt securities. Accordingly, the
Company designates these investments as
available-for-sale,
measures them at fair value and classifies them as either cash
and cash equivalents or other assets in the accompanying
Consolidated Balance Sheets based upon maturity terms and
certain contractual restrictions.
The Company maintains multiple trust accounts comprised of money
market funds with short-term investments in marketable
securities, such as U.S. government securities, commercial
paper and bankers acceptances, that have maturities of less than
three months. The Company determined that the valuation
measurement inputs of these marketable securities represent
unadjusted quoted prices in active markets and, accordingly, has
classified such investments within Level 1 of the hierarchy
framework as described in ASC 820.
The Company, within its trust accounts, also holds investments
in debt instruments, such as government obligations and other
fixed income securities. The debt securities are measured based
upon quoted market prices utilizing public information,
independent external valuations from pricing services or
third-party advisors. Accordingly, the Company has concluded the
valuation measurement inputs of these debt securities to
represent, at their lowest level, quoted market prices for
identical or similar assets in markets where there are few
transactions for the assets and has categorized such investments
within Level 2 of the hierarchy framework. In addition, the
Company periodically invests in unsecured, corporate demand
obligations with manufacturer-affiliated finance companies,
which bear interest at a variable rate and are redeemable on
demand by the Company. Therefore, the Company has classified
these demand obligations as cash and cash equivalents on the
Consolidated Balance Sheet. The Company determined that the
valuation measurement inputs of these instruments include inputs
other than quoted market prices, that are observable or that can
be corroborated by observable data by correlation. Accordingly,
the Company has classified these instruments within Level 2
of the hierarchy framework.
Further, the Company holds real estate investments, associated
with non-operational dealership facilities that qualified as
held-for-sale
assets as of September 30, 2010. The Company adjusts the
carrying value of these assets each period to an estimate of
fair value, less costs to sell, that utilizes third-party
appraisals and brokers’ opinions of value, and suspends
depreciation of the asset once it is classified as
held-for-sale.
23
GROUP 1
AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The fair values of the Company’s short-term investments,
assets
held-for-sale,
debt securities, and interest rate derivative financial
instruments as of September 30, 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities — money market
|
|
$
|
337
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
337
|
|
|
Assets
held-for-sale
|
|
|
—
|
|
|
|
23,622
|
|
|
|
—
|
|
|
|
23,622
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand obligations
|
|
|
—
|
|
|
|
85,985
|
|
|
|
—
|
|
|
|
85,985
|
|
|
Collaterized mortgage obligations
|
|
|
—
|
|
|
|
1,720
|
|
|
|
—
|
|
|
|
1,720
|
|
|
Corporate bonds
|
|
|
—
|
|
|
|
1,115
|
|
|
|
—
|
|
|
|
1,115
|
|
|
Muncipal obligations
|
|
|
—
|
|
|
|
1,009
|
|
|
|
—
|
|
|
|
1,009
|
|
|
Mortage backed
|
|
|
—
|
|
|
|
813
|
|
|
|
—
|
|
|
|
813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities
|
|
|
—
|
|
|
|
90,642
|
|
|
|
—
|
|
|
|
90,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
337
|
|
|
$
|
114,264
|
|
|
$
|
—
|
|
|
$
|
114,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate derivative financial instruments
|
|
$
|
—
|
|
|
$
|
24,317
|
|
|
$
|
—
|
|
|
$
|
24,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
24,317
|
|
|
$
|
—
|
|
|
$
|
24,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.
|
COMMITMENTS
AND CONTINGENCIES
|
Legal
Proceedings
From time to time, the Company’s dealerships are named in
various types of litigation involving customer claims,
employment matters, class action claims, purported class action
claims, as well as claims involving the manufacturer of
automobiles, contractual disputes and other matters arising in
the ordinary course of business. Due to the nature of the
automotive retailing business, the Company may be involved in
legal proceedings or suffer losses that could have a material
adverse effect on the Company’s business. In the normal
course of business, the Company is required to respond to
customer, employee and other third-party complaints. Amounts
that have been accrued or paid related to the settlement of
litigation are included in selling, general and administrative
expenses in the Company’s Consolidated Statements of
Operations. In addition, the manufacturers of the vehicles that
the Company sells and services have audit rights allowing them
to review the validity of amounts claimed for incentive, rebate
or warranty-related items and charge the Company back for
amounts determined to be invalid rewards under the
manufacturers’ programs, subject to the Company’s
right to appeal any such decision. Amounts that have been
accrued or paid related to the settlement of manufacturer
chargebacks of recognized incentives and rebates are included in
cost of sales in the Company’s Consolidated Statements of
Operations, while such amounts for manufacturer chargebacks of
recognized warranty-related items are included as a reduction of
revenues in the Company’s Consolidated Statements of
Operations.
The Company is not party to any legal proceedings, including
class action lawsuits that, individually or in the aggregate,
are reasonably expected to have a material adverse effect on the
results of operations, financial condition or cash flows of the
Company. However, the results of these matters cannot be
predicted with certainty, and an unfavorable resolution of one
or more of these matters could have a material adverse effect on
the Company’s results of operations, financial condition or
cash flows.
Other
Matters
The Company, acting through its subsidiaries, is the lessee
under many real estate leases that provide for the use by the
Company’s subsidiaries of their respective dealership
premises. Pursuant to these leases, the Company’s
24
GROUP 1
AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
subsidiaries generally agree to indemnify the lessor and other
parties from certain liabilities arising as a result of the use
of the leased premises, including environmental liabilities, or
a breach of the lease by the lessee. Additionally, from time to
time, the Company enters into agreements in connection with the
sale of assets or businesses in which it agrees to indemnify the
purchaser, or other parties, from certain liabilities or costs
arising in connection with the assets or business. Also, in the
ordinary course of business in connection with purchases or
sales of goods and services, the Company enters into agreements
that may contain indemnification provisions. In the event that
an indemnification claim is asserted, liability would be limited
by the terms of the applicable agreement.
From time to time, primarily in connection with dealership
dispositions, the Company’s subsidiaries assign or sublet
to the dealership purchaser the subsidiaries’ interests in
any real property leases associated with such dealerships. In
general, the Company’s subsidiaries retain responsibility
for the performance of certain obligations under such leases to
the extent that the assignee or sublessee does not perform,
whether such performance is required prior to or following the
assignment or subletting of the lease. Additionally, the Company
and its subsidiaries generally remain subject to the terms of
any guarantees made by the Company and its subsidiaries in
connection with such leases. Although the Company generally has
indemnification rights against the assignee or sublessee in the
event of non-performance under these leases, as well as certain
defenses, and the Company presently has no reason to believe
that it or its subsidiaries will be called on to perform under
any such assigned leases or subleases, the Company estimates
that lessee rental payment obligations during the remaining
terms of these leases were $26.8 million as of
September 30, 2010. The Company’s exposure under these
leases is difficult to estimate and there can be no assurance
that any performance of the Company or its subsidiaries required
under these leases would not have a material adverse effect on
the Company’s business, financial condition and cash flows.
The Company and its subsidiaries also may be called on to
perform other obligations under these leases, such as
environmental remediation of the leased premises or repair of
the leased premises upon termination of the lease. However, the
Company presently has no reason to believe that it or its
subsidiaries will be called on to so perform and such
obligations cannot be quantified at this time.
In the ordinary course of business, the Company is subject to
numerous laws and regulations, including automotive,
environmental, health and safety, and other laws and
regulations. The Company does not anticipate that the costs of
such compliance will have a material adverse effect on its
business, consolidated results of operations, cash flows, or
financial condition, although such outcome is possible given the
nature of its operations and the extensive legal and regulatory
framework applicable to its business. The Dodd-Frank Wall Street
Reform and Consumer Protection Act, which was signed into law on
July 21, 2010, established a new consumer financial
protection agency with broad regulatory powers. Although
automotive dealers are generally excluded, the
Dodd-Frank
Act could lead to additional, indirect regulation of automotive
dealers through its regulation of automotive finance companies
and other financial institutions. In addition, the Patient
Protection and Affordable Care Act, which was signed into law on
March 23, 2010, has the potential to increase its future
annual employee health care costs. Further, new laws and
regulations, particularly at the federal level, may be enacted,
which could also materially adversely impact its business. The
Company does not have any material known environmental
commitments or contingencies.
25
GROUP 1
AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table provides a reconciliation of net income to
comprehensive income for the three and nine months ended
September 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
|
|
Net income
|
|
$
|
18,985
|
|
|
$
|
18,340
|
|
|
$
|
39,735
|
|
|
$
|
36,797
|
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of interest rate derivatives
|
|
|
1,522
|
|
|
|
16
|
|
|
|
3,904
|
|
|
|
4,500
|
|
|
Unrealized gain (loss) on investments
|
|
|
13
|
|
|
|
97
|
|
|
|
(11
|
)
|
|
|
343
|
|
|
Unrealized gain (loss) on currency translations
|
|
|
1,712
|
|
|
|
(1,122
|
)
|
|
|
201
|
|
|
|
2,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
22,232
|
|
|
$
|
17,331
|
|
|
$
|
43,829
|
|
|
$
|
44,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13.
|
DISPOSITIONS
AND ACQUISITIONS
|
On March 1, 2010, the Company acquired two BMW/Mini
dealerships in the Southeast region of the U.K. with anticipated
annual revenues of $161.5 million. And, in April 2010, the
Company acquired a Toyota/Scion dealership and an Audi
dealership located in South Carolina, with expected aggregate
annual revenues of $69.5 million. Consideration paid for
these dealerships totaled $34.6 million, including the
amounts paid for vehicle inventory, parts inventory, equipment,
and furniture and fixtures, as well as the purchase of
associated real estate. The vehicle inventory was subsequently
financed through borrowings under the Company’s credit
facility with BMW Financial Services or the Floorplan Line.
During the first nine months of 2010, the Company was awarded
two Sprinter franchises located in two separate Mercedes-Benz
stores in Georgia and New York. The Company was also granted a
Mini franchise in May and acquired a Lincoln franchise in July
2010, respectively, for stores located in Texas.
During the first nine months of 2010, the Company disposed of a
Ford-Lincoln-Mercury dealership in Florida along with the
associated real estate. Gross consideration received was
$35.0 million, including amounts used to repay the
Company’s floorplan notes payable associated with the
vehicle inventory sold and the respective Mortgage Facility
financing balance. As a result, the Company recognized a
$5.1 million pretax loss, which was included in selling,
general and administrative expenses in the Consolidated
Statement of Operations.
During the first nine months of 2009, the Company acquired one
Hyundai franchise located in Texas. Consideration paid for the
franchise totaled $3.8 million, including amounts paid for
new vehicle inventory, parts inventory, equipment and furniture
and fixtures. The new vehicle inventory was subsequently
financed through borrowings under the Company’s Floorplan
Line. During the first nine months of 2009, the Company disposed
of two dealership franchises, one of which included property
related to the dealership. Consideration received for these
franchises totaled $20.8 million, including amounts used to
repay the Company’s floorplan notes payable associated with
the vehicle inventory sold and the respective Mortgage Facility
financing balance.
|
|
|
|
14.
|
CONDENSED
CONSOLIDATING FINANCIAL INFORMATION
|
The following tables include the Condensed Consolidating Balance
Sheet as of December 31, 2009, the related Condensed
Consolidating Statements of Operations for the three and nine
months ended September 30, 2009 and the Condensed
Consolidating Statement of Cash Flows for the nine months ended
September 30, 2009, for Group 1 Automotive,
Inc.’s (as issuer of the 8.25% Notes) guarantor
subsidiaries and non-guarantor subsidiaries (representing
foreign entities). On March 30, 2010, the Company completed
the redemption of its then outstanding 8.25% Notes,
therefore, only those periods during which the 8.25% Notes
were outstanding have been presented. The condensed
consolidating financial information includes certain allocations
of balance sheet, statement of operations and cash flows items
that are not necessarily indicative of the financial position,
results of operations or cash flows of these entities on a
stand-alone basis.
26
GROUP 1
AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
CONDENSED
CONSOLIDATING BALANCE SHEET
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Group 1
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
Total Company
|
|
|
Elimination
|
|
|
Automotive, Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
|
|
(In thousands)
|
|
|
|
|
ASSETS
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
13,221
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10,969
|
|
|
$
|
2,252
|
|
|
Accounts and other receivables, net
|
|
|
148,996
|
|
|
|
—
|
|
|
|
—
|
|
|
|
145,426
|
|
|
|
3,570
|
|
|
Inventories
|
|
|
596,743
|
|
|
|
—
|
|
|
|
—
|
|
|
|
586,539
|
|
|
|
10,204
|
|
|
Deferred and other current assets
|
|
|
63,078
|
|
|
|
—
|
|
|
|
—
|
|
|
|
50,516
|
|
|
|
12,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
822,038
|
|
|
|
—
|
|
|
|
—
|
|
|
|
793,450
|
|
|
|
28,588
|
|
|
PROPERTY AND EQUIPMENT, net
|
|
|
475,828
|
|
|
|
—
|
|
|
|
—
|
|
|
|
454,257
|
|
|
|
21,571
|
|
|
GOODWILL AND INTANGIBLE FRANCHISE RIGHTS
|
|
|
658,281
|
|
|
|
—
|
|
|
|
—
|
|
|
|
651,388
|
|
|
|
6,893
|
|
|
INVESTMENT IN SUBSIDIARIES
|
|
|
—
|
|
|
|
(926,297
|
)
|
|
|
926,297
|
|
|
|
—
|
|
|
|
—
|
|
|
OTHER ASSETS
|
|
|
13,267
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,595
|
|
|
|
7,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,969,414
|
|
|
$
|
(926,297
|
)
|
|
$
|
926,297
|
|
|
$
|
1,904,690
|
|
|
$
|
64,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floorplan notes payable — credit facility
|
|
$
|
420,319
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
420,319
|
|
|
$
|
—
|
|
|
Floorplan notes payable — manufacturer affiliates
|
|
|
115,180
|
|
|
|
—
|
|
|
|
—
|
|
|
|
110,617
|
|
|
|
4,563
|
|
|
Current maturities of long-term debt
|
|
|
14,355
|
|
|
|
—
|
|
|
|
—
|
|
|
|
12,898
|
|
|
|
1,457
|
|
|
Current maturities of interest rate swap liabilities
|
|
|
10,412
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,412
|
|
|
|
—
|
|
|
Accounts payable
|
|
|
72,276
|
|
|
|
—
|
|
|
|
—
|
|
|
|
64,989
|
|
|
|
7,287
|
|
|
Intercompany accounts payable
|
|
|
—
|
|
|
|
—
|
|
|
|
179,885
|
|
|
|
(162,161
|
)
|
|
|
(17,724
|
)
|
|
Accrued expenses
|
|
|
86,271
|
|
|
|
—
|
|
|
|
—
|
|
|
|
84,725
|
|
|
|
1,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
718,813
|
|
|
|
—
|
|
|
|
179,885
|
|
|
|
541,799
|
|
|
|
(2,871
|
)
|
|
LONG TERM DEBT, net of current maturities
|
|
|
444,141
|
|
|
|
—
|
|
|
|
—
|
|
|
|
429,620
|
|
|
|
14,521
|
|
|
LIABILITIES FROM INTEREST RATE RISK MANAGEMENT ACTIVITIES
|
|
|
20,151
|
|
|
|
—
|
|
|
|
—
|
|
|
|
20,151
|
|
|
|
—
|
|
|
DEFERRED AND OTHER LIABILITIES
|
|
|
60,565
|
|
|
|
—
|
|
|
|
—
|
|
|
|
59,164
|
|
|
|
1,401
|
|
|
DEFERRED REVENUES
|
|
|
5,588
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,229
|
|
|
|
4,359
|
|
|
STOCKHOLDERS’ EQUITY:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL STOCKHOLDERS’ EQUITY
|
|
|
720,156
|
|
|
|
(926,297
|
)
|
|
|
746,412
|
|
|
|
852,727
|
|
|
|
47,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
1,969,414
|
|
|
$
|
(926,297
|
)
|
|
$
|
926,297
|
|
|
$
|
1,904,690
|
|
|
$
|
64,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
GROUP 1
AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
CONDENSED
CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended September 30,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Group 1
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
Total Company
|
|
|
Elimination
|
|
|
Automotive, Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
|
|
(Unaudited, In thousands)
|
|
|
|
|
Revenue
|
|
$
|
1,246,719
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,211,575
|
|
|
$
|
35,144
|
|
|
Cost of Sales
|
|
|
1,034,698
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,004,631
|
|
|
|
30,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
212,021
|
|
|
|
—
|
|
|
|
—
|
|
|
|
206,944
|
|
|
|
5,077
|
|
|
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
162,466
|
|
|
|
—
|
|
|
|
1,124
|
|
|
|
157,329
|
|
|
|
4,013
|
|
|
DEPRECIATION AND AMORTIZATION EXPENSE
|
|
|
6,666
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,347
|
|
|
|
319
|
|
|
ASSET IMPAIRMENTS
|
|
|
702
|
|
|
|
—
|
|
|
|
—
|
|
|
|
702
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) FROM OPERATIONS
|
|
|
42,187
|
|
|
|
—
|
|
|
|
(1,124
|
)
|
|
|
42,566
|
|
|
|
745
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floorplan interest expense
|
|
|
(7,523
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(7,404
|
)
|
|
|
(119
|
)
|
|
Other interest expense, net
|
|
|
(7,318
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(7,228
|
)
|
|
|
(90
|
)
|
|
Gain on redemption of long-term debt
|
|
|
598
|
|
|
|
—
|
|
|
|
—
|
|
|
|
598
|
|
|
|
—
|
|
|
Other expense, net
|
|
|
(4
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(4
|
)
|
|
|
—
|
|
|
Equity in earnings of subsidiaries
|
|
|
—
|
|
|
|
(19,464
|
)
|
|
|
19,464
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE INCOME TAXES
|
|
|
27,940
|
|
|
|
(19,464
|
)
|
|
|
18,340
|
|
|
|
28,528
|
|
|
|
536
|
|
|
PROVISION FOR INCOME TAXES
|
|
|
(9,600
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(9,468
|
)
|
|
|
(132
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$
|
18,340
|
|
|
$
|
(19,464
|
)
|
|
$
|
18,340
|
|
|
$
|
19,060
|
|
|
$
|
404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
GROUP 1
AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
CONDENSED
CONSOLIDATING STATEMENT OF OPERATIONS
Nine months Ended September 30,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Group 1
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
Total Company
|
|
|
Elimination
|
|
|
Automotive, Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
|
|
(Unaudited, In thousands)
|
|
|
|
|
Revenue
|
|
$
|
3,375,291
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,287,746
|
|
|
$
|
87,545
|
|
|
Cost of Sales
|
|
|
2,789,501
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,714,606
|
|
|
|
74,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
585,790
|
|
|
|
—
|
|
|
|
—
|
|
|
|
573,140
|
|
|
|
12,650
|
|
|
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
466,813
|
|
|
|
—
|
|
|
|
2,970
|
|
|
|
453,100
|
|
|
|
10,743
|
|
|
DEPRECIATION AND AMORTIZATION EXPENSE
|
|
|
19,541
|
|
|
|
—
|
|
|
|
—
|
|
|
|
18,679
|
|
|
|
862
|
|
|
ASSET IMPAIRMENTS
|
|
|
2,837
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,837
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) FROM OPERATIONS
|
|
|
96,599
|
|
|
|
—
|
|
|
|
(2,970
|
)
|
|
|
98,524
|
|
|
|
1,045
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floorplan interest expense
|
|
|
(24,342
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(23,997
|
)
|
|
|
(345
|
)
|
|
Other interest expense, net
|
|
|
(21,857
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(21,499
|
)
|
|
|
(358
|
)
|
|
Gain on redemption of long-term debt
|
|
|
8,211
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,211
|
|
|
|
—
|
|
|
Other expense, net
|
|
|
(6
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(6
|
)
|
|
|
—
|
|
|
Equity in earnings of subsidiaries
|
|
|
—
|
|
|
|
(39,767
|
)
|
|
|
39,767
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE INCOME TAXES
|
|
|
58,605
|
|
|
|
(39,767
|
)
|
|
|
36,797
|
|
|
|
61,233
|
|
|
|
342
|
|
|
PROVISION FOR INCOME TAXES
|
|
|
(21,808
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(21,730
|
)
|
|
|
(78
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$
|
36,797
|
|
|
$
|
(39,767
|
)
|
|
$
|
36,797
|
|
|
$
|
39,503
|
|
|
$
|
264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
GROUP 1
AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
CONDENSED
CONSOLIDATING STATEMENT OF CASH FLOWS
Nine months Ended September 30,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Group 1
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
Total Company
|
|
|
Automotive, Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
|
|
|
|
|
(Unaudited, In thousands)
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
464,772
|
|
|
$
|
(2,970
|
)
|
|
$
|
470,924
|
|
|
$
|
(3,182
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(11,711
|
)
|
|
|
—
|
|
|
|
(11,362
|
)
|
|
|
(349
|
)
|
|
Cash paid in acquisitions, net of cash received
|
|
|
(3,754
|
)
|
|
|
—
|
|
|
|
(3,754
|
)
|
|
|
—
|
|
|
Proceeds from sales of franchises, property and equipment
|
|
|
21,068
|
|
|
|
—
|
|
|
|
21,068
|
|
|
|
—
|
|
|
Other
|
|
|
1,901
|
|
|
|
—
|
|
|
|
(999
|
)
|
|
|
2,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
7,504
|
|
|
|
—
|
|
|
|
4,953
|
|
|
|
2,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings on credit facility — Floorplan Line
|
|
|
2,675,415
|
|
|
|
—
|
|
|
|
2,675,415
|
|
|
|
—
|
|
|
Repayments on credit facility — Floorplan Line
|
|
|
(3,065,676
|
)
|
|
|
—
|
|
|
|
(3,065,676
|
)
|
|
|
—
|
|
|
Repayments on credit facility — Acquisition Line
|
|
|
(139,000
|
)
|
|
|
—
|
|
|
|
(139,000
|
)
|
|
|
—
|
|
|
Borrowings on credit facility — Acquisition Line
|
|
|
89,000
|
|
|
|
—
|
|
|
|
89,000
|
|
|
|
—
|
|
|
Borrowings on mortgage facility
|
|
|
29,133
|
|
|
|
—
|
|
|
|
29,133
|
|
|
|
—
|
|
|
Principal payments of long-term debt related to real estate loans
|
|
|
(34,049
|
)
|
|
|
—
|
|
|
|
(33,906
|
)
|
|
|
(143
|
)
|
|
Redemption of long-term debt
|
|
|
(20,859
|
)
|
|
|
—
|
|
|
|
(20,859
|
)
|
|
|
—
|
|
|
Principal payments on mortgage facility
|
|
|
(17,150
|
)
|
|
|
—
|
|
|
|
(17,150
|
)
|
|
|
—
|
|
|
Principal payments of other long-term debt
|
|
|
(397
|
)
|
|
|
—
|
|
|
|
(397
|
)
|
|
|
—
|
|
|
Proceeds from issuance of common stock to benefit plans
|
|
|
2,520
|
|
|
|
2,520
|
|
|
|
—
|
|
|
|
—
|
|
|
Excess tax benefits from stock-based compensation
|
|
|
(348
|
)
|
|
|
—
|
|
|
|
(348
|
)
|
|
|
—
|
|
|
Debt extinguishment costs related to real estate loans
|
|
|
(534
|
)
|
|
|
—
|
|
|
|
(534
|
)
|
|
|
—
|
|
|
Borrowings (repayments) with subsidiaries
|
|
|
—
|
|
|
|
12,915
|
|
|
|
(12,915
|
)
|
|
|
—
|
|
|
Investment in subsidiaries
|
|
|
—
|
|
|
|
(63,696
|
)
|
|
|
62,339
|
|
|
|
1,357
|
|
|
Distributions to parent
|
|
|
—
|
|
|
|
51,231
|
|
|
|
(51,231
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(481,945
|
)
|
|
|
2,970
|
|
|
|
(486,129
|
)
|
|
|
1,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATE CHANGES ON CASH
|
|
|
1,407
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
(8,262
|
)
|
|
|
—
|
|
|
|
(10,252
|
)
|
|
|
1,990
|
|
|
CASH AND CASH EQUIVALENTS, beginning of period
|
|
|
23,144
|
|
|
|
—
|
|
|
|
22,598
|
|
|
|
546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of period
|
|
$
|
14,882
|
|
|
$
|
—
|
|
|
$
|
12,346
|
|
|
$
|
2,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
CAUTIONARY
STATEMENT ABOUT FORWARD-LOOKING STATEMENTS
This quarterly report includes certain “forward-looking
statements” within the meaning of Section 27A of the
Securities Act of 1933, as amended (the “Securities
Act”), and Section 21E of the Securities Exchange Act
of 1934, as amended (the “Exchange Act”). This
information includes statements regarding our plans, goals or
current expectations with respect to, among other things:
|
|
|
|
|
|
•
|
our future operating performance;
|
|
|
|
|
•
|
our ability to improve our margins;
|
|
|
|
|
•
|
operating cash flows and availability of capital;
|
|
|
|
|
•
|
the completion of future acquisitions;
|
|
|
|
|
•
|
the future revenues of acquired dealerships;
|
|
|
|
|
•
|
future stock repurchases and dividends;
|
|
|
|
|
•
|
future capital expenditures;
|
|
|
|
|
•
|
changes in sales volumes and credit for customer financing in
new and used vehicles and sales volumes in the parts and service
markets;
|
|
|
|
|
•
|
business trends in the retail automotive industry, including the
level of manufacturer incentives, new and used vehicle retail
sales volume, customer demand, interest rates and changes in
industry-wide inventory levels; and
|
|
|
|
|
•
|
availability of financing for inventory, working capital, real
estate and capital expenditures.
|
Although we believe that the expectations reflected in these
forward-looking statements are reasonable when and as made, we
cannot assure you that these expectations will prove to be
correct. When used in this quarterly report, the words
“anticipate,” “believe,”
“estimate,” “expect,” “may” and
similar expressions, as they relate to our company and
management, are intended to identify forward-looking statements.
Forward-looking statements are not assurances of future
performance and involve risks and uncertainties. Actual results
may differ materially from anticipated results in the
forward-looking statements for a number of reasons, including:
|
|
|
|
|
|
•
|
the recent economic recession substantially depressed consumer
confidence, raised unemployment and limited the availability of
consumer credit, causing a marked decline in demand for new and
used vehicles; further deterioration in the economic
environment, including consumer confidence, interest rates, the
price of gasoline, the level of manufacturer incentives and the
availability of consumer credit may affect the demand for new
and used vehicles, replacement parts, maintenance and repair
services and finance and insurance products;
|
|
|
|
|
•
|
domestic and international developments such as war, terrorism,
political conflicts or other hostilities may adversely affect
the demand for our products and services;
|
|
|
|
|
•
|
the future regulatory environment, including legislation related
to the Dodd-Frank Wall Street Reform and Consumer Protection
Act, climate control changes legislation, and unexpected
litigation or adverse legislation, including changes in state
franchise laws, may impose additional costs on us or otherwise
adversely affect us;
|
|
|
|
|
•
|
our principal automobile manufacturers, especially Toyota/Lexus,
Ford, Mercedes-Benz, Chrysler, Nissan/Infiniti, Honda/Acura,
General Motors and BMW, because of financial distress,
bankruptcy or other reasons, may not continue to produce or make
available to us vehicles that are in high demand by our
customers or provide financing, insurance, advertising or other
assistance to us;
|
|
|
|
|
•
|
the immediate concerns over the financial viability of one or
more of the domestic manufacturers (i.e., Chrysler, General
Motors and Ford) could result in, or in the case of Chrysler and
General Motors, has resulted in a restructuring of these
companies, up to and including bankruptcy; and, as such, we may
suffer financial loss in the form of uncollectible receivables,
devalued inventory or loss of franchises;
|
31
|
|
|
|
|
|
•
|
requirements imposed on us by our manufacturers may require
dispositions or limit our acquisitions and require us to
increase the level of capital expenditures related to our
dealership facilities;
|
|
|
|
|
•
|
our existing
and/or
new
dealership operations may not perform at expected levels or
achieve expected improvements;
|
|
|
|
|
•
|
our failure to achieve expected future cost savings or future
costs being higher than we expect;
|
|
|
|
|
•
|
manufacturer quality issues may negatively impact vehicle sales
and brand reputation;
|
|
|
|
|
•
|
available capital resources, increases in cost of financing and
various debt agreements may limit our ability to complete
acquisitions, complete construction of new or expanded
facilities, repurchase shares or pay dividends;
|
|
|
|
|
•
|
our ability to refinance or obtain financing in the future may
be limited and the cost of financing could increase
significantly;
|
|
|
|
|
•
|
foreign exchange controls and currency fluctuations;
|
|
|
|
|
•
|
new accounting standards could materially impact our reported
earnings per share;
|
|
|
|
|
•
|
the inability to complete additional acquisitions or changes in
the pace of acquisitions;
|
|
|
|
|
•
|
the inability to adjust our cost structure to offset any
reduction in the demand for our products and services;
|
|
|
|
|
•
|
our loss of key personnel;
|
|
|
|
|
•
|
competition in our industry may impact our operations or our
ability to complete additional acquisitions;
|
|
|
|
|
•
|
the failure to achieve expected sales volumes from our new
franchises;
|
|
|
|
|
•
|
insurance costs could increase significantly and all of our
losses may not be covered by insurance; and
|
|
|
|
|
•
|
our inability to obtain inventory of new and used vehicles and
parts, including imported inventory, at the cost, or in the
volume, we expect.
|
These factors, as well as additional factors that could affect
our operating results and performance are described in our 2009
Form 10-K,
under the headings “Item 1A. Risk Factors” and
“Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” and
elsewhere within this quarterly report. Should one or more of
the risks or uncertainties described above or elsewhere in this
quarterly report or in the documents incorporated by reference
occur, or should underlying assumptions prove incorrect, our
actual results and plans could differ materially from those
expressed in any forward-looking statements. We urge you to
carefully consider those factors, as well as factors described
in our reports filed from time to time with the Securities and
Exchange Commission (the “SEC”) and other
announcements we make from time to time.
Readers are cautioned not to place undue reliance on
forward-looking statements, which speak only as of the date
hereof. We undertake no responsibility to publicly release the
result of any revision of our forward-looking statements after
the date they are made, except to the extent required by
applicable law.
32
|
|
|
|
Item 2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
This Management’s Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking
statements that involve risks and uncertainties. Our actual
results may differ materially from those discussed in the
forward-looking statements because of various factors. See
“Cautionary Statement about
Forward
-
Looking
Statements.”
Overview
We are a leading operator in the automotive retail industry. As
of September 30, 2010, we owned and operated 127
franchises, representing 32 brands of automobiles, at 96
dealership locations and 22 collision service centers in the
United States of America (the “U.S.”) and ten
franchises, representing 2 brands, at five dealerships and three
collision centers in the United Kingdom (the “U.K.”).
We market and sell an extensive range of automotive products and
services, including new and used vehicles and related financing,
vehicle maintenance and repair services, replacement parts, and
warranty, insurance and extended service contracts. Our
operations are primarily located in major metropolitan areas in
Alabama, California, Florida, Georgia, Kansas, Louisiana,
Maryland, Massachusetts, Mississippi, New Hampshire, New Jersey,
New York, Oklahoma, South Carolina and Texas in the
U.S. and in the towns of Brighton, Farnborough, Hailsham,
Hindhead and Worthing in the U.K.
As of September 30, 2010, our retail network consisted of
the following three regions (with the number of dealerships they
comprised): (i) the Eastern (42 dealerships in Alabama,
Florida, Georgia, Louisiana, Maryland, Massachusetts,
Mississippi, New Hampshire, New Jersey, New York and South
Carolina); (ii) the Central (43 dealerships in Kansas,
Oklahoma and Texas); and (iii) the Western (11 dealerships
in California). Each region is managed by a regional vice
president who reports directly to our Chief Executive Officer
and is responsible for the overall performance of their regions,
as well as for overseeing the market directors and dealership
general managers that report to them. Each region is also
managed by a regional chief financial officer who reports
directly to our Chief Financial Officer. Our dealerships in the
U.K. are also managed locally with direct reporting
responsibilities to our corporate management team.
Outlook
Since September 2008, the U.S. and global economies have
suffered from, among other things, a substantial decline in
consumer confidence, a rise in unemployment and a tightening of
credit availability. As a result, the retail automotive industry
was negatively impacted by decreasing customer demand for new
and used vehicles, vehicle margin pressures and higher inventory
levels. Through the first nine months of 2010, economic trends
have stabilized and consumer demand for new and used vehicles
has shown some improvement. According to industry experts, the
September 2010 seasonally adjusted annual rate of sales (or
“SAAR”) was 11.7 million units, compared to
9.2 million units a year ago. And, despite the significant
challenge to achieve comparable revenue growth in the third
quarter of 2010 as a result of the U.S. government
sponsored Car Allowance Rebate System (“CARS”) program
that artificially inflated the automotive selling environment in
the third quarter of 2009, our new and used vehicle retail sales
increased 12.9% and 33.7%, respectively.
The highly-publicized concerns regarding Toyota product quality
that surfaced in the first three months of 2010 impacted our
results of operations. Toyota responded to the product quality
concerns by initially suspending the sale of a number of Toyota
models for up to two weeks during the first quarter of 2010. Our
new and used vehicle sales were negatively impacted as this stop
sale related to about 60% of our Toyota sales volume. Toyota
later issued two major recalls to address the quality issues,
which has bolstered our warranty parts and service business
through the first nine months of 2010. The manufacturer’s
recalls are anticipated to continue to have a positive effect on
our warranty parts and service business through the fourth
quarter of 2010. In the wake of these recalls, Toyota offered
incentivized financing rates and instituted a free maintenance
program, both of which were designed to stimulate new vehicle
sales. However, no assurances can be made that these or other
future programs will adequately mitigate the impact of the
product quality issues to Toyota’s brand reputation, as
well as the resulting effect to our new and used vehicle
businesses.
Our operations have, and we believe that our operations will
continue to generate positive cash flow. As such, we are focused
on maximizing the return on the capital that we generate from
our operations and positioning our
33
balance sheet to take advantage of investment opportunities as
they arise. Despite the challenging retail and economic
environment, we believe that opportunities exist to invest in
our operations and improve profitability, including
(i) focusing on our higher margin parts and service
business by enhancing the cost effectiveness of our marketing
efforts, improving customer interfaces, expanding our product
offerings and creating operational efficiencies,
(ii) expanding our collision business footprint and
(iii) implementing strategic selling methods.
We continue to closely scrutinize all planned future capital
spending and work closely with our manufacturer partners in this
area to make prudent investment decisions that are expected to
generate an adequate return
and/or
improve the customer experience. We anticipate that 2010 capital
spending will be less than $30.0 million.
We remain committed to our
growth-by-acquisition
strategy, and with the prolonged nature of the anticipated
economic recovery, we believe that significant opportunities
exist to enhance our portfolio with dealerships that meet our
stringent investment criteria. We completed the acquisition of
four franchises located in the Southeast region of the U.K. with
expected annual revenues of $161.5 million and two
franchises in South Carolina with expected annual revenues of
$69.5 million, during the nine months ended
September 30, 2010. In addition, we added four franchises
located in Georgia, New York and Texas with expected aggregate
annual revenues of $25.2 million. We will continue to
pursue dealership investment opportunities that we believe will
add value for our stockholders.
Financial
and Operational Highlights
Our operating results reflect the combined performance of each
of our interrelated business activities, which include the sale
of new vehicles, used vehicles, finance and insurance products,
and parts, service and collision repair services. Historically,
each of these activities has been directly or indirectly
impacted by a variety of supply/demand factors, including
vehicle inventories, consumer confidence, discretionary
spending, availability and affordability of consumer credit,
manufacturer incentives, weather patterns, fuel prices and
interest rates. For example, during periods of sustained
economic downturn or significant supply/demand imbalances, new
vehicle sales may be negatively impacted as consumers tend to
shift their purchases to used vehicles. Some consumers may even
delay their purchasing decisions altogether, electing instead to
repair their existing vehicles. In such cases, however, we
believe the new vehicle sales impact on our overall business is
mitigated by our ability to offer other products and services,
such as used vehicles and parts, service and collision repair
services, as well as our ability to reduce our costs in response
to lower sales.
We generally experience higher volumes of vehicle sales and
service in the second and third calendar quarters of each year.
This seasonality is generally attributable to consumer buying
trends and the timing of manufacturer new vehicle model
introductions. In addition, in some regions of the U.S., vehicle
purchases decline during the winter months due to inclement
weather. As a result, our revenues and operating income are
typically lower in the first and fourth quarters and higher in
the second and third quarters. Other factors unrelated to
seasonality, such as changes in economic condition and
manufacturer incentive programs, may exaggerate seasonal or
cause
counter-seasonal
fluctuations in our revenues and operating income.
For the three months ended September 30, 2010 and 2009, we
realized net income of $19.0 million and
$18.3 million, respectively, and diluted income per share
of $0.83 and $0.78, respectively. For the nine months ended
September 30, 2010 and 2009, we realized net income of
$39.7 million and $36.8 million, respectively, and a
diluted income per share of $1.70 and $1.58, respectively. We
generated cash flow of $82.9 million for the nine months
ended September 30, 2010, while we used $8.3 million
in the nine months ended September 30, 2009. Included in
our cash flow during the nine months ended September 30,
2010, we issued $115.0 million of convertible notes. We
used a portion of the proceeds from this offering to redeem the
remaining outstanding face value of our 8.25% Senior
Subordinated Notes (the “8.25% Notes”) and to
execute convertible note hedge transactions with respect to our
common stock, which effectively increased the conversion rate of
the convertible notes. Included in our cash flow for the nine
months ended September 30, 2009 was the net repayment of
$50.0 million associated with our Acquisition Line
borrowings.
34
Key
Performance Indicators
The following table highlights certain of the key performance
indicators we use to manage our business:
Consolidated
Statistical Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
Unit Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Vehicle
|
|
|
26,396
|
|
|
|
25,057
|
|
|
|
72,128
|
|
|
|
62,942
|
|
|
Used Vehicle
|
|
|
17,601
|
|
|
|
14,175
|
|
|
|
50,230
|
|
|
|
41,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Retail Sales
|
|
|
43,997
|
|
|
|
39,232
|
|
|
|
122,358
|
|
|
|
104,123
|
|
|
Wholesale Sales
|
|
|
9,308
|
|
|
|
8,367
|
|
|
|
24,716
|
|
|
|
21,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Vehicle Sales
|
|
|
53,305
|
|
|
|
47,599
|
|
|
|
147,074
|
|
|
|
125,345
|
|
|
Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Vehicle Retail Sales
|
|
|
5.7
|
%
|
|
|
6.7
|
%
|
|
|
5.8
|
%
|
|
|
6.0
|
%
|
|
Total Used Vehicle Sales
|
|
|
7.7
|
%
|
|
|
9.2
|
%
|
|
|
8.3
|
%
|
|
|
9.5
|
%
|
|
Parts and Service Sales
|
|
|
54.3
|
%
|
|
|
53.7
|
%
|
|
|
54.1
|
%
|
|
|
53.1
|
%
|
|
Total Gross Margin
|
|
|
15.7
|
%
|
|
|
17.0
|
%
|
|
|
16.2
|
%
|
|
|
17.4
|
%
|
|
SG&A
(1)
as a % of Gross Profit
|
|
|
76.0
|
%
|
|
|
76.6
|
%
|
|
|
79.2
|
%
|
|
|
79.7
|
%
|
|
Operating Margin
|
|
|
3.2
|
%
|
|
|
3.4
|
%
|
|
|
2.8
|
%
|
|
|
2.9
|
%
|
|
Pretax Margin
|
|
|
2.1
|
%
|
|
|
2.2
|
%
|
|
|
1.6
|
%
|
|
|
1.7
|
%
|
|
Finance and Insurance Revenues per Retail Unit Sold
|
|
$
|
1,006
|
|
|
$
|
956
|
|
|
$
|
1,018
|
|
|
$
|
982
|
|
|
|
|
|
|
(1)
|
|
Selling, general and administrative
expenses.
|
The following discussion briefly highlights certain of the
results and trends occurring within our business. Throughout the
following discussion, references are made to Same Store results
and variances which are discussed in more detail in the
“Results of Operations” section that follows.
During the first nine months of 2010, the industry has
experienced a modest increase in the seasonally adjusted annual
rate of sales (or “SAAR”) of new vehicle unit sales.
This increase is primarily related to the stabilization of the
U.S. economic conditions and a growing need to replace aged
or scrapped vehicles. While SAAR is still low relative to the
years before the recession, it has risen from 9.2 million
at September 30, 2009 to 11.7 million at
September 30, 2010. Bolstered by this improved sales
environment and our recent efforts to gain market share, our new
vehicle retail sales increased 12.9% during the third quarter of
2010 and, for the nine months ended September 30, 2010,
improved over the comparable period of 2009 by 19.6%. The
improvement reflects higher unit sales of 5.3% and 14.6%, as
well as an increase in average sales price driven by improved
brand mix. We believe that our performance has outpaced the
national average retail results, as well as the specific
performances of the major brands we represent and the markets in
which we operate.
Our used vehicle results are directly affected by economic
conditions, the level of manufacturer incentives on new vehicles
and new vehicle financing, the number and quality of trade-ins
and lease turn-ins and the availability of consumer credit. The
stabilizing economic environment that benefited new vehicle
sales also supported improved used vehicle traffic and provided
an increase in used vehicle trade-ins that positively impacted
our used vehicle retail sales in comparison to our 2009 results.
As a result, we have experienced improving used vehicle volumes
through the first nine months of 2010. Still, when compared to
trend industry conditions, we are sourcing a higher percentage
of our used vehicles from higher cost auctions instead of
trade-ins, and as a result used vehicle retail margin pressure
persists in 2010. Further, the wholesale side of the business
experienced increases in unit sales and a decrease in gross
profits for the three and nine months ended September 30,
2010 as compared to the same periods in 2009.
35
Our parts and service sales were positively impacted by the
Toyota recalls during the first nine months of 2010 that
affected approximately 6.0 million vehicles. Parts and
service margins were enhanced for the first nine months of 2010
primarily as a result of additional internal work, resulting
from increased new and used vehicle sales. In addition, the
Toyota warranty campaigns primarily require labor services,
which generate higher margins than the corresponding parts
sales. Our consolidated finance and insurance income per retail
unit sold (“PRU”) also increased through the third
quarter of 2010 as compared to 2009, primarily driven by an
improvement in penetration rates on our finance and vehicle
service contract offerings. However, our total gross margin
declined for the three and nine months ended September 30,
2010, as a result of the shift in business mix towards the lower
margin new and used vehicle businesses and the
period-over-period
decrease in margins in both our new and used vehicle business.
Our consolidated selling, general and administrative
(“SG&A”) expenses increased in absolute dollars,
and decreased as a percentage of gross profit by 60 basis
points to 76.0% for the three months ended
September 30, 2010, from the comparable period in
2009. SG&A was positively impacted during the third quarter
of 2010 by a $1.3 million pretax gain realized from the
sale of non-operating dealership real estate in Florida. The
impact of this transaction lowered SG&A as a percent of
gross profit by 0.6 percentage points. For the nine months
ended September 30, 2010, our consolidated SG&A
expenses increased in absolute dollars, but decreased as a
percentage of gross profit by 50 basis points to 79.2% from
the comparable period in 2009, primarily as a result of the
improved gross profit and our cost rationalization efforts that
have resulted in a leaner organization and coupled with the gain
on the sale of real estate. These positive factors were
partially offset by the impact of the loss on dealership
disposal and severance charges which occurred during the second
quarter of 2010.
The combination of all of these factors, including
$1.6 million of asset impairments, resulted in an operating
margin of 3.2% for the three months ended September 30,
2010, a 20 basis-point decrease from 2009. Our operating margin
decreased by 10 basis points to 2.8% for the nine months
ended September 30, 2010 when compared to 2009, primarily
as a result of the $3.1 million of asset impairments
recognized during 2010.
Our floorplan interest expense increased 19.9% for the three
months ended September 30, 2010, as compared to the third
quarter of 2009, primarily as a result of an increase in our
weighted average outstanding borrowings, and increased 3.6% for
the nine months ended September 30, 2010 compared to the
same period in 2009. Other interest expense decreased 5.8% and
7.3% for the three and nine months ended September 30,
2010, respectively, primarily attributable to decreases in our
weighted average outstanding borrowings, and an increase in
interest income. As a result, our pretax margin for the three
months ended September 30, 2010 decreased 10 basis
points to 2.1% as compared to the third quarter of 2009. For the
nine months ended September 30, 2010, including the
$3.9 million loss on the extinguishment of the
8.25% Notes in 2010 and the $8.2 million gain on
redemption of a portion of our 2.25% Convertible Senior
Notes due 2036 (the “2.25% Notes”) in 2009, our
pretax margin decreased 10 basis points.
We address these items further, and other variances between the
periods presented, in the “Results of Operations”
section below.
Recent
Accounting Pronouncements
Refer to the
Recent Accounting Pronouncements
section
within Note 2, “Summary of Significant Accounting
Policies,” of Item 1 for a discussion of those most
recent pronouncements that impact us.
Critical
Accounting Policies and Accounting Estimates
The preparation of our Consolidated Financial Statements in
conformity with generally accepted accounting principles
(“GAAP”) requires management to make certain estimates
and assumptions during their preparation.
Refer to Note 2, “Summary of Significant Accounting
Policies and Estimates,” in Item 1 for a discussion of
our critical accounting policies and accounting estimates. Also,
we disclosed our critical accounting policies and estimates in
our 2009 Annual Report on
Form 10-K,
and no significant changes have occurred since that time.
36
Results
of Operations
The following tables present comparative financial and
non-financial data for the three and nine months ended
September 30, 2010 and 2009, of (a) our “Same
Store” locations, (b) those locations acquired or
disposed of (“Transactions”) during the periods and
(c) the total company. Same Store amounts include the
results of dealerships for the identical months in each period
presented in the comparison, commencing with the first full
month in which the dealership was owned by us and, in the case
of dispositions, ending with the last full month it was owned by
us. Same Store results also include the activities of our
corporate headquarters.
The following table summarizes our combined Same Store results
for the three and nine months ended September 30, 2010 as
compared to 2009:
Total
Same Store Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2010
|
|
|
% Change
|
|
|
2009
|
|
|
|
2010
|
|
|
% Change
|
|
|
2009
|
|
|
|
|
(Dollars in thousands, except per unit amounts)
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New vehicle retail
|
|
$
|
783,782
|
|
|
|
9.4
|
%
|
|
$
|
716,630
|
|
|
|
$
|
2,170,481
|
|
|
|
17.5
|
%
|
|
$
|
1,846,689
|
|
|
Used vehicle retail
|
|
|
321,260
|
|
|
|
29.2
|
%
|
|
|
248,718
|
|
|
|
|
914,386
|
|
|
|
28.6
|
%
|
|
|
710,784
|
|
|
Used vehicle wholesale
|
|
|
54,092
|
|
|
|
28.1
|
%
|
|
|
42,213
|
|
|
|
|
147,124
|
|
|
|
34.1
|
%
|
|
|
109,691
|
|
|
Parts and Service
|
|
|
190,157
|
|
|
|
7.3
|
%
|
|
|
177,285
|
|
|
|
|
560,192
|
|
|
|
5.3
|
%
|
|
|
531,810
|
|
|
Finance, insurance and other
|
|
|
43,337
|
|
|
|
18.2
|
%
|
|
|
36,661
|
|
|
|
|
122,408
|
|
|
|
22.4
|
%
|
|
|
99,983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
1,392,628
|
|
|
|
14.0
|
%
|
|
$
|
1,221,507
|
|
|
|
$
|
3,914,591
|
|
|
|
18.7
|
%
|
|
$
|
3,298,957
|
|
|
Cost of Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New vehicle retail
|
|
$
|
739,268
|
|
|
|
10.6
|
%
|
|
$
|
668,671
|
|
|
|
$
|
2,044,512
|
|
|
|
17.8
|
%
|
|
$
|
1,735,172
|
|
|
Used vehicle retail
|
|
|
292,043
|
|
|
|
30.9
|
%
|
|
|
223,061
|
|
|
|
|
828,042
|
|
|
|
30.2
|
%
|
|
|
636,105
|
|
|
Used vehicle wholesale
|
|
|
53,691
|
|
|
|
31.3
|
%
|
|
|
40,906
|
|
|
|
|
143,826
|
|
|
|
35.3
|
%
|
|
|
106,327
|
|
|
Parts and Service
|
|
|
86,879
|
|
|
|
6.2
|
%
|
|
|
81,770
|
|
|
|
|
257,274
|
|
|
|
3.4
|
%
|
|
|
248,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales
|
|
$
|
1,171,881
|
|
|
|
15.5
|
%
|
|
$
|
1,014,408
|
|
|
|
$
|
3,273,654
|
|
|
|
20.1
|
%
|
|
$
|
2,726,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
220,747
|
|
|
|
6.6
|
%
|
|
$
|
207,099
|
|
|
|
$
|
640,937
|
|
|
|
12.0
|
%
|
|
$
|
572,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
$
|
167,571
|
|
|
|
6.3
|
%
|
|
$
|
157,662
|
|
|
|
$
|
500,160
|
|
|
|
10.3
|
%
|
|
$
|
453,650
|
|
|
Depreciation and amortization expenses
|
|
$
|
6,491
|
|
|
|
1.5
|
%
|
|
$
|
6,394
|
|
|
|
$
|
19,315
|
|
|
|
1.7
|
%
|
|
$
|
18,993
|
|
|
Floorplan interest expense
|
|
$
|
8,851
|
|
|
|
18.7
|
%
|
|
$
|
7,458
|
|
|
|
$
|
24,785
|
|
|
|
2.9
|
%
|
|
$
|
24,093
|
|
|
Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Vehicle Retail
|
|
|
5.7
|
%
|
|
|
|
|
|
|
6.7
|
%
|
|
|
|
5.8
|
%
|
|
|
|
|
|
|
6.0
|
%
|
|
Used Vehicle
|
|
|
7.9
|
%
|
|
|
|
|
|
|
9.3
|
%
|
|
|
|
8.4
|
%
|
|
|
|
|
|
|
9.5
|
%
|
|
Parts and Service
|
|
|
54.3
|
%
|
|
|
|
|
|
|
53.9
|
%
|
|
|
|
54.1
|
%
|
|
|
|
|
|
|
53.2
|
%
|
|
Total Gross Margin
|
|
|
15.9
|
%
|
|
|
|
|
|
|
17.0
|
%
|
|
|
|
16.4
|
%
|
|
|
|
|
|
|
17.4
|
%
|
|
SG&A as a % of Gross Profit
|
|
|
75.9
|
%
|
|
|
|
|
|
|
76.1
|
%
|
|
|
|
78.0
|
%
|
|
|
|
|
|
|
79.2
|
%
|
|
Operating Margin
|
|
|
3.2
|
%
|
|
|
|
|
|
|
3.5
|
%
|
|
|
|
3.1
|
%
|
|
|
|
|
|
|
3.0
|
%
|
|
Finance and Insurance Revenues per Retail Unit Sold
|
|
$
|
1,037
|
|
|
|
8.7
|
%
|
|
$
|
954
|
|
|
|
$
|
1,042
|
|
|
|
5.9
|
%
|
|
$
|
984
|
|
The discussion that follows provides explanation for the
variances noted above. In addition, each table presents, by
primary statement of operations line item, comparative financial
and non-financial data of our Same Store locations, those
locations acquired or disposed of (“Transactions”)
during the periods and the consolidated company for the three
and nine months ended September 30, 2010 and 2009.
37
New
Vehicle Retail Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2010
|
|
|
% Change
|
|
|
2009
|
|
|
|
2010
|
|
|
% Change
|
|
|
2009
|
|
|
|
|
(Dollars in thousands, except per unit amounts)
|
|
|
Retail Unit Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
|
25,155
|
|
|
|
2.0
|
%
|
|
|
24,665
|
|
|
|
|
69,411
|
|
|
|
12.5
|
%
|
|
|
61,680
|
|
|
Transactions
|
|
|
1,241
|
|
|
|
|
|
|
|
392
|
|
|
|
|
2,717
|
|
|
|
|
|
|
|
1,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
26,396
|
|
|
|
5.3
|
%
|
|
|
25,057
|
|
|
|
|
72,128
|
|
|
|
14.6
|
%
|
|
|
62,942
|
|
|
Retail Sales Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
$
|
783,782
|
|
|
|
9.4
|
%
|
|
$
|
716,630
|
|
|
|
$
|
2,170,481
|
|
|
|
17.5
|
%
|
|
$
|
1,846,689
|
|
|
Transactions
|
|
|
38,339
|
|
|
|
|
|
|
|
11,459
|
|
|
|
|
83,612
|
|
|
|
|
|
|
|
37,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
822,121
|
|
|
|
12.9
|
%
|
|
$
|
728,089
|
|
|
|
$
|
2,254,093
|
|
|
|
19.6
|
%
|
|
$
|
1,883,973
|
|
|
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
$
|
44,514
|
|
|
|
(7.2
|
)%
|
|
$
|
47,959
|
|
|
|
$
|
125,967
|
|
|
|
13.0
|
%
|
|
$
|
111,517
|
|
|
Transactions
|
|
|
2,561
|
|
|
|
|
|
|
|
660
|
|
|
|
|
5,593
|
|
|
|
|
|
|
|
1,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
47,075
|
|
|
|
(3.2
|
)%
|
|
$
|
48,619
|
|
|
|
$
|
131,560
|
|
|
|
16.3
|
%
|
|
$
|
113,073
|
|
|
Gross Profit per Retail
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unit Sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
$
|
1,770
|
|
|
|
(9.0
|
)%
|
|
$
|
1,944
|
|
|
|
$
|
1,815
|
|
|
|
0.4
|
%
|
|
$
|
1,808
|
|
|
Transactions
|
|
$
|
2,064
|
|
|
|
|
|
|
$
|
1,684
|
|
|
|
$
|
2,059
|
|
|
|
|
|
|
$
|
1,233
|
|
|
Total
|
|
$
|
1,783
|
|
|
|
(8.1
|
)%
|
|
$
|
1,940
|
|
|
|
$
|
1,824
|
|
|
|
1.6
|
%
|
|
$
|
1,796
|
|
|
Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
|
5.7
|
%
|
|
|
|
|
|
|
6.7
|
%
|
|
|
|
5.8
|
%
|
|
|
|
|
|
|
6.0
|
%
|
|
Transactions
|
|
|
6.7
|
%
|
|
|
|
|
|
|
5.8
|
%
|
|
|
|
6.7
|
%
|
|
|
|
|
|
|
4.2
|
%
|
|
Total
|
|
|
5.7
|
%
|
|
|
|
|
|
|
6.7
|
%
|
|
|
|
5.8
|
%
|
|
|
|
|
|
|
6.0
|
%
|
The economic slowdown that began in the U.S. in 2008
resulted in declining new vehicle sales over much of the past
two years, except for the sales spike realized in the third
quarter of 2009 as a result of the CARS program. But, as
U.S. economic conditions have recently begun to stabilize,
most new vehicle brands have generated improved sales. With the
stabilized selling environment, a number of our improvement
efforts have been focused on enhancing the effectiveness of our
sales processes and capturing market share. As a result, while
the automotive industry’s new vehicle retail sales were
down slightly for the three months ended September 30, 2010
as compared to the corresponding period in 2009, which benefited
significantly from the CARS program, our Same Store new vehicle
unit sales and revenues increased 2.0% and 9.4%, respectively.
We generated increases in Same Store revenues of 19.3%, 2.3% and
15.7% in our domestic, import and luxury categories,
respectively, and in most major brands that we represent.
Generally, our import brands benefited most from the CARS
program in 2009 and, as a result, realized a 3.1% unit sales
decline. However, increases in unit sales of 8.8% and 11.9% in
our domestic and luxury brands, respectively, offset this
decline. Our Same Store revenues PRU improved 7.2% to $31,158 in
the third quarter of 2010, while our Same Store gross profit PRU
decreased by 9.0% to $1,770, as a competitive selling
environment persisted. As a result, our Same Store gross margin
fell 100 basis points from 6.7% in 2009 to 5.7% in the
third quarter of 2010.
The modest economic recovery and the increase in SAAR, as well
as the focus that we have placed on improving our sales
processes at our dealerships, also led to increased new vehicle
sales and profits for the nine months ended September 30,
2010 as compared to 2009. For the nine months ended
September 30, 2010, as compared to the corresponding period
in 2009, Same Store new vehicle unit sales and revenues
increased 12.5% and 17.5%, respectively. We experienced
increases in Same Store unit sales and revenues in each of our
brand categories. Our Same Store revenues PRU improved 4.4% to
$31,270 for the nine months ended September 30, 2010.
38
The following table sets forth our Same Store new vehicle retail
sales volume by manufacturer:
Same
Store New Vehicle Unit Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2010
|
|
|
% Change
|
|
|
2009
|
|
|
|
2010
|
|
|
% Change
|
|
|
2009
|
|
|
Toyota
|
|
|
9,344
|
|
|
|
(2.9
|
)%
|
|
|
9,620
|
|
|
|
|
25,113
|
|
|
|
10.2
|
%
|
|
|
22,784
|
|
|
Nissan
|
|
|
3,722
|
|
|
|
5.2
|
|
|
|
3,537
|
|
|
|
|
10,531
|
|
|
|
29.4
|
|
|
|
8,138
|
|
|
Honda
|
|
|
3,107
|
|
|
|
1.8
|
|
|
|
3,051
|
|
|
|
|
8,785
|
|
|
|
7.5
|
|
|
|
8,172
|
|
|
BMW
|
|
|
2,337
|
|
|
|
1.9
|
|
|
|
2,294
|
|
|
|
|
6,303
|
|
|
|
5.4
|
|
|
|
5,979
|
|
|
Ford
|
|
|
1,899
|
|
|
|
13.4
|
|
|
|
1,675
|
|
|
|
|
5,722
|
|
|
|
24.4
|
|
|
|
4,598
|
|
|
Mercedes-Benz
|
|
|
1,506
|
|
|
|
24.5
|
|
|
|
1,210
|
|
|
|
|
4,055
|
|
|
|
19.2
|
|
|
|
3,402
|
|
|
General Motors
|
|
|
1,038
|
|
|
|
20.1
|
|
|
|
864
|
|
|
|
|
2,851
|
|
|
|
22.7
|
|
|
|
2,323
|
|
|
Chrysler
|
|
|
798
|
|
|
|
(10.7
|
)
|
|
|
894
|
|
|
|
|
2,120
|
|
|
|
(25.4
|
)
|
|
|
2,841
|
|
|
Other
|
|
|
1,404
|
|
|
|
(7.6
|
)
|
|
|
1,520
|
|
|
|
|
3,931
|
|
|
|
14.2
|
|
|
|
3,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
25,155
|
|
|
|
2.0
|
|
|
|
24,665
|
|
|
|
|
69,411
|
|
|
|
12.5
|
|
|
|
61,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the third quarter of 2009, many Toyota models realized a
disproportionate benefit from the CARS program. As a result, we
realized a 2.9% decline in unit sales for the three months ended
September 30, 2010. But, this decline was more than offset
by improvement in most of the other manufacturers that we
represent. Our retail car unit sales decreased by 5.5% in the
third quarter of 2010 due to the impact of the CARS program,
which was a disproportionate benefit to car models. However, our
retail truck unit sales increased by 14.7%, as compared with the
same period in 2009, which more than offset the retail car unit
decline. We believe that our performance has outpaced the
national average retail results, as well as the specific
performances of most of the major brands we represent and the
markets in which we operate. As the economy recovers, we
anticipate that total industry-wide sales of new vehicles
throughout 2010 and into 2011 will be higher than 2009. However,
the level of retail sales, as well as our own ability to retain
or grow market share during future periods, is difficult to
predict.
Most manufacturers offer interest assistance to offset floorplan
interest charges incurred in connection with inventory
purchases. This assistance varies by manufacturer, but generally
provides for a defined amount, adjusted periodically for changes
in market interest rates, regardless of our actual floorplan
interest rate or the length of time for which the inventory is
financed. The amount of interest assistance we recognize in a
given period is primarily a function of: (1) the mix of
units being sold, as domestic brands tend to provide more
assistance, (2) the specific terms of the respective
manufacturers’ interest assistance programs and market
interest rates, (3) the average wholesale price of
inventory sold, and (4) our rate of inventory turnover. To
further mitigate our exposure to interest rate fluctuations, we
have entered into interest rate swaps with an aggregate notional
amount of $550.0 million as of September 30, 2010, at
a weighted average LIBOR interest rate of 4.7%. We record the
majority of the impact of the periodic settlements of these
swaps as a component of floorplan interest expense, effectively
hedging a substantial portion of our total floorplan interest
expense and mitigating the impact of interest rate fluctuations.
As a result, in this declining interest rate environment, our
interest assistance recognized as a percent of total floorplan
interest expense has declined. Over the past three years, this
assistance as a percentage of our total consolidated floorplan
interest expense has ranged from 76.7% in the third quarter of
2009 to 49.9% in the fourth quarter of 2008. For the quarter
ended September 30, 2010, the floorplan assistance as a
percentage of our consolidated interest expense was 72.2%. We
record these incentives as a reduction of new vehicle cost of
sales as the vehicles are sold, impacting the gross profit and
gross margin detailed above. The total assistance recognized in
cost of goods sold during the three months ended
September 30, 2010 and 2009 was $6.5 million and
$5.8 million, respectively.
We continue to aggressively manage our new vehicle inventory in
response to the rapidly changing market conditions. With the
improving selling environment, we increased our new vehicle
inventory levels by $109.7 million, or 25.6%, from
$427.9 million as of December 31, 2009 to
$537.6 million as of September 30, 2010. Further, our
consolidated days’ supply of new vehicle inventory
increased to 62 days at September 30, 2010 from
44 days at September 30, 2009, which was abnormally
low following the CARS program. Generally, we are comfortable
with our new vehicle inventory levels, given the current and
projected selling environment.
39
Used
Vehicle Retail Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2010
|
|
|
% Change
|
|
|
2009
|
|
|
|
2010
|
|
|
% Change
|
|
|
2009
|
|
|
|
|
(Dollars in thousands, except per unit amounts)
|
|
|
Retail Unit Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
|
16,641
|
|
|
|
20.8
|
%
|
|
|
13,774
|
|
|
|
|
48,096
|
|
|
|
20.4
|
%
|
|
|
39,955
|
|
|
Transactions
|
|
|
960
|
|
|
|
|
|
|
|
401
|
|
|
|
|
2,134
|
|
|
|
|
|
|
|
1,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
17,601
|
|
|
|
24.2
|
%
|
|
|
14,175
|
|
|
|
|
50,230
|
|
|
|
22.0
|
%
|
|
|
41,181
|
|
|
Retail Sales Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
$
|
321,260
|
|
|
|
29.2
|
%
|
|
$
|
248,718
|
|
|
|
$
|
914,386
|
|
|
|
28.6
|
%
|
|
$
|
710,784
|
|
|
Transactions
|
|
|
19,365
|
|
|
|
|
|
|
|
5,998
|
|
|
|
|
45,990
|
|
|
|
|
|
|
|
18,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
340,625
|
|
|
|
33.7
|
%
|
|
$
|
254,716
|
|
|
|
$
|
960,376
|
|
|
|
31.7
|
%
|
|
$
|
729,345
|
|
|
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
$
|
29,217
|
|
|
|
13.9
|
%
|
|
$
|
25,657
|
|
|
|
$
|
86,344
|
|
|
|
15.6
|
%
|
|
$
|
74,679
|
|
|
Transactions
|
|
|
1,353
|
|
|
|
|
|
|
|
614
|
|
|
|
|
3,209
|
|
|
|
|
|
|
|
2,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
30,570
|
|
|
|
16.4
|
%
|
|
$
|
26,271
|
|
|
|
$
|
89,553
|
|
|
|
16.7
|
%
|
|
$
|
76,705
|
|
|
Gross Profit per Retail
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unit Sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
$
|
1,756
|
|
|
|
(5.7
|
)%
|
|
$
|
1,863
|
|
|
|
$
|
1,795
|
|
|
|
(4.0
|
)%
|
|
$
|
1,869
|
|
|
Transactions
|
|
$
|
1,409
|
|
|
|
|
|
|
$
|
1,531
|
|
|
|
$
|
1,504
|
|
|
|
|
|
|
$
|
1,653
|
|
|
Total
|
|
$
|
1,737
|
|
|
|
(6.3
|
)%
|
|
$
|
1,853
|
|
|
|
$
|
1,783
|
|
|
|
(4.3
|
)%
|
|
$
|
1,863
|
|
|
Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
|
9.1
|
%
|
|
|
|
|
|
|
10.3
|
%
|
|
|
|
9.4
|
%
|
|
|
|
|
|
|
10.5
|
%
|
|
Transactions
|
|
|
7.0
|
%
|
|
|
|
|
|
|
10.2
|
%
|
|
|
|
7.0
|
%
|
|
|
|
|
|
|
10.9
|
%
|
|
Total
|
|
|
9.0
|
%
|
|
|
|
|
|
|
10.3
|
%
|
|
|
|
9.3
|
%
|
|
|
|
|
|
|
10.5
|
%
|
Used
Vehicle Wholesale Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2010
|
|
|
% Change
|
|
|
2009
|
|
|
|
2010
|
|
|
% Change
|
|
|
2009
|
|
|
|
|
(Dollars in thousands, except per unit amounts)
|
|
|
Wholesale Unit Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
|
8,790
|
|
|
|
8.2
|
%
|
|
|
8,123
|
|
|
|
|
23,626
|
|
|
|
14.4
|
%
|
|
|
20,661
|
|
|
Transactions
|
|
|
518
|
|
|
|
|
|
|
|
244
|
|
|
|
|
1,090
|
|
|
|
|
|
|
|
561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
9,308
|
|
|
|
11.2
|
%
|
|
|
8,367
|
|
|
|
|
24,716
|
|
|
|
16.5
|
%
|
|
|
21,222
|
|
|
Wholesale Sales Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
$
|
54,092
|
|
|
|
28.1
|
%
|
|
$
|
42,213
|
|
|
|
$
|
147,124
|
|
|
|
34.1
|
%
|
|
$
|
109,691
|
|
|
Transactions
|
|
|
4,371
|
|
|
|
|
|
|
|
938
|
|
|
|
|
9,529
|
|
|
|
|
|
|
|
2,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
58,463
|
|
|
|
35.5
|
%
|
|
$
|
43,151
|
|
|
|
$
|
156,653
|
|
|
|
39.2
|
%
|
|
$
|
112,536
|
|
|
Gross Profit (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
$
|
401
|
|
|
|
(69.3
|
)%
|
|
$
|
1,307
|
|
|
|
$
|
3,298
|
|
|
|
(2.0
|
)%
|
|
$
|
3,364
|
|
|
Transactions
|
|
|
(96
|
)
|
|
|
|
|
|
|
(28
|
)
|
|
|
|
(210
|
)
|
|
|
|
|
|
|
(33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
305
|
|
|
|
(76.2
|
)%
|
|
$
|
1,279
|
|
|
|
$
|
3,088
|
|
|
|
(7.3
|
)%
|
|
$
|
3,331
|
|
|
Gross Profit (Loss) per
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale Unit Sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
$
|
46
|
|
|
|
(71.4
|
)%
|
|
$
|
161
|
|
|
|
$
|
140
|
|
|
|
(14.1
|
)%
|
|
$
|
163
|
|
|
Transactions
|
|
$
|
(185
|
)
|
|
|
|
|
|
$
|
(115
|
)
|
|
|
$
|
(193
|
)
|
|
|
|
|
|
$
|
(59
|
)
|
|
Total
|
|
$
|
33
|
|
|
|
(78.4
|
)%
|
|
$
|
153
|
|
|
|
$
|
125
|
|
|
|
(20.4
|
)%
|
|
$
|
157
|
|
|
Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
|
0.7
|
%
|
|
|
|
|
|
|
3.1
|
%
|
|
|
|
2.2
|
%
|
|
|
|
|
|
|
3.1
|
%
|
|
Transactions
|
|
|
(2.2
|
)%
|
|
|
|
|
|
|
(3.0
|
)%
|
|
|
|
(2.2
|
)%
|
|
|
|
|
|
|
(1.2
|
)%
|
|
Total
|
|
|
0.5
|
%
|
|
|
|
|
|
|
3.0
|
%
|
|
|
|
2.0
|
%
|
|
|
|
|
|
|
3.0
|
%
|
40
Total
Used Vehicle Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2010
|
|
|
% Change
|
|
|
2009
|
|
|
|
2010
|
|
|
% Change
|
|
|
2009
|
|
|
|
|
(Dollars in thousands, except per unit amounts)
|
|
|
Used Vehicle Unit Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
|
25,431
|
|
|
|
16.1
|
%
|
|
|
21,897
|
|
|
|
|
71,722
|
|
|
|
18.3
|
%
|
|
|
60,616
|
|
|
Transactions
|
|
|
1,478
|
|
|
|
|
|
|
|
645
|
|
|
|
|
3,224
|
|
|
|
|
|
|
|
1,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
26,909
|
|
|
|
19.4
|
%
|
|
|
22,542
|
|
|
|
|
74,946
|
|
|
|
20.1
|
%
|
|
|
62,403
|
|
|
Sales Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
$
|
375,352
|
|
|
|
29.0
|
%
|
|
$
|
290,931
|
|
|
|
$
|
1,061,510
|
|
|
|
29.4
|
%
|
|
$
|
820,475
|
|
|
Transactions
|
|
|
23,736
|
|
|
|
|
|
|
|
6,936
|
|
|
|
|
55,519
|
|
|
|
|
|
|
|
21,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
399,088
|
|
|
|
34.0
|
%
|
|
$
|
297,867
|
|
|
|
$
|
1,117,029
|
|
|
|
32.7
|
%
|
|
$
|
841,881
|
|
|
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
$
|
29,618
|
|
|
|
9.8
|
%
|
|
$
|
26,964
|
|
|
|
$
|
89,642
|
|
|
|
14.9
|
%
|
|
$
|
78,043
|
|
|
Transactions
|
|
|
1,257
|
|
|
|
|
|
|
|
586
|
|
|
|
|
2,999
|
|
|
|
|
|
|
|
1,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
30,875
|
|
|
|
12.1
|
%
|
|
$
|
27,550
|
|
|
|
$
|
92,641
|
|
|
|
15.7
|
%
|
|
$
|
80,036
|
|
|
Gross Profit per Used
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vehicle Unit Sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
$
|
1,165
|
|
|
|
(5.4
|
)%
|
|
$
|
1,231
|
|
|
|
$
|
1,250
|
|
|
|
(2.9
|
)%
|
|
$
|
1,287
|
|
|
Transactions
|
|
$
|
850
|
|
|
|
|
|
|
$
|
909
|
|
|
|
$
|
930
|
|
|
|
|
|
|
$
|
1,115
|
|
|
Total
|
|
$
|
1,147
|
|
|
|
(6.1
|
)%
|
|
$
|
1,222
|
|
|
|
$
|
1,236
|
|
|
|
(3.7
|
)%
|
|
$
|
1,283
|
|
|
Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
|
7.9
|
%
|
|
|
|
|
|
|
9.3
|
%
|
|
|
|
8.4
|
%
|
|
|
|
|
|
|
9.5
|
%
|
|
Transactions
|
|
|
5.3
|
%
|
|
|
|
|
|
|
8.4
|
%
|
|
|
|
5.4
|
%
|
|
|
|
|
|
|
9.3
|
%
|
|
Total
|
|
|
7.7
|
%
|
|
|
|
|
|
|
9.2
|
%
|
|
|
|
8.3
|
%
|
|
|
|
|
|
|
9.5
|
%
|
In addition to factors such as general economic conditions and
consumer confidence, our used vehicle business is affected by
the level of manufacturer incentives on new vehicles and new
vehicle financing, the number and quality of trade-ins and lease
turn-ins, the availability of consumer credit and our ability to
effectively manage the level and quality of our overall used
vehicle inventory. Thus far during 2010, the improved economic
conditions, and uptick in consumer confidence, have translated
into an increase in used vehicle traffic. This resulted in
increases in our Same Store used retail unit sales and in our
Same Store used retail revenues in the third quarter of 2010 of
20.8% and 29.2%, respectively, as compared to the same period in
2009. For the nine months ended September 30, 2010,
Same Store used retail unit sales and revenues improved 20.4%
and 28.6%, respectively, as compared to the corresponding period
in 2009. Our average sales price PRU increased 6.9% during both
the third quarter and first nine months of 2010. We generated
these improvements in sales despite the comparison difficulties
as a result of the CARS program in the third quarter of 2009
that increased overall customer traffic and benefited our used
vehicle retail sales, as well as our new vehicle retail sales.
Our certified pre-owned (“CPO”) volume increased 32.7%
to 5,899 for the three months ended September 30, 2010
as compared to the same period of 2009, corresponding to the
overall lift in used retail volume. As a percentage of total
retail sales, CPO units increased to 33.5% of total used retail
units for the three months ended September 30, 2010 as
compared to 31.4% for the same period of 2009. CPO units
represented 34.1% of total used retail units for the nine months
ended September 30, 2010, as compared to 33.5% for the same
period in 2009.
New vehicle trade-ins and lease turn-ins are our best source of
quality used vehicles. Despite the increase in new vehicle
volumes, used vehicle retail sales volumes substantially
outpaced new vehicles sales, and the sourcing of quality used
vehicles continues to be a challenge. This has caused us to
source a higher percentage of our inventory from auctions,
generally at higher prices, as we are forced to bid against
other dealers instead of
41
negotiated prices paid on trade-ins. As a result, gross profit
per used retail unit decreased 5.7% in the third quarter of
2010, as compared to the same period in 2009 and our Same Store
used retail vehicle margins declined 120 basis points to
9.1%. Price relativities between new and used vehicles also
continued to pressure used retail vehicle margins. For the nine
months ended September 30, 2010, gross profit per used
retail unit decreased 4.0%, and coupled with the increase in
average sales price PRU, our Same Store used retail vehicle
margins declined by 110 basis points to 9.4% as compared to
the same period in 2009.
With the increase in new vehicle sales and trade-in activity, we
also experienced an increase in our wholesale used vehicles
sales of 28.1% on 8.2% more units for the quarter ended
September 30, 2010, and 34.1% on 14.4% more units for the
nine months ended September 30, 2010. While wholesaling
more vehicles seems inconsistent with our need for more used
vehicle inventory, most of the vehicles that we sent to auction
to be wholesaled were of relatively lower value, higher mileage
and older age than their retail counterparts. As used vehicle
values have begun to stabilize, our wholesale gross profits per
unit have begun to return to more normal levels. We would expect
the wholesale gross profit per unit to continue to trend closer
to break-even, with stable used vehicle values and supply.
Our days’ supply of used vehicle inventory was 30 days
at September 30, 2010, which was down from
December 31, 2009 levels of 31 days.
Parts
and Service Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2010
|
|
|
% Change
|
|
|
2009
|
|
|
|
2010
|
|
|
% Change
|
|
|
2009
|
|
|
|
|
(Dollars in thousands)
|
|
|
Parts and Service Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
$
|
190,157
|
|
|
|
7.3
|
%
|
|
$
|
177,285
|
|
|
|
$
|
560,192
|
|
|
|
5.3
|
%
|
|
$
|
531,810
|
|
|
Transactions
|
|
|
6,107
|
|
|
|
|
|
|
|
5,969
|
|
|
|
|
15,570
|
|
|
|
|
|
|
|
15,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
196,264
|
|
|
|
7.1
|
%
|
|
$
|
183,254
|
|
|
|
$
|
575,762
|
|
|
|
5.2
|
%
|
|
$
|
547,224
|
|
|
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
$
|
103,278
|
|
|
|
8.1
|
%
|
|
$
|
95,515
|
|
|
|
$
|
302,920
|
|
|
|
7.1
|
%
|
|
$
|
282,887
|
|
|
Transactions
|
|
|
3,329
|
|
|
|
|
|
|
|
2,828
|
|
|
|
|
8,358
|
|
|
|
|
|
|
|
7,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
106,607
|
|
|
|
8.4
|
%
|
|
$
|
98,343
|
|
|
|
$
|
311,278
|
|
|
|
7.2
|
%
|
|
$
|
290,468
|
|
|
Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
|
54.3
|
%
|
|
|
|
|
|
|
53.9
|
%
|
|
|
|
54.1
|
%
|
|
|
|
|
|
|
53.2
|
%
|
|
Transactions
|
|
|
54.5
|
%
|
|
|
|
|
|
|
47.4
|
%
|
|
|
|
53.7
|
%
|
|
|
|
|
|
|
49.2
|
%
|
|
Total
|
|
|
54.3
|
%
|
|
|
|
|
|
|
53.7
|
%
|
|
|
|
54.1
|
%
|
|
|
|
|
|
|
53.1
|
%
|
Our Same Store parts and service revenues increased 7.3% for the
three months ended September 30, 2010, primarily driven by
a 4.8% increase in customer-pay parts and service sales. We also
generated a 9.9% increase in warranty parts and service
revenues, a 9.2% increase in wholesale parts sales and a 10.0%
increase in our collision revenues. Same Store parts and service
revenues increased 5.3% for the nine months ended
September 30, 2010, as compared to the same period a year
ago, primarily from increases in our customer-pay parts and
service revenues, our wholesale parts business and our warranty
parts and service revenues. In addition, our collision business
improved for the nine months ended September 30, 2010.
The increase in Same Store customer-pay parts and service
revenues for the three and nine months ended September 30,
2010, as compared to prior periods was primarily driven by our
domestic brand dealerships and attributable to markets with
recent domestic dealership closures. Our Same Store wholesale
parts business increased for the three and nine months ended
September 30, 2010, as compared to the comparable periods
in 2009, benefiting from recent improvements in business
processes, and an increase in business with second-tier
collision centers and repair shops, which was stimulated by the
stabilization in the economy, as well as the closure of
surrounding dealerships.
The increase in our Same Store warranty parts and service
revenue for the third quarter and first nine months of 2010, as
compared to the corresponding period in 2009, was primarily
driven by the Toyota recalls that began during the first quarter
of 2010, which affected approximately 6.0 million vehicles.
The two major recalls included the
42
floormat/accelerator recall, which affected approximately
5.3 million Toyota and Lexus vehicles, and the sticky
accelerator pedal recall, which affected approximately
2.3 million Toyota vehicles. There were approximately
1.7 million units that were impacted by both recalls.
However, this increase was partially offset by a decline in our
warranty parts and services revenues from our Lexus,
Mercedes-Benz and Chrysler brands. Our collision revenues also
improved for the three and nine months ended September 30,
2010, as a result of enhanced business processes and the opening
of additional capacity.
Same Store parts and service gross profit for the three and nine
months ended September 30, 2010 increased 8.1% and 7.1%,
respectively, from the comparable periods in 2009, while Same
Store parts and service margins increased 40 and 90 basis
points, respectively. These improvements were primarily a result
of internal work generated by the increase in new and used
retail vehicle sales volumes and the increased warranty work
generated by the two major Toyota recalls. These recall
campaigns consist predominantly of labor services, which produce
higher margins than the corresponding parts sales, and are
comparable to our customer-pay business.
Finance
and Insurance Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2010
|
|
|
% Change
|
|
|
2009
|
|
|
|
2010
|
|
|
% Change
|
|
|
2009
|
|
|
|
|
(Dollars in thousands, except per unit amounts)
|
|
|
Retail New and Used Unit Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
|
41,796
|
|
|
|
8.7
|
%
|
|
|
38,439
|
|
|
|
|
117,507
|
|
|
|
15.6
|
%
|
|
|
101,635
|
|
|
Transactions
|
|
|
2,201
|
|
|
|
|
|
|
|
793
|
|
|
|
|
4,851
|
|
|
|
|
|
|
|
2,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
43,997
|
|
|
|
12.1
|
%
|
|
|
39,232
|
|
|
|
|
122,358
|
|
|
|
17.5
|
%
|
|
|
104,123
|
|
|
Retail Finance Fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
$
|
15,126
|
|
|
|
27.5
|
%
|
|
$
|
11,861
|
|
|
|
$
|
41,275
|
|
|
|
30.6
|
%
|
|
$
|
31,609
|
|
|
Transactions
|
|
|
577
|
|
|
|
|
|
|
|
275
|
|
|
|
|
1,299
|
|
|
|
|
|
|
|
815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
15,703
|
|
|
|
29.4
|
%
|
|
$
|
12,136
|
|
|
|
$
|
42,574
|
|
|
|
31.3
|
%
|
|
$
|
32,424
|
|
|
Vehicle Service Contract Fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
$
|
18,532
|
|
|
|
15.4
|
%
|
|
$
|
16,064
|
|
|
|
$
|
52,232
|
|
|
|
21.6
|
%
|
|
$
|
42,955
|
|
|
Transactions
|
|
|
172
|
|
|
|
|
|
|
|
353
|
|
|
|
|
391
|
|
|
|
|
|
|
|
920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,704
|
|
|
|
13.9
|
%
|
|
$
|
16,417
|
|
|
|
$
|
52,623
|
|
|
|
19.9
|
%
|
|
$
|
43,875
|
|
|
Insurance and Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
$
|
9,679
|
|
|
|
10.8
|
%
|
|
$
|
8,736
|
|
|
|
$
|
28,901
|
|
|
|
13.7
|
%
|
|
$
|
25,419
|
|
|
Transactions
|
|
|
196
|
|
|
|
|
|
|
|
220
|
|
|
|
|
435
|
|
|
|
|
|
|
|
495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,875
|
|
|
|
10.3
|
%
|
|
$
|
8,956
|
|
|
|
$
|
29,336
|
|
|
|
13.2
|
%
|
|
$
|
25,914
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
$
|
43,337
|
|
|
|
18.2
|
%
|
|
$
|
36,661
|
|
|
|
$
|
122,408
|
|
|
|
22.4
|
%
|
|
$
|
99,983
|
|
|
Transactions
|
|
|
945
|
|
|
|
|
|
|
|
848
|
|
|
|
|
2,125
|
|
|
|
|
|
|
|
2,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
44,282
|
|
|
|
18.1
|
%
|
|
$
|
37,509
|
|
|
|
$
|
124,533
|
|
|
|
21.8
|
%
|
|
$
|
102,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance and Insurance Revenues per Unit Sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
$
|
1,037
|
|
|
|
8.7
|
%
|
|
$
|
954
|
|
|
|
$
|
1,042
|
|
|
|
5.9
|
%
|
|
$
|
984
|
|
|
Transactions
|
|
$
|
429
|
|
|
|
|
|
|
$
|
1,069
|
|
|
|
$
|
438
|
|
|
|
|
|
|
$
|
896
|
|
|
Total
|
|
$
|
1,006
|
|
|
|
5.2
|
%
|
|
$
|
956
|
|
|
|
$
|
1,018
|
|
|
|
3.7
|
%
|
|
$
|
982
|
|
Our Same Store finance and insurance revenues increased by 18.2%
to $43.3 million for the three months ended
September 30, 2010, as compared to the same period in 2009.
This improvement was primarily driven by the increases in new
and used vehicle sales volumes. In addition, we experienced
increases in finance income per contract and increases in both
finance and vehicle service contract penetration rates for the
three months ended
43
September 30, 2010. The increase in our finance penetration
rate was primarily driven by the increase in manufacturer
financing promotions that continued during the third quarter of
2010, as well as the negative impact of the CARS program on
finance penetration rates in the third quarter of 2009 as a
disproportionate number of the CARS customers paid cash for
their vehicle purchase. These increases were partially offset by
an increase in our chargeback expense. As a result, our Same
Store revenues PRU for the three months ended September 30,
2010 improved 8.7% to $1,037.
For the first nine months of 2010, our Same Store finance and
insurance revenues improved 22.4% over the comparable 2009
period, primarily as a result of the 15.6% increase in retail
new and used unit sales. Our Same Store revenues PRU increased
5.9%, or $58, to $1,042 PRU for the nine months ended
September 30, 2010, as compared to the same in period in
2009, primarily as a result of improvement in finance and
vehicle service contract penetration rates and an increase in
finance income per contract.
Selling,
General and Administrative Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2010
|
|
|
% Change
|
|
|
2009
|
|
|
|
2010
|
|
|
% Change
|
|
|
2009
|
|
|
|
|
(Dollars in thousands)
|
|
|
Personnel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
$
|
100,289
|
|
|
|
8.2
|
%
|
|
$
|
92,687
|
|
|
|
$
|
296,931
|
|
|
|
11.0
|
%
|
|
$
|
267,601
|
|
|
Transactions
|
|
|
3,686
|
|
|
|
|
|
|
|
2,490
|
|
|
|
|
10,140
|
|
|
|
|
|
|
|
7,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
103,975
|
|
|
|
9.2
|
%
|
|
$
|
95,177
|
|
|
|
$
|
307,071
|
|
|
|
11.7
|
%
|
|
$
|
274,960
|
|
|
Advertising
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
$
|
11,097
|
|
|
|
21.3
|
%
|
|
$
|
9,147
|
|
|
|
$
|
32,375
|
|
|
|
22.4
|
%
|
|
$
|
26,459
|
|
|
Transactions
|
|
|
539
|
|
|
|
|
|
|
|
171
|
|
|
|
|
1,144
|
|
|
|
|
|
|
|
537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,636
|
|
|
|
24.9
|
%
|
|
$
|
9,318
|
|
|
|
$
|
33,519
|
|
|
|
24.2
|
%
|
|
$
|
26,996
|
|
|
Rent and Facility Costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
$
|
21,158
|
|
|
|
(3.3
|
)%
|
|
$
|
21,872
|
|
|
|
$
|
65,926
|
|
|
|
0.6
|
%
|
|
$
|
65,508
|
|
|
Transactions
|
|
|
1,247
|
|
|
|
|
|
|
|
995
|
|
|
|
|
2,997
|
|
|
|
|
|
|
|
2,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
22,405
|
|
|
|
(2.0
|
)%
|
|
$
|
22,867
|
|
|
|
$
|
68,923
|
|
|
|
0.7
|
%
|
|
$
|
68,421
|
|
|
Other SG&A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
$
|
35,027
|
|
|
|
3.2
|
%
|
|
$
|
33,956
|
|
|
|
$
|
104,928
|
|
|
|
11.5
|
%
|
|
$
|
94,082
|
|
|
Transactions
|
|
|
882
|
|
|
|
|
|
|
|
1,148
|
|
|
|
|
8,355
|
|
|
|
|
|
|
|
2,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
35,909
|
|
|
|
2.3
|
%
|
|
$
|
35,104
|
|
|
|
$
|
113,283
|
|
|
|
17.5
|
%
|
|
$
|
96,436
|
|
|
Total SG&A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
$
|
167,571
|
|
|
|
6.3
|
%
|
|
$
|
157,662
|
|
|
|
$
|
500,160
|
|
|
|
10.3
|
%
|
|
$
|
453,650
|
|
|
Transactions
|
|
|
6,354
|
|
|
|
|
|
|
|
4,804
|
|
|
|
|
22,636
|
|
|
|
|
|
|
|
13,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
173,925
|
|
|
|
7.1
|
%
|
|
$
|
162,466
|
|
|
|
$
|
522,796
|
|
|
|
12.0
|
%
|
|
$
|
466,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
$
|
220,747
|
|
|
|
6.6
|
%
|
|
$
|
207,099
|
|
|
|
$
|
640,937
|
|
|
|
12.0
|
%
|
|
$
|
572,430
|
|
|
Transactions
|
|
|
8,092
|
|
|
|
|
|
|
|
4,922
|
|
|
|
|
19,075
|
|
|
|
|
|
|
|
13,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
228,839
|
|
|
|
7.9
|
%
|
|
$
|
212,021
|
|
|
|
$
|
660,012
|
|
|
|
12.7
|
%
|
|
$
|
585,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SG&A as a % of Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
|
75.9
|
%
|
|
|
|
|
|
|
76.1
|
%
|
|
|
|
78.0
|
%
|
|
|
|
|
|
|
79.2
|
%
|
|
Transactions
|
|
|
78.5
|
%
|
|
|
|
|
|
|
97.6
|
%
|
|
|
|
118.7
|
%
|
|
|
|
|
|
|
98.5
|
%
|
|
Total
|
|
|
76.0
|
%
|
|
|
|
|
|
|
76.6
|
%
|
|
|
|
79.2
|
%
|
|
|
|
|
|
|
79.7
|
%
|
|
Employees
|
|
|
7,500
|
|
|
|
|
|
|
|
7,000
|
|
|
|
|
7,500
|
|
|
|
|
|
|
|
7,000
|
|
44
Our SG&A consists primarily of salaries, commissions and
incentive-based compensation, as well as rent, advertising,
insurance, benefits, utilities and other fixed expenses. We
believe that the majority of our personnel and all of our
advertising expenses are variable and can be adjusted in
response to changing business conditions given time.
In response to the increasingly challenging automotive retailing
environment, we initiated significant cost reduction actions
beginning in the fourth quarter of 2008. These actions, which
were fully implemented in the first quarter of 2009, continued
to provide benefit to us throughout the third quarter of 2010 in
the form of a leaner cost organization. Coupled with the
increase in gross profit, our Same Store SG&A as a
percentage of Gross Profit improved 20 basis points to
75.9% for the three months ended September 30, 2010 and
120 basis points to 78.0% for the nine months ended
September 30, 2010, as compared to the same periods in
2009. Our absolute dollars of Same Store SG&A expenses
increased by $9.9 million and $46.5 million, for the
three and nine months respectively, from the same periods in
2009, which was primarily attributable to personnel costs that
is generally driven by the increased volume in vehicle sales.
Our net advertising expenses increased by $2.0 million, or
21.3%, and $5.9 million, or 22.4%, for the three and nine
months ended September 30, 2010, from the same periods in
2009, following the general stabilization in the economy and
efforts to capture market share and stimulate parts and service
activity.
Our Same Store other SG&A increased $1.1 million and
$10.8 million, respectively, for the three and nine months
ended September 30, 2010, as compared to the same periods
in 2009, primarily due to increases in vehicle delivery
expenses, tools and supplies and outside services and other
areas that traditionally trend with sales volume. We continue to
aggressively pursue opportunities that take advantage of our
size and negotiating leverage with our vendors and service
providers.
Depreciation
and Amortization Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2010
|
|
|
% Change
|
|
|
2009
|
|
|
|
2010
|
|
|
% Change
|
|
|
2009
|
|
|
|
|
(Dollars in thousands)
|
|
|
Same Stores
|
|
$
|
6,491
|
|
|
|
1.5
|
%
|
|
$
|
6,394
|
|
|
|
$
|
19,315
|
|
|
|
1.7
|
%
|
|
$
|
18,993
|
|
|
Transactions
|
|
|
281
|
|
|
|
|
|
|
|
272
|
|
|
|
|
621
|
|
|
|
|
|
|
|
548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,772
|
|
|
|
1.6
|
%
|
|
$
|
6,666
|
|
|
|
$
|
19,936
|
|
|
|
2.0
|
%
|
|
$
|
19,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our Same Store depreciation and amortization expense increased
1.5% and 1.7% respectively for the three and nine months ended
September 30, 2010, as compared to the same period of 2009.
We continue to strategically add dealership-related real estate
to our portfolio and make improvements to our existing
facilities, designed to enhance the profitability of our
dealerships and the overall customer experience. We critically
evaluate all planned future capital spending, working closely
with our manufacturer partners to maximize the return on our
investments.
Floorplan
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2010
|
|
|
% Change
|
|
|
2009
|
|
|
|
2010
|
|
|
% Change
|
|
|
2009
|
|
|
|
|
(Dollars in thousands)
|
|
|
Same Stores
|
|
$
|
8,851
|
|
|
|
18.7
|
%
|
|
$
|
7,458
|
|
|
|
$
|
24,785
|
|
|
|
2.9
|
%
|
|
$
|
24,093
|
|
|
Transactions
|
|
|
170
|
|
|
|
|
|
|
|
65
|
|
|
|
|
435
|
|
|
|
|
|
|
|
249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,021
|
|
|
|
19.9
|
%
|
|
$
|
7,523
|
|
|
|
$
|
25,220
|
|
|
|
3.6
|
%
|
|
$
|
24,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Memo:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturer’s assistance
|
|
$
|
6,512
|
|
|
|
12.8
|
%
|
|
$
|
5,771
|
|
|
|
$
|
17,836
|
|
|
|
18.7
|
%
|
|
$
|
15,030
|
|
Our floorplan interest expense fluctuates with changes in
borrowings outstanding and interest rates, which are based on
one-month LIBOR rate (or Prime rate in some cases) plus a
spread. Mitigating the impact of interest rate fluctuations, we
employ an interest rate hedging strategy, whereby we swap
variable interest rate exposure for a fixed interest rate over
the term of the variable interest rate debt. As of
September 30, 2010, we had interest rate
45
swaps in place for an aggregate notional amount of
$550.0 million that fixed our underlying LIBOR rate at a
weighted average rate of 4.7%. The majority of the monthly
settlements of these interest rate swap liabilities are
recognized as floorplan interest expense.
Our Same Store floorplan interest expense increased
$1.4 million, or 18.7%, during the three months ended
September 30, 2010, compared to the corresponding period of
2009. The increase primarily reflects a $255.3 million
increase in our weighted average floorplan borrowings
outstanding. The Same Store increase during the nine months
ended September 30, 2010 as compared to the same period
last year is attributable to an $81.4 million increase in
our weighted average floorplan borrowings outstanding.
Other
Interest Expense, net
Other net interest expense, which consists of interest charges
primarily on our Mortgage Facility, our Acquisition Line and our
long-term debt, partially offset by interest income, decreased
$0.4 million, or 5.8%, to $6.9 million for the three
months ended September 30, 2010, from $7.3 million for
the same period in 2009. This decrease was primarily due to an
increase in interest income, the payoff of all borrowings
outstanding on our Acquisition Line and the redemption of our
8.25% Notes on March 30, 2010. Partially offsetting
the decrease was interest expense related to our
3.00% Convertible Senior Notes due 2020 (the
“3.00% Notes”), which were issued on
March 16, 2010. Our weighted average borrowings declined
$26.9 million and $33.8 million for three months and
nine months ended September 30, 2010 as compared to the
same period in 2009.
For the nine months ended September 30, 2010, other net
interest expense decreased $1.6 million, or 7.3%, to
$20.3 million. This decrease was primarily due to an
increase in interest income, the payoff of all borrowings
outstanding on our Acquisition Line and the redemption of our
8.25% Notes. Partially offsetting the decrease was interest
expense related to our 3.00% Convertible Senior Notes.
Included in other interest expense for the three months ended
September 30, 2010 and 2009 is non-cash, discount
amortization expense of $2.1 million and $1.1 million,
respectively, representing the impact of the accounting for
convertible debt. Based on the level of 2.25% Notes
outstanding and the issuance of our 3.00% Notes during the
latter part of the first quarter of 2010, we anticipate the
ongoing annual non-cash discount amortization expense related to
the convertible debt instruments will be $11.9 million,
which will be included in other interest expense, net.
Gain/Loss
on Redemption of Debt
On March 30, 2010, we completed the redemption of
$74.6 million of our 8.25% Notes, representing the
then outstanding balance, at a redemption price of 102.75% of
the principal amount of the notes, utilizing proceeds from our
3.00% Notes offering. We incurred a $3.9 million
pretax charge in completing the redemption, consisting primarily
of a $2.1 million redemption premium, a $1.5 million
write-off of unamortized bond discount and deferred costs and
$0.3 million of other debt extinguishment costs. Total cash
used in completing the redemption, excluding accrued interest of
$0.8 million, was $77.0 million.
We did not repurchase any of our 2.25% Notes during the
first nine months of 2010. During the first nine months of 2009,
we repurchased $41.7 million par value of our outstanding
2.25% Notes for $20.9 million in cash, excluding
$0.2 million of accrued interest, and realized a net gain
of $8.7 million. In conjunction with the repurchases,
$12.6 million of discounts, underwriters’ fees and
debt issuance costs were written off. The unamortized cost of
the related purchased options (the “2.25% Purchased
Options”) acquired at the time the repurchased convertible
notes were issued was $13.4 million, which was deductible
as original issue discount for tax purposes, was taken into
account in determining the tax gain. Accordingly, we recorded a
proportionate reduction in our deferred tax assets. No value was
attributed to the equity component of the 2.25% Notes at
the time of the redemption and, therefore, no adjustment to
additional
paid-in-capital
was recognized.
In addition, during the nine months ended September 30,
2009, we refinanced certain real estate related debt through
borrowings from our Mortgage Facility. In conjunction with the
refinancing, we paid down the total amount borrowed by
$4.1 million and recognized an aggregate prepayment penalty
of $0.5 million.
46
Provision
for Income Taxes
Our provision for income taxes increased $2.0 million to
$11.6 million for the three months ended September 30,
2010, from a provision of $9.6 million for the same period
in 2009, primarily due to the increase of pretax book income.
For the three months ended September 30, 2010, our
effective tax rate increased to 37.9% from 34.4% for the same
period in 2009. This increase was primarily due to the changes
in certain state tax laws and rates, the mix of our pretax
income from the taxable state jurisdictions in which we operate,
as well as a benefit recognized in conjunction with a tax
election made during the three months ended September 30,
2009.
Our provision for income taxes increased $3.3 million to
$25.1 million for the nine months ended September 30,
2010, from a provision of $21.8 million for the same period
in 2009, primarily due to the increase of pretax book income.
For the nine months ended September 30, 2010, our effective
tax rate increased to 38.7% from 37.2% for the same period in
2009. This increase was primarily due to the changes in certain
state tax laws and rates and the mix of our pretax income from
the taxable state jurisdictions in which we operate, as well as
a benefit recognized in conjunction with a tax election made
during the nine months ended September 30, 2009.
We believe that it is more likely than not that our deferred tax
assets, net of valuation allowances provided, will be realized,
based primarily on the assumption of future taxable income and
taxes available in carry back periods. We expect our effective
tax rate for the remainder of 2010 will be approximately 39.0%.
Liquidity
and Capital Resources
Our liquidity and capital resources are primarily derived from
cash on hand, cash temporarily invested as a pay down of
Floorplan Line levels, cash from operations, borrowings under
our credit facilities, which provide vehicle floorplan
financing, working capital and real estate acquisition
financing, and proceeds from debt and equity offerings. Based on
current facts and circumstances, we believe we have adequate
cash flow, coupled with available borrowing capacity, to fund
our current operations, capital expenditures and acquisition
program for the remainder of 2010. If economic and business
conditions deteriorate further or if our capital expenditures or
acquisition plans for 2010 change, we may need to access the
private or public capital markets to obtain additional funding.
Sources
of Liquidity and Capital Resources
Cash on Hand.
As of September 30, 2010,
our total cash on hand was $96.2 million. Included in cash
on hand are balances from various investments in marketable and
debt securities, such as money market accounts and variable-rate
demand obligations with manufacturer-affiliated finance
companies, which have maturities of less than three months or
are redeemable on demand by us. The balance of cash on hand
excludes $57.9 million of immediately available funds used
to pay down our Floorplan Line. We use the pay down of our
Floorplan Line as a channel for the short-term investment of
excess cash.
Cash Flows.
The following table sets forth
selected historical information regarding cash flows from our
Consolidated Statements of Cash Flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
Ended September 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
(In thousands)
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
(52,185
|
)
|
|
$
|
464,772
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(14,984
|
)
|
|
|
7,504
|
|
|
Net cash provided by (used in) financing activities
|
|
|
149,817
|
|
|
|
(481,945
|
)
|
|
Effect of exchange rate changes on cash
|
|
|
293
|
|
|
|
1,407
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
82,941
|
|
|
$
|
(8,262
|
)
|
|
|
|
|
|
|
|
|
|
|
With respect to all new vehicle floorplan borrowings, the
manufacturers of the vehicles draft our credit facilities
directly with no cash flow to or from us. With respect to
borrowings for used vehicle financing, we choose which vehicles
to finance and the funds flow directly to us from the lender.
All borrowings from, and repayments to,
47
lenders affiliated with our vehicle manufacturers (excluding the
cash flows from or to manufacturer-affiliated lenders
participating in our syndicated lending group) are presented
within Cash Flows from Operating Activities on the Consolidated
Statements of Cash Flows. All borrowings from, and repayments
to, the syndicated lending group under our revolving credit
facility (our “Revolving Credit Facility”) (including
the cash flows from or to manufacturer-affiliated lenders
participating in the facility) are presented within Cash Flows
from Financing Activities.
Operating Activities.
For the nine months
ended September 30, 2010, we used $52.2 million in net
cash flow from operating activities, primarily driven by
$158.9 million in net changes in operating assets and
liabilities partially offset by $39.7 million in net income
and significant non-cash adjustments related to depreciation and
amortization of $19.9 million, deferred income taxes of
$22.2 million, and stock-based compensation of
$7.5 million. Included in the net changes in operating
assets and liabilities is $152.9 million of cash outflow
due to increases in inventory levels, $10.6 million of cash
outflow from increases of vehicles receivables,
contracts-in-transit,
accounts and notes receivables and $9.6 million of cash
provided by increases in accounts payable and accrued expenses.
In addition, cash flow from operating activities includes an
adjustment of $3.9 million for the loss on the redemption
of our 8.25% Notes. The debt redemption is considered a
cash flow from financing activities.
For the nine months ended September 30, 2009, we generated
$464.8 million in net cash flow from operating activities,
primarily driven by $378.8 million in net changes in
operating assets and liabilities, $36.8 million in net
income and $58.0 million in adjustments for non-cash items.
Included in the net changes in operating assets and liabilities
is $373.1 million of cash flow provided by reductions in
inventory levels and $56.8 million of cash flow from
collections of vehicles receivables,
contracts-in-transit,
accounts and notes receivables, partially offset by
$39.5 million of net repayments to manufacturer-affiliated
floorplan lenders. The non-cash adjustments include
$19.5 million in depreciation and amortization,
$23.1 million in deferred income taxes, $7.4 million
of stock based compensation, $5.4 million of debt discount
and issuance cost amortization and $2.8 million in non-cash
asset impairment charges. In addition, cash flow from operating
activities includes an adjustment of $8.2 million for gains
from repurchase of $41.7 million of par value of our
2.25% Notes, which is considered a cash flow from financing
activities.
Investing Activities.
During the first nine
months of 2010, we used $15.0 million from investing
activities, primarily as a result of $34.4 million used in
dealership acquisitions, including vehicle and parts inventory
and related property, and $22.7 million for purchases of
property and equipment to construct new and improve existing
facilities, including $9.5 million for real estate to be
used in the future relocation of an existing dealership. These
cash outflows were partially offset by $41.0 million in
proceeds from the sale of dealership franchises, property and
equipment during the nine months ended September 30, 2010.
During the first nine months of 2009, we generated
$7.5 million from investing activities, primarily
consisting of $21.1 million from the proceeds of sales of
two franchises and related property and equipment, partially
offset by $11.7 million of capital expenditures for the
construction of new or expanded facilities and $3.8 million
for inventory acquired as part of our dealership acquisition
during the nine months ended September 30, 2009.
Financing Activities.
We generated
$149.8 million in financing activities during the nine
months ended September 30, 2010, consisting primarily of
$115.0 million of proceeds from the issuance of our
3.00% Notes, $29.3 million from the sale of the
associated 3.00% Warrants and $178.4 million in net
borrowings under the Floorplan Line of our Revolving Credit
Facility. These cash inflows were partially offset by the
$77.0 million used to repurchase all of our outstanding
8.25% Notes, $45.9 million used for the 3.00%
Purchased Options, $35.3 million of principal payments on
the Mortgage Facility, which includes $24.2 million related
to the disposition of our dealership in Florida, and
$4.0 million in underwriters’ fees and debt issuance
costs related to the 3.00% Notes offering. We entered into
$12.8 million of Real Estate Notes, of which
$3.8 million was used to pay down the Mortgage Facility. In
addition, we used $26.8 million to repurchase treasury
shares of our common stock during the nine months ended
September 30, 2010. Included in the $178.4 million of
net borrowings under the Floorplan Line of our Revolving Credit
Facility is a net cash inflow of $13.6 million due to a
decrease in our floorplan offset account.
48
We used $481.9 million in financing activities during the
nine months ended September 30, 2009, consisting primarily
of $390.3 million in net repayments under the Floorplan
Line of our Revolving Credit Facility, $50.0 million in net
repayments under the Acquisition Line of our Revolving Credit
Facility, $20.9 million to repurchase $41.7 million
par value of our 2.25% Notes, $17.2 million to repay a
portion of our outstanding Mortgage Facility borrowings.
Included in the $390.3 million of net repayments under the
Floorplan Line of our Revolving Credit Facility is a net cash
outflow of $26.2 million due to changes in our floorplan
offset account. In addition, we refinanced our March 2008 and
September 2008 Real Estate Loans through borrowings on our
Mortgage Facility of $27.9 million. In conjunction with the
refinancing, we paid down the total amount borrowed by
$4.1 million and recognized an aggregate prepayment penalty
of $0.5 million.
Working Capital.
At September 30, 2010,
we had $175.7 million of working capital. Changes in our
working capital are driven primarily by changes in floorplan
notes payable outstanding. Borrowings on our new vehicle
floorplan notes payable, subject to agreed upon pay-off terms,
are equal to 100% of the factory invoice of the vehicles.
Borrowings on our used vehicle floorplan notes payable, subject
to agreed upon pay-off terms, are limited to 70% of the
aggregate book value of our used vehicle inventory. At times, we
have made payments on our floorplan notes payable using excess
cash flow from operations and the proceeds of debt and equity
offerings. As needed, we re-borrow the amounts later, up to the
limits on the floorplan notes payable discussed below, for
working capital, acquisitions, capital expenditures or general
corporate purposes.
Credit Facilities.
Our various credit
facilities are used to finance the purchase of inventory and
real estate, provide acquisition funding and provide working
capital for general corporate purposes. Our three most
significant domestic revolving facilities currently provide us
with a total of $1.15 billion of borrowing capacity for
inventory floorplan financing, $231.2 million for real
estate purchases, and an additional $350.0 million for
acquisitions, capital expenditures
and/or
other
general corporate purposes.
Revolving Credit Facility.
Our Revolving
Credit Facility, which is comprised of 20 financial
institutions, including four manufacturer-affiliated finance
companies, expires in March 2012 and consists of two tranches:
$1.0 billion for vehicle inventory floorplan financing (the
“Floorplan Line”) and $350.0 million for working
capital, including acquisitions (the “Acquisition
Line”). Up to half of the Acquisition Line can be borrowed
in either Euros or Pound Sterling. The capacity under these two
tranches can be re-designated within the overall
$1.35 billion commitment, subject to the original limits of
a minimum of $1.0 billion for the Floorplan Line and
maximum of $350.0 million for the Acquisition Line. The
Revolving Credit Facility can be expanded to its maximum
commitment of $1.85 billion, subject to participating
lender approval. The Acquisition Line bears interest at the
one-month London Inter Bank Offered Rate (“LIBOR”)
plus a margin that ranges from 150 to 250 basis points,
depending on our leverage ratio. The Floorplan Line bears
interest at rates equal to LIBOR plus 87.5 basis points for
new vehicle inventory and LIBOR plus 97.5 basis points for
used vehicle inventory. In addition, we pay a commitment fee on
the unused portion of the Acquisition Line, as well as the
Floorplan Line. The available funds on the Acquisition Line
carry a commitment fee ranging from 0.25% to 0.375% per annum,
depending on our leverage ratio, based on a minimum commitment
of $200.0 million. The Floorplan Line requires a 0.20%
commitment fee on the unused portion. In conjunction with the
amendment to the Revolving Credit Facility on March 19,
2007, we capitalized $2.3 million of related costs that are
being amortized over the term of the facility.
As of September 30, 2010, after considering outstanding
balances, we had $401.3 million of available floorplan
capacity under the Floorplan Line. Included in the
$401.3 million available balance under the Floorplan Line
is $57.9 million of immediately available funds. The
weighted average interest rate on the Floorplan Line was 1.1% as
of September 30, 2010. After considering $17.3 million
of outstanding letters of credit, and other factors included in
our available borrowing base calculation, there was
$137.5 million of available borrowing capacity under the
Acquisition Line as of September 30, 2010. The amount of
available borrowing capacity under the Acquisition Line may be
limited from time to time based upon certain debt covenants.
All of our domestic dealership-owning subsidiaries are
co-borrowers under the Revolving Credit Facility. The Revolving
Credit Facility contains a number of significant covenants that,
among other things, restrict our ability to make disbursements
outside of the ordinary course of business, dispose of assets,
incur additional indebtedness, create liens on assets, make
investments and engage in mergers or consolidations. We are also
required to comply with specified financial tests and ratios
defined in the Revolving Credit Facility, such as fixed charge
coverage,
49
current, total leverage, and senior secured leverage, among
others. As of September 30, 2010, we were in compliance
with these covenants, including:
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
|
|
2010
|
|
|
|
Required
|
|
Actual
|
|
|
|
Senior secured leverage ratio
|
|
< 2.75
|
|
|
1.24
|
|
|
Total leverage ratio
|
|
< 4.50
|
|
|
3.61
|
|
|
Fixed charge coverage ratio
|
|
> 1.25
|
|
|
1.70
|
|
|
Current Ratio
|
|
> 1.15
|
|
|
1.35
|
|
Based upon our current operating and financial projections, we
believe that we will remain compliant with such covenants in the
future. Further, provisions of our Revolving Credit Facility
require us to maintain financial ratios and a minimum level of
stockholders’ equity (the “Required Stockholders’
Equity”), which effectively limits the amount of
disbursements (or “Restricted Payments”) that we may
make outside the ordinary course of business (e.g., cash
dividends and stock repurchases). The Required
Stockholders’ Equity is defined as a base of
$520.0 million, plus 50% of cumulative adjusted net income,
plus 100% of the proceeds from any equity issuances and less
non-cash asset impairment charges. The amount by which adjusted
stockholders’ equity exceeds the Required
Stockholders’ Equity is the amount available for Restricted
Payments (the “Amount Available for Restricted
Payments”). For purposes of this covenant calculation, net
income and stockholders’ equity represents such amounts per
the consolidated financial statements, adjusted to exclude our
foreign operations and the impact of the adoption of the
accounting standard for convertible debt that became effective
on January 1, 2009. As of September 30, 2010, the
Amount Available for Restricted Payments was $168.0 million.
Amounts borrowed under the Floorplan Line of our Revolving
Credit Facility must be repaid upon the sale of the specific
vehicle financed, and in no case may a borrowing for a vehicle
remain outstanding greater than one year. Our obligations under
the Revolving Credit Facility are secured by essentially all of
our domestic personal property (other than equity interests in
dealership-owning subsidiaries) including all motor vehicle
inventory and proceeds from the disposition of dealership-owning
subsidiaries.
Ford Motor Credit Company Facility.
Our FMCC
Facility provides for the financing of, and is collateralized
by, our Ford, Lincoln and Mercury new vehicle inventory. This
arrangement provides for $150.0 million of floorplan
financing and is an evergreen arrangement that may be cancelled
with 30 days notice by either party. During June 2009, we
amended our FMCC Facility to reduce the available floorplan
financing available from $300.0 million to
$150.0 million, with no change to any other original terms
or pricing related to the facility. As of September 30,
2010, we had an outstanding balance of $52.8 million, with
an available floorplan capacity of $97.2 million. This
facility bears interest at a rate of Prime plus 150 basis
points minus certain incentives; however, the prime rate is
defined to be a minimum of 4.0%. As of September 30, 2010,
the interest rate on the FMCC Facility was 5.5%, before
considering the applicable incentives.
Real Estate Credit Facility.
Our Mortgage
Facility is a five-year real estate credit facility that is
syndicated with nine financial institutions and provides a
maximum commitment of $231.2 million. The Mortgage Facility
is used for acquisitions of real estate and vehicle dealerships.
Borrowings under the Mortgage Facility consist of individual
term loans, each in a minimum amount of $0.5 million,
secured by a parcel or property. The facility matures in March
2012. At our option, any loan under the Mortgage Facility will
bear interest at a rate equal to (i) one-month LIBOR plus
1.05% or (ii) the Base Rate as defined in the facility
agreement. The interest rate of the Mortgage Facility as of
September 30, 2010 was 1.3%. Quarterly principal payments
are required of each loan outstanding under the facility at an
amount equal to one eightieth of the original principal amount,
with any remaining unpaid principal amount due at the end of the
term. We capitalized $1.3 million of related debt financing
costs that are being amortized over the term of the facility, of
which, $0.9 million has been amortized as of
September 30, 2010.
The Mortgage Facility is guaranteed by us and essentially all of
our existing and future direct and indirect domestic
subsidiaries that also guarantee or are required to guarantee
our Revolving Credit Facility. Each loan is secured by real
property (and improvements related thereto) specified by us and
located at or near a vehicle dealership operated by a subsidiary
of ours or otherwise used or to be used by a vehicle dealership
operated by a subsidiary of ours.
50
As of September 30, 2010, we were entitled to sell any
property subject to the facility on fair and reasonable terms in
an arm’s length transaction, remove it from the facility,
and repay in full the entire outstanding balance of the loan
relating to such sold property. On July 13, 2010, the
Mortgage Facility was amended to require that repayments of
outstanding loan balances, other than scheduled principal
payments, would immediately and permanently reduce the total
$235.0 million original commitment. During the three months
ended September 30, 2010, we executed a note agreement
with a third-party financial institution for $3.8 million
to refinance a portion of the borrowings under our Mortgage
Facility related to existing dealership real estate. This pay
down of the Mortgage Facility permanently reduced the total
commitment from $235.0 million to $231.2 million at
September 30, 2010. We also executed two additional note
agreements during the third quarter of 2010 with the same
third-party financial institution for an aggregate of
$9.0 million to finance the purchase of real estate to be
developed for future dealerships. We plan to replace the
remainder of our existing syndicated Mortgage Facility with
separate mortgage loans, similar to the aforementioned Real
Estate Notes, through several of our manufacturer partners and a
group of banking partners during the fourth quarter of 2010. As
of September 30, 2010, available unused borrowings from the
Mortgage Facility totaled $73.8 million.
The Mortgage Facility contains certain covenants, including
financial ratios that must be complied with including: fixed
charge coverage ratio; senior secured leverage ratio;
dispositions of financed properties; ownership of equity
interests in a lessor subsidiary; and occupancy or sublease of
any financed property. We are also required to comply with
specified financial covenant ratios defined in the note
agreements referred to above, including fixed charge coverage
and senior secured leverage, which are calculated on similar
terms to the ratios required under our Mortgage Facility. As of
September 30, 2010, we were in compliance with all of these
covenants. Based upon our current operating and financial
projections, we believe that we will remain compliant with such
covenants in the future.
Other Credit Facilities.
We finance the new,
used and rental vehicle inventories of our U.K. operations using
a credit facility with BMW Financial Services. This facility is
an evergreen arrangement that may be cancelled with notice by
either party and bears interest at a base rate, plus a surcharge
that varies based upon the type of vehicle being financed. As of
September 30, 2010, the interest rate being charged on
borrowings outstanding under this facility ranged from 1.1% to
4.5%.
Financing for rental vehicles is typically obtained directly
from the automobile manufacturers, excluding rental vehicles
financed through the Revolving Credit Facility. These financing
arrangements generally require small monthly payments and mature
in varying amounts throughout 2010 and 2011. As of
September 30, 2010, the interest rate charged on borrowings
related to our rental vehicle fleet ranged from 1.1% to 6.8%.
Rental vehicles are typically moved to used vehicle inventory
when they are removed from rental service and repayment of the
borrowing is required at that time.
The following table summarizes the current position of our
credit facilities as of September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
Credit Facility
|
|
Commitment
|
|
|
Outstanding
|
|
|
Available
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
Floorplan
Line
(1)
|
|
$
|
1,000,000
|
|
|
$
|
598,738
|
|
|
$
|
401,262
|
|
|
Acquisition
Line
(2)
|
|
|
350,000
|
|
|
|
17,275
|
|
|
|
137,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revolving Credit Facility
|
|
|
1,350,000
|
|
|
|
616,013
|
|
|
|
538,759
|
|
|
FMCC Facility
|
|
|
150,000
|
|
|
|
52,822
|
|
|
|
97,178
|
|
|
Mortgage Facility
|
|
|
231,206
|
|
|
|
157,443
|
|
|
|
73,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Credit
Facilities
(3)
|
|
$
|
1,731,206
|
|
|
$
|
826,278
|
|
|
$
|
709,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The available balance at
September 30, 2010, includes $57.9 million of
immediately available funds.
|
|
|
|
(2)
|
|
The outstanding balance of
$17.3 million at September 30, 2010 is completely made
up of outstanding letters of credit. The total amount available
is restricted to a borrowing base calculation within the debt
covenants of the Revolving Credit Facility which totaled
$154.8 million at September 30, 2010.
|
|
|
|
(3)
|
|
Outstanding balance excludes
$51.1 million of borrowings with manufacturer-affiliates
for foreign and rental vehicle financing not associated with any
of the Company’s credit facilities.
|
51
Long-Term Debt.
On March 16, 2010, we
issued $100.0 million aggregate principal amount the
3.00% Notes at par in a private offering to qualified
institutional buyers pursuant to Rule 144A under the
Securities Act. On April 1, 2010, the underwriters of the
3.00% Notes exercised their full over-allotment option, and
we issued an additional $15.0 million aggregate principal
amount of 3.00% Notes. The 3.00% Notes will bear
interest at a rate of 3.00% per annum until maturity. Interest
on the 3.00% Notes will accrue from March 22, 2010.
Interest will be payable semiannually in arrears on March 15 and
September 15 of each year, beginning September 15, 2010.
The 3.00% Notes mature on March 15, 2020, unless
earlier repurchased or converted in accordance with their terms
prior to such date.
We may not redeem the 3.00% Notes prior to the maturity
date. Holders of the 3.00% Notes may require us to
repurchase all or a portion of the 3.00% Notes on or after
September 15, 2019. If we experience specified types of
fundamental changes, holders of 3.00% Notes may require us
to repurchase the 3.00% Notes. Any repurchase of the
3.00% Notes pursuant to this provision will be for cash at
a price equal to 100% of the principal amount of the
3.00% Notes to be repurchased plus any accrued and unpaid
interest to, but excluding, the purchase date. Additionally, in
the event of a make-whole fundamental change, as defined in the
indenture, dated March 22, 2010, with Wells Fargo
Bank, N.A., as Trustee, which governs the 3.00% Notes (the
“Indenture”), the holders of the 3.00% Notes may
be entitled to a make-whole premium in the form of an increase
in the conversion rate.
The 3.00% Notes are convertible into cash and, if
applicable, common stock based on an initial conversion rate of
25.8987 shares of common stock per $1,000 principal amount
of the 3.00% Notes (which is equal to an initial conversion
price of approximately $38.61 per common share) subject to
adjustment, on the business day preceding September 15,
2019, under the following circumstances: (1) during any
fiscal quarter (and only during such fiscal quarter) beginning
after June 30, 2010, if the last reported sale price of our
common stock for at least 20 trading days in the period of 30
consecutive trading days ending on the last trading day of the
immediately preceding fiscal quarter is equal to or more than
130% of the applicable conversion price per share (such
threshold closing price initially being $50.193);
(2) during the five business day period after any ten
consecutive trading day period in which the trading price per
$1,000 principal amount of 3.00% Notes for each day of the
ten day trading period was less than 98% of the product of the
last reported sale price of our common stock and the conversion
rate of the 3.00% Notes on that day; and (3) upon the
occurrence of specified corporate transactions set forth in the
Indenture. Upon conversion, a holder will receive an amount in
cash and common shares of our common stock, determined in the
manner set forth in the Indenture. Upon any conversion of the
3.00% Notes, we will deliver to converting holders a
settlement amount comprised of cash and, if applicable, shares
of our common stock, based on a conversion value determined by
multiplying the then applicable conversion rate by a volume
weighted price of our common stock on each trading day in a
specified 25 trading day observation period. In general, as
described more fully in the Indenture, converting holders will
receive, in respect of each $1,000 principal amount of notes
being converted, the conversion value in cash up to $1,000 and
the excess, if any, of the conversion value over $1,000 in
shares of our common stock.
The net proceeds from the issuance of the 3.00% Notes were
used to redeem our then outstanding 8.25% Notes which were
called on March 22, 2010 for redemption on April 22,
2010 at a redemption price of 102.75% plus accrued interest, and
to pay the $16.6 million net cost of the convertible note
hedge transactions (after such costs is partially offset by the
proceeds from the sale of the warrant transactions described
below in —
Uses of Liquidity and Capital
Resources
). Debt issue costs and underwriters’ fees
totaled $4.0 million and are being amortized over a period
of ten years.
The 3.00% Notes rank equal in right of payment to all of
our other existing and future senior indebtedness. The
3.00% Notes are not guaranteed by any of our subsidiaries
and, accordingly, are structurally subordinated to all of the
indebtedness and other liabilities of our subsidiaries. The
3.00% Notes will also be effectively subordinated to all of
our secured indebtedness. For a more detailed discussion of the
3.00% Notes, see Note 7 to our Consolidated Financial
Statements.
Dispositions.
During the nine months ended
September 30, 2010, we disposed of a Ford Lincoln Mercury
dealership in Florida along with the associated real estate.
Gross consideration received was $35.0 million, including
amounts used to repay our floorplan notes payable associated
with the vehicle inventory sold and the respective Mortgage
Facility financing balance.
52
Uses
of Liquidity and Capital Resources
Redemption of 8.25% Notes.
During the
first three months of 2010, we completed the redemption of all
of our then outstanding 8.25% Notes. Total cash used in
completing the redemption, excluding accrued interest of
$0.8 million, was $77.0 million.
Acquisitions.
During the first nine months of
2010, we acquired two BMW/Mini dealerships in the Southeast
region of the U.K. In addition, we acquired a Toyota/Scion
dealership and an Audi dealership located in
South Carolina. Gross consideration paid for these
acquisitions was $36.4 million, including the amounts paid
for vehicle inventory, parts inventory, equipment and furniture
and fixtures, as well as the purchase of portions of the
associated real estate. The vehicle inventory was subsequently
financed through borrowings under our applicable credit facility.
Mortgage Facility Activity.
During the nine
months ended September 30, 2010, we paid down
$35.3 million in principal payments against the Mortgage
Facility, $24.2 million of which was from the proceeds of
the sale of property associated with a dealership disposition in
June 2010 and $3.8 million of which was from the refinance
of an existing dealership property.
Capital Expenditures.
Our capital expenditures
include expenditures to extend the useful lives of current
facilities and expenditures to start or expand operations.
Historically, our annual capital expenditures, exclusive of new
or expanded operations, have equaled our annual depreciation
charge. In general, expenditures relating to the construction or
expansion of dealership facilities are driven by new franchises
being granted to us by a manufacturer, significant growth in
sales at an existing facility, dealership acquisition activity,
or manufacturer imaging programs. Through the nine months ended
September 30, 2010, we have spent $13.2 million in
capital expenditures. We forecast our capital expenditures for
2010 to be less than $30.0 million, generally funded from
excess cash.
Dividends.
The payment of dividends is subject
to the discretion of our Board of Directors after considering
the results of operations, financial condition, cash flows,
capital requirements, outlook for our business, general business
conditions, the political and legislative environments and other
factors. In February 2009, our Board of Directors indefinitely
suspended the cash dividend on our common shares.
Further, provisions of our Revolving Credit Facility require us
to maintain the Required Stockholders’ Equity, which
effectively limits Restricted Payments. (e.g., cash dividends
and stock repurchases). As of September 30, 2010, the
Amount Available for Restricted Payments was
$168.0 million. This limit will increase or decrease in
future periods by adding to the current limitation the sum of
50% of our consolidated net income excluding non-cash items, if
positive, and 100% of equity issuances, less actual dividends or
stock repurchases completed in each quarterly period.
Purchase of Convertible Note Hedge.
In
connection with the issuance of the 3.00% Notes during the
first quarter of 2010, we purchased ten-year call options on our
common stock (the “3.00% Purchased Options”). Under
the terms of the 3.00% Purchased Options, which become
exercisable upon conversion of the 3.00% Notes, we have the
right to purchase a total of 3.0 million shares of our
common stock at a purchase price of $38.61 per share. The total
cost of the Purchased Options was $45.9 million. The future
income tax deductions relating to the cost of the 3.00%
Purchased Options will result in a tax benefit of approximately
$17.2 million.
In addition to the purchase of the 3.00% Purchased Options, we
sold warrants in separate transactions (the “3.00%
Warrants”). These 3.00% Warrants have a ten-year term and
enable the holders to acquire shares of our common stock from
us. The 3.00% Warrants are exercisable for a maximum of
3.0 million shares of our common stock at an exercise price
of $56.74 per share, subject to adjustment for quarterly
dividends, liquidation, bankruptcy, or a change in control of us
and other conditions, including a failure by us to deliver
registered securities to the purchasers upon exercise. Subject
to these adjustments, the maximum amount of shares of our common
stock that could be required to be issued under the 3.00%
Warrants is 5.3 million shares. On exercise of the 3.00%
Warrants, we will settle the difference between the then market
price and the strike price of the 3.00% Warrants in shares of
our common stock. The proceeds from the sale of the 3.00%
Warrants were $29.3 million, which were recorded as an
increase to additional paid-in capital in the accompanying
Consolidated Balance Sheet at September 30, 2010.
The 3.00% Purchased Options and 3.00% Warrants transactions were
designed to increase the conversion price per share of our
common stock from $38.61 to $56.74 (an 80% premium to the
closing price of our common stock
53
on the date that the 3.00% Notes were priced to investors)
and, therefore, mitigate the potential dilution of our common
stock upon conversion of the 3.00% Notes, if any.
No shares of our common stock have been issued or received under
the 3.00% Purchased Options or the 3.00% Warrants. Since the
price of our common stock was less than $38.61 at
September 30, 2010, the intrinsic value of both the 3.00%
Purchased Options and the 3.00% Warrants, as expressed in shares
of our common stock, was zero. Changes in the price of our
common stock will impact the share settlement of
3.00% Notes, the 3.00% Purchased Options and the 3.00%
Warrants as illustrated below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share
|
|
|
|
|
|
|
|
|
|
Net Shares
|
|
Entitlement
|
|
Shares
|
|
|
|
|
|
|
|
Issuable
|
|
Under the
|
|
Issuable
|
|
Net
|
|
Potential
|
Company
|
|
Under the 3.00%
|
|
Purchased
|
|
Under the
|
|
Shares
|
|
EPS
|
|
Stock Price
|
|
Notes
|
|
Options
|
|
Warrants
|
|
Issuable
|
|
Dilution
|
|
|
|
(Shares in thousands)
|
|
|
|
$37.50
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$40.00
|
|
|
103
|
|
|
|
(103
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
103
|
|
|
$42.50
|
|
|
272
|
|
|
|
(272
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
272
|
|
|
$45.00
|
|
|
423
|
|
|
|
(423
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
423
|
|
|
$47.50
|
|
|
557
|
|
|
|
(557
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
557
|
|
|
$50.00
|
|
|
678
|
|
|
|
(678
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
678
|
|
|
$52.50
|
|
|
788
|
|
|
|
(788
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
788
|
|
|
$55.00
|
|
|
887
|
|
|
|
(887
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
887
|
|
|
$57.50
|
|
|
978
|
|
|
|
(978
|
)
|
|
|
40
|
|
|
|
40
|
|
|
|
1,018
|
|
|
$60.00
|
|
|
1,062
|
|
|
|
(1,062
|
)
|
|
|
162
|
|
|
|
162
|
|
|
|
1,224
|
|
|
$62.50
|
|
|
1,138
|
|
|
|
(1,138
|
)
|
|
|
275
|
|
|
|
275
|
|
|
|
1,413
|
|
|
$65.00
|
|
|
1,209
|
|
|
|
(1,209
|
)
|
|
|
379
|
|
|
|
379
|
|
|
|
1,588
|
|
|
$67.50
|
|
|
1,275
|
|
|
|
(1,275
|
)
|
|
|
475
|
|
|
|
475
|
|
|
|
1,750
|
|
|
$70.00
|
|
|
1,335
|
|
|
|
(1,335
|
)
|
|
|
564
|
|
|
|
564
|
|
|
|
1,899
|
|
|
$72.50
|
|
|
1,392
|
|
|
|
(1,392
|
)
|
|
|
648
|
|
|
|
648
|
|
|
|
2,040
|
|
|
$75.00
|
|
|
1,445
|
|
|
|
(1,445
|
)
|
|
|
725
|
|
|
|
725
|
|
|
|
2,170
|
|
|
$77.50
|
|
|
1,494
|
|
|
|
(1,494
|
)
|
|
|
798
|
|
|
|
798
|
|
|
|
2,292
|
|
|
$80.00
|
|
|
1,541
|
|
|
|
(1,541
|
)
|
|
|
866
|
|
|
|
866
|
|
|
|
2,407
|
|
|
$82.50
|
|
|
1,584
|
|
|
|
(1,584
|
)
|
|
|
930
|
|
|
|
930
|
|
|
|
2,514
|
|
|
$85.00
|
|
|
1,625
|
|
|
|
(1,625
|
)
|
|
|
990
|
|
|
|
990
|
|
|
|
2,615
|
|
|
$87.50
|
|
|
1,664
|
|
|
|
(1,664
|
)
|
|
|
1,047
|
|
|
|
1,047
|
|
|
|
2,711
|
|
|
$90.00
|
|
|
1,701
|
|
|
|
(1,701
|
)
|
|
|
1,101
|
|
|
|
1,101
|
|
|
|
2,802
|
|
|
$92.50
|
|
|
1,735
|
|
|
|
(1,735
|
)
|
|
|
1,152
|
|
|
|
1,152
|
|
|
|
2,887
|
|
|
$95.00
|
|
|
1,768
|
|
|
|
(1,768
|
)
|
|
|
1,200
|
|
|
|
1,200
|
|
|
|
2,968
|
|
|
$97.50
|
|
|
1,799
|
|
|
|
(1,799
|
)
|
|
|
1,245
|
|
|
|
1,245
|
|
|
|
3,044
|
|
|
$100.00
|
|
|
1,828
|
|
|
|
(1,828
|
)
|
|
|
1,289
|
|
|
|
1,289
|
|
|
|
3,117
|
|
For dilutive
earnings-per-share
calculations, we will be required to include the dilutive
effect, if applicable, of the net shares issuable under the
3.00% Notes and the 3.00% Warrants as depicted in the table
above under the heading “Potential EPS Dilution.”
Although the 3.00% Purchased Options have the economic benefit
of decreasing the dilutive effect of the 3.00% Notes, for
earnings per share purposes we cannot factor this benefit into
our dilutive shares outstanding as their impact would be
anti-dilutive.
Stock Repurchases.
From time to time, our
Board of Directors authorizes us to repurchase shares of our
common stock, subject to the restrictions of various debt
agreements and our judgment. In August 2008, our Board of
Directors authorized us to repurchase up to $20.0 million
of common stock, during which month 37,300 shares were
repurchased at a cost of $0.8 million. During the three
months ended June 30, 2010, pursuant to this
54
authorization, an additional 748,464 shares were
repurchased at a cost of $19.2 million, effectively
exhausting the August 2008 authorization.
In July 2010, our Board of Directors authorized the repurchase
of up to an additional $25.0 million of our common shares.
During the three months ended September 30, 2010, pursuant
to this authorization, 294,098 shares were repurchased at a
cost of $7.5 million. These repurchases reduced our
weighted average diluted shares outstanding to 22.9 million
for the three months ended September 30, 2010. On a go
forward basis, that would equate to 22.8 million diluted
shares outstanding. Future repurchases are subject to the
discretion of our Board of Directors after considering our
results of operations, financial condition, cash flows, capital
requirements, existing debt covenants, outlook for our business,
general business conditions and other factors.
Registration Statement.
We have a
“well-known seasoned issuer” universal shelf
registration statement, effective August 13, 2009, which
registers future sales of an indeterminate amount of debt or
equity securities. We intend to use the proceeds from any future
securities sales off this shelf for general corporate purposes.
We have not issued any securities under this shelf registration
statement to date.
|
|
|
|
Item 3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
Interest Rates.
We have interest rate risk in
our variable rate debt obligations and interest rate swaps. Our
policy is to manage our interest rate exposure through the use
of a combination of fixed and floating rate debt and interest
rate swaps.
As of September 30, 2010, the outstanding principal amount
of our 2.25% Notes and 3.00% Notes, which is primarily
all of our fixed rate debt, totaled $182.8 million and
$115.0 million, respectively, and had a fair value of
$151.0 million and $110.9 million, respectively. The
carrying amount of our 2.25% Notes and 3.00% Notes was
$136.6 million and $73.6 million, respectively, at
September 30, 2010.
As of September 30, 2010, we had $702.7 million of
variable-rate floorplan borrowings outstanding and
$157.4 million of variable-rate Mortgage Facility
borrowings outstanding. Based on the aggregate amount
outstanding and before the impact of our interest rate swaps
described below, a 100 basis-point change in interest rates
would result in an approximate $8.4 million change to our
annual interest expense. After consideration of the interest
rate swaps described below, a 100 basis-point change would yield
a net annual change of $2.9 million.
We reflect interest assistance as a reduction of new vehicle
inventory cost until the associated vehicle is sold. During the
nine months ended September 30, 2010, we recognized
$17.8 million of interest assistance as a reduction of new
vehicle cost of sales. For the past three years, the reduction
to our new vehicle cost of sales has ranged from 49.9% to 76.7%
of our floorplan interest expense. Although we can provide no
assurance as to the amount of future interest assistance, it is
our expectation, based on historical data, that an increase in
prevailing interest rates would result in increased assistance
from certain manufacturers.
We use interest rate swaps to adjust our exposure to interest
rate movements when appropriate based upon market conditions.
These swaps are entered into with financial institutions with
investment grade credit ratings, thereby minimizing the risk of
credit loss. We reflect the current fair value of all
derivatives on our balance sheet. The related gains or losses on
these transactions are deferred in stockholders’ equity as
a component of accumulated other comprehensive loss. These
deferred gains and losses are recognized in income in the period
in which the related items being hedged are recognized in
expense. However, to the extent that the change in value of a
derivative contract does not perfectly offset the change in the
value of the items being hedged, that ineffective portion is
immediately recognized in income. All of our interest rate
hedges are designated as cash flow hedges. The hedge instruments
are designed to convert floating rate vehicle floorplan payables
under our Revolving Credit Facility and variable rate Mortgage
Facility borrowings to fixed rate debt. In aggregate, as of
September 30, 2010, we held interest rate swaps with
aggregate notional amounts of $550.0 million that fixed our
underlying LIBOR rate at a weighted average rate of 4.7%. The
fair value of the interest rate swaps is impacted by the forward
LIBOR interest rate curve and the length of time to maturity of
the swap contract.
During the three months ended September 30, 2010, we
entered into an interest rate swap with a $50.0 million
notional value, effective in January 2011 with expiration in
August 2015, effectively locking in a rate of 1.7%. At
September 30, 2010, net unrealized losses, net of income
taxes, related to hedges included in accumulated other
55
comprehensive income totaled $15.2 million. As of
September 30, 2010, our liability associated with these
interest rate swaps decreased from $30.6 million as of
December 31, 2009 to $24.3 million. At
September 30, 2010, all of our derivative contracts were
determined to be effective, and no material ineffective portion
was recognized in income during the period.
Foreign Currency Exchange Rates.
As of
September 30, 2010, we had dealership operations in the
U.K. The functional currency of our U.K. subsidiaries is the
Pound Sterling. We intend to remain permanently invested in
these foreign operations and, as such, do not hedge against
foreign currency fluctuations that may impact our investment in
the U.K. subsidiaries. If we change our intent with respect to
such international investment, we would expect to implement
strategies designed to manage those risks in an effort to
mitigate the effect of foreign currency fluctuations on our
earnings and cash flows. A 10% change in average exchange rates
versus the U.S. dollar would have resulted in an
$18.5 million change to our revenues for the nine months
ended September 30, 2010.
Additional information about our market sensitive financial
instruments was provided in our 2009
Form 10-K.
|
|
|
|
Item 4.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
As required by
Rule 13a-15(b)
under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), we have evaluated, under the
supervision and with the participation of our management,
including our principal executive officer and principal
financial officer, the effectiveness of the design and operation
of our disclosure controls and procedures (as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Exchange Act) as of the end of the period covered by
this quarterly report. Our disclosure controls and procedures
are designed to provide reasonable assurance that the
information required to be disclosed by us in reports that we
file under the Exchange Act is accumulated and communicated to
our management, including our principal executive officer and
principal financial officer, as appropriate, to allow timely
decisions regarding required disclosure and is recorded,
processed, summarized and reported within the time periods
specified in the rules and forms of the SEC. Based upon that
evaluation, our principal executive officer and principal
financial officer concluded that our disclosure controls and
procedures were effective as of September 30, 2010 at the
reasonable assurance level.
Changes
in Internal Control over Financial Reporting
During the three months ended September 30, 2010, there was
no change in our system of internal control over financial
reporting (as defined in
Rules 13a-15(f)
and
15d-15(f)
under the Exchange Act) that has materially affected, or is
reasonably likely to materially affect, our internal control
over financial reporting.
PART II.
OTHER INFORMATION
|
|
|
|
Item 1.
|
Legal
Proceedings
|
We are not party to any legal proceedings, including class
action lawsuits that, individually or in the aggregate, are
reasonably expected to have a material adverse effect on our
results of operations, financial condition or cash flows. For a
discussion of our legal proceedings, see Part I,
Item 1, Financial Information, Notes to Condensed
Consolidated Financial Statements, Note 11,
“Commitments and Contingencies”.
Our
success depends upon the continued viability and overall success
of a limited number of manufacturers.
We are subject to a concentration of risk in the event of
financial distress, merger, sale or bankruptcy, including
potential liquidation, of a major vehicle manufacturer.
Toyota/Lexus/Scion, Nissan/Infiniti, Honda/Acura, Ford,
BMW/Mini, Mercedes-Benz, Chrysler and General Motors dealerships
represented approximately 94.1% of our total new vehicle retail
units sold in the first nine months of 2010. In particular,
sales of Toyota/Lexus/Scion and Nissan/Infiniti new vehicles
represented 50.1% of our new vehicle unit sales during the nine
months ended
56
September 30, 2010. The success of our dealerships is
dependent on vehicle manufacturers in several key respects.
First, we rely exclusively on the various vehicle manufacturers
for our new vehicle inventory. Our ability to sell new vehicles
is dependent on a vehicle manufacturer’s ability to produce
and allocate to our dealerships an attractive, high quality, and
desirable product mix at the right time in order to satisfy
customer demand. Second, manufacturers generally support their
franchisees by providing direct financial assistance in various
areas, including, among others, floorplan assistance and
advertising assistance. Third, manufacturers provide product
warranties and, in some cases, service contracts to customers.
Our dealerships perform warranty and service contract work for
vehicles under manufacturer product warranties and service
contracts and direct bill the manufacturer as opposed to
invoicing the customer. At any particular time, we have
significant receivables from manufacturers for warranty and
service work performed for customers, as well as for vehicle
incentives. In addition, we rely on manufacturers to varying
extents for original equipment manufactured replacement parts,
training, product brochures and point of sale materials, and
other items for our dealerships.
Vehicle manufacturers may be adversely impacted by economic
downturns or recessions, significant declines in the sales of
their new vehicles, increases in interest rates, adverse
fluctuations in currency exchange rates, declines in their
credit ratings, reductions in access to capital or credit, labor
strikes or similar disruptions (including within their major
suppliers), supply shortages or rising raw material costs,
rising employee benefit costs, adverse publicity that may reduce
consumer demand for their products (including due to
bankruptcy), product defects, vehicle recall campaigns,
litigation, poor product mix or unappealing vehicle design,
governmental laws and regulations, or other adverse events.
These and other risks could materially adversely affect any
manufacturer and impact its ability to profitably design,
market, produce or distribute new vehicles, which in turn could
materially adversely affect our business, results of operations,
financial condition, stockholders’ equity, cash flows and
prospects. In 2008 and 2009, vehicle manufacturers and in
particular domestic manufacturers, were adversely impacted by
the unfavorable economic conditions in the U.S.
In addition, in January 2010, Toyota Motor Sales, U.S.A., Inc.
(“Toyota”) temporarily suspended the production and
sale of certain models representing about two-thirds of its
total unit sales in the U.S. and launched a recall to
address quality issues on those vehicles. In January and
February of 2010, this recall negatively impacted our new and
used vehicle sales. In the long-term, Toyota’s reputation
for quality vehicles could be permanently impaired, despite the
efforts of Toyota to address these quality issues. We are unable
to estimate the longer term net impact of the recalls made by
Toyota in the first nine months of 2010, but, since Toyota
brands represented 36.6% of our unit sales in 2009, it could be
materially adverse to our financial condition and results of
operations. In the event or threat of a bankruptcy by a vehicle
manufacturer, among other things: (1) the manufacturer
could attempt to terminate all or certain of our franchises, and
we may not receive adequate compensation for them, (2) we
may not be able to collect some or all of our significant
receivables that are due from such manufacturer and we may be
subject to preference claims relating to payments made by such
manufacturer prior to bankruptcy, (3) we may not be able to
obtain financing for our new vehicle inventory, or arrange
financing for our customers for their vehicle purchases and
leases, with such manufacturer’s captive finance
subsidiary, which may cause us to finance our new vehicle
inventory, and arrange financing for our customers, with
alternate finance sources on less favorable terms, and
(4) consumer demand for such manufacturer’s products
could be materially adversely affected and could impact the
value of our inventory. These events may result in a partial or
complete write-down of our goodwill
and/or
intangible franchise rights with respect to any terminated
franchises and cause us to incur impairment charges related to
operating leases
and/or
receivables due from such manufacturers or to record allowances
against the value of our new and used inventory.
Manufacturers’
restrictions may limit our future growth.
We must obtain the consent of the manufacturer prior to the
acquisition of any of its dealership franchises. Delays in
obtaining, or failing to obtain, manufacturer approvals for
dealership acquisitions could adversely affect our acquisition
program. Obtaining the consent of a manufacturer for the
acquisition of a dealership could take a significant amount of
time or might be rejected entirely. In determining whether to
approve an acquisition, manufacturers may consider many factors,
including the moral character and business experience of the
dealership principals and the financial condition, ownership
structure, customer satisfaction index scores and other
performance measures of our dealerships. Also, our manufacturers
attempt to measure customers’ satisfaction
57
with automobile dealerships through systems generally known as
the customer satisfaction index or CSI. Manufacturers may use
these performance indicators, as well as sales performance
numbers, as conditions for certain payments and as factors in
evaluating applications for additional acquisitions. The
manufacturers have modified the components of their CSI scores
from time to time in the past, and they may replace them with
different systems at any time. In unusual cases where
performance indicators, such as the ones described above, are
not met to the satisfaction of the manufacturer, certain
manufacturers may either limit our ability to acquire additional
dealerships or require the disposal of existing dealerships or
both. From time to time, we have not met all of the
manufacturers’ requirements to make acquisitions and have
received requests to dispose of certain of our dealerships. On
one occasion, one of our manufacturers initiated legal
proceedings to block one of our acquisitions, but before the
court could address the matter, the manufacturer dismissed its
proceeding when the seller elected not to sell its dealerships
to us. In the event one or more of our manufacturers sought to
prohibit future acquisitions, or imposed requirements to dispose
of one or more of our dealerships, this could adversely affect
our acquisition and growth strategy.
In addition, a manufacturer may limit the number of its
dealerships that we may own or the number that we may own in a
particular geographic area. If we reach a limitation imposed by
a manufacturer for a particular geographic market, we will be
unable to make additional acquisitions of that
manufacturer’s franchises in that market, which could limit
our ability to grow in that geographic area. In addition,
geographic limitations imposed by manufacturers could restrict
our ability to make geographic acquisitions involving markets
that overlap with those we already serve. We may acquire only
four primary Lexus dealerships or six outlets nationally,
including only two Lexus dealerships in any one of the four
Lexus geographic areas. We own three primary Lexus dealerships.
Also, we own the maximum number of Toyota dealerships we are
currently permitted to own in the Gulf States region, which is
comprised of Texas, Oklahoma, Louisiana, Mississippi and
Arkansas, and in the Boston region, which is comprised of Maine,
Massachusetts, New Hampshire, Rhode Island and Vermont.
Notwithstanding the matters discussed above, there have been no
other material changes in our risk factors as previously
disclosed in “Item 1A. Risk Factors” of our 2009
Form 10-K.
In addition to the other information set forth in this quarterly
report, you should carefully consider the factors discussed in
Part 1, “Item 1A. Risk Factors” in our 2009
Form 10-K,
which could materially affect our business, financial condition
or future results. The risks described in this quarterly report
and in our 2009
Form 10-K
are not the only risks we face. Additional risks and
uncertainties not currently known to us or that we currently
deem to be immaterial also may materially adversely affect our
business, financial condition or future results.
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|
|
|
Item 2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
The following table provides information about purchases of
equity securities that are registered by us pursuant to
Section 12 of the Exchange Act during the three months
ended September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased as
|
|
|
Approximate
|
|
|
|
|
|
|
|
|
|
|
Part of
|
|
|
Dollar Value of
|
|
|
|
|
|
|
|
Average
|
|
|
Publicly
|
|
|
Shares that May
|
|
|
|
|
Total Number
|
|
|
Price
|
|
|
Announced
|
|
|
Be Purchased
|
|
|
|
|
of Shares
|
|
|
Paid per
|
|
|
Plans or
|
|
|
Under the Plans
|
|
|
Period
|
|
Purchased
|
|
|
Share
|
|
|
Programs
|
|
|
or
Programs
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
excluding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
commissions)
|
|
|
|
|
July 1 — July 31, 2010
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
25,000
|
|
|
August 1 — August 31, 2010
|
|
|
280,134
|
|
|
|
25.51
|
|
|
|
280,134
|
|
|
|
17,853
|
|
|
September 1 — September 30, 2010
|
|
|
13,964
|
|
|
|
26.49
|
|
|
|
13,964
|
|
|
$
|
17,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
294,098
|
|
|
$
|
25.56
|
|
|
|
294,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
On July 26, 2010, our Board of
Directors approved a common stock repurchase program, subject to
restrictions of various debt agreements, that authorizes us to
purchase up to $25.0 million in common stock. The shares
are to be repurchased from time to time in open market or
privately negotiated transactions, depending on market
conditions, at our discretion, and will be funded by cash from
operations. The July 2010 authorization does not have an
expiration date.
|
58
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
|
Number
|
|
|
|
Description
|
|
|
|
|
3
|
.1
|
|
—
|
|
Restated Certificate of Incorporation (Incorporated by reference
to Exhibit 3.1 of Group 1 Automotive, Inc.’s
Registration Statement on
Form S-1
(Registration
No. 333-29893)
filed June 24, 1997)
|
|
|
3
|
.2
|
|
—
|
|
Amended and Restated Bylaws of Group 1 Automotive, Inc.
(Incorporated by reference to Exhibit 3.1 of Group 1
Automotive, Inc.’s Current Report on
Form 8-K
(File
No. 001-13461)
filed November 13, 2007)
|
|
|
4
|
.1†
|
|
—
|
|
First Supplemental Indenture dated August 9, 2010 among
Group 1 Automotive, Inc. and Wells Fargo Bank, N.A., as trustee
|
|
|
10
|
.1*
|
|
—
|
|
Employment Agreement between Group 1 Automotive, Inc. and Earl
J. Hesterberg dated effective September 8, 2010
(Incorporated by reference to Exhibit 10.1 of Group 1
Automotive, Inc.’s Current Report on
Form 8-K
(File
No. 001-13461)
filed September 9, 2010)
|
|
|
10
|
.2*
|
|
—
|
|
Non-Compete Agreement between Group 1 Automotive, Inc. and Earl
J. Hesterberg dated effective September 8, 2010
(Incorporated by reference to Exhibit 10.2 of Group 1
Automotive, Inc.’s Current Report on
Form 8-K
(File
No. 001-13461)
filed September 9, 2010)
|
|
|
10
|
.3*
|
|
—
|
|
Form of Senior Executive Officer Restricted Stock Agreement
(Incorporated by reference to Exhibit 10.3 of Group 1
Automotive, Inc.’s Current Report on
Form 8-K
(File
No. 001-13461)
filed September 9, 2010)
|
|
|
10
|
.4*
|
|
—
|
|
Form of Senior Executive Officer Phantom Stock Agreement
(Incorporated by reference to Exhibit 10.4 of Group 1
Automotive, Inc.’s Current Report on
Form 8-K
(File
No. 001-13461)
filed September 9, 2010)
|
|
|
10
|
.5*
|
|
—
|
|
Description of Group 1 Automotive, Inc. Non-Employee Director
Compensation Plan for 2010 (effective July 1, 2010)
(Incorporated by reference to Exhibit 10.1 of Group 1
Automotive, Inc.’s Quarterly Report on
Form 10-Q
(File
No. 001-13461)
filed July 28, 2010)
|
|
|
10
|
.6
|
|
—
|
|
Amendment No. 5 to Credit Agreement effective as of
July 13, 2010 by and among Group 1 Realty, Inc., Group 1
Automotive, Inc., Bank of America, N.A. and the Joining Lenders
(Incorporated by reference to Exhibit 10.1 of Group 1
Automotive, Inc.’s Quarterly Report on
Form 10-Q
(File No. 001-13461)
filed July 28, 2010)
|
|
|
31
|
.1†
|
|
—
|
|
Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
31
|
.2†
|
|
—
|
|
Certification of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
32
|
.1†
|
|
—
|
|
Certification of Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
32
|
.2†
|
|
—
|
|
Certification of Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
†
|
|
Filed or furnished herewith
|
|
|
|
*
|
|
Management contract or compensatory plan or arrangement
|
59
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Group 1 Automotive, Inc.
John C. Rickel
Senior Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial
and Accounting Officer)
Date: October 27, 2010
60
EXHIBIT INDEX
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
|
Number
|
|
|
|
Description
|
|
|
|
|
3
|
.1
|
|
—
|
|
Restated Certificate of Incorporation (Incorporated by reference
to Exhibit 3.1 of Group 1 Automotive, Inc.’s
Registration Statement on
Form S-1
(Registration
No. 333-29893)
filed June 24, 1997)
|
|
|
3
|
.2
|
|
—
|
|
Amended and Restated Bylaws of Group 1 Automotive, Inc.
(Incorporated by reference to Exhibit 3.1 of Group 1
Automotive, Inc.’s Current Report on
Form 8-K
(File
No. 001-13461)
filed November 13, 2007)
|
|
|
4
|
.1†
|
|
—
|
|
First Supplemental Indenture dated August 9, 2010 among
Group 1 Automotive, Inc. and Wells Fargo Bank, N.A., as trustee
|
|
|
10
|
.1*
|
|
—
|
|
Employment Agreement between Group 1 Automotive, Inc. and Earl
J. Hesterberg dated effective September 8, 2010
(Incorporated by reference to Exhibit 10.1 of Group 1
Automotive, Inc.’s Current Report on
Form 8-K
(File
No. 001-13461)
filed September 9, 2010)
|
|
|
10
|
.2*
|
|
—
|
|
Non-Compete Agreement between Group 1 Automotive, Inc. and Earl
J. Hesterberg dated effective September 8, 2010
(Incorporated by reference to Exhibit 10.2 of Group 1
Automotive, Inc.’s Current Report on
Form 8-K
(File
No. 001-13461)
filed September 9, 2010)
|
|
|
10
|
.3*
|
|
—
|
|
Form of Senior Executive Officer Restricted Stock Agreement
(Incorporated by reference to Exhibit 10.3 of Group 1
Automotive, Inc.’s Current Report on
Form 8-K
(File
No. 001-13461)
filed September 9, 2010)
|
|
|
10
|
.4*
|
|
—
|
|
Form of Senior Executive Officer Phantom Stock Agreement
(Incorporated by reference to Exhibit 10.4 of Group 1
Automotive, Inc.’s Current Report on
Form 8-K
(File
No. 001-13461)
filed September 9, 2010)
|
|
|
10
|
.5*
|
|
—
|
|
Description of Group 1 Automotive, Inc. Non-Employee Director
Compensation Plan for 2010 (effective July 1, 2010)
(Incorporated by reference to Exhibit 10.1 of Group 1
Automotive, Inc.’s Quarterly Report on
Form 10-Q
(File
No. 001-13461)
filed July 28, 2010)
|
|
|
10
|
.6
|
|
—
|
|
Amendment No. 5 to Credit Agreement effective as of
July 13, 2010 by and among Group 1 Realty, Inc., Group 1
Automotive, Inc., Bank of America, N.A. and the Joining Lenders
(Incorporated by reference to Exhibit 10.1 of Group 1
Automotive, Inc.’s Quarterly Report on
Form 10-Q
(File No. 001-13461)
filed July 28, 2010)
|
|
|
31
|
.1†
|
|
—
|
|
Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
31
|
.2†
|
|
—
|
|
Certification of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
32
|
.1†
|
|
—
|
|
Certification of Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
32
|
.2†
|
|
—
|
|
Certification of Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
†
|
|
Filed or furnished herewith
|
|
|
|
*
|
|
Management contract or compensatory plan or arrangement
|