United Auto Group, Inc. 10-Q 09/30/2006
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 September 30, 2006
|
or
|
o
|
|
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 1-12297
United
Auto Group, Inc.
(Exact
name of registrant as specified in its charter)
|
|
|
Delaware
|
|
22-3086739
|
(State
or other jurisdiction of
incorporation
or organization)
|
|
(I.R.S.
Employer
Identification
No.)
|
2555
Telegraph Road,
Bloomfield
Hills, Michigan
|
|
48302-0954
(Zip
Code)
|
(Address
of principal executive offices)
|
|
|
Registrant’s
telephone number, including area code:
(248)
648-2500
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes
þ No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer in Rule 12b-2 of the Exchange Act (check
one)
Large
Accelerated Filer þ Accelerated
Filer o Non-accelerated
Filer o
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes o
No þ
As
of
November 2, 2006, there were 94,467,524 shares of voting common stock
outstanding.
|
|
|
|
|
|
|
Page
|
|
|
|
|
|
|
|
|
3 |
|
|
|
3 |
|
|
|
4 |
|
|
|
5 |
|
|
|
6 |
|
|
|
7 |
|
|
|
22 |
|
|
|
41 |
|
|
|
41 |
|
|
|
|
|
42 |
Signatures |
|
|
43 |
Certifications |
|
|
|
CONSOLIDATED
CONDENSED BALANCE SHEETS
|
|
September
30,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
(Unaudited)
(In
thousands, except
per
share amounts)
|
|
ASSETS
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
19,065
|
|
$
|
8,957
|
|
Accounts
receivable, net
|
|
|
464,287
|
|
|
413,431
|
|
Inventories,
net
|
|
|
1,455,910
|
|
|
1,219,735
|
|
Other
current assets
|
|
|
91,197
|
|
|
50,865
|
|
Assets
held for sale
|
|
|
137,442
|
|
|
189,373
|
|
Total
current assets
|
|
|
2,167,901
|
|
|
1,882,361
|
|
Property
and equipment, net
|
|
|
562,011
|
|
|
423,513
|
|
Goodwill
|
|
|
1,265,486
|
|
|
1,015,378
|
|
Franchise
value
|
|
|
227,120
|
|
|
189,297
|
|
Other
assets
|
|
|
116,410
|
|
|
83,624
|
|
Total
assets
|
|
$
|
4,338,928
|
|
$
|
3,594,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
Floor
plan notes payable
|
|
$
|
896,113
|
|
$
|
841,911
|
|
Floor
plan notes payable - non-trade
|
|
|
360,548
|
|
|
331,009
|
|
Accounts
payable
|
|
|
400,414
|
|
|
207,426
|
|
Accrued
expenses
|
|
|
253,593
|
|
|
174,157
|
|
Current
portion of long-term debt
|
|
|
3,743
|
|
|
3,551
|
|
Liabilities
held for sale
|
|
|
68,624
|
|
|
106,710
|
|
Total
current liabilities
|
|
|
1,983,035
|
|
|
1,664,764
|
|
Long-term
debt
|
|
|
862,535
|
|
|
576,690
|
|
Other
long-term liabilities
|
|
|
234,646
|
|
|
206,987
|
|
Total
liabilities
|
|
|
3,080,216
|
|
|
2,448,441
|
|
|
|
|
|
|
|
|
|
Commitments
and contingent liabilities
|
|
|
|
|
|
|
|
Stockholders'
Equity
|
|
|
|
|
|
|
|
Preferred
Stock, $0.0001 par value; 100 shares authorized;
|
|
|
|
|
|
|
|
none
issued and outstanding
|
|
|
-
|
|
|
-
|
|
Common
Stock, $0.0001 par value, 240,000 shares authorized;
|
|
|
|
|
|
|
|
94,457
shares issued at September 30, 2006; 93,767 shares issued at December
31,
2005
|
|
|
5 |
|
|
5 |
|
Non-voting
Common Stock, $0.0001 par value, 7,125 shares authorized; none
issued and
outstanding
|
|
|
- |
|
|
- |
|
Class
C Common Stock, $0.0001 par value, 20,000 shares authorized; none
issued
and outstanding
|
|
|
- |
|
|
- |
|
Additional
paid-in-capital
|
|
|
766,740
|
|
|
746,165
|
|
Retained
earnings
|
|
|
480,186
|
|
|
404,010
|
|
Accumulated
other comprehensive income
|
|
|
57,014
|
|
|
21,830
|
|
Treasury
stock, at cost; 5,306 shares at September 30, 2006; 4,306 shares at
December 31, 2005
|
|
|
(45,233 |
) |
|
(26,278 |
) |
Total
stockholders' equity
|
|
|
1,258,712
|
|
|
1,145,732
|
|
Total
liabilities and stockholders' equity
|
|
$
|
4,338,928
|
|
$
|
3,594,173
|
|
See
Notes
to Consolidated Condensed Financial Statements
UNITED AUTO GROUP, INC.
CONSOLIDATED
CONDENSED STATEMENTS OF INCOME
|
|
Three
Months Ended September 30,
|
|
Nine
Months Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
(Unaudited)
|
|
|
|
(In
thousands, except per share amounts)
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New
vehicle
|
|
$
|
1,732,275
|
|
$
|
1,577,928
|
|
$
|
4,851,791
|
|
$
|
4,445,052
|
|
Used
vehicle
|
|
|
704,254
|
|
|
550,665
|
|
|
1,935,739
|
|
|
1,626,516
|
|
Finance
and insurance, net
|
|
|
68,799
|
|
|
62,939
|
|
|
195,636
|
|
|
175,464
|
|
Service
and parts
|
|
|
329,322
|
|
|
277,040
|
|
|
951,884
|
|
|
809,278
|
|
Fleet
and wholesale vehicle
|
|
|
245,954
|
|
|
206,717
|
|
|
726,439
|
|
|
606,525
|
|
Total
revenues
|
|
|
3,080,604
|
|
|
2,675,289
|
|
|
8,661,489
|
|
|
7,662,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New
vehicle
|
|
|
1,584,517
|
|
|
1,443,278
|
|
|
4,431,374
|
|
|
4,059,563
|
|
Used
vehicle
|
|
|
645,135
|
|
|
500,925
|
|
|
1,766,982
|
|
|
1,478,151
|
|
Service
and parts
|
|
|
147,231
|
|
|
127,017
|
|
|
427,464
|
|
|
369,563
|
|
Fleet
and wholesale vehicle
|
|
|
245,301
|
|
|
207,176
|
|
|
721,906
|
|
|
605,617
|
|
Total
cost of sales
|
|
|
2,622,184
|
|
|
2,278,396
|
|
|
7,347,726
|
|
|
6,512,894
|
|
Gross
profit
|
|
|
458,420
|
|
|
396,893
|
|
|
1,313,763
|
|
|
1,149,941
|
|
Selling,
general and administrative expenses
|
|
|
361,297
|
|
|
309,265
|
|
|
1,039,317
|
|
|
905,171
|
|
Depreciation
and amortization
|
|
|
11,722
|
|
|
9,772
|
|
|
33,373
|
|
|
28,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
85,401
|
|
|
77,856
|
|
|
241,073
|
|
|
215,979
|
|
Floor
plan interest expense
|
|
|
(16,716
|
)
|
|
(11,865
|
)
|
|
(49,097
|
)
|
|
(37,483
|
)
|
Other
interest expense
|
|
|
(11,111
|
)
|
|
(12,222
|
)
|
|
(34,559
|
)
|
|
(35,735
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before income taxes and minority
interests
|
|
|
57,574
|
|
|
53,769
|
|
|
157,417
|
|
|
142,761
|
|
Income
taxes
|
|
|
(20,727
|
)
|
|
(19,552
|
)
|
|
(57,254
|
)
|
|
(52,390
|
)
|
Minority
interests
|
|
|
(478
|
)
|
|
(486
|
)
|
|
(1,536
|
)
|
|
(1,250
|
)
|
Income
from continuing operations
|
|
|
36,369
|
|
|
33,731
|
|
|
98,627
|
|
|
89,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations, net of tax
|
|
|
(2,496
|
)
|
|
(967
|
)
|
|
(3,825
|
)
|
|
(269
|
)
|
Net
income
|
|
$
|
33,873
|
|
$
|
32,764
|
|
$
|
94,802
|
|
$
|
88,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
0.39
|
|
$
|
0.36
|
|
$
|
1.06
|
|
$
|
0.96
|
|
Discontinued
operations
|
|
|
(0.03
|
)
|
|
(0.01
|
)
|
|
(0.04
|
)
|
|
(0.00
|
)
|
Net
income
|
|
|
0.36
|
|
|
0.35
|
|
|
1.02
|
|
|
0.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
used in determining basic earnings per share
|
|
|
93,754
|
|
|
93,080
|
|
|
93,257
|
|
|
92,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
0.39
|
|
$
|
0.36
|
|
$
|
1.05
|
|
$
|
0.95
|
|
Discontinued
operations
|
|
|
(0.03
|
)
|
|
(0.01
|
)
|
|
(0.04
|
)
|
|
(0.00
|
)
|
Net
income
|
|
|
0.36
|
|
|
0.35
|
|
|
1.01
|
|
|
0.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
used in determining diluted earnings per share
|
|
|
94,288
|
|
|
94,248
|
|
|
94,085
|
|
|
94,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends per share
|
|
$
|
0.07
|
|
$
|
0.06
|
|
$
|
0.20
|
|
$
|
0.17
|
|
See
Notes to Consolidated Condensed Financial Statements
UNITED
AUTO GROUP, INC.
CONSOLIDATED
CONDENSED STATEMENTS OF CASH
FLOWS
|
|
Nine
Months Ended September 30,
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
Operating
Activities:
|
|
(In
thousands)
|
|
Net
income
|
|
$
|
94,802
|
|
$
|
88,852
|
|
Adjustments
to reconcile net income to net cash from continuing operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
33,373
|
|
|
28,791
|
|
Undistributed
earnings of equity method investments
|
|
|
(5,503
|
)
|
|
(2,645
|
)
|
Loss
from discontinued operations, net of tax
|
|
|
3,825
|
|
|
269
|
|
Deferred
income taxes
|
|
|
16,776
|
|
|
16,993
|
|
Minority
interests
|
|
|
1,536
|
|
|
1,250
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(25,550
|
)
|
|
(12,467
|
)
|
Inventories
|
|
|
(69,251
|
)
|
|
132,158
|
|
Floor
plan notes payable
|
|
|
54,202
|
|
|
(117,857
|
)
|
Accounts
payable and accrued expenses
|
|
|
163,892
|
|
|
27,906
|
|
Other
|
|
|
(28,760
|
)
|
|
(509
|
)
|
Net
cash from continuing operating activities
|
|
|
239,342
|
|
|
162,741
|
|
|
|
|
|
|
|
|
|
Investing
Activities:
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(150,695
|
)
|
|
(165,446
|
)
|
Proceeds
from sale-leaseback transactions
|
|
|
62,778
|
|
|
71,188
|
|
Dealership
acquisitions, net, including repayment of sellers floorplan notes
payable
of $114,255 and $35,853, respectively
|
|
|
(369,260
|
)
|
|
(97,091
|
)
|
Net
cash from continuing investing activities
|
|
|
(457,177
|
)
|
|
(191,349
|
)
|
|
|
|
|
|
|
|
|
Financing
Activities:
|
|
|
|
|
|
|
|
Proceeds
from borrowings under U.S. Credit Agreement
|
|
|
327,000
|
|
|
171,000
|
|
Repayments
under U.S. Credit Agreement
|
|
|
(553,000
|
)
|
|
(110,800
|
)
|
Issuance
of convertible subordinated debt
|
|
|
375,000
|
|
|
-
|
|
Net
borrowings (repayments) of other long-term debt
|
|
|
74,185
|
|
|
(14,609
|
)
|
Net
borrowings (repayments) of floor plan notes payable -
non-trade
|
|
|
29,539
|
|
|
(47,914
|
)
|
Payment
of deferred financing costs
|
|
|
(12,630
|
)
|
|
-
|
|
Proceeds
from exercises of options including excess tax benefit
|
|
|
17,992
|
|
|
3,978
|
|
Repurchase
of common stock
|
|
|
(18,955
|
)
|
|
-
|
|
Dividends
|
|
|
(18,626
|
)
|
|
(15,269
|
)
|
Net
cash from continuing financing activities
|
|
|
220,505
|
|
|
(13,614
|
)
|
Discontinued
operations:
|
|
|
|
|
|
|
|
Net
cash from discontinued operating activities
|
|
|
(15,428
|
)
|
|
4,501
|
|
Net
cash from discontinued investing activities
|
|
|
28,115
|
|
|
31,771
|
|
Net
cash from discontinued financing activities
|
|
|
(5,249
|
)
|
|
(12,527
|
)
|
Net
cash from discontinued operations
|
|
|
7,438
|
|
|
23,745
|
|
|
|
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
|
|
10,108
|
|
|
(18,477
|
)
|
Cash
and cash equivalents, beginning of period
|
|
|
8,957
|
|
|
23,547
|
|
Cash
and cash equivalents, end of period
|
|
$
|
19,065
|
|
$
|
5,070
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
Cash
paid for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
82,073
|
|
$
|
78,832
|
|
Income
taxes
|
|
|
26,823
|
|
|
26,887
|
|
Seller
financed debt / debt assumed in acquisitions
|
|
|
64,168
|
|
|
5,300
|
|
|
|
|
|
|
|
|
|
*
See
Note 1
See
Notes
to Consolidated Condensed Financial Statements
UNITED
AUTO GROUP, INC.
CONSOLIDATED
CONDENSED STATEMENT OF STOCKHOLDERS’
EQUITY
AND
COMPREHENSIVE INCOME
|
|
Common
Stock
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
Other
|
|
|
|
Total
|
|
|
|
Issued
|
|
|
|
Paid-In
|
|
Retained
|
|
Comprehensive
|
|
Treasury
|
|
Stockholders'
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Earnings
|
|
Income
|
|
Stock
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
January 1, 2006
|
|
|
93,767,468
|
|
$
|
5
|
|
$
|
746,165
|
|
$
|
404,010
|
|
$
|
21,830
|
|
$
|
(26,278
|
)
|
$
|
1,145,732
|
|
Restricted
stock
|
|
|
222,130
|
|
|
-
|
|
|
2,583
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,583
|
|
Exercise
of options, including tax benefit of $8,654
|
|
|
1,467,748
|
|
|
-
|
|
|
17,992
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
17,992
|
|
Repurchase
of common stock
|
|
|
(1,000,000
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(18,955
|
)
|
|
(18,955
|
)
|
Dividends
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(18,626
|
)
|
|
-
|
|
|
-
|
|
|
(18,626
|
)
|
Fair
value of interest rate swap agreements
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,690
|
|
|
-
|
|
|
1,690
|
|
Foreign
currency translation
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
33,494
|
|
|
-
|
|
|
33,494
|
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
94,802
|
|
|
-
|
|
|
-
|
|
|
94,802
|
|
Balances,
September 30, 2006
|
|
|
94,457,346
|
|
$
|
5
|
|
$
|
766,740
|
|
$
|
480,186
|
|
$
|
57,014
|
|
$
|
(45,233
|
)
|
$
|
1,258,712
|
|
See
Notes
to Consolidated Condensed Financial Statements
UNITED
AUTO GROUP, INC.
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS
(Unaudited)
(In
thousands, except per share amounts)
1.
Interim Financial Statements
Basis of Presentation
The unaudited consolidated condensed financial statements of United Auto Group,
Inc. (the “Company”) have been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission (“SEC”). Certain information and
disclosures normally included in the Company’s annual financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to SEC rules and regulations. The information
presented as of September 30, 2006 and December 31, 2005 and for the three
and nine month periods ended September 30, 2006 and 2005 is unaudited, but
includes all adjustments which the management of the Company believes to be
necessary for the fair presentation of results for the periods presented. The
consolidated condensed financial statements for prior periods have been revised
for entities which have been treated as discontinued operations through
September 30, 2006. The results for interim periods are not necessarily
indicative of results to be expected for the year. These consolidated condensed
financial statements should be read in conjunction with the Company’s audited
financial statements for the year ended December 31, 2005, which are
included as part of the Company’s Annual Report on Form 10-K.
On
June
1, 2006, the Company effected a two-for-one split of its voting common stock
in
the form of a stock dividend. Shareholders of record as of May 11, 2006 received
one additional share for each share owned. All share and per share information
herein reflects the stock split.
Statement of Cash Flows
The Company has restated its 2005 consolidated statement of cash flows to
reflect the repayment of floor plan obligations in connection with acquisitions
and dispositions as cash transactions to comply with guidance under Statement
of
Financial Accounting Standards (“SFAS”) No. 95, “Statement of Cash Flows.”
More specifically, with respect to acquisitions, the Company restated the
consolidated statement of cash flows to reflect the repayment of seller floor
plan notes payable by its floor plan lenders as additional cost of dealership
acquisitions with the corresponding borrowings of floor plan notes payable
reflected as floor plan notes payable-non trade. Similarly, with respect to
dispositions, the Company restated the consolidated statement of cash flows
to
reflect the repayment of the Company’s floor plan notes payable by the
purchaser’s floor plan lender as additional transaction proceeds with
corresponding repayments of floor plan notes payable reflected as floor plan
notes payable trade or non-trade, as appropriate. Previously, all such activity
was treated as a non-cash acquisition or disposition of inventory and floor
plan
notes payable. As a result, the consolidated condensed statement of cash flows
for the nine months ended September 30, 2005 has been restated. A summary of
the
significant effects of the restatement follows:
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
|
|
2005
|
|
Net
cash from continuing operating activities as previously reported
|
|
$
|
137,316
|
|
Discontinued
operations
|
|
|
(8,780
|
)
|
Recognition
of floorplan balances as cash transactions
|
|
|
34,205
|
|
Net
cash from continuing operating activities, as restated
|
|
$
|
162,741
|
|
|
Net
cash from continuing investing activities as previously reported
|
|
$
|
(155,010
|
)
|
Discontinued
operations
|
|
|
(486
|
)
|
Recognition
of floorplan balances as cash transactions
|
|
|
(35,853
|
)
|
Net
cash from continuing investing activities, as restated
|
|
$
|
(191,349
|
)
|
|
|
|
|
|
Net
cash from continuing financing activities as previously reported
|
|
$
|
(17,818
|
)
|
Discontinued
operations
|
|
|
2,556
|
|
Recognition
of floorplan balances as cash transactions
|
|
|
1,648
|
|
Net
cash from continuing financing activities, as restated
|
|
$
|
(13,614
|
)
|
Discontinued
Operations
The Company accounts for dispositions as discontinued operations when it is
evident that the operations and cash flows of a franchise being disposed of
will
be eliminated from on-going operations and that the Company will not have any
significant continuing involvement in its operations. In reaching the
determination as to whether the cash flows of a dealership will be eliminated
from ongoing operations, the Company considers whether it is likely that
customers will migrate to similar franchises that it owns in the same geographic
market. The Company’s consideration includes an evaluation of the brands sold at
other dealerships it operates in the market and their proximity to the
dealership being disposed. When the Company disposes of franchises, it typically
does not have continuing brand representation in that market. If the franchise
being disposed of is located in a complex of Company dealerships, the Company
does not treat the disposition as a discontinued operation if the Company
believes that the cash flows generated by the disposed franchise will be
replaced by expanded operations of the remaining franchises. Combined financial
information regarding dealerships accounted for as discontinued operations
follows:
|
|
Three
Months Ended September 30,
|
|
Nine
Months Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Revenues
|
|
$
|
128,056
|
|
$
|
202,980
|
|
$
|
399,976
|
|
$
|
746,842
|
|
Pre-tax
loss
|
|
|
(1,579
|
)
|
|
(1,298
|
)
|
|
(3,962
|
)
|
|
(4,594
|
)
|
Gain
(loss) on disposal
|
|
|
(1,898
|
)
|
|
(222
|
)
|
|
(1,709
|
)
|
|
4,169
|
|
|
|
September
30,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
Inventories
|
|
$
|
61,272
|
|
$
|
92,750
|
|
Other
assets
|
|
|
76,170
|
|
|
96,623
|
|
Total
assets
|
|
$
|
137,442
|
|
$
|
189,373
|
|
Floor
plan notes payable
|
|
$
|
53,714
|
|
$
|
89,647
|
|
Other
liabilities
|
|
|
14,910
|
|
|
17,063
|
|
Total
liabilities
|
|
$
|
68,624
|
|
$
|
106,710
|
|
Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date
of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The accounts requiring the use of significant estimates include accounts
receivable, inventories, income taxes, intangible assets and certain
reserves.
Intangible
Assets
The Company’s principal intangible assets relate to its franchise agreements
with vehicle manufacturers, which represent the estimated value of franchises
acquired in business combinations, and goodwill, which represents the excess
of
cost over the fair value of tangible and identified intangible assets acquired
in connection with business combinations. Intangible assets are amortized over
their estimated useful lives. The Company believes the franchise value of its
dealerships has an indefinite useful life based on the following
facts:
|
•
|
Automotive
retailing is a mature industry and is based on franchise agreements
with
the vehicle manufacturers;
|
|
|
|
•
|
There
are no known changes or events that would alter the automotive retailing
franchise environment;
|
|
|
|
•
|
Certain
franchise agreement terms are indefinite;
|
|
|
|
•
|
Franchise
agreements that have limited terms have historically been renewed
without
substantial cost; and
|
|
|
|
•
|
The
Company’s history shows that manufacturers have not terminated our
franchise agreements.
|
The following is a summary of the changes in the carrying amount of goodwill
and
franchise value for the nine months ended September 30, 2006:
|
|
Goodwill
|
|
Franchise
Value
|
|
|
|
|
|
Balance
- January 1, 2006
|
|
$
|
1,015,378
|
|
$
|
189,297
|
|
Additions
during period
|
|
|
231,752
|
|
|
32,518
|
|
Foreign
currency translation
|
|
|
18,356
|
|
|
5,305
|
|
|
|
|
Balance
- September 30, 2006
|
|
$
|
1,265,486
|
|
$
|
227,120
|
|
As
of September 30, 2006,
approximately $703,520 of the Company’s goodwill is deductible for tax purposes.
The Company has established deferred tax liabilities related to temporary
differences arising from such tax deductible goodwill.
Stock-Based
Compensation
Key employees, outside directors, consultants and advisors of the Company are
eligible to receive stock-based compensation pursuant to the terms of the
Company’s 2002 Equity Compensation Plan (the “Plan”). The Plan originally
allowed for the issuance of 4,200 shares for stock options, stock
appreciation rights, restricted stock, restricted stock units, performance
shares and other awards. As of September 30, 2006, 2,988 shares of common stock
were available for grant under the Plan.
The
Company elected to
adopt SFAS No. 123(R), “Share-Based Payment,” as amended and
interpreted, effective July 1, 2005. The Company utilized the modified
prospective method approach, pursuant to which the Company has recorded
compensation expense for all awards granted after July 1, 2005 based on
their fair value. The Company’s share-based payments have generally been in the
form of “non-vested shares” which are measured at their fair value as if they
were vested and issued on the grant date.
Prior
to July 1,
2005, the Company accounted for stock-based compensation using the intrinsic
value method pursuant to Accounting Principles Board (“APB”) Opinion
No. 25, “Accounting for Stock Issued to Employees.” All options granted
pursuant to the Plan had a strike price equal to fair market value on the date
of grant. As a result, no compensation expense was recorded with respect to
option grants. During that time, the Company followed the disclosure only
provisions of SFAS No. 123, “Accounting for Stock Based Compensation,”
as interpreted and amended. Had the Company elected to recognize
compensation expense for option grants using the fair value method prior to
July
1, 2005, the effect on net income and basic and diluted earnings per share
would
not have been material.
New
Accounting Pronouncements
SFAS No. 154, “Accounting Changes and Error Corrections — A
Replacement of APB Opinion No. 20 and FASB Statement No. 3,” requires
all direct financial statement effects caused by a voluntary change in
accounting principle to be applied retrospectively to prior period financial
statements as if the new principle had always been applied, unless it is
impracticable to determine either the period-specific effects or the cumulative
effect of the change in principle. APB Opinion No. 20 and
SFAS No. 3 previously required that a voluntary change in accounting
principle be recognized as a cumulative effect in the period of change.
SFAS No. 154 was effective for the Company on January 1, 2006.
See “Statement of Cash Flows” discussion above.
Financial
Accounting
Standards Board (“FASB”) Staff Position FAS 13-1, “Accounting for Rental
Costs Incurred During a Construction Period” (“FSP FAS 13-1”), requires
companies to expense real estate rental costs under operating leases during
periods of construction and was effective for the Company on January 1,
2006. FSP FAS 13-1 did not require retroactive application and did not have
a
material effect on consolidated operating results, financial position or cash
flows.
FASB
Interpretation
(“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes,” requires companies
to recognize and measure tax benefits using a “more likely than not” threshold
and requires companies to make disclosures about uncertainties in their income
tax positions. FIN No. 48 will be effective for the Company on January 1, 2007.
The Company is currently evaluating the impact of this pronouncement.
SFAS
No. 157,
"Fair Value Measurements"
defines
fair value, establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosure requirements relating
to
fair value measurements.
SFAS
No. 157 will be effective for the Company on January 1, 2008. The Company is
currently evaluating the impact of this pronouncement.
SFAS
No. 158, “Employers’
Accounting For Defined Benefit Pension and Other Postretirement Plans - an
amendment of FASB Statements No. 87, 88, 106 and 132(R)” requires companies to
recognize the funded status (plan obligations less the fair value of plan
assets) of pension and other postretirement benefit plans on their balance
sheets, effective for fiscal years ending after December 15, 2006. The Company
is currently evaluating the impact of this pronouncement.
SEC
Staff Accounting
Bulletin Topic 1N, “Financial Statements — Considering the Effects of Prior Year
Misstatements When Quantifying Misstatements in Current Year Financial
Statements” (“SAB 108”) addresses how a registrant should quantify the effect of
an error on the financial statements. SAB 108 will be effective for the Company
for the fiscal year ending December 31, 2006. The Company is currently
evaluating the impact of this pronouncement.
2.
Inventories
Inventories consisted of the following:
|
|
September
30,
2006
|
|
December
31,
2005
|
|
New
vehicles
|
|
$
|
1,025,997
|
|
$
|
911,180
|
|
Used
vehicles
|
|
|
350,480
|
|
|
241,792
|
|
Parts,
accessories and other
|
|
|
79,433
|
|
|
66,763
|
|
|
|
|
Total
inventories
|
|
$
|
1,455,910
|
|
$
|
1,219,735
|
|
The
Company receives non-refundable credits from certain vehicle manufacturers
which
are treated as a reduction of cost of sales when the vehicles are sold. Such
credits amounted to $9,228 and $9,502 during the three months ended September
30, 2006 and 2005, respectively, and $25,834 and $24,354 during the
nine months ended September 30, 2006 and 2005, respectively.
3.
Business
Combinations
During each of the periods presented, the Company completed a number of
acquisitions. The Company’s financial statements include the results of
operations of the acquired dealerships from the dates of acquisition. Purchase
price allocations may be subject to final adjustment. A summary of the aggregate
purchase price allocations during the nine months ended September 30, 2006
follows:
Accounts
receivable
|
|
$
|
24,171
|
|
Inventory
|
|
|
166,924
|
|
Other
current assets
|
|
|
20,268
|
|
Property
and equipment
|
|
|
71,051
|
|
Goodwill
|
|
|
231,752
|
|
Franchise
value
|
|
|
32,518
|
|
Other
assets
|
|
|
21
|
|
Current
liabilities
|
|
|
(177,445
|
)
|
Cash
used in dealership acquisitions, including repayment of sellers floorplan
notes payable of $114,255 during the nine months ended September
30, 2006
|
|
$
|
369,260
|
|
The
following unaudited consolidated pro forma results of operations of the Company
for the three and nine months ended September 30, 2006 and 2005 give effect
to
acquisitions consummated during 2006 and 2005 as if they had occurred on
January 1, 2005.
|
|
Three
Months Ended September 30,
|
|
Nine
Months Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Revenues
|
|
$
|
3,218,911
|
|
$
|
3,164,963
|
|
$
|
9,319,279
|
|
$
|
9,111,028
|
|
Income
from continuing operations
|
|
|
36,565
|
|
|
35,994
|
|
|
99,907
|
|
|
95,795
|
|
Net
income
|
|
|
34,069
|
|
|
35,027
|
|
|
96,082
|
|
|
95,526
|
|
Income
from continuing operations per diluted common share
|
|
$
|
0.39
|
|
$
|
0.38
|
|
$
|
1.06
|
|
$
|
1.02
|
|
Net
income per diluted common share
|
|
$
|
0.36
|
|
$
|
0.37
|
|
$
|
1.02
|
|
$
|
1.02
|
|
4.
Floor
Plan Notes
Payable
—
Trade and Non-trade
The Company finances the majority of its new and a portion of its used vehicle
inventories under revolving floor plan arrangements with various lenders. In
the
U.S., the floor plan arrangements are due on demand; however, the Company is
generally not required to make loan principal repayments prior to the sale
of
the vehicles that have been financed. The Company typically makes monthly
interest payments on the amount financed. Outside of the U.S., substantially
all
of the floor plan arrangements are payable on demand or have an original
maturity of 90 days or less and the Company is generally required to repay
floor plan advances at the earlier of the sale of the vehicles that have been
financed or the stated maturity. All of the floor plan agreements grant a
security interest in substantially all of the assets of the Company’s dealership
subsidiaries. Interest rates under the floor plan arrangements are variable
and
increase or decrease based on changes in the prime rate, defined LIBOR or Euro
Interbank Offer Rate. The Company classifies floor plan notes payable to a
party
other than the manufacturer of a particular new vehicle, and all floor plan
notes payable relating to pre-owned vehicles, as floor plan notes payable —
non-trade on its consolidated condensed balance sheets and classifies related
cash flows as a financing activity on its consolidated condensed statements
of
cash flows.
5.
Earnings
Per Share
Basic earnings per share is computed using net income and weighted average
shares of voting common stock outstanding. Diluted earnings per share is
computed using net income and the weighted average shares of voting common
stock
outstanding, adjusted for the dilutive effect of stock options and restricted
stock. A reconciliation of the number of shares used in the calculation of
basic
and diluted earnings per share for the three and nine months ended September
30,
2006 and 2005 follows:
|
|
Three
Months Ended September 30,
|
|
Nine
Months Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Weighted
average shares outstanding
|
|
|
93,754
|
|
|
93,080
|
|
|
93,257
|
|
|
92,780
|
|
Effect
of stock options
|
|
|
276
|
|
|
818
|
|
|
465
|
|
|
790
|
|
Effect
of restricted stock
|
|
|
258
|
|
|
350
|
|
|
363
|
|
|
440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding, including effect of dilutive securities
|
|
|
94,288
|
|
|
94,248
|
|
|
94,085
|
|
|
94,010
|
|
In
addition, the Company has senior subordinated convertible notes outstanding
which, under certain circumstances discussed in Note 6, may be converted to
voting common stock. As of September 30, 2006, no voting common shares were
included in the calculation of diluted earnings per share because the effect
of
such securities was not dilutive.
6.
Long-Term
Debt
Long-term debt consisted of the following:
|
|
September
30,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
U.S.
Credit Agreement
|
|
$
|
46,000
|
|
$
|
272,000
|
|
U.K.
Credit Agreement
|
|
|
131,068
|
|
|
-
|
|
9.625%
Senior Subordinated Notes due 2012
|
|
|
300,000
|
|
|
300,000
|
|
3.5%
Senior Subordinated Convertible Notes due 2026
|
|
|
375,000
|
|
|
-
|
|
Other
|
|
|
14,210
|
|
|
8,241
|
|
Total
long-term debt
|
|
|
866,278
|
|
|
580,241
|
|
Less:
current portion
|
|
|
(3,743
|
)
|
|
(3,551
|
)
|
Net
long-term debt
|
|
$
|
862,535
|
|
$
|
576,690
|
|
U.S. Credit
Agreement
The Company is party to a credit agreement with DaimlerChrysler Services
Americas LLC and Toyota Motor Credit Corporation, as amended (the
“U.S. Credit Agreement”), which provides for up to $600,000 in revolving
loans for working capital, acquisitions, capital expenditures, investments
and
for other general corporate purposes, and for an additional $50,000 of
availability for letters of credit, through September 30, 2009. The
revolving loans bear interest between defined LIBOR plus 2.50% and defined
LIBOR
plus 3.50%.
The
U.S. Credit Agreement is fully and unconditionally guaranteed on a joint
and several basis by the Company’s domestic subsidiaries and contains a number
of significant covenants that, among other things, restrict the Company’s
ability to dispose of assets, incur additional indebtedness, repay other
indebtedness, create liens on assets, make investments or acquisitions and
engage in mergers or consolidations. The Company is also required to comply
with
specified financial and other tests and ratios, each as defined in the
U.S. Credit Agreement, including: a ratio of current assets to current
liabilities, a fixed charge coverage ratio, a ratio of debt to stockholders’
equity, a ratio of debt to earnings before interest, taxes, depreciation and
amortization (“EBITDA”), a ratio of domestic debt to domestic EBITDA, and a
measurement of stockholders’ equity. A breach of these requirements would give
rise to certain remedies under the agreement, the most severe of which is the
termination of the agreement and acceleration of the amounts owed. As of
September 30, 2006, the Company was in compliance with all covenants under
the
U.S. Credit Agreement.
The
U.S. Credit
Agreement also contains typical events of default, including change of control,
non-payment of obligations and cross-defaults to the Company’s other material
indebtedness. Substantially all of the Company’s domestic assets not pledged as
security under floor plan arrangements are subject to security interests granted
to lenders under the U.S. Credit Agreement. As of September 30, 2006,
outstanding borrowings and letters of credit under the U.S. Credit
Agreement amounted to $46,000 and $12,400, respectively.
U.K. Credit Agreement
The
Company’s
subsidiaries in the U.K. (the “U.K. Subsidiaries”) and the Royal Bank of
Scotland plc, as agent for National Westminster Bank plc ("RBS"), replaced
their
existing credit agreement on August 31, 2006, with a five year multi-option
credit agreement, a new fixed rate credit agreement and a new seasonally
adjusted overdraft line of credit (collectively, the "U.K. Credit Agreement")
to
be used to finance acquisitions, working capital, and general corporate
purposes. The U.K. Credit Agreement provides for (1) up to £70,000 in revolving
loans through August 31, 2011, which have an original maturity of 90 days
or less and bear interest between defined LIBOR plus 0.65% and defined LIBOR
plus 1.25%, (2) a £30,000 funded term loan which bears interest between 5.94%
and 6.54% and is payable ratably in quarterly intervals commencing on June
30,
2007, through June 30, 2011 and (3) a seasonally adjusted overdraft line of
credit for up to £30,000 that bears interest at the Bank of England Base Rate
plus 1.00% and matures on August 31, 2011.
The
U.K. Credit Agreement
is fully and unconditionally guaranteed on a joint and several basis by the
U.K.
Subsidiaries, and contains a number of significant covenants that, among other
things, restrict the ability of the U.K. Subsidiaries to pay dividends, dispose
of assets, incur additional indebtedness, repay other indebtedness, create
liens
on assets, make investments or acquisitions and engage in mergers or
consolidations. In addition, the U.K. Subsidiaries are required to comply with
specified ratios and tests, each as defined in the U.K. Credit Agreement,
including: a ratio of earnings before interest and taxes plus rental payments
to
interest plus rental payments (as defined), a measurement of maximum capital
expenditures, and a debt to EBITDA ratio (as defined). A breach of these
requirements would give rise to certain remedies under the agreement, the most
severe of which is the termination of the agreement and acceleration of the
amounts owed. As of September 30, 2006, the Company was in compliance with
all
covenants under the U.K. Credit Agreement.
The
U.K. Credit Agreement
also contains typical events of default, including change of control and
non-payment of obligations and cross-defaults to other material indebtedness
of
the U.K. Subsidiaries. Substantially all of the U.K. Subsidiaries' assets not
pledged as security under floor plan arrangements are subject to security
interests granted to lenders under the U.K. Credit Agreement. As of September
30, 2006, outstanding revolving loans under the U.K. Credit Agreement
amounted to £70,000 ($131,068).
Senior Subordinated Notes
The Company has outstanding $300,000 aggregate principal amount of
9.625% Senior Subordinated Notes due 2012 (the “9.625% Notes”). The
9.625% Notes are unsecured senior subordinated notes and are subordinate to
all existing and future senior debt, including debt under the Company’s credit
agreements and floor plan indebtedness. The 9.625% Notes are guaranteed by
substantially all domestic subsidiaries on a senior subordinated basis. The
Company can redeem all or some of the 9.625% Notes at its option beginning
in March 2007 at specified redemption prices. Upon a change of control, each
holder of 9.625% Notes will be able to require the Company to repurchase
all or some of the Notes at a redemption price of 101% of their principal
amount. The 9.625% Notes also contain customary negative covenants and
events of default. As of September 30, 2006, the Company was in compliance
with
all negative covenants and there were no events of default.
Senior Subordinated Convertible Notes
On January 31, 2006, the Company issued $375,000 of 3.50% senior
subordinated convertible notes due 2026 (the “Convertible Notes”). The
Convertible Notes mature on April 1, 2026, unless earlier converted,
redeemed or purchased by the Company. The Convertible Notes are unsecured senior
subordinated obligations and are guaranteed on an unsecured senior subordinated
basis by the Company’s wholly owned domestic subsidiaries. The Convertible Notes
also contain customary negative covenants and events of default. As of September
30, 2006, the Company was in compliance with all negative covenants and there
were no events of default.
Holders
may convert based
on a conversion rate of 42.2052 shares of common stock per $1,000 principal
amount of the Convertible Notes (which is equal to a conversion price of
approximately $23.69 per share), subject to adjustment, only under the
following circumstances: (1) if the closing price of the common stock
reaches, or the trading price of the Convertible Notes falls below, specific
thresholds, (2) if the Convertible Notes are called for redemption,
(3) if specified distributions to holders of common stock are made or
specified corporate transactions occur, (4) if a fundamental change (as
defined) occurs, or (5) during the ten trading days prior to, but
excluding, the maturity date. Upon conversion of the Convertible Notes, for
each
$1,000 principal amount of the Convertible Notes, a holder will receive an
amount in cash, in lieu of shares of common stock, equal to the lesser of
(i) $1,000 or (ii) the conversion value, determined in the manner set
forth in the related indenture (the “Indenture”), of the number of shares of
common stock equal to the conversion rate. If the conversion value exceeds
$1,000, the Company will also deliver, at its election, cash, common stock
or a
combination of cash and common stock with respect to the remaining value
deliverable upon conversion. If a holder elects to convert its Convertible
Notes
in connection with certain events that constitute a change of control on or
before April 6, 2011, the Company will pay, to the extent described in the
Indenture, a make-whole premium by increasing the conversion rate applicable
to
such Convertible Notes.
In
addition, the Company will pay contingent interest in cash, commencing with
any
six-month period beginning on April 1, 2011, if the average trading price
of a Convertible Note for the five trading days ending on the third trading
day
immediately preceding the first day of that six-month period equals 120% or
more
of the principal amount of the Convertible Note.
On
or
after April 6, 2011, the Company may redeem the Convertible Notes, in whole
at any time or in part from time to time, for cash at a redemption price of
100%
of the principal amount of the Convertible Notes to be redeemed, plus any
accrued and unpaid interest to the applicable redemption date. Holders of the
Convertible Notes may require the Company to purchase all or a portion of their
Convertible Note for cash on each of April 1, 2011, April 1, 2016 and
April 1, 2021 at a purchase price equal to 100% of the principal amount of
the Convertible Notes to be purchased, plus accrued and unpaid interest, if
any,
to the applicable purchase date.
7.
Stockholders’ Equity
Share
Repurchase
In connection with the issuance of the Convertible Notes discussed above, the
Company repurchased 1,000,000 shares of its outstanding common stock on
January 26, 2006 for $18,955, or $18.955 per share.
Comprehensive
income
Other
comprehensive
income includes changes in the fair value of interest rate swap agreements
and
foreign currency translation gains and losses that have been excluded from
net
income and reflected in equity. Total comprehensive income is summarized as
follows:
|
|
Three
Months Ended September 30,
|
|
Nine
Months Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Net
income
|
|
|
33,873
|
|
|
32,764
|
|
|
94,802
|
|
|
88,852
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of interest rate swap agreements
|
|
|
(554
|
)
|
|
1,843
|
|
|
1,690
|
|
|
2,884
|
|
Foreign
currency translation
|
|
|
4,329
|
|
|
(5,337
|
)
|
|
33,494
|
|
|
(32,819
|
)
|
Comprehensive
Income
|
|
$
|
37,648
|
|
$
|
29,270
|
|
$
|
129,986
|
|
$
|
58,917
|
|
8. Interest Rate
Swaps
The Company is party to an interest rate swap agreement through January 2008
pursuant to which a notional $200,000 of its U.S. floating rate debt was
exchanged for fixed rate debt. The swap was designated as a cash flow hedge
of
future interest payments of LIBOR based U.S. floor plan borrowings. As of
September 30, 2006, the Company expected approximately $600 associated with
the
swap to be recognized as a reduction of interest expense over the next twelve
months.
9. Commitments and
Contingent Liabilities
From time to time, the Company is involved in litigation relating to claims
arising in the normal course of business. Such issues may relate to litigation
with customers, employment related lawsuits, class action lawsuits, purported
class action lawsuits, and actions brought by governmental authorities. As
of
September 30, 2006, the Company was not party to any legal proceedings,
including class action lawsuits to which it is a party, that, individually
or in
the aggregate, are reasonably expected to have a material adverse effect on
the
Company’s results of operations, financial condition or cash flows. However, the
results of these matters cannot be predicted with certainty, and an unfavorable
resolution of one or more of these matters could have a material adverse effect
on the Company’s results of operations, financial condition or cash
flows.
The
Company is party to a
joint venture agreement with respect to one of the Company’s franchises pursuant
to which the Company is required to repurchase its partner’s interest in July
2008. The Company expects this payment to be approximately
$4.0 million.
The
Company leases the
majority of its dealership facilities and corporate offices under long-term
non-cancelable operating lease agreements. Such leases typically include
escalation clauses tied to an inflation index such as the Consumer Price Index
and additional option periods that are available to the Company.
10.
Consolidating Condensed Financial Information
The terms of the Company’s 9.625% Notes and Convertible Notes require
guarantees by substantially all of the Company’s domestic subsidiaries on a
senior subordinated basis. The following tables include consolidating condensed
financial information as of September 30, 2006 and December 31, 2005 and
for the three and nine month periods ended September 30, 2006 and 2005 for
United Auto Group, Inc.’s wholly owned subsidiary guarantors, non-wholly owned
subsidiaries (which are guarantors of the 9.625% Notes but not the
Convertible Notes), and non-guarantor subsidiaries (primarily representing
foreign entities). The condensed consolidating financial information includes
certain allocations of balance sheet, income statement and cash flow items
which
are not necessarily indicative of the financial position, results of operations
or cash flows of these entities on a stand-alone basis.
Consolidating
Condensed Balance Sheet
September
30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Wholly
Owned Guarantor Subsidiaries*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UAG
|
|
UAG
Mentor
|
|
UAG
|
|
Non-
|
|
|
Total
|
|
|
|
United
Auto
|
|
Guarantor
|
|
HBL
|
|
Connecticut
I,
|
|
Acquisition
|
|
Central
NJ,
|
|
Guarantor
|
|
|
Company |
|
Eliminations |
|
Group,
Inc. |
|
Subsidiaries |
|
LLC |
|
LLC
|
|
LLC |
|
LLC |
|
Subsidiaries |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
Thousands)
|
|
Cash
and cash equivalents
|
$
|
19,065
|
|
$
|
-
|
|
$
|
2,566
|
|
$
|
-
|
|
$
|
-
|
|
$
|
763
|
|
$
|
765
|
|
$
|
1,209
|
|
$
|
13,762
|
|
|
|
464,287
|
|
|
(50,171
|
)
|
|
50,171
|
|
|
244,354
|
|
|
9,166
|
|
|
6,081
|
|
|
2,390
|
|
|
1,123
|
|
|
201,173
|
|
Inventories,
net
|
|
1,455,910
|
|
|
-
|
|
|
-
|
|
|
765,634
|
|
|
31,678
|
|
|
21,930
|
|
|
5,421
|
|
|
3,154
|
|
|
628,093
|
|
Other
current assets
|
|
91,197
|
|
|
-
|
|
|
10,083
|
|
|
26,885
|
|
|
613
|
|
|
89
|
|
|
36
|
|
|
-
|
|
|
53,491
|
|
Assets
held for sale
|
|
137,442
|
|
|
-
|
|
|
-
|
|
|
122,538
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
14,904
|
|
Total
current assets
|
|
2,167,901
|
|
|
(50,171
|
)
|
|
62,820
|
|
|
1,159,411
|
|
|
41,457
|
|
|
28,863
|
|
|
8,612
|
|
|
5,486
|
|
|
911,423
|
|
Property
and equipment, net
|
|
562,011
|
|
|
-
|
|
|
4,179
|
|
|
302,870
|
|
|
5,470
|
|
|
3,761
|
|
|
1,772
|
|
|
3,472
|
|
|
240,487
|
|
Intangible
assets
|
|
1,492,606
|
|
|
-
|
|
|
-
|
|
|
948,933
|
|
|
68,281
|
|
|
20,738
|
|
|
3,722
|
|
|
-
|
|
|
450,932
|
|
Other
assets
|
|
116,410
|
|
|
(1,179,731
|
)
|
|
1,194,046
|
|
|
48,208
|
|
|
3
|
|
|
1
|
|
|
2
|
|
|
-
|
|
|
53,881
|
|
Total
assets
|
$
|
4,338,928
|
|
$
|
(1,229,902
|
)
|
$
|
1,261,045
|
|
$
|
2,459,422
|
|
$
|
115,211
|
|
$
|
53,363
|
|
$
|
14,108
|
|
$
|
8,958
|
|
$
|
1,656,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
896,113
|
|
$
|
-
|
|
$
|
-
|
|
$
|
486,641
|
|
$
|
10,107
|
|
$
|
6,574
|
|
$
|
5,162
|
|
$
|
-
|
|
$
|
387,629
|
|
Floor
plan notes payable - non-trade
|
|
360,548
|
|
|
-
|
|
|
-
|
|
|
200,267
|
|
|
15,062
|
|
|
12,581
|
|
|
-
|
|
|
2,321
|
|
|
130,317
|
|
Accounts
payable
|
|
400,414
|
|
|
-
|
|
|
1,804
|
|
|
107,826
|
|
|
5,201
|
|
|
2,170
|
|
|
583
|
|
|
2,712
|
|
|
280,118
|
|
Accrued
expenses
|
|
253,593
|
|
|
(50,171
|
)
|
|
529
|
|
|
(7,120
|
)
|
|
35,181
|
|
|
16,267
|
|
|
2,303
|
|
|
1,149
|
|
|
255,455
|
|
Current
portion of long-term debt
|
|
3,743
|
|
|
-
|
|
|
-
|
|
|
3,743
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Liabilities
held for sale
|
|
68,624
|
|
|
-
|
|
|
-
|
|
|
53,266
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
15,358
|
|
Total
current liabilities
|
|
1,983,035
|
|
|
(50,171
|
)
|
|
2,333
|
|
|
844,623
|
|
|
65,551
|
|
|
37,592
|
|
|
8,048
|
|
|
6,182
|
|
|
1,068,877
|
|
Long-term
debt
|
|
862,535
|
|
|
-
|
|
|
-
|
|
|
468,621
|
|
|
63,151
|
|
|
21,361
|
|
|
3,842
|
|
|
3,059
|
|
|
302,501
|
|
Other
long-term liabilities
|
|
234,646
|
|
|
-
|
|
|
-
|
|
|
219,448
|
|
|
10,389
|
|
|
217
|
|
|
4,069
|
|
|
(152
|
)
|
|
675
|
|
Total
liabilities
|
|
3,080,216
|
|
|
(50,171
|
)
|
|
2,333
|
|
|
1,532,692
|
|
|
139,091
|
|
|
59,170
|
|
|
15,959
|
|
|
9,089
|
|
|
1,372,053
|
|
Total
stockholders' equity
|
|
1,258,712
|
|
|
(1,179,731
|
)
|
|
1,258,712
|
|
|
926,730
|
|
|
(23,880
|
)
|
|
(5,807
|
)
|
|
(1,851
|
)
|
|
(131
|
)
|
|
284,670
|
|
Total
liabilities and stockholders' equity
|
$
|
4,338,928
|
|
$
|
(1,229,902
|
)
|
$
|
1,261,045
|
|
$
|
2,459,422
|
|
$
|
115,211
|
|
$
|
53,363
|
|
$
|
14,108
|
|
$
|
8,958
|
|
$
|
1,656,723
|
|
*
Guarantors of the 9.625% notes; non-guarantors of the Convertible
Notes
Consolidating
Condensed Balance Sheet
December 31,
2005
|
|
|
|
|
|
|
|
|
Non-Wholly
Owned Guarantor Subsidiaries*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UAG
|
|
UAG
Mentor
|
|
UAG
|
|
Non-
|
|
Total
|
|
|
|
United
Auto
|
|
Guarantor
|
|
HBL
|
|
Connecticut
I,
|
|
Acquisition
|
|
Central
NJ,
|
|
Guarantor
|
|
Company
|
|
Eliminations |
|
Group,
Inc. |
|
Subsidiaries |
|
LLC |
|
LLC |
|
LLC |
|
LLC |
|
Subsidiaries |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
Thousands)
|
|
Cash
and cash equivalents
|
$
|
8,957
|
|
$
|
-
|
|
$
|
4,365
|
|
$
|
-
|
|
$
|
-
|
|
$
|
1,127
|
|
$
|
394
|
|
$
|
2,540
|
|
$
|
531
|
|
|
413,431
|
|
|
(42,810
|
)
|
|
42,810
|
|
|
280,795
|
|
|
11,489
|
|
|
7,117
|
|
|
2,852
|
|
|
1,032
|
|
|
110,146
|
Inventories,
net
|
|
1,219,735
|
|
|
-
|
|
|
-
|
|
|
749,409
|
|
|
33,029
|
|
|
19,941
|
|
|
6,272
|
|
|
2,184
|
|
|
408,900
|
Other
current assets
|
|
50,865
|
|
|
-
|
|
|
5,118
|
|
|
21,782
|
|
|
467
|
|
|
42
|
|
|
6
|
|
|
-
|
|
|
23,450
|
Assets
held for sale
|
|
189,373
|
|
|
-
|
|
|
-
|
|
|
179,126
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
10,247
|
Total
current assets
|
|
1,882,361
|
|
|
(42,810
|
)
|
|
52,293
|
|
|
1,231,112
|
|
|
44,985
|
|
|
28,227
|
|
|
9,524
|
|
|
5,756
|
|
|
553,274
|
Property
and equipment, net
|
|
423,513
|
|
|
-
|
|
|
4,297
|
|
|
249,725
|
|
|
5,929
|
|
|
2,932
|
|
|
1,859
|
|
|
3,660
|
|
|
155,111
|
Intangible
assets
|
|
1,204,675
|
|
|
-
|
|
|
-
|
|
|
853,041
|
|
|
68,281
|
|
|
20,738
|
|
|
3,722
|
|
|
-
|
|
|
258,893
|
Other
assets
|
|
83,624
|
|
|
(1,066,353
|
)
|
|
1,093,522
|
|
|
11,681
|
|
|
83
|
|
|
1
|
|
|
-
|
|
|
-
|
|
|
44,690
|
Total
assets
|
$
|
3,594,173
|
|
$
|
(1,109,163
|
)
|
$
|
1,150,112
|
|
$
|
2,345,559
|
|
$
|
119,278
|
|
$
|
51,898
|
|
$
|
15,105
|
|
$
|
9,416
|
|
$
|
1,011,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
841,911
|
|
$
|
-
|
|
$
|
-
|
|
$
|
532,020
|
|
$
|
14,045
|
|
$
|
6,725
|
|
$
|
6,156
|
|
$
|
-
|
|
$
|
282,965
|
Floor
plan notes payable - non-trade
|
|
331,009
|
|
|
-
|
|
|
-
|
|
|
231,081
|
|
|
15,154
|
|
|
12,000
|
|
|
-
|
|
|
2,486
|
|
|
70,288
|
Accounts
payable
|
|
207,426
|
|
|
-
|
|
|
3,874
|
|
|
87,902
|
|
|
6,941
|
|
|
1,393
|
|
|
676
|
|
|
2,532
|
|
|
104,108
|
Accrued
expenses
|
|
174,157
|
|
|
(42,810
|
)
|
|
506
|
|
|
1,522
|
|
|
29,933
|
|
|
13,952
|
|
|
2,040
|
|
|
715
|
|
|
168,299
|
Current
portion of long-term debt
|
|
3,551
|
|
|
-
|
|
|
-
|
|
|
3,551
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Liabilities
held for sale
|
|
106,710
|
|
|
-
|
|
|
-
|
|
|
96,099
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
10,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
Total
current liabilities
|
|
1,664,764
|
|
|
(42,810
|
)
|
|
4,380
|
|
|
952,175
|
|
|
66,073
|
|
|
34,070
|
|
|
8,872
|
|
|
5,733
|
|
|
636,271
|
Long-term
debt
|
|
576,690
|
|
|
-
|
|
|
-
|
|
|
334,950
|
|
|
63,151
|
|
|
21,361
|
|
|
3,842
|
|
|
3,096
|
|
|
150,290
|
Other
long-term liabilities
|
|
206,987
|
|
|
-
|
|
|
-
|
|
|
191,033
|
|
|
10,638
|
|
|
548
|
|
|
4,059
|
|
|
176
|
|
|
533
|
Total
liabilities
|
|
2,448,441
|
|
|
(42,810
|
)
|
|
4,380
|
|
|
1,478,158
|
|
|
139,862
|
|
|
55,979
|
|
|
16,773
|
|
|
9,005
|
|
|
787,094
|
Total
stockholders' equity
|
|
1,145,732
|
|
|
(1,066,353
|
)
|
|
1,145,732
|
|
|
867,401
|
|
|
(20,584
|
)
|
|
(4,081
|
)
|
|
(1,668
|
)
|
|
411
|
|
|
224,874
|
Total
liabilities and stockholders' equity
|
$
|
3,594,173
|
|
$
|
(1,109,163
|
)
|
$
|
1,150,112
|
|
$
|
2,345,559
|
|
$
|
119,278
|
|
$
|
51,898
|
|
$
|
15,105
|
|
$
|
9,416
|
|
$
|
1,011,968
|
*
Guarantors of the 9.625% notes; non-guarantors of the Convertible
Notes
Consolidating
Condensed Statement of Income
Three
Months Ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Wholly
Owned Guarantor Subsidiaries*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UAG |
|
UAG
Mentor |
|
UAG |
|
Non- |
|
|
|
Total |
|
|
|
|
United
Auto |
|
Guarantor |
|
HBL |
|
Connecticut
I, |
|
Acquisition |
|
Central
NJ, |
|
Guarantor |
|
|
|
Company |
|
Eliminations |
|
Group,
Inc. |
|
Subsidiaries |
|
LLC |
|
LLC |
LLC |
|
LLC |
|
Subsidiaries |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
Thousands)
|
|
|
Revenues
|
|
$
|
3,080,604
|
|
$
|
-
|
|
$
|
-
|
|
$
|
1,860,630
|
|
$
|
65,925
|
|
$
|
44,530
|
|
$
|
13,790
|
|
$
|
9,472
|
|
$
|
1,086,257
|
|
Cost
of sales
|
|
|
2,622,184
|
|
|
-
|
|
|
-
|
|
|
1,577,034
|
|
|
53,294
|
|
|
37,390
|
|
|
11,872
|
|
|
8,178
|
|
|
934,416
|
|
Gross
profit
|
|
|
458,420
|
|
|
-
|
|
|
-
|
|
|
283,596
|
|
|
12,631
|
|
|
7,140
|
|
|
1,918
|
|
|
1,294
|
|
|
151,841
|
|
Selling,
general, and administrative expenses
|
|
|
361,297
|
|
|
-
|
|
|
4,189
|
|
|
225,246
|
|
|
10,079
|
|
|
5,596
|
|
|
1,548
|
|
|
900
|
|
|
113,739
|
|
Depreciation
and amortization
|
|
|
11,722
|
|
|
-
|
|
|
365
|
|
|
6,672
|
|
|
243
|
|
|
154
|
|
|
51
|
|
|
70
|
|
|
4,167
|
|
Operating
income (loss)
|
|
|
85,401
|
|
|
-
|
|
|
(4,554
|
)
|
|
51,678
|
|
|
2,309
|
|
|
1,390
|
|
|
319
|
|
|
324
|
|
|
33,935
|
|
Floor
plan interest expense
|
|
|
(16,716
|
)
|
|
-
|
|
|
-
|
|
|
(11,385
|
)
|
|
(444
|
)
|
|
(274
|
)
|
|
(44
|
)
|
|
(30
|
)
|
|
(4,539
|
)
|
Other
interest expense
|
|
|
(11,111
|
)
|
|
-
|
|
|
-
|
|
|
(6,761
|
)
|
|
(1,230
|
)
|
|
(416
|
)
|
|
235
|
|
|
(123
|
)
|
|
(2,816
|
)
|
Equity
in earnings of subsidiaries
|
|
|
-
|
|
|
(57,754
|
)
|
|
57,754
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations before income taxes and minority
interests
|
|
|
57,574
|
|
|
(57,754
|
)
|
|
53,200
|
|
|
33,532
|
|
|
635
|
|
|
700
|
|
|
510
|
|
|
171
|
|
|
26,580
|
|
Income
taxes
|
|
|
(20,727
|
)
|
|
23,044
|
|
|
(21,227
|
)
|
|
(13,138
|
)
|
|
(253
|
)
|
|
(279
|
)
|
|
(203
|
)
|
|
(68
|
)
|
|
(8,603
|
)
|
Minority
interests
|
|
|
(478
|
)
|
|
-
|
|
|
-
|
|
|
(325
|
)
|
|
(38
|
)
|
|
(84
|
)
|
|
-
|
|
|
(31
|
)
|
|
-
|
|
Income
(loss) from continuing operations
|
|
|
36,369
|
|
|
(34,710
|
)
|
|
31,973
|
|
|
20,069
|
|
|
344
|
|
|
337
|
|
|
307
|
|
|
72
|
|
|
17,977
|
|
Loss
from discontinued operations, net of tax
|
|
|
(2,496
|
)
|
|
-
|
|
|
-
|
|
|
(1,935
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(561
|
)
|
Net
income (loss)
|
|
$
|
33,873
|
|
$
|
(34,710
|
)
|
$
|
31,973
|
|
$
|
18,134
|
|
$
|
344
|
|
$
|
337
|
|
$
|
307
|
|
$
|
72
|
|
$
|
17,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
Guarantors of the 9.625% notes; non-guarantors of the Convertible
Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidating
Condensed Statement of Income
Three
Months Ended September 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Wholly
Owned Guarantor Subsidiaries*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UAG
|
|
UAG
Mentor |
|
UAG |
|
Non- |
|
|
|
Total |
|
|
|
|
United
Auto |
|
Guarantor |
|
HBL |
|
Connecticut
I, |
|
Acquisition |
|
Central
NJ, |
|
Guarantor |
|
|
|
Company |
|
Eliminations |
|
Group,
Inc. |
|
Subsidiaries |
|
LLC |
|
LLC |
|
LLC |
|
LLC |
|
Subsidiaries |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
Thousands)
|
|
|
Revenues
|
|
$
|
2,675,289
|
|
$
|
-
|
|
$
|
-
|
|
$
|
1,711,686
|
|
$
|
66,568
|
|
$
|
38,787
|
|
$
|
14,787
|
|
$
|
10,167
|
|
$
|
833,294
|
|
Cost
of sales
|
|
|
2,278,396
|
|
|
-
|
|
|
-
|
|
|
1,455,688
|
|
|
53,956
|
|
|
32,163
|
|
|
13,055
|
|
|
8,809
|
|
|
714,725
|
|
Gross
profit
|
|
|
396,893
|
|
|
-
|
|
|
-
|
|
|
255,998
|
|
|
12,612
|
|
|
6,624
|
|
|
1,732
|
|
|
1,358
|
|
|
118,569
|
|
Selling,
general, and administrative expenses
|
|
|
309,265
|
|
|
-
|
|
|
4,001
|
|
|
195,201
|
|
|
10,003
|
|
|
5,352
|
|
|
1,479
|
|
|
856
|
|
|
92,373
|
|
Depreciation
and amortization
|
|
|
9,772
|
|
|
-
|
|
|
313
|
|
|
5,731
|
|
|
235
|
|
|
127
|
|
|
51
|
|
|
69
|
|
|
3,246
|
|
Operating
income (loss)
|
|
|
77,856
|
|
|
-
|
|
|
(4,314
|
)
|
|
55,066
|
|
|
2,374
|
|
|
1,145
|
|
|
202
|
|
|
433
|
|
|
22,950
|
|
Floor
plan interest expense
|
|
|
(11,865
|
)
|
|
-
|
|
|
-
|
|
|
(7,767
|
)
|
|
(287
|
)
|
|
(265
|
)
|
|
(47
|
)
|
|
(24
|
)
|
|
(3,475
|
)
|
Other
interest expense
|
|
|
(12,222
|
)
|
|
-
|
|
|
-
|
|
|
(7,308
|
)
|
|
(1,040
|
)
|
|
(352
|
)
|
|
(288
|
)
|
|
(118
|
)
|
|
(3,116
|
)
|
Equity
in earnings of subsidiaries
|
|
|
-
|
|
|
(50,495
|
)
|
|
50,495
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Income
(loss) from continuing operations before income taxes and minority
interests
|
|
|
53,769
|
|
|
(50,495
|
)
|
|
46,181
|
|
|
39,991
|
|
|
1,047
|
|
|
528
|
|
|
(133
|
)
|
|
291
|
|
|
16,359
|
|
Income
taxes
|
|
|
(19,552
|
)
|
|
19,663
|
|
|
(17,983
|
)
|
|
(15,468
|
)
|
|
(408
|
)
|
|
(206
|
)
|
|
52
|
|
|
(113
|
)
|
|
(5,089
|
)
|
Minority
interests
|
|
|
(486
|
)
|
|
-
|
|
|
-
|
|
|
(305
|
)
|
|
(64
|
)
|
|
(64
|
)
|
|
-
|
|
|
(53
|
)
|
|
-
|
|
Income
(loss) from continuing operations
|
|
|
33,731
|
|
|
(30,832
|
)
|
|
28,198
|
|
|
24,218
|
|
|
575
|
|
|
258
|
|
|
(81
|
)
|
|
125
|
|
|
11,270
|
|
Loss
from discontinued operations, net of tax
|
|
|
(967
|
)
|
|
-
|
|
|
-
|
|
|
(777
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(190
|
)
|
Net
income (loss)
|
|
$
|
32,764
|
|
$
|
(30,832
|
)
|
$
|
28,198
|
|
$
|
23,441
|
|
$
|
575
|
|
$
|
258
|
|
$
|
(81
|
)
|
$
|
125
|
|
$
|
11,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
Guarantors of the 9.625% notes; non-guarantors of the Convertible
Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidating
Condensed Statement of Income
Nine
Months Ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
Non-Wholly
Owned Guarantor Subsidiaries*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UAG
|
|
UAG
Mentor
|
|
UAG
|
|
Non-
|
|
|
|
Total
|
|
|
|
United
Auto
|
|
Guarantor
|
|
HBL
|
|
Connecticut
I,
|
|
Acquisition
|
|
Central
NJ,
|
|
Guarantor
|
|
|
|
Company
|
|
Eliminations
|
|
Group,
Inc.
|
|
Subsidiaries
|
|
LLC
|
|
LLC
|
|
LLC
|
|
LLC
|
|
Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
Thousands)
|
|
Revenues
|
|
$
|
8,661,489
|
|
$
|
-
|
|
$
|
-
|
|
$
|
5,381,131
|
|
$
|
200,571
|
|
$
|
132,054
|
|
$
|
40,842
|
|
$
|
29,199
|
|
$
|
2,877,692
|
|
Cost
of sales
|
|
|
7,347,726
|
|
|
-
|
|
|
-
|
|
|
4,548,367
|
|
|
161,432
|
|
|
110,303
|
|
|
35,604
|
|
|
25,169
|
|
|
2,466,851
|
|
Gross
profit
|
|
|
1,313,763
|
|
|
-
|
|
|
-
|
|
|
832,764
|
|
|
39,139
|
|
|
21,751
|
|
|
5,238
|
|
|
4,030
|
|
|
410,841
|
|
Selling,
general, and administrative expenses
|
|
|
1,039,317
|
|
|
-
|
|
|
11,338
|
|
|
660,930
|
|
|
30,730
|
|
|
17,172
|
|
|
4,535
|
|
|
2,774
|
|
|
311,838
|
|
Depreciation
and amortization
|
|
|
33,373
|
|
|
-
|
|
|
1,063
|
|
|
19,519
|
|
|
728
|
|
|
433
|
|
|
160
|
|
|
208
|
|
|
11,262
|
|
Operating
income (loss)
|
|
|
241,073
|
|
|
-
|
|
|
(12,401
|
)
|
|
152,315
|
|
|
7,681
|
|
|
4,146
|
|
|
543
|
|
|
1,048
|
|
|
87,741
|
|
Floor
plan interest expense
|
|
|
(49,097
|
)
|
|
-
|
|
|
-
|
|
|
(34,423
|
)
|
|
(1,311
|
)
|
|
(807
|
)
|
|
(211
|
)
|
|
(86
|
)
|
|
(12,259
|
)
|
Other
interest expense
|
|
|
(34,559
|
)
|
|
-
|
|
|
-
|
|
|
(21,210
|
)
|
|
(3,554
|
)
|
|
(1,202
|
)
|
|
(357
|
)
|
|
(364
|
)
|
|
(7,872
|
)
|
Equity
in earnings of subsidiaries
|
|
|
-
|
|
|
(173,597
|
)
|
|
173,597
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Income
(loss) from continuing operations before income taxes and minority
interests
|
|
|
157,417
|
|
|
(173,597
|
)
|
|
161,196
|
|
|
96,682
|
|
|
2,816
|
|
|
2,137
|
|
|
(25
|
)
|
|
598
|
|
|
67,610
|
|
Income
taxes
|
|
|
(57,254
|
)
|
|
70,466
|
|
|
(65,400
|
)
|
|
(38,696
|
)
|
|
(1,135
|
)
|
|
(870
|
)
|
|
28
|
|
|
(238
|
)
|
|
(21,409
|
)
|
Minority
interests
|
|
|
(1,536
|
)
|
|
-
|
|
|
-
|
|
|
(1,006
|
)
|
|
(168
|
)
|
|
(253
|
)
|
|
-
|
|
|
(109
|
)
|
|
-
|
|
Income
(loss) from continuing operations
|
|
|
98,627
|
|
|
(103,131
|
)
|
|
95,796
|
|
|
56,980
|
|
|
1,513
|
|
|
1,014
|
|
|
3
|
|
|
251
|
|
|
46,201
|
|
Loss
from discontinued operations, net of tax
|
|
|
(3,825
|
)
|
|
-
|
|
|
-
|
|
|
(3,248
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(577
|
)
|
Net
income (loss)
|
|
$
|
94,802
|
|
$
|
(103,131
|
)
|
$
|
95,796
|
|
$
|
53,732
|
|
$
|
1,513
|
|
$
|
1,014
|
|
$
|
3
|
|
$
|
251
|
|
$
|
45,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
Guarantors of the 9.625% notes; non-guarantors of the Convertible
Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidating
Condensed Statement of Income
Nine
Months Ended September 30, 2005
|
|
|
|
|
|
|
|
|
|
Non-Wholly
Owned Guarantor Subsidiaries*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UAG
|
|
UAG
Mentor
|
|
UAG
|
|
Non-
|
|
|
|
Total
|
|
|
|
United
Auto
|
|
Guarantor
|
|
HBL
|
|
Connecticut
I,
|
|
Acquisition
|
|
Central
NJ,
|
|
Guarantor
|
|
|
|
Company
|
|
Eliminations
|
|
Group,
Inc.
|
|
Subsidiaries
|
|
LLC
|
|
LLC
|
|
LLC
|
|
LLC
|
|
Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
Thousands)
|
|
|
Revenues
|
|
$
|
7,662,835
|
|
$
|
-
|
|
$
|
-
|
|
$
|
4,786,955
|
|
$
|
191,046
|
|
$
|
116,011
|
|
$
|
41,659
|
|
$
|
26,858
|
|
$
|
2,500,306
|
|
Cost
of sales
|
|
|
6,512,894
|
|
|
-
|
|
|
-
|
|
|
4,058,953
|
|
|
154,195
|
|
|
96,435
|
|
|
36,331
|
|
|
23,426
|
|
|
2,143,554
|
|
Gross
profit
|
|
|
1,149,941
|
|
|
-
|
|
|
-
|
|
|
728,002
|
|
|
36,851
|
|
|
19,576
|
|
|
5,328
|
|
|
3,432
|
|
|
356,752
|
|
Selling,
general, and administrative expenses
|
|
|
905,171
|
|
|
-
|
|
|
10,357
|
|
|
572,133
|
|
|
29,766
|
|
|
15,664
|
|
|
4,269
|
|
|
2,428
|
|
|
270,554
|
|
Depreciation
and amortization
|
|
|
28,791
|
|
|
-
|
|
|
1,105
|
|
|
16,619
|
|
|
698
|
|
|
348
|
|
|
150
|
|
|
204
|
|
|
9,667
|
|
Operating
income (loss)
|
|
|
215,979
|
|
|
-
|
|
|
(11,462
|
)
|
|
139,250
|
|
|
6,387
|
|
|
3,564
|
|
|
909
|
|
|
800
|
|
|
76,531
|
|
Floor
plan interest expense
|
|
|
(37,483
|
)
|
|
-
|
|
|
-
|
|
|
(24,466
|
)
|
|
(803
|
)
|
|
(873
|
)
|
|
(164
|
)
|
|
(76
|
)
|
|
(11,101
|
)
|
Other
interest expense
|
|
|
(35,735
|
)
|
|
-
|
|
|
-
|
|
|
(22,533
|
)
|
|
(2,838
|
)
|
|
(949
|
)
|
|
(845
|
)
|
|
(340
|
)
|
|
(8,230
|
)
|
Equity
in earnings of subsidiaries
|
|
|
-
|
|
|
(173,476
|
)
|
|
173,476
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Income
(loss) from continuing operations before income taxes and minority
interests
|
|
|
142,761
|
|
|
(173,476
|
)
|
|
162,014
|
|
|
92,251
|
|
|
2,746
|
|
|
1,742
|
|
|
(100
|
)
|
|
384
|
|
|
57,200
|
|
Income
taxes
|
|
|
(52,390
|
)
|
|
71,227
|
|
|
(66,542
|
)
|
|
(37,094
|
)
|
|
(1,094
|
)
|
|
(702
|
)
|
|
42
|
|
|
(142
|
)
|
|
(18,085
|
)
|
Minority
interests
|
|
|
(1,250
|
)
|
|
-
|
|
|
-
|
|
|
(805
|
)
|
|
(165
|
)
|
|
(208
|
)
|
|
-
|
|
|
(72
|
)
|
|
-
|
|
Income
(loss) from continuing operations
|
|
|
89,121
|
|
|
(102,249
|
)
|
|
95,472
|
|
|
54,352
|
|
|
1,487
|
|
|
832
|
|
|
(58
|
)
|
|
170
|
|
|
39,115
|
|
Income
(loss) from discontinued operations, net of tax
|
|
|
(269
|
)
|
|
-
|
|
|
-
|
|
|
219
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(488
|
)
|
Net
income (loss)
|
|
$
|
88,852
|
|
$
|
(102,249
|
)
|
$
|
95,472
|
|
$
|
54,571
|
|
$
|
1,487
|
|
$
|
832
|
|
$
|
(58
|
)
|
$
|
170
|
|
$
|
38,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
Guarantors of the 9.625% notes; non-guarantors of the Convertible
Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidating
Condensed Statement of Cash Flows
Nine
Months Ended September 30, 2006
|
|
|
|
|
|
|
|
Non-Wholly
Owned Guarantor Subsidiaries*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UAG
|
|
UAG
Mentor
|
|
UAG
|
|
Non-
|
|
|
|
Total
|
|
United
Auto
|
|
Guarantor
|
|
HBL
|
|
Connecticut
I,
|
|
Acquisition
|
|
Central
NJ,
|
|
Guarantor
|
|
|
|
Company
|
|
Group,
Inc.
|
|
Subsidiaries
|
|
LLC
|
|
LLC
|
|
LLC
|
|
LLC
|
|
Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
Thousands)
|
|
Net
cash from continuing operating activities
|
|
$
|
239,342
|
|
$
|
(854
|
)
|
$
|
139,319
|
|
$
|
5,178
|
|
$
|
2,703
|
|
$
|
634
|
|
$
|
(314
|
)
|
$
|
92,676
|
|
Investing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(150,695
|
)
|
|
(945
|
)
|
|
(28,059
|
)
|
|
(269
|
)
|
|
(2,835
|
)
|
|
(73
|
)
|
|
(20
|
)
|
|
(118,494
|
)
|
Proceeds
from sale - leaseback transactions
|
|
|
62,778
|
|
|
-
|
|
|
26,447
|
|
|
-
|
|
|
1,573
|
|
|
-
|
|
|
-
|
|
|
34,758
|
|
Dealership
acquisitions, net
|
|
|
(369,260
|
)
|
|
-
|
|
|
(124,379
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(244,881
|
)
|
Net
cash from continuing investing activities
|
|
|
(457,177
|
)
|
|
(945
|
)
|
|
(125,991
|
)
|
|
(269
|
)
|
|
(1,262
|
)
|
|
(73
|
)
|
|
(20
|
)
|
|
(328,617
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
borrowings (repayments) of long-term debt
|
|
|
223,185
|
|
|
32,219
|
|
|
30,649
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(37
|
)
|
|
160,354
|
|
Floor
plan notes payable - non-trade
|
|
|
29,539
|
|
|
-
|
|
|
(57,503
|
)
|
|
(92
|
)
|
|
581
|
|
|
-
|
|
|
(165
|
)
|
|
86,718
|
|
Payment
of deferred financing costs
|
|
|
(12,630
|
)
|
|
(12,630
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Proceeds
from exercise of options including excess tax
benefit
|
|
|
17,992
|
|
|
17,992
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Repurchase
of common stock
|
|
|
(18,955
|
)
|
|
(18,955
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Distributions
from (to) parent
|
|
|
-
|
|
|
-
|
|
|
8,188
|
|
|
(4,817
|
)
|
|
(2,386
|
)
|
|
(190
|
)
|
|
(795
|
)
|
|
-
|
|
Dividends
|
|
|
(18,626
|
)
|
|
(18,626
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Net
cash from continuing financing activities
|
|
|
220,505
|
|
|
-
|
|
|
(18,666
|
)
|
|
(4,909
|
)
|
|
(1,805
|
)
|
|
(190
|
)
|
|
(997
|
)
|
|
247,072
|
|
Net
cash from discontinued operations
|
|
|
7,438
|
|
|
-
|
|
|
5,338
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,100
|
|
Net
change in cash and cash equivalents
|
|
|
10,108
|
|
|
(1,799
|
)
|
|
-
|
|
|
-
|
|
|
(364
|
)
|
|
371
|
|
|
(1,331
|
)
|
|
13,231
|
|
Cash
and cash equivalents, beginning of period
|
|
|
8,957
|
|
|
4,365
|
|
|
-
|
|
|
-
|
|
|
1,127
|
|
|
394
|
|
|
2,540
|
|
|
531
|
|
Cash
and cash equivalents, end of period
|
|
$
|
19,065
|
|
$
|
2,566
|
|
$
|
-
|
|
$
|
-
|
|
$
|
763
|
|
$
|
765
|
|
$
|
1,209
|
|
$
|
13,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
Guarantors of the 9.625% notes; non-guarantors of the Convertible
Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidating
Condensed Statement of Cash Flows
Nine
Months Ended September 30, 2005
|
|
|
|
|
|
|
|
Non-Wholly
Owned Guarantor Subsidiaries*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UAG
|
|
UAG
Mentor
|
|
UAG
|
|
Non-
|
|
|
|
Total
|
|
United
Auto
|
|
Guarantor
|
|
HBL
|
|
Connecticut
I,
|
|
Acquisition
|
|
Central
NJ,
|
|
Guarantor
|
|
|
|
Company
|
|
Group,
Inc.
|
|
Subsidiaries
|
|
LLC
|
|
LLC
|
|
LLC
|
|
LLC
|
|
Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
Thousands)
|
|
Net
cash from continuing operating activities
|
|
$
|
162,741
|
|
$
|
(11,879
|
)
|
$
|
128,569
|
|
$
|
5,853
|
|
$
|
6,449
|
|
$
|
667
|
|
$
|
1,504
|
|
$
|
31,578
|
|
Investing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(165,446
|
)
|
|
(1,715
|
)
|
|
(94,872
|
)
|
|
(770
|
)
|
|
(5,550
|
)
|
|
(169
|
)
|
|
(113
|
)
|
|
(62,257
|
)
|
Proceeds
from sale - leaseback transactions
|
|
|
71,188
|
|
|
-
|
|
|
49,347
|
|
|
-
|
|
|
4,799
|
|
|
-
|
|
|
-
|
|
|
17,042
|
|
Dealership
acquisitions, net
|
|
|
(97,091
|
)
|
|
-
|
|
|
(77,296
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(19,795
|
)
|
Net
cash from continuing investing activities
|
|
|
(191,349
|
)
|
|
(1,715
|
)
|
|
(122,821
|
)
|
|
(770
|
)
|
|
(751
|
)
|
|
(169
|
)
|
|
(113
|
)
|
|
(65,010
|
)
|
Financing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
borrowings (repayments) of long-term debt
|
|
|
45,591
|
|
|
11,291
|
|
|
34,822
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
86
|
|
|
(608
|
)
|
Floor
plan notes payable - non-trade
|
|
|
(47,914
|
)
|
|
-
|
|
|
(57,575
|
)
|
|
(1,428
|
)
|
|
(3,721
|
)
|
|
-
|
|
|
228
|
|
|
14,582
|
|
Proceeds
from exercise of options including excess tax
benefit
|
|
|
3,978
|
|
|
3,978
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Distributions
from (to) parent
|
|
|
-
|
|
|
-
|
|
|
(6,926
|
)
|
|
(3,655
|
)
|
|
(2,774
|
)
|
|
(426
|
)
|
|
-
|
|
|
13,781
|
|
Dividends
|
|
|
(15,269
|
)
|
|
(15,269
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Net
cash from continuing financing activities
|
|
|
(13,614
|
)
|
|
-
|
|
|
(29,679
|
)
|
|
(5,083
|
)
|
|
(6,495
|
)
|
|
(426
|
)
|
|
314
|
|
|
27,755
|
|
Net
cash from discontinued operations
|
|
|
23,745
|
|
|
-
|
|
|
20,609
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3,136
|
|
Net
change in cash and cash equivalents
|
|
|
(18,477
|
)
|
|
(13,594
|
)
|
|
(3,322
|
)
|
|
-
|
|
|
(797
|
)
|
|
72
|
|
|
1,705
|
|
|
(2,541
|
)
|
Cash
and cash equivalents, beginning of period
|
|
|
23,547
|
|
|
13,638
|
|
|
5,698
|
|
|
-
|
|
|
1,424
|
|
|
125
|
|
|
-
|
|
|
2,662
|
|
Cash
and cash equivalents, end of period
|
|
$
|
5,070
|
|
$
|
44
|
|
$
|
2,376
|
|
$
|
-
|
|
$
|
627
|
|
$
|
197
|
|
$
|
1,705
|
|
$
|
121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
Guarantors of the 9.625% notes; non-guarantors of the Convertible
Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 as a result of various factors. See “Forward
Looking Statements.” This Management’s Discussion and Analysis of Financial
Condition and Results of Operations has been updated to include the effects
of
the restatement of our 2005 consolidated statement of cash flows to reflect
the
repayment of floor plan obligations in connection with acquisitions and
dispositions as cash transactions, and also to include the effects of revising
our prior period financial statements for entities which have been treated
as
discontinued operations through September 30, 2006.
Overview
We
are
the second largest automotive retailer in the United States as measured by
total
revenues. As of September 30, 2006, we owned and operated 170 franchises in
the
United States and 152 franchises outside of the U.S., primarily in the United
Kingdom. We offer a full range of vehicle brands. In addition to selling new
and
used vehicles, we generate higher-margin revenue at each of our dealerships
through maintenance and repair services and the sale and placement of
higher-margin products, such as third-party finance and insurance products,
third-party extended service contracts and replacement and aftermarket
automotive products.
On
June
1, 2006 we effected a two-for-one split of our voting common stock in the form
of a stock dividend. Shareholders of record as of May 11, 2006 received one
additional share for each share owned. All share and per share information
included in this Management’s Discussion and Analysis of Financial Condition and
Results of Operations has been restated to reflect the stock split.
New
and
used vehicle revenues include sales to retail customers and to leasing companies
providing consumer automobile leasing. We generate finance and insurance
revenues from sales of third-party extended service contracts, sales of other
third-party insurance policies, sales of third-party finance and lease contracts
and the sale of certain other products. Service and parts revenues include
fees
paid for repair, maintenance and collision services, the sale of replacement
parts and the sale of aftermarket accessories.
We
and
Sirius Satellite Radio Inc. (“Sirius”) have agreed to jointly promote Sirius
Satellite Radio service. Pursuant to the terms of our arrangement with Sirius,
our dealerships in the U.S. endeavor to order a significant percentage of
eligible vehicles with a factory installed Sirius radio. We and Sirius have
also
agreed to jointly market the Sirius service under a best efforts arrangement
through January 4, 2009. Our costs relating to such marketing initiatives
are expensed as incurred. As compensation for our efforts, we received warrants
to purchase ten million shares of Sirius common stock at $2.392 per share
in 2004 that are being earned ratably on an annual basis through January 2009.
Two million of these warrants were earned in each of 2004 and 2005 and vested
in
the first quarter of 2005 and 2006, respectively. We exercised the warrants
and
sold the underlying stock we received upon vesting. The earning of these
warrants may be accelerated based on us attaining specified subscription
targets. We measure the fair value of the warrants earned ratably on the date
they are earned as there are no significant disincentives for non-performance.
Since we can reasonably estimate the number of warrants that will be earned
pursuant to the ratable schedule, the estimated fair value (based on current
fair value) of these warrants is being recognized ratably during each annual
period.
We
also
have received twelve million additional warrants to purchase Sirius common
stock
at $2.392 per share which may be earned upon our sale of certain units
pertaining to specified brands through December 31, 2007. We earned 522,400
of these warrants during the year ended December 31, 2005 and 959,200 of
these warrants during the first nine months of 2006. We exercised the warrants
we earned in 2005 and sold the underlying stock we received upon vesting. Since
we cannot reasonably estimate the number of warrants that will be earned subject
to the sale of certain units pertaining to specified brands, the fair value
of
these warrants is being recognized when they are earned.
The
value
of Sirius stock has been and is expected to be subject to significant
fluctuations, which may result in variability in the amount we earn under this
arrangement. The warrants may be cancelled upon the termination of our
arrangement in January 2009. We may not be able to achieve any of the
performance targets outlined in the warrants.
Our
gross
profit tends to vary with the mix of revenues we derive from the sale of new
vehicles, used vehicles, finance and insurance products, and service and parts
transactions. Our gross profit generally varies across product lines, with
vehicle sales usually resulting in lower gross profit margins and our other
revenues resulting in higher gross profit margins. Factors such as seasonality,
weather, cyclicality and manufacturers’ advertising and incentives may impact
the mix of our revenues, and therefore influence our gross profit
margin.
Our
selling expenses consist of advertising and compensation for sales personnel,
including commissions and related bonuses. General and administrative expenses
include compensation for administration, finance, legal and general management
personnel, rent, insurance, utilities and other outside services. A significant
portion of our selling expenses are variable, and we believe a significant
portion of our general and administrative expenses are subject to our control,
allowing us to adjust them over time to reflect economic trends.
Floor
plan interest expense relates to obligations incurred in connection with the
acquisition of new and used vehicle inventories. Other interest expense consists
of interest charges on all of our interest-bearing debt, other than interest
relating to floor plan financing.
We
have
acquired a number of dealerships each year since our inception. Our financial
statements include the results of operations of the acquired dealerships from
the date of acquisition. We have also disposed of certain dealerships which
have
been treated as discontinued operations in accordance with Statement of
Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the
Impairment of Long-Lived Assets.”
The
future success of our business will likely be dependent on, among other things,
our ability to consummate and integrate acquisitions, our ability to increase
sales of higher-margin products and services, especially service and parts
transactions, and our ability to realize returns on our significant capital
investment in new and upgraded dealerships. See “Forward-Looking
Statements.”
Critical
Accounting Policies and Estimates
The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires the application
of
accounting policies that often involve making estimates and employing judgments.
Such judgments influence the assets, liabilities, revenues and expenses
recognized in our financial statements. Management, on an ongoing basis, reviews
these estimates and assumptions. Management may determine that modifications
in
assumptions and estimates are required, which may result in a material change
in
our results of operations or financial position.
The
following are the accounting policies applied in the preparation of our
financial statements that management believes are most dependent upon the use
of
estimates and assumptions.
Revenue
Recognition
Vehicle,
Parts and Service Sales
We record revenue when vehicles are delivered and title has passed to the
customer, when vehicle service or repair work is performed and when parts are
delivered to our customers. Sales promotions that we offer to customers are
accounted for as a reduction of sales at the time of sale. Rebates and other
incentives offered directly to us by manufacturers are recognized as
earned.
Finance
and Insurance Sales
Subsequent to the sale of the vehicle to a customer, we may arrange financing
for customers through various financial institutions and receive a commission
from the lender equal to either the difference between the interest rates
charged to customers and the interest rates set by the financing institution
or
a flat fee. We also receive commissions for facilitating the sale of various
third-party insurance products to customers, including credit and life insurance
policies and extended service contracts. These commissions are recorded as
revenue at the time the customer enters into the contract. In the case of
finance contracts, a customer may prepay or fail to pay their contract, thereby
terminating the contract. Customers may also terminate extended service
contracts and other insurance products, which are fully paid at purchase, and
become eligible for refunds of unused premiums. In these circumstances, a
portion of the commissions we receive may be charged back to us based on the
terms of the contracts. The revenue we record relating to commissions is net
of
an estimate of the amount of chargebacks we will be required to pay. This
estimate is based upon our historical experience with similar contracts,
including the impact of refinance and default rates on retail finance contracts
and cancellation rates on extended service contracts and other insurance
products.
Intangible Assets
Our principal intangible assets relate to our franchise agreements with vehicle
manufacturers, which represent the estimated value of franchises acquired in
business combinations, and goodwill, which represents the excess of cost over
the fair value of tangible and identified intangible assets acquired in
connection with business combinations. Intangible assets other than goodwill
are
required to be amortized over their estimated useful lives. We believe the
franchise values of our dealerships have an indefinite useful life based on
the
following facts:
|
•
|
Automotive
retailing is a mature industry and is based on franchise agreements
with
the vehicle manufacturers;
|
|
|
|
•
|
There
are no known changes or events that would alter the automotive retailing
franchise environment;
|
|
|
|
•
|
Certain
franchise agreement terms are indefinite;
|
|
|
|
•
|
Franchise
agreements that have limited terms have historically been renewed
without
substantial cost; and
|
|
|
|
•
|
Our
history shows that manufacturers have not terminated our franchise
agreements.
|
Impairment
Testing
Franchise value impairment is assessed at least annually through a comparison
of
the carrying amounts of our franchises with their estimated fair values. An
indicator of impairment exists if the carrying value of a franchise exceeds
its
estimated fair value and an impairment loss may be recognized equal to that
excess. We also evaluate the remaining useful lives of our franchises in
connection with the annual impairment testing to determine whether events and
circumstances continue to support indefinite useful lives.
Goodwill
impairment is
assessed at least annually at the reporting unit level. An indicator of
impairment exists if the carrying amount of the reporting unit including
goodwill is determined to exceed its estimated fair value. If an impairment
exists it is measured by comparing the implied fair value of the reporting
unit
goodwill with the carrying amount of that goodwill and an impairment loss may
be
recognized equal to that excess.
The
fair values of
franchise value and goodwill are determined using a discounted cash flow
approach, which includes assumptions that include revenue and profitability
growth, franchise profit margins, residual values and our cost of capital.
If
future events and circumstances cause significant changes in the underlying
assumptions and result in a reduction of our estimates of fair value, we may
incur an impairment charge.
Investments
Investments include marketable securities and investments in businesses
accounted for under the equity method. Marketable securities include investments
in debt and equity securities. Marketable securities held by us are typically
classified as available for sale and are stated at fair value on our balance
sheet with unrealized gains and losses included in other comprehensive income,
a
separate component of stockholders’ equity. Declines in investment values that
are deemed to be other than temporary would be an indicator of impairment and
may result in an impairment charge reducing the investments’ carrying value to
fair value. A majority of our investments are in joint venture relationships
that are more fully described in “Joint Venture Relationships” below. Such joint
venture relationships are accounted for under the equity method, pursuant to
which we record our proportionate share of the joint venture’s income each
period.
Self-Insurance
We retain risk relating to certain of our general liability insurance, workers’
compensation insurance and employee medical benefits in the United States.
As a
result, we are likely to be responsible for a majority of the claims and losses
incurred under these programs. The amount of risk we retain varies by program,
and, for certain exposures, we have pre-determined maximum exposure limits
for
certain individual claims and/or insurance periods. The majority of losses,
if
any, above the pre-determined exposure limits are paid by third-party insurance
carriers. Our estimate of future losses is prepared by management using
historical loss experience and industry-based development factors.
Income
Taxes
Tax regulations may require items to be included in our tax return at different
times than the items are reflected in our financial statements. Some of these
differences are permanent, such as expenses that are not deductible on our
tax
return, and some are timing differences, such as the timing of depreciation
expense. Timing differences create deferred tax assets and liabilities. Deferred
tax assets generally represent items that can be used as a tax deduction or
credit in our tax return in future years which we have already recorded in
our
financial statements. Deferred tax liabilities generally represent deductions
taken on our tax return that have not yet been recognized as an expense in
our
financial statements. We establish valuation allowances for our deferred tax
assets if it is more likely than not that the amount of expected future taxable
income will not be sufficient to allow the use of the deduction or
credit.
New
Accounting Pronouncements
SFAS No. 154,
“Accounting Changes and Error Corrections — A Replacement of Accounting
Principles Board (“APB”) Opinion No. 20 and SFAS No. 3,” requires
all direct financial statement effects caused by a voluntary change in
accounting principle to be applied retrospectively to prior period financial
statements as if the new principle had always been applied, unless it is
impracticable to determine either the period-specific effects or the cumulative
effect of the change in principle. APB Opinion No. 20 and
SFAS No. 3 previously required that a voluntary change in accounting
principle be recognized as a cumulative effect in the period of change.
SFAS No. 154 was effective for us on January 1, 2006. See “Cash
Flows” discussion below.
Financial
Accounting Standards Board (“FASB”) Staff Position FAS 13-1, “Accounting
for Rental Costs Incurred During a Construction Period” (“FSP FAS 13-1”),
requires companies to expense real estate rental costs under operating leases
during periods of construction and was effective for us on January 1, 2006.
FSP FAS 13-1 did not require retroactive application and did not have a material
effect on consolidated operating results, financial position or cash
flows.
FASB
Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes,”
requires companies to recognize and measure tax benefits using a “more likely
than not” threshold and requires companies to make disclosures about
uncertainties in their income tax positions. FIN No. 48 will be effective for
us
on January 1, 2007. We are currently evaluating the impact of this
pronouncement.
SFAS
No. 157, "Fair Value Measurements" defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles,
and expands disclosure requirements relating to fair value measurements. SFAS
No. 157 will be effective for us on January 1, 2008. We are currently evaluating
the impact of this pronouncement.
SFAS
No.
158, “Employers’ Accounting For Defined Benefit Pension and Other Postretirement
Plans - an amendment of FASB Statements No. 87, 88, 106 and 132(R)” requires
companies to recognize the funded status (plan obligations less the fair value
of plan assets) of pension and other postretirement benefit plans on their
balance sheets, effective for fiscal years ending after December 15, 2006.
We
are
currently evaluating the impact of this pronouncement.
SEC
Staff
Accounting Bulletin Topic 1N, “Financial Statements — Considering the Effects of
Prior Year Misstatements When Quantifying Misstatements in Current Year
Financial Statements” (“SAB 108”) addresses how a registrant should quantify the
effect of an error on the financial statements. SAB 108 will be effective for
us
for our fiscal year ending December 31, 2006. We are currently evaluating the
impact of this pronouncement.
Results
of Operations
The
following tables present comparative financial data relating to our operating
performance in the aggregate and on a “same store” basis. Dealership results are
included in same store comparisons when we have consolidated the acquired entity
during the entirety of both periods being compared. As an example, if a
dealership was acquired on January 15, 2004, the results of the acquired
entity would be included in annual same store comparisons beginning with the
year ended December 31, 2006 and in quarterly same store comparisons beginning
with the quarter ended June 30, 2005.
Three Months Ended September 30, 2006 Compared to Three Months Ended September
30, 2005 (dollars in millions, except per unit
amounts)
Total
Retail Data
|
|
|
|
|
|
2006
vs. 2005
|
|
|
|
2006
|
|
2005
|
|
Change
|
|
%
Change
|
|
Total
retail unit sales
|
|
|
77,489
|
|
|
70,598
|
|
|
6,891
|
|
|
9.8
|
%
|
Total
same store retail unit sales
|
|
|
68,886
|
|
|
70,109
|
|
|
(1,223
|
)
|
|
(1.7
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
retail sales revenue
|
|
$
|
2,834.7
|
|
$
|
2,468.6
|
|
$
|
366.1
|
|
|
14.8
|
%
|
Total
same store retail sales revenue
|
|
$
|
2,494.5
|
|
$
|
2,455.9
|
|
$
|
38.6
|
|
|
1.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
retail gross profit
|
|
$
|
457.8
|
|
$
|
397.3
|
|
$
|
60.5
|
|
|
15.2
|
%
|
Total
same store retail gross profit
|
|
$
|
408.1
|
|
$
|
395.5
|
|
$
|
12.6
|
|
|
3.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
retail gross margin
|
|
|
16.1
|
%
|
|
16.1
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
Total
same store retail gross margin
|
|
|
16.4
|
%
|
|
16.1
|
%
|
|
0.3
|
%
|
|
1.9
|
%
|
Units
Retail data includes retail new vehicle, retail used vehicle, finance and
insurance and service and parts transactions. Retail unit sales of vehicles
increased by 6,891 units, or 9.8%, from 2005 to 2006. The increase is due
to an 8,114 unit increase from net dealership acquisitions during the
period, offset by a 1,223 unit, or 1.7%, decrease in same store retail unit
sales. The decrease in same store retail unit sales in 2006 is due primarily
to
a decrease in new retail unit sales of our domestic and premium brands, offset
by an increase in retail unit sales of our volume foreign brands and used
vehicle unit sales.
Revenues
Retail sales revenue increased $366.1 million, or 14.8%, from 2005 to 2006.
The increase is due to a $327.5 million increase from net dealership
acquisitions during the period, coupled with a $38.6 million, or 1.6%,
increase in same store revenues. The same store revenue increase is due to
(1) a $627, or 1.9%, increase in average new vehicle revenue per unit,
which increased revenue by $29.5 million, (2) a $1,635, or 6.4%,
increase in average used vehicle revenue per unit, which increased revenue
by
$35.0 million, (3) an $18, or 2.0%, increase in average finance and
insurance revenue per unit, which increased revenue by $1.3 million, and
(4) a $15.9 million, or 5.7%, increase in service and parts revenues,
offset by a 1.7% decrease in retail unit sales which decreased revenue by $43.1
million.
Gross
Profit
Retail gross profit increased $60.5 million, or 15.2%, from 2005 to 2006.
The increase is due to a $47.9 million increase from net dealership
acquisitions during the period, coupled with a $12.6 million, or 3.2%,
increase in same store retail gross profit. The same store retail gross profit
increase is due to (1) a $43, or 1.6%, increase in average gross profit per
new vehicle retailed, which increased retail gross profit by $2.0 million,
(2) a $102, or 4.4%, increase in average gross profit per used vehicle retailed,
which increased retail gross profit by $2.2 million, (3) an $18, or
2.0%, increase in average finance and insurance revenue per unit, which
increased retail gross profit by $1.3 million, and (4) an
$11.8 million, or 7.9%, increase in service and parts gross profit, offset
by the 1.7% decrease in retail unit sales which decreased retail gross profit
by
$4.7 million.
New
Vehicle Data
|
|
|
|
|
|
2006
vs. 2005
|
|
|
|
2006
|
|
2005
|
|
Change
|
|
%
Change
|
|
New
retail unit sales
|
|
|
52,234
|
|
|
49,076
|
|
|
3,158
|
|
|
6.4
|
%
|
Same
store new retail unit sales
|
|
|
47,054
|
|
|
48,777
|
|
|
(1,723
|
)
|
|
(3.5
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New
retail sales revenue
|
|
$
|
1,732.3
|
|
$
|
1,577.9
|
|
$
|
154.4
|
|
|
9.8
|
%
|
Same
store new retail sales revenue
|
|
$
|
1,545.2
|
|
$
|
1,571.2
|
|
$
|
(26.0
|
)
|
|
(1.7
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New
retail sales revenue per unit
|
|
$
|
33,164
|
|
$
|
32,153
|
|
$
|
1,011
|
|
|
3.1
|
%
|
Same
store new retail sales revenue per unit
|
|
$
|
32,839
|
|
$
|
32,212
|
|
$
|
627
|
|
|
1.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit - new
|
|
$
|
147.8
|
|
$
|
134.6
|
|
$
|
13.2
|
|
|
9.8
|
%
|
Same
store gross profit - new
|
|
$
|
131.4
|
|
$
|
134.1
|
|
$
|
(2.7
|
)
|
|
(2.0
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
gross profit per new vehicle retailed
|
|
$
|
2,829
|
|
$
|
2,744
|
|
$
|
85
|
|
|
3.1
|
%
|
Same
store average gross profit per new vehicle retailed
|
|
$
|
2,792
|
|
$
|
2,749
|
|
$
|
43
|
|
|
1.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin % - new
|
|
|
8.5
|
%
|
|
8.5
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
Same
store gross margin % - new
|
|
|
8.5
|
%
|
|
8.5
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
Units
Retail unit sales of new vehicles increased 3,158 units, or 6.4%, from 2005
to 2006. The increase is due to a 4,881 unit increase from net dealership
acquisitions during the period, offset by a 1,723 unit, or 3.5%, decrease
in same store retail unit sales. The decrease in same store retail unit sales
in
2006 is due primarily to a decrease in retail unit sales of our domestic and
premium brands, offset by an increase in retail unit sales of our volume foreign
brands.
Revenues
New vehicle retail sales revenue increased $154.4 million, or 9.8%, from
2005 to 2006. The increase is due to a $180.4 million increase from net
dealership acquisitions during the period, offset by a $26.0 million, or
1.7%, decrease in same store revenues. The same store revenue decrease is due
to
the 3.5% decrease in retail unit sales, which decreased revenue by
$55.5 million, offset by a $627, or 1.9%, increase in comparative average
selling prices per unit, which increased revenue by
$29.5 million.
Gross
Profit
Retail gross profit from new vehicle sales increased $13.2 million, or
9.8%, from 2005 to 2006. The increase is due to a $15.9 million increase
from net dealership acquisitions during the period, offset by a
$2.7 million, or 2.0%, decrease in same store gross profit. The same store
decrease is due to the 3.5% decrease in new retail unit sales, which decreased
gross profit by $4.7 million, offset by a $43, or 1.6%, increase in average
gross profit per new vehicle retailed, which increased gross profit by
$2.0 million.
Used
Vehicle Data
|
|
|
|
|
|
2006
vs. 2005
|
|
|
|
2006
|
|
2005
|
|
Change
|
|
%
Change
|
|
Used
retail unit sales
|
|
|
25,255
|
|
|
21,522
|
|
|
3,733
|
|
|
17.3
|
%
|
Same
store used retail unit sales
|
|
|
21,832
|
|
|
21,332
|
|
|
500
|
|
|
2.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Used
retail sales revenue
|
|
$
|
704.3
|
|
$
|
550.7
|
|
$
|
153.6
|
|
|
27.9
|
%
|
Same
store used retail sales revenue
|
|
$
|
594.8
|
|
$
|
546.2
|
|
$
|
48.6
|
|
|
8.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Used
retail sales revenue per unit
|
|
$
|
27,886
|
|
$
|
25,586
|
|
$
|
2,300
|
|
|
9.0
|
%
|
Same
store used retail sales revenue per unit
|
|
$
|
27,242
|
|
$
|
25,607
|
|
$
|
1,635
|
|
|
6.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit - used
|
|
$
|
59.1
|
|
$
|
49.7
|
|
$
|
9.4
|
|
|
18.9
|
%
|
Same
store gross profit - used
|
|
$
|
52.8
|
|
$
|
49.4
|
|
$
|
3.4
|
|
|
6.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
gross profit per used vehicle retailed
|
|
$
|
2,341
|
|
$
|
2,311
|
|
$
|
30
|
|
|
1.3
|
%
|
Same
store average gross profit per used vehicle retailed
|
|
$
|
2,419
|
|
$
|
2,317
|
|
$
|
102
|
|
|
4.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin % - used
|
|
|
8.4
|
%
|
|
9.0
|
%
|
|
(0.6
|
%)
|
|
(6.7
|
%)
|
Same
store gross margin % - used
|
|
|
8.9
|
%
|
|
9.0
|
%
|
|
(0.1
|
%)
|
|
(1.1
|
%)
|
Units
Retail unit sales of used vehicles increased 3,733 units, or 17.3%, from
2005 to 2006. The increase is due to a 3,233 unit increase from net
dealership acquisitions during the period, coupled with a 500 unit, or
2.3%, increase in same store retail unit sales. The increase in same store
retail unit sales in 2006 is due primarily to an increase in retail unit sales
of our premium and volume foreign brands, offset by a decrease in retail unit
sales of our domestic brands.
Revenues
Used vehicle retail sales revenue increased $153.6 million, or 27.9%, from
2005 to 2006. The increase is due to a $105.0 million increase from net
dealership acquisitions during the period, coupled with a $48.6 million, or
8.9%, increase in same store revenues. The same store revenue increase is due
primarily to the 2.3% increase in retail unit sales, which increased revenue
by
$13.6 million, coupled with a $1,635, or 6.4%, increase in comparative
average selling prices per vehicle, which increased revenue by
$35.0 million.
Gross
Profit
Retail gross profit from used vehicle sales increased $9.4 million, or
18.9%, from 2005 to 2006. The increase is due to a $6.0 million increase
from net dealership acquisitions during the period, coupled with a
$3.4 million, or 6.9%, increase in same store gross profit. The increase in
same store gross profit is due primarily to the 2.3% increase in used retail
unit sales, which increased gross profit by $1.2 million, coupled with a
$102, or 4.4%, increase in average gross profit per used vehicle retailed,
which
increased retail gross profit by $2.2 million.
Finance
and Insurance Data
|
|
|
|
|
|
2006
vs. 2005
|
|
|
|
2006
|
|
2005
|
|
Change
|
|
%
Change
|
|
Total
retail unit sales
|
|
|
77,489
|
|
|
70,598
|
|
|
6,891
|
|
|
9.8
|
%
|
Total
same store retail unit sales
|
|
|
68,886
|
|
|
70,109
|
|
|
(1,223
|
)
|
|
(1.7
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance
and insurance revenue
|
|
$
|
68.8
|
|
$
|
62.9
|
|
$
|
5.9
|
|
|
9.4
|
%
|
Same
store finance and insurance revenue
|
|
$
|
62.6
|
|
$
|
62.5
|
|
$
|
0.1
|
|
|
0.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance
and insurance revenue per unit
|
|
$
|
888
|
|
$
|
892
|
|
$
|
(4
|
)
|
|
(0.4
|
%)
|
Same
store finance and insurance revenue per unit
|
|
$
|
909
|
|
$
|
891
|
|
$
|
18
|
|
|
2.0
|
%
|
Finance
and insurance revenue increased $5.9 million, or 9.4%, from 2005 to 2006.
The increase is due to a $5.8 million increase from net dealership
acquisitions during the period, coupled with a $0.1 million, or 0.2%,
increase in same store revenues. The same store revenue increase is due to
an
$18, or 2.0%, increase in comparative average finance and insurance revenue
per
unit, which increased revenue by $1.3 million, offset by the 1.7% decrease
in retail unit sales, which decreased revenue by $1.2 million. The $18
increase in comparative average finance and insurance revenue per unit is due
to
a $46 per unit increase in finance and insurance revenues offset in part by
a $28 reduction in average finance and insurance revenue per unit from our
Sirius Satellite Radio promotion agreement.
Service
and Parts Data
|
|
|
|
|
|
2006
vs. 2005
|
|
|
|
2006
|
|
2005
|
|
Change
|
|
%
Change
|
|
Service
and parts revenue
|
|
$
|
329.3
|
|
$
|
277.0
|
|
$
|
52.3
|
|
|
18.9
|
%
|
Same
store service and parts revenue
|
|
$
|
291.9
|
|
$
|
276.0
|
|
$
|
15.9
|
|
|
5.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
$
|
182.1
|
|
$
|
150.0
|
|
$
|
32.1
|
|
|
21.4
|
%
|
Same
store gross profit
|
|
$
|
161.3
|
|
$
|
149.5
|
|
$
|
11.8
|
|
|
7.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
55.3
|
%
|
|
54.2
|
%
|
|
1.1
|
%
|
|
2.0
|
%
|
Same
store gross margin
|
|
|
55.3
|
%
|
|
54.2
|
%
|
|
1.1
|
%
|
|
2.0
|
%
|
Revenues
Service and parts revenue increased $52.3 million, or 18.9%, from 2005 to
2006. The increase is due to a $36.4 million increase from net dealership
acquisitions during the period, coupled with a $15.9 million, or 5.7%,
increase in same store revenues. We believe that our service and parts business
is being positively impacted by the growth in total retail unit sales at our
dealerships in recent years and capacity increases in our service and parts
operations resulting from our facility improvement and expansion
programs.
Gross
Profit
Service and parts gross profit increased $32.1 million, or 21.4%, from 2005
to 2006. The increase is due to a $20.3 million increase from net
dealership acquisitions during the period, coupled with an $11.8 million,
or 7.9%, increase in same store gross profit. The same store gross profit
increase is due to the $15.9 million, or 5.7%, increase in same store
revenues, which increased gross profit by $8.8 million, and a 110 basis
point increase in gross margin, which increased gross profit by
$3.0 million.
Selling,
General and Administrative
Selling,
general and administrative expenses (“SG&A”) increased $52.0 million,
or 16.8%, from $309.3 million to $361.3 million. The aggregate
increase is primarily due to a $39.6 million increase from net dealership
acquisitions during the period, coupled with a $12.4 million, or 4.0%,
increase in same store SG&A. The increase in same store SG&A is due in
large part to a net increase in variable selling expenses, including increases
in variable compensation, resulting from of the 3.2% increase in same store
retail gross profit over the prior year, coupled with increased rent and other
costs relating to our facility improvement and expansion programs. SG&A
expenses increased as a percentage of total revenue from 11.6% to 11.7% and
increased as a percentage of gross profit from 77.9% to 78.8%.
Depreciation
and Amortization
Depreciation
and amortization increased $1.9 million, or 20.0%, from $9.8 million
to $11.7 million. The increase is due to a $1.0 million increase from
net dealership acquisitions during the period, coupled with a $0.9 million,
or 9.9%, increase in same store depreciation and amortization. The same store
increase is due in large part to our facility improvement and expansion
program.
Floor
Plan Interest Expense
Floor
plan interest expense increased $4.8 million, or 40.9%, from
$11.9 million to $16.7 million. The increase is due to a
$1.5 million increase from net dealership acquisitions during the period,
coupled with a $3.3 million, or 28.5%, increase in same store floor plan
interest expense. The same store increase is due primarily to a net increase
in
our weighted average borrowing rate during 2006 compared to 2005.
Other
Interest Expense
Other
interest expense decreased $1.1 million, or 9.1%, from $12.2 million
to $11.1 million. The decrease is due primarily to a decrease in our
weighted average borrowing rate during 2006 versus 2005 offset by an increase
in
our average total outstanding indebtedness in 2006 versus 2005. The decrease
in
our weighted average borrowing rate is due primarily to the issuance of
$375.0 million of 3.5% Convertible Senior Subordinated Notes on
January 31, 2006 which was used to repay higher-rate debt under our credit
agreements, partially offset by an increase in the interest on our variable
rate
indebtedness.
Income
Taxes
Income
taxes increased $1.1 million, or 6.0%, from $19.6 million to
$20.7 million. The increase from 2005 to 2006 is due primarily to an
increase in pre-tax income versus the prior year, offset in part by a reduction
in our overall effective income tax rate.
Nine
Months Ended September 30, 2006 Compared to Nine Months Ended September 30,
2005
(dollars in millions, except per unit amounts)
Total
Retail Data
|
|
|
|
|
|
2006
vs. 2005
|
|
|
2006
|
|
2005
|
|
Change
|
|
%
Change
|
|
Total
retail unit sales
|
|
|
215,704
|
|
|
199,053
|
|
|
16,651
|
|
|
8.4
|
%
|
Total
same store retail unit sales
|
|
|
193,021
|
|
|
194,330
|
|
|
(1,309
|
)
|
|
(0.7
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
retail sales revenue
|
|
$
|
7,935.1
|
|
$
|
7,056.3
|
|
$
|
878.8
|
|
|
12.5
|
%
|
Total
same store retail sales revenue
|
|
$
|
7,113.8
|
|
$
|
6,939.9
|
|
$
|
173.9
|
|
|
2.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
retail gross profit
|
|
$
|
1,309.2
|
|
$
|
1,149.0
|
|
$
|
160.2
|
|
|
13.9
|
%
|
Total
same store retail gross profit
|
|
$
|
1,180.1
|
|
$
|
1,130.8
|
|
$
|
49.3
|
|
|
4.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
retail gross margin
|
|
|
16.5
|
%
|
|
16.3
|
%
|
|
0.2
|
%
|
|
1.2
|
%
|
Total
same store retail gross margin
|
|
|
16.6
|
%
|
|
16.3
|
%
|
|
0.3
|
%
|
|
1.8
|
%
|
Units
Retail data includes retail new vehicle, retail used vehicle, finance and
insurance and service and parts transactions. Retail unit sales of vehicles
increased by 16,651 units, or 8.4%, from 2005 to 2006. The increase is due
to a 17,960 unit increase from net dealership acquisitions during the
period, offset by a 1,309 unit, or 0.7%, decrease in same store retail unit
sales. The decrease in same store retail unit sales in 2006 is due primarily
to
a decrease in retail unit sales of our domestic brands, offset by an increase
in
retail unit sales of our premium and volume foreign brands.
Revenues
Retail sales revenue increased $878.8 million, or 12.5%, from 2005 to 2006.
The increase is due to a $704.9 million increase from net dealership
acquisitions during the period, coupled with a $173.9 million, or 2.5%,
increase in same store revenues. The same store revenue increase is due to
(1) a $566, or 1.7%, increase in average new vehicle revenue per unit,
which increased revenue by $74.2 million, (2) a $1,382, or 5.3%,
increase in average used vehicle revenue per unit, which increased revenue
by
$84.2 million, (3) a $43, or 4.9%, increase in average finance and
insurance revenue per unit, which increased revenue by $8.4 million, and
(4) a $56.1 million, or 7.0%, increase in service and parts revenues,
offset by the 0.7% decrease in retail unit sales which decreased revenue by
$49.0 million.
Gross
Profit
Retail gross profit increased $160.2 million, or 13.9%, from 2005 to 2006.
The increase is due to a $110.9 million increase from net dealership
acquisitions during the period, coupled with a $49.3 million, or 4.4%,
increase in same store retail gross profit. The same store retail gross profit
increase is due to (1) a $35, or 1.2%, increase in average gross profit per
new vehicle retailed, which increased retail gross profit by $4.6 million,
(2) a $68, or 2.9%, increase in average gross profit per used vehicle
retailed, which increased retail gross profit by $4.1 million, (3) a
$43, or 4.9%, increase in average finance and insurance revenue per unit, which
increased retail gross profit by $8.4 million, and (4) a
$37.2 million, or 8.6%, increase in service and parts gross profit, offset
by the 0.7% decrease in retail unit sales which decreased retail gross
profit by $5.0 million.
New
Vehicle Data
|
|
|
|
|
|
2006
vs. 2005
|
|
|
|
2006
|
|
2005
|
|
Change
|
|
%
Change
|
|
New
retail unit sales
|
|
|
145,697
|
|
|
136,415
|
|
|
9,282
|
|
|
6.8
|
%
|
Same
store new retail unit sales
|
|
|
131,165
|
|
|
133,414
|
|
|
(2,249
|
)
|
|
(1.7
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New
retail sales revenue
|
|
$
|
4,851.8
|
|
$
|
4,445.1
|
|
$
|
406.7
|
|
|
9.1
|
%
|
Same
store new retail sales revenue
|
|
$
|
4,375.5
|
|
$
|
4,375.0
|
|
$
|
0.5
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New
retail sales revenue per unit
|
|
$
|
33,301
|
|
$
|
32,585
|
|
$
|
716
|
|
|
2.2
|
%
|
Same
store new retail sales revenue per unit
|
|
$
|
33,359
|
|
$
|
32,793
|
|
$
|
566
|
|
|
1.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit - new
|
|
$
|
420.4
|
|
$
|
385.5
|
|
$
|
34.9
|
|
|
9.1
|
%
|
Same
store gross profit - new
|
|
$
|
378.5
|
|
$
|
380.2
|
|
$
|
(1.7
|
)
|
|
(0.4
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
gross profit per new vehicle retailed
|
|
$
|
2,885
|
|
$
|
2,826
|
|
$
|
59
|
|
|
2.1
|
%
|
Same
store average gross profit per new vehicle retailed
|
|
$
|
2,885
|
|
$
|
2,850
|
|
$
|
35
|
|
|
1.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin % - new
|
|
|
8.7
|
%
|
|
8.7
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
Same
store gross margin % - new
|
|
|
8.6
|
%
|
|
8.7
|
%
|
|
(0.1
|
%)
|
|
(1.1
|
%)
|
Units
Retail unit sales of new vehicles increased 9,282 units, or 6.8%, from 2005
to 2006. The increase is due to an 11,531 unit increase from net dealership
acquisitions during the period, offset by a 2,249 unit, or 1.7%, decrease
in same store retail unit sales. The decrease in same store retail unit sales
in
2006 is due primarily to a decrease in retail unit sales of our domestic and
premium brands, offset by an increase in retail unit sales of our volume foreign
brands.
Revenues
New vehicle retail sales revenue increased $406.7 million, or 9.1%, from
2005 to 2006. The increase is due primarily to a $406.2 million increase
from net dealership acquisitions during the period, coupled with a
$0.5 million increase in same store revenues. The same store revenue
increase is due primarily to a $566, or 1.7%, increase in comparative average
selling prices per vehicle, which increased revenue by $74.2 million,
offset by the 1.7% decrease in retail unit sales, which decreased revenue by
$73.7 million.
Gross
Profit
Retail gross profit from new vehicle sales increased $34.9 million, or
9.1%, from 2005 to 2006. The increase is due to a $36.6 million increase
from net dealership acquisitions during the period, offset by a
$1.7 million, or 0.4%, decrease in same store gross profit. The same store
decrease is due to the 1.7% decrease in new retail unit sales, which decreased
gross profit by $6.3 million, offset by a $35, or 1.2%, increase in average
gross profit per new vehicle retailed, which increased gross profit by
$4.6 million.
Used
Vehicle Data
|
|
|
|
|
|
2006
vs. 2005
|
|
|
|
2006
|
|
2005
|
|
Change
|
|
%
Change
|
|
Used
retail unit sales
|
|
|
70,007
|
|
|
62,638
|
|
|
7,369
|
|
|
11.8
|
%
|
Same
store used retail unit sales
|
|
|
61,856
|
|
|
60,916
|
|
|
940
|
|
|
1.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Used
retail sales revenue
|
|
$
|
1,935.7
|
|
$
|
1,626.5
|
|
$
|
309.2
|
|
|
19.0
|
%
|
Same
store used retail sales revenue
|
|
$
|
1,704.1
|
|
$
|
1,594.0
|
|
$
|
110.1
|
|
|
6.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Used
retail sales revenue per unit
|
|
$
|
27,651
|
|
$
|
25,967
|
|
$
|
1,684
|
|
|
6.5
|
%
|
Same
store used retail sales revenue per unit
|
|
$
|
27,550
|
|
$
|
26,168
|
|
$
|
1,382
|
|
|
5.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit - used
|
|
$
|
168.8
|
|
$
|
148.4
|
|
$
|
20.4
|
|
|
13.7
|
%
|
Same
store gross profit - used
|
|
$
|
151.6
|
|
$
|
145.1
|
|
$
|
6.5
|
|
|
4.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
gross profit per used vehicle retailed
|
|
$
|
2,411
|
|
$
|
2,369
|
|
$
|
42
|
|
|
1.8
|
%
|
Same
store average gross profit per used vehicle retailed
|
|
$
|
2,451
|
|
$
|
2,383
|
|
$
|
68
|
|
|
2.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin % - used
|
|
|
8.7
|
%
|
|
9.1
|
%
|
|
(0.4
|
%)
|
|
(4.4
|
%)
|
Same
store gross margin % - used
|
|
|
8.9
|
%
|
|
9.1
|
%
|
|
(0.2
|
%)
|
|
(2.2
|
%)
|
Units
Retail unit sales of used vehicles increased 7,369 units, or 11.8%, from
2005 to 2006. The increase is due to a 6,429 unit increase from net
dealership acquisitions during the period, coupled with a 940 unit, or
1.5%, increase in same store retail unit sales. The increase in same store
retail unit sales in 2006 is due primarily to an increase in retail unit sales
of our premium brands, offset by a decrease in retail unit sales of our domestic
and volume foreign brands.
Revenues
Used vehicle retail sales revenue increased $309.2 million, or 19.0%, from
2005 to 2006. The increase is due to a $199.1 million increase from net
dealership acquisitions during the period, coupled with a $110.1 million,
or 6.9%, increase in same store revenues. The same store revenue increase is
due
primarily to the 1.5% increase in retail unit sales, which increased revenue
by
$25.9 million, coupled with a $1,382, or 5.3%, increase in comparative
average selling prices per vehicle, which increased revenue by
$84.2 million.
Gross
Profit
Retail gross profit from used vehicle sales increased $20.4 million, or
13.7%, from 2005 to 2006. The increase is due to a $13.9 million increase
from net dealership acquisitions during the period, coupled with a
$6.5 million, or 4.5%, increase in same store gross profit. The increase in
same store gross profit is due primarily to the 1.5% increase in used retail
unit sales, which increased gross profit by $2.4 million, coupled with a
$68, or 2.9%, increase in average gross profit per used vehicle retailed, which
increased retail gross profit by $4.1 million.
Finance
and Insurance Data
|
|
|
|
|
|
2006
vs. 2005
|
|
|
|
2006
|
|
2005
|
|
Change
|
|
%
Change
|
|
Total
retail unit sales
|
|
|
215,704
|
|
|
199,053
|
|
|
16,651
|
|
|
8.4
|
%
|
Total
same store retail unit sales
|
|
|
193,021
|
|
|
194,330
|
|
|
(1,309
|
)
|
|
(0.7
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance
and insurance revenue
|
|
$
|
195.6
|
|
$
|
175.5
|
|
$
|
20.1
|
|
|
11.5
|
%
|
Same
store finance and insurance revenue
|
|
$
|
179.4
|
|
$
|
172.1
|
|
$
|
7.3
|
|
|
4.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance
and insurance revenue per unit
|
|
$
|
907
|
|
$
|
882
|
|
$
|
25
|
|
|
2.8
|
%
|
Same
store finance and insurance revenue per unit
|
|
$
|
929
|
|
$
|
886
|
|
$
|
43
|
|
|
4.9
|
%
|
Finance
and insurance revenue increased $20.1 million, or 11.5%, from 2005 to 2006.
The increase is due to a $12.8 million increase from net dealership
acquisitions during the period, coupled with a $7.3 million, or 4.2%,
increase in same store revenues. The same store revenue increase is due to
a
$43, or 4.9%, increase in comparative average finance and insurance revenue
per
unit, which increased revenue by $8.4 million, offset by a 0.7% decrease in
retail unit sales, which decreased revenue by $1.1 million. The $43
increase in comparative average finance and insurance revenue per unit
is due to a $55 per unit increase in finance and insurance revenues offset
in part by a $12 reduction in average finance and insurance revenue per unit
from our Sirius Satellite Radio promotion agreement.
Service
and Parts Data
|
|
|
|
|
|
2006
vs. 2005
|
|
|
|
2006
|
|
2005
|
|
Change
|
|
%
Change
|
|
Service
and parts revenue
|
|
$
|
951.9
|
|
$
|
809.3
|
|
$
|
142.6
|
|
|
17.6
|
%
|
Same
store service and parts revenue
|
|
$
|
854.8
|
|
$
|
798.7
|
|
$
|
56.1
|
|
|
7.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
$
|
524.4
|
|
$
|
439.7
|
|
$
|
84.7
|
|
|
19.3
|
%
|
Same
store gross profit
|
|
$
|
470.6
|
|
$
|
433.4
|
|
$
|
37.2
|
|
|
8.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
55.1
|
%
|
|
54.3
|
%
|
|
0.8
|
%
|
|
1.5
|
%
|
Same
store gross margin
|
|
|
55.1
|
%
|
|
54.3
|
%
|
|
0.8
|
%
|
|
1.5
|
%
|
Revenues
Service and parts revenue increased $142.6 million, or 17.6%, from 2005 to
2006. The increase is due to an $86.5 million increase from net dealership
acquisitions during the period, coupled with a $56.1 million, or 7.0%,
increase in same store revenues. We believe that our service and parts business
is being positively impacted by the growth in total retail unit sales at our
dealerships in recent years and capacity increases in our service and parts
operations resulting from our facility improvement and expansion
programs.
Gross
Profit
Service and parts gross profit increased $84.7 million, or 19.3%, from 2005
to 2006. The increase is due to a $47.5 million increase from net
dealership acquisitions during the period, coupled with a $37.2 million, or
8.6%, increase in same store gross profit. The same store gross profit increase
is due to the $56.1 million, or 7.0%, increase in same store revenues,
which increased gross profit by $30.9 million, and an 80 basis point
increase in gross margin, which increased gross profit by
$6.3 million.
Selling,
General and Administrative
Selling,
general and administrative expenses (“SG&A”) increased $134.1 million,
or 14.8%, from $905.2 million to $1,039.3 million. The aggregate
increase is primarily due to a $90.8 million increase from net dealership
acquisitions during the period, coupled with a $43.3 million, or 4.9%,
increase in same store SG&A. The increase in same store SG&A is due in
large part to a net increase in variable selling expenses, including increases
in variable compensation as a result of the 4.4% increase in same store retail
gross profit over the prior year, coupled with increased rent and other costs
relating to our facility improvement and expansion programs. SG&A expenses
increased as a percentage of total revenue from 11.8% to 12.0% and increased
as
a percentage of gross profit from 78.7% to 79.1%.
Depreciation
and Amortization
Depreciation
and amortization increased $4.6 million, or 15.9%, from $28.8 million
to $33.4 million. The increase is due to a $2.0 million increase from
net dealership acquisitions during the period, coupled with a $2.6 million,
or 9.4%, increase in same store depreciation and amortization. The same store
increase is due in large part to our facility improvement and expansion
program.
Floor
Plan Interest Expense
Floor
plan interest expense increased $11.6 million, or 31.0%, from
$37.5 million to $49.1 million. The increase is due to a
$3.5 million increase from net dealership acquisitions during the period,
coupled with an $8.1 million, or 22.0%, increase in same store floor plan
interest expense. The same store increase is due primarily to a net increase
in
our weighted average borrowing rate during 2006 compared to 2005.
Other
Interest Expense
Other
interest expense decreased $1.1 million, or 3.3%, from $35.7 million
to $34.6 million. The decrease is due primarily to a decrease in our
weighted average borrowing rate during 2006 versus 2005 offset by an increase
in
our average total outstanding indebtedness in 2006 versus 2005. The decrease
in
our weighted average borrowing rate is due primarily to the issuance of
$375.0 million of 3.5% Convertible Senior Subordinated Notes on
January 31, 2006 which was used to repay higher-rate debt under our credit
agreements, partially offset by an increase in the interest on our variable
rate
indebtedness.
Income
Taxes
Income
taxes increased $4.9 million, or 9.3%, from $52.4 million to
$57.3 million. The increase from 2005 to 2006 is due primarily to an
increase in pre-tax income versus the prior year, offset in part by a reduction
in our overall effective income tax rate.
Liquidity
and Capital Resources
Our
cash
requirements are primarily for working capital, inventory financing, the
acquisition of new dealerships, the improvement and expansion of existing
facilities, the construction of new facilities and dividends. Historically,
these cash requirements have been met through cash flow from operations,
borrowings under our credit agreements and floor plan arrangements, the issuance
of debt securities, sale-leaseback transactions or the issuance of equity
securities. As of September 30, 2006, we had working capital of
$184.9 million, including $19.1 million of cash, available to fund our
operations and capital commitments. In addition, we had $554.0 million and
£43.2
million ($80.9 million) available for borrowing under our U.S. credit
agreement and our U.K. credit agreement, respectively, each of which is
discussed below.
We
paid
dividends of five and one half cents per share on March 1, 2005,
June 1, 2005 and September 1, 2005, six cents per share on
December 1, 2005 and March 1, 2006, and seven cents per share on
June 1, 2006 and September 1, 2006. We have declared a cash dividend on our
common stock of seven cents per share payable on December 1, 2006 to
shareholders of record on November 10, 2006. Future quarterly or other cash
dividends will depend upon our earnings, capital requirements, financial
condition, restrictions on any then existing indebtedness and other factors
considered relevant by our Board of Directors.
We
have
grown primarily through the acquisition of automotive dealerships. We believe
that cash flow from operations and our existing capital resources, including
the
liquidity provided by our credit agreements and floor plan financing
arrangements, will be sufficient to fund our operations and commitments for
at
least the next twelve months. To the extent we pursue additional significant
acquisitions or refinance existing debt, we may need to raise additional capital
either through the public or private issuance of equity or debt securities
or
through additional bank borrowings. We may not have sufficient availability
under our credit agreements to finance significant additional acquisitions
or
refinance existing debt. In certain circumstances, a public equity offering
could require the prior approval of certain automobile manufacturers. In
connection with any potential significant acquisitions or refinancings, we
may
be unable to access the capital markets or increase our borrowing capabilities
on terms acceptable to us, if at all.
Inventory
Financing
We finance substantially all of our new and a portion of our used vehicle
inventories under revolving floor plan arrangements with various lenders. In
the
U.S., the floor plan arrangements are due on demand; however, we are generally
not required to make loan principal repayments prior to the sale of the vehicles
that have been financed. We typically make monthly interest payments on the
amount financed. Outside of the U.S., substantially all of our floor plan
arrangements are payable on demand or have an original maturity of 90 days
or less, and we are generally required to repay floor plan advances at the
earlier of the sale of the vehicles that have been financed or the stated
maturity. All of the floor plan agreements grant a security interest in
substantially all of the assets of our dealership subsidiaries. Interest rates
under the floor plan arrangements are variable and increase or decrease based
on
changes in the prime rate, defined LIBOR or Euro Interbank Offer Rate. We
receive non-refundable credits from certain of our vehicle manufacturers, which
are treated as a reduction of cost of sales as vehicles are sold.
U.S. Credit Agreement
Our credit agreement with DaimlerChrysler Services Americas LLC and Toyota
Motor
Credit Corporation, as amended, provides for up to $600.0 million in
revolving loans for working capital, acquisitions, capital expenditures,
investments and for other general corporate purposes, and for an additional
$50.0 million of availability for letters of credit, through
September 30, 2009. The revolving loans bear interest between defined LIBOR
plus 2.50% and defined LIBOR plus 3.50%.
The
U.S. credit
agreement is fully and unconditionally guaranteed on a joint and several basis
by our domestic subsidiaries and contains a number of significant covenants
that, among other things, restrict our ability to dispose of assets, incur
additional indebtedness, repay other indebtedness, create liens on assets,
make
investments or acquisitions and engage in mergers or consolidations. We are
also
required to comply with specified financial and other tests and ratios, each
as
defined in the U.S. credit agreement, including: a ratio of current assets
to current liabilities, a fixed charge coverage ratio, a ratio of debt to
stockholders’ equity, a ratio of debt to earnings before income taxes,
depreciation and amortization, (“EBITDA”), a ratio of domestic debt to domestic
EBITDA, and a measurement of stockholders’ equity. A breach of these
requirements would give rise to certain remedies under the agreement, the most
severe of which is the termination of the agreement and acceleration of the
amounts owed. As of September 30, 2006 we were in compliance with all covenants
under the U.S. credit agreement, and we believe we will remain in
compliance with such covenants for the foreseeable future. In making such
determination, we have considered our current margin of compliance with the
covenants and our expected future results of operations, working capital
requirements, acquisitions, capital expenditures and investments. See
“Forward Looking Statements.”
The
U.S. credit
agreement also contains typical events of default, including change of control,
non-payment of obligations and cross-defaults to our other material
indebtedness. Substantially all of our domestic assets not pledged as security
under floor plan arrangements are subject to security interests granted to
lenders under the U.S. credit agreement. As of September 30, 2006,
outstanding borrowings and letters of credit under the U.S. credit
agreement amounted to $46.0 million and $12.4 million,
respectively.
U.K.
Credit Agreement
Our
subsidiaries in the
U.K. (the “U.K. Subsidiaries”) and the Royal Bank of Scotland plc, as agent for
National Westminster Bank plc ("RBS"), replaced their existing credit agreement
on August 31, 2006, with a five year multi-option credit agreement, a new fixed
rate credit agreement and a new seasonally adjusted overdraft line of credit
(collectively, the "U.K. Credit Agreement") to be used to finance acquisitions,
working capital, and general corporate purposes. The U.K. Credit Agreement
provides for (1) up to £70,000 in revolving loans through August 31, 2011, which
have an original maturity of 90 days or less and bear interest between
defined LIBOR plus 0.65% and defined LIBOR plus 1.25%, (2) a £30,000 funded term
loan which bears interest between 5.94% and 6.54% and is payable ratably in
quarterly intervals commencing on June 30, 2007, through June 30, 2011 and
(3) a
seasonally adjusted overdraft line of credit for up to £30,000 that bears
interest at the Bank of England Base Rate plus 1.00% and matures on August
31,
2011.
The
U.K. Credit Agreement
is fully and unconditionally guaranteed on a joint and several basis by our
U.K.
Subsidiaries, and contains a number of significant covenants that, among other
things, restrict the ability of our U.K. Subsidiaries to pay dividends, dispose
of assets, incur additional indebtedness, repay other indebtedness, create
liens
on assets, make investments or acquisitions and engage in mergers or
consolidations. In addition, our U.K. Subsidiaries are required to comply with
specified ratios and tests, each as defined in the U.K. Credit Agreement,
including: a ratio of earnings before interest and taxes plus rental payments
to
interest plus rental payments (as defined), a measurement of maximum capital
expenditures, and a debt to EBITDA ratio (as defined). A breach of these
requirements would give rise to certain remedies under the agreement, the most
severe of which is the termination of the agreement and acceleration of the
amounts owed. As of September 30, 2006, we were in compliance with all covenants
under the U.K. Credit Agreement, and we believe that we will remain in
compliance with such covenants for the foreseeable future. In making such
determination, we considered the current margin of compliance with the covenants
and the Company’s expected future results of operations, working capital
requirements, acquisitions, capital expenditures and investments in the
U.K.
The
U.K. Credit Agreement
also contains typical events of default, including change of control and
non-payment of obligations and cross-defaults to other material indebtedness
of
the U.K. Subsidiaries. Substantially all of our U.K. Subsidiaries' assets not
pledged as security under floor plan arrangements are subject to security
interests granted to lenders under the U.K. Credit Agreement. As of September
30, 2006, outstanding revolving loans under the U.K. Credit Agreement
amounted to £70.0 million ($131.1million).
Senior
Subordinated Notes
We have outstanding $300.0 million aggregate principal amount of
9.625% senior subordinated notes due 2012, referred to as the
9.625% Notes. The 9.625% Notes are unsecured senior subordinated notes
and are subordinate to all existing and future senior debt, including debt
under
our credit agreements and obligations under our floor plan arrangements. The
9.625% Notes are guaranteed by substantially all domestic subsidiaries on a
senior subordinated basis. We can redeem all or some of the 9.625% Notes at
our option beginning in March 2007 at specified redemption prices. Upon a change
of control, each holder of 9.625% Notes will be able to require us to
repurchase all or some of the 9.625% Notes at a redemption price of 101% of
their principal amount. The 9.625% Notes also contain customary negative
covenants and events of default. As of September 30, 2006, we were in compliance
with all negative covenants and there were no events of default.
Senior
Subordinated Convertible Notes
On January 31, 2006, we issued $375.0 million of 3.50% senior
subordinated convertible notes due 2026 (the “Convertible Notes”).The
Convertible Notes mature on April 1, 2026, unless earlier converted,
redeemed or purchased by us. The Convertible Notes are our unsecured senior
subordinated obligations and are guaranteed on an unsecured senior subordinated
basis by our wholly owned domestic subsidiaries. The Convertible Notes also
contain customary negative covenants and events of default. As of September
30,
2006 we were in compliance with all negative covenants and there were no events
of default.
Holders
may convert based on a conversion rate of 42.2052 shares of our common
stock per $1,000 principal amount of the Convertible Notes (which is equal
to a
conversion price of approximately $23.69 per share), subject to adjustment,
only under the following circumstances: (1) if the closing price of our
common stock reaches, or the trading price of the Convertible Notes falls below,
specific thresholds, (2) if the Convertible Notes are called for
redemption, (3) if specified distributions to holders of our common stock
are made or specified corporate transactions occur, (4) if a fundamental
change (as defined) occurs, or (5) during the ten trading days prior to,
but excluding, the maturity date. Upon conversion of the Convertible Notes,
for
each $1,000 principal amount of the Convertible Notes, a holder will receive
an
amount in cash, in lieu of shares of our common stock, equal to the lesser
of
(i) $1,000 or (ii) the conversion value, determined in the manner set
forth in the related indenture, of the number of shares of our common stock
equal to the conversion rate. If the conversion value exceeds $1,000, we will
also deliver, at our election, cash, common stock or a combination of cash
and
common stock with respect to the remaining value deliverable upon conversion.
If
a holder elects to convert its Convertible Notes in connection with certain
events that constitute a change of control on or before April 6, 2011, we
will pay, to the extent described in the related indenture, a make-whole premium
by increasing the conversion rate applicable to such Convertible
Notes.
In
addition, we will pay contingent interest in cash, commencing with any six-month
period beginning on April 1, 2011, if the average trading price of a
Convertible Note for the five trading days ending on the third trading day
immediately preceding the first day of that six-month period equals 120% or
more
of the principal amount of the Convertible Note.
On
or
after April 6, 2011, we may redeem the Convertible Notes, in whole at any
time or in part from time to time, for cash at a redemption price of 100% of
the
principal amount of the Convertible Notes to be redeemed, plus any accrued
and
unpaid interest to the applicable redemption date. Holders of the Convertible
Notes may require us to purchase all or a portion of their Convertible Notes
for
cash on each of April 1, 2011, April 1, 2016 and April 1, 2021 at
a purchase price equal to 100% of the principal amount of the Convertible Notes
to be purchased, plus accrued and unpaid interest, if any, to the applicable
purchase date.
Share
Repurchase
In connection with the issuance of the Convertible Notes discussed above, we
repurchased 1,000,000 shares of our outstanding common stock on
January 26, 2006 for $18.96 million, or $18.955 per
share.
Interest
Rate Swaps
We are party to an interest rate swap agreement through January 2008 pursuant
to
which a notional $200.0 million of our U.S. floating rate debt was
exchanged for fixed rate debt. The swap was designated as a cash flow hedge
of
future interest payments of LIBOR-based U.S. floor plan borrowings. As of
September 30, 2006, we expected approximately $0.6 million associated with
the swap to be recognized as a reduction of interest expense over the next
twelve months.
Other
Financing Arrangements
We expect to enter into sale-leaseback transactions to finance certain property
acquisitions and capital expenditures, pursuant to which we sell property and/or
leasehold improvements to a third-party and agree to lease those assets back
for
a certain period of time. Such sales generate proceeds which vary from period
to
period.
Off-Balance Sheet Arrangements
We are not party to any off-balance sheet arrangements.
Cash
Flows
We
have
restated our 2005 consolidated statement of cash flows to reflect the repayment
of floor plan obligations in connection with acquisitions and dispositions
as
cash transactions to comply with guidance under SFAS No. 95,
“Statement of Cash Flows.” More specifically, with respect to acquisitions, we
restated our consolidated statement of cash flows to reflect the repayment
of
seller floor plan notes payable obligations by our floor plan lenders as
additional cost of dealership acquisitions with the corresponding borrowings
of
floor plan notes payable reflected as floor plan notes payable-non-trade.
Similarly, with respect to dispositions, we restated our consolidated statement
of cash flows to reflect the repayment of our floor plan notes payable by the
purchaser’s floor plan lender as additional transaction proceeds with
corresponding repayments of floor plan notes payable reflected as floor plan
notes payable trade or non-trade, as appropriate. Previously, all such activity
was treated as a non-cash acquisition or disposition of inventory and floor
plan
notes payable. As a result, the consolidated condensed statement of cash flows
for the nine months ended September 30, 2005 has been restated. A summary of
the
significant effects of the restatement follows:
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
|
2005
|
|
Net
cash from continuing operating activities as previously reported
|
|
$
|
137,316
|
|
Discontinued
operations
|
|
|
(8,780
|
)
|
Recognition
of floorplan balances as cash transactions
|
|
|
34,205
|
|
Net
cash from continuing operating activities, as restated
|
|
$
|
162,741
|
|
|
Net
cash from continuing investing activities as previously reported
|
|
$
|
(155,010
|
)
|
Discontinued
operations
|
|
|
(486
|
)
|
Recognition
of floorplan balances as cash transactions
|
|
|
(35,853
|
)
|
Net
cash from continuing investing activities, as restated
|
|
$
|
(191,349
|
)
|
|
|
|
|
|
Net
cash from continuing financing activities as previously reported
|
|
$
|
(17,818
|
)
|
Discontinued
operations
|
|
|
2,556
|
|
Recognition
of floorplan balances as cash transactions
|
|
|
1,648
|
|
Net
cash from continuing financing activities, as restated
|
|
$
|
(13,614
|
)
|
Cash
and
cash equivalents increased by $10.1 million and decreased by
$18.5 million during the nine months ended September 30, 2006 and 2005,
respectively. The major components of these changes are discussed
below.
Cash
Flows from Continuing Operating Activities
Cash provided by continuing operating activities was $239.3 million and
$162.7 million during the nine months ended September 30, 2006 and 2005,
respectively. Cash flows from operating activities include net income adjusted
for non-cash items and the effects of changes in working capital.
We
finance substantially all of our new and a portion of our used vehicle
inventories under revolving floor plan arrangements with various lenders. We
report all cash flows arising in connection with floor plan arrangements with
the manufacturer of a particular new vehicle as an operating activity and all
cash flows arising in connection with floor plan arrangements with a party
other
than the manufacturer of a particular new vehicle and all floor plan notes
payable relating to pre-owned vehicles as a financing activity.
We
believe that changes in aggregate floor plan liabilities are linked to changes
in vehicle inventory and, therefore, are an integral part of understanding
changes in our working capital and operating cash flow. Consequently, we have
provided below a reconciliation of cash flow from operating activities as
reported in our condensed consolidated statement of cash flows to cash flows
from operating activities on the basis that all changes in vehicle floor plan
were classified as an operating activity:
|
|
Nine
Months Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
Net
cash from operating activities as reported
|
|
$
|
239,342
|
|
|
162,741
|
|
Floor
plan notes payable - non-trade as reported
|
|
|
29,539
|
|
|
(47,914
|
)
|
Net
cash from operating activities including all floor plan notes payable
|
|
$
|
268,881
|
|
|
114,827
|
|
Cash
Flows from Continuing Investing Activities
Cash used in continuing investing activities was $457.2 million and
$191.3 million during the nine months ended September 30, 2006 and 2005,
respectively. Cash flows from investing activities consist primarily of cash
used for capital expenditures, proceeds from sale-leaseback transactions and
net
expenditures for dealership acquisitions. Capital expenditures were
$150.7 million and $165.4 million during the nine months ended
September 30, 2006 and 2005, respectively. Capital expenditures relate primarily
to improvements to our existing dealership facilities and the construction
of
new facilities. Proceeds from sale-leaseback transactions were
$62.8 million and $71.2 million during the nine months ended September
30, 2006 and 2005, respectively. Cash used in business acquisitions, net of
cash
acquired, was $369.3 million and $97.1 million during the nine months
ended September 30, 2006 and 2005, respectively, and included cash used to
repay
sellers’ floor plan liabilities in such business acquisitions of
$114.3 million and $35.9 million during the nine months ended September 30,
2006 and 2005, respectively.
Cash
Flows from Continuing Financing Activities
Cash provided by continuing financing activities was $220.5 million during
the nine months ended September 30, 2006. Cash used in continuing financing
activities was $13.6 million during the nine months ended September 30,
2005. Cash flows from financing activities include net borrowings or repayments
of long-term debt, net borrowings or repayments of floor plan notes payable
non-trade, payments of deferred financing costs, proceeds from the issuance
of
common stock, including proceeds from the exercise of stock options, repurchases
of common stock and dividends. We had net borrowings of long-term debt of
$223.2 million and $45.6 million during the nine months ended
September 30, 2006 and 2005, respectively. We had net borrowings of floor plan
notes payable non-trade of $29.5 million during the nine months ended September
30, 2006 and net repayments of floor plan notes payable non-trade of
$47.9 million during the nine months ended September 30, 2005. During the
nine months ended September 30, 2006, we paid $12.6 million of deferred
financing costs relating to various financings. During the nine months ended
September 30, 2006 and 2005, we received proceeds of $18.0 million and
$4.0 million, respectively, from the issuance of common stock, including
tax benefits. In connection with the issuance of the Convertible Notes, we
repurchased 1,000,000 shares of our outstanding common stock for
$19.0 million. During the nine months ended September 30, 2006 and 2005, we
paid $18.6 million and $15.3 million, respectively, of cash dividends
to our stockholders.
Commitments
We
are
party to a joint venture agreement with respect to one of the Company’s
franchises pursuant to which we are required to repurchase our partner’s
interest in July 2008. We expect this payment to be approximately
$4.0 million.
Related
Party Transactions
Stockholders
Agreement
Roger S. Penske, our Chairman of the Board and Chief Executive Officer, is
also
Chairman of the Board and Chief Executive Officer of Penske Corporation, and
through entities affiliated with Penske Corporation, our largest stockholder
owning approximately 40% of our outstanding common stock. Mitsui & Co.,
Ltd. and Mitsui & Co. (USA), Inc. (collectively, “Mitsui”) own
approximately 16% of our outstanding common stock. Mitsui, Penske Corporation
and certain other affiliates of Penske Corporation are parties to a stockholders
agreement pursuant to which the Penske affiliated companies agreed to vote
their
shares for one director who is a representative of Mitsui. In turn, Mitsui
agreed to vote their shares for up to fourteen directors voted for by the Penske
affiliated companies. This agreement terminates in March 2014, upon the mutual
consent of the parties, or when either party no longer owns any of our common
stock.
Other
Related Party Interests
Roger S. Penske is also a managing member of Penske Capital Partners and
Transportation Resource Partners, organizations that undertake investments
in
transportation-related industries. Richard J. Peters, one of our directors,
is a
director of Penske Corporation and a managing director of Transportation
Resource Partners. Eustace W. Mita and Lucio A. Noto (two of our directors)
are
investors in Transportation Resource Partners. One of our directors, Hiroshi
Ishikawa, serves as our Executive Vice President — International Business
Development and serves in a similar capacity for Penske Corporation. Robert
H.
Kurnick, Jr., our Vice Chairman, is also the President and a director of
Penske Corporation and Paul F. Walters, our Executive Vice President —
Human Resources serves in a similar human resources capacity for Penske
Corporation.
Other
Transactions
We are currently a tenant under a number of non-cancelable lease agreements
with
Automotive Group Realty, LLC and its subsidiaries (together “AGR”), which are
subsidiaries of Penske Corporation. From time to time, we may sell AGR real
property and improvements that are subsequently leased by AGR to us. In
addition, we may purchase real property or improvements from AGR which, in
some
instances, occur via the purchase of the equity interest of a corporate entity.
Each of these transactions is valued at a price that is independently confirmed
by a third party appraiser. We sometimes pay to and/or receive fees from Penske
Corporation and its affiliates for services rendered in the normal course of
business, or to reimburse payments made to third parties on each others’ behalf.
These transactions and those relating to AGR mentioned above, are reviewed
periodically by our Audit Committee and reflect the provider’s cost or an amount
mutually agreed upon by both parties, which we believe represent terms at least
as favorable as those that could be obtained from an unaffiliated third party
negotiated on an arm’s length basis.
We
and
Penske Corporation have entered into a joint insurance agreement which provides
that, with respect to our joint insurance policies (which includes our property
policy), available coverage with respect to a loss shall be paid to each party
as stipulated in the policies. In the event of losses by us and Penske
Corporation in excess of the limit of any policy during a policy period, the
total policy proceeds shall be allocated based on the ratio of premiums
paid.
We have entered into joint ventures with certain related parties as more fully
discussed below.
Joint
Venture Relationships
From
time
to time, we enter into joint venture relationships in the ordinary course of
business, through which we acquire dealerships together with other investors.
We
may provide these dealerships with working capital and other debt financing
at
costs that are based on our incremental borrowing rate. As of September 30,
2006, our joint venture relationships were as follows:
Location
|
|
Dealerships
|
|
Ownership
Interest
|
|
|
|
|
|
|
Fairfield,
Connecticut
|
|
|
Audi,
Mercedes-Benz, Porsche
|
|
|
91.70%
|
(A)(B)
|
Edison,
New Jersey
|
|
|
Ferrari,
Maserati
|
|
|
70.00%
|
(B)
|
Tysons
Corner, Virginia
|
|
|
Mercedes-Benz,
Maybach,
|
|
|
90.00%
|
(B)(C)
|
|
|
|
Aston
Martin, Audi, Porsche
|
|
|
|
|
Las
Vegas, Nevada
|
|
|
Ferrari,
Maserati
|
|
|
50.00%
|
(D)
|
Mentor,
Ohio
|
|
|
Honda
|
|
|
75.00%
|
(B)
|
Munich,
Germany
|
|
|
BMW,
MINI
|
|
|
50.00%
|
(D)
|
Frankfurt,
Germany
|
|
|
Lexus,
Toyota
|
|
|
50.00%
|
(D)
|
Achen,
Germany
|
|
|
Audi,
Volkswagen, Lexus, Toyota
|
|
|
50.00%
|
(D)
|
Mexico
|
|
|
Toyota
|
|
|
48.70%
|
(D)
|
Mexico
|
|
|
Toyota
|
|
|
45.00%
|
(D)
|
____________________
(A)
|
|
An
entity controlled by one of our directors, Lucio A. Noto (the “Investor”),
owns an 8.3% interest in this joint venture, which entitles the Investor
to 20% of the operating profits of the dealerships owned by the joint
venture. In addition, the Investor has an option to purchase up to
a 20%
interest in the joint venture for specified amounts.
|
|
|
(B)
|
|
Entity
is consolidated in our financial statements.
|
|
|
(C)
|
|
Roger
S. Penske, Jr. owns a 10% interest in this joint
venture.
|
|
|
(D)
|
|
Entity
is accounted for using the equity method of
accounting.
|
Cyclicality
Unit
sales of motor vehicles, particularly new vehicles, historically have been
cyclical, fluctuating with general economic cycles. During economic downturns,
the automotive retailing industry tends to experience periods of decline and
recession similar to those experienced by the general economy. We believe that
the industry is influenced by general economic conditions and particularly
by
consumer confidence, the level of personal discretionary spending, fuel prices,
interest rates and credit availability.
Seasonality
Our
business is modestly seasonal overall. Our U.S. operations generally
experience higher volumes of vehicle sales in the second and third quarters
of
each year due in part to consumer buying trends and the introduction of new
vehicle models. Also, demand for cars and light trucks is generally lower during
the winter months than in other seasons, particularly in regions of the United
States where dealerships may be subject to severe winters. The greatest
U.S. seasonality exists at the dealerships we operate in northeastern and
upper mid-western states, for which the second and third quarters are the
strongest with respect to vehicle-related sales. Our U.K. operations generally
experience higher volumes of vehicle sales in the first and third quarters
of
each year, due primarily to vehicle registration practices in the U.K. The
service and parts business at all dealerships experiences relatively modest
seasonal fluctuations.
Effects
of Inflation
We
believe that inflation rates over the last few years have not had a significant
impact on revenues or profitability. We do not expect inflation to have any
near-term material effects on the sale of our products and services, however,
we
cannot be sure there will be no such effect in the future.
We
finance substantially all of our inventory through various revolving floor
plan
arrangements with interest rates that vary based on the prime rate, LIBOR or
Euro Interbank Offer Rate. Such rates have historically increased during periods
of increasing inflation.
Forward-Looking
Statements
This
quarterly report on Form 10-Q contains “forward-looking statements” within the
meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended.
Forward-looking statements generally can be identified by the use of terms
such
as “may,” “will,” “should,” “expect,” “anticipate,” “believe,” “intend,” “plan,”
“estimate,” “predict,” “potential,” “forecast,” “continue” or variations of such
terms, or the use of these terms in the negative. Forward-looking statements
include statements regarding our current plans, forecasts, estimates, beliefs
or
expectations, including, without limitation, statements with respect
to:
|
•
|
our
future financial performance;
|
|
|
|
•
|
future
acquisitions;
|
|
|
|
•
|
future
capital expenditures;
|
|
|
|
•
|
our
ability to obtain cost savings and synergies;
|
|
|
|
•
|
our
ability to respond to economic cycles;
|
|
|
|
•
|
trends
in the automotive retail industry and in the general economy in the
various countries in which we operate dealerships;
|
|
|
|
•
|
our
ability to access the remaining availability under our credit
agreements;
|
|
|
|
•
|
our
liquidity;
|
|
|
|
•
|
interest
rates;
|
|
|
|
|
•
|
trends
affecting our future financial condition or results of
operations; and
|
|
|
|
•
|
our
business strategy.
|
Forward-looking
statements involve known and unknown risks and uncertainties and are not
assurances of future performance. Actual results may differ materially from
anticipated results due to a variety of factors, including the factors
identified in our filings with the SEC. Important factors that could cause
actual results to differ materially from our expectations include the
following:
|
•
|
the
ability of automobile manufacturers to exercise significant control
over
our operations, since we depend on them in order to operate our
business;
|
|
|
|
•
|
because
we depend on the success and popularity of the brands we sell, adverse
conditions affecting one or more automobile manufacturers may negatively
impact our revenues and profitability;
|
|
|
|
•
|
we
may not be able to satisfy our capital requirements for making
acquisitions, dealership renovation projects or financing the purchase
of
our inventory;
|
|
|
|
•
|
our
failure to meet a manufacturer’s consumer satisfaction requirements may
adversely affect our ability to acquire new dealerships, our ability
to
obtain incentive payments from manufacturers and our
profitability;
|
|
|
|
•
|
automobile
manufacturers may impose limits on our ability to issue additional
equity
and on the ownership of our common stock by third parties, which
may
hamper our ability to meet our financing needs;
|
|
|
|
•
|
our
business and the automotive retail industry in general are susceptible
to
adverse economic conditions, including changes in interest rates,
consumer
confidence, fuel prices and credit availability;
|
|
|
|
•
|
substantial
competition in automotive sales and services may adversely affect
our
profitability;
|
|
|
|
•
|
if
we lose key personnel, especially our Chief Executive Officer, or
are
unable to attract additional qualified personnel, our business could
be
adversely affected;
|
|
|
|
•
|
our
quarterly operating results may fluctuate due to seasonality in the
automotive retail business and other factors;
|
|
|
|
•
|
because
most customers finance the cost of purchasing a vehicle, higher interest
rates may adversely affect our vehicle sales;
|
|
|
|
•
|
our
business may be adversely affected by import product restrictions
and
foreign trade risks that may impair our ability to sell foreign vehicles
profitably;
|
|
|
|
•
|
our
automobile dealerships are subject to substantial regulations which
may
adversely affect our profitability;
|
|
|
|
•
|
if
state dealer laws in the United States are repealed or weakened,
our
automotive dealerships may be subject to increased competition and
may be
more susceptible to termination, non-renewal or renegotiation of
their
franchise agreements;
|
|
|
|
|
•
|
our
U.K. dealerships are not afforded the same legal franchise protections
as
those in the U.S. so we could be subject to additional competition
from other local dealerships in the U.K.;
|
|
|
|
•
|
our
automotive dealerships are subject to environmental regulations that
may
result in claims and liabilities;
|
|
|
|
•
|
our
dealership operations may be affected by severe weather or other
periodic
business interruptions;
|
|
|
|
•
|
our
principal stockholders have substantial influence over us and may
make
decisions with which other stockholders may disagree;
|
|
|
|
•
|
some
of our directors and officers may have conflicts of interest with
respect
to certain related party transactions and other business
interests;
|
|
|
|
|
•
|
our
level of indebtedness may limit our ability to obtain financing for
acquisitions and may require that a significant portion of our cash
flow
be used for debt service;
|
|
|
|
•
|
we
may be involved in legal proceedings that could have a material adverse
effect on our business;
|
|
|
|
•
|
our
operations outside of the United States subject our profitability
to
fluctuations relating to changes in foreign currency
valuations;
|
|
|
|
•
|
we
are a holding company and, as a result, rely on the receipt of payments
from our subsidiaries in order to meet our cash needs and service
our
indebtedness;
|
|
|
|
•
|
the
price of our common stock is subject to substantial fluctuation,
which may
be unrelated to our performance; and
|
|
|
|
•
|
shares
eligible for future sale, or issuable under the terms of our convertible
notes, may cause the market price of our common stock to drop
significantly, even if our business is doing
well.
|
We urge you to carefully consider these risk factors in evaluating all
forward-looking statements regarding our business. Readers of this report are
cautioned not to place undue reliance on the forward-looking statements
contained in this report. All forward-looking statements attributable to us
are
qualified in their entirety by this cautionary statement. Except to the extent
required by the federal securities laws and SEC rules and regulations, we have
no intention or obligation to update publicly any forward-looking statements
whether as a result of new information, future events or otherwise.
|
Quantitative
and Qualitative Disclosures About Market
Risk
|
Interest
Rates.
We are
exposed to market risk from changes in the interest rates on a significant
portion of our outstanding indebtedness. Outstanding balances under our credit
agreements bear interest at variable rates based on a margin over defined
benchmarks. Based on the amount outstanding as of September 30, 2006, a
100 basis point change in interest rates would result in an approximate
$1.6 million change to our annual interest expense. Similarly, amounts
outstanding under floor plan financing arrangements bear interest at a variable
rate based on a margin over defined benchmarks. We continually evaluate our
exposure to interest rate fluctuations and follow established policies and
procedures to implement strategies designed to manage the amount of variable
rate indebtedness outstanding at any point in time in an effort to mitigate
the
effect of interest rate fluctuations on our earnings and cash flows. We are
currently party to a swap agreement pursuant to which a notional
$200.0 million of our floating rate floor plan debt was exchanged for fixed
rate debt through January 2008. Based on an average of the aggregate amounts
outstanding under our floor plan financing arrangements subject to variable
interest payments during the nine months ended September 30, 2006, a
100 basis point change in interest rates would result in an approximate
$10.7 million change to our annual interest expense.
Interest
rate fluctuations affect the fair market value of our swaps and fixed rate
debt,
including the 9.625% Notes, the Convertible Notes and certain seller financed
promissory notes, but, with respect to such fixed rate debt instruments, do
not
impact our earnings or cash flows.
Foreign
Currency Exchange Rates.
As of
September 30, 2006, we had dealership operations in the U.K. and Germany. In
each of these markets, the local currency is the functional currency. Due to
our
intent to remain permanently invested in these foreign markets, we do not hedge
against foreign currency fluctuations. In the event we change our intent with
respect to the investment in any of our international operations, we would
expect to implement strategies designed to manage those risks in an effort
to
mitigate the effect of foreign currency fluctuations on our earnings and cash
flows. A ten percent change in average exchange rates versus the
U.S. Dollar would have resulted in an approximate $265.3 million
change to our revenues for the three months ended September 30,
2006.
In
common
with other automotive retailers, we purchase certain of our new vehicle and
parts inventories from foreign manufacturers. Although we purchase the majority
of our inventories in the local functional currency, our business is subject
to
certain risks, including, but not limited to, differing economic conditions,
changes in political climate, differing tax structures, other regulations and
restrictions and foreign exchange rate volatility which may influence such
manufacturers’ ability to provide their products at competitive prices in the
local jurisdictions. Our future results could be materially and adversely
impacted by changes in these or other factors.
Under the supervision and with the participation of our management, including
the principal executive and financial officers, we conducted an evaluation
of
the effectiveness of our disclosure controls and procedures (as such term is
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
of 1934, as amended (the “Exchange Act”)), as of September 30, 2006. Our
disclosure controls and procedures are designed to ensure that information
required to be disclosed by us in the reports we file under the Exchange Act
is
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms, and that such information is accumulated and
communicated to management, including our principal executive and financial
officers, to allow timely discussions regarding required
disclosure.
Based
upon this evaluation, the Company’s principal executive and financial officers
concluded that our disclosure controls and procedures were effective as of
September 30, 2006. In addition, we maintain internal controls designed to
provide us with the information required for accounting and financial reporting
purposes. There were no changes in our internal control over financial reporting
that occurred during our third quarter of 2006 that materially affected, or
are
reasonably likely to materially affect, our internal control over financial
reporting.
|
Exhibits
|
|
|
|
|
|
|
4.1
|
|
Multi-Option
Credit Agreement dated as of August 31, 2006 between Sytner Group
Limited
and The Royal Bank of Scotland, plc, as agent for National Westminster
Bank Plc. (incorporated by reference to exhibit 4.1 to our Form 8-K
filed
on September 5, 2006).
|
|
4.2
|
|
Fixed
Rate Credit Agreement dated as of August 31, 2006 between Sytner
Group
Limited and The Royal Bank of Scotland, plc, as agent for National
Westminster Bank Plc. (incorporated by reference to exhibit 4.2 to
our
Form 8-K filed on September 5, 2006).
|
|
4.3
|
|
Seasonally
Adjusted Overdraft Agreement dated as of August 31, 2006 between
Sytner
Group Limited and The Royal Bank of Scotland, plc, as agent for National
Westminster Bank Plc. (incorporated by reference to exhibit 4.3 to
our
Form 8-K filed on September 5, 2006).
|
|
4.4
|
|
Extension
Notice dated September 25, 2006, among us, DaimlerChrysler Financial
Services Americas, LLC and Toyota Motor Credit Corporation (incorporated
by reference to exhibit 4.1 to our Form 8-K filed on September 27,
2006).
|
|
12
|
|
Computation
of Ratio of Earnings to Fixed Charges
|
|
31
|
|
Rule 13a-14(a)/15(d)-14(a)
Certifications
|
|
32
|
|
Section 1350
Certifications
|
S
IGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
|
|
UNITED
AUTO GROUP, INC.
|
|
|
|
Date: November
8, 2006 |
By: |
/s/
Roger S. Penske
|
|
Roger
S. Penske
|
|
Chief
Executive Officer
|
|
|
|
|
|
|
|
|
Date: November
8, 2006 |
By: |
/s/
James R. Davidson
|
|
James
R. Davidson
|
|
Executive
Vice President
—
Finance
(Principal
Financial Officer)
|
EXHIBIT
INDEX
|
|
|
|
Exhibits
|
|
|
Number:
|
|
Description
|
|
|
|
4.1
|
|
Multi-Option
Credit Agreement dated as of August 31, 2006 between Sytner Group
Limited
and The Royal Bank of Scotland, plc, as agent for National Westminster
Bank Plc. (incorporated by reference to exhibit 4.1 to our Form 8-K
filed
on September 5, 2006).
|
4.2
|
|
Fixed
Rate Credit Agreement dated as of August 31, 2006 between Sytner
Group
Limited and The Royal Bank of Scotland, plc, as agent for National
Westminster Bank Plc. (incorporated by reference to exhibit 4.2 to
our
Form 8-K filed on September 5, 2006).
|
4.3
|
|
Seasonally
Adjusted Overdraft Agreement dated as of August 31, 2006 between
Sytner
Group Limited and The Royal Bank of Scotland, plc, as agent for National
Westminster Bank Plc. (incorporated by reference to exhibit 4.3 to
our
Form 8-K filed on September 5, 2006).
|
4.4
|
|
Extension
Notice dated September 25, 2006, among us, DaimlerChrysler Financial
Services Americas, LLC and Toyota Motor Credit Corporation (incorporated
by reference to exhibit 4.1 to our Form 8-K filed on September 27,
2006).
|
12
|
|
Computation
of Ratio of Earnings to Fixed Charges
|
31
|
|
Rule 13a-14(a)/15(d)-14(a)
Certifications
|
32
|
|
Section 1350
Certifications
|