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 |
For the quarterly period ended September 30, 2011
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 |
For the transition period from to
Commission File Number: 1-13461
Group 1 Automotive, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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76-0506313
(I.R.S. Employer
Identification No.) |
800 Gessner, Suite 500
Houston, Texas 77024
(Address of principal executive offices) (Zip Code)
(713) 647-5700
(Registrants 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
þ 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
(Do not check if a smaller reporting company)
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No þ
As of October 21, 2011, the registrant had 22,735,108 shares of common stock, par value
$0.01, outstanding.
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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September 30, |
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December 31, |
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2011 |
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2010 |
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(Unaudited) |
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(In thousands, except per share |
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amounts) |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
11,300 |
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$ |
19,843 |
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Contracts-in-transit and vehicle receivables, net |
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100,246 |
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113,846 |
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Accounts and notes receivable, net |
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71,496 |
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75,623 |
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Inventories |
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719,677 |
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777,771 |
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Deferred income taxes |
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16,482 |
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14,819 |
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Prepaid expenses and other current assets |
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18,232 |
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17,332 |
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Total current assets |
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937,433 |
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1,019,234 |
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PROPERTY AND EQUIPMENT, net |
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550,908 |
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506,288 |
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GOODWILL |
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526,487 |
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507,962 |
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INTANGIBLE FRANCHISE RIGHTS |
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166,818 |
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158,694 |
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OTHER ASSETS |
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13,656 |
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9,786 |
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Total assets |
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$ |
2,195,302 |
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$ |
2,201,964 |
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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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$ |
437,052 |
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$ |
560,840 |
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Floorplan notes payable manufacturer affiliates |
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122,358 |
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103,345 |
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Current maturities of long-term debt |
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14,003 |
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53,189 |
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Current liabilities from interest rate risk management activities |
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7,656 |
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1,098 |
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Accounts payable |
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128,490 |
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92,799 |
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Accrued expenses |
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92,360 |
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83,663 |
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Total current liabilities |
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801,919 |
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894,934 |
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LONG-TERM DEBT, net of current maturities |
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473,193 |
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412,950 |
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DEFERRED INCOME TAXES |
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70,929 |
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58,970 |
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LIABILITIES FROM INTEREST RATE RISK MANAGEMENT ACTIVITIES |
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25,112 |
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16,426 |
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OTHER LIABILITIES |
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33,252 |
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31,036 |
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DEFERRED REVENUES |
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2,133 |
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3,280 |
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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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Common stock, $0.01 par value, 50,000 shares authorized;
26,204 and 26,096 issued, respectively . |
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262 |
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261 |
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Additional paid-in capital |
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368,776 |
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363,966 |
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Retained earnings |
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573,120 |
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519,843 |
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Accumulated other comprehensive loss |
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(27,986 |
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(18,755 |
) |
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Treasury stock, at cost; 3,480 and 2,303 shares, respectively |
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(125,408 |
) |
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(80,947 |
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Total stockholders equity |
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788,764 |
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784,368 |
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Total liabilities and stockholders equity |
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$ |
2,195,302 |
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$ |
2,201,964 |
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3
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these consolidated financial statements.
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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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2011 |
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2010 |
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2011 |
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2010 |
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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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$ |
862,660 |
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$ |
822,121 |
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$ |
2,457,255 |
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$ |
2,254,093 |
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Used vehicle retail sales |
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377,115 |
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340,625 |
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1,053,609 |
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960,376 |
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Used vehicle wholesale sales |
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69,051 |
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58,463 |
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191,609 |
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156,653 |
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Parts and service sales |
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210,067 |
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196,264 |
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609,108 |
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575,762 |
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Finance, insurance and other, net |
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51,496 |
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44,282 |
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142,255 |
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124,533 |
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Total revenues |
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1,570,389 |
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1,461,755 |
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4,453,836 |
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4,071,417 |
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COST OF SALES: |
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New vehicle retail sales |
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806,498 |
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775,046 |
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2,304,057 |
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2,122,533 |
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Used vehicle retail sales |
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345,048 |
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310,055 |
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958,094 |
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870,823 |
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Used vehicle wholesale sales |
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69,254 |
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58,158 |
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187,651 |
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153,565 |
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Parts and service sales |
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100,836 |
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89,657 |
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289,295 |
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264,484 |
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Total cost of sales |
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1,321,636 |
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1,232,916 |
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3,739,097 |
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3,411,405 |
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GROSS PROFIT |
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248,753 |
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228,839 |
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714,739 |
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660,012 |
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES |
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188,185 |
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173,925 |
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547,120 |
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522,796 |
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DEPRECIATION AND AMORTIZATION EXPENSE |
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6,845 |
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6,772 |
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19,881 |
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19,936 |
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ASSET IMPAIRMENTS . |
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3,644 |
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1,639 |
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4,008 |
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3,121 |
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INCOME FROM OPERATIONS |
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50,079 |
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46,503 |
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143,730 |
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114,159 |
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OTHER EXPENSE: |
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Floorplan interest expense |
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(6,964 |
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(9,021 |
) |
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(20,245 |
) |
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(25,220 |
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Other interest expense, net |
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(8,644 |
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(6,894 |
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(24,811 |
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(20,265 |
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Loss on redemption of long-term debt |
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(3,872 |
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INCOME BEFORE INCOME TAXES |
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34,471 |
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30,588 |
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98,674 |
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64,802 |
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PROVISION FOR INCOME TAXES |
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(12,977 |
) |
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(11,603 |
) |
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(37,135 |
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(25,067 |
) |
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NET INCOME |
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$ |
21,494 |
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$ |
18,985 |
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$ |
61,539 |
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$ |
39,735 |
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BASIC EARNINGS PER SHARE |
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$ |
0.98 |
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$ |
0.85 |
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$ |
2.75 |
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$ |
1.74 |
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Weighted average common shares outstanding |
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22,020 |
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22,419 |
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22,377 |
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22,877 |
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DILUTED EARNINGS PER SHARE |
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$ |
0.94 |
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$ |
0.83 |
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$ |
2.67 |
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$ |
1.70 |
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Weighted average common shares outstanding |
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22,778 |
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22,926 |
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23,073 |
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23,414 |
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CASH DIVIDENDS PER COMMON SHARE |
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$ |
0.13 |
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$ |
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$ |
0.35 |
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$ |
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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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Nine Months Ended September 30, |
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2011 |
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2010 |
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(Unaudited, in thousands) |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income |
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$ |
61,539 |
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$ |
39,735 |
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Adjustments to reconcile net income to net cash provided
by (used in) operating activities: |
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Depreciation and amortization |
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19,881 |
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19,936 |
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Deferred income taxes |
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16,280 |
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22,224 |
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Asset impairments |
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4,008 |
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3,121 |
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Stock-based compensation |
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8,333 |
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7,505 |
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Amortization of debt discount and issue costs |
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8,871 |
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6,336 |
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Loss on redemption of long-term debt |
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3,872 |
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(Gain) loss on disposition of assets |
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(967 |
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3,170 |
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Tax effect from stock-based compensation |
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(651 |
) |
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985 |
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Other |
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636 |
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(131 |
) |
Changes in operating assets and liabilities, net of effects
of acquisitions and dispositions: |
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Accounts payable and accrued expenses |
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39,722 |
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9,624 |
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Accounts and notes receivable |
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3,908 |
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(4,747 |
) |
Inventories |
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111,704 |
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(152,947 |
) |
Contracts-in-transit and vehicle receivables |
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13,525 |
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(5,888 |
) |
Prepaid expenses and other assets |
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(3,454 |
) |
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7,060 |
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Floorplan notes payable manufacturer affiliates |
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19,028 |
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(10,281 |
) |
Deferred revenues |
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(1,245 |
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(1,759 |
) |
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Net cash provided by (used in) operating activities |
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301,118 |
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(52,185 |
) |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Cash paid in acquisitions, net of cash received |
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(109,935 |
) |
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(34,431 |
) |
Proceeds from disposition of franchises, property and equipment |
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5,768 |
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41,001 |
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Purchases of property and equipment, including real estate |
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(45,052 |
) |
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(22,699 |
) |
Other |
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421 |
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1,145 |
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Net cash used in investing activities |
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(148,798 |
) |
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(14,984 |
) |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Borrowings on credit facility Floorplan Line |
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3,635,810 |
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3,731,339 |
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Repayments on credit facility Floorplan Line |
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(3,759,598 |
) |
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(3,552,920 |
) |
Principal payments on mortgage facility |
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(1,065 |
) |
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(35,284 |
) |
Proceeds from issuance of 3.00% Convertible Notes |
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|
115,000 |
|
Debt issue costs |
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(3,959 |
) |
Purchase of equity calls |
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(45,939 |
) |
Sale of equity warrants |
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29,309 |
|
Redemption of other long-term debt |
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(77,011 |
) |
Borrowings of other long-term debt |
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|
202 |
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|
4,909 |
|
Principal payments of long-term debt related to real estate loans |
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|
(5,684 |
) |
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|
(2,685 |
) |
Borrowings of long-term debt related to real estate |
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|
21,823 |
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|
12,804 |
|
Principal payments of other long-term debt |
|
|
(2,851 |
) |
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|
(558 |
) |
Repurchases of common stock, amounts based on settlement date |
|
|
(44,912 |
) |
|
|
(26,765 |
) |
Proceeds from issuance of common stock to benefit plans |
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|
3,094 |
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|
2,562 |
|
Tax effect from stock-based compensation |
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|
651 |
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(985 |
) |
Dividends paid |
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(8,262 |
) |
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Net cash provided by (used in) financing activities |
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|
(160,792 |
) |
|
|
149,817 |
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EFFECT OF EXCHANGE RATE CHANGES ON CASH |
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(71 |
) |
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|
293 |
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NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS |
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(8,543 |
) |
|
|
82,941 |
|
CASH AND CASH EQUIVALENTS, beginning of period |
|
|
19,843 |
|
|
|
13,221 |
|
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|
CASH AND CASH EQUIVALENTS, end of period |
|
$ |
11,300 |
|
|
$ |
96,162 |
|
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SUPPLEMENTAL CASH FLOW INFORMATION: |
|
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|
|
Purchases of property and equipment, including real estate,
accrued in accounts payable and accrued expenses |
|
|
845 |
|
|
|
526 |
|
Repurchases of common stock, accrued in accounts payable
and accrued expenses |
|
|
5,866 |
|
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|
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|
The
accompanying notes are an integral part of these consolidated financial statements.
5
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Gains (Losses) |
|
|
Gains (Losses) |
|
|
Gains (Losses) |
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
Paid-in |
|
|
Retained |
|
|
on Interest |
|
|
on Marketable |
|
|
on Currency |
|
|
Treasury |
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Earnings |
|
|
Rate Swaps |
|
|
Securities |
|
|
Translation |
|
|
Stock |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited, in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, December 31, 2010 |
|
|
26,096 |
|
|
$ |
261 |
|
|
$ |
363,966 |
|
|
$ |
519,843 |
|
|
$ |
(10,953 |
) |
|
$ |
50 |
|
|
$ |
(7,852 |
) |
|
$ |
(80,947 |
) |
|
$ |
784,368 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61,539 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61,539 |
|
Interest rate swap adjustment, net of tax provision of $5,717 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,528 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,528 |
) |
Unrealized loss on investments, net of tax benefit of $13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22 |
) |
|
|
|
|
|
|
|
|
|
|
(22 |
) |
Unrealized gain on currency translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
319 |
|
|
|
|
|
|
|
319 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52,308 |
|
Purchases of treasury stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50,778 |
) |
|
|
(50,778 |
) |
Issuance of common and treasury shares to employee
benefit plans |
|
|
(188 |
) |
|
|
(2 |
) |
|
|
(7,417 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,317 |
|
|
|
(1,102 |
) |
Proceeds from sales of common stock under employee
benefit plans |
|
|
81 |
|
|
|
1 |
|
|
|
3,093 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,094 |
|
Issuance of restricted stock |
|
|
300 |
|
|
|
3 |
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeiture of restricted stock |
|
|
(85 |
) |
|
|
(1 |
) |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
8,333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,333 |
|
Tax effect from options exercised and the vesting of
restricted shares |
|
|
|
|
|
|
|
|
|
|
803 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
803 |
|
Cash dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,262 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,262 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, September 30, 2011 |
|
|
26,204 |
|
|
$ |
262 |
|
|
$ |
368,776 |
|
|
$ |
573,120 |
|
|
$ |
(20,481 |
) |
|
$ |
28 |
|
|
$ |
(7,533 |
) |
|
$ |
(125,408 |
) |
|
$ |
788,764 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. INTERIM FINANCIAL INFORMATION
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; 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, 2011, the Companys U.S. retail network consisted of the following two
regions (with the number of dealerships they comprised): (i) the East (42 dealerships in Alabama,
Florida, Georgia, Louisiana, Maryland, Massachusetts, Mississippi, New Hampshire, New Jersey, New
York and South Carolina) and (ii) the West (58 dealerships in California, Kansas, Oklahoma and
Texas). Each region is managed by a regional vice president who reports directly to the Companys
Chief Executive Officer and is responsible for the overall performance of their region, 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 Companys
Chief Financial Officer. The Companys five dealerships in the U.K. are also managed locally with
direct reporting responsibilities to the Companys corporate management team.
Basis of Presentation
The accompanying unaudited 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. These unaudited Consolidated Financial Statements should be
read in conjunction with the Consolidated Financial Statements and footnotes thereto included in
the Companys Annual Report on Form 10-K for the year ended December 31, 2010 (2010 Form 10-K).
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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
Goodwill
The Company defines its reporting units as each of its two 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, based on the carrying values of the Companys regions as of October
31st, 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, which is calculated by using unobservable inputs based
upon the Companys internally developed assumptions (i.e., Level 3 valuation hierarchy inputs).
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. The Company then compares the value of the implied
goodwill resulting from this second
7
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
step to the carrying value of the goodwill in the reporting unit. 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 three months ended September 30, 2011, 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 Companys 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, for
agreements that 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, based on the carrying values of the Companys individual
dealerships as of October 31st, 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, or income approach, specifically the excess earnings method. This income approach for
measuring fair value of each individual franchise right involves unobservable inputs based upon the
Companys internally developed assumptions (i.e., Level 3 valuation hierarchy inputs). During
the three months ended September 30, 2011, the Company did not identify an impairment indicator
relative to its capitalized value of intangible franchise rights and, therefore, no impairment
evaluation was required.
Recent Accounting Pronouncements
In May 2011, the Financial Accounting Standards Board (the FASB) issued Accounting Standards
Update (ASU) No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure
Requirements in U.S. GAAP and IFRSs. This update changes certain fair value measurement principles
and enhances the disclosure requirements particularly Level 3 fair value measurements. It is
effective for interim and annual reporting periods beginning after December 15, 2011, with early
adoption prohibited. The Company believes that the adoption of this guidance will primarily affect
certain disclosures related to fair value, but will not have a material impact on the consolidated
financial position or results of operations.
In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income. This
update will require entities to present the total of comprehensive income, the component of net
income, and the components of other comprehensive income in either, a single continuous statement
of comprehensive income, or in two separate but consecutive statements. The current option to
report other comprehensive income and its components in the statement of changes in equity has been
eliminated. This update is effective for reporting periods beginning after December 15, 2011, with
early adoption permitted. The Company believes that the adoption of this guidance will affect the
presentation of comprehensive income, but will not have a material impact on the consolidated
financial position or results of operations.
In September 2011, the FASB issued ASU No. 2011-08, Testing Goodwill for Impairment. This
update will permit an entity to first assess qualitative factors to determine whether it is more
likely than not likelihood more than 50%) that the fair value of a reporting unit is less than its
carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill
impairment test. This update is effective for interim and annual reporting periods beginning after
December 15, 2011, with early adoption permitted. The Company believes that the adoption of this
guidance will not have a material impact on the consolidated financial position or results of
operations.
3. ACQUISITIONS AND DISPOSITIONS
During the first nine months of 2011, the Company acquired one Ford dealership located in
Houston, Texas and one Volkswagen dealership located in Irving, Texas, as well as one BMW/MINI
dealership, one Ford dealership, and one Buick/GMC dealership, all
8
located in El Paso, Texas.
Consideration paid for these dealerships totaled $109.9 million, including amounts paid for vehicle
inventory, parts inventory, equipment, and furniture and fixtures, as well as the purchase of some
of the associated real estate. The vehicle inventory was subsequently financed through borrowings
under the FMCC Facility and the Floorplan Line, each as defined in Note 9. Further, the Company was
awarded one Fiat franchise located in Houston, Texas. In addition, during the nine months ended
September 30, 2011, the Company sold one of its non-operational dealership facilities that
qualified as a held-for-sale asset as of December 31, 2010 for $4.1 million with no gain or loss
recognized by the Company related to this sale. The carrying value of this non-operational
dealership facility was classified in Other Current Assets in the accompanying Consolidated Balance
Sheet at December 31, 2010.
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, was granted a MINI franchise in
Texas, and acquired a Lincoln franchise in Texas. The Company also acquired two BMW/MINI
dealerships in the Southeast region of the U.K., a Toyota/Scion dealership and an Audi dealership
located in South Carolina. Consideration paid for these dealerships totaled $34.4 million,
including amounts paid for vehicle inventory, parts inventory, equipment, and furniture and
fixtures, as well as the purchase some of the associated real estate. The vehicle inventory was
subsequently financed through borrowings under either the Companys credit facility with BMW
Financial Services or the Floorplan Line. In addition, the Company disposed of real estate holdings
of non-operating facilities in Texas and Massachusetts and a Ford-Lincoln-Mercury dealership in
Florida during the nine months ended September 30, 2010.
Subsequent to September 30, 2011, the Company acquired a Cadillac/Buick/GMC dealership in
Houston, Texas and was awarded a Volkswagen franchise in both San Diego, California and Beaumont,
Texas.
4. DERIVATIVE INSTRUMENTS AND RISK MANAGEMENT ACTIVITIES
The periodic interest rates of the Revolving Credit Facility (as defined in Note 9), the
Mortgage Facility (as defined in Note 10) and certain variable-rate real estate related borrowings
are indexed to one-month London Inter Bank Offered Rate (LIBOR) plus an associated company credit
risk rate. In order to minimize the earnings variability 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 related
variable-rate debt.
The Company presents the 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 one-month 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 fair value estimate of the interest rate derivative instruments also considers the
credit risk of the Company for instruments in a liability position or the counterparty for
instruments in an asset position. The credit risk is calculated by using the spread between the
one-month LIBOR yield curve and the relevant average 10 and 20-year rate according to Standard and
Poors. The Company has determined the valuation 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 by the Fair Value Measurements and Disclosures Topic of the FASB Accounting
Standards Codification.
The related gains or losses on these interest rate derivatives 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 other income or expense. Monthly contractual settlements of these swap
positions are recognized as floorplan or other interest expense in the Companys accompanying
Consolidated Statements of Operations. All of the Companys interest rate hedges are designated as
cash flow hedges.
As of September 30, 2011, the Company held interest rate swaps in effect of $300.0 million in
notional value that fixed its underlying one-month LIBOR at a weighted average rate of 4.3%. Of
this total notional value, $250.0 million expire in 2012 and
9
$50.0 million expire in 2015. At
September 30, 2011, all of the Companys derivative contracts were determined to be effective. For
the three and nine months ended September 30, 2011, the impact of the Companys interest rate
hedges in effect increased floorplan interest expense by $3.1 million and $9.6 million,
respectively; 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.
Total floorplan interest expense was $7.0 million and $9.0 million for the three months ended
September 30, 2011 and 2010, respectively, and $20.2 million and $25.2 million for the nine months
ended September 30, 2011 and 2010, respectively.
In addition to the $300.0 million of swaps in effect as of September 30, 2011, the Company
entered into 18 additional interest rate swaps during the nine months ended September 30, 2011 with
forward start dates in either August 2012, December 2012, or August 2015 and expiration dates in
August 2015, December 2016, December 2017, or December 2018. The aggregate notional value of these
18 forward-starting swaps is $575.0 million and the weighted average interest rate of these swaps
is 2.9%.
As of September 30, 2011 and December 31, 2010, the Company reflected liabilities from
interest risk management activities of $32.8 million and $17.5 million, respectively, in its
Consolidated Balance Sheets, of which a portion with expiration dates less than one year was
classified as a current liability. Included in accumulated other comprehensive loss at September
30, 2011 and 2010 were unrealized losses, net of income taxes, totaling $20.5 million and $15.2
million, respectively, related to these hedges.
The Company had no 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, 2011 or 2010, respectively.
|
|
|
|
|
|
|
|
|
|
|
Amount of Unrealized Gain (Loss), |
|
|
|
Net of Tax, Recognized in Other |
|
|
|
Comprehensive Income |
|
Derivatives in |
|
Nine Months Ended September 30, |
|
Cash Flow Hedging Relationship |
|
2011 |
|
|
2010 |
|
|
|
(In thousands) |
|
Interest rate swap contracts |
|
$ |
(9,528 |
) |
|
$ |
3,904 |
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Loss Reclassified from |
|
|
|
Other Comprehensive Income into |
|
|
|
Statements of Operations |
|
Location of Loss Reclassified from OCI |
|
Nine Months Ended September 30, |
|
into Statements of Operations |
|
2011 |
|
|
2010 |
|
|
|
(In thousands) |
|
Floorplan interest expense |
|
$ |
(9,587 |
) |
|
$ |
(15,887 |
) |
Other interest expense |
|
|
(749 |
) |
|
|
(2,521 |
) |
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 $11.5 million.
5. STOCK-BASED COMPENSATION PLANS
The Company provides stock-based 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
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 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
10
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, and bonus stock,
each at the market price of the Companys 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 Companys 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 Companys option awards are subject to graded vesting over a 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 or
expected forfeitures differ from the previous estimate. As of September 30, 2011, there were
1,298,642 shares available under the Incentive Plan for future grants of these awards.
Stock Option Awards
No stock option awards have been granted since November 2005. The following table summarizes
the Companys outstanding stock options as of September 30, 2011 and the changes during the nine
months then ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
Number |
|
|
Exercise Price |
|
Options outstanding, December 31, 2010 |
|
|
68,908 |
|
|
$ |
33.11 |
|
Granted |
|
|
|
|
|
|
|
|
Exercised |
|
|
(32,805 |
) |
|
|
27.88 |
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, September 30, 2011 |
|
|
36,103 |
|
|
|
37.86 |
|
|
|
|
|
|
|
|
|
Options vested at September 30, 2011 |
|
|
36,103 |
|
|
|
37.86 |
|
|
|
|
|
|
|
|
|
Options exercisable at September 30,
2011 |
|
|
36,103 |
|
|
$ |
37.86 |
|
|
|
|
|
|
|
|
|
Restricted Stock Awards
In 2005, the Company began granting to non-employee directors and certain employees, at no
cost to the recipient, restricted stock awards or, at their election, restricted stock units
pursuant to the Incentive Plan. In November 2006, the Company began granting to 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 six months to five years. Vested restricted stock units, which are not
considered outstanding at the grant date, will settle in shares of common stock upon the
termination of the grantees employment or directorship. Performance awards are considered
outstanding at the date of grant and have forfeiture provisions that lapse based on the passage of
time and the achievement of certain performance criteria established by the Compensation Committee
of the Board of Directors. In the event the employee or non-employee 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 Companys 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, 2011, along with the changes during the nine
months then ended, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
|
Grant Date |
|
|
|
Awards |
|
|
Fair Value |
|
Nonvested at December 31, 2010 |
|
|
1,283,794 |
|
|
$ |
23.57 |
|
Granted |
|
|
300,236 |
|
|
|
40.42 |
|
Vested |
|
|
(107,484 |
) |
|
|
29.32 |
|
Forfeited |
|
|
(84,802 |
) |
|
|
26.77 |
|
|
|
|
|
|
|
|
|
Nonvested at September 30, 2011 |
|
|
1,391,744 |
|
|
$ |
26.58 |
|
|
|
|
|
|
|
|
|
11
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. 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 acquires 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, 2011, there were 859,977 shares remaining in reserve for future issuance
under the Purchase Plan. During the nine months ended September 30, 2011 and 2010, the Company
issued 80,667 and 111,744 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 $9.04 and $8.30 during the nine months ended September 30, 2011 and 2010,
respectively. The fair value of stock purchase rights is calculated using the quarter-end stock
price, the value of the embedded call option and the value of the embedded put option.
Stock-Based Compensation
Total stock-based compensation cost was $2.8 million and $2.3 million for the three months
ended September 30, 2011 and 2010, respectively, and $8.3 million and $7.5 million for the nine
months ended September 30, 2011 and 2010, respectively. Cash received from option exercises and
Purchase Plan purchases was $3.1 million and $2.6 million for the nine months ended September 30,
2011 and 2010, respectively. Additional paid-in capital was increased by $0.8 million and reduced
by $0.9 million for the nine months ended September 30, 2011 and 2010, 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 $2.3 million and $2.1 million for the nine months ended September 30,
2011 and 2010, respectively.
The Company issues new shares when options are exercised or restricted stock vests or will use
treasury shares, if available. With respect to shares issued under the Purchase Plan, the Companys
Board of Directors has authorized specific share repurchases to fund the shares issuable under the
Purchase Plan.
6. EARNINGS PER SHARE
Basic earnings per share (EPS) is computed based on weighted average shares outstanding and
excludes dilutive securities. Diluted EPS is computed by 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, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
(In thousands, except per share amounts) |
|
|
|
|
|
Net income |
|
$ |
21,494 |
|
|
$ |
18,985 |
|
|
$ |
61,539 |
|
|
$ |
39,735 |
|
Weighted average basic shares outstanding |
|
|
22,020 |
|
|
|
22,419 |
|
|
|
22,377 |
|
|
|
22,877 |
|
Dilutive effect of contingently Convertible 3.00% Notes |
|
|
185 |
|
|
|
|
|
|
|
144 |
|
|
|
|
|
Dilutive effect of stock options, net of assumed repurchase of
treasury stock |
|
|
5 |
|
|
|
4 |
|
|
|
9 |
|
|
|
10 |
|
Dilutive effect of restricted stock and employee stock purchases,
net of assumed repurchase of treasury stock
|
|
|
568 |
|
|
|
503 |
|
|
|
543 |
|
|
|
527 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average dilutive shares outstanding |
|
|
22,778 |
|
|
|
22,926 |
|
|
|
23,073 |
|
|
|
23,414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share from: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.98 |
|
|
$ |
0.85 |
|
|
$ |
2.75 |
|
|
$ |
1.74 |
|
Diluted |
|
$ |
0.94 |
|
|
$ |
0.83 |
|
|
$ |
2.67 |
|
|
$ |
1.70 |
|
Any options with an exercise price in excess of the average market price of the Companys
common stock during each of the quarterly periods in the years presented are not considered when
calculating the dilutive effect of stock options for the diluted earnings per share calculations.
The weighted average number of stock-based awards not included in the calculation of the dilutive
effect of stock-based awards was immaterial for the three and nine months ended September 30, 2011.
For the three and nine months ended September 30, 2010, 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.
12
The Company is required to include the dilutive effect, if applicable, of the net shares
issuable under the 2.25% Notes (as defined in Note 10) and the 2.25% Warrants sold in connection
with the 2.25% Notes. Although the 2.25% Purchased Options have the economic benefit of decreasing
the dilutive effect of the 2.25% Notes, the Company cannot factor this benefit into the dilutive
shares outstanding for the diluted earnings calculation since the impact would be anti-dilutive.
Since the average price of the Companys common stock for the three months ended September 30, 2011
was less than $59.43, no net shares were included in the computation of diluted earnings per share
for such period, as the impact would have been anti-dilutive.
In addition, the Company is required to include the dilutive effect, if applicable, of the net
shares issuable under the 3.00% Notes (as defined in Note 10) and the 3.00% Warrants sold in
connection with the 3.00% Notes (the 3.00% Warrants). Although the 3.00% Purchased Options have
the economic benefit of decreasing the dilutive effect of the 3.00% Notes, the Company cannot
factor this benefit into the dilutive shares outstanding for the diluted earnings calculation since
the impact would be anti-dilutive. Since the average price of the Companys common stock for the
three months ended September 30, 2011 was more than the conversion price in effect at the end of
the period, the dilutive effect of the 3.00% Notes and 3.00% Warrants was included in the
computation of diluted earnings per share for such period. Refer to Note 10 for a description of
the change to the conversion price, as a result of the Companys decision to pay cash dividends
during 2011.
7. INCOME TAXES
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. attributable to its foreign
subsidiaries. The effective income tax rate of 37.6% of pretax income for the three months ended
September 30, 2011 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, 2011, the Companys effective tax rate decreased to
37.6% from 38.7% for the same period in 2010. The change was primarily due to the mix of pretax
income from the taxable state jurisdictions in which the Company operates, a change in valuation
allowances for certain state net operating losses that occurred during the nine months ended
September 30, 2011 and an increase in federal employment tax credits.
As of September 30, 2011 and December 31, 2010, the Company had no unrecognized tax benefits.
Consistent with prior practices, the Company recognizes interest and penalties related to uncertain
tax positions in its provision for income taxes. The Company did not incur any interest and
penalties nor did it accrue any interest for the nine months ended September 30, 2011.
Taxable years 2006 and subsequent remain open for examination by the Companys major taxing
jurisdictions.
8. PROPERTY AND EQUIPMENT
The Companys property and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
|
|
|
Useful Lives |
|
|
September 30, |
|
|
December 31, |
|
|
|
in Years |
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
(Dollars in thousands) |
|
Land |
|
|
|
|
|
$ |
194,248 |
|
|
$ |
183,391 |
|
Buildings |
|
|
30 to 40 |
|
|
|
276,473 |
|
|
|
241,355 |
|
Leasehold improvements |
|
up to 30 |
|
|
82,709 |
|
|
|
68,808 |
|
Machinery and equipment |
|
|
7 to 20 |
|
|
|
57,015 |
|
|
|
53,473 |
|
Furniture and fixtures |
|
|
3 to 10 |
|
|
|
54,102 |
|
|
|
49,893 |
|
Company vehicles |
|
|
3 to 5 |
|
|
|
9,464 |
|
|
|
9,182 |
|
Construction in progress |
|
|
|
|
|
|
9,351 |
|
|
|
17,333 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
683,362 |
|
|
|
623,435 |
|
Less accumulated depreciation and amortization |
|
|
|
|
|
|
132,454 |
|
|
|
117,147 |
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
|
|
|
$ |
550,908 |
|
|
$ |
506,288 |
|
|
|
|
|
|
|
|
|
|
|
|
13
During the nine months ended September 30, 2011, the Company incurred $22.2 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 Companys dealerships and facilities. In addition, the
Company purchased real estate during the nine months ended September 30, 2011 associated with
existing dealership operations totaling $22.4 million. Also, in conjunction with the Companys
acquisition of five separate dealerships during the nine months ended September 30, 2011, the
Company acquired $29.2 million of real estate and other property and equipment.
In the third quarter of 2011, the Company determined that certain of its real estate
investments qualified as held-for-sale assets. Accordingly, the Company reclassified such
investments to current assets in the accompanying Consolidated Balance Sheet as of September 30,
2011, after adjusting the carrying value to fair market value. The Company recognized a $3.2
million pre-tax asset impairment charge as a result.
9. CREDIT FACILITIES
The Company has a $1.35 billion revolving syndicated credit arrangement with 21 financial
institutions including four manufacturer-affiliated finance companies (the Revolving Credit
Facility). The Company also has a $150.0 million floorplan
financing arrangement with Ford Motor Credit Company (the FMCC Facility) as well as
arrangements with BMW Financial Services for financing of its new and used vehicles in the U.K. and
with several other automobile manufacturers for financing of a portion of its rental vehicle
inventory. Within the Companys 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.
The Company receives interest assistance from certain automobile manufacturers. Over the past
three years, manufacturers interest assistance as a percentage of the Companys total consolidated
floorplan interest expense has ranged from 49.9% in the fourth quarter of 2008 to 96.8% for the
third quarter of 2011. The Company records manufacturers interest assistance in cost of sales for
new vehicle retail sales.
Revolving Credit Facility
The Revolving Credit Facility expires on June 1, 2016 and consists of two tranches: $1.1
billion for vehicle inventory floorplan financing (the Floorplan Line) and $250.0 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 $1.1 billion for the Floorplan Line and maximum of $250.0 million for the Acquisition
Line. The Revolving Credit Facility can be expanded to its maximum commitment of $1.60 billion,
subject to participating lender approval. The Floorplan Line bears interest at rates equal to
one-month LIBOR plus 150 basis points for new vehicle inventory and one-month LIBOR plus 175 basis
points for used vehicle inventory. The Acquisition Line bears interest at the one-month LIBOR plus
a margin that ranges from 150 to 250 basis points, depending on the Companys leverage ratio. The
Floorplan Line requires a commitment fee of 0.20% per annum on the unused portion. The Acquisition
Line also requires a commitment fee ranging from 0.25% to 0.45% per annum, depending on the
Companys leverage ratio, based on a minimum commitment of $100.0 million less outstanding
borrowings. In conjunction with the Revolving Credit Facility, the Company had $7.0 million of
related unamortized costs as of September 30, 2011 that were being amortized over the term of the
facility.
After considering outstanding balances of $437.1 million at September 30, 2011, the Company
had $662.9 million of available floorplan borrowing capacity under the Floorplan Line. Included in
the $662.9 million available borrowings under the Floorplan Line was $116.8 million of immediately
available funds. The weighted average interest rate on the Floorplan Line was 1.7% as of September
30, 2011, excluding the impact of the Companys interest rate swaps. Amounts borrowed by the
Company under the Floorplan Line of the Revolving Credit Facility for specific vehicle inventory
must repaid upon the sale of the vehicle financed, and in no case may a borrowing for a specific
vehicle remain outstanding for greater than one year. With regards to the Acquisition Line, no
borrowings were outstanding as of September 30, 2011. After considering $17.3 million of
outstanding letters of credit and other factors included in the Companys available borrowing base
calculation, there was $232.8 million of available borrowing capacity
14
under the Acquisition Line as
of September 30, 2011. The amount of available borrowing capacity under the Acquisition Line may be
limited from time to time based upon the available borrowing base calculation within the debt
covenants.
All of the Companys domestic dealership-owning subsidiaries are co-borrowers under the
Revolving Credit Facility. The Companys obligations under the Revolving Credit Facility are
secured by essentially all of the Companys 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. The Revolving Credit Facility contains a number of
significant covenants that, among other things, restrict the Companys 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, total leverage, and senior secured
leverage. Further, the Revolving Credit Facility restricts the Companys ability to make certain
payments, such as dividends or other distributions of assets, properties, cash, rights, obligations
or securities (Restricted Payments). The Restricted Payments shall not exceed the sum of $100.0
million plus (or minus if negative) (a) one-half of the aggregate consolidated net income of the
Company for the period beginning on January 1, 2011 and ending on the date of determination and (b)
the amount of net cash proceeds received from the sale of capital stock on or after January 1, 2011
and ending on the date of determination (Restricted Payment Basket). For purposes of the
calculation of the Restricted Payment Basket, net income represents such amounts per the
consolidated financial statements adjusted to exclude the Companys foreign operations, non-cash
interest expense, non-cash asset impairment charges, and non-cash stock-based compensation. As of
September 30, 2011, the Restricted
Payment Basket totaled $79.7 million. As of September 30, 2011, the Company was in compliance
with all applicable covenants and ratios under the Revolving Credit Facility.
Ford Motor Credit Company Facility
The FMCC Facility provides for the financing of, and is collateralized by, the Companys Ford
new vehicle inventory, including affiliated brands. 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, 2011, the Company had an outstanding balance of $73.9 million
with an available floorplan borrowing capacity of $76.1 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, 2011, the interest rate on the FMCC Facility was 5.5%
before considering the applicable incentives.
Other Credit Facilities
The Company has a credit facility with BMW Financial Services for the financing of new, used
and rental vehicle inventories related to 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. Dependent upon the type
of inventory financed, the interest rates charged on borrowings outstanding under this facility
ranged from 0.2% to 3.5%, as of September 30, 2011.
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 over the next
two years. As of September 30, 2011, the interest rate charged on borrowings related to the
Companys rental vehicle fleet ranged from 2.5% to 6.8%. Rental vehicles are typically transferred
to used vehicle inventory when they are removed from rental service and repayment of the borrowing
is required at that time.
15
10. LONG-TERM DEBT
The Company carries its long-term debt at face value, net of applicable discounts. Long-term
debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(Dollars in thousands) |
|
2.25% Convertible Senior Notes due 2036 (principal of $182,753
at September 30, 2011 and December 31, 2010) |
|
$ |
143,228 |
|
|
$ |
138,155 |
|
3.00% Convertible Senior Notes due 2020 (principal of $115,000
at September 30, 2011 and December 31, 2010) |
|
|
76,617 |
|
|
|
74,365 |
|
Mortgage Facility |
|
|
41,535 |
|
|
|
42,600 |
|
Other Real Estate Related and Long-Term Debt |
|
|
185,998 |
|
|
|
170,291 |
|
Capital lease obligations related to real estate, maturing in varying amounts
through November 2032 with a weighted average interest rate of
9.3% |
|
|
39,818 |
|
|
|
40,728 |
|
|
|
|
|
|
|
|
|
|
|
487,196 |
|
|
|
466,139 |
|
Less current maturities of mortgage facility and other long-term
debt |
|
|
14,003 |
|
|
|
53,189 |
|
|
|
|
|
|
|
|
|
|
$ |
473,193 |
|
|
$ |
412,950 |
|
|
|
|
|
|
|
|
2.25% Convertible Senior Notes
The Companys outstanding 2.25% Convertible Senior Notes due 2036 (the 2.25% Notes) had a fair value based on quoted market prices utilizing public information, independent external
valuations from pricing services or third-party advisors of $179.3 million and $180.0 million as of
September 30, 2011 and December 31, 2010, respectively. The Company determined the discount
applicable to 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 Company utilized a ten-year term for the
assessment of the fair value of its 2.25% Notes.
As of September 30, 2011 and December 31, 2010, the carrying value of the 2.25% Notes, related
discount and equity component consisted of the following:
16
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(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 |
|
$ |
14,071 |
|
|
$ |
15,855 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal amount of 2.25% Notes |
|
$ |
182,753 |
|
|
$ |
182,753 |
|
Unamortized discount |
|
|
(38,035 |
) |
|
|
(42,916 |
) |
Unamortized underwriter fees |
|
|
(1,490 |
) |
|
|
(1,682 |
) |
|
|
|
|
|
|
|
Net carrying amount of liability component |
|
$ |
143,228 |
|
|
$ |
138,155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impact on retained earnings |
|
$ |
(40,394 |
) |
|
$ |
(37,420 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized debt issuance cost |
|
$ |
59 |
|
|
$ |
67 |
|
For the nine months ended September 30, 2011 and 2010, 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, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(Dollars in thousands) |
|
Year-to-date contractual interest expense |
|
$ |
3,091 |
|
|
$ |
3,091 |
|
Year-to-date discount amortization |
|
$ |
4,758 |
|
|
$ |
4,320 |
|
|
|
|
|
|
|
|
|
|
Effective interest rate of liability component |
|
|
7.7 |
% |
|
|
7.7 |
% |
3.00% Convertible Senior Notes
The Companys outstanding 3.00% Convertible Senior Notes due 2020 (the 3.00% Notes) had a fair value based on quoted market prices utilizing public information, independent external
valuations from pricing services or third-party advisors of $128.7 million and $143.3 million as of
September 30, 2011 and December 31, 2010, respectively. The Company also determined the discount
applicable to 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 of its 3.00%
Notes.
As of September 30, 2011 and December 31, 2010, the carrying value of the 3.00% Notes, related
discount and equity component consisted of the following:
17
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(In thousands) |
|
Carrying amount of equity component |
|
$ |
25,359 |
|
|
$ |
25,359 |
|
Allocated underwriter fees, net of taxes |
|
|
(760 |
) |
|
|
(760 |
) |
Allocated debt issuance cost, net of taxes |
|
|
(112 |
) |
|
|
(112 |
) |
|
|
|
|
|
|
|
Total net equity component |
|
$ |
24,487 |
|
|
$ |
24,487 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax component |
|
$ |
13,219 |
|
|
$ |
13,971 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal amount of 3.00% Notes |
|
$ |
115,000 |
|
|
$ |
115,000 |
|
Unamortized discount |
|
|
(36,381 |
) |
|
|
(38,516 |
) |
Unamortized underwriter fees |
|
|
(2,002 |
) |
|
|
(2,119 |
) |
|
|
|
|
|
|
|
Net carrying amount of liability component |
|
$ |
76,617 |
|
|
$ |
74,365 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impact on retained earnings |
|
$ |
(2,456 |
) |
|
$ |
(1,202 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized debt issuance cost |
|
$ |
295 |
|
|
$ |
313 |
|
For the nine months ended September 30, 2011 and 2010, 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, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(Dollars in thousands) |
|
Year-to-date contractual interest expense |
|
$ |
2,588 |
|
|
$ |
1,822 |
|
Year-to-date discount amortization |
|
$ |
2,006 |
|
|
$ |
1,285 |
|
|
|
|
|
|
|
|
|
|
Effective interest rate of liability component |
|
|
8.6 |
% |
|
|
8.6 |
% |
The 3.00% Notes are convertible into cash and, if applicable, common stock based on the
conversion rate, 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 Companys 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 (or $49.641 as of September 30, 2011); (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 Companys 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
3.00% Notes Indenture. Upon conversion, a holder will receive an amount in cash and common shares
of the Companys common stock, determined in the manner set forth in the 3.00% Notes Indenture.
None of the conversion features of the Companys 3.00% Notes were triggered in the three months
ended September 30, 2011.
As of September 30, 2011, the conversion rate was 26.1885 shares of common stock per $1,000
principal amount of 3.00% Notes, with a conversion price of $38.19 per share, which was reduced
during the third quarter of 2011 as the result of the Companys decision to pay a cash dividend of
$0.13 per share of common stock for the second quarter of 2011 to holders of record on September 1,
2011. If any cash dividend or distribution is made to all, or substantially all, holders of the
Companys common stock in the future, the conversion rate will be adjusted based on the formula
defined in the 3.00% Notes Indenture.
As of September 30, 2011, the exercise price of the 3.00% Warrants, which are related to the
issuance of the 3.00% Notes, was $56.11 due to the Companys decision to pay a cash dividend of
$0.13 per share of common stock for the second quarter of 2011 to
18
holders of record on September 1,
2011. If any cash dividend or distribution is made to all, or substantially all, holders of the
Companys common stock in the future, the conversion rate will be adjusted based on the formula
defined in the 3.00% Notes Indenture.
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 $38.19 per share, the conversion price, as of September 30, 2011. The
exercise price is subject to certain adjustments that mirror the adjustments to the conversion
price of the 3.00% Notes (including payments of cash dividends).
Real Estate Credit Facility
On December 29, 2010, the Company amended and restated its $235.0 million five-year real
estate credit facility with Bank of America, N.A. and Comerica Bank. As amended and restated, the
Real Estate Credit Facility (the Mortgage Facility) provides for $42.6 million of term loans with
the right to expand to $75.0 million provided that (i) no default or event of default exists under
the Mortgage Facility; (ii) the Company obtains commitments from the lenders who would qualify as
assignees for such increased amounts; and (iii) certain other agreed upon terms and conditions have
been satisfied. This facility is guaranteed by the Company and substantially all of the domestic
subsidiaries of the Company and is secured by the relevant real property owned by the Company that
is mortgaged under the Mortgage Facility. The Company capitalized $0.9 million of debt issuance
costs related to the Mortgage Facility that are being amortized over the term of the facility, $0.8
million of which are still unamortized as of September 30, 2011.
As amended and restated, the Mortgage Facility now provides for only term loans and no longer
has a revolving feature. The interest rate is now equal to (i) the per annum rate equal to
one-month LIBOR plus 3.00% per annum, determined on the first day of each month, or (ii) 1.95% per
annum in excess of the higher of (a) the Bank of America prime rate (adjusted daily on the day
specified in the public announcement of such price rate), (b) the Federal Funds Rate adjusted
daily, plus 0.5% or (c) the per annum rate equal to one-month LIBOR plus 1.05% per annum. The
Federal Funds Rate is the weighted average of the rates on overnight Federal funds transactions
with members of the Federal Reserve System arranged by Federal funds brokers on such day, as
published by the Federal Reserve Bank of New York on the business day succeeding such day.
The Company is required to make quarterly principal payments equal to 1.25% of the principal
amount outstanding, which began in April 2011, and is required to repay the aggregate principal
amount outstanding on the maturity date December 29, 2015. During the nine months ended September
30, 2011, the Company made principal payments of $1.1 million on outstanding borrowings from the
Mortgage Facility. As of September 30, 2011, borrowings under the amended and restated Mortgage
Facility totaled $41.5 million, with $2.1 million recorded as a current maturity of long-term debt
in the accompanying Consolidated Balance Sheet.
The Mortgage Facility also contains usual and customary provisions limiting the Companys
ability to engage in certain transactions, including limitations on the Companys ability to incur
additional debt, additional liens, make investments, and pay distributions to its stockholders. As
amended, the Mortgage Facility contains certain covenants, including financial ratios that must be
complied with, including: fixed charge coverage ratio, total funded lease adjusted indebtedness to
proforma EBITDAR ratio, and current ratio. For covenant calculation purposes, EBITDAR is defined as
earnings before non-floorplan interest expense, taxes, depreciation and amortization and rent
expense. EBITDAR also includes interest income and is further adjusted for certain non-cash income
charges. In addition, congruent with the Revolving Credit Facility, the Mortgage Facility restricts
the Companys ability to make certain payments, such as dividends or other distributions of assets,
properties, cash, rights, obligations or securities. As of September 30, 2011, the Company was in
compliance with all of these covenants and the Mortgage Facilitys Restricted Payment Basket
totaled $79.7 million. Based upon current operating and financial projections, the Company believes
that it will remain compliant with such covenants for the remainder of the fiscal year.
Real Estate Related Debt
In addition to the amended and restated Mortgage Facility, the Company entered into separate
term loans in 2010 and 2011, totaling $162.5 million, with three of its manufacturer-affiliated
finance partners, Toyota Motor Credit Corporation (TMCC), Mercedes-Benz Financial Services USA,
LLC (MBFS), BMW Financial Services NA, LLC (BMWFS) and a third-party financial institution
(collectively, the Real Estate Notes). The Company used $116.4 million of these borrowings to
refinance a portion of its Mortgage Facility and the remaining amount to finance owned or purchased
real estate to be utilized in existing dealership operations. The Real Estate Notes may be
expanded, are on specific buildings and/or properties and are guaranteed by the Company. Each loan
was made in connection with, and is secured by mortgage liens on, the relevant real property owned
by the Company that is mortgaged under the Real Estate Notes. The Real Estate Notes bear interest
at fixed rates between 4.62% and 5.47%, and at variable indexed rates plus
19
between 2.25% and 3.35%
per annum. The Company capitalized $1.3 million of related debt issuance costs related to the Real
Estate Notes that are being amortized over the terms of the notes, $1.1 million of which are still
unamortized as of September 30, 2011.
The loan agreements with TMCC consist of four term loans. As of September 30, 2011, $27.0
million remained outstanding with $0.6 million classified as current and the remainder in long-term
debt. The maturity dates vary from two to seven years and provide for monthly payments based on a
20-year amortization schedule. These four loans are cross-collateralized and cross-defaulted with
each other. During the first three months of 2011, the loan agreements were amended to also be
cross-defaulted with the Revolving Credit Facility.
The loan agreements with MBFS consist of three term loans. As of September 30, 2011, $49.0
million remained outstanding with $1.5 million classified as current and the remainder in long-term
debt. The agreements provide for monthly payments based on a 20-year amortization schedule and have
a maturity date of five years. These three loans are cross-collateralized and cross-defaulted with
each other. They are also cross-defaulted with the Revolving Credit Facility.
The loan agreements with BMWFS consist of 13 term loans. As of September 30, 2011, $71.3
million remained outstanding with $3.4 million classified as current and the remainder in long-term
debt. The agreements provide for monthly payments based on a 15-year amortization schedule and have
a maturity date of seven years. In the case of three properties owned by subsidiaries, the
applicable loan is also guaranteed by the subsidiary real property owner. These 13 loans are
cross-collateralized with each other. In addition, they are cross-defaulted with each other, the
Revolving Credit Facility, and certain dealership franchising agreements with BMW of North America,
LLC.
The loan agreements with a third party financial institution consist of three term loans for
an aggregate principal amount of $16.5 million, to finance real estate associated with three of the
Companys dealerships. The loans are repaid in monthly installments which began in September 2011,
and mature in August 2016. As of September 30, 2011, borrowings under these notes totaled $16.4
million, with $0.8 million classified as a current maturity of long-term debt in the accompanying
Consolidated Balance Sheets.
In October 2008, the Company executed a note agreement with a third-party financial
institution for an aggregate principal amount of £10.0 million (the Foreign Note), which is
secured by the Companys foreign subsidiary properties. The Foreign Note is being repaid in monthly
installments that began in March 2010 and matures in August 2018. As of September 30, 2011,
borrowings under the Foreign Note totaled $12.7 million, with $1.8 million classified as a current
maturity of long-term debt in the accompanying Consolidated Balance Sheets.
11. FAIR VALUE MEASUREMENTS
The Fair Value Measurements and Disclosures Topic of the FASB Accounting Standards
Codification (the Fair Value Measurements Topic) 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; 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; 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 entitys internally developed
assumptions that market participants would use in pricing the asset or liability. |
The Companys 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.
20
The Company designates its investments in marketable securities and debt instruments 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.
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.
The Company holds real estate investments that qualified as held-for-sale assets as of
September 30, 2011. 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.
The Companys derivative financial instruments are recorded at fair market value. See Note 4
Derivative Instruments and Risk Management Activities for further details regarding the Companys
derivative financial instruments.
The Company determined that its investments in marketable securities, debt instruments and
interest rate derivative financial instruments met the criteria for disclosure within the Fair
Value Measurements Topic. The respective fair values measured on a recurring basis as of September
30, 2011 and December 31, 2010, respectively, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2011 |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Total |
|
|
|
(In thousands) |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities money market |
|
$ |
1,391 |
|
|
$ |
|
|
|
$ |
1,391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets held-for-sale |
|
|
|
|
|
|
8,525 |
|
|
|
8,525 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Demand obligations |
|
|
|
|
|
|
336 |
|
|
|
336 |
|
Collateralized mortgage obligations |
|
|
|
|
|
|
32 |
|
|
|
32 |
|
Corporate bonds |
|
|
|
|
|
|
655 |
|
|
|
655 |
|
Municipal obligations |
|
|
|
|
|
|
688 |
|
|
|
688 |
|
Mortgage backed |
|
|
|
|
|
|
661 |
|
|
|
661 |
|
|
|
|
|
|
|
|
|
|
|
Total debt securities |
|
|
|
|
|
|
2,372 |
|
|
|
2,372 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,391 |
|
|
$ |
10,897 |
|
|
$ |
12,288 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate derivative financial instruments |
|
$ |
|
|
|
$ |
32,769 |
|
|
$ |
32,769 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
32,769 |
|
|
$ |
32,769 |
|
|
|
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010 |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Total |
|
|
|
(In thousands) |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities money market |
|
$ |
1,695 |
|
|
$ |
|
|
|
$ |
1,695 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets held-for-sale |
|
|
|
|
|
|
5,575 |
|
|
|
5,575 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Demand obligations |
|
|
|
|
|
|
680 |
|
|
|
680 |
|
Collateralized mortgage obligations |
|
|
|
|
|
|
121 |
|
|
|
121 |
|
Corporate bonds |
|
|
|
|
|
|
1,114 |
|
|
|
1,114 |
|
Municipal obligations |
|
|
|
|
|
|
1,004 |
|
|
|
1,004 |
|
Mortgage backed |
|
|
|
|
|
|
753 |
|
|
|
753 |
|
|
|
|
|
|
|
|
|
|
|
Total debt securities |
|
|
|
|
|
|
3,672 |
|
|
|
3,672 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,695 |
|
|
$ |
9,247 |
|
|
$ |
10,942 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate derivative financial instruments |
|
$ |
|
|
|
$ |
17,524 |
|
|
$ |
17,524 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
17,524 |
|
|
$ |
17,524 |
|
|
|
|
|
|
|
|
|
|
|
12. COMMITMENTS AND CONTINGENCIES
From time to time, the Companys 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 Companys 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 Companys 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 Companys 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 Companys
Consolidated Statements of Operations, while such amounts for manufacturer chargebacks of
recognized warranty-related items are included as a reduction of revenues in the Companys
Consolidated Statements of Operations.
Legal Proceedings
Currently, the Company is not party to any legal proceedings that, individually or in the
aggregate, are reasonably expected to have a material adverse effect on the Companys results of
operations, financial condition, or cash flows, including class action lawsuits. However, the
results of current, or future, matters cannot be predicted with certainty, and an unfavorable
resolution of one or more of such matters could have a material adverse effect on the Companys
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 Companys subsidiaries of their respective dealership premises. Pursuant
to these leases, the Companys 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
22
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 Companys
subsidiaries assign or sublet to the dealership purchaser the subsidiaries interests in any real
property leases associated with such dealerships. In general, the Companys 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 $21.8 million as of
September 30, 2011. The Companys 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 Companys business, financial condition, or
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, financial condition, or cash flows, 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 the Companys future annual employee health care costs. Further, new laws and
regulations, particularly at the federal level, may be enacted, which could also have a materially
adverse impact on its business. The Company does not have any material known environmental
commitments or contingencies.
13. COMPREHENSIVE INCOME
The following table provides a reconciliation of net income to comprehensive income for the
three and nine months ended September 30, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Net income |
|
$ |
21,494 |
|
|
$ |
18,985 |
|
|
$ |
61,539 |
|
|
$ |
39,735 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of interest rate swaps |
|
|
(9,842 |
) |
|
|
1,522 |
|
|
|
(9,528 |
) |
|
|
3,904 |
|
Unrealized gain (loss) on investments |
|
|
(11 |
) |
|
|
13 |
|
|
|
(22 |
) |
|
|
(11 |
) |
Unrealized gain (loss) on currency translation |
|
|
(978 |
) |
|
|
1,712 |
|
|
|
319 |
|
|
|
201 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
10,663 |
|
|
$ |
22,232 |
|
|
$ |
52,308 |
|
|
$ |
43,829 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
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, 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 availability of 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; |
|
|
|
adverse 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, Ford, Daimler, Chrysler,
Nissan, Honda, General Motors and BMW, because of financial distress, bankruptcy, natural
disasters that disrupt production 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;
|
24
|
|
|
restructuring by one or more of our principal manufacturers, up to and including
bankruptcy may cause us to suffer financial loss in the form of uncollectible receivables,
devalued inventory or loss of franchises; |
|
|
|
requirements imposed on us by our manufacturers may require dispositions, limit our
acquisitions or increases in 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 may be 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 2010 Form 10-K, under the headings Item 1A. Risk Factors and
Item 7. Managements 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 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.
25
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
This Managements 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, 2011, we
owned and operated 125 franchises, representing 30 brands of automobiles, at 100 dealership
locations and 25 collision service centers in the United States of America (the U.S.) and ten
franchises, representing two 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 cars and light trucks, arrange related financing, sell vehicle service and
insurance contracts, maintenance and repair services, and replacement parts. 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, 2011, our U.S. retail network consisted of the following two regions (with
the number of dealerships they comprised): (i) the East (42 dealerships in Alabama, Florida,
Georgia, Louisiana, Maryland, Massachusetts, Mississippi, New Hampshire, New Jersey, New York and
South Carolina) and (ii) the West (58 dealerships in California, Kansas, Oklahoma and Texas). 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
From September 2008 through most of 2009, the U.S. and global economies 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 much of 2010 and the first nine months of 2011, economic trends have stabilized and
consumer demand for new and used vehicles has shown improvement. According to industry experts, the
average 2011 seasonally adjusted annual rate of sales (or SAAR) was 12.5 million units, compared
to 11.3 million units a year ago. But given the depth of the downturn and current pace of recovery,
a return to historically normalized industry selling levels will probably be extended.
In March of 2011, the earthquake and tsunami in Japan adversely affected certain vehicle
manufacturers and a number of parts suppliers on which these manufacturers depend. Manufacturers,
including Toyota, Nissan and Honda, which represented 61.6% of our new vehicle unit sales in 2010,
have experienced a shortage of parts that are critical to vehicle production, limiting the supply
of new vehicles and negatively impacting the volume of new vehicles sold during the second and
third quarters of 2011. As a result, those same manufacturers have only represented 50.9% of new
vehicle unit sales for the nine months ended September 30, 2011. We expect the inventory supply
limitations of these brands to improve in the near term.
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 balance sheet to take advantage of investment opportunities as
they arise. Though the retail and economic environment continues to be challenging, we believe that
the stabilizing economic trends provide opportunities for us in the marketplace to: (i) continue to
focus on our higher margin parts and service business by enhancing the cost effectiveness of our
marketing efforts, implementing strategic selling methods, and improving operational efficiencies;
and (ii) invest capital where necessary to support the anticipated growth, particularly in our
parts and service business.
We continue to closely scrutinize all planned 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 improve the customer experience. We anticipate that 2011 capital
spending will be less than $50.0 million, which includes about $10.0 million for specific growth
initiatives in our parts and service business segment.
26
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. During the nine months
ended September 30, 2011, we completed the acquisitions of one Volkswagen dealership, one BMW/MINI
dealership, two Ford dealerships, one Buick/GMC dealership, and were awarded one Fiat franchise,
which are expected to generate $345.0 million in aggregate annual revenues. We will continue to
pursue dealership investment opportunities that we believe will add value for our company and
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. In particular, the disruption
in new vehicle production, for many of our import manufacturer partners resulting from the natural
disasters in Japan earlier in 2011, altered these seasonal trends for much of 2011.
For the three months ended September 30, 2011, total revenues increased 7.4% from 2010 levels
to $1.6 billion and gross profit improved 8.7% to $248.8 million. For the nine months ended
September 30, 2011, total revenues increased 9.4% from 2010 levels to $4.5 billion and gross profit
improved 8.3% to $714.7 million. Operating income rose for the three and nine months ended
September 30, 2011 by 7.7% and 25.9%, respectively, from 2010 to $50.1 million and $143.7 million,
respectively. Income before income taxes improved to $34.5 million for the third quarter of 2011,
which was a 12.7% improvement over the same period from the prior year. For the first nine months
of 2011, income before income taxes increased 52.3% to $98.7 million. For the three months ended
September 30, 2011 and 2010, we realized net income of $21.5 million and $19.0 million,
respectively, and diluted income per share of $0.94 and $0.83, respectively. For the nine months
ended September 30, 2011 and 2010, we realized net income of $61.5 million and $39.7 million,
respectively, and diluted income per share of $2.67 and $1.70, respectively. Our net cash flow
provided by operations was $301.1 million for the nine months ended September 30, 2011, while our
net cash flow used in operations was $52.2 million for the nine months ended September 30, 2010.
27
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 |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Unit Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Vehicle |
|
|
25,777 |
|
|
|
26,396 |
|
|
|
74,578 |
|
|
|
72,128 |
|
Used Vehicle |
|
|
18,770 |
|
|
|
17,601 |
|
|
|
52,700 |
|
|
|
50,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Retail Sales |
|
|
44,547 |
|
|
|
43,997 |
|
|
|
127,278 |
|
|
|
122,358 |
|
Wholesale Sales |
|
|
9,697 |
|
|
|
9,308 |
|
|
|
27,246 |
|
|
|
24,716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Vehicle Sales |
|
|
54,244 |
|
|
|
53,305 |
|
|
|
154,524 |
|
|
|
147,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Vehicle Retail Sales |
|
|
6.5 |
% |
|
|
5.7 |
% |
|
|
6.2 |
% |
|
|
5.8 |
% |
Total Used Vehicle Sales |
|
|
7.1 |
% |
|
|
7.7 |
% |
|
|
8.0 |
% |
|
|
8.3 |
% |
Parts and Service Sales |
|
|
52.0 |
% |
|
|
54.3 |
% |
|
|
52.5 |
% |
|
|
54.1 |
% |
Total Gross Margin |
|
|
15.8 |
% |
|
|
15.7 |
% |
|
|
16.0 |
% |
|
|
16.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SG&A(1) as a % of Gross Profit |
|
|
75.7 |
% |
|
|
76.0 |
% |
|
|
76.5 |
% |
|
|
79.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Margin |
|
|
3.2 |
% |
|
|
3.2 |
% |
|
|
3.2 |
% |
|
|
2.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax Margin |
|
|
2.2 |
% |
|
|
2.1 |
% |
|
|
2.2 |
% |
|
|
1.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance and Insurance Revenues per Retail Unit Sold |
|
$ |
1,156 |
|
|
$ |
1,006 |
|
|
$ |
1,118 |
|
|
$ |
1,018 |
|
|
|
|
(1) |
|
Selling, general and administrative expenses. |
The following discussion briefly highlights certain 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 nine months of 2011, the industry experienced an increase in the 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 the average SAAR is still
low relative to the years immediately preceding the recession, it has risen from 11.3 million
through the first nine months of 2010 to 12.5 million in 2011, a 10.6% improvement. Our unit sales
performance has outpaced the specific performances of most of a number of the brands we represent,
though our overall sales increases lagged the industry results due primarily to our brand mix and
inventory shortages in our import brands. Our new vehicle retail sales revenues increased 4.9% and
9.0% for the three and nine months ended September 30, 2011, respectively. We achieved this
increase despite inventory shortages in our predominant import brands, caused by the natural
disasters in Japan that occurred in March 2011. The improvements primarily reflect an increase in
average selling price. New vehicle retail gross margin improved during the three and nine months
ended September 30, 2011, reflecting brand and car/truck mix shifts, as well as the impact of
constrained inventory levels.
Our used vehicle results are directly affected by economic conditions, the level of
manufacturer incentives on new vehicles, 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. The stabilizing economic environment that
benefited new vehicle sales also supported improved used vehicle demand that positively impacted
our used vehicle retail sales in comparison to our 2010 results. Further, the wholesale side of our
business experienced increases in unit sales for the three and nine months ended September 30,
2011, primarily as a result of a trend in trade-ins towards higher mileage units. Used vehicle
gross margins declined for the three and nine months ended September 30, 2011, due to tightening
price relativities between new and used vehicles, as well as a recent decline in auction prices.
28
Our parts and service sales increased by 7.0% and 5.8%, respectively, for the three and nine
months ended September 30, 2011 as compared to the same periods in 2010, primarily driven by
increases in our collision and wholesale parts businesses, as well as increases in our customer-pay
parts and service business. The overall improvement in our parts and service business is
particularly noteworthy, given that the comparable period in 2010 was bolstered by two significant
Toyota recall campaigns and given the loss of approximately one week of business in August 2011 as
many of our stores in the Northeast portion of the U.S. prepared for and then recovered from the
effects of Hurricane Irene. The stores impacted by the hurricane represent approximately 25% of our
normal total sales revenues. Our parts and service margins declined for the three and nine month
periods in 2011 as compared to the same period in 2010 as growth in our collision and wholesale
parts segments which are relatively lower margin segments, outpaced the growth in our customer-pay
and warranty related parts and service segments. We also experienced declining margins in our
warranty parts and service business, reflecting a return to more normalized levels as the Toyota
recalls of 2010 consisted predominantly of labor services that generated higher margin than the
corresponding parts.
Our consolidated finance and insurance income per retail unit sold (PRU) also increased for
the third quarter and first nine months of 2011 as compared to 2010, primarily driven by an
increase in finance income per contract coupled with improvements in both our vehicle service
contract penetration rates and income per contract.
Our consolidated selling, general and administrative (SG&A) expenses increased in absolute
dollars, but decreased as a percentage of gross profit by 30 and 270 basis points, respectively,
for the three and nine months ended September 30, 2011 from the comparable periods in 2010,
reflecting ongoing cost control and the leverage on our cost structure that the higher revenues and
gross profits provide.
For the three and nine months ended September 30, 2011, floorplan interest expense decreased
22.8% and 19.7%, respectively, as compared to the same period in 2010, due to a decline in weighted
average floorplan interest rates, as well as a decline in weighted average borrowings for the three
months ended September 30, 2011. Other interest expense increased 25.4% and 22.4% for the three and
nine months ended September 30, 2011, respectively, primarily attributable to higher mortgage
interest rates coupled with an increase in weighted average real estate borrowings outstanding as
we continue to strategically add dealership related real estate to our portfolio. As a result, our
pretax margin for the three and nine months ended September 30, 2011, increased 10 and 60 basis
points, respectively, as compared to 2010.
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 and Estimates, 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 accordance with accounting
principles generally accepted in the U.S.
Refer to Note 2, Summary of Significant Accounting Policies and Estimates, in Item 1 for a
discussion of certain critical accounting policies and estimates. Also, we disclosed certain
critical accounting policies and estimates in our 2010 Annual Report on Form 10-K, and no
significant changes have occurred since that time.
Results of Operations
The following tables present comparative financial and non-financial data for the three and
nine months ended September 30, 2011 and 2010, of (a) our Same Store locations, (b) those
locations acquired or disposed of during the periods (Transactions) 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, 2011 as compared to 2010:
29
Total Same Store Data
(dollars in thousands, except per unit amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2011 |
|
|
% Change |
|
|
2010 |
|
|
2011 |
|
|
% Change |
|
|
2010 |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New vehicle retail |
|
$ |
818,269 |
|
|
|
(0.0 |
)% |
|
$ |
818,645 |
|
|
$ |
2,369,672 |
|
|
|
6.5 |
% |
|
$ |
2,225,429 |
|
Used vehicle retail |
|
|
361,511 |
|
|
|
6.6 |
% |
|
|
339,094 |
|
|
|
1,016,231 |
|
|
|
6.7 |
% |
|
|
952,124 |
|
Used vehicle wholesale |
|
|
66,018 |
|
|
|
13.6 |
% |
|
|
58,140 |
|
|
|
184,630 |
|
|
|
19.7 |
% |
|
|
154,188 |
|
Parts and Service |
|
|
199,744 |
|
|
|
2.2 |
% |
|
|
195,416 |
|
|
|
584,251 |
|
|
|
3.2 |
% |
|
|
566,294 |
|
Finance, insurance and other |
|
|
48,913 |
|
|
|
10.9 |
% |
|
|
44,107 |
|
|
|
137,759 |
|
|
|
11.8 |
% |
|
|
123,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
1,494,455 |
|
|
|
2.7 |
% |
|
$ |
1,455,402 |
|
|
$ |
4,292,543 |
|
|
|
6.7 |
% |
|
$ |
4,021,229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New vehicle retail |
|
$ |
764,233 |
|
|
|
(1.0 |
)% |
|
$ |
771,813 |
|
|
$ |
2,220,979 |
|
|
|
6.0 |
% |
|
$ |
2,095,451 |
|
Used vehicle retail |
|
|
330,939 |
|
|
|
7.2 |
% |
|
|
308,673 |
|
|
|
923,976 |
|
|
|
7.0 |
% |
|
|
863,209 |
|
Used vehicle wholesale |
|
|
66,097 |
|
|
|
14.4 |
% |
|
|
57,782 |
|
|
|
180,535 |
|
|
|
19.6 |
% |
|
|
150,978 |
|
Parts and Service |
|
|
94,292 |
|
|
|
5.6 |
% |
|
|
89,280 |
|
|
|
273,820 |
|
|
|
5.5 |
% |
|
|
259,538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales |
|
$ |
1,255,561 |
|
|
|
2.3 |
% |
|
$ |
1,227,548 |
|
|
$ |
3,599,310 |
|
|
|
6.8 |
% |
|
$ |
3,369,176 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
$ |
238,894 |
|
|
|
4.8 |
% |
|
$ |
227,854 |
|
|
$ |
693,233 |
|
|
|
6.3 |
% |
|
$ |
652,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses |
|
$ |
180,417 |
|
|
|
4.1 |
% |
|
$ |
173,389 |
|
|
$ |
528,971 |
|
|
|
4.0 |
% |
|
$ |
508,427 |
|
Depreciation
and amortization expenses |
|
$ |
6,634 |
|
|
|
0.0 |
% |
|
$ |
6,632 |
|
|
$ |
19,264 |
|
|
|
0.3 |
% |
|
$ |
19,213 |
|
Floorplan interest expense |
|
$ |
6,606 |
|
|
|
(26.3 |
)% |
|
$ |
8,961 |
|
|
$ |
19,576 |
|
|
|
(21.3 |
)% |
|
$ |
24,884 |
|
Gross Margin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Vehicle Retail |
|
|
6.6 |
% |
|
|
|
|
|
|
5.7 |
% |
|
|
6.3 |
% |
|
|
|
|
|
|
5.8 |
% |
Used Vehicle |
|
|
7.1 |
% |
|
|
|
|
|
|
7.7 |
% |
|
|
8.0 |
% |
|
|
|
|
|
|
8.3 |
% |
Parts and Service |
|
|
52.8 |
% |
|
|
|
|
|
|
54.3 |
% |
|
|
53.1 |
% |
|
|
|
|
|
|
54.2 |
% |
Total Gross Margin |
|
|
16.0 |
% |
|
|
|
|
|
|
15.7 |
% |
|
|
16.1 |
% |
|
|
|
|
|
|
16.2 |
% |
SG&A as a % of Gross Profit |
|
|
75.5 |
% |
|
|
|
|
|
|
76.1 |
% |
|
|
76.3 |
% |
|
|
|
|
|
|
78.0 |
% |
Operating Margin |
|
|
3.2 |
% |
|
|
|
|
|
|
3.2 |
% |
|
|
3.3 |
% |
|
|
|
|
|
|
3.0 |
% |
Finance and Insurance Revenues per Retail Unit Sold |
|
$ |
1,155 |
|
|
|
14.7 |
% |
|
$ |
1,007 |
|
|
$ |
1,123 |
|
|
|
10.3 |
% |
|
$ |
1,018 |
|
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, Transactions and the consolidated company for
the three and nine months ended September 30, 2011 and 2010.
30
New Vehicle Retail Data
(dollars in thousands, except per unit amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2011 |
|
|
% Change |
|
|
2010 |
|
|
2011 |
|
|
% Change |
|
|
2010 |
|
Retail Unit Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores |
|
|
24,427 |
|
|
|
(7.1 |
)% |
|
|
26,298 |
|
|
|
71,807 |
|
|
|
0.7 |
% |
|
|
71,300 |
|
Transactions |
|
|
1,350 |
|
|
|
|
|
|
|
98 |
|
|
|
2,771 |
|
|
|
|
|
|
|
828 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
25,777 |
|
|
|
(2.3 |
)% |
|
|
26,396 |
|
|
|
74,578 |
|
|
|
3.4 |
% |
|
|
72,128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail Sales Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores |
|
$ |
818,269 |
|
|
|
(0.0 |
)% |
|
$ |
818,645 |
|
|
$ |
2,369,672 |
|
|
|
6.5 |
% |
|
$ |
2,225,429 |
|
Transactions |
|
|
44,391 |
|
|
|
|
|
|
|
3,476 |
|
|
|
87,583 |
|
|
|
|
|
|
|
28,664 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
862,660 |
|
|
|
4.9 |
% |
|
$ |
822,121 |
|
|
$ |
2,457,255 |
|
|
|
9.0 |
% |
|
$ |
2,254,093 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores |
|
$ |
54,035 |
|
|
|
15.4 |
% |
|
$ |
46,832 |
|
|
$ |
148,692 |
|
|
|
14.4 |
% |
|
$ |
129,977 |
|
Transactions |
|
|
2,127 |
|
|
|
|
|
|
|
243 |
|
|
|
4,506 |
|
|
|
|
|
|
|
1,583 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
56,162 |
|
|
|
19.3 |
% |
|
$ |
47,075 |
|
|
$ |
153,198 |
|
|
|
16.4 |
% |
|
$ |
131,560 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit per Retail |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unit Sold |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores |
|
$ |
2,212 |
|
|
|
24.2 |
% |
|
$ |
1,781 |
|
|
$ |
2,071 |
|
|
|
13.6 |
% |
|
$ |
1,823 |
|
Transactions |
|
$ |
1,576 |
|
|
|
|
|
|
$ |
2,480 |
|
|
$ |
1,626 |
|
|
|
|
|
|
$ |
1,912 |
|
Total |
|
$ |
2,179 |
|
|
|
22.2 |
% |
|
$ |
1,783 |
|
|
$ |
2,054 |
|
|
|
12.6 |
% |
|
$ |
1,824 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores |
|
|
6.6 |
% |
|
|
|
|
|
|
5.7 |
% |
|
|
6.3 |
% |
|
|
|
|
|
|
5.8 |
% |
Transactions |
|
|
4.8 |
% |
|
|
|
|
|
|
7.0 |
% |
|
|
5.1 |
% |
|
|
|
|
|
|
5.5 |
% |
Total |
|
|
6.5 |
% |
|
|
|
|
|
|
5.7 |
% |
|
|
6.2 |
% |
|
|
|
|
|
|
5.8 |
% |
The stabilization of U.S. economic conditions, coupled with the increase in SAAR, as well
as the focus that we have placed on improving our sales processes at our dealerships, helped to
offset the negative impact of inventory shortages experienced during the third quarter of 2011 in
our predominant import brands resulting from the natural disaster in Japan. From a mix standpoint,
we achieved increases in Same Store unit sales of 24.9% and in Same Store revenues of 28.1% in our
domestic brands that offset the 8.1% decline in Same Store revenues within our import brands.
Although the impact of the natural disasters has temporarily constrained the supply of new vehicle
inventory, primarily in our import brands, we anticipate that total industry-wide sales of new
vehicles for 2011 will be higher than 2010, as the economy continues to recover. 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.
Our total Same Store revenues PRU increased 7.6% to $33,499 in the third quarter of 2011, due
primarily to manufacturer price increases, and a mix shift to trucks from cars. In the third
quarter of 2011, our Same Store retail new truck unit sales increased by 5.0% and our retail new
car unit sales decreased by 15.3%, as compared with the same period in 2010. Our Same Store new
vehicle gross profits improved 15.4% for the three months ended September 30, 2011 and our Same
Store gross profit PRU increased by 24.2% to $2,212. This gross profit PRU improvement consisted of
increases in predominantly all of the brands that we represent. As a result, our Same Store gross
margin grew 90 basis points from 5.7% in the third quarter of 2010 to 6.6% in 2011.
For the nine months ended September 30, 2011, as compared to the corresponding period in 2010,
Same Store new vehicle unit sales and revenues increased 0.7% and 6.5%, respectively. We achieved
increases in Same Store unit sales of 25.1% and 2.8% in our domestic and luxury categories,
respectively, partially offset by a decrease in Same Store unit sales of 6.0% in our import
category. Our Same Store new vehicle retail revenues PRU improved 5.7% to $33,001 for the nine
months ended September 30, 2011. Gross profit PRU improved 13.6% to $2,071 in the third quarter of
2011 from $1,823 during the same period in 2010, and, as a result, our gross margin grew 50 basis
points from 5.8% to 6.3% for the nine months ended 2011, as compared to the same period in 2010.
The following table sets forth our Same Store new vehicle retail sales volume by manufacturer:
31
Same Store New Vehicle Unit Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2011 |
|
|
%
Change |
|
|
2010 |
|
|
2011 |
|
|
%
Change |
|
|
2010 |
|
Toyota |
|
|
7,393 |
|
|
|
(23.3 |
)% |
|
|
9,638 |
|
|
|
22,455 |
|
|
|
(12.3 |
)% |
|
|
25,600 |
|
Nissan |
|
|
3,916 |
|
|
|
5.2 |
|
|
|
3,722 |
|
|
|
10,464 |
|
|
|
(0.6 |
) |
|
|
10,531 |
|
BMW |
|
|
3,226 |
|
|
|
2.4 |
|
|
|
3,149 |
|
|
|
9,257 |
|
|
|
13.1 |
|
|
|
8,185 |
|
Honda |
|
|
2,402 |
|
|
|
(22.7 |
) |
|
|
3,107 |
|
|
|
8,283 |
|
|
|
(5.7 |
) |
|
|
8,785 |
|
Ford |
|
|
1,925 |
|
|
|
6.5 |
|
|
|
1,807 |
|
|
|
5,440 |
|
|
|
10.0 |
|
|
|
4,945 |
|
General Motors |
|
|
1,336 |
|
|
|
28.7 |
|
|
|
1,038 |
|
|
|
3,668 |
|
|
|
28.7 |
|
|
|
2,851 |
|
Chrysler |
|
|
1,300 |
|
|
|
62.9 |
|
|
|
798 |
|
|
|
3,319 |
|
|
|
56.6 |
|
|
|
2,120 |
|
Daimler |
|
|
1,292 |
|
|
|
(14.2 |
) |
|
|
1,506 |
|
|
|
4,135 |
|
|
|
2.0 |
|
|
|
4,055 |
|
Other |
|
|
1,637 |
|
|
|
6.8 |
|
|
|
1,533 |
|
|
|
4,786 |
|
|
|
13.2 |
|
|
|
4,228 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
24,427 |
|
|
|
(7.1 |
)% |
|
|
26,298 |
|
|
|
71,807 |
|
|
|
0.7 |
% |
|
|
71,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. 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, 2011 and 2010 was $6.7 million and $6.5 million,
respectively. 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.
In effect as of September 30, 2011, we had interest rate swaps with an aggregate notional
amount of $300.0 million, at a weighted average fixed rate of 4.3%. 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 further
mitigating the impact of interest rate fluctuations. Over the past three years, manufacturers
interest assistance as a percentage of our total consolidated floorplan interest expense has ranged
from 49.9% in the fourth quarter of 2008 to 96.8% in the third quarter of 2011.
We continue to aggressively manage the mix and overall level of our new vehicle inventory in
response to the rapidly changing market conditions. Our consolidated days supply of new vehicle
inventory decreased to 49 days as of September 30, 2011 compared to 59 days at December 31, 2010.
32
Used Vehicle Retail Data
(dollars in thousands, except per unit amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2011 |
|
|
%
Change |
|
|
2010 |
|
|
2011 |
|
|
%
Change |
|
|
2010 |
|
Retail Unit Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores |
|
|
17,939 |
|
|
|
2.6 |
% |
|
|
17,487 |
|
|
|
50,809 |
|
|
|
2.2 |
% |
|
|
49,699 |
|
Transactions |
|
|
831 |
|
|
|
|
|
|
|
114 |
|
|
|
1,891 |
|
|
|
|
|
|
|
531 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
18,770 |
|
|
|
6.6 |
% |
|
|
17,601 |
|
|
|
52,700 |
|
|
|
4.9 |
% |
|
|
50,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail Sales Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores |
|
$ |
361,511 |
|
|
|
6.6 |
% |
|
$ |
339,094 |
|
|
$ |
1,016,231 |
|
|
|
6.7 |
% |
|
$ |
952,124 |
|
Transactions |
|
|
15,604 |
|
|
|
|
|
|
|
1,531 |
|
|
|
37,378 |
|
|
|
|
|
|
|
8,252 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
377,115 |
|
|
|
10.7 |
% |
|
$ |
340,625 |
|
|
$ |
1,053,609 |
|
|
|
9.7 |
% |
|
$ |
960,376 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores |
|
$ |
30,572 |
|
|
|
0.5 |
% |
|
$ |
30,421 |
|
|
$ |
92,255 |
|
|
|
3.8 |
% |
|
$ |
88,915 |
|
Transactions |
|
|
1,495 |
|
|
|
|
|
|
|
149 |
|
|
|
3,260 |
|
|
|
|
|
|
|
638 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
32,067 |
|
|
|
4.9 |
% |
|
$ |
30,570 |
|
|
$ |
95,515 |
|
|
|
6.7 |
% |
|
$ |
89,553 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit per Retail |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unit Sold |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores |
|
$ |
1,704 |
|
|
|
(2.1 |
)% |
|
$ |
1,740 |
|
|
$ |
1,816 |
|
|
|
1.5 |
% |
|
$ |
1,789 |
|
Transactions |
|
$ |
1,799 |
|
|
|
|
|
|
$ |
1,307 |
|
|
$ |
1,724 |
|
|
|
|
|
|
$ |
1,202 |
|
Total |
|
$ |
1,708 |
|
|
|
(1.7 |
)% |
|
$ |
1,737 |
|
|
$ |
1,812 |
|
|
|
1.6 |
% |
|
$ |
1,783 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores |
|
|
8.5 |
% |
|
|
|
|
|
|
9.0 |
% |
|
|
9.1 |
% |
|
|
|
|
|
|
9.3 |
% |
Transactions |
|
|
9.6 |
% |
|
|
|
|
|
|
9.7 |
% |
|
|
8.7 |
% |
|
|
|
|
|
|
7.7 |
% |
Total |
|
|
8.5 |
% |
|
|
|
|
|
|
9.0 |
% |
|
|
9.1 |
% |
|
|
|
|
|
|
9.3 |
% |
33
Used Vehicle Wholesale Data
(dollars in thousands, except per unit amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2011 |
|
|
% Change |
|
|
2010 |
|
|
2011 |
|
|
% Change |
|
|
2010 |
|
Wholesale Unit Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores |
|
|
9,222 |
|
|
|
(0.5 |
)% |
|
|
9,264 |
|
|
|
26,210 |
|
|
|
7.4 |
% |
|
|
24,415 |
|
Transactions |
|
|
475 |
|
|
|
|
|
|
|
44 |
|
|
|
1,036 |
|
|
|
|
|
|
|
301 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
9,697 |
|
|
|
4.2 |
% |
|
|
9,308 |
|
|
|
27,246 |
|
|
|
10.2 |
% |
|
|
24,716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale Sales Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores |
|
$ |
66,018 |
|
|
|
13.6 |
% |
|
$ |
58,140 |
|
|
$ |
184,630 |
|
|
|
19.7 |
% |
|
$ |
154,188 |
|
Transactions |
|
|
3,033 |
|
|
|
|
|
|
|
323 |
|
|
|
6,979 |
|
|
|
|
|
|
|
2,465 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
69,051 |
|
|
|
18.1 |
% |
|
$ |
58,463 |
|
|
$ |
191,609 |
|
|
|
22.3 |
% |
|
$ |
156,653 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores |
|
$ |
(79 |
) |
|
|
(122.1 |
)% |
|
$ |
358 |
|
|
$ |
4,096 |
|
|
|
27.6 |
% |
|
$ |
3,211 |
|
Transactions |
|
|
(124 |
) |
|
|
|
|
|
|
(53 |
) |
|
|
(138 |
) |
|
|
|
|
|
|
(123 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(203 |
) |
|
|
(166.6 |
)% |
|
$ |
305 |
|
|
$ |
3,958 |
|
|
|
28.2 |
% |
|
$ |
3,088 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit per |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale Unit Sold |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores |
|
$ |
(9 |
) |
|
|
(123.1 |
)% |
|
$ |
39 |
|
|
$ |
156 |
|
|
|
18.2 |
% |
|
$ |
132 |
|
Transactions |
|
$ |
(261 |
) |
|
|
|
|
|
$ |
(1,205 |
) |
|
$ |
(133 |
) |
|
|
|
|
|
$ |
(409 |
) |
Total |
|
$ |
(21 |
) |
|
|
(163.6 |
)% |
|
$ |
33 |
|
|
$ |
145 |
|
|
|
16.0 |
% |
|
$ |
125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores |
|
|
(0.1 |
)% |
|
|
|
|
|
|
0.6 |
% |
|
|
2.2 |
% |
|
|
|
|
|
|
2.1 |
% |
Transactions |
|
|
(4.1 |
)% |
|
|
|
|
|
|
(16.4 |
)% |
|
|
(2.0 |
)% |
|
|
|
|
|
|
(5.0 |
)% |
Total |
|
|
(0.3 |
)% |
|
|
|
|
|
|
0.5 |
% |
|
|
2.1 |
% |
|
|
|
|
|
|
2.0 |
% |
34
Total Used Vehicle Data
(dollars in thousands, except per unit amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2011 |
|
|
% Change |
|
|
2010 |
|
|
2011 |
|
|
% Change |
|
|
2010 |
|
Used Vehicle Unit Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores |
|
|
27,161 |
|
|
|
1.5 |
% |
|
|
26,751 |
|
|
|
77,019 |
|
|
|
3.9 |
% |
|
|
74,114 |
|
Transactions |
|
|
1,306 |
|
|
|
|
|
|
|
158 |
|
|
|
2,927 |
|
|
|
|
|
|
|
832 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
28,467 |
|
|
|
5.8 |
% |
|
|
26,909 |
|
|
|
79,946 |
|
|
|
6.7 |
% |
|
|
74,946 |
|
|
Sales Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores |
|
$ |
427,529 |
|
|
|
7.6 |
% |
|
$ |
397,234 |
|
|
$ |
1,200,861 |
|
|
|
8.5 |
% |
|
$ |
1,106,312 |
|
Transactions |
|
|
18,637 |
|
|
|
|
|
|
|
1,854 |
|
|
|
44,357 |
|
|
|
|
|
|
|
10,717 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
446,166 |
|
|
|
11.8 |
% |
|
$ |
399,088 |
|
|
$ |
1,245,218 |
|
|
|
11.5 |
% |
|
$ |
1,117,029 |
|
|
Gross Profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores |
|
$ |
30,493 |
|
|
|
(0.9 |
)% |
|
$ |
30,779 |
|
|
$ |
96,351 |
|
|
|
4.6 |
% |
|
$ |
92,126 |
|
Transactions |
|
|
1,371 |
|
|
|
|
|
|
|
96 |
|
|
|
3,122 |
|
|
|
|
|
|
|
515 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
31,864 |
|
|
|
3.2 |
% |
|
$ |
30,875 |
|
|
$ |
99,473 |
|
|
|
7.4 |
% |
|
$ |
92,641 |
|
|
Gross Profit
per Used Vehicle Unit Sold Same Stores |
|
$ |
1,123 |
|
|
|
(2.4 |
)% |
|
$ |
1,151 |
|
|
$ |
1,251 |
|
|
|
0.6 |
% |
|
$ |
1,243 |
|
Transactions |
|
$ |
1,050 |
|
|
|
|
|
|
$ |
608 |
|
|
$ |
1,067 |
|
|
|
|
|
|
$ |
619 |
|
Total |
|
$ |
1,119 |
|
|
|
(2.4 |
)% |
|
$ |
1,147 |
|
|
$ |
1,244 |
|
|
|
0.6 |
% |
|
$ |
1,236 |
|
|
Gross Margin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores |
|
|
7.1 |
% |
|
|
|
|
|
|
7.7 |
% |
|
|
8.0 |
% |
|
|
|
|
|
|
8.3 |
% |
Transactions |
|
|
7.4 |
% |
|
|
|
|
|
|
5.2 |
% |
|
|
7.0 |
% |
|
|
|
|
|
|
4.8 |
% |
Total |
|
|
7.1 |
% |
|
|
|
|
|
|
7.7 |
% |
|
|
8.0 |
% |
|
|
|
|
|
|
8.3 |
% |
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, 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. For the three months ended September 30, 2011 our Same Store used retail
revenues improved by 6.6% on a 2.6% increase in Same Store used retail units sales, as compared to
the same period in 2010. Our average selling price PRU increased 3.9% in the three months ended
September 30, 2011 to $20,152. For the nine months ended September 30, 2011, our Same Store used
retail revenue improved by 6.7% on a 2.2% increase in Same Store used retail unit sales as compared
to the same period in 2010, primarily as a result of an increase in our average selling price PRU
of 4.4% to $20,001. The increases for both the three and nine month periods of 2011 reflect the
overall strengthening in used vehicle valuations experienced in 2011, as compared to 2010.
Our certified pre-owned (CPO) volume increased 1.8% to 6,005 units sold in the three months
ended September 30, 2011 as compared to the same period of 2010, corresponding to the overall
increase in used retail volume. As a percentage of total retail sales, CPO units decreased 150
basis points to 32.0% of total used retail units for the three months ended September 30, 2011 as
compared to the same period of 2010. The decline in CPO volume as a percent of total used retail
units is primarily the result of the recent mix shift to domestic brands, as well as the impact of
a decrease in supply of quality, off-lease luxury vehicles.
During the first six months of 2011, a shortage in supply of new vehicle inventory in many of
the import brands drove up demand for used vehicles. With increased demand and shortening supply,
auction prices of used vehicles experienced steady increases over 2010 levels. The Manheim Index,
which measures used vehicle auction prices, reached an all-time high at the end of the second
quarter of 2011. During the third quarter of 2011, the index declined to the lowest level of 2011,
but was still above comparable 2010 levels. In addition, price relativities between new and used
vehicles also continued to pressure used retail vehicle profits. As a result, gross profit per used
retail unit declined 2.1% to $1,704 and coupled with the increase in average sales price PRU, our
Same Store used retail vehicle margins declined 50 basis points to 8.5% in the third quarter of
2011. For the nine months ended September 30,
35
2011, gross profit per used retail unit increased
1.5%, but was outpaced by the increase in average sales price PRU. As a result, our Same Store
used retail vehicle margins decreased 20 basis points as compared to the same period in 2010.
The limited availability of quality used vehicles also impacted our wholesale used vehicle
business during the third quarter of 2011. We sold 0.5% fewer wholesale units in the three months
ended September 30, 2011 than we did last year. In spite of the decline in volume, we realized an
increase in our wholesale used vehicles revenues of 13.6% for the quarter ended September 30, 2011,
as the price of vehicles sold at auction increased on a year over year basis.
Our wholesale gross profit PRU declined $48 during the third quarter of 2011 to a loss of $9
per wholesale unit and wholesale used vehicle gross margin experienced a 70 basis point decrease as
compared to the same period in 2010. These declines correspond with the decrease in used vehicle
market prices during the quarter as the Manheim Index declined to its lowest level of the year in
September 2011.
Our days supply of used vehicle inventory was 29 days at September 30, 2011, which was down
from December 31, 2010 levels of 31 days, further reflecting the increased demand.
Parts and Service Data
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2011 |
|
|
% Change |
|
|
2010 |
|
|
2011 |
|
|
% Change |
|
|
2010 |
|
Parts and Service Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores |
|
$ |
199,744 |
|
|
|
2.2 |
% |
|
$ |
195,416 |
|
|
$ |
584,251 |
|
|
|
3.2 |
% |
|
$ |
566,294 |
|
Transactions |
|
|
10,323 |
|
|
|
|
|
|
|
848 |
|
|
|
24,857 |
|
|
|
|
|
|
|
9,468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
210,067 |
|
|
|
7.0 |
% |
|
$ |
196,264 |
|
|
$ |
609,108 |
|
|
|
5.8 |
% |
|
$ |
575,762 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores |
|
$ |
105,453 |
|
|
|
(0.6 |
)% |
|
$ |
106,136 |
|
|
$ |
310,431 |
|
|
|
1.2 |
% |
|
$ |
306,756 |
|
Transactions |
|
|
3,778 |
|
|
|
|
|
|
|
471 |
|
|
|
9,382 |
|
|
|
|
|
|
|
4,522 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
109,231 |
|
|
|
2.5 |
% |
|
$ |
106,607 |
|
|
$ |
319,813 |
|
|
|
2.7 |
% |
|
$ |
311,278 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores |
|
|
52.8 |
% |
|
|
|
|
|
|
54.3 |
% |
|
|
53.1 |
% |
|
|
|
|
|
|
54.2 |
% |
Transactions |
|
|
36.6 |
% |
|
|
|
|
|
|
55.5 |
% |
|
|
37.7 |
% |
|
|
|
|
|
|
47.8 |
% |
Total |
|
|
52.0 |
% |
|
|
|
|
|
|
54.3 |
% |
|
|
52.5 |
% |
|
|
|
|
|
|
54.1 |
% |
Our Same Store parts and service revenues increased 2.2% for the three months ended
September 30, 2011, driven primarily by a 6.8% increase in wholesale part sales and a 2.6% increase
in customer-pay parts and service sales. We also generated a 7.4% increase in collision revenues.
The increase in Same Store parts and service revenues were partially offset by a 6.3% decrease in
warranty parts and service revenues related to the non-recurrence of the large Toyota recall in
2010. Similarly, for the nine months ended September 30, 2011, Same Store parts and service
revenues increased 3.2%, as compared to the same period a year ago. The overall increase consisted
of improvements in our wholesale parts business of 5.9%, our customer-pay parts and service
revenues of 2.2%, and our collision revenues of 6.8%, as compared to the same period in 2010. Year
to date, our warranty parts and service revenues increased 0.8%.
Our Same Store wholesale parts business benefited from 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. Our Same Store collision business
increased for the three and nine months ended September 30, 2011, as compared to the comparable
period in 2010, benefiting from recent improvements in business processes, as well as the expansion
of our collision center footprint.
In addition, the increase in Same Store customer-pay parts and service revenues for the three
and nine months ended September 30, 2011, as compared to prior periods, was realized in most of the
major brands that we represent, primarily driven by initiatives focused on customers, products and
processes that continue to build momentum and generate results. The decline in our Same Store
warranty parts and service revenue for the third quarter of 2011, as compared to prior periods was
primarily driven by declines in our Toyota stores, which continued to benefit from two major
recalls in the third quarter of 2010, as well as, a number of other import and luxury
36
brands. For
the nine months ended September 30, 2011, increases in BMW and Lexus recall activity more than
offset the declines in our Toyota brand associated with the major recalls.
Our Same Store parts and service gross profit and gross margin for the three months ended
September 30, 2011 decreased 0.6% and 150 basis points, respectively, from the comparable period in
2010. Growth in our collision and wholesale parts business, which have relatively lower margins,
outpaced the growth in our customer-pay business. Further, the decline in margins also reflected
the return to more normalized levels in our warranty parts and service segment, which benefited
from the 2010 Toyota recall campaigns. These recalls consisted predominantly of labor services that
generate higher margins than the corresponding parts. For the nine months ended September 30, 2011,
Same Store parts and service gross profit improved 1.2%, while gross margin declined 110 basis
points. In addition to the factors described above, recently instituted customer-pay initiatives
that are designed to grow market share and revenues have eclipsed the growth in our other higher
margin products and services, resulting in improved gross profits, but a decline in our
customer-pay parts and service margins.
Finance and Insurance Data
(dollars in thousands, except per unit amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2011 |
|
|
% Change |
|
|
2010 |
|
|
2011 |
|
|
% Change |
|
|
2010 |
|
Retail New and Used Unit Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores |
|
|
42,366 |
|
|
|
(3.2 |
)% |
|
|
43,785 |
|
|
|
122,616 |
|
|
|
1.3 |
% |
|
|
120,999 |
|
Transactions |
|
|
2,181 |
|
|
|
|
|
|
|
212 |
|
|
|
4,662 |
|
|
|
|
|
|
|
1,359 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
44,547 |
|
|
|
1.3 |
% |
|
|
43,997 |
|
|
|
127,278 |
|
|
|
4.0 |
% |
|
|
122,358 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail Finance Fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores |
|
$ |
17,492 |
|
|
|
11.9 |
% |
|
$ |
15,638 |
|
|
$ |
48,441 |
|
|
|
14.9 |
% |
|
$ |
42,160 |
|
Transactions |
|
|
1,024 |
|
|
|
|
|
|
|
65 |
|
|
|
1,947 |
|
|
|
|
|
|
|
414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
18,516 |
|
|
|
17.9 |
% |
|
$ |
15,703 |
|
|
$ |
50,388 |
|
|
|
18.4 |
% |
|
$ |
42,574 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vehicle Service Contract Fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores |
|
$ |
20,195 |
|
|
|
8.3 |
% |
|
$ |
18,642 |
|
|
$ |
57,744 |
|
|
|
10.4 |
% |
|
$ |
52,282 |
|
Transactions |
|
|
896 |
|
|
|
|
|
|
|
62 |
|
|
|
1,417 |
|
|
|
|
|
|
|
341 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
21,091 |
|
|
|
12.8 |
% |
|
$ |
18,704 |
|
|
$ |
59,161 |
|
|
|
12.4 |
% |
|
$ |
52,623 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance and Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores |
|
$ |
11,226 |
|
|
|
14.2 |
% |
|
$ |
9,827 |
|
|
$ |
31,574 |
|
|
|
9.8 |
% |
|
$ |
28,752 |
|
Transactions |
|
|
663 |
|
|
|
|
|
|
|
48 |
|
|
|
1,132 |
|
|
|
|
|
|
|
584 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
11,889 |
|
|
|
20.4 |
% |
|
$ |
9,875 |
|
|
$ |
32,706 |
|
|
|
11.5 |
% |
|
$ |
29,336 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores |
|
$ |
48,913 |
|
|
|
10.9 |
% |
|
$ |
44,107 |
|
|
$ |
137,759 |
|
|
|
11.8 |
% |
|
$ |
123,194 |
|
Transactions |
|
|
2,583 |
|
|
|
|
|
|
|
175 |
|
|
|
4,496 |
|
|
|
|
|
|
|
1,339 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
51,496 |
|
|
|
16.3 |
% |
|
$ |
44,282 |
|
|
$ |
142,255 |
|
|
|
14.2 |
% |
|
$ |
124,533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance and Insurance Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
per Unit Sold |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores |
|
$ |
1,155 |
|
|
|
14.7 |
% |
|
$ |
1,007 |
|
|
$ |
1,123 |
|
|
|
10.3 |
% |
|
$ |
1,018 |
|
Transactions |
|
$ |
1,184 |
|
|
|
|
|
|
$ |
825 |
|
|
$ |
964 |
|
|
|
|
|
|
$ |
985 |
|
Total |
|
$ |
1,156 |
|
|
|
14.9 |
% |
|
$ |
1,006 |
|
|
$ |
1,118 |
|
|
|
9.8 |
% |
|
$ |
1,018 |
|
Our focus on improving our finance and insurance business processes, as well as the
pricing of our products continues to reap benefits. Our Same Store finance and insurance revenues
increased by 10.9% to $48.9 million for the three months ended September 30, 2011, when compared
to the same period in 2010. This improvement was primarily driven by the increases in finance and
vehicle service contract income per contract of 14.0% and 4.1%, respectively, and an increase in
vehicle service contract penetration rates of 250 basis points to 37.0%. The improved finance
income per contract was driven by an increase in amounts financed, corresponding with higher
average selling prices, and stabilizing economic and customer lending conditions that have
allowed for
37
lower customer down-payments and higher amounts financed. In addition, we experienced
a 14.2% increase in insurance and other product revenue as a result of increases in both income
per contract and penetration rates relating to these product offerings. These increases more than
offset a 3.2% decrease in our retail new and used retail sales and an increase in our chargeback
expense. As a result, our Same Store revenues PRU for the three months ended September 30, 2011
improved 14.7%, or $148, to $1,155 per retail unit sold.
For the nine months ended September 30, 2011, our Same Store finance and insurance revenues
improved 11.8% over the comparable 2010 period, primarily as a result of an increase in finance
income per contract of 13.9%. In addition, we generated increases in our vehicle service contract
penetration rate of 210 basis points to 36.4% and our vehicle service contract income per
contract of 3.3%.And coupled with new and used vehicle retail sales volumes increases through the
first nine months of 2011, these improvements more than offset an increase in chargeback expense.
Our Same Store revenues PRU increased 10.3%, or $105, to $1,123 PRU sold for the nine months
ended September 30, 2011.
Selling, General and Administrative Data
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2011 |
|
|
% Change |
|
|
2010 |
|
|
2011 |
|
|
% Change |
|
|
2010 |
|
Personnel |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores |
|
$ |
110,840 |
|
|
|
7.2 |
% |
|
$ |
103,384 |
|
|
$ |
322,623 |
|
|
|
6.8 |
% |
|
$ |
302,207 |
|
Transactions |
|
|
4,614 |
|
|
|
|
|
|
|
591 |
|
|
|
10,281 |
|
|
|
|
|
|
|
4,864 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
115,454 |
|
|
|
11.0 |
% |
|
$ |
103,975 |
|
|
$ |
332,904 |
|
|
|
8.4 |
% |
|
$ |
307,071 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores |
|
$ |
10,946 |
|
|
|
(5.6 |
)% |
|
$ |
11,590 |
|
|
$ |
33,183 |
|
|
|
0.0 |
% |
|
$ |
33,169 |
|
Transactions |
|
|
540 |
|
|
|
|
|
|
|
46 |
|
|
|
1,453 |
|
|
|
|
|
|
|
350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
11,486 |
|
|
|
(1.3 |
)% |
|
$ |
11,636 |
|
|
$ |
34,636 |
|
|
|
3.3 |
% |
|
$ |
33,519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rent and Facility Costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores |
|
$ |
22,685 |
|
|
|
3.2 |
% |
|
$ |
21,980 |
|
|
$ |
64,369 |
|
|
|
(2.3 |
)% |
|
$ |
65,859 |
|
Transactions |
|
|
920 |
|
|
|
|
|
|
|
425 |
|
|
|
3,092 |
|
|
|
|
|
|
|
3,064 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
23,605 |
|
|
|
5.4 |
% |
|
$ |
22,405 |
|
|
$ |
67,461 |
|
|
|
(2.1 |
)% |
|
$ |
68,923 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other SG&A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores |
|
$ |
35,946 |
|
|
|
(1.3 |
)% |
|
$ |
36,435 |
|
|
$ |
108,796 |
|
|
|
1.5 |
% |
|
$ |
107,192 |
|
Transactions |
|
|
1,694 |
|
|
|
|
|
|
|
(526 |
) |
|
|
3,323 |
|
|
|
|
|
|
|
6,091 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
37,640 |
|
|
|
4.8 |
% |
|
$ |
35,909 |
|
|
$ |
112,119 |
|
|
|
(1.0 |
)% |
|
$ |
113,283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total SG&A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores |
|
$ |
180,417 |
|
|
|
4.1 |
% |
|
$ |
173,389 |
|
|
$ |
528,971 |
|
|
|
4.0 |
% |
|
$ |
508,427 |
|
Transactions |
|
|
7,768 |
|
|
|
|
|
|
|
536 |
|
|
|
18,149 |
|
|
|
|
|
|
|
14,369 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
188,185 |
|
|
|
8.2 |
% |
|
$ |
173,925 |
|
|
$ |
547,120 |
|
|
|
4.7 |
% |
|
$ |
522,796 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gross Profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores |
|
$ |
238,894 |
|
|
|
4.8 |
% |
|
$ |
227,854 |
|
|
$ |
693,233 |
|
|
|
6.3 |
% |
|
$ |
652,053 |
|
Transactions |
|
|
9,859 |
|
|
|
|
|
|
|
985 |
|
|
|
21,506 |
|
|
|
|
|
|
|
7,959 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
248,753 |
|
|
|
8.7 |
% |
|
$ |
228,839 |
|
|
$ |
714,739 |
|
|
|
8.3 |
% |
|
$ |
660,012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SG&A as a % of Gross Profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores |
|
|
75.5 |
% |
|
|
|
|
|
|
76.1 |
% |
|
|
76.3 |
% |
|
|
|
|
|
|
78.0 |
% |
Transactions |
|
|
78.8 |
% |
|
|
|
|
|
|
54.4 |
% |
|
|
84.4 |
% |
|
|
|
|
|
|
180.5 |
% |
Total |
|
|
75.7 |
% |
|
|
|
|
|
|
76.0 |
% |
|
|
76.5 |
% |
|
|
|
|
|
|
79.2 |
% |
Employees |
|
|
8,100 |
|
|
|
|
|
|
|
7,500 |
|
|
|
8,100 |
|
|
|
|
|
|
|
7,500 |
|
38
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.
Our continued cost rationalization efforts have provided benefit to us throughout the third
quarter of 2011 in the form of a leaner cost organization and better leverage of revenue and gross
profit growth. Coupled with the increase in gross profit, our Same Store SG&A as a % of Gross
Profit improved 60 basis points to 75.5% for the three months ended September 30, 2011 and 170
basis points to 76.3% for the nine months ended September 30, 2011, as compared to the same periods
in 2010. Our absolute dollars of Same Store SG&A expenses increased by $7.0 million and $20.5
million, for the three and nine months, respectively, from the same periods in 2010. The increase
was primarily attributable to personnel costs, which predominantly correlate with vehicle sales.
Our net advertising expenses decreased by $0.6 million in the third quarter of 2011and was flat for
nine months ended September 30, 2011 as compared to 2010 as advertising spending was rationalized
in light of the general inventory shortage experienced through much of 2011.
We continue to aggressively pursue opportunities that take advantage of our size and
negotiating leverage with all of our vendors and service providers.
Our Same Store rent and facilities expense increased $0.7 million for the three months ended
September 30, 2011, as building repair maintenance activity increased, and in light of the damages
in August by Hurricane Irene to a number of our dealership facilities in the Northeast portion of
the U.S. For the nine months ended September 30, 2011, rent and facilities expense declined $1.5
million as compared to the same period in 2010. This decrease was primarily as a result of our
purchase of real estate associated with existing dealerships, which served to reduce our rent
expense. We plan to continue to strategically add dealership-related real estate to our portfolio.
Depreciation and Amortization Data
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2011 |
|
|
%Change |
|
|
2010 |
|
|
2011 |
|
|
%Change |
|
|
2010 |
|
Same Stores |
|
$ |
6,634 |
|
|
|
0.0 |
% |
|
$ |
6,632 |
|
|
$ |
19,264 |
|
|
|
0.3 |
% |
|
$ |
19,213 |
|
Transactions |
|
|
211 |
|
|
|
|
|
|
|
140 |
|
|
|
617 |
|
|
|
|
|
|
|
723 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
6,845 |
|
|
|
1.1 |
% |
|
$ |
6,772 |
|
|
$ |
19,881 |
|
|
|
(0.3 |
)% |
|
$ |
19,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our Same Store depreciation remained flat for the three and nine months ended September
30, 2011, as compared to the same period of 2010. We continue to strategically add dealership
related real estate to our portfolio and to 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.
Asset Impairment
In the third quarter of 2011, we determined that certain of our real estate investments
qualified as held-for-sale assets. Accordingly, we reclassified such investments to current assets
in the accompanying Consolidated Balance Sheet as of September 30, 2011, after adjusting the
carrying value to fair market value. We recognized a $3.2 million pre-tax asset impairment
charge as a result.
Floorplan Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2011 |
|
|
%Change |
|
|
2010 |
|
|
2011 |
|
|
%Change |
|
|
2010 |
|
Same Stores |
|
$ |
6,606 |
|
|
|
(26.3 |
)% |
|
$ |
8,961 |
|
|
$ |
19,576 |
|
|
|
(21.3 |
)% |
|
$ |
24,884 |
|
Transactions |
|
|
358 |
|
|
|
|
|
|
|
60 |
|
|
|
669 |
|
|
|
|
|
|
|
336 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
6,964 |
|
|
|
(22.8 |
)% |
|
$ |
9,021 |
|
|
$ |
20,245 |
|
|
|
(19.7 |
)% |
|
$ |
25,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Memo: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturers assistance |
|
$ |
6,740 |
|
|
|
3.5 |
% |
|
$ |
6,512 |
|
|
$ |
18,836 |
|
|
|
5.6 |
% |
|
$ |
17,836 |
|
39
Our floorplan interest expense fluctuates with changes in borrowings outstanding and
interest rates, which are based on one-month LIBOR (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, 2011, we had effective interest rate swaps with an
aggregate notional amount of $300.0 million that fixed our underlying one-month LIBOR at a weighted
average rate of 4.3%. The majority of the monthly settlements of these interest rate swap
liabilities are recognized as floorplan interest expense. From time to time, we utilize excess cash
on hand to pay down our floorplan borrowings, and the resulting interest earned is recognized as an
offset to our gross floorplan interest expense.
Our Same Store floorplan interest expense decreased 26.3%, or $2.4 million, for the three
months ended September 30, 2011, compared to the corresponding period of 2010. The decrease
primarily reflects a decline in our weighted average floorplan borrowings outstanding of $177.8
million between the respective periods, including an increase in the weighted average pay down of
floorplan borrowings during the quarter. In addition, declines in our Same Store floorplan interest
expense due to the expiration of $300.0 million of interest rate swaps in December 2010 and August
2011 were substantially offset by an increase in our contractual borrowing rates for new and used
vehicle inventory, resulting from the amendment of our Revolving Credit Facility in July 2011. Our
Same Store floorplan interest decreased 21.3% or $5.3 million during the nine months ended
September 30, 2011 as compared to the same period last year. The reduction is primarily
attributable to a 116 basis-point decrease in our weighted average floorplan interest rates,
including the impact of our interest rate swaps.
Other Interest Expense, net
Other net interest expense consists of interest charges primarily on our Real Estate Debt, our
Acquisition Line and our long-term debt, partially offset by interest income. For the three months
ended September 30, 2011, other net interest expense increased $1.8 million, or 25.4%, to $8.6
million from the same period in 2010. For the nine months ended September 30, 2011, other net
interest expense increased $4.5 million, or 22.4%, to $24.8 million.
Our weighted average interest rates increased for the three and nine months ended September
30, 2011 as compared to the same period in 2010, primarily related to higher interest costs on our
real estate related borrowings. In conjunction with the amendment and restatement of our Real
Estate Credit Facility (our Mortgage Facility) in the fourth quarter of 2010, we replaced
borrowing capacity under the Mortgage Facility by entering into term loans with several of our
manufacturer-affiliated finance partners that are at higher interest rates than the prior interest
rates under the Mortgage Facility.
Further, during the third quarter of 2011, the Company entered into four additional loan
agreements with third-party financial institutions, for an aggregate principal amount of $21.9
million, to finance real estate associated primarily with the Companys acquired dealerships. We
will continue to strategically add dealership related real estate to our portfolio.
Included in other interest expense for the three months ended September 30, 2011 and 2010 is
non-cash, discount amortization expense of $2.3 million and $2.1 million, respectively,
representing the impact of the accounting for convertible debt as required by Accounting Standards
Codification 470. Based on the level of 2.25% Convertible Senior Notes due 2036 (our 2.25%
Notes) and 3.00% Convertible Senior Notes due 2020 (our 3.00% Notes) outstanding, we anticipate
that the ongoing annual non-cash discount amortization expense related to the convertible debt
instruments will be $12.4 million, which will be included in other interest expense, net.
Provision for Income Taxes
Our provision for income taxes increased $1.4 million to $13.0 million for the three months
ended September 30, 2011, from a provision of $11.6 million for the same period in 2010, primarily
due to the increase of pretax book income. For the three months ended September 30, 2011, our
effective tax rate decreased to 37.6% from 37.9% for the same period in 2010. This decrease was
primarily due to the mix of our pretax income from the taxable state jurisdictions in which we
operate, and an increase in federal employment tax credits.
Our provision for income taxes increased $12.0 million to $37.1 million for the nine months
ended September 30, 2011, from a provision of $25.1 million for the same period in 2010, primarily
due to the increase of pretax book income. For the nine months ended September 30, 2011, our
effective tax rate decreased to 37.6% from 38.7% for the same period in 2010. This decrease was
primarily due to the mix of our pretax income from the taxable state jurisdictions in which we
operate, a change in valuation allowances for certain state net operating losses that occurred
during the nine months ended September 30, 2011, as well as an increase in federal employment tax
credits.
40
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 reversals of deferred tax liabilities as well as taxes available in carry back periods. We
expect our effective tax rate for the remainder of 2011 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 dealership 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 acquisitions for the remainder
of 2011. If economic and business conditions deteriorate further or if our capital expenditures or
acquisition plans for 2011 change, we may need to access the private or public capital markets to
obtain additional funding.
Cash on Hand. As of September 30, 2011, our total cash on hand was $11.3 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 $116.8 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, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(In thousands) |
|
Net cash provided by (used in) operating
activities |
|
$ |
301,118 |
|
|
$ |
(52,185 |
) |
Net cash used in investing
activities |
|
|
(148,798 |
) |
|
|
(14,984 |
) |
Net cash provided by (used in) financing
activities |
|
|
(160,792 |
) |
|
|
149,817 |
|
Effect of exchange rate changes on cash |
|
|
(71 |
) |
|
|
293 |
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash
equivalents |
|
$ |
(8,543 |
) |
|
$ |
82,941 |
|
|
|
|
|
|
|
|
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, 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.
Sources and Uses of Liquidity from Operating Activities
For the nine months ended September 30, 2011, we generated $301.1 million in net cash flow
from operating activities, primarily driven by $61.5 million in net income and a $183.2 million net
change in operating assets and liabilities, as well as non-cash adjustments related to deferred
income taxes of $16.3 million, depreciation and amortization of $19.9 million, amortization of debt
discounts and debt issue costs of $8.9 million, stock-based compensation of $8.3 million, and asset
impairment charges of $4.0 million. Included in the net change in operating assets and liabilities
are cash inflows of $111.7 million from decreases in inventory levels, $19.0 million from the net
increase in floorplan borrowings from manufacturer-affiliates, $39.7 million from increases in
accounts payable and accrued expenses, $13.5 million from decreases of contracts-in-transit and
vehicles receivables, and $3.9 million from decreases in accounts and notes receivables.
For the nine months ended September 30, 2010, we used $52.2 million in net cash flow from
operating activities, primarily driven by a $158.9 million net change in operating assets and
liabilities partially offset by $39.7 million in net income and significant non-
41
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 change 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
and accounts and notes receivables; and $10.3 million from net decreases in floorplan borrowings
from manufacturer-affiliates. These cash outflows were partially offset by $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
outstanding 8.25% Notes, which is considered a cash flow from financing activities.
Working Capital. At September 30, 2011, we had $135.5 million of working capital. Changes in
our working capital are generally driven by changes in inventory and related 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, are limited to 80% 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.
Sources and Uses of Liquidity from Investing Activities
During the first nine months of 2011, we used $148.7 million for investing activities,
primarily related to the acquisition of a Ford dealership in Houston, Texas, a Volkswagen
dealership in Irving, Texas, and BMW/MINI, Ford, and Buick/GMC dealerships, in El Paso, Texas for a
total of $109.9 million, including the amounts paid for vehicle inventory, parts inventory,
equipment and furniture fixtures, as well as the purchase of some of the associated real estate.
The vehicle inventory for the Ford dealership acquisitions was subsequently financed through
borrowing under the Ford Motor Credit Company Facility (the FMCC Facility). The vehicle inventory
for the other dealership acquisitions was subsequently financed through borrowings under our
Floorplan Line. We also used $45.1 million during the first nine months of 2011 primarily for
purchases of property and equipment to construct new and improve existing facilities, consisting of
$22.4 million for real estate to be used for existing dealership operations and $22.2 million for
capital expenditures. These cash outflows were partially offset by $5.8 million in proceeds from
the sale of property and equipment during the first nine months of 2011.
During the first nine months of 2010, we used $15.0 million for investing activities,
primarily as a result of $34.4 million for dealership acquisitions, which primarily consisted of
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 property and equipment during the nine months
ended September 30, 2010.
Capital Expenditures. Our capital expenditures include costs to extend the useful lives of
current facilities, as well as 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. We critically
evaluate all planned future capital spending, working closely with our manufacturer partners to
maximize the return on our investments. We forecast our capital expenditures for 2011 to be less
than $50.0 million, generally funded from excess cash, and includes about $10.0 million for
specific growth initiatives in our parts and service business.
Sources and Uses of Liquidity from Financing Activities
We used $160.8 million in net cash outflows from financing activities during the nine months
ended September 30, 2011, primarily related to $153.8 million in net repayments under the Floorplan
Line of our Revolving Credit Facility, which included a net cash inflow of $12.4 million due to a
decrease in our floorplan offset account. In addition, we used $44.9 million to repurchase treasury
shares of our common stock during the second and third quarter of 2011, $8.3 million for dividend
payments, and $5.7 million for principal payments of long-term debt related to real estate loans.
These cash outflows were offset by $21.8 million in borrowings of long-term debt related to real
estate.
During the nine months ended September 30, 2010, we generated $149.8 million in net cash flow
from financing activities, primarily related to net proceeds of $115.0 million from the issuance of
our 3.00% Notes and $29.3 million from the sale of the associated 3.00% Warrants, less $45.9
million for the 3.00% Purchased Options and the related $4.0 million in underwriters fees and debt
issuance costs. In addition, we had net borrowings of $178.4 million under the Floorplan Line of
our Revolving Credit Facility,
42
which included a net cash inflow of $13.6 million due to a decrease in our floorplan offset
account. These net proceeds were partially offset by $77.0 million for the repurchase of all of our
outstanding 8.25% Notes, and $35.3 million for principal payments on the Mortgage Facility. 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 second quarter of 2010.
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 two most significant domestic revolving facilities currently provide us
with a total of $1.15 billion of borrowing capacity for inventory floorplan financing and an
additional $250.0 million for acquisitions, capital expenditures and/or other general corporate
purposes.
Revolving Credit Facility. Our Revolving Credit Facility, which is comprised of 21 financial
institutions, including four manufacturer-affiliated finance companies, expires on June 1, 2016 and
consists of two tranches: $1.1 billion for vehicle inventory floorplan financing (the Floorplan
Line) and $250.0 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 $1.1 billion for the Floorplan Line and maximum of $250.0
million for the Acquisition Line. The Revolving Credit Facility can be expanded to its maximum
commitment of $1.60 billion, subject to participating lender approval. The Floorplan Line bears
interest at rates equal to one-month LIBOR plus 150 basis points for new vehicle inventory and
one-month LIBOR plus 175 basis points for used vehicle inventory. The Acquisition Line bears
interest at the one-month LIBOR plus a margin that ranges from 150 to 250 basis points, depending
on our leverage ratio. The Floorplan Line requires a commitment fee of 0.20% per annum on the
unused portion. The Acquisition Line also requires a commitment fee ranging from 0.25% to 0.45% per
annum, depending on our leverage ratio, based on a minimum commitment of $100.0 million less
outstanding borrowings.
As of September 30, 2011, after considering outstanding balances, we had $662.9 million of
available floorplan borrowing capacity under the Floorplan Line. Included in the $662.9 million
available borrowings under the Floorplan Line is $116.8 million of immediately available funds. The
weighted average interest rate on the Floorplan Line was 1.7% as of September 30, 2011, excluding
the impact of the interest rate swaps. Amounts borrowed under the Floorplan Line of our Revolving
Credit Facility for specific vehicle inventory must be repaid upon the sale of the vehicle
financed, and in no case may a borrowing for a specific vehicle remain outstanding greater than one
year. With regards to the Acquisition Line, no borrowings were outstanding as of September 30,
2011. After considering $17.3 million of outstanding letters of credit, and other factors included
in our available borrowing base calculation, there was $232.8 million of available borrowing
capacity under the Acquisition Line as of September 30, 2011. 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. 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. 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,
total leverage, and senior secured leverage. Further, the Revolving Credit Facility restricts our
ability to make certain payments, such as dividends or other distributions of assets, properties,
cash, rights, obligations or securities (Restricted Payments). The Restricted Payments shall not
exceed the sum of $100.0 million plus (or minus if negative) (a) one-half of our aggregate
consolidated net income for the period beginning on January 1, 2011 and ending on the date of
determination and (b) the amount of net cash proceeds received from the sale of capital stock on or
after January 1, 2011 and ending on the date of determination (Restricted Payment Basket). For
purposes of the Restricted Payment Basket calculation, net income represents such amounts per our
consolidated financial statements, adjusted to exclude our foreign operations, non-cash interest
expense, non-cash asset impairment charges, and non-cash stock-based compensation. As of September
30, 2011, the Restricted Payment Basket totaled $79.7 million. As of September 30, 2011, we were in
compliance with financial ratio covenants, including:
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2011 |
|
|
|
Required |
|
|
Actual |
|
Senior Secured Adjusted Leverage Ratio |
|
|
< 3.75 |
|
|
|
2.57 |
|
Total Leverage Ratio |
|
|
< 5.50 |
|
|
|
3.83 |
|
Fixed Charge Coverage Ratio |
|
|
> 1.35 |
|
|
|
1.89 |
|
43
Based upon our current operating and financial projections, we believe that we will remain
compliant with such covenants for the remainder of the fiscal year.
Ford Motor Credit Company Facility. Our FMCC Facility provides for the financing of, and is
collateralized by, our Ford new vehicle inventory, including affiliated brands. 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, 2011, we had an outstanding
balance of $73.9 million, with an available floorplan capacity of $76.1 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, 2011, the interest rate on the
FMCC Facility was 5.5% before considering the applicable incentives.
Other Credit Facilities. We finance the new, used and rental vehicle inventories related to
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. Dependent upon the type of inventory financed, the interest rates charged on borrowings outstanding under this facility ranged
from 0.2% to 3.5%, as of September 30, 2011.
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 over
the next two years. As of September 30, 2011, the interest rate charged on borrowings related to
our rental vehicle fleet ranged from 2.5% 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, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2011 |
|
|
|
Total |
|
|
|
|
|
|
|
Credit Facility |
|
Commitment |
|
|
Outstanding |
|
|
Available |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Floorplan Line (1) |
|
$ |
1,100,000 |
|
|
$ |
437,052 |
|
|
$ |
662,948 |
|
Acquisition Line (2) |
|
|
250,000 |
|
|
|
17,250 |
|
|
|
232,750 |
|
|
|
|
|
|
|
|
|
|
|
Total Revolving Credit Facility |
|
|
1,350,000 |
|
|
|
454,302 |
|
|
|
895,698 |
|
FMCC Facility |
|
|
150,000 |
|
|
|
73,914 |
|
|
|
76,086 |
|
|
|
|
|
|
|
|
|
|
|
Total Credit Facilities (3) |
|
$ |
1,500,000 |
|
|
$ |
528,216 |
|
|
$ |
971,784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The available balance at September 30, 2011, includes $116.8 million of immediately available funds. |
|
(2) |
|
The outstanding balance of $17.3 million at September 30, 2011 is related to outstanding letters of credit. |
|
(3) |
|
Outstanding balance excludes $48.4 million of borrowings with manufacturer-affiliates for foreign and
rental vehicle financing not associated with any of the Companys credit facilities. |
Real Estate Credit Facility. On December 29, 2010, we amended and restated the $235.0
million five-year real estate credit facility with Bank of America, N.A. and Comerica Bank, the two
remaining participants in the facility. As amended and restated, the Mortgage Facility is no longer
a revolving credit facility. Rather, it provides for $42.6 million of term loans, with the right to
expand to $75.0 million of term loans provided that: (i) no default or event of default exists
under the Mortgage Facility; (ii) we obtain commitments from the lenders who would qualify as
assignees for such increased amounts; and (iii) certain other agreed upon terms and conditions have
been satisfied. The Mortgage Facility is guaranteed by us and essentially all of our existing and
future direct and indirect domestic subsidiaries. Each loan is secured by the relevant real
property (and improvements related thereto) that is mortgaged under the Mortgage Facility.
The interest rate is now equal to (i) the per annum rate equal to one-month LIBOR plus 3.00%
per annum, determined on the first day of each month, or (ii) 1.95% per annum in excess of the
higher of (a) the Bank of America prime rate (adjusted daily on the day specified in the public
announcement of such price rate), (b) the Federal Funds Rate adjusted daily, plus 0.5% or (c) the
per annum rate equal to one-month LIBOR plus 1.05% per annum. The Federal Funds Rate is the
weighted average of the rates on overnight Federal funds transactions with members of the Federal
Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve
Bank of New York on the business day succeeding such day.
44
We are required to make quarterly principal payments equal to 1.25% of the principal amount
outstanding beginning in April 2011 and are required to repay the aggregate principal amount
outstanding on the maturity date December 29, 2015. During the nine months ended September 30,
2011, we made principal payments of $1.1 million on outstanding borrowings from the Mortgage
Facility. As of September 30, 2011, borrowings under the amended and restated Mortgage Facility
totaled $41.5 million, with $2.1 million recorded as a current maturity of long-term debt in the
accompanying Consolidated Balance Sheet.
The Mortgage Facility also contains usual and customary provisions limiting our ability to
engage in certain transactions, including limitations on our ability to incur additional debt,
additional liens, make investments, and pay distributions to our stockholders. As amended, the
Mortgage Facility defines certain covenants, including financial ratios that must be complied with,
including: total funded lease adjusted indebtedness to proforma EBITDAR ratio, fixed charge
coverage ratio, and current ratio. For covenant calculation purposes, EBITDAR is defined as
earnings before non-floorplan interest expense, taxes, depreciation and amortization and rent
expense. EBITDAR also includes interest income and is further adjusted for certain non-cash income
charges. In addition, congruent with the Revolving Credit Facility, the Mortgage Facility restricts
our ability to make certain payments, such as dividends or other distributions of assets,
properties, cash, rights, obligations or securities. As of September 30, 2011, we were in
compliance with all of these covenants and the Mortgage Facilitys Restricted Payment Basket
totaled $79.7 million. Based upon our current operating and financial projections, we believe that
we will remain compliant with such covenants for the remainder of the fiscal year.
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2011 |
|
|
|
Required |
|
|
Actual |
|
Fixed Charge Coverage Ratio |
|
|
> 1.35 |
|
|
|
1.89 |
|
Total Funded Lease Adjusted Indebtedness to Proforma EBITDAR |
|
|
< 5.75 |
|
|
|
3.83 |
|
Current Ratio |
|
|
> 1.10 |
|
|
|
1.46 |
|
Real Estate Related Debt. In addition to the amended and restated Mortgage Facility, we
entered into separate term loans in 2010 and 2011, totaling $162.5 million, with three of our
manufacturer-affiliated finance partners, Toyota Motor Credit Corporation (TMCC), Mercedes-Benz
Financial Services USA, LLC (MBFS), BMW Financial Services NA, LLC (BMWFS) and a third party
financial institution (collectively, the Real Estate Notes). We used $116.4 million of these
borrowings to refinance a portion of our Mortgage Facility and the remaining amount to finance
owned or purchased real estate to be utilized in existing dealership operations. The Real Estate
Notes may be expanded, are on specific buildings and/or properties and are guaranteed by us. Each
loan was made in connection with, and is secured by mortgage liens on, the relevant real property
owned by us that is mortgaged under the Real Estate Notes. The Real Estate Notes bear interest at
fixed rates between 4.62% and 5.47%, and at variable indexed rates plus between 2.25% and 3.35% per
annum. During the first three months of 2011, the loan agreements with TMCC were amended to also be
cross-defaulted with the Revolving Credit Facility.
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.
Further, we are limited under the terms of the Credit Facility and Mortgage Facility in our
ability to make cash dividend payments to our stockholders and to repurchase shares of our
outstanding common stock, based primarily on our quarterly net income or loss. As of September 30,
2011, the Restricted Payment Basket was $79.7 million and will increase in the future periods by
50.0% of our cumulative net income, as well as the net proceeds from stock option exercises, and
decrease by subsequent payments for cash dividends and share repurchases.
Stock Issuances. No shares of our common stock have been issued or received under the 3.00%
Purchased Options or the 3.00% Warrants. For dilutive earnings-per-share calculations, we are
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 below under the heading Potential Dilutive
Shares. 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. As of September 30, 2011,
changes in the average 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:
45
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Shares Issuable |
|
Share Entitlement |
|
Shares Issuable |
|
Net |
|
Potential |
Company Stock |
|
Under the 3.00% |
|
Under the 3.00% |
|
Under the 3.00% |
|
Issuable |
|
Dilutive |
Price |
|
Notes |
|
Purchased Options |
|
Warrants |
|
Shares |
|
Shares |
|
|
|
|
|
|
(Shares in thousands) |
|
|
|
|
$37.50
|
|
|
|
|
|
|
|
|
|
|
$40.00
|
|
137
|
|
(137)
|
|
|
|
|
|
137 |
$42.50
|
|
306
|
|
(306)
|
|
|
|
|
|
306 |
$45.00
|
|
456
|
|
(456)
|
|
|
|
|
|
456 |
$47.50
|
|
591
|
|
(591)
|
|
|
|
|
|
591 |
$50.00
|
|
712
|
|
(712)
|
|
|
|
|
|
712 |
$52.50
|
|
821
|
|
(821)
|
|
|
|
|
|
821 |
$55.00
|
|
921
|
|
(921)
|
|
|
|
|
|
921 |
$57.50
|
|
1,012
|
|
(1,012)
|
|
73
|
|
73
|
|
1,085 |
$60.00
|
|
1,095
|
|
(1,095)
|
|
195
|
|
195
|
|
1,290 |
$62.50
|
|
1,172
|
|
(1,172)
|
|
308
|
|
308
|
|
1,480 |
$65.00
|
|
1,242
|
|
(1,242)
|
|
412
|
|
412
|
|
1,654 |
$67.50
|
|
1,308
|
|
(1,308)
|
|
508
|
|
508
|
|
1,816 |
$70.00
|
|
1,369
|
|
(1,369)
|
|
598
|
|
598
|
|
1,967 |
$72.50
|
|
1,425
|
|
(1,425)
|
|
681
|
|
681
|
|
2,106 |
$75.00
|
|
1,478
|
|
(1,478)
|
|
759
|
|
759
|
|
2,237 |
$77.50
|
|
1,528
|
|
(1,528)
|
|
831
|
|
831
|
|
2,359 |
$80.00
|
|
1,574
|
|
(1,574)
|
|
899
|
|
899
|
|
2,473 |
$82.50
|
|
1,618
|
|
(1,618)
|
|
963
|
|
963
|
|
2,581 |
$85.00
|
|
1,659
|
|
(1,659)
|
|
1,024
|
|
1,024
|
|
2,683 |
$87.50
|
|
1,697
|
|
(1,697)
|
|
1,080
|
|
1,080
|
|
2,777 |
$90.00
|
|
1,734
|
|
(1,734)
|
|
1,134
|
|
1,134
|
|
2,868 |
$92.50
|
|
1,768
|
|
(1,768)
|
|
1,185
|
|
1,185
|
|
2,953 |
$95.00
|
|
1,801
|
|
(1,801)
|
|
1,233
|
|
1,233
|
|
3,034 |
$97.50
|
|
1,832
|
|
(1,832)
|
|
1,279
|
|
1,279
|
|
3,111 |
$100.00
|
|
1,862
|
|
(1,862)
|
|
1,322
|
|
1,322
|
|
3,184 |
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 2011, we completed the Board of Directors approved July 2010 authorization to
repurchase up to an additional $25.0 million of our common stock. Also in August 2011, our Board of
Directors authorized the repurchase of up to $50.0 million of our common shares. During the three
months ended September 30, 2011, we repurchased 976,701 shares at an average price of $37.63 for a
cost of $36.7 million, leaving $16.7 million of authorized repurchases available under the August
2011 Board authorization. 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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to a variety of market risks, including interest rate risk and foreign currency
exchange rate risk. We address these risks through a program of risk management which includes the
use of derivative instruments. The following quantitative information is provided about financial
instruments to which we are a party at September 30, 2011, and from which we may incur future gains
or losses from changes in market interest rates and foreign currency exchange rates. We do not
enter into derivative or other financial instruments for speculative or trading purposes.
Hypothetical changes commodity prices and interest rates chosen for the following estimated
sensitivity analysis are considered to be reasonably possible near-tern changes generally based on
consideration of past fluctuations for each risk category. However, since
46
it is not possible to accurately predict future changes in interest rate and commodity prices,
these hypothetical changes may not necessarily be an indicator of probable future fluctuations.
Interest Rates. We have interest rate risk in our variable-rate debt obligations and interest
rate swaps. Our policy is to monitor the effects of market changes in interest rates and 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, 2011, the outstanding principal amounts of our 2.25% Notes and 3.00% Notes
totaled $182.8 million and $115.0 million, respectively, and had fair values of $179.3 million and
$128.7 million, respectively. The carrying amounts of our 2.25% Notes and 3.00% Notes were $143.2
million and $76.6 million, respectively, at September 30, 2011.
As of September 30, 2011, we had $520.8 million of variable-rate floorplan borrowings
outstanding and $41.5 million of variable-rate Mortgage Facility borrowings outstanding as of
September 30, 2011 and $38.1 million of other variable-rate real estate related borrowings
outstanding. Based on the aggregate amount outstanding as of September 30, 2011 and before the
impact of our interest rate swaps described below, a 100 basis-point change in interest rates would
have resulted in an approximate $6.0 million change to our annual interest expense. After
consideration of the interest rate swaps described below, a 100 basis-point change would have
yielded a net annual change of $3.0 million in annual interest expense based on the borrowings
outstanding as of September 30, 2011.
Our exposure to changes in interest rates with respect to our variable-rate floorplan
borrowings and variable-rate Mortgage Facility borrowings is partially mitigated by manufacturers
interest assistance, which in some cases is based on variable interest rates. 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, 2011, we recognized $18.8 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% of our floorplan interest expense in the fourth quarter
of 2008 to 96.8%, in the third quarter of 2011. 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. In effect as of September 30, 2011, we held interest rate swaps with
aggregate notional amounts of $300.0 million that fixed our underlying one-month LIBOR at a
weighted average rate of 4.3%. In addition, during the nine months ended September 30, 2011, we
entered into 18 additional interest rate swaps with forward start dates in August 2012, December
2012, or August 2015 and expiration dates in August 2015, December 2016, December 2017, or December
2018. The aggregate notional value of these 18 forward-starting swaps is $575.0 million and the
weighted average interest rate of these swaps is 2.9%. 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. We entered into these swaps with financial
institutions that have 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 fair value of the
interest rate swaps is impacted by the forward one-month LIBOR curve and the length of time to
maturity of the swap contracts. The related gains or losses on these transactions are deferred in
stockholders equity as a component of accumulated other comprehensive loss. As of September 30,
2011, net unrealized losses, net of income taxes, totaled $20.5 million. 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. As of September 30, 2011, all of our derivative contracts were determined to be
effective, and no material ineffective portion was recognized in income during the period. A 100
basis-point change in the interest rates of our swaps would have resulted in a $2.3 million change
to our interest expense for the nine months ended September 30, 2011.
Foreign Currency Exchange Rates. As of September 30, 2011, 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 a $22.7 million change to our revenues for the nine months ended September 30,
2011.
For additional information about our market sensitive financial instruments please see Part
II, Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations,
Item 7A, Quantitative and Qualitative Disclosures About Market Risk and Note 4 to Item 8, Financial
Statements and Supplementary Data in our 2010 Form 10-K.
47
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, 2011 at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
During the three months ended September 30, 2011, 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.
48
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 Consolidated Financial Statements, Note 12, Commitments
and Contingencies.
Item 1A. Risk Factors
Notwithstanding the matters discussed below, there has been no material changes in our risk
factors as previously disclosed in Item 1A. Risk Factors of our 2010 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 2010 Form 10-K, which could materially affect
our business, financial condition or future results. The risks described in this quarterly report
and in our 2010 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.
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/Scion/Lexus,
Nissan/Infiniti, Honda/Acura, Ford, BMW/MINI, Daimler, Chrysler and General Motors dealerships
represented approximately 92.6% of our total new vehicle retail units sold as of September 30,
2011. 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 manufacturers 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, natural disasters 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 March 2011, the natural disasters in Japan
adversely affected certain vehicle manufacturers and many of the parts suppliers on which they
depend by temporarily restricting the manufacturers ability to supply new vehicles and related
parts. During the three months ended September 30, 2011, we experienced a decline in the supply of
new vehicles and related parts associated with these manufacturers, slowing the pace of new vehicle
sales. We expect depressed inventory levels of these brands to persist into early 2012.
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 manufacturers 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 manufacturers 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
49
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 vehicle inventory.
If we fail to obtain a desirable mix of popular new vehicles from manufacturers our profitability
can be affected.
We depend on the manufacturers to provide us with a desirable mix of new vehicles. The most
popular vehicles usually produce the highest profit margins and are frequently difficult to obtain
from the manufacturers. Our ability to sell new vehicles is dependent on a vehicle manufacturers
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.
In March of 2011, the earthquake and tsunami in Japan adversely affected certain vehicle
manufacturers and a number of parts suppliers on which they depend. As a result, manufacturers,
including Toyota, Nissan and Honda, were short of certain parts that are critical to vehicle
production, limiting the supply of new vehicles and negatively impacting the volume of new vehicles
sold during the three months ended September 30, 2011. We expect the inventory supply limitations
in certain of these brands to persist into 2012.
If we cannot obtain sufficient quantities of the most popular models, our profitability may be
adversely affected. Sales of less desirable models may reduce our profit margins. Several
manufacturers generally allocate their vehicles among their franchised dealerships based on the
sales history of each dealership. If our dealerships experience prolonged sales slumps relative to
our competitors, these manufacturers may cut back their allotments of popular vehicles to our
dealerships and new vehicle sales and profits may decline. Similarly, the delivery of vehicles,
particularly newer, more popular vehicles, from manufacturers at a time later than scheduled could
lead to reduced sales during those periods.
50
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 nine months ended September
30, 2011:
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
Approximate Dollar |
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|
|
|
|
|
|
|
|
|
|
Total Number of |
|
|
Value of Shares |
|
|
|
|
|
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|
|
|
|
|
Shares Purchased as |
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|
that May Be |
|
|
|
|
|
|
|
|
|
|
|
Part of Publicly |
|
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Purchased Under the |
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|
|
Total Number of |
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|
Average Price Paid |
|
|
Announced Plans or |
|
|
Plans or |
|
Period |
|
Shares Purchased |
|
|
per Share |
|
|
Programs |
|
|
Programs
(1) |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
excluding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
commissions) |
|
July 1 - July 31, 2011 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
3,482 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 1 - August 31, 2011 |
|
|
495,162 |
|
|
|
38.99 |
|
|
|
495,162 |
|
|
|
34,175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 1 - September 30, 2011 |
|
|
481,539 |
|
|
$ |
36.22 |
|
|
|
481,539 |
|
|
$ |
16,733 |
|
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|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
Total (2) |
|
|
976,701 |
|
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|
|
|
|
|
976,701 |
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(1) |
|
In August 2011, we completed the
Board of Directors approved July
2010 authorization to repurchase up
to $25.0 million of our common
stock. Also, in August 2011, a new
repurchase program was approved and
amended by our Board of Directors
that authorizes us to purchase up to
$50.0 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 August
2011 authorization does not have an
expiration date. |
|
(2) |
|
In aggregate for the three
months ended September 30, 2011,
976,701 shares were repurchased at
an average price of $37.63 for a
cost of $36.7 million. |
Item 6. Exhibits
Those exhibits to be filed by Item 601 of Regulation S-K are listed in the Exhibit Index
immediately preceding the exhibits filed herewith and such listing is incorporated herein by
reference.
51
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.
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Group 1 Automotive, Inc.
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By: |
/s/ John C. Rickel
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John C. Rickel |
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Senior Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial
and Accounting Officer) |
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|
Date: October 26, 2011
52
EXHIBIT INDEX
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|
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Exhibit |
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|
|
|
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) |
|
|
|
|
|
10.1
|
|
|
|
Eighth Amended and Restated Revolving Credit Agreement, dated effective as of July 1, 2011, among
Group 1 Automotive, Inc., the Subsidiary Borrowers listed therein, the Lenders listed therein,
JPMorgan Chase Bank, N.A., as Administrative Agent, Comerica Bank, as Floor Plan Agent and Bank
of America, N.A., as Syndication Agent (Incorporated by reference to Exhibit 10.1 of Group 1
Automotive, Inc.s Current Report on Form 8-K (File No. 001-13461) filed July 6, 2011) |
|
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31.1
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|
|
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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 |
|
|
|
|
|
101.INS**
|
|
|
|
XBRL Instance Document |
|
|
|
|
|
101.SCH**
|
|
|
|
XBRL Taxonomy Extension Schema Document |
|
|
|
|
|
101.CAL**
|
|
|
|
XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
|
|
101.DEF**
|
|
|
|
XBRL Taxonomy Extension Definition Linkbase Document |
|
|
|
|
|
101.LAB**
|
|
|
|
XBRL Taxonomy Extension Label Linkbase Document |
|
|
|
|
|
101.PRE**
|
|
|
|
XBRL Taxonomy Extension Presentation Linkbase Document |
|
|
|
* |
|
Furnished herewith |
|
** |
|
Pursuant to Rule 406T of Regulation S-T, these interactive data files
are deemed not filed or part of a registration statement or prospectus
for purposes of Sections 11 and 12 of the Securities Act of 1933, are
deemed not filed for purposes of Section 18 of the Securities Exchange
Act of 1934 and otherwise are not subject to liability under those
sections. |
53