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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended March 31, 2002
Commission file number:
ASBURY AUTOMOTIVE GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 01-0609375
- ------------------------------------ ----------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
Three Landmark Square, Suite 500, Stamford, Connecticut 06901, (203) 356-4400
- --------------------------------------------------------------------------------
(Address of, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices
- --------------------------------------------------------------------------------
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 3 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X* No -- ----
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date (applicable only to corporate
registrants).
The number of shares of common stock outstanding as of May 1, 2002 was
34,000,000.
* The registrant became subject to the Securities Exchange Act of 1934 on March
13, 2002.
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ASBURY AUTOMOTIVE GROUP, INC.
March 31, 2002 Form 10-Q Quarterly Report
Table of Contents
Part I - Financial Information
Page
Item 1. Financial Statements
Consolidated Balance Sheets as of
March 31, 2002 and December 31, 2001............................1
Consolidated Statements of Income -
Three Months Ended March 31, 2002 and 2001......................2
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2002 and 2001......................3
Notes to Consolidated Financial Statements......................4
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations..........................................9
Item 3. Quantitative and Qualitative Disclosures About Market Risk........12
Part II - Other Information
Item 2. Application of Proceeds of Initial Public Offering................13
Item 6. Exhibits and Reports on Form 8-K..................................13
ASBURY AUTOMOTIVE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except for share data)
March 31, December 31,
ASSETS 2002 2001
------ ------------ ------------
(unaudited)
CURRENT ASSETS
Cash and cash equivalents ............................................ $ 78,112 $ 60,506
Contracts-in-transit ................................................. 86,217 93,044
Current portion of restricted marketable securities .................. 1,455 1,410
Accounts receivable (net of allowance of $2,347 and $2,396) .......... 84,592 81,347
Inventories .......................................................... 510,799 496,054
Deferred income taxes ................................................ 8,264 --
Prepaid and other current assets ..................................... 30,416 25,253
----------- ----------
Total current assets .................................... 799,855 757,614
PROPERTY AND EQUIPMENT, net .............................................. 258,379 256,402
GOODWILL, net ............................................................ 392,287 392,856
RESTRICTED MARKETABLE SECURITIES ......................................... 5,849 6,807
OTHER ASSETS ............................................................. 48,002 51,334
----------- -----------
Total assets ............................................ $ 1,504,372 $ 1,465,013
=========== ===========
LIABILITIES AND STOCKHOLDERS'/MEMBERS' EQUITY
CURRENT LIABILITIES:
Floor plan notes payable ............................................. $ 451,003 $ 451,375
Short-term debt ...................................................... 10,194 10,000
Current maturities of long-term debt ................................. 46,338 35,789
Accounts payable ..................................................... 38,257 33,573
Deferred income taxes ................................................ -- 3,876
Accrued liabilities .................................................. 85,635 75,384
----------- -----------
Total current liabilities ............................... 631,427 609,997
LONG-TERM DEBT ........................................................... 429,689 492,548
DEFERRED INCOME TAXES .................................................... 27,585 1,370
OTHER LIABILITIES ........................................................ 9,858 13,191
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS'/MEMBERS' EQUITY:
Preferred stock, $.01 par value, 10,000,000 shares authorized ........ -- --
Common stock, $.01 par value, 90,000,000 shares authorized, 34,000,000
issued and outstanding ............................................ 340 --
Additional paid-in capital ........................................... 413,838 --
Contributed capital .................................................. -- 302,035
Retained earnings .................................................... (10,278) 44,216
Accumulated other comprehensive income ............................... 1,913 1,656
----------- -----------
Total stockholders'/members' equity ..................... 405,813 347,907
----------- -----------
Total liabilities and stockholders'/members' equity ..... $ 1,504,372 $ 1,465,013
=========== ===========
See Notes to Consolidated Financial Statements.
1
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ASBURY AUTOMOTIVE GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share data)
(unaudited)
For the Three Months
Ended March 31,
--------------------------
2002 2001
------------ ------------
REVENUES:
New vehicle .................................................... $ 631,105 $ 570,270
Used vehicle ................................................... 285,849 282,145
Parts, service and collision repair ............................ 125,068 116,054
Finance and insurance, net ..................................... 26,563 23,258
----------- -----------
Total revenues ............................................. 1,068,585 991,727
----------- -----------
COST OF SALES:
New vehicle .................................................... 578,770 524,126
Used vehicle ................................................... 258,388 257,027
Parts, service and collision repair ............................ 59,452 55,910
----------- -----------
Total cost of sales ........................................ 896,610 837,063
----------- -----------
GROSS PROFIT ...................................................... 171,975 154,664
OPERATING EXPENSES:
Selling, general and administrative ............................ 133,015 117,221
Depreciation and amortization .................................. 5,833 7,041
----------- -----------
Income from operations ..................................... 33,127 30,402
----------- -----------
OTHER INCOME (EXPENSE):
Floor plan interest expense .................................... (4,350) (8,934)
Other interest expense ......................................... (9,778) (12,441)
Interest income ................................................ 315 1,185
Net losses from unconsolidated affiliates ...................... (100) (1,000)
Other income (expense) ......................................... (392) 438
----------- -----------
Total other expense, net ................................... (14,305) (20,752)
----------- -----------
Income before income taxes, minority interest, discontinued
operations and extraordinary loss ....................... 18,822 9,650
INCOME TAX PROVISIONS:
Income tax expense ............................................. 2,194 1,168
Tax adjustment upon conversion from an L.L.C. to a corporation . 11,553 --
MINORITY INTEREST IN SUBSIDIARY EARNINGS .......................... -- 144
----------- -----------
Income before discontinued operations and extraordinary loss 5,075 8,338
DISCONTINUED OPERATIONS ........................................... 87 (229)
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT ................ -- (1,433)
----------- -----------
Net income ................................................. 5,162 $ 6,676
===========
PRO FORMA TAX (BENEFIT) EXPENSE:
Pro forma income tax expense ................................... 5,299
Tax adjustment upon conversion from an L.L.C. to a corporation . (11,553)
-----------
Tax affected pro forma net income .......................... $ 11,416
===========
EARNINGS PER SHARE:
Basic .......................................................... $0.17
===========
Diluted ........................................................ $0.17
===========
PRO FORMA EARNINGS PER SHARE:
Basic .......................................................... $0.37
===========
Diluted ........................................................ $0.37
===========
WEIGHTED AVERAGE SHARES OUTSTANDING (in thousands):
Basic .......................................................... 30,400
===========
Diluted ........................................................ 30,434
===========
See Notes to Consolidated Financial Statements.
<
2
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ASBURY AUTOMOTIVE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
For the Three Months
Ended March 31,
-----------------------
2002 2001
---------- ----------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income ...................................................................... $ 5,162 $ 6,676
Adjustments to reconcile net income to net cash provided by operating activities-
Depreciation and amortization ................................................ 5,808 7,007
Gain on sale of discontinued operations ...................................... (559) --
Deferred income taxes ........................................................ 11,115 --
Extraordinary loss on early extinguishment of debt ........................... -- 1,433
Loss on equity investments, net .............................................. 100 1,000
Other non-cash charges ....................................................... 1,044 875
Change in operating assets and liabilities, net of effects
from acquisitions and divestiture of assets-
Contracts-in-transit ......................................................... 6,827 4,211
Accounts receivable, net ..................................................... (6,403) (15,741)
Proceeds from the sale of accounts receivable ................................ 4,448 4,967
Inventories .................................................................. (17,233) 23,792
Floor plan notes payable ..................................................... 4,865 (13,109)
Accounts payable and accrued liabilities ..................................... 3,355 2,728
Other ........................................................................ (2,129) (3,144)
--------- --------
Net cash provided by operating activities .............................. 16,400 20,695
--------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures ............................................................ (8,593) (10,326)
Proceeds from the sale of assets ................................................ -- 484
Proceeds from sale of discontinued operations ................................... 3,377 --
Acquisitions (net of cash acquired) ............................................. -- (2,224)
Equity investments .............................................................. -- (1,200)
Proceeds from restricted marketable securities .................................. 913 568
Net receipt (issuance) of finance contracts ..................................... (850) (571)
Other investing activities ...................................................... (1,901) --
--------- --------
Net cash used in investing activities .................................. (7,054) (13,269)
--------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Distributions to members ........................................................ (4,202) (1,803)
Contributions ................................................................... 800 --
Repayments of debt .............................................................. (58,211) (326,318)
Proceeds from borrowings ........................................................ 2,509 335,650
Proceeds from initial public offering, net ...................................... 67,364 --
Payment of debt issuance costs .................................................. -- (12,191)
--------- --------
Net cash provided by (used in) financing activities .................... 8,260 (4,662)
--------- --------
Net increase in cash and cash equivalents .............................. 17,606 2,764
CASH AND CASH EQUIVALENTS, beginning of period ...................................... 60,506 47,241
--------- --------
CASH AND CASH EQUIVALENTS, end of period ............................................ $ 78,112 $ 50,005
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for-
Interest (net of amounts capitalized) $12,880 $20,371
========= =========
Income taxes $67 $1,903
========= =========
See Notes to Consolidated Financial Statements.
3
ASBURY AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data)
(unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation:
The consolidated balance sheet at March 31, 2002, the consolidated statements of
income for the three-month periods ended March 31, 2002 and 2001, and the
consolidated statements of cash flows for the three-month periods ended March
31, 2002 and 2001, are unaudited. In the opinion of management, all adjustments
necessary to present fairly the financial position, results of operations and
cash flows for the interim periods were made. Certain items in the March 31,
2001 financial statements were reclassified to conform to the classification of
the March 31, 2002 financial statements. Due to seasonality and other factors,
the results of operations for interim periods are not necessarily indicative of
the results that will be realized for the entire year.
Certain information and footnote disclosures, normally included in financial
statements prepared in accordance with generally accepted accounting principles,
were omitted. Accordingly, these consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes thereto
for the year ended December 31, 2001 which are included in the Company's Form
S-1 filing for its initial public offering.
All significant intercompany balances and transactions have been eliminated in
consolidation.
Recent Accounting Pronouncements
- --------------------------------
On June 30, 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142. SFAS No. 142
eliminates goodwill amortization over its estimated useful life. However,
goodwill will be subject to at least an annual assessment for impairment by
applying a fair-value based test. Additionally, acquired intangible assets
should be separately recognized if the benefit of the intangible asset is
obtained through contractual or other legal rights, or if the intangible asset
can be sold, transferred, licensed, rented or exchanged, regardless of the
acquirer's intent to do so. Intangible assets with definitive lives will need to
be amortized over their useful lives. The statement requires that by June 30,
2002, a company must establish its fair value benchmarks in order to test for
impairment. The Company adopted this statement effective January 1, 2002, but is
still in the process of evaluating its benchmark assessments. The Company does
not anticipate that the ultimate adoption of all the provisions of SFAS No. 142
will result in an impairment of goodwill, based on the fair value based test;
however, changes in the facts and circumstances relating to the Company's
goodwill and other intangible assets could result in an impairment of intangible
assets in the future.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS No. 144 supercedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed of" and the accounting and reporting provisions of Accounting
Principles Board Opinion (APB) No. 30, "Reporting the Results of Operations -
Reporting the Effects of the Disposal of a Segment Business and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions." SFAS No. 144
establishes a single accounting model for assets to be disposed of by sale
whether previously held and used or newly acquired. SFAS No. 144 retains the
provisions of APB No. 30 for presentation of discontinued operations in the
income statement, but broadens the presentation to include a component of an
entity. The Company adopted this statement effective January 1, 2002. The
adoption of this statement resulted in income of $87 and a loss of $229 being
reclassified to discontinued operations of the accompanying statements of income
for the three months ended March 31, 2002 and 2001, respectively.
2. INITIAL PUBLIC OFFERING:
On March 14, 2002, the Company completed an initial public offering ("IPO") of
4,500,000 shares of its common shares at a price of $16.50 per share. The IPO
proceeds received, net of underwriting discount and expenses, were $62.8
4
million. Pursuant to the terms of the Company's $550 million Committed Credit
Facility, 80% of the net IPO proceeds were used to repay debt under this
facility. The remaining net proceeds will be used for working capital, future
platform or dealership acquisitions and general corporate purposes.
Upon the closing of the IPO on March 19, 2002, Asbury Automotive Group L.L.C.
became a wholly-owned subsidiary of Asbury Automotive Group, Inc. Membership
interests in the limited liability company were exchanged for 29,500,000 shares
of common stock in the new corporation on the basis of 295,000 shares of common
stock for each 1% membership interest.
3. INVENTORIES:
Inventories consisted of the following:
March 31, 2002 December 31, 2001
-------------- -----------------
New vehicles $380,947 $381,761
Used vehicles 90,640 74,135
Parts, accessories and other 39,212 40,158
-------- --------
$510,799 $496,054
======= ========
Effective March 19, 2002, the Company changed its method of valuing certain
inventories which were on the last-in, first-out ("LIFO") cost method to the
specific identification and the first-in, first-out ("FIFO") cost method. The
Company believes that the specific identification and FIFO methods of inventory
valuation provide a more meaningful presentation of its financial position since
these methods reflect a better matching of revenue and expense and most clearly
reflects periodic income.
The effect of the change in accounting principle was to decrease net income for
the year ended December 31, 2001 by $908. The change has been applied to prior
years through restating the financial statements presented for 2001. The effect
of the change was to increase members' equity as of December 31, 2001, by
$4,356.
4. EARNINGS PER SHARE:
Basic earnings per share is computed by dividing net income by the
weighted-average common shares outstanding during the period. Diluted earnings
per share is computed by dividing net income by the weighted-average common
shares and common share equivalents outstanding during the period.
The difference between the basic and diluted weighted average shares outstanding
is 34 thousand shares issuable with respect to stock options.
5. INCOME TAXES:
Effective March 19, 2002, the Company converted to a corporation and is now
subject to federal, state and local income taxes. In connection with the IPO and
in accordance with SFAS No. 109 "Accounting for Income Taxes," the Company
recorded a one-time, non-recurring charge of $11,553 for deferred taxes upon the
exchange of the limited liability company interest in Asbury Automotive Group
L.L.C. for the Company's stock. This charge relates to a net deferred tax
liability associated with the difference between the financial statement and tax
basis of the assets and liabilities of the Company at the conversion date. Prior
to the conversion to a corporation, Asbury Automotive Group L.L.C. was comprised
primarily of limited liability companies and partnerships (with Asbury
Automotive Group L.L.C. as the parent), which were treated as one partnership
for tax purposes. In addition, Asbury Automotive Group L.L.C. had nine
subsidiaries that were already corporations and followed the provisions of SFAS
No. 109. For the period from January 1, 2002 through March 31, 2002 the Company
recorded a tax provision of $2,194 relating to income from operations of the
Company's pre-existing corporations (noted above) for the three months ended
March 31, 2002 and income from operations of the remainder of the Company's
subsidiaries for the period from March 19, 2002 through March 31, 2002.
5
The tax effects of these temporary differences representing deferred tax assets
(liabilities) result principally from the following:
Reserves and accruals not deductible until paid ........ $ 9,898
Goodwill amortization .................................. (13,496)
Depreciation ........................................... (12,449)
Other .................................................. (3,274)
-------
Net deferred tax liability ............................. ($19,321)
=======
The net deferred tax assets (liabilities) are comprised of the following:
Deferred tax assets:
Current ....................................... $ 14,327
Long term ..................................... 39
Deferred tax liabilities:
Current ....................................... (6,063)
Long term ..................................... (27,624)
-------
Net deferred tax liability ....................... ($19,321)
=======
The following reconciles the statutory corporate federal income tax rate for the
three months ended March 31, 2002:
Statutory federal income tax rate ........................ 35.0%
State income tax, net of federal tax effect .............. 4.0
Other, net ............................................... 0.8
-----
Pro forma effective tax rate ............................. 39.8%
=====
6. INTANGIBLE ASSETS AND GOODWILL:
Intangible assets consist of the following (included in other assets on the
accompanying consolidated balance sheets):
As of March 31, 2002
Accumulated
Cost Amortization
-------- ------------
Amortized intangible assets-
Noncompete agreements .......................... $ 5,331 ($ 2,778)
Licensing agreements ........................... 1,500 (188)
Lease agreements (amortization is included
in rent expense) 6,605 (3,489)
------- -------
$13,436 ($ 6,455)
======= =======
Unamortized intangible assets-
Franchise rights ............................... $ 5,000
=======
Amortization expense-
For the three months ended March 31, 2002 ...... $ 598
=======
Estimated amortization expense-
For the years ended December 31:
2003 $ 1,815
2004 849
2005 462
2006 443
2007 409
6
The changes in the carrying amounts of goodwill for the period ended March 31,
2002 are as follows:
Balance as of December 31, 2001 ................... $ 392,856
Additions ...................................... 1,382
Goodwill associated with discontinued operations (1,951)
---------
Balance as of March 31, 2002 ...................... $ 392,287
=========
Goodwill amortization expense for the three months ended March 31, 2001 was
$2,528.
7. STOCKHOLDERS' EQUITY:
Accumulated
Additional Other
Common Paid-in Contributed Retained Comprehensive
Stock Capital Capital Earnings Income Total
------ ---------- ----------- -------- ------------- ---------
Balance, December 31, 2001 $ - $ - $ 302,035 $44,216 $1,656 $347,907
Contributions - - 800 - - 800
Distributions - - (11,655) - - (11,655)
Net income - - - 5,162 - 5,162
Change in fair value of interest rate
swaps, net of $1,230 tax effect - - - - 257 257
Stock and stock option compensation - 549 - - - 549
Proceeds from initial public offering,
net 45 62,748 - - - 62,793
Reclassification of members'
equity due to the exchange of
membership interests for shares
of common stock 295 350,541 (291,180) (59,656) - -
----- -------- --------- -------- ------ --------
Balance, March 31, 2002 $ 340 $413,838 $ - ($10,278) $1,913 $405,813
===== ======== ========= ======== ====== ========
8. FINANCIAL INSTRUMENTS:
During the first quarter of 2002, the Company terminated its three interest rate
swap agreements with a financial institution having a combined notional
principal of $300 million and immediately entered into three new interest rate
swap agreements for the same combined notional principal amount, with the same
maturity date, November 2003. The original swap agreements had an aggregate fair
market value of $1,727 at the date of termination. Such amount will be amortized
into income using the effective interest method through November 2003, the
maturity date of the original agreements. The swaps require the Company to pay
fixed rates with a weighted average of approximately 2.99% and receive in return
amounts calculated at one-month LIBOR. The swap agreements have been designated
and qualify as cash flow hedges of the Company's forecasted variable interest
rate payments. At March 31, 2002, the aggregate fair value of the unamortized
portion of the terminated swaps and the swaps currently in place was $3,143. For
the quarter, the ineffectiveness reflected in earnings, prior to the termination
of the original swaps, was not material. The new swap agreements do not contain
any ineffectiveness.
7
9. COMPREHENSIVE INCOME:
Three Months Ended
March 31,
------------------
2002 2001
------ ------
Net income ..................................... $5,162 $6,676
Other comprehensive income, net of tax:
Change in fair value of interest rate swaps,
net of $1,230 tax effect ................ 257 --
------ ------
Comprehensive income ........................... $5,419 $6,676
====== ======
10. DISCONTINUED OPERATIONS:
During the first quarter of 2002, the Company divested two dealerships, one each
in Oregon and North Carolina. The results of operations are accounted for as
discontinued operations in the consolidated statements of income. A summary of
balance sheet and statement of income information relating to the discontinued
operations is as follows:
Balance Sheet:
December 31,
2001
------------
Assets:
Cash and cash equivalents ........................... $ 3,545
Inventory ........................................... 5,363
Fixed assets, net ................................... 1,094
Other ............................................... 1,465
-------
Total assets .................................. 11,467
-------
Liabilities:
Floor plan notes payable ............................ 6,900
Accounts payable and accrued liabilities ............ 4,873
Other ............................................... 149
-------
Total liabilities ............................. 11,922
-------
Net assets of discontinued operations ................. ($ 455)
=======
Statement of Income:
For the Three Months
Ended March 31,
--------------------
2002 2001
--------- ---------
Revenues ......................................... $ 3,127 $ 15,138
Cost of sales .................................... 2,935 13,077
-------- --------
Gross profit ..................................... 192 2,061
Operating expenses ............................... 644 2,077
-------- --------
Loss from operations ............................. (452) (16)
Other, net ....................................... (20) (213)
-------- --------
Net loss ......................................... (472) (229)
Net gain on disposition of discontinued operations 559 --
-------- --------
Discontinued operations .......................... $ 87 ($ 229)
======== ========
As of March 31, 2002, $3,893 of real estate assets related to the North Carolina
dealership divestiture were still held by the Company. The Company anticipates
that these assets will be sold in the second quarter of 2002.
8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
This management's discussion and analysis of financial condition and results of
operations contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from those
discussed in the forward-looking statements as a result of various factors, as
described under "Risk Factors" as detailed on pages 6 through 15 in the
Company's Form S-1 declared effective on March 13, 2002.
Results of Operations
Three Months Ended March 31, 2002, Compared to Three Months Ended March 31, 2001
Pro forma net income for the three months ended March 31, 2002 was $11.3 million
before discontinued operations or $0.33 per share basic and diluted. These pro
forma results (i) exclude a non-recurring charge of $11.6 million related to the
establishment of a net deferred tax liability associated with the Company's
conversion to a corporation, (ii) include a pro forma tax charge of $5.3 million
as if the Company was a corporation for the entire quarter and (iii) assume that
all shares issued in the Company's IPO were outstanding for the entire quarter.
Actual net income was $5.2 million, or $0.17 per share basic and diluted.
Income before income taxes, minority interest, extraordinary loss and
discontinued operations of $18.8 million during the three months ended March 31,
2002 was up 55% over the same period last year, after adjusting for the
elimination of goodwill amortization. Pro forma net income and per share amounts
have not been provided for the prior year quarter as the Company believes that
due to changes in its tax status, such comparisons with the current year quarter
would not be meaningful.
Revenues-
Revenues of $1.068 billion for the three months ended March 31, 2002,
represented a $76.9 million or 8% increase over the three months ended March 31,
2001. Same store retail revenues (excluding fleet and wholesale) were up $15.4
million or 2%.
New vehicle retail revenues were up $59.0 million or 11%, and 4% on a same store
basis. New vehicle retail units were up 5% during the quarter and down 1% on a
same store basis, while average selling prices were up 6% over the same quarter
last year, principally due to the shift in mix to luxury brands and from cars to
light trucks and sport utility vehicles ("SUV's").
Used vehicle retail revenues were up $7.5 million or 4%, but down 5% on a same
store basis. Used vehicle retail units were up 1% during the quarter and down 6%
on a same store basis as manufacturer incentives contributed to stronger than
expected trends in new vehicles at the expense of used vehicles. Average selling
prices were up 2% over the same quarter last year.
Parts, service and collision repair revenues were up $9.0 million or 8% in the
current quarter versus the same quarter last year and up 1% on a same store
basis. Increases in service and parts business were partially offset by lower
collision repair revenues due to milder weather conditions throughout the United
States in the current quarter versus the prior year quarter.
Finance and insurance (F&I) revenues during the three months ended March 31,
2002 increased $3.3 million or 14% over the same period last year. On a same
store basis, F&I revenues were up 10% over the prior period, while F&I per
vehicle retailed (PVR) was $709 during the first quarter of 2002, an 11%
improvement over the first quarter of 2001. These results principally reflect
new programs (including preferred lender programs) initiated over the past year.
Gross Profit-
Gross profit for the quarter ended March 31, 2002, increased $17.3 million or
11% over the quarter ended March 31, 2001. Same store retail gross profit (the
Company's preferred productivity measurement) was up 4%.
Gross profit as a percentage of revenues for the current quarter was 16.1% as
compared to 15.6% for the same quarter last year as the Company experienced
margin improvements across all product lines. New vehicle and used vehicle
9
retail margins increased to 8.4% and 12.2%, respectively, principally due to the
change in mix from cars to light trucks and SUV's mentioned above. Parts,
service and collision repair margins increased to 52.5% due to a slight shift
towards higher margin service business.
Operating Expenses-
Selling, general and administrative ("SG&A") expenses for the quarter ended
March 31, 2002, increased $15.8 million or 13% over the quarter ended March 31,
2001. SG&A expenses as a percentage of revenues increased to 12.4% in the first
quarter of 2002 from 11.8% in the first quarter of 2001. Contributing to this
increase was increased variable compensation related to higher gross profit
margins, increased insurance costs of $1.2 million and one-time IPO-related
compensation of $0.5 million. Depreciation and amortization decreased $1.2
million to $5.8 million as goodwill amortization of $2.5 million in the three
months ended March 31, 2001 did not recur in the current quarter due to
elimination of such amortization pursuant to SFAS 142. This was offset by
increased depreciation principally due to capital expenditures made in 2001. In
addition, start-up expenses related to the Price 1 Auto Store used car pilot
program of $1.1 million were included in SG&A expenses for the quarter ended
March 31, 2002. The Price 1 Auto Store used car pilot program is a six-month,
five-store pilot in Houston, Texas to sell used vehicles on Wal-Mart parking
lots. Both the Company and Wal-Mart intend to evaluate the program at the end of
the pilot.
Other Income (Expense)-
Floor plan interest expense decreased to $4.4 million for the quarter ended
March 31, 2002 from $8.9 million for the quarter ended March 31, 2001. This
decline was primarily due to lower interest rates in 2002 versus 2001 and lower
inventory levels in the current quarter. Other interest expense decreased by
$2.7 million from the prior year principally due to lower interest rates,
partially offset by increased borrowings used to fund acquisitions completed
after January 1, 2001. Net losses from unconsolidated affiliates for the quarter
ended March 31, 2002, and March 31, 2001, were related to the Company's share of
losses in an automotive finance company. Other income (expense) in the first
quarter of 2002 reflected certain non-operating expenses associated with the IPO
of $0.6 million, while the first quarter of 2001 included a gain on an interest
rate swap transaction of $0.4 million.
Income Tax Provision-
During the quarter ended March 31, 2002, the Company recorded, in accordance
with SFAS No. 109, a one-time non-recurring charge of $11.6 million related to
the establishment of a net deferred tax liability, in connection with the
Company's conversion from a limited liability company to a corporation. This
liability represented the difference between the financial statement and tax
basis of the assets and liabilities of the Company at the conversion date. The
Company's pro forma tax rate for the quarter of approximately 40%, is based on
the estimated effective tax rate for the year. During the three months ended
March 31, 2001, income tax was provided in accordance with SFAS 109 on only the
"C" corporations owned directly or indirectly by Asbury Automotive Group L.L.C.
during that period.
Extraordinary Loss on Early Extinguishment of Debt-
In connection with the repayment of certain term notes with borrowings under the
Committed Credit Facility (as defined below), the Company incurred prepayment
penalties and wrote off the unamortized portion of deferred financing fees,
aggregating $1.4 million in the first quarter of 2001.
Discontinued Operations-
The Company divested of two dealerships during the first quarter of 2002, and in
accordance with SFAS 144 these dealerships have been treated as discontinued
operations in both periods presented. In the quarter ended March 31, 2002, the
Company recognized a $0.6 million net gain on the disposal of the dealerships
and incurred $0.5 million of losses from operations. The loss from discontinued
operations in the quarter ended March 31, 2001 related to the operations of
those dealerships.
Liquidity and Capital Resources
The Company requires cash to fund working capital needs, finance acquisitions of
new dealerships and fund capital expenditures. These requirements are met
principally from cash flow from operations, borrowings under the Committed
Credit Facility and the Floor Plan Lines (as defined below), and mortgage notes.
As of March 31, 2002, we had cash and cash equivalents of $78.1 million.
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Credit Facilities
The Company has a three-year committed financing agreement (the "Committed
Credit Facility") with total availability of $550 million. The Company recently
extended the maturity of the Committed Credit Facility to January 2005. The
Committed Credit Facility is primarily used to finance acquisitions. Borrowings
under the Committed Credit Facility bear interest at variable rates based on
LIBOR plus a specified percentage depending on the attainment of certain
leverage ratios and the outstanding balance. As of March 31, 2002, approximately
$217.9 million remained available to the Company for additional borrowings under
the Committed Credit Facility.
Floor Plan Financing
The Company has uncommitted floor plan financing lines of credit for new and
used vehicles (the "Floor Plan Lines"). The Floor Plan Lines do not have
specified maturities and bear interest at variable rates based on LIBOR or the
prime rate with total availability of $750 million. As of March 31, 2002, the
Company had $451.0 million outstanding under its floor plan financing
agreements.
Cash Flow
Cash flow from operations totaled $16.4 million for the three months ended March
31, 2002, as net income plus non-cash items of $22.7 million, a $4.9 million net
decrease in accounts receivable and contracts-in-transit and an increase in
floor plan notes payable of $4.9 million offset by an increase in inventories of
$17.2 million. Net cash flow used in investing activities was $7.1 million,
principally related to capital expenditures offset by proceeds from the
dispositions of certain franchises. Net cash flow from financing activities was
$8.3 million, as net proceeds from the IPO, was partially offset a net reduction
in borrowings.
Cash flow from operations totaled $20.7 million for the three months ended March
31, 2001, as net income plus non-cash items of $17.0 million and a decrease in
inventories of $23.8 million offset an increase in floor plan notes payable of
$13.1 million and a net increase in accounts receivable and contracts-in-transit
of $6.6 million. Net cash flow used in investing activities was $13.3 million,
principally related to capital expenditures of $10.3, acquisitions of $2.2
million and an investment of $1.2 million in an unconsolidated affiliate. Net
cash flow used in financing activities was $4.7 million due to a net reduction
in borrowings and payment of member distributions.
Capital Expenditures
Capital spending for the three months ended March 31, 2002 and 2001 was $8.6
million and $10.3 million, respectively. Capital spending other than from
acquisitions during the year ended December 31, 2002, will be primarily related
to operational improvements and manufacturer-required spending to upgrade
existing dealership facilities
Recent Accounting Pronouncements
On June 30, 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
142. SFAS No. 142 eliminates goodwill amortization over its estimated useful
life. However, goodwill will be subject to at least an annual assessment for
impairment by applying a fair-value based test. Additionally, acquired
intangible assets should be separately recognized if the benefit of the
intangible asset is obtained through contractual or other legal rights, or if
the intangible asset can be sold, transferred, licensed, rented or exchanged,
regardless of the acquirer's intent to do so. Intangible assets with definitive
lives will need to be amortized over their useful lives. The statement requires
that by June 30, 2002, a company must establish its fair value benchmarks in
order to test for impairment. The Company adopted this statement effective
January 1, 2002, but is still in the process of evaluating its benchmark
assessments. The adoption of this statement resulted in elimination of
approximately $9.8 million of goodwill amortization annually, subsequent to
December 31, 2001. The Company does not anticipate that the ultimate adoption of
SFAS No. 142 will result in an impairment of goodwill, based on the fair value
based test; however, changes in the facts and circumstances relating to the
Company's goodwill and other intangible assets could result in an impairment of
intangible assets in the future.
In August 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). This statement
supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," and the accounting and
reporting provisions of APB Opinion No. 30, "Reporting the Results of
Operations-- Reporting the Effects of Disposal of a Segment of a Business, and
11
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," and
establishes accounting standards for the impairment and disposal of long-lived
assets and criteria for determining when a long-lived asset is held for sale.
SFAS 144 removes the requirement to allocate goodwill to long-lived assets to be
tested for impairment, requires that the depreciable life of a long-lived asset
to be abandoned be revised in accordance with APB Opinion No. 20, "Accounting
Changes," provides that one accounting model be used for long-lived assets to be
disposed of by sale, whether previously held and used or newly acquired and
broadens the presentation of discontinued operations to include more disposal
transactions. The Company adopted the provisions of SFAS 144 effective January
1, 2002.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
The Company is exposed to market risk from changes in interest rates on a
significant portion of its outstanding indebtedness. Given amounts outstanding
at March 31, 2002, a 1% change in the LIBOR rate would result in a change of
approximately $1.7 million to our annual non-floor plan interest expense after
giving effect to the interest rate swaps discussed below. Based on floor plan
amounts outstanding at March 31, 2002, a 1% change in the LIBOR rate would
result in a $4.5 million change to annual floor plan interest expense.
Interest Rate Swaps
During the first quarter of 2002, the Company terminated three swap agreements,
having a combined total notional principal amount of $300 million, all maturing
in November 2003 and entered into three new swap agreements with the same
notional value and maturity date. The original swap agreements had an aggregate
fair value of $1.7 million at the date of termination. Such amount will be
amortized into income using the effective interest method through November 2003.
The aggregate fair value of the swap arrangements, including the unamortized
portion of the terminated swaps, was $3.1 million at March 31, 2002. To the
extent the swap arrangements are not "perfectly effective" (for example, because
scheduled rate resets are not simultaneous), the ineffectiveness is reported in
"other income" in the income statement. For the quarter ended March 31, 2002,
the ineffectiveness was immaterial. The new swap agreements do not contain any
ineffectiveness.
. . .
Forward Looking Information
This report contains "forward-looking statements" as that term is defined in the
Private Securities Litigation Reform Act of 1995. The forward-looking statements
include statements relating to goals, plans and projections regarding the
Company's financial position, results of operations, market position, product
development and business strategy. These statements are based on management's
current expectations and involve significant risks and uncertainties that may
cause results to differ materially from those set forth in the statements. These
risks and uncertainties include, among other things, market factors, the
Company's relationships with vehicle manufacturers and other suppliers, risks
associated with the Company's substantial indebtedness, risks related to pending
and potential future acquisitions, general economic conditions both nationally
and locally and governmental regulations and legislation. There can be no
guarantees the Company's plans for future operations will be successfully
implemented or that they will prove to be commercially successful. These and
other risk factors are discussed in the Company's registration statement on Form
S-1 declared effective on March 13, 2002. We undertake no obligation to publicly
update any forward-looking statement, whether as a result of new information,
future events or otherwise.
12
PART II - OTHER INFORMAITON
Item 2. Application of Proceeds from Initial Public Offering
Of the $62.8 million of net proceeds received by the Company from its initial
public offering, the Company applied $50.4 million to repay borrowings under its
Committed Credit Facility and retained $12.4 million for working capital, future
acquisitions and general corporate purposes.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
18 - Letter regarding a change in accounting principles.
b. Reports on Form 8-K
Report furnished April 10, 2002, under Item 9, related to issuance of press
release with respect to earnings per share guidance for fiscal 2002.
Report filed April 23, 2002, under Item 5, related to the issuance of a
press release with respect to the appointment of new directors.
Report furnished April 25, 2002, under Item 9, related to issuance of press
release announcing earnings for the first quarter ending March 31, 2002.
<
13
>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Asbury Automotive Group, Inc.
-------------------------------------------------------
(Registrant)
Date: May 7, 2002 /s/ Thomas F. Gilman
------------------------------------------------------
Thomas F. Gilman
Senior Vice President and Chief Financial Officer
14
Index to Exhibits
Exhibit
Number Description
- ------ -----------
18 Letter regarding a change in accounting principle
Exhibit 18
Asbury Automotive Group
3 Landmark Square
Suite 500
Stamford, CT 06901
Re: Form 10-Q Report for the quarter ended March 31, 2002.
Gentlemen/Ladies:
This letter is written to meet the requirements of Regulation S-K calling for a
letter from a registrant's independent accountants whenever there has been a
change in accounting principle or practice.
We have been informed that, as of March 19, 2002, the Company changed its method
of valuation of certain of its inventories from the "last in, first out" or LIFO
method to the specific identification and "first in, first out" or FIFO method.
According to the management of the Company, this change was made in connection
with the Company's initial public equity offering to better match revenue and
expense and most clearly reflect periodic income. Additionally the specific
identification and FIFO methods are most widely used by the Company's major
publicly held competitors.
A complete coordinated set of financial and reporting standards for determining
the preferability of accounting principles among acceptable alternative
principles has not been established by the accounting profession. Thus, we
cannot make an objective determination of whether the change in accounting
described in the preceding paragraph is to a preferable method. However, we have
reviewed the pertinent factors, including those related to financial reporting,
in this particular case on a subjective basis, and our opinion stated below is
based on our determination made in this manner.
We are of the opinion that the Company's change in method of accounting is to an
acceptable alternative method of accounting, which, based upon the reasons
stated for the change and our discussions with you, is also preferable under the
circumstances in this particular case. In arriving at this opinion, we have
relied on the business judgment and business planning of your management.
We have not audited the application of this change to the financial statements
of any period. Further, we have not examined and do not express any opinion with
respect to your financial statements for the three months ended March 31, 2002.
Very truly yours,
/s/ Arthur Andersen LLP