UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q/A
þ | 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
¨ | 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)
Delaware | 76-0506313 | |
(State or other jurisdiction of incorporation or organization) |
(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 ¨
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 ¨
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):
Large accelerated filer | ¨ | Accelerated filer | þ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
As of October 21, 2011, the registrant had 22,735,108 shares of common stock, par value $0.01, outstanding.
EXPLANATORY NOTE
The purpose of this Amendment No. 1 (Amendment No. 1) to Group 1 Automotive, Inc.s (the Companys) Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2011 (the Form 10-Q) is to amend the Form 10-Q for immaterial errors identified in the Companys calculation of basic and diluted earnings per share. The Companys management has assessed the errors, both quantitatively and qualitatively, and determined that the effects on all prior periods are immaterial. Other than the corrections to basic and diluted earnings per share, which are explained further in Note 1 of Item 1, Financial Statements, this Amendment No. 1 has no effect on the Companys consolidated statement of operations, consolidated balance sheet, consolidated statement of cash flows or its liquidity. In addition, the correction of these immaterial errors, as disclosed in this Amendment No. 1, did not result in a breach of any covenant under the Companys credit facilities, trigger the Companys clawback policy or impact bonuses paid to the Companys management in any period from January 1, 2009 through September 30, 2011. Further, the correction of these immaterial errors did not change a reported gain into a loss, alter the earnings trend of the Company or result in the Company failing to meet or exceed consensus analyst expectations for each quarterly period from January 1, 2009 through September 30, 2011.
The following items in the Form 10-Q are impacted by Amendment No. 1:
1. | Item 1, Financial Statements is amended to: |
| correct the immaterial errors in basic and diluted earnings per share and the associated weighted average common shares outstanding, included in the Consolidated Statement of Operations; |
| further explain the immaterial errors in basic and diluted earnings per share and the associated weighted average common shares outstanding in Note 1 Interim Financial Information; |
| provide, for comparative purposes, corrected quarterly basic and diluted earnings per share and the associated weighted average common shares outstanding for each quarterly period in the years ended December 31, 2009 and 2010, as well as in the nine-month period ended September 30, 2011 in Note 1 Interim Financial Information; and |
| correct the immaterial errors in basic and diluted earnings per share and the associated weighted average common shares outstanding for the three and nine months ended September 30, 2011 and 2010 in Note 6 Earnings Per Share. |
2. | Item 2, Managements Discussion and Analysis of Financial Condition and Results of Operations is amended to correct the immaterial errors in diluted earnings per share, included in Financial and Operational Highlights. |
For the convenience of the reader, Amendment No. 1 includes the Form 10-Q in its entirety. Except as set forth above, no other changes have been made to the Form 10-Q.
This Amendment No. 1 speaks as of the original filing date of the Form 10-Q, does not reflect events that may have occurred subsequent to the original filing date, and does not modify or update in any way disclosures made in the original Form 10-Q.
Pursuant to Rule 12b-15 under the Securities Exchange Act of 1934, as amended (the Exchange Act), the certifications required pursuant to the rules promulgated under the Exchange Act, as adopted pursuant to Section 302 and Section 906 of the Sarbanes-Oxley Act of 2002, which were included as exhibits to the Form 10-Q, have been re-executed as of the date of this Amendment No. 1 and are included as Exhibits 31.1, 31.2, 32.1 and 32.2 hereto.
2
Item 1. |
Financial Statements | |
Cautionary Statement about Forward-Looking Statements | ||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations | |
Item 3. |
Quantitative and Qualitative Disclosures about Market Risk | |
Item 4. |
Controls and Procedures | |
Item 1. |
Legal Proceedings | |
Item 1A. |
Risk Factors | |
Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds | |
Item 6. |
Exhibits | |
3
Item 1. | Financial Statements |
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2011 |
December 31, 2010 |
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(Unaudited) | ||||||||
(In thousands, except per share amounts) |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
$ | 11,300 | $ | 19,843 | ||||
Contracts-in-transit and vehicle receivables, net |
100,246 | 113,846 | ||||||
Accounts and notes receivable, net |
71,496 | 75,623 | ||||||
Inventories |
719,677 | 777,771 | ||||||
Deferred income taxes |
16,482 | 14,819 | ||||||
Prepaid expenses and other current assets |
18,232 | 17,332 | ||||||
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Total current assets |
937,433 | 1,019,234 | ||||||
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PROPERTY AND EQUIPMENT, net |
550,908 | 506,288 | ||||||
GOODWILL |
526,487 | 507,962 | ||||||
INTANGIBLE FRANCHISE RIGHTS |
166,818 | 158,694 | ||||||
OTHER ASSETS |
13,656 | 9,786 | ||||||
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Total assets |
$ | 2,195,302 | $ | 2,201,964 | ||||
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LIABILITIES AND STOCKHOLDERS EQUITY |
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CURRENT LIABILITIES: |
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Floorplan notes payablecredit facility |
$ | 437,052 | $ | 560,840 | ||||
Floorplan notes payablemanufacturer affiliates |
122,358 | 103,345 | ||||||
Current maturities of long-term debt |
14,003 | 53,189 | ||||||
Current liabilities from interest rate risk management activities |
7,656 | 1,098 | ||||||
Accounts payable |
128,490 | 92,799 | ||||||
Accrued expenses |
92,360 | 83,663 | ||||||
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Total current liabilities |
801,919 | 894,934 | ||||||
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LONG-TERM DEBT, net of current maturities |
473,193 | 412,950 | ||||||
DEFERRED INCOME TAXES |
70,929 | 58,970 | ||||||
LIABILITIES FROM INTEREST RATE RISK MANAGEMENT ACTIVITIES |
25,112 | 16,426 | ||||||
OTHER LIABILITIES |
33,252 | 31,036 | ||||||
DEFERRED REVENUES |
2,133 | 3,280 | ||||||
STOCKHOLDERS EQUITY: |
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Preferred stock, $0.01 par value, 1,000 shares authorized; none issued or outstanding |
| | ||||||
Common stock, $0.01 par value, 50,000 shares authorized; 26,204 and 26,096 issued, respectively |
262 | 261 | ||||||
Additional paid-in capital |
368,776 | 363,966 | ||||||
Retained earnings |
573,120 | 519,843 | ||||||
Accumulated other comprehensive loss |
(27,986 | ) | (18,755 | ) | ||||
Treasury stock, at cost; 3,480 and 2,303 shares, respectively |
(125,408 | ) | (80,947 | ) | ||||
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Total stockholders equity |
788,764 | 784,368 | ||||||
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Total liabilities and stockholders equity |
$ | 2,195,302 | $ | 2,201,964 | ||||
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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 OPERATIONS
Three Months Ended September 30, |
Nine Months Ended September 30, |
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2011 | 2010 | 2011 | 2010 | |||||||||||||
(Unaudited, in thousands, except per share amounts) | ||||||||||||||||
REVENUES: |
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New vehicle retail sales |
$ | 862,660 | $ | 822,121 | $ | 2,457,255 | $ | 2,254,093 | ||||||||
Used vehicle retail sales |
377,115 | 340,625 | 1,053,609 | 960,376 | ||||||||||||
Used vehicle wholesale sales |
69,051 | 58,463 | 191,609 | 156,653 | ||||||||||||
Parts and service sales |
210,067 | 196,264 | 609,108 | 575,762 | ||||||||||||
Finance, insurance and other, net |
51,496 | 44,282 | 142,255 | 124,533 | ||||||||||||
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Total revenues |
1,570,389 | 1,461,755 | 4,453,836 | 4,071,417 | ||||||||||||
COST OF SALES: |
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New vehicle retail sales |
806,498 | 775,046 | 2,304,057 | 2,122,533 | ||||||||||||
Used vehicle retail sales |
345,048 | 310,055 | 958,094 | 870,823 | ||||||||||||
Used vehicle wholesale sales |
69,254 | 58,158 | 187,651 | 153,565 | ||||||||||||
Parts and service sales |
100,836 | 89,657 | 289,295 | 264,484 | ||||||||||||
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Total cost of sales |
1,321,636 | 1,232,916 | 3,739,097 | 3,411,405 | ||||||||||||
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GROSS PROFIT |
248,753 | 228,839 | 714,739 | 660,012 | ||||||||||||
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES |
188,185 | 173,925 | 547,120 | 522,796 | ||||||||||||
DEPRECIATION AND AMORTIZATION EXPENSE |
6,845 | 6,772 | 19,881 | 19,936 | ||||||||||||
ASSET IMPAIRMENTS |
3,644 | 1,639 | 4,008 | 3,121 | ||||||||||||
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INCOME FROM OPERATIONS |
50,079 | 46,503 | 143,730 | 114,159 | ||||||||||||
OTHER EXPENSE: |
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Floorplan interest expense |
(6,964 | ) | (9,021 | ) | (20,245 | ) | (25,220 | ) | ||||||||
Other interest expense, net |
(8,644 | ) | (6,894 | ) | (24,811 | ) | (20,265 | ) | ||||||||
Loss on redemption of long-term debt |
| | | (3,872 | ) | |||||||||||
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INCOME BEFORE INCOME TAXES |
34,471 | 30,588 | 98,674 | 64,802 | ||||||||||||
PROVISION FOR INCOME TAXES |
(12,977 | ) | (11,603 | ) | (37,135 | ) | (25,067 | ) | ||||||||
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NET INCOME |
$ | 21,494 | $ | 18,985 | $ | 61,539 | $ | 39,735 | ||||||||
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BASIC EARNINGS PER SHARE |
$ | 0.92 | $ | 0.79 | $ | 2.59 | $ | 1.63 | ||||||||
Weighted average common shares outstanding |
22,020 | 22,419 | 22,377 | 22,877 | ||||||||||||
DILUTED EARNINGS PER SHARE |
$ | 0.91 | $ | 0.79 | $ | 2.57 | $ | 1.63 | ||||||||
Weighted average common shares outstanding |
22,218 | 22,432 | 22,533 | 22,896 | ||||||||||||
CASH DIVIDENDS PER COMMON SHARE |
$ | 0.13 | $ | | $ | 0.35 | $ | |
The accompanying notes are an integral part of these consolidated financial statements.
5
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, |
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2011 | 2010 | |||||||
(Unaudited, in thousands) | ||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income |
$ | 61,539 | $ | 39,735 | ||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
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Depreciation and amortization |
19,881 | 19,936 | ||||||
Deferred income taxes |
16,280 | 22,224 | ||||||
Asset impairments |
4,008 | 3,121 | ||||||
Stock-based compensation |
8,333 | 7,505 | ||||||
Amortization of debt discount and issue costs |
8,871 | 6,336 | ||||||
Loss on redemption of long-term debt |
| 3,872 | ||||||
(Gain) loss on disposition of assets |
(967 | ) | 3,170 | |||||
Tax effect from stock-based compensation |
(651 | ) | 985 | |||||
Other |
636 | (131 | ) | |||||
Changes in operating assets and liabilities, net of effects of acquisitions and dispositions: |
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Accounts payable and accrued expenses |
39,722 | 9,624 | ||||||
Accounts and notes receivable |
3,908 | (4,747 | ) | |||||
Inventories |
111,704 | (152,947 | ) | |||||
Contracts-in-transit and vehicle receivables |
13,525 | (5,888 | ) | |||||
Prepaid expenses and other assets |
(3,454 | ) | 7,060 | |||||
Floorplan notes payablemanufacturer affiliates |
19,028 | (10,281 | ) | |||||
Deferred revenues |
(1,245 | ) | (1,759 | ) | ||||
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Net cash provided by (used in) operating activities |
301,118 | (52,185 | ) | |||||
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Cash paid in acquisitions, net of cash received |
(109,935 | ) | (34,431 | ) | ||||
Proceeds from disposition of franchises, property and equipment |
5,768 | 41,001 | ||||||
Purchases of property and equipment, including real estate |
(45,052 | ) | (22,699 | ) | ||||
Other |
421 | 1,145 | ||||||
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Net cash used in investing activities |
(148,798 | ) | (14,984 | ) | ||||
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Borrowings on credit facilityFloorplan Line |
3,635,810 | 3,731,339 | ||||||
Repayments on credit facilityFloorplan Line |
(3,759,598 | ) | (3,552,920 | ) | ||||
Principal payments on mortgage facility |
(1,065 | ) | (35,284 | ) | ||||
Proceeds from issuance of 3.00% Convertible Notes |
| 115,000 | ||||||
Debt issue costs |
| (3,959 | ) | |||||
Purchase of equity calls |
| (45,939 | ) | |||||
Sale of equity warrants |
| 29,309 | ||||||
Redemption of other long-term debt |
| (77,011 | ) | |||||
Borrowings of other long-term debt |
202 | 4,909 | ||||||
Principal payments of long-term debt related to real estate loans |
(5,684 | ) | (2,685 | ) | ||||
Borrowings of long-term debt related to real estate |
21,823 | 12,804 | ||||||
Principal payments of other long-term debt |
(2,851 | ) | (558 | ) | ||||
Repurchases of common stock, amounts based on settlement date |
(44,912 | ) | (26,765 | ) | ||||
Proceeds from issuance of common stock to benefit plans |
3,094 | 2,562 | ||||||
Tax effect from stock-based compensation |
651 | (985 | ) | |||||
Dividends paid |
(8,262 | ) | | |||||
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Net cash provided by (used in) financing activities |
(160,792 | ) | 149,817 | |||||
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EFFECT OF EXCHANGE RATE CHANGES ON CASH |
(71 | ) | 293 | |||||
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NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS |
(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 | |
The accompanying notes are an integral part of these consolidated financial statements.
6
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
Accumulated Other Comprehensive Income (Loss) |
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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: |
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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 | |||||||||||||||||||||||||||
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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 | ) | |||||||||||||||||||||||||
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BALANCE, September 30, 2011 |
26,204 | $ | 262 | $ | 368,776 | $ | 573,120 | $ | (20,481 | ) | $ | 28 | $ | (7,533 | ) | $ | (125,408 | ) | $ | 788,764 | ||||||||||||||||
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The accompanying notes are an integral part of these consolidated financial statements.
7
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.
Amendments to Previously Filed Financial Statements
In June 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) Emerging Issues Task Force (EITF) 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. The FSP clarified that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are participating securities and therefore should be included in computing earnings per share (EPS) using the two-class method. The Companys restricted stock awards and performance awards qualify as participating securities as each contain non-forfeitable rights to dividends. Therefore, the Company became subject to the guidance in the first quarter 2009.
Upon the adoption of FSP 03-6-1 and subsequently through the third quarter 2011, the Company failed to properly apply the two-class method for computing EPS. The Company has assessed the errors, both quantitatively and qualitatively, and determined that the effects on all prior periods are immaterial. Other than the corrections to basic and diluted earnings per share, the revisions have no effect on the Companys consolidated statement of operations, consolidated balance sheet, consolidated statement of cash flows or its liquidity.
The following tables summarize the effect of correctly applying the two-class method for each quarter beginning in the first quarter of 2009 through the third quarter 2011:
8
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2009 | ||||||||||||||||||||
Q1 | Q2 | Q3 | Q4 | Year End | ||||||||||||||||
(In thousands, except per share data) | ||||||||||||||||||||
As Reported: |
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Net income |
$ | 8,375 | $ | 10,082 | $ | 18,340 | $ | (1,952 | ) | $ | 34,845 | |||||||||
Weighted average basic shares outstanding |
22,704 | 22,826 | 22,965 | 23,054 | 22,888 | |||||||||||||||
Weighted average dilutive shares outstanding |
22,923 | 23,288 | 23,503 | 23,577 | 23,325 | |||||||||||||||
Basic earnings (loss) per common share |
$ | 0.37 | $ | 0.44 | $ | 0.80 | $ | (0.08 | ) | $ | 1.52 | |||||||||
Diluted earnings (loss) per common share |
$ | 0.37 | $ | 0.43 | $ | 0.78 | $ | (0.08 | ) | $ | 1.49 | |||||||||
Amended Basic: |
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Net income |
$ | 8,375 | $ | 10,082 | $ | 18,340 | $ | (1,952 | ) | $ | 34,845 | |||||||||
Less: Earnings allocated to participating securities |
450 | 525 | 955 | | 2,018 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income (loss) available to common shares |
$ | 7,925 | $ | 9,557 | $ | 17,385 | $ | (1,952 | ) | $ | 32,827 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Weighted average basic common shares outstanding |
22,704 | 22,826 | 22,965 | 23,054 | 22,888 | |||||||||||||||
Basic earnings (loss) per common share |
$ | 0.35 | $ | 0.42 | $ | 0.76 | $ | (0.08 | ) | $ | 1.43 | |||||||||
Amended Diluted: |
||||||||||||||||||||
Net income |
$ | 8,375 | $ | 10,082 | $ | 18,340 | $ | (1,952 | ) | $ | 34,845 | |||||||||
Less: Earnings allocated to participating securities |
450 | 524 | 954 | | 2,016 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income (loss) available to common shares |
$ | 7,925 | $ | 9,558 | $ | 17,386 | $ | (1,952 | ) | $ | 32,829 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Weighted average dilutive common shares outstanding |
22,712 | 22,851 | 22,984 | 23,073 | 22,906 | |||||||||||||||
Diluted earnings (loss) per common share |
$ | 0.35 | $ | 0.42 | $ | 0.76 | $ | (0.08 | ) | $ | 1.43 |
2010 | ||||||||||||||||||||
Q1 | Q2 | Q3 | Q4 | Year End | ||||||||||||||||
(In thousands, except per share data) | ||||||||||||||||||||
As Reported: |
||||||||||||||||||||
Net income |
$ | 7,981 | $ | 12,769 | $ | 18,985 | $ | 10,569 | $ | 50,304 | ||||||||||
Weighted average basic shares outstanding |
23,135 | 23,084 | 22,419 | 22,442 | 22,767 | |||||||||||||||
Weighted average dilutive shares outstanding |
23,688 | 23,638 | 22,926 | 23,027 | 23,317 | |||||||||||||||
Basic earnings per common share |
$ | 0.34 | $ | 0.55 | $ | 0.85 | $ | 0.47 | $ | 2.21 | ||||||||||
Diluted earnings per common share |
$ | 0.34 | $ | 0.54 | $ | 0.83 | $ | 0.46 | $ | 2.16 | ||||||||||
Amended Basic: |
||||||||||||||||||||
Net income |
$ | 7,981 | $ | 12,769 | $ | 18,985 | $ | 10,569 | $ | 50,304 | ||||||||||
Less: Dividends paid to participating securities |
| | | 118 | 118 | |||||||||||||||
Less: Undistributed earnings allocated to participating securities |
457 | 718 | 1,187 | 444 | 2,557 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income available to common shares |
$ | 7,524 | $ | 12,051 | $ | 17,798 | $ | 10,007 | $ | 47,629 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Weighted average basic common shares outstanding |
23,135 | 23,084 | 22,419 | 22,442 | 22,767 | |||||||||||||||
Basic earnings per common share |
$ | 0.33 | $ | 0.52 | $ | 0.79 | $ | 0.45 | $ | 2.09 | ||||||||||
Amended Diluted: |
||||||||||||||||||||
Net income |
$ | 7,981 | $ | 12,769 | $ | 18,985 | $ | 10,569 | $ | 50,304 | ||||||||||
Less: Dividends paid to participating securities |
| | | 118 | 118 | |||||||||||||||
Less: Undistributed earnings allocated to participating securities |
456 | 717 | 1,186 | 444 | 2,555 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income available to common shares |
$ | 7,525 | $ | 12,052 | $ | 17,799 | $ | 10,007 | $ | 47,631 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Weighted average dilutive common shares outstanding |
23,156 | 23,108 | 22,433 | 22,467 | 22,788 | |||||||||||||||
Diluted earnings per common share |
$ | 0.32 | $ | 0.52 | $ | 0.79 | $ | 0.45 | $ | 2.09 |
9
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2011 | ||||||||||||
Q1 | Q2 | Q3 | ||||||||||
(In thousands, except per share data) | ||||||||||||
As Reported: |
||||||||||||
Net income |
$ | 15,362 | $ | 24,683 | $ | 21,494 | ||||||
Weighted average basic shares outstanding |
22,582 | 22,533 | 22,020 | |||||||||
Weighted average dilutive shares outstanding |
23,264 | 23,183 | 22,778 | |||||||||
Basic earnings per common share |
$ | 0.68 | $ | 1.10 | $ | 0.98 | ||||||
Diluted earnings per common share |
$ | 0.66 | $ | 1.06 | $ | 0.94 | ||||||
Amended Basic: |
||||||||||||
Net income |
$ | 15,362 | $ | 24,683 | $ | 21,494 | ||||||
Less: Dividends paid to participating securities |
148 | 142 | 168 | |||||||||
Less: Undistributed earnings allocated to participating securities |
768 | 1,284 | 1,098 | |||||||||
|
|
|
|
|
|
|||||||
Net income available to common shares |
$ | 14,446 | $ | 23,257 | $ | 20,228 | ||||||
|
|
|
|
|
|
|||||||
Weighted average basic common shares outstanding |
22,582 | 22,533 | 22,020 | |||||||||
Basic earnings per common share |
$ | 0.64 | $ | 1.03 | $ | 0.92 | ||||||
Amended Diluted: |
||||||||||||
Net income |
$ | 15,362 | $ | 24,683 | $ | 21,494 | ||||||
Less: Dividends paid to participating securities |
148 | 142 | 168 | |||||||||
Less: Undistributed earnings allocated to participating securities |
763 | 1,278 | 1,088 | |||||||||
|
|
|
|
|
|
|||||||
Net income available to common shares |
$ | 14,451 | $ | 23,263 | $ | 20,238 | ||||||
|
|
|
|
|
|
|||||||
Weighted average dilutive common shares outstanding |
22,736 | 22,651 | 22,219 | |||||||||
Diluted earnings per common share |
$ | 0.64 | $ | 1.03 | $ | 0.91 |
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 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).
10
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 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 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.
11
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 $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.
12
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 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.
13
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 | |||||
|
|
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.
14
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
The two-class method is utilized for the computation of EPS. The two-class method requires a portion of net income to be allocated to participating securities, which are unvested awards of share-based payments with non-forfeitable rights to receive dividends or dividend equivalents. The Companys restricted stock awards and performance awards qualify as participating securities as each contain non-forfeitable rights to dividends. Income allocated to these participating securities is excluded from net earnings available to common shares, as shown in the table below. Basic EPS is computed by dividing net income available to common shares by the weighted average number of common shares outstanding during the period. Diluted EPS is computed by dividing net income available to common shares by the weighted average number of common shares outstanding during the period, plus the dilutive effect of securities, using the treasury stock method.
15
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 (1) | 2010 (1) | 2011 (1) | 2010 (1) | |||||||||||||
(In thousands, except per share amounts) | ||||||||||||||||
Weighted average basic common 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 | 8 | 10 | ||||||||||||
Dilutive effect of employee stock purchases |
8 | 9 | 4 | 9 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Weighted average dilutive common shares outstanding |
22,218 | 22,432 | 22,533 | 22,896 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Basic: |
||||||||||||||||
Net income |
$ | 21,494 | $ | 18,985 | $ | 61,539 | $ | 39,735 | ||||||||
Less: Dividends paid to participating securities |
168 | | 452 | | ||||||||||||
Less: Undistributed earnings allocated to participating securities |
1,098 | 1,187 | 3,118 | 2,438 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income available to common shares |
$ | 20,228 | $ | 17,798 | $ | 57,969 | $ | 37,297 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Basic earnings per common share |
$ | 0.92 | $ | 0.79 | $ | 2.59 | $ | 1.63 | ||||||||
Diluted: |
||||||||||||||||
Net income |
$ | 21,494 | $ | 18,985 | $ | 61,539 | $ | 39,735 | ||||||||
Less: Dividends paid to participating securities |
168 | | 452 | | ||||||||||||
Less: Undistributed earnings allocated to participating securities |
1,088 | 1,186 | 3,098 | 2,436 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income available to common shares |
$ | 20,238 | $ | 17,799 | $ | 57,989 | $ | 37,299 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Diluted earnings per common share |
$ | 0.91 | $ | 0.79 | $ | 2.57 | $ | 1.63 |
(1) | As disclosed in Note 1, Interim Financial Information, basic and diluted EPS for the periods presented have been revised due to an immaterial error resulting from the Company's failure to properly apply the two-class method for computing EPS. |
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 0.1 million.
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.
16
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 | ||||||
|
|
|
|
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
17
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 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.
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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.
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.
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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:
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.
20
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:
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.
21
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 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
22
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 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.
23
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 securitiesmoney 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 | ||||||
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|
|
|
|
|
24
As of December 31, 2010 | ||||||||||||
Level 1 | Level 2 | Total | ||||||||||
(In thousands) | ||||||||||||
Assets: |
||||||||||||
Marketable securitiesmoney 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 | ||||||
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|
|
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 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.
25
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 | |||||||||||
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|
|
|
|
|
|
|
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Total comprehensive income |
$ | 10,663 | $ | 22,232 | $ | 52,308 | $ | 43,829 | ||||||||
|
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|
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|
|
26
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; |
27
| 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.
28
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.
29
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 $0.91 and $0.79, 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 $2.57 and $1.63, 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.
30
Key Performance Indicators
The following table highlights certain of the key performance indicators we use to manage our business:
Consolidated Statistical Data
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
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.
31
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.
32
The following table summarizes our combined Same Store results for the three and nine months ended September 30, 2011 as compared to 2010:
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 | ||||||||||||
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|
|
|
|
|
|
|
|||||||||||||||||
Gross profit |
$ | 238,894 | 4.8 | % | $ | 227,854 | $ | 693,233 | 6.3 | % | $ | 652,053 | ||||||||||||
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|
|
|
|
|
|
|
|||||||||||||||||
Sellng, 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.
33
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 | ||||||||||||||||||||
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|
|
|
|
|
|
|
|||||||||||||||||
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 | ||||||||||||||||||||
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|
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|
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|
|||||||||||||||||
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 | ||||||||||||||||||||
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|
|
|
|
|
|
|||||||||||||||||
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.
34
The following table sets forth our Same Store new vehicle retail sales volume by manufacturer:
Same Store New Vehicle Unit Sales
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
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 | ||||||||||||||||||
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|
|
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|
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|
|||||||||||||||||
Total |
24,427 | (7.1 | )% | 26,298 | 71,807 | 0.7 | % | 71,300 | ||||||||||||||||
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|
|
|
|
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.
35
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 | ||||||||||||||||||||
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|
|
|
|
|
|||||||||||||||||
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 | ||||||||||||||||||||
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|
|
|
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|
|||||||||||||||||
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 | ||||||||||||||||||||
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|
|
|
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|
|||||||||||||||||
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 | % |
36
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 | ||||||||||||||||||||
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|
|
|
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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 | ||||||||||||||||||||
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|
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|
|||||||||||||||||
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 | ) | ||||||||||||||||
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|
|||||||||||||||||
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 | % |
37
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 | ||||||||||||||||||||
|
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|
|
|
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|
|||||||||||||||||
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 | ||||||||||||||||||||
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|
|
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|
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|
|||||||||||||||||
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 | ||||||||||||||||||||
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|
|
|
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|
|||||||||||||||||
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, 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.
38
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 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.
39
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 |
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Same Stores |
42,366 | (3.2 | )% | 43,785 | 122,616 | 1.3 | % | 120,999 | ||||||||||||||||
Transactions |
2,181 | 212 | 4,662 | 1,359 | ||||||||||||||||||||
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|
|
|
|
|
|
|
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Total |
44,547 | 1.3 | % | 43,997 | 127,278 | 4.0 | % | 122,358 | ||||||||||||||||
Retail Finance Fees |
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Same Stores |
$ | 17,492 | 11.9 | % | $ | 15,638 | $ | 48,441 | 14.9 | % | $ | 42,160 | ||||||||||||
Transactions |
1,024 | 65 | 1,947 | 414 | ||||||||||||||||||||
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|
|
|
|
|
|
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Total |
$ | 18,516 | 17.9 | % | $ | 15,703 | $ | 50,388 | 18.4 | % | $ | 42,574 | ||||||||||||
Vehicle Service Contract Fees |
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Same Stores |
$ | 20,195 | 8.3 | % | $ | 18,642 | $ | 57,744 | 10.4 | % | $ | 52,282 | ||||||||||||
Transactions |
896 | 62 | 1,417 | 341 | ||||||||||||||||||||
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|
|
|
|
|
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Total |
$ | 21,091 | 12.8 | % | $ | 18,704 | $ | 59,161 | 12.4 | % | $ | 52,623 | ||||||||||||
Insurance and Other |
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Same Stores |
$ | 11,226 | 14.2 | % | $ | 9,827 | $ | 31,574 | 9.8 | % | $ | 28,752 | ||||||||||||
Transactions |
663 | 48 | 1,132 | 584 | ||||||||||||||||||||
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|
|
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Total |
$ | 11,889 | 20.4 | % | $ | 9,875 | $ | 32,706 | 11.5 | % | $ | 29,336 | ||||||||||||
Total |
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Same Stores |
$ | 48,913 | 10.9 | % | $ | 44,107 | $ | 137,759 | 11.8 | % | $ | 123,194 | ||||||||||||
Transactions |
2,583 | 175 | 4,496 | 1,339 | ||||||||||||||||||||
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|
|
|
|
|
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Total |
$ | 51,496 | 16.3 | % | $ | 44,282 | $ | 142,255 | 14.2 | % | $ | 124,533 | ||||||||||||
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|
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Finance and Insurance Revenues per Unit Sold |
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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 | &nbs |