XNYS:GPI Group 1 Automotive Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

XNYS:GPI Fair Value Estimate
Premium
XNYS:GPI Consider Buying
Premium
XNYS:GPI Consider Selling
Premium
XNYS:GPI Fair Value Uncertainty
Premium
XNYS:GPI Economic Moat
Premium
XNYS:GPI Stewardship
Premium
 
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

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

For the quarterly period ended June 30, 2012

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

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨

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   þ    Accelerated filer   ¨
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 July 23, 2012, the registrant had 22,770,190 shares of common stock, par value $0.01, outstanding.

 

 

 


Table of Contents

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION   
Item 1.    Financial Statements      1   
   Cautionary Statement about Forward-Looking Statements      26   
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      28   
Item 3.    Quantitative and Qualitative Disclosures about Market Risk      50   
Item 4.    Controls and Procedures      52   
PART II. OTHER INFORMATION   
Item 1.    Legal Proceedings      53   
Item 1A.    Risk Factors      53   
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds      53   
Item 6.    Exhibits      53   

SIGNATURE

     54   

 

i


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

     June 30,
2012
    December 31,
2011
 
     (Unaudited)        
       (In thousands, except per share amounts)    
ASSETS   

CURRENT ASSETS:

    

Cash and cash equivalents

   $ 9,544      $ 14,895   

Contracts-in-transit and vehicle receivables, net

     150,978        167,507   

Accounts and notes receivable, net

     114,361        92,775   

Inventories, net

     1,071,927        867,470   

Deferred income taxes

     18,147        16,012   

Prepaid expenses and other current assets

     20,154        16,925   
  

 

 

   

 

 

 

Total current assets

     1,385,111        1,175,584   
  

 

 

   

 

 

 

PROPERTY AND EQUIPMENT, net

     638,971        585,633   

GOODWILL

     563,181        531,458   

INTANGIBLE FRANCHISE RIGHTS

     195,535        170,687   

OTHER ASSETS

     12,459        12,981   
  

 

 

   

 

 

 

Total assets

   $ 2,795,257      $ 2,476,343   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY   

CURRENT LIABILITIES:

    

Floorplan notes payable—credit facility

   $ 886,237      $ 718,945   

Offset account related to floorplan notes payable—credit facility

     (101,760     (109,207

Floorplan notes payable—manufacturer affiliates

     174,783        155,980   

Current maturities of long-term debt and short-term financing

     25,184        14,663   

Current liabilities from interest rate risk management activities

     2,119        7,273   

Accounts payable

     166,127        148,048   

Accrued expenses

     117,625        109,245   
  

 

 

   

 

 

 

Total current liabilities

     1,270,315        1,044,947   
  

 

 

   

 

 

 

LONG-TERM DEBT, net of current maturities

     516,970        482,601   

DEFERRED INCOME TAXES

     83,295        78,459   

LIABILITIES FROM INTEREST RATE RISK MANAGEMENT ACTIVITIES

     38,201        26,766   

OTHER LIABILITIES

     40,702        36,470   

COMMITMENTS AND CONTINGENCIES (NOTE 11)

    

STOCKHOLDERS’ EQUITY:

    

Preferred stock, $0.01 par value, 1,000 shares authorized; none issued or outstanding

     —          —     

Common stock, $0.01 par value, 50,000 shares authorized; 26,126 and 25,967 issued, respectively

     261        260   

Additional paid-in capital

     368,069        363,375   

Retained earnings

     636,182        591,037   

Accumulated other comprehensive loss

     (33,160     (29,236

Treasury stock, at cost; 3,382 and 3,260 shares, respectively

     (125,578     (118,336
  

 

 

   

 

 

 

Total stockholders’ equity

     845,774        807,100   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,795,257      $ 2,476,343   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

1


Table of Contents

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
             2012                     2011                     2012                     2011          
     (Unaudited, in thousands, except per share amounts)  

REVENUES:

        

New vehicle retail sales

   $ 1,080,710      $ 809,881      $ 1,993,305      $ 1,594,595   

Used vehicle retail sales

     456,234        353,047        871,208        676,494   

Used vehicle wholesale sales

     73,134        60,607        139,991        122,558   

Parts and service sales

     220,313        204,091        433,414        399,041   

Finance, insurance and other, net

     65,435        46,519        122,653        90,759   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     1,895,826        1,474,145        3,560,571        2,883,447   

COST OF SALES:

        

New vehicle retail sales

     1,016,868        755,617        1,876,643        1,497,559   

Used vehicle retail sales

     417,388        318,499        795,965        613,046   

Used vehicle wholesale sales

     72,811        58,940        136,964        118,397   

Parts and service sales

     103,415        96,878        205,231        188,459   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of sales

     1,610,482        1,229,934        3,014,803        2,417,461   
  

 

 

   

 

 

   

 

 

   

 

 

 

GROSS PROFIT

     285,344        244,211        545,768        465,986   

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

     214,327        183,051        413,439        358,935   

DEPRECIATION AND AMORTIZATION EXPENSE

     7,742        6,581        14,978        13,036   

ASSET IMPAIRMENTS

     187        142        288        364   
  

 

 

   

 

 

   

 

 

   

 

 

 

INCOME FROM OPERATIONS

     63,088        54,437        117,063        93,651   

OTHER EXPENSE:

        

Floorplan interest expense

     (7,863     (6,521     (15,482     (13,281

Other interest expense, net

     (9,190     (8,225     (18,230     (16,167
  

 

 

   

 

 

   

 

 

   

 

 

 

INCOME BEFORE INCOME TAXES

     46,035        39,691        83,351        64,203   

PROVISION FOR INCOME TAXES

     (17,410     (15,008     (31,609     (24,158
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME

   $ 28,625      $ 24,683      $ 51,742      $ 40,045   
  

 

 

   

 

 

   

 

 

   

 

 

 

BASIC EARNINGS PER SHARE

   $ 1.25      $ 1.03      $ 2.26      $ 1.67   

Weighted average common shares outstanding

     21,650        22,533        21,640        22,558   

DILUTED EARNINGS PER SHARE

   $ 1.20      $ 1.03      $ 2.18      $ 1.66   

Weighted average common shares outstanding

     22,513        22,651        22,522        22,693   

CASH DIVIDENDS PER COMMON SHARE

   $ 0.15      $ 0.11      $ 0.29      $ 0.22   

The accompanying notes are an integral part of these consolidated financial statements.

 

2


Table of Contents

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
             2012                     2011                     2012                     2011          
     (Unaudited, in thousands)  

NET INCOME

   $ 28,625      $ 24,683      $ 51,742      $ 40,045   

Other comprehensive income (loss):

        

Foreign currency translation adjustment

     (1,400     (43     (6     1,297   

Unrealized gain (loss) on marketable securities, net of tax benefit (provision) of ($3), $2, $(5) and $7, respectively

     5        (4     8        (11

Net unrealized gain (loss) on interest rate swaps:

        

Unrealized loss arising during the period, net of tax benefit of $4,273, $2,194, $4,566 and $2,407, respectively

     (7,122     (3,656     (7,610     (4,012

Reclassification adjustment for loss included in interest expense, net of tax provision of $1,076, $1,299, $2,210 and $2,595, respectively

     1,793        2,166        3,684        4,326   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized gain (loss) on interest rate swaps, net of tax

     (5,329     (1,490     (3,926     314   
  

 

 

   

 

 

   

 

 

   

 

 

 

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAXES

     (6,724     (1,537     (3,924     1,600   
  

 

 

   

 

 

   

 

 

   

 

 

 

COMPREHENSIVE INCOME

   $ 21,901      $ 23,146      $ 47,818      $ 41,645   
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3


Table of Contents

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 

   

 

Common Stock

    Additional
Paid-in
Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive
Loss
    Treasury
Stock
    Total  
    Shares     Amount            
    (Unaudited, in thousands)  

BALANCE, December 31, 2011

    25,967      $ 260      $ 363,375      $ 591,037      $ (29,236   $ (118,336   $ 807,100   

Net income

    —          —          —          51,742        —          —          51,742   

Other comprehensive loss, net

    —          —          —          —          (3,924     —          (3,924

Purchases of treasury stock

    —          —          —          —          —          (11,317     (11,317

Issuance of common and treasury shares to employee stock purchase plans

    (122     (1     (5,128     —          —          4,075        (1,054

Proceeds from sales of common stock under employee stock purchase plans

    56        —          3,105        —          —          —          3,105   

Issuance of restricted stock

    263        2        (2     —          —          —          —     

Forfeiture of restricted stock

    (38     —          —          —          —          —          —     

Stock-based compensation

    —          —          5,903        —          —          —          5,903   

Tax effect from the vesting of restricted shares

    —          —          816        —          —          —          816   

Cash dividends

    —          —          —          (6,597     —          —          (6,597
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE, June 30, 2012

    26,126      $ 261      $ 368,069      $ 636,182      $ (33,160   $ (125,578   $ 845,774   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4


Table of Contents

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Six Months Ended
June 30,
 
             2012                     2011          
     (Unaudited, in thousands)  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 51,742      $ 40,045   

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

    

Depreciation and amortization

     14,978        13,036   

Deferred income taxes

     6,075        14,110   

Asset impairments

     288        364   

Stock-based compensation

     5,915        5,558   

Amortization of debt discount and issue costs

     6,388        5,848   

Gain on real estate transactions

     (1,588     —     

Gain on disposition of assets

     —          (786

Tax effect from stock-based compensation

     (707     (471

Other

     764        369   

Changes in operating assets and liabilities, net of effects of acquisitions and dispositions:

    

Accounts payable and accrued expenses

     17,623        24,890   

Accounts and notes receivable

     (14,720     3,963   

Inventories

     (160,082     52,803   

Contracts-in-transit and vehicle receivables

     23,871        8,127   

Prepaid expenses and other assets

     6,215        1,022   

Floorplan notes payable—manufacturer affiliates

     (3,077     32,444   

Deferred revenues

     594        (948
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (45,721     200,374   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Cash paid in acquisitions, net of cash received

     (114,958     (109,934

Proceeds from disposition of franchises, property and equipment

     213        5,174   

Purchases of property and equipment, including real estate

     (38,434     (23,472

Other

     396        756   
  

 

 

   

 

 

 

Net cash used in investing activities

     (152,783     (127,476
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Borrowings on credit facility—Floorplan Line

     2,797,532        2,443,288   

Repayments on credit facility—Floorplan Line

     (2,622,793     (2,501,056

Borrowings on mortgage facility

     18,080        —     

Principal payments on mortgage facility

     (1,065     (532

Borrowings of other long-term debt

     36        79   

Principal payments of long-term debt related to real estate loans

     (4,703     (3,793

Borrowings of long-term debt related to real estate

     21,708        —     

Principal payments of other long-term debt

     (2,815     (1,652

Repurchases of common stock, amounts based on settlement date

     (8,496     (14,009

Proceeds from issuance of common stock to benefit plans

     2,051        1,899   

Tax effect from stock-based compensation

     707        471   

Dividends paid

     (6,609     (5,248
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     193,633        (80,553
  

 

 

   

 

 

 

EFFECT OF EXCHANGE RATE CHANGES ON CASH

     (480     97   
  

 

 

   

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

     (5,351     (7,558

CASH AND CASH EQUIVALENTS, beginning of period

     14,895        19,843   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, end of period

   $ 9,544      $ 12,285   
  

 

 

   

 

 

 

SUPPLEMENTAL CASH FLOW INFORMATION:

    

Purchases of property and equipment, including real estate, accrued in accounts payable and accrued expenses

   $ 3,844      $ 258   

The accompanying notes are an integral part of these consolidated financial statements.

 

5


Table of Contents

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 15 states in the United States of America (“U.S.”) and 11 towns in the United Kingdom (“U.K.”). Group 1 Automotive, Inc. and its subsidiaries are herein collectively referred to as the “Company.” The Company, through its regions, sells new and used cars and light trucks; arranges related vehicle financing; service and insurance contracts; provides automotive maintenance and repair services; and sells vehicle parts.

As of June 30, 2012, the Company’s U.S. retail network consisted of the following two regions (with the number of dealerships they comprised): (a) the East (47 dealerships in Alabama, Florida, Georgia, Louisiana, Maryland, Massachusetts, Mississippi, New Hampshire, New Jersey, New York and South Carolina), and (b) the West (64 dealerships in California, Kansas, Oklahoma, and Texas). Each region is managed by a regional vice president who reports directly to the Company’s Chief Executive Officer and is responsible for the overall performance of their regions, as well as for overseeing the market directors and dealership general managers that report to them. Each region is also managed by a regional chief financial officer who reports directly to the Company’s Chief Financial Officer. The Company’s 11 dealerships in the U.K. are also managed locally with direct reporting responsibilities to the Company’s corporate management team.

Basis of Presentation

The accompanying unaudited condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the U.S. for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the U.S. for complete financial statements. In the opinion of management, all adjustments of a normal and recurring nature considered necessary for a fair presentation have been included in the accompanying unaudited condensed Consolidated Financial Statements. Due to seasonality and other factors, the results of operations for the interim period are not necessarily indicative of the results that will be realized for the entire fiscal year. For further information, refer to the Consolidated Financial Statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 (“2011 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 respective 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.

Recent Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 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. The Company adopted ASU 2011-04 as of March 31, 2012 and it did not have a material impact on its consolidated financial position or results of operations.

In September 2011, the FASB issued ASU 2011-08, Testing Goodwill for Impairment. This update permits an entity to first assess qualitative factors to determine whether it is more likely than not (likelihood more than

 

6


Table of Contents

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

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. The Company adopted ASU 2011-08 as of March 31, 2012 and it did not have an impact on its consolidated financial position or results of operations.

In December 2011, the FASB issued ASU 2011-10, Disclosures about Offsetting Assets and Liabilities. This update requires additional disclosures related to offsetting either in accordance with U.S. generally accepted accounting principles (“GAAP”) or master netting arrangements. This ASU is effective for reporting periods beginning after January 1, 2013. The Company does not expect this update to have a material effect on its consolidated financial statements.

2. ACQUISITIONS AND DISPOSITIONS

During the first six months of 2012, the Company acquired one dealership in each of South Carolina, Texas and Kansas, three dealerships in Florida, and six dealerships in the U.K. Consideration paid for these dealerships totaled $115.0 million.

During the first six months of 2011, the Company acquired five dealerships in Texas. Consideration paid for these dealerships totaled $109.9 million. In addition, the Company sold for $4.1 million one nonoperational dealership that qualified as held-for-sale as of December 31, 2010, with no gain or loss recognized by the Company during the six months ended June 30, 2011.

3. DERIVATIVE INSTRUMENTS AND RISK MANAGEMENT ACTIVITIES

The periodic interest rates of the Revolving Credit Facility (as defined in Note 8, “Credit Facilities”), the Mortgage Facility (as defined in Note 9, “Long-Term Debt”) and certain variable-rate real estate related borrowings are indexed to the 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 Poor’s. 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.

 

7


Table of Contents

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

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 Company’s accompanying Consolidated Statements of Operations. All of the Company’s interest rate hedges are designated as cash flow hedges.

As of June 30, 2012, the Company held interest rate swaps in effect of $275.0 million in notional value that fixed its underlying one-month LIBOR at a weighted average rate of 4.4%. For the three and six months ended June 30, 2012, the impact of the Company’s interest rate hedges in effect increased floorplan interest expense by $2.6 million and $5.3 million, respectively; for the three and six months ended June 30, 2011, the impact of these interest rate hedges increased floorplan interest by $3.2 million and $6.5 million, respectively. Total floorplan interest expense was $7.9 million and $6.5 million for the three months ended June 30, 2012 and 2011, respectively, and $15.5 million and $13.3 million for the six months ended June 30, 2012 and 2011, respectively.

In addition to the $275.0 million of swaps in effect as of June 30, 2012, the Company has entered into 24 additional interest rate swaps with forward start dates between August 2012 and December 2016 and expiration dates between August 2015 and December 2019. The aggregate notional value of these forward-starting swaps is $875.0 million, with a maximum of $550.0 million in effect at any time, and the weighted average interest rate is 2.7%.

As of June 30, 2012 and December 31, 2011, the Company reflected liabilities from interest rate risk management activities of $40.3 million and $34.0 million, respectively, in its Consolidated Balance Sheets. Several of the Company’s interest rate swaps expire in 2012, as such, the fair value of these instruments are classified as current liabilities in the accompanying Consolidated Balance Sheets. Included in accumulated other comprehensive loss at June 30, 2012 and 2011 are unrealized losses, net of income taxes, totaling $25.2 million and $10.6 million, respectively, related to these hedges.

At June 30, 2012, all of the Company’s derivative contracts were determined to be effective. The Company had no gains or losses related to ineffectiveness or amounts excluded from effectiveness testing recognized in the Consolidated Statements of Operations for either the three months ended June 30, 2012 or 2011, respectively.

 

     Amount of Unrealized Gain (Loss), Net of Tax,
Recognized in OCI
 
     Six Months Ended June 30,  

Derivatives in Cash Flow Hedging Relationship

           2012                     2011          
     (In thousands)  

Interest rate swap contracts

   $ (3,926   $ 314   

 

     Amount of Loss Reclassified from OCI into
Statements of Operations
 
      Six Months Ended June 30,  

Location of Loss Reclassified from OCI into

Statements of Operations

           2012                     2011          
     (In thousands)  

Floorplan interest expense

   $ (5,344   $ (6,476

Other interest expense

   $ (550   $ (445

 

8


Table of Contents

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The amount expected to be reclassified out of other comprehensive income into earnings (through floorplan interest expense or other interest expense) in the next twelve months is $9.9 million.

4. 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 (“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: (a) 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 (b) stock appreciation rights, restricted stock, performance awards, and bonus stock, each granted at the market price of the Company’s common stock at the date of grant. The Incentive Plan expires on March 8, 2017. The terms of the awards (including vesting schedules) are established by the Compensation Committee of the Company’s Board of Directors. All outstanding option awards are exercisable over a period not to exceed ten years and vest over a period not to exceed five years. Certain of the Company’s option awards are subject to graded vesting over a service period for the entire award. As of June 30, 2012, there were 1,047,140 shares available for issuance under the Incentive Plan.

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 2006, the Company began granting to certain employees, at no cost to the recipient, performance awards pursuant to the Incentive Plan. Restricted stock awards and performance awards qualify as participating securities as each contain non-forfeitable rights to dividends. As such, the two-class method is required for the computation of earnings per share. See Note 5, “Earnings Per Share” for further details. 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 Company’s Board of Directors. During the first six months of June 30, 2012, there were no granted or outstanding performance awards. 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 Company’s common stock at the date of grant and recognized over the requisite service period. 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.

 

9


Table of Contents

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

A summary of these awards as of June 30, 2012, along with the changes during the six months then ended, is as follows:

 

     Awards     Weighted Average
Grant Date
Fair Value
 

Nonvested at December 31, 2011

     1,154,004      $ 28.30   

Granted

     262,824        54.60   

Vested

     (65,232     26.55   

Forfeited

     (90,822     31.73   
  

 

 

   

Nonvested at June 30, 2012

     1,260,774      $ 33.63   
  

 

 

   

Employee Stock Purchase Plan

In 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 June 30, 2012, there were 774,892 shares remaining in reserve for future issuance under the Purchase Plan. During the six months ended June 30, 2012 and 2011, the Company issued 56,149 and 49,177 shares, respectively, of common stock to employees participating in the Purchase Plan.

The weighted average fair value of employee stock purchase rights issued pursuant to the Purchase Plan was $11.68 and $9.59 during the six months ended June 30, 2012 and 2011, respectively. The fair value of stock purchase rights is calculated using the grant date 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 $3.0 million and $2.8 million for the three months ended June 30, 2012 and 2011, respectively, and $5.9 million and $5.6 million for the six months ended June 30, 2012 and 2011, respectively. Cash received from option exercises and Purchase Plan purchases was $3.1 million and $1.9 million for the six months ended June 30, 2012 and 2011, respectively. Additional paid-in capital increased by $0.8 million and $0.5 million for the six months ended June 30, 2012 and 2011, respectively, for the effect of tax deductions for options exercised and vesting of restricted shares that were more than the associated book expense previously recognized. Total income tax benefit recognized for stock-based compensation arrangements was $1.6 million and $1.5 million for the six months ended June 30, 2012 and 2011, respectively.

The Company issues new shares or treasury shares, if available, when options are exercised or restricted stock vests. With respect to shares issued under the Purchase Plan, the Company’s Board of Directors has authorized specific share repurchases to fund the shares issuable under the Purchase Plan.

5. EARNINGS PER SHARE

The two-class method is utilized for the computation of Earnings Per Share (“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 Company’s

 

10


Table of Contents

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

restricted stock 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 basic common shares by the weighted average number of basic common shares outstanding during the period. Diluted EPS is computed by dividing net income available to diluted common shares by the weighted average number of dilutive common shares outstanding during the period.

The following table sets forth the calculation of EPS for the three and six months ended June 30, 2012 and 2011:

 

    Three Months Ended
June 30,
    Six Months Ended
June 30,
 
            2012                     2011                     2012                     2011          
    (In thousands, except per share amounts)  

Weighted average basic common shares outstanding

    21,650        22,533        21,640        22,558   

Dilutive effect of contingently Convertible 3.00% Notes

    851        107        871        123   

Dilutive effect of stock options, net of assumed repurchase of treasury stock

    4        8        5        10   

Dilutive effect of employee stock purchases, net of assumed repurchase of treasury stock

    8        3        6        2   
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average dilutive common shares outstanding

    22,513        22,651        22,522        22,693   
 

 

 

   

 

 

   

 

 

   

 

 

 

Basic:

       

Net Income

  $ 28,625      $ 24,683      $ 51,742      $ 40,045   

Less: Earnings allocated to participating securities

    1,628        1,426        2,822        2,308   
 

 

 

   

 

 

   

 

 

   

 

 

 

Earnings available to basic common shares

  $ 26,997      $ 23,257      $ 48,920      $ 37,737   
 

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per common share

  $ 1.25      $ 1.03      $ 2.26      $ 1.67   

Diluted:

       

Net Income

  $ 28,625      $ 24,683      $ 51,742      $ 40,045   

Less: Earnings allocated to participating securities

    1,576        1,420        2,730        2,296   
 

 

 

   

 

 

   

 

 

   

 

 

 

Earnings available to diluted common shares

  $ 27,049      $ 23,263      $ 49,012      $ 37,749   
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per common share

  $ 1.20      $ 1.03      $ 2.18      $ 1.66   

Any options with exercise prices in excess of the average market price of the Company’s 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 EPS 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 both the three and six months ended June 30, 2012 and 2011.

As discussed in Note 9, “Long-Term Debt” below, 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 9) and the 2.25% Warrants sold in connection with the 2.25% Notes (“2.25% Warrants”) in its diluted common shares outstanding for the diluted earnings calculation. Although the ten-year call options the Company purchased on its common stock in connection with the issuance of the 2.25% Notes (“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 diluted common shares outstanding for the diluted earnings calculation since the impact would be anti-dilutive. Since the average price of the Company’s common stock for the six months ended June 30, 2012 was less than the

 

11


Table of Contents

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

conversion price in effect at the end of the respective periods, no net shares were included in the computation of diluted EPS for such period, as the impact would have been anti-dilutive. Refer to Note 9 for a description of the change to the conversion price, which occurred during the three months ended June 30, 2012 as a result of the Company’s decision to pay a cash dividend in excess of $0.14.

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 9) and the 3.00% Warrants sold in connection with the 3.00% Notes (“3.00% Warrants”). Although the ten-year call options the Company purchased on its common stock in connection with the issuance of the 3.00% Notes (“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 diluted common shares outstanding for the diluted earnings calculation since the impact would be anti-dilutive. Since the average price of the Company’s common stock for the six months ended June 30, 2012 was more than the conversion price in effect at the end of the respective periods, the dilutive effect of the 3.00% Notes and 3.00% Warrants was included in the computation of diluted earnings per share. Refer to Note 9 for a description of the change to the conversion price, which occurred during the three months ended June 30, 2012 as a result of the Company’s decision to pay a cash dividend.

6. 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. relative to its foreign subsidiaries. The effective income tax rate of 37.8% of pretax income for the three months ended June 30, 2012 differed from the federal statutory rate of 35.0% due primarily to taxes provided for the taxable state jurisdictions in which the Company operates.

For the six months ended June 30, 2012, the Company’s effective tax rate increased to 37.9% from 37.6% for the same period in 2011. The change was primarily due to the mix of pretax income from the taxable state jurisdictions in which the Company operates.

As of June 30, 2012 and December 31, 2011, the Company had no unrecognized tax benefits. Consistent with prior practice, the Company recognizes interest and penalties related to uncertain tax positions in income tax expense. The Company did not incur any interest and penalties nor did it accrue any interest for the six months ended June 30, 2012.

Taxable years 2007 and subsequent remain open for examination by the Company’s major taxing jurisdictions.

7. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS

Accounts and notes receivable consisted of the following:

 

     June 30,
2012
     December 31,
2011
 
     (unaudited)         
     (In thousands)  

Amounts due from manufacturers

   $ 52,573       $ 48,912   

Parts and service receivables

     17,991         16,956   

Finance and insurance receivables

     16,438         16,755   

Other

     28,503         11,395   
  

 

 

    

 

 

 

Total accounts and notes receivable

     115,505         94,018   

Less allowance for doubtful accounts

     1,144         1,243   
  

 

 

    

 

 

 

Accounts and notes receivable, net

   $ 114,361       $ 92,775   
  

 

 

    

 

 

 

 

12


Table of Contents

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

During the three months ended June 30, 2012, the Company sustained damage to its new and used inventory, as well as real estate due to a hail storm in Oklahoma. The Company recorded a $2.7 million charge in selling, general, and administrative (“SG&A”) expense for its insurance deductible, as well as $16.9 million in related receivables for losses incurred which is included in other receivables as of June 30, 2012 and subsequently received in July 2012.

Inventories consisted of the following:

 

     June 30,
2012
     December 31,
2011
 
     (unaudited)         
     (In thousands)  

New vehicles

   $ 763,357       $ 610,694   

Used vehicles

     194,097         153,648   

Rental vehicles

     64,952         57,790   

Parts, accessories and other

     49,521         45,338   
  

 

 

    

 

 

 

Inventories, net

   $ 1,071,927       $ 867,470   
  

 

 

    

 

 

 

New and used vehicles are valued at the lower of specific cost or market and are removed from inventory using the specific identification method. Parts and accessories are valued at lower of cost or market determined on a first-in, first-out basis.

Property and equipment consisted of the following:

 

     Estimated
Useful Lives
in Years
     June 30,
2012
     December 31,
2011
 
            (unaudited)         
            (Dollars in thousands)  

Land

     —         $ 231,349       $ 211,754   

Buildings

     30 to 40         317,490         284,638   

Leasehold improvements

     up to 30         92,051         86,084   

Machinery and equipment

     7 to 20         64,657         59,316   

Furniture and fixtures

     3 to 10         59,043         54,406   

Company vehicles

     3 to 5         10,493         9,877   

Construction in progress

     —           19,412         16,719   
     

 

 

    

 

 

 

Total

        794,495         722,794   

Less accumulated depreciation

        155,524         137,161   
     

 

 

    

 

 

 

Property and equipment, net

      $ 638,971       $ 585,633   
     

 

 

    

 

 

 

During the six months ended June 30, 2012, the Company incurred $26.2 million of capital expenditures for the construction of new or expanded facilities and the purchase of equipment and other fixed assets in the maintenance of the Company’s dealerships and facilities. In addition, the Company purchased real estate during the six months ended June 30, 2012 associated with existing dealership operations totaling $8.1 million. And, in conjunction with the Company’s acquisition of 12 separate dealerships during the six months ended June 30, 2012, the Company acquired $34.4 million of real estate and other property and equipment.

8. CREDIT FACILITIES

The Company has a $1.35 billion revolving syndicated credit arrangement with 21 financial institutions including four manufacturer-affiliated finance companies (“Revolving Credit Facility”). The Company also has a

 

13


Table of Contents

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

$150.0 million floorplan financing arrangement with Ford Motor Credit Company (“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 Company’s Consolidated Balance Sheets, Floorplan Notes Payable—Credit Facility reflects amounts payable for the purchase of specific new, used and rental vehicle inventory (with the exception of new and rental vehicle purchases financed through lenders affiliated with the respective manufacturer) whereby financing is provided by the Revolving Credit Facility. Floorplan Notes Payable—Manufacturer Affiliates reflects amounts payable for the purchase of specific new vehicles whereby financing is provided by the FMCC Facility, the financing of new and used vehicles in the U.K. with BMW Financial Services and the financing of rental vehicle inventory with several other manufacturers. Payments on the floorplan notes payable are generally due as the vehicles are sold. As a result, these obligations are reflected in 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 Company’s total consolidated floorplan interest expense has ranged from 62.6% for the fourth quarter of 2009 to 110.1% for the second quarter of 2012.

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 (“Floorplan Line”) and $250.0 million for working capital, including acquisitions (“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 $1.6 billion, subject to participating lender approval. The Floorplan Line bears interest at rates equal to the one-month LIBOR plus 150 basis points for new vehicle inventory and the 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 Company’s leverage ratio. The Floorplan Line also requires a commitment fee of 0.20% per annum on the unused portion. The Acquisition Line requires a commitment fee ranging from 0.25% to 0.45% per annum, depending on the Company’s leverage ratio, based on a minimum commitment of $100.0 million less outstanding borrowings. In conjunction with the Revolving Credit Facility, the Company had $5.8 million of related unamortized costs as of June 30, 2012 that are being amortized over the term of the facility.

After considering outstanding balances of $784.5 million at June 30, 2012, the Company had $315.5 million of available floorplan borrowing capacity under the Floorplan Line. Included in the $315.5 million available borrowings under the Floorplan Line was $101.8 million of immediately available funds. The weighted average interest rate on the Floorplan Line was 1.7% and 1.8% as of June 30, 2012 and December 31, 2011, respectively, excluding the impact of the Company’s interest rate swaps. Amounts borrowed by the Company under the Floorplan Line of the Revolving Credit Facility for specific vehicle inventory are to be repaid upon the sale of the vehicle financed, and in no case is a borrowing for a vehicle to remain outstanding for greater than one year. With regards to the Acquisition Line, no borrowings were outstanding as of June 30, 2012 or December 31, 2011. The amount of available borrowing capacity under the Acquisition Line is limited from time to time based upon certain debt covenants. After considering $24.3 million of outstanding letters of credit and other factors included in the Company’s available borrowing base calculation, there was $225.7 million of available borrowing capacity under the Acquisition Line as of June 30, 2012.

All of the Company’s domestic dealership-owning subsidiaries are co-borrowers under the Revolving Credit Facility. The Company’s obligations under the Revolving Credit Facility are secured by essentially all of the

 

14


Table of Contents

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Company’s 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 Company’s ability to make disbursements outside of the ordinary course of business, dispose of assets, incur additional indebtedness, create liens on assets, make investments and engage in mergers or consolidations. The Company is also required to comply with specified financial tests and ratios defined in the Revolving Credit Facility, such as fixed charge coverage, total leverage, and senior secured leverage. Further, the Revolving Credit Facility restricts the Company’s 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 Company’s foreign operations, non-cash interest expense, non-cash asset impairment charges, and non-cash stock-based compensation. As of June 30, 2012, the Restricted Payment Basket totaled $97.3 million. As of June 30, 2012, the Company was in compliance with all applicable covenants and ratios under the Revolving Credit Facility.

Ford Motor Credit Company Facility

The FMCC Facility provides for the financing of, and is collateralized by, the Company’s 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 canceled with 30 days notice by either party. As of June 30, 2012, the Company had an outstanding balance of $103.3 million under the FMCC Facility with an available floorplan borrowing capacity of $46.7 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 3.75%. As of June 30, 2012, the interest rate on the FMCC Facility was 5.25% before considering the applicable incentives.

Other Credit Facilities

The Company has a credit facility with BMW Financial Services and Volkswagen Finance for the financing of new, used and rental vehicle inventories related to its U.K. operations. These facilities are evergreen arrangements that may be canceled 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 these facilities ranged from 1.1% to 4.5%, as of June 30, 2012.

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 June 30, 2012, the interest rate charged on borrowings related to the Company’s rental vehicle fleet varied up to 5.3%. Rental vehicles are typically transferred to used vehicle inventory when they are removed from rental service and repayment of the borrowing is required at that time.

 

15


Table of Contents

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

9. LONG-TERM DEBT

The Company carries its long-term debt at face value, net of applicable discounts. Long-term debt consisted of the following:

 

     June 30,
2012
     December 31,
2011
 
     (Dollars in thousands)  

2.25% Convertible Senior Notes

   $ 148,603       $ 144,985   

3.00% Convertible Senior Notes

     79,018         77,401   

Mortgage Facility

     58,018         41,003   

Real Estate Related and Other Long-Term Debt

     211,139         194,580   

Capital lease obligations related to real estate, maturing in varying amounts through November 2032 with a weighted average interest rate of 9.3%

     37,024         39,295   
  

 

 

    

 

 

 
     533,802         497,264   

Less current maturities of long-term debt

     16,832         14,663   
  

 

 

    

 

 

 
   $ 516,970       $ 482,601   
  

 

 

    

 

 

 

Fair Value of Long-Term Debt

The Company’s outstanding 2.25% Convertible Senior Notes (“2.25% Notes”) had a fair value of $189.0 million and $192.3 million as of June 30, 2012 and December 31, 2011, respectively. The Company’s outstanding 3.00% Convertible Senior Notes (“3.00% Notes”) had a fair value of $159.4 million and $170.6 million as of June 30, 2012 and December 31, 2011, respectively. The carrying value of the Company’s variable rate debt approximates fair value due to the short-term nature of the interest rates.

The fair value estimates are based on Level 2 inputs of the fair value hierarchy available as of June 30, 2012 and December 31, 2012. The Company determined the estimated fair value of its long-term debt using available market information and commonly accepted valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, these estimates are not necessarily indicative of the amounts that the Company, or holders of the instruments, could realize in a current market exchange. The use of different assumptions and/or estimation methodologies could have a material effect on estimated fair values. These amounts have not been revalued since those dates, and current estimates of fair value could differ significantly from the amounts presented.

 

16


Table of Contents

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

2.25% Convertible Senior Notes

As of June 30, 2012 and December 31, 2011, the carrying value of the 2.25% Notes, related discount and equity component consisted of the following:

 

     June 30,
2012
    December 31,
2011
 
     (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

   $ 12,175      $ 13,452   
  

 

 

   

 

 

 

Principal amount of 2.25% Notes

   $ 182,753      $ 182,753   

Unamortized discount

     (32,862     (36,344

Unamortized underwriter fees

     (1,288     (1,424
  

 

 

   

 

 

 

Net carrying amount of liability component

   $ 148,603      $ 144,985   
  

 

 

   

 

 

 

Unamortized debt issuance cost

   $ 51      $ 56   

The Company determined the discount 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 due to the impact of underwriter fees associated with this issuance that were capitalized as an additional discount 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.

For the six months ended June 30, 2012 and 2011, the contractual interest expense and the discount amortization, which is recorded as interest expense in the accompanying Consolidated Statements of Operations, were as follows:

 

     Six Months Ended
June 30,
 
             2012                     2011          
     (Dollars in thousands)  

Year-to-date contractual interest expense

   $ 2,056      $ 2,056   

Year-to-date discount amortization (1)

   $ 3,404      $ 3,140   

Effective interest rate of liability component

     7.7     7.7

  

 

(1) Represents the incremental impact of the accounting for convertible debt as primarily codified in ASC 470.

The 2.25% Notes are convertible into cash and, if applicable, common stock based on the conversion rate, subject to adjustment, including a quarterly cash dividend in excess of $0.14 per share, under the following circumstances: (a) during any calendar quarter (and only during such calendar quarter) beginning after September 30, 2006, if the closing price of the Company’s common stock for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is equal to or more than 130% of the applicable conversion price per share (or $77.24 as of June 30, 2012); (b) during the five business day period after any ten consecutive trading day period in which the trading price per $1,000 principal amount for each day of the ten day trading period was less than 98% of the product of the last

 

17


Table of Contents

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

reported sale/bid price of the Company’s common stock and the conversion rate on that day; and (c) upon the occurrence of specified corporate transactions set forth in the 2.25% Notes Indenture. Upon conversion, a holder will receive an amount in cash and common shares of the Company’s common stock, determined in the manner set forth in the 2.25% Notes Indenture.

As of June 30, 2012, the conversion rate was 16.8298 shares of common stock per $1,000 principal amount of 2.25% Notes, with a conversion price of $59.42 per share, which was reduced during the second quarter of 2012 as the result of the Company’s decision to pay a cash dividend in excess of $0.14 per share. If any cash dividend or distribution is made to all, or substantially all, holders of the Company’s common stock in excess of $0.14 per share in the future, the conversion rate will be adjusted based on the formula defined in the 2.25% Notes Indenture.

As of June 30, 2012, the exercise price of the 2.25% Warrants, which are related to the issuance of the 2.25% Notes, was $80.30 due to the Company’s decision to pay a cash dividend in excess of $0.14 per share. If any cash dividend or distribution is made to all, or substantially all, holders of the Company’s common stock in excess of $0.14 per share in the future, the conversion rate will be adjusted based on the formula defined in the 2.25% Notes Indenture.

Under the terms of the 2.25% Purchased Options, which become exercisable upon conversion of the 2.25% Notes, the Company has the right to receive a total of 4.8 million shares of its common stock at the conversion price then in effect. The exercise price is subject to certain adjustments that mirror the adjustments to the conversion price of the 2.25% Notes (including payments of cash dividends in excess of $0.14 per share).

3.00% Convertible Senior Notes

As of June 30, 2012 and December 31, 2011, the carrying value of the 3.00% Notes, related discount and equity component consisted of the following:

 

     June 30,
2012
    December 31,
2011
 
     (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

   $ 12,413      $ 12,956   
  

 

 

   

 

 

 

Principal amount of 3.00% Notes

   $ 115,000      $ 115,000   

Unamortized discount

     (34,105     (35,638

Unamortized underwriter fees

     (1,877     (1,961
  

 

 

   

 

 

 

Net carrying amount of liability component

   $ 79,018      $ 77,401   
  

 

 

   

 

 

 

Unamortized debt issuance cost

   $ 277      $ 289   

The Company determined the discount using the estimated effective interest rate for similar debt with no convertible features. The original effective interest rate of 8.25% was estimated by receiving a range of quotes from the underwriters 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 and are being amortized to interest

 

18


Table of Contents

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

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.

For the six months ended June 30, 2012 and 2011, the contractual interest expense and the discount amortization, which is recorded as interest expense in the accompanying Consolidated Statements of Operations, were as follows:

 

     Six Months Ended
June 30,
 
         2012             2011      
     (Dollars in thousands)  

Year-to-date contractual interest expense

   $ 1,725      $ 1,725   

Year-to-date discount amortization (1)

   $ 1,449      $ 1,322   

Effective interest rate of liability component

     8.6     8.6

 

(1) Represents the incremental impact of the accounting for convertible debt as primarily codified in ASC 470.

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: (a) during any fiscal quarter (and only during such fiscal quarter) beginning after June 30, 2010, if the last reported sale price of the Company’s common stock for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is equal to or more than 130% of the applicable conversion price per share (or $49.23 as of June 30, 2012) (“Stock Price Trigger”); (b) during the five business day period after any ten consecutive trading day period in which the trading price per $1,000 principal amount for each day of the ten day trading period was less than 98% of the product of the last reported sale/bid price of the Company’s common stock and the conversion rate on that day; and (c) 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 Company’s common stock, determined in the manner set forth in the 3.00% Notes Indenture. As a result of the Stock Price Trigger in the first quarter of 2012, the 3.00% Notes were convertible at the option of holders during the three months ended June 30, 2012, however, as of June 30, 2012, the 3.00% Notes are no longer convertible. Upon conversion, a holder will receive an amount in cash and common shares of the Company’s common stock, determined in the manner set forth in the 3.00% Notes Indenture. The if-converted value of the 3.00% Notes exceeded the principal amount of the 3.00% Notes by $23.4 million at June 30, 2012.

As of June 30, 2012, the conversion rate was 26.4086 shares of common stock per $1,000 principal amount of 3.00% Notes, with a conversion price of $37.87 per share, which was reduced during the second quarter of 2012 as the result of the Company’s decision to pay a cash dividend. If any cash dividend or distribution is made to all, or substantially all, holders of the Company’s common stock in the future, the conversion rate will be adjusted based on the formula defined in the 3.00% Notes Indenture.

As of June 30, 2012, the exercise price of the 3.00% Warrants, which are related to the issuance of the 3.00% Notes, was $55.64 due to the Company’s decision to pay a cash dividend. If any cash dividend or distribution is made to all, or substantially all, holders of the Company’s 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 receive a total of 3.0 million shares of its common stock at the conversion price then in effect. 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).

 

19


Table of Contents

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Real Estate Credit Facility

As amended and restated, the Company’s real estate credit facility with Bank of America, N.A. and Comerica Bank (“Mortgage Facility”) provides the right to expand to $83.4 million of term loans, of which $60.7 million has been used as of June 30, 2012. The term loans can be expanded provided that (a) no default or event of default exists under the Mortgage Facility; (b) the Company obtains commitments from the lenders who would qualify as assignees for such increased amounts; and (c) 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, $0.7 million of which were still unamortized as of June 30, 2012.

The interest rate is equal to (a) the per annum rate equal to one-month LIBOR plus 2.50% per annum, determined on the first day of each month, or (b) 1.45% per annum in excess of the higher of (i) the Bank of America prime rate (adjusted daily on the day specified in the public announcement of such price rate), (ii) the Federal Funds Rate adjusted daily, plus 0.5%, or (iii) the per annum rate equal to the 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 amount outstanding on the maturity dates, from December 29, 2015 through February 27, 2017. During the six months ended June 30, 2012, the Company borrowed an additional $18.1 million to finance the acquisition and/or improvement of dealership facilities and made principal payments of $1.1 million on outstanding borrowings from the Mortgage Facility. As of June 30, 2012, borrowings under the amended and restated Mortgage Facility totaled $58.0 million, with $3.0 million recorded as a current maturity of long-term debt in the accompanying Consolidated Balance Sheets.

The Mortgage Facility also contains usual and customary provisions limiting the Company’s ability to engage in certain transactions, including limitations on the Company’s ability to incur additional debt, additional liens, make investments, and pay distributions to its stockholders. In addition, effective December 31, 2011, the Mortgage Facility was amended to require certain financial covenants that are identical to those contained in the Company’s Revolving Credit Facility. As of June 30, 2012, the Company was in compliance with all applicable covenants and ratios under the Revolving Credit Facility.

Real Estate Related Debt

The Company has entered into separate term mortgage loans 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 several third-party financial institutions (collectively, “Real Estate Notes”). The Real Estate Notes are on specific buildings and/or properties and are guaranteed by the Company. Each loan was made in connection with, and is secured by mortgage liens on, the relevant real property owned the Company that is mortgaged under the Real Estate Notes. The Real Estate Notes bear interest at fixed rates between 4.56% and 5.47%, and at variable indexed rates plus a spread 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 were still unamortized as of June 30, 2012.

 

20


Table of Contents

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The loan agreements with TMCC consist of six term loans, one of which was added during the first quarter of 2012 for $4.0 million. As of June 30, 2012, $41.1 million was outstanding under the TMCC term loans with $1.3 million classified as current. The maturity dates vary from two to seven years and provide for monthly payments based on a 20-year amortization schedule. These six loans are cross-collateralized and cross-defaulted with each other and are cross-defaulted with the Revolving Credit Facility.

The loan agreements with MBFS consist of three term loans. As of June 30, 2012, $47.9 million was outstanding under the MBFS term loans with $1.6 million classified as current. 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 14 term loans, one of which was added during the first quarter of 2012 for $5.6 million to finance the acquisition of a dealership facility. As of June 30, 2012, $74.3 million was outstanding under the BMWFS term loans with $3.8 million classified as current. 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 14 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.

In addition, agreements with third-party financial institutions consist of four term loans for an aggregate principal amount of $24.9 million, to finance real estate associated with four of the Company’s dealerships. The loans are being repaid in monthly installments that began in September 2011 and will mature in May 2017. As of June 30, 2012, borrowings under these notes totaled $24.1 million, with $1.2 million classified as a current maturity of long-term debt in the accompanying Consolidated Balance Sheets. These four loans are cross-defaulted with the Revolving Credit Facility.

In 2008, the Company executed a note agreement with another third-party financial institution for an aggregate principal amount of £10.0 million, which is secured by the Company’s foreign subsidiary properties. In addition, during the three months ended June 30, 2012, the Company borrowed £2.4 million to partially finance the acquisition of six U.K. dealerships. These agreements combined (“Foreign Notes”) are being repaid in monthly installments that began in March 2010 and mature in June 2024. As of June 30, 2012, borrowings under the Foreign Notes totaled $15.1 million, with $2.1 million classified as a current maturity of long-term debt in the accompanying Consolidated Balance Sheets.

10. FAIR VALUE MEASUREMENTS

Accounting Standards Codification (“ASC”) 820 defines fair value as the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date; 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

 

21


Table of Contents

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

   

Level 3—unobservable inputs based upon the reporting entity’s internally developed assumptions that market participants would use in pricing the asset or liability.

The Company’s financial instruments consist primarily of cash and cash equivalents, contracts-in-transit and vehicle receivables, accounts and notes receivable, investments in debt and equity securities, accounts payable, credit facilities, long-term debt and interest rate swaps. The fair values of cash and cash equivalents, contracts-in-transit and vehicle receivables, accounts and notes receivable, accounts payable, and credit facilities approximate their carrying values due to the short-term nature of these instruments or the existence of variable interest rates.

The Company 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 in the accompanying Consolidated Balance Sheets. 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’s derivative financial instruments are recorded at fair market value. See Note 3, “Derivative Instruments and Risk Management Activities” for further details regarding the Company’s derivative financial instruments.

 

22


Table of Contents

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The Company evaluated its assets and liabilities for those that met the criteria of the disclosure requirements and fair value framework of ASC 820 and identified investments in marketable securities, debt instruments, and interest rate derivative financial instruments as having met such criteria. The respective fair values measured on a recurring basis as of June 30, 2012 and December 31, 2011, respectively, were as follows:

 

     As of June 30, 2012  
     Level 1      Level 2      Total  
     (In thousands)  

Assets:

        

Marketable securities—money market

   $ 611       $ —         $ 611   

Debt securities:

        

Demand obligations

     —           178         178   

Corporate bonds

     —           353         353   

Municipal obligations

     —           388         388   

Mortgage backed

     —           581         581   
  

 

 

    

 

 

    

 

 

 

Total debt securities

     —           1,500         1,500   
  

 

 

    

 

 

    

 

 

 

Total

   $ 611       $ 1,500       $ 2,111   
  

 

 

    

 

 

    

 

 

 

Liabilities:

        

Interest rate derivative financial instruments

   $ —         $ 40,320       $ 40,320   
  

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 40,320       $ 40,320   
  

 

 

    

 

 

    

 

 

 

 

     As of December 31, 2011  
     Level 1      Level 2      Total  
     (In thousands)  

Assets:

        

Marketable securities—money market

   $ 1,571       $ —         $ 1,571   

Debt securities:

        

Demand obligations

     —           271         271   

Collateralized mortgage obligations

     —           19         19   

Corporate bonds

     —           338         338   

Municipal obligations

     —           683         683   

Mortgage backed

     —           632         632   
  

 

 

    

 

 

    

 

 

 

Total debt securities

     —           1,943         1,943   
  

 

 

    

 

 

    

 

 

 

Total

   $ 1,571       $ 1,943       $ 3,514   
  

 

 

    

 

 

    

 

 

 

Liabilities:

        

Interest rate derivative financial instruments

   $ —         $ 34,040       $ 34,040   
  

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 34,040       $ 34,040   
  

 

 

    

 

 

    

 

 

 

11. COMMITMENTS AND CONTINGENCIES

From time to time, the Company’s dealerships are named in various types of litigation involving customer claims, employment matters, class action claims, purported class action claims, as well as claims involving the manufacturer of automobiles, contractual disputes and other matters arising in the ordinary course of business. Due to the nature of the automotive retailing business, the Company may be involved in legal proceedings or suffer losses that could have a material adverse effect on the Company’s business. In the normal course of business, the Company is required to respond to customer, employee and other third-party complaints. Amounts

 

23


Table of Contents

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

that have been accrued or paid related to the settlement of litigation are included in SG&A expenses in the Company’s Consolidated Statements of Operations. In addition, the manufacturers of the vehicles that the Company sells and services have audit rights allowing them to review the validity of amounts claimed for incentive, rebate or warranty-related items and charge the Company back for amounts determined to be invalid rewards under the manufacturers’ programs, subject to the Company’s right to appeal any such decision. Amounts that have been accrued or paid related to the settlement of manufacturer chargebacks of recognized incentives and rebates are included in cost of sales in the Company’s Consolidated Statements of Operations, while such amounts for manufacturer chargebacks of recognized warranty-related items are included as a reduction of revenues in the Company’s Consolidated Statements of Operations.

Legal Proceedings

In December 2011, an adverse jury verdict was rendered against the Company in the San Diego County Superior Court, awarding $7.5 million to the plaintiff who sought reimbursement for medical expenses, lost wages and pain and suffering arising from an accident involving one of the Company’s customer shuttle vans and the plaintiff’s motorcycle. In February 2012, the trial judge entered a judgment on the jury verdict. The Company believes it has meritorious defenses and has appealed the verdict. The Company maintains insurance coverage for any loss in excess of the Company’s $1.0 million self-insured retention. The Company has fully accrued the amount of the award as a current accrued expense in the accompanying Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011. The amount of the award, net of the related insurance deductible, is reflected as a current account receivable in the accompanying Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011. The Company’s insurance deductible was recognized as SG&A expense during the year ended December 31, 2011.

Other Matters

The Company, acting through its subsidiaries, is the lessee under many real estate leases that provide for the use by the Company’s subsidiaries of their respective dealership premises. Pursuant to these leases, the Company’s subsidiaries generally agree to indemnify the lessor and other parties from certain liabilities arising as a result of the use of the leased premises, including environmental liabilities, or a breach of the lease by the lessee. Additionally, from time to time, the Company enters into agreements in connection with the sale of assets or businesses in which it agrees to indemnify the purchaser, or other parties, from certain liabilities or costs arising in connection with the assets or business. Also, in the ordinary course of business in connection with purchases or sales of goods and services, the Company enters into agreements that may contain indemnification provisions. In the event that an indemnification claim is asserted, liability would be limited by the terms of the applicable agreement.

From time to time, primarily in connection with dealership dispositions, the Company’s subsidiaries assign or sublet to the dealership purchaser the subsidiaries’ interests in any real property leases associated with such dealerships. In general, the Company’s subsidiaries retain responsibility for the performance of certain obligations under such leases to the extent that the assignee or sublessee does not perform, whether such performance is required prior to or following the assignment or subletting of the lease. Additionally, the Company and its subsidiaries generally remain subject to the terms of any guarantees made by the Company and its subsidiaries in connection with such leases. Although the Company generally has indemnification rights against the assignee or sublessee in the event of non-performance under these leases, as well as certain defenses, and the Company presently has no reason to believe that it or its subsidiaries will be called on to perform under any such assigned leases or subleases, the Company estimates that lessee rental payment obligations during the remaining terms of these leases were $9.2 million as of June 30, 2012. The Company’s exposure under these leases is difficult to estimate and there can be no assurance that any performance of the Company or its subsidiaries required under these leases would not have a material adverse effect on the Company’s business, financial condition, or cash flows. The Company and its subsidiaries also may be called on to perform other

 

24


Table of Contents

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

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 does not have any known material environmental commitments or contingencies and presently has no reason to believe that it or its subsidiaries will be called on to so perform.

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 Company’s 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.

12. ACCUMULATED OTHER COMPREHENSIVE LOSS

Changes in the balances of each component of accumulated other comprehensive loss for the six months ended June 30, 2012 and 2011 were as follows:

 

     Unrealized Loss
on Foreign
Currency
Translation
    Unrealized Gain
on Marketable
Securities
    Unrealized Loss
on Interest Rate
Swaps
    Accumulated Other
Comprehensive
Loss
 
     (In thousands)  

Balance, December 31, 2010

   $ (7,852   $ 50      $ (10,953   $ (18,755

Other comprehensive income (loss), net of tax

     1,297        (11     314        1,600   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2011

   $ (6,555   $ 39      $ (10,639   $ (17,155
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2011

   $ (7,969   $ 8      $ (21,275   $ (29,236

Other comprehensive income (loss), net of tax

     (6     8        (3,926     (3,924
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2012

   $ (7,975   $ 16      $ (25,201   $ (33,160
  

 

 

   

 

 

   

 

 

   

 

 

 

 

25


Table of Contents

CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (“Form 10-Q”) includes certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“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 maintain or 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 that these expectations will prove to be correct. When used in this Form 10-Q, 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; future 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 similarly 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, Nissan, Honda, BMW, Ford, Daimler, General Motors, Chrysler, and Volkswagen, 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;

 

   

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;

 

26


Table of Contents
   

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.

For additional information regarding known material factors that could cause our actual results to differ from our projected results, please see (a) Part II, “Item 1A. Risk Factors” in this Form 10-Q and (b) Part I, “Item 1A. Risk Factors” in our 2011 Form 10-K.

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.

 

27


Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements because of various factors. See “Cautionary Statement about Forward-Looking Statements.”

Overview

We are a leading operator in the automotive retail industry. As of June 30, 2012, we owned and operated 143 franchises, representing 32 brands of automobiles, at 111 dealership locations and 25 collision service centers in the U.S. and 16 franchises at 11 dealerships and three collision centers in the U.K. We, through our regions, sell new and used cars and light trucks; arrange related vehicle financing; sell service and insurance contracts; provide automotive maintenance and repair services; and sell vehicle 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, Chelmsford, Colchester, Farnborough, Hailsham, Harold Wood, Hindhead, London, Southend, Stanstead, and Worthing in the U.K.

As of June 30, 2012, our U.S. retail network consisted of the following two regions (with the number of dealerships they comprised): (a) the East (47 dealerships in Alabama, Florida, Georgia, Louisiana, Maryland, Massachusetts, Mississippi, New Hampshire, New Jersey, New York and South Carolina) and (b) the West (64 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 2011 and the first six months of 2012, economic trends have stabilized and consumer demand for new and used vehicles has shown improvement. According to industry experts, the June 2012 seasonally adjusted annual rate of sales (or “SAAR”) was 14.1 million units, compared to 11.5 million units a year ago. But given the depth of the downturn, we believe the recovery to historically normalized industry selling levels will probably be extended.

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. We believe that the stabilizing economic trends provide opportunities for us to improve our operating results as we: (a) expand our new and used vehicle sales results and improve our sales efficiency; (b) 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; (c) invest capital where necessary to support our anticipated growth, particularly in our parts and service business; and (d) further leverage our revenue and gross profit growth through continued cost containment.

We continue to closely scrutinize all planned future capital spending and work closely with our original equipment manufacturer (“OEM”) partners in this area to make prudent investment decisions that are expected to generate an adequate return and/or improve the customer experience. We anticipate that our 2012 capital spending will be less than $55.0 million, which includes $15.0 million for specific growth initiatives in our parts and service business.

 

28


Table of Contents

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 first six months of 2012, we completed the acquisition of 12 dealerships. We will continue to pursue dealership investment opportunities that we believe will add value for our stockholders.

Financial and Operational Highlights

Our operating results reflect the combined performance of each of our interrelated business activities, which include the sale of new vehicles, used vehicles, finance and insurance products, and parts, as well as maintenance 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, as well as maintenance and collision repair services. In addition, our ability to reduce our costs in response to lower sales also tempers the impact of lower new vehicle sales volume.

We generally experience higher volumes of vehicle sales and service in the second and third calendar quarters of each year. This seasonality is generally attributable to consumer buying trends and the timing of manufacturer new vehicle model introductions. In addition, in some regions of the U.S., vehicle purchases decline during the winter months due to inclement weather. As a result, our revenues and operating income are typically lower in the first and fourth quarters and higher in the second and third quarters. Other factors unrelated to seasonality, such as changes in economic condition and manufacturer incentive programs, may exaggerate seasonal or cause counter-seasonal fluctuations in our revenues and operating income.

For the three months ended June 30, 2012, total revenues increased 28.6% from 2011 levels to $1.9 billion and gross profit improved 16.8% to $285.3 million. For the six months ended June 30, 2012, total revenues increased 23.5% from 2011 levels to $3.6 billion and gross profit improved 17.1% to $545.8 million. Operating income increased for the three and six months ended June 30, 2012 by 15.9% and 25.0%, respectively, from 2011 to $63.1 million and $117.1 million, respectively. Income before income taxes increased to $46.0 million for the second quarter of 2012, which was a 16.0% improvement over the same period from the prior year. For the first half of 2012, income before income taxes increased 29.8% to $83.4 million. For the three months ended June 30, 2012 and 2011, we realized net income of $28.6 million and $24.7 million, respectively, and diluted income per share of $1.20 and $1.03, respectively. For the six months ended June 30, 2012 and 2011, we realized net income of $51.7 million and $40.0 million, respectively, and diluted income per share of $2.18 and $1.66, respectively. For the six months ended June 30, 2012 and 2011, our net cash used was $5.4 million and $7.6 million, respectively.

 

29


Table of Contents

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
June 30,
    Six Months Ended
June 30,
 
     2012     2011     2012     2011  

Unit Sales

        

Retail Sales

        

New Vehicle

     32,924        24,097        60,854        48,801   

Used Vehicle

     22,004        17,200        42,753        33,930   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Retail Sales

     54,928        41,297        103,607        82,731   

Wholesale Sales

     11,244        8,494        21,238        17,549   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Vehicle Sales

     66,172        49,791        124,845        100,280   

Gross Margin

        

New Vehicle Retail Sales

     5.9     6.7     5.9     6.1

Total Used Vehicle Sales

     7.4     8.8     7.7     8.5

Parts and Service Sales

     53.1     52.5     52.6     52.8

Total Gross Margin

     15.1     16.6     15.3     16.2

SG&A (1) as a % of Gross Profit

     75.1     75.0     75.8     77.0

Operating Margin

     3.3     3.7     3.3     3.2

Pretax Margin

     2.4     2.7     2.3     2.2

Finance and Insurance Revenues per Retail Unit Sold

   $ 1,191      $ 1,126      $ 1,184      $ 1,097   

 

(1) Selling, general and administrative expenses.

The following discussion briefly highlights certain of the results and trends occurring within our business. Throughout the following discussion, references are made to Same Store results and variances that are discussed in more detail in the “Results of Operations” section that follows.

During the first six months of 2012, our industry experienced an increase in SAAR of new vehicle unit sales. While the average SAAR is still low relative to the years before 2008, it has risen from an average of 12.6 million through the first six months of 2011 to 14.3 million in 2012. Our new vehicle retail sales revenues increased 33.4% and 25.0% for the three and six months ended June 30, 2012, respectively. This improvement primarily reflects an increase in new vehicle unit sales of 36.6% and 24.7% for the three and six months ended June 30, 2012, respectively. The increase in unit sales is primarily a result of increased inventory levels in our predominant import brands over 2011 levels that experienced shortages as a result of the natural disaster in Japan that occurred in March 2011. New vehicle retail gross margin declined during the three and six months ended June 30, 2012 primarily as a result of an industry wide increase in the supply of new vehicles units.

Our used vehicle results are directly affected by economic conditions, the level of manufacturer incentives on new vehicles and new vehicle financing, the number and quality of trade-ins and lease turn-ins, the availability of consumer credit, as well as 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. Further, the wholesale side of our business experienced increases in unit sales for the three and six months ended June 30, 2012. Used vehicle gross margins declined for the three and six months ended June 30, 2012, due to tightening price relativities between new and used vehicles, as well as a recent decline in auction prices during the latter part of the second quarter.

 

30


Table of Contents

Our parts and service sales increased by 7.9% and 8.6%, respectively, for the three and six months ended June 30, 2012, as compared to the same period in 2011, primarily driven by increases in our customer pay parts and service business and in our collision business, as well as increases in our wholesale parts business. Our parts and service margins increased for the second quarter of 2012 but declined for the six months ended June 30, 2012, as compared to the same period in 2011. The increase in the margins during the second quarter of 2012 was primarily a result of an increase in internal work generated by increased new and used retail vehicle sales volumes. The year-to-date decline is primarily due to a mix shift away from our higher margin warranty business and towards our relatively lower margin wholesale and collision businesses.

Our consolidated finance and insurance income per retail unit sold increased for the three and six months of 2012, as compared to the same period in 2011, primarily driven by increases in penetration rates for finance and vehicle service contracts. In addition, we experienced increases in income per contract in our insurance and other product offerings.

Our total gross margin declined for the three and six months ended June 30, 2012, as compared to the same period in 2011, as a result of the shift in business mix towards the lower margin new and used vehicle businesses.

Our consolidated SG&A expenses increased in absolute dollars for the three and six months ended June 30, 2012, as compared to the same period in 2011. SG&A as a percentage of gross profit was relatively flat and decreased 120 basis points, respectively, for the three and six months ended June 30, 2012 from the same periods in 2011, reflecting ongoing cost control and the leverage on our cost structure that the higher revenues and gross profits provide. SG&A expenses during the three months ended June 30, 2012, included $2.7 million of expense related to the insurance deductible associated with a significant hail storm that struck our Oklahoma City dealerships in May.

For the three and six months ended June 30, 2012, floorplan interest expense increased 20.6% and 16.6%, respectively, as compared to the same period in 2011, primarily due to higher weighted average borrowings as our import brand inventories returned to more normalized levels following the impact of the Japanese earthquake and tsunami constrained levels last year and reflecting recent acquisitions. Other interest expense increased 11.7% and 12.8%, respectively, for the three and six months ended June 30, 2012, due in part to an increase in real estate related borrowings.

We address these items further, and other variances between the periods presented, in the “Results of Operations” section below.

Critical Accounting Policies and Accounting Estimates

The preparation of our Consolidated Financial Statements in conformity with U.S. generally accepted accounting principles requires management to make certain estimates and assumptions.

We disclosed certain critical accounting policies and estimates in our 2011 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 six months ended June 30, 2012 and 2011 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.

 

31


Table of Contents

The following table summarizes our combined Same Store results for the three and six months ended June 30, 2012, as compared to 2011:

Total Same Store Data

(dollars in thousands, except per unit amounts)

 

     Three Months Ended June 30,           Six Months Ended June 30,  
     2012     % Change     2011           2012     % Change     2011  

Revenues

                 

New vehicle retail

   $ 979,317        21.5   $ 806,141           $ 1,820,048        14.5   $ 1,589,794   

Used vehicle retail

     417,810        18.8     351,653             803,310        19.1     674,697   

Used vehicle wholesale

     63,212        4.4     60,542             124,427        1.6     122,478   

Parts and service

     206,171        1.3     203,592             404,708        1.8     397,666   

Finance, insurance and other

     60,563        30.8     46,293             113,775        25.7     90,486   
  

 

 

     

 

 

        

 

 

     

 

 

 

Total revenues

   $ 1,727,073        17.6   $ 1,468,221           $ 3,266,268        13.6   $ 2,875,121   

Cost of Sales

                 

New vehicle retail

   $ 922,113        22.6   $ 752,123           $ 1,714,081        14.8   $ 1,493,095   

Used vehicle retail

     382,265        20.5     317,326             734,361        20.1     611,518   

Used vehicle wholesale

     62,801        6.6     58,890             121,529        2.7     118,334   

Parts and service

     97,284        0.7     96,595             191,471        2.1     187,569   
  

 

 

     

 

 

        

 

 

     

 

 

 

Total cost of sales

   $ 1,464,463        19.6   $ 1,224,934           $ 2,761,442        14.6   $ 2,410,516   
  

 

 

     

 

 

        

 

 

     

 

 

 

Gross profit

   $ 262,610        7.9   $ 243,287           $ 504,826        8.7   $ 464,605   
  

 

 

     

 

 

        

 

 

     

 

 

 

Selling, general and administrative expenses

   $ 197,644        8.2   $ 182,674           $ 382,921        6.9   $ 358,185   

Depreciation and amortization expenses

   $ 7,333        11.3   $ 6,589           $ 14,252        9.6   $ 13,009   

Floorplan interest expense

   $ 7,177        11.3   $ 6,450           $ 14,178        7.4   $ 13,201   

Gross Margin

                 

New vehicle retail

     5.8       6.7          5.8       6.1

Used vehicle

     7.5       8.7          7.7       8.4

Parts and service

     52.8       52.6          52.7       52.8

Total gross margin

     15.2       16.6          15.5       16.2

SG&A as a % of gross profit

     75.3       75.1          75.9       77.1

Operating margin

     3.3       3.7          3.3       3.2

Finance and insurance revenues per retail unit sold

   $ 1,206        7.1   $ 1,126           $ 1,194        8.8   $ 1,097   

The discussion that follows provides explanation for the material 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 six months ended June 30, 2012 and 2011.

 

32


Table of Contents

New Vehicle Retail Data

(dollars in thousands, except per unit amounts)

 

     Three Months Ended June 30,           Six Months Ended June 30,  
     2012     % Change     2011           2012     % Change     2011  

Retail Unit Sales

                 

Same Stores

     29,899        24.7     23,977             55,691        14.5     48,637   

Transactions

     3,025          120             5,163          164   
  

 

 

     

 

 

        

 

 

     

 

 

 

Total

     32,924        36.6     24,097             60,854        24.7     48,801   

Retail Sales Revenues

                 

Same Stores

   $ 979,317        21.5   $ 806,141           $ 1,820,048        14.5   $ 1,589,794   

Transactions

     101,393          3,740             173,257          4,801   
  

 

 

     

 

 

        

 

 

     

 

 

 

Total

   $ 1,080,710        33.4   $ 809,881           $ 1,993,305        25.0   $ 1,594,595   

Gross Profit

                 

Same Stores

   $ 57,204        5.9   $ 54,018           $ 105,967        9.6   $ 96,699   

Transactions

     6,638          246             10,695          337   
  

 

 

     

 

 

        

 

 

     

 

 

 

Total

   $ 63,842        17.7   $ 54,264           $ 116,662        20.2   $ 97,036   

Gross Profit per Retail Unit Sold

                 

Same Stores

   $ 1,913        (15.1 )%    $ 2,253           $ 1,903        (4.3 )%    $ 1,988   

Transactions

   $ 2,194        $ 2,050           $ 2,071        $ 2,055   

Total

   $ 1,939        (13.9 )%    $ 2,252           $ 1,917        (3.6 )%    $ 1,988   

Gross Margin

                 

Same Stores

     5.8       6.7          5.8       6.1

Transactions

     6.5       6.6          6.2       7.0

Total

     5.9       6.7          5.9       6.1

Coupled with the increase in SAAR, we believe the focus that we have placed on improving our dealership sales processes has led to increased Same Store new vehicle sales and profit. In addition, the recovery by our major import brand OEM partners from the natural disasters in Japan in 2011 led to the normalization of inventory levels and bolstered new vehicle sales. Our Same Store new vehicle retail revenues increased 21.5%, primarily on increased new vehicle unit sales of 24.7% for the three months ended June 30, 2012, as compared to the same period in 2011. From a mix standpoint, we generated the majority of the volume increase through our import brands, which sold 35.0% more units in the second quarter of 2012, as compared to the same period in 2011. Same Store revenues for the three months ended June 30, 2012 improved 33.9% in our import brands, as well as 23.1% and 8.4% in our domestic and luxury categories, respectively, as compared to the same period in 2011. The mix shift effect on revenues from the normalization of import brand inventories contributed to a decline in our Same Store revenues per retail unit (“PRU”), which decreased 2.6% to $32,754 in the second quarter of 2012, as compared to the same period in 2011. The level of retail sales, as well as our own ability to retain or grow market share during the future periods, is difficult to predict.

Our Same Store new vehicle gross profit increased 5.9% for the three months ended June 30, 2012 as a result of the 24.7% increase in new vehicle retail unit sales. The mix effect of our new vehicle business shifting to import from luxury brands, coupled with the improved level of industry-wide supply of import brand inventory contributed to a decline in our Same Store gross profit PRU by 15.1%, as compared to the same period in 2011. Same Store gross profit PRU declined $435 in our import brands and $202 in our domestic brands, but improved $18 in our luxury brands. On a sequential basis, we experienced a 1.2%, or $22, increase in our gross profit PRU for second quarter of 2012, as compared to the first quarter of 2012.

For the six months ended June 30, 2012, as compared to the same period in 2011, Same Store new vehicle unit sales and revenues increased 14.5%. Same Store unit sales increased 22.1%, 17.8%, and 3.5% in our domestic, import, and luxury categories, respectively. Our Same Store new vehicle retail revenues PRU were

 

33


Table of Contents

relatively flat, at $32,681 for the six months ended June 30, 2012, as compared to the same period in 2011. Gross profit PRU decreased 4.3% to $1,903 in the first half of 2012 from $1,988 during the same period in 2011, and, as a result, our gross margin decreased 30 basis points from 6.1% to 5.8% for the six months ended 2012, as compared to the same period in 2011.

The following table sets forth our Same Store new vehicle retail sales volume by manufacturer:

Same Store New Vehicle Unit Sales

 

     Three Months Ended June 30,            Six Months Ended June 30,  
     2012      % Change     2011            2012      % Change     2011  

Toyota

     10,257         49.1     6,878              18,832         22.3     15,393   

Nissan

     3,547         15.5        3,070              7,193         9.9        6,548   

Honda

     3,648         34.2        2,718              6,695         13.8        5,881   

BMW

     3,563         (0.2     3,570              6,397         (1.0     6,461   

Ford

     2,355         22.1        1,928              4,508         22.2        3,689   

Daimler

     1,567         2.1        1,535              2,889         1.6        2,843   

General Motors

     1,371         17.0        1,172              2,604         11.7        2,332   

Chrysler

     1,439         27.8        1,126              2,708         34.1        2,019   

Volkswagen

     778         5.9        735              1,251         12.5        1,112   

Other

     1,374         10.4        1,245              2,614         10.8        2,359   
  

 

 

      

 

 

         

 

 

      

 

 

 

Total

     29,899         24.7     23,977              55,691         14.5     48,637   
  

 

 

      

 

 

         

 

 

      

 

 

 

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 June 30, 2012 and 2011 was $8.7 million and $5.9 million, respectively. The amount of interest assistance we recognize in a given period is primarily a function of: (a) the mix of units being sold, as domestic brands tend to provide more assistance, (b) the specific terms of the respective manufacturers’ interest assistance programs and market interest rates, (c) the average wholesale price of inventory sold, and (d) our rate of inventory turnover. The increase in floorplan interest assistance from 2011 to 2012 was primarily the result of an increased inventory turnover.

In effect as of June 30, 2012, we had interest rate swaps with an aggregate notional amount of $275.0 million, at a weighted average one-month LIBOR of 4.4%. 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 62.6% in the fourth quarter of 2009 to 110.1% in the second quarter of 2012.

We continue to aggressively manage our new vehicle inventory in response to the rapidly changing market conditions. We increased our new vehicle inventory levels by $154.7 million, or 25.0%, from $619.2 million as of December 31, 2011 to $773.9 million as of June 30, 2012 as the Japanese brand inventory levels have normalized and the selling environment has strengthened. Our consolidated days’ supply of new vehicle inventory increased to 63 days as of June 30, 2012 compared to 54 days at December 31, 2011, as import brand inventories recovered from the industry-wide shortages in 2011.

 

34


Table of Contents

Used Vehicle Retail Data

(dollars in thousands, except per unit amounts)

 

     Three Months Ended June 30,           Six Months Ended June 30,  
     2012     % Change     2011           2012     % Change     2011  

Retail Unit Sales

                 

Same Stores

     20,310        18.6     17,131             39,590        17.0     33,836   

Transactions

     1,694          69             3,163          94   
  

 

 

     

 

 

        

 

 

     

 

 

 

Total

     22,004        27.9     17,200             42,753        26.0     33,930   

Retail Sales Revenues

                 

Same Stores

   $ 417,810        18.8   $ 351,653           $ 803,310        19.1   $ 674,697   

Transactions

     38,424          1,394             67,898          1,797   
  

 

 

     

 

 

        

 

 

     

 

 

 

Total

   $ 456,234        29.2   $ 353,047           $ 871,208        28.8   $ 676,494   

Gross Profit

                 

Same Stores

   $ 35,545        3.5   $ 34,327           $ 68,949        9.1   $ 63,179   

Transactions

     3,301          221             6,294          269   
  

 

 

     

 

 

        

 

 

     

 

 

 

Total

   $ 38,846        12.4   $ 34,548           $ 75,243        18.6   $ 63,448   

Gross Profit per Retail Unit Sold

                 

Same Stores

   $ 1,750        (12.7 )%    $ 2,004           $ 1,742        (6.7 )%    $ 1,867   

Transactions

   $ 1,949        $ 3,203           $ 1,990        $ 2,862   

Total

   $ 1,765        (12.1 )%    $ 2,009           $ 1,760        (5.9 )%    $ 1,870   

Gross Margin

                 

Same Stores

     8.5       9.8          8.6       9.4

Transactions

     8.6       15.9          9.3       15.0

Total

     8.5       9.8          8.6       9.4

 

35


Table of Contents

Used Vehicle Wholesale Data

(dollars in thousands, except per unit amounts)

 

     Three Months Ended June 30,           Six Months Ended June 30,  
     2012     % Change     2011           2012     % Change     2011  

Wholesale Unit Sales

                 

Same Stores

     9,949        17.3     8,484             19,162        9.3     17,535   

Transactions

     1,295          10             2,076          14   
  

 

 

     

 

 

        

 

 

     

 

 

 

Total

     11,244        32.4     8,494             21,238        21.0     17,549   

Wholesale Sales Revenues

                 

Same Stores

     63,212        4.4     60,542             124,427        1.6     122,478   

Transactions

     9,922          65             15,564          80   
  

 

 

     

 

 

        

 

 

     

 

 

 

Total

   $ 73,134        20.7   $ 60,607           $ 139,991        14.2   $ 122,558   

Gross Profit

                 

Same Stores

   $ 411        (75.1 )%    $ 1,652           $ 2,898        (30.1 )%    $ 4,144   

Transactions

     (88       15             129          17   
  

 

 

     

 

 

        

 

 

     

 

 

 

Total

   $ 323        (80.6 )%    $ 1,667           $ 3,027        (27.3 )%    $ 4,161   

Gross Profit per Wholesale Unit Sold

                 

Same Stores

   $ 41        (79.0 )%    $ 195           $ 151        (36.0 )%    $ 236   

Transactions

   $ (68     $ 1,500           $ 62        $ 1,214   

Total

   $ 29        (85.2 )%    $ 196           $ 143        (39.7 )%    $ 237   

Gross Margin

                 

Same Stores

     0.7       2.7          2.3       3.4

Transactions

     (0.9 )%        23.1          0.8       21.3

Total

     0.4       2.8          2.2       3.4

 

36


Table of Contents

Total Used Vehicle Data

(dollars in thousands, except per unit amounts)

 

     Three Months Ended June 30,           Six Months Ended June 30,  
     2012     % Change     2011           2012     % Change     2011  

Used Vehicle Unit Sales

                 

Same Stores

     30,259        18.1     25,615             58,752        14.4     51,371   

Transactions

     2,989          79             5,239          108   
  

 

 

     

 

 

        

 

 

     

 

 

 

Total

     33,248        29.4     25,694             63,991        24.3     51,479   

Sales Revenues

                 

Same Stores

   $ 481,022        16.7   $ 412,195           $ 927,737        16.4   $ 797,175   

Transactions

     48,346          1,459             83,462          1,877   
  

 

 

     

 

 

        

 

 

     

 

 

 

Total

   $ 529,368        28.0   $ 413,654           $ 1,011,199        26.5   $ 799,052   

Gross Profit

                 

Same Stores

   $ 35,956        (0.1 )%    $ 35,979           $ 71,847        6.7   $ 67,323   

Transactions

     3,213          236             6,423          286   
  

 

 

     

 

 

        

 

 

     

 

 

 

Total

   $ 39,169        8.2   $ 36,215           $ 78,270        15.8   $ 67,609   

Gross Profit per Used Vehicle Unit Sold

                 

Same Stores

   $ 1,188        (15.4 )%    $ 1,405           $ 1,223        (6.7 )%    $ 1,311   

Transactions

   $ 1,075        $ 2,987           $ 1,226        $ 2,648   

Total

   $ 1,178        (16.4 )%    $ 1,409           $ 1,223        (6.9 )%    $ 1,313   

Gross Margin

                 

Same Stores

     7.5       8.7          7.7       8.4

Transactions

     6.6       16.2          7.7       15.2

Total

     7.4       8.8          7.7       8.5

In addition to factors such as general economic conditions and consumer confidence, our used vehicle business is affected by the level of manufacturer incentives on new vehicles and new vehicle financing, the number and quality of trade-ins and lease turn-ins, the availability of consumer credit and our ability to effectively manage the level and quality of our overall used vehicle inventory. The improved economic conditions, uptick in consumer confidence, and a healthier new vehicle selling environment have translated into an increase in used vehicle demand in 2012. However, the Manheim Index, which measures used vehicle auction prices, decreased by an average of 1.9% during the three months ended June 30, 2012, as compared to the same period in 2011. And, in June 2012 alone, the Manheim Index fell 1.4% from May 2012 and December 2011 levels.

The improved selling environment, coupled with our emphasis on improving our dealership sales processes has resulted in an increase in our Same Store used retail units sales of 18.6% for the three months ended June 30, 2012, as compared to the same period in 2011. In addition, our average used retail selling price increased by $44 during the three months ended June 30, 2012 to $20,572. And, as a result, our Same Store used retail revenues improved 18.8%. For the six months ended June 30, 2012, our Same Store used retail revenue improved by 19.1% as a result of a 17.0% increase in Same Store used retail unit sales, as compared to the same period in 2011, as well as an increase in our average selling price PRU of 1.8% to $20,291.

Our certified pre-owned (“CPO”) volume increased 23.1% to 7,146 units sold for the three months ended June 30, 2012, as compared to the same period in 2011, corresponding to the overall increase in used retail volume. As a percentage of total retail sales, CPO units decreased 130 basis points to 32.5% of total used retail units for the three months ended June 30, 2012, as compared to the same period in 2011. CPO units sold represented 32.7% of total used retail units sold for the six months ended June 30, 2012, as compared to 33.9% for the same period in 2011.

 

37


Table of Contents

During the second quarter 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. During 2012, supply of new vehicle inventory improved to more normalized levels and price relativities between new and used vehicles negatively impact used retail vehicle profits. For these reasons, gross profit per used retail unit declined by 12.7% to $1,750 and our Same Store used retail vehicle margins declined 130 basis points to 8.5% in the second quarter of 2012, as compared to the same period in 2011. For the six months ended June 30, 2012, gross profit per used retail unit declined 6.7%, while our average sales price PRU increased by 1.8%. As a result, our Same Store used retail vehicle margins decreased 80 basis points, as compared to the same period in 2011.

For the three months ended June 30, 2012, we sold 17.3% more wholesale units, as compared to the same period in 2011, corresponding with the improvements in new and used retail sales volumes. Our wholesale gross profit PRU declined $154 during the second quarter of 2012 to $41 per wholesale unit and our wholesale used vehicle gross margin experienced a 200 basis-point decrease, as compared to the same period in 2011. For the six months ended June 30, 2012, as compared to the same period in 2011, we experienced a 36.0% decline in wholesale gross profit PRU and a 110 basis-point decline in wholesale used vehicle gross margin on a 9.3% increase in used vehicle wholesaled units. These declines in profitability correspond with our continued focus on maximizing our used vehicle retail sales, as well as with the decrease in used vehicle market prices during the quarter as the Manheim index declined to its lowest level of the year in June 2012.

Our days’ supply of used vehicle inventory was 31 days at June 30, 2012, which was down from December 31, 2011 levels of 33 days.

Parts and Service Data

(dollars in thousands)

 

     Three Months Ended June 30,           Six Months Ended June 30,  
     2012     % Change     2011           2012     % Change     2011  

Parts and Service Revenues

                 

Same Stores

   $ 206,171        1.3   $ 203,592           $ 404,708        1.8   $ 397,666   

Transactions

     14,142          499             28,706          1,375   
  

 

 

     

 

 

        

 

 

     

 

 

 

Total

   $ 220,313        7.9   $ 204,091           $ 433,414        8.6   $ 399,041   

Gross Profit

                 

Same Stores

   $ 108,887        1.8   $ 106,997           $ 213,237        1.5   $ 210,097   

Transactions

     8,011          216             14,946          485   
  

 

 

     

 

 

        

 

 

     

 

 

 

Total

   $ 116,898        9.0   $ 107,213           $ 228,183        8.4   $ 210,582   

Gross Margin

                 

Same Stores

     52.8       52.6          52.7       52.8

Transactions

     56.6       43.3          52.1       35.3

Total

     53.1       52.5          52.6       52.8

Our Same Store parts and service revenues increased 1.3% for the three months ended June 30, 2012 as compared to the same period in 2011, driven primarily by a 3.5% increase in customer pay parts and service sales. We also generated a 2.0% increase in wholesale parts sales and a 0.4% increase in collision revenue. These increases were partially offset by a 4.6% decline in our warranty parts and service revenues. Similarly, for the six months ended June 30, 2012, Same Store parts and service revenues increased 1.8% as compared to the same period in 2011. The overall increase consisted of improvements in our customer pay parts and service revenues of 5.2%, our collision revenues of 5.3%, and our wholesale parts business of 2.3%. Our warranty parts and service revenues decreased 8.7%, as compared to the same period in 2011.

 

38


Table of Contents

The increase in Same Store customer parts and service revenues for the three and six months ended June 30, 2012, as compared to the same periods in 2011, was primarily driven by initiatives focused on customers, products and processes that continue to build momentum and generate results. Our Same Store wholesale parts business benefitted from an increase in business with second-tier collision centers and repair shops, stimulated by the stabilization in the economy.

Our Same Store collision business increased for the three and six months ended June 30, 2012, as compared to the same periods in 2011, benefitting from recent improvements in our business processes, as well as the expansion of our collision center footprint. The decrease in our Same Store warranty parts and service revenue for the three and six months ended June 30, 2012, as compared to the same periods in 2011, was primarily driven by the resolution of several large recall campaigns that bolstered our prior year’s results. Specifically by brand, Same Store warranty parts and service revenues from Lexus, BMW, Toyota and Ford declined 46.3%, 15.6%, 6.9% and 10.2%, respectively, for the six months ended June 30, 2012, as compared to the same period in 2011, primarily due to a decline in manufacturer recall activity.

Same Store parts and service gross profit for the three and six months ended June 30, 2012 increased 1.8% and 1.5%, respectively, from the same periods in 2011. For the three months ended June 30, 2012, our Same Store parts and service margins increased 20 basis points from the same period in 2011 primarily due to an increase in internal work generated by the increase in new and used retail vehicle sales volumes, as well as improvements in our collision and warranty parts and service businesses. For the six months ended June 30, 2012, our Same Store parts and service margins declined 10 basis points primarily explained by a mix shift away from our warranty parts and service business and towards our collision and wholesale parts businesses, which generate lower margins on a relative basis. In addition, 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 a decline in our customer-pay parts and service margins.

 

39


Table of Contents

Finance and Insurance Data

(dollars in thousands, except per unit amounts)

 

     Three Months Ended June 30,            Six Months Ended June 30,  
     2012      % Change     2011            2012      % Change     2011  

Retail New and Used Unit Sales

                    

Same Stores

     50,209         22.1     41,108              95,281         15.5     82,473   

Transactions

     4,719           189              8,326           258   
  

 

 

      

 

 

         

 

 

      

 

 

 

Total

     54,928         33.0     41,297              103,607         25.2     82,731   

Retail Finance Fees

                    

Same Stores

   $ 20,737         24.8   $ 16,617            $ 39,060         23.0   $ 31,749   

Transactions

     2,026           92              3,672           123   
  

 

 

      

 

 

         

 

 

      

 

 

 

Total

   $ 22,763         36.2   $ 16,709            $ 42,732         34.1   $ 31,872   

Vehicle Service Contract Fees

                    

Same Stores

   $ 24,842         29.7   $ 19,160            $ 47,187         24.2   $ 37,981   

Transactions

     1,484           76              2,902           90   
  

 

 

      

 

 

         

 

 

      

 

 

 

Total

   $ 26,326         36.9   $ 19,236            $ 50,089         31.6   $ 38,071   

Insurance and Other

                    

Same Stores

   $ 14,984         42.5   $ 10,516            $ 27,528         32.6   $ 20,756   

Transactions

     1,362           58              2,304           60   
  

 

 

      

 

 

         

 

 

      

 

 

 

Total

   $ 16,346         54.6   $ 10,574            $ 29,832         43.3   $ 20,816   

Total

                    

Same Stores

   $ 60,563         30.8   $ 46,293            $ 113,775         25.7   $ 90,486   

Transactions

     4,872           226              8,878           273   
  

 

 

      

 

 

         

 

 

      

 

 

 

Total

   $ 65,435         40.7   $ 46,519            $ 122,653         35.1   $ 90,759   
  

 

 

      

 

 

         

 

 

      

 

 

 

Finance and Insurance Revenues per Unit Sold

                    

Same Stores

   $ 1,206         7.1   $ 1,126            $ 1,194         8.8   $ 1,097   

Transactions

   $ 1,032         $ 1,196            $ 1,066         $ 1,058   

Total

   $ 1,191         5.8   $ 1,126            $ 1,184         7.9   $ 1,097   

Our focus on improving our finance and insurance business processes, coupled with improved retail vehicle sales volumes, continues to generate growth in finance and insurance revenues. Our Same Store finance and insurance revenues increased by 30.8% to $60.6 million for the three months ended June 30, 2012, as compared to the same period in 2011. This improvement was primarily driven by a 22.1% increase in new and used vehicle unit sales, along with an increase in penetration rates for finance and vehicle service contracts of 120 basis points and 130 basis points, respectively. In addition, finance income per contract increased by 1.4% for the three months ended June 30, 2012, as compared to the same period in 2011. We also experienced a 42.5% increase in our insurance and other product revenue primarily relating to increases in income per contract associated with these product offerings. These increases more than offset an increase in our chargeback expense. As a result, our Same Store revenues PRU for the three months ended June 30, 2012 improved 7.1 %, or $80, to $1,206, as compared to the same period in 2011.

For the first half of 2012, our Same Store finance and insurance revenues improved 25.7% over the same period in 2011, primarily reflecting a 15.5% increase in our new and used retail volumes coupled with a 5.7% increase in our finance income per contract and improvements in penetration of both our finance and vehicle service contracts, our Same Store revenues PRU increased 8.8%, or $97, to 1,194 for the six months ended June 30, 2012, as compared to the same period in 2011.

 

40


Table of Contents

Selling, General and Administrative Data

(dollars in thousands)

 

     Three Months Ended June 30,           Six Months Ended June 30,  
     2012     % Change     2011           2012     % Change     2011  

Personnel

                 

Same Stores

   $ 119,302        8.0   $ 110,438           $ 235,718        8.8   $ 216,705   

Transactions

     10,355          506             18,974          745   
  

 

 

     

 

 

        

 

 

     

 

 

 

Total

   $ 129,657        16.9   $ 110,944           $ 254,692        17.1   $ 217,450   

Advertising

                 

Same Stores

   $ 12,852        7.9   $ 11,910           $ 24,433        6.0   $ 23,053   

Transactions

     1,151          46             1,860          97   
  

 

 

     

 

 

        

 

 

     

 

 

 

Total

   $ 14,003        17.1   $ 11,956           $ 26,293        13.6   $ 23,150   

Rent and Facility Costs

                 

Same Stores

   $ 21,353        0.1   $ 21,339           $ 42,251        (3.4 )%    $ 43,753   

Transactions

     2,142          181             3,659          103   
  

 

 

     

 

 

        

 

 

     

 

 

 

Total

   $ 23,495        9.2   $ 21,520           $ 45,910        4.7   $ 43,856   

Other SG&A

                 

Same Stores

   $ 44,137        13.2   $ 38,987           $ 80,519        7.8   $ 74,674   

Transactions

     3,035          (356          6,025          (195
  

 

 

     

 

 

        

 

 

     

 

 

 

Total

   $ 47,172        22.1   $ 38,631           $ 86,544        16.2   $ 74,479   

Total SG&A

                 

Same Stores

   $ 197,644        8.2   $ 182,674           $ 382,921        6.9   $ 358,185   

Transactions

     16,683          377             30,518          750   
  

 

 

     

 

 

        

 

 

     

 

 

 

Total

   $ 214,327        17.1   $ 183,051           $ 413,439        15.2   $ 358,935