e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal
year ended December 31, 2009
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
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Commission file
number: 1-13461
Group 1 Automotive,
Inc.
(Exact name of registrant as
specified in its charter)
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DELAWARE
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76-0506313
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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800 Gessner, Suite 500
Houston, Texas 77024
(Address of principal
executive
offices, including zip code)
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(713) 647-5700
(Registrants
telephone
number, including area code)
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Securities registered pursuant to Section 12(b) of the
Act:
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Title of each class
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Name of exchange on which registered
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Common stock, par value $0.01 per share
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act: None.
Indicate by check mark if the registrant is a well
known seasoned issuer, as defined in Rule 405 of the
Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this Chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the Exchange Act. (Check one):
Large accelerated
filer o Accelerated filer þ
Non-accelerated
filer o
(Do not check if a smaller reporting company)
Smaller reporting
company o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). o No þ
The aggregate market value of common stock held by
non-affiliates of the registrant was approximately
$605.4 million based on the reported last sale price of
common stock on June 30, 2009, which is the last business
day of the registrants most recently completed second
quarter.
As of February 9, 2010, there were 24,497,257 shares
of our common stock, par value $0.01 per share, outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the registrants definitive proxy statement for
its 2010 Annual Meeting of Stockholders, which will be filed
with the Securities and Exchange Commission within 120 days
of December 31, 2009, are incorporated by reference into
Part III of this
Form 10-K.
Cautionary
Statement About Forward-Looking Statements
This Annual Report on
Form 10-K
includes certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933,
as amended (the Securities Act) and Section 21E
of the Securities Exchange Act of 1934, as amended (the
Exchange Act). This information includes statements
regarding our plans, goals or current expectations with respect
to, among other things:
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our future operating performance;
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our ability to improve our margins;
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operating cash flows and availability of capital;
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the completion of future acquisitions;
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the future revenues of acquired dealerships;
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future stock repurchases and dividends;
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capital expenditures;
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changes in sales volumes and credit for customer financing in
new and used vehicles and sales volumes in the parts and service
markets;
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business trends in the retail automotive industry, including the
level of manufacturer incentives, new and used vehicle retail
sales volume, customer demand, interest rates and changes in
industry-wide inventory levels; and
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availability of financing for inventory, working capital, real
estate and capital expenditures.
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Although we believe that the expectations reflected in these
forward-looking statements are reasonable when and as made, we
cannot assure you that these expectations will prove to be
correct. When used in this Annual Report, the words
anticipate, believe,
estimate, expect, may and
similar expressions, as they relate to our company and
management, are intended to identify forward-looking statements.
Forward-looking statements are not assurances of future
performance and involve risks and uncertainties. Actual results
may differ materially from anticipated results in the
forward-looking statements for a number of reasons, including:
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the recent economic recession substantially depressed consumer
confidence, raised unemployment and limited the availability of
consumer credit, causing a marked decline in demand for new and
used vehicles; further deterioration in the economic
environment, including consumer confidence, interest rates, the
price of gasoline, the level of manufacturer incentives and the
availability of consumer credit may affect the demand for new
and used vehicles, replacement parts, maintenance and repair
services and finance and insurance products;
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adverse domestic and international developments such as war,
terrorism, political conflicts or other hostilities may
adversely affect the demand for our products and services;
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the future regulatory environment, including climate control
changes legislation, unexpected litigation or adverse
legislation, including changes in state franchise laws, may
impose additional costs on us or otherwise adversely affect us;
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our principal automobile manufacturers, especially Toyota/Lexus,
Ford, Mercedes-Benz, Chrysler, Nissan/Infiniti, Honda/Acura,
General Motors and BMW, because of financial distress,
bankruptcy or other reasons, may not continue to produce or make
available to us vehicles that are in high demand by our
customers or provide financing, insurance, advertising or other
assistance to us;
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the immediate concerns over the financial viability of one or
more of the domestic manufacturers (i.e., Chrysler, General
Motors and Ford) could result in, or in the case of Chrysler and
General Motors has resulted in, a restructuring of these
companies, up to and including bankruptcy; and, as such, we may
suffer financial loss in the form of uncollectible receivables,
devalued inventory or loss of franchises;
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requirements imposed on us by our manufacturers may limit our
acquisitions and require us to increase the level of capital
expenditures related to our dealership facilities;
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our existing
and/or new
dealership operations may not perform at expected levels or
achieve expected improvements;
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our failure to achieve expected future cost savings or future
costs being higher than we expect;
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manufacturer quality issues may negatively impact vehicle sales
and brand reputation;
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available capital resources, increases in cost of financing and
various debt agreements may limit our ability to complete
acquisitions, complete construction of new or expanded
facilities, repurchase shares or pay dividends;
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our ability to refinance or obtain financing in the future may
be limited and the cost of financing could increase
significantly;
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foreign exchange controls and currency fluctuations;
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new accounting standards could materially impact our reported
earnings per share;
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the inability to complete additional acquisitions or changes in
the pace of acquisitions;
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the inability to adjust our cost structure to offset any
reduction in the demand for our products and services;
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our loss of key personnel;
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competition in our industry may impact our operations or our
ability to complete additional acquisitions;
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the failure to achieve expected sales volumes from our new
franchises;
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insurance costs could increase significantly and all of our
losses may not be covered by insurance; and
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our inability to obtain inventory of new and used vehicles and
parts, including imported inventory, at the cost, or in the
volume, we expect.
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The information contained in this Annual Report on
Form 10-K,
including the information set forth under the headings
Risk Factors and Managements Discussion
and Analysis of Financial Condition and Results of
Operation, identifies factors that could affect our
operating results and performance. Should one or more of the
risks or uncertainties described above or elsewhere in this
Annual Report or in the documents incorporated by reference
occur, or should underlying assumptions prove incorrect, our
actual results and plans could differ materially from those
expressed in any forward-looking statements. We urge you to
carefully consider those factors, as well as factors described
in our reports filed from time to time with the Securities and
Exchange Commission (the SEC) and other
announcements we make from time to time.
Readers are cautioned not to place undue reliance on
forward-looking statements, which speak only as of the date
hereof. We undertake no responsibility to publicly release the
result of any revision of our forward-looking statements after
the date they are made.
iii
PART I
General
Group 1 Automotive, Inc., a Delaware corporation, organized in
1995, is a leading operator in the automotive retail industry.
As of December 31, 2009, we owned and operated 124
franchises at 95 dealership locations and 22 collision
service centers in the United States of America (the
U.S.) and six franchises at three dealerships and
two collision centers in the United Kingdom (the
U.K.). Through our operating subsidiaries, we market
and sell an extensive range of automotive products and services,
including new and used vehicles and related financing, vehicle
maintenance and repair services, replacement parts, warranty,
insurance and extended service contracts. Our operations are
primarily located in major metropolitan areas in the states of
Alabama, California, Florida, Georgia, Kansas, Louisiana,
Maryland, Massachusetts, Mississippi, New Hampshire, New Jersey,
New York, Oklahoma, South Carolina and Texas in the
U.S. and in the towns of Brighton, Hailsham, and Worthing
in the U.K.
As of December 31, 2009, our retail network consisted of
the following three regions (with the number of dealerships they
comprised): (i) the Eastern (41 dealerships in Alabama,
Florida, Georgia, Louisiana, Maryland, Massachusetts,
Mississippi, New Hampshire, New Jersey, New York, and South
Carolina), (ii) the Central (43 dealerships in Kansas,
Oklahoma and Texas) and (iii) the Western (11 dealerships
in California). Each region is managed by a regional vice
president who reports directly to our Chief Executive Officer
and is responsible for the overall performance of their regions,
as well as for overseeing the market directors and dealership
general managers that report to them. Each region is also
managed by a regional chief financial officer who reports
directly to our Chief Financial Officer. Our dealerships in the
U.K. are also managed locally with direct reporting
responsibilities to our corporate management team.
As discussed in more detail in Note 2 to our Consolidated
Financial Statements, all of our operating subsidiaries operate
as one reportable segment. Our financial information, including
our revenues, is included in our Consolidated Financial
Statements and related notes beginning on
page F-1.
Business
Strategy
Our business strategy is to leverage what we believe to be one
of our key strengths the talent of our people to:
(i) sell new and used vehicles; (ii) arrange related
financing, vehicle service and insurance contracts;
(iii) provide maintenance and repair services; and
(iv) sell replacement parts via an expanding network of
franchised dealerships located primarily in growing regions of
the U.S. and the U.K. We believe, as evidenced by the
significant industry experience reflected in the biographical
information of our executive officers, which is provided on
page 16, that over the last four years we have developed a
distinguished management team with substantial industry
expertise.
With this level of talent, we plan to continue empowering our
operators to make appropriate decisions to grow their respective
dealership operations and to control fixed and variable costs
and expenses. We believe this approach allows us to continue to
attract and retain talented employees, as well as provide the
best possible service to our customers.
We completed acquisitions comprising in excess of
$108.4 million in estimated aggregated annualized revenues
for 2009. And, we believe that substantial opportunities for
growth through acquisition remain in our industry. An
acquisition target has not yet been determined for 2010, but we
expect to acquire dealerships in existing or new markets that
meet our stringent acquisitions and return on investment
criteria. We will selectively grow our portfolio of import and
luxury brands, and we will focus that growth in geographically
diverse areas with bright economic outlooks over the
longer-term. Further, we will continue to critically evaluate
our return on invested capital in our dealership operations for
disposition opportunities.
While we desire to grow through acquisitions, we continue to
primarily focus on the performance of our existing dealerships
to achieve internal growth goals. We believe further revenue
expansion is available in our dealerships and plan to utilize
enhancements to our processes and technology to help our people
deliver that goal. In particular, we continue to focus on
growing our higher margin used vehicle and parts and service
businesses, which can be expanded even in a shrinking new
vehicle market. The use of software tools in conjunction with
our
1
management focus on proven processes in the used vehicle and
parts and service operations have helped to increase retail
sales and improve margins over the past several years. We will
continue to enhance the business in these areas in the future
and make the requisite capital investments to expand our service
business.
For 2010, we will primarily focus on five key areas as we
continue to become a
best-in-class
automotive retailer. These areas are:
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Used vehicle and parts and service businesses;
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Operating efficiency and additional cost reduction/savings
efforts;
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Maximize cash flow generated through operations;
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Continued transition to an operating model with greater
commonality of key operating processes and systems that support
the extension of best practices and the leveraging of
scale; and
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Enhancement of our current dealership portfolio by strategic
acquisition, dealership facility investments and the improvement
or disposition of underperforming dealerships.
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Despite the recent economic downturn and resulting negative
impact on our business, we remain optimistic about our business
model and expect that, over the long term, industry sales will
rebound, reflecting a significant level of
pent-up
demand.
Our focus for our used vehicle operations in 2010 will include
the enhancement of our processes around the matching of
inventory supply with customer demand, the sharing of inventory
across markets, regions and the company, the utilization of
alternative means of marketing and the continued development of
technological solutions to assist in the management of our used
vehicle inventory. Focus in our parts and service operations
will be on targeted marketing efforts, strategic selling and
operational efficiencies. We believe that these initiatives will
enhance our results of operations in these business areas and
our overall results.
We made significant changes in our operating model during 2008
and 2009, designed to reduce variable expenses, appropriately
size our business for the reduced levels of sales and service
activity and generate operating efficiencies. Specifically
related to personnel expenses, we initiated various wage cuts,
including a 10% wage reduction for the Board of Directors and
senior management and a 5% wage reduction for all other
corporate employees, as well as various other regional, market
and dealership level employees. In addition, we suspended the
Companys match for employee contributions to their
respective 401(K) savings plans. Further, we reduced headcount
from the beginning of 2008 by approximately 20% to date. As it
relates to advertising, our cost reductions were primarily
related to a decrease in overall advertising levels and a shift
to utilization of various
in-house and
email marketing tools, as well as our ability to capitalize on
declining media rates. Other forecasted expense reductions
reflect initiatives designed to reduce software solutions,
contract labor, travel and entertainment, delivery and loaner
car expenses. In 2010, we will continue to look for
opportunities to reduce variable costs and improve our operating
efficiency. And, as the level of sales and service returns to
more normalized levels in the future, we will be judicious with
the expansion of our cost structure to maximize our operating
results.
During 2009, which was one of the most challenging years in the
history of the automotive retail industry, we generated positive
cash flow from operations. We expect to be cash flow positive
from operations in 2010, as well. We will, therefore, be focused
on opportunities to use the cash generated in the best interest
of our company and our stockholders.
We continue with our efforts to fully leverage our scale, reduce
costs, enhance internal controls and enable further growth and,
as such, we are taking steps to standardize key operating
processes. Our management structure supports more rapid decision
making and speeds the roll-out of new processes. Since 2005, we
have consolidated our operational structure from over 15
platforms led by Platform Presidents who directly reported to
the President and CEO to our current structure of three regions
and the United Kingdom, led by Regional Vice Presidents who
report directly to our President and CEO. In 2007, we
successfully completed the conversion of all of our dealerships
to the same dealer management system offered by Dealer Services
Group of Automatic Data Processing Inc. (ADP) and
put in place a standard general ledger layout. During 2008, we
consolidated portions of our
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dealership accounting and administrative functions into regional
centers. These actions represent key building blocks that we are
using to effectively manage the business operations and
strategically consolidate operational and administrative
functions, further developing the operating model and supporting
the extension of best practices and the leverage of scale.
With regards to our efforts to improve or dispose of
underperforming dealerships, we are constantly evaluating the
opportunity to improve the profitability of our dealerships. We
attempt to capitalize on our size, leverage and ability to
disseminate best practices, in order to expedite these efforts.
We believe that our efforts will improve our financial condition
and operating results.
3
Dealership
Operations
Our operations are located in geographically diverse markets
that extend domestically from New Hampshire to California and,
beginning in 2007, internationally in the U.K. By geographic
area, our revenues from external customers for the years ended
December 31, 2009, 2008 and 2007 were
$4,401.3 million, $5,491.8 million and
$6,086.9 million from our domestic operations, and
$124.4 million, $162.3 million and $173.3 million
from our foreign operations, respectively. As of
December 31, 2009, 2008, and 2007 our aggregate long-lived
assets other than goodwill, intangible assets and financial
instruments in our domestic operations were $462.1 million,
$531.3 million and $418.3 million, and in our foreign
operations were $21.6 million, $20.3 million and
$28.4 million, respectively. The following table sets forth
the regions and geographic markets in which we operate, the
percentage of new vehicle retail units sold in each region in
2009 and the number of dealerships and franchises in each region:
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Percentage of Our
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New Vehicle
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Retail Units Sold
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During the
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As of December 31, 2009
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Year Ended
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Number of
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Number of
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Region
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Geographic Market
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December 31, 2009
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Dealerships
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Franchises
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Eastern
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Massachusetts
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15.1
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10
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10
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New Jersey
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6.5
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6
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7
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New Hampshire
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4.2
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3
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3
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New York
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4.1
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4
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4
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Georgia
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3.7
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4
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4
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Louisiana
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3.1
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4
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8
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Mississippi
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1.8
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3
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3
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Florida
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1.7
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2
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4
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Maryland
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0.9
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2
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2
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Alabama
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0.7
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2
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2
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South Carolina
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0.3
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1
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1
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42.1
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41
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48
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Central
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Texas
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32.1
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29
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39
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Oklahoma
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8.3
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12
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20
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Kansas
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1.2
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2
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2
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41.6
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43
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61
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Western
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California
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14.0
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11
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15
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International
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United Kingdom
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2.3
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3
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6
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Total
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100.0
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%
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98
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130
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Each of our local operations has a management structure that
promotes and rewards entrepreneurial spirit and the achievement
of team goals. The general manager of each dealership, with
assistance from the managers of new vehicle sales, used vehicle
sales, parts, service, and finance and insurance, is ultimately
responsible for the operation, personnel and financial
performance of the dealership. Our dealerships are operated as
distinct profit centers, and our general managers have a
reasonable degree of empowerment within our organization. In the
U.S., each general manager reports to one of our market
directors or one of three regional vice presidents. Our regional
vice presidents report directly to our Chief Executive Officer
and are responsible for the overall performance of their
regions, as well as for overseeing the market directors and
dealership general managers that report to them. Our U.K.
operations are structured similarly, with a director of
operations reporting directly to our Chief Executive Officer.
New
Vehicle Sales
In 2009, we sold or leased 83,182 new vehicles representing 31
brands in retail transactions at our dealerships. Our retail
sales of new vehicles accounted for approximately 19.9% of our
gross profit in 2009. In addition to the
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profit related to the transactions, a typical new vehicle retail
sale or lease creates the following additional profit
opportunities for our dealerships:
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manufacturer incentives, if any;
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the resale of any used vehicle trade-in purchased by the
dealership;
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the sale of third-party finance, vehicle service and insurance
contracts in connection with the retail sale; and
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the service and repair of the vehicle both during and after the
warranty period.
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Brand diversity is one of our strengths. Our mix of domestic,
import and luxury franchises is critical to our success. Over
the past five years, we have strategically managed our exposure
to the declining domestic brands and emphasized the faster
growing luxury and import brands, shifting our sales mix from
36.2% domestic and 63.8% luxury and import in 2005 to 16.5% and
83.5% in 2009, respectively. The following table sets forth new
vehicle sales revenue by brand and the number of new vehicle
retail units sold in The Year Ended, and the number of
franchises we owned as of December 31, 2009:
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Franchises Owned
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As of
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New Vehicle
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New Vehicle
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% of Total
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December 31,
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Revenues
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Unit Sales
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Units Sold
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2009
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(In thousands)
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|
Toyota
|
|
$
|
618,730
|
|
|
|
25,079
|
|
|
|
30.2
|
%
|
|
|
13
|
(1)
|
Nissan
|
|
|
248,209
|
|
|
|
9,943
|
|
|
|
12.0
|
%
|
|
|
12
|
|
Honda
|
|
|
203,590
|
|
|
|
8,766
|
|
|
|
10.5
|
%
|
|
|
8
|
|
Mazda
|
|
|
18,951
|
|
|
|
825
|
|
|
|
1.0
|
%
|
|
|
2
|
|
Hyundai
|
|
|
18,084
|
|
|
|
870
|
|
|
|
1.0
|
%
|
|
|
3
|
|
Volkswagen
|
|
|
17,735
|
|
|
|
719
|
|
|
|
0.9
|
%
|
|
|
2
|
|
Subaru
|
|
|
16,490
|
|
|
|
688
|
|
|
|
0.8
|
%
|
|
|
1
|
|
Scion
|
|
|
14,588
|
|
|
|
826
|
|
|
|
1.0
|
%
|
|
|
N/A
|
(1)
|
Kia
|
|
|
6,276
|
|
|
|
326
|
|
|
|
0.4
|
%
|
|
|
2
|
|
Mitsubishi
|
|
|
864
|
|
|
|
39
|
|
|
|
0.0
|
%
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total import
|
|
|
1,163,517
|
|
|
|
48,081
|
|
|
|
57.8
|
%
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BMW
|
|
|
306,140
|
|
|
|
6,169
|
|
|
|
7.4
|
%
|
|
|
13
|
|
Mercedes-Benz
|
|
|
250,916
|
|
|
|
4,696
|
|
|
|
5.6
|
%
|
|
|
6
|
|
Lexus
|
|
|
199,038
|
|
|
|
4,570
|
|
|
|
5.5
|
%
|
|
|
3
|
|
Acura
|
|
|
60,880
|
|
|
|
1,711
|
|
|
|
2.1
|
%
|
|
|
4
|
|
Mini
|
|
|
49,583
|
|
|
|
1,988
|
|
|
|
2.4
|
%
|
|
|
6
|
|
Infiniti
|
|
|
29,105
|
|
|
|
741
|
|
|
|
0.9
|
%
|
|
|
1
|
|
Volvo
|
|
|
21,147
|
|
|
|
648
|
|
|
|
0.8
|
%
|
|
|
1
|
|
Audi
|
|
|
19,095
|
|
|
|
437
|
|
|
|
0.5
|
%
|
|
|
1
|
|
Lincoln
|
|
|
6,369
|
|
|
|
148
|
|
|
|
0.2
|
%
|
|
|
4
|
|
Porsche
|
|
|
4,252
|
|
|
|
59
|
|
|
|
0.1
|
%
|
|
|
1
|
|
Maybach
|
|
|
3,858
|
|
|
|
8
|
|
|
|
0.0
|
%
|
|
|
1
|
|
smart
|
|
|
3,218
|
|
|
|
193
|
|
|
|
0.2
|
%
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total luxury
|
|
|
953,601
|
|
|
|
21,368
|
|
|
|
25.7
|
%
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ford
|
|
|
199,897
|
|
|
|
6,310
|
|
|
|
7.6
|
%
|
|
|
10
|
|
Dodge
|
|
|
75,794
|
|
|
|
2,539
|
|
|
|
3.1
|
%
|
|
|
6
|
|
Chevrolet
|
|
|
72,881
|
|
|
|
2,268
|
|
|
|
2.7
|
%
|
|
|
5
|
|
Jeep
|
|
|
27,766
|
|
|
|
1,083
|
|
|
|
1.3
|
%
|
|
|
6
|
|
GMC
|
|
|
23,683
|
|
|
|
642
|
|
|
|
0.8
|
%
|
|
|
2
|
|
Chrysler
|
|
|
15,107
|
|
|
|
505
|
|
|
|
0.6
|
%
|
|
|
6
|
|
Buick
|
|
|
4,241
|
|
|
|
113
|
|
|
|
0.1
|
%
|
|
|
2
|
|
Pontiac
|
|
|
3,632
|
|
|
|
164
|
|
|
|
0.2
|
%
|
|
|
2
|
|
Mercury
|
|
|
2,912
|
|
|
|
109
|
|
|
|
0.1
|
%
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total domestic
|
|
|
425,913
|
|
|
|
13,733
|
|
|
|
16.5
|
%
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,543,031
|
|
|
|
83,182
|
|
|
|
100.0
|
%
|
|
|
130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Scion brand is not considered a
separate franchise, but rather is governed by our Toyota
franchise agreements. We sell the Scion brand at all of our
Toyota franchised locations.
|
5
Our diversity by manufacturer for the years ended
December 31, 2009 and 2008 is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
2009
|
|
|
Total
|
|
|
2008
|
|
|
Total
|
|
|
Toyota
|
|
|
30,475
|
|
|
|
36.6
|
%
|
|
|
38,818
|
|
|
|
35.1
|
%
|
Nissan
|
|
|
10,684
|
|
|
|
12.8
|
|
|
|
14,075
|
|
|
|
12.7
|
|
Honda
|
|
|
10,477
|
|
|
|
12.6
|
|
|
|
15,473
|
|
|
|
14.0
|
|
BMW
|
|
|
8,157
|
|
|
|
9.8
|
|
|
|
9,670
|
|
|
|
8.7
|
|
Ford
|
|
|
7,215
|
|
|
|
8.7
|
|
|
|
10,560
|
|
|
|
9.5
|
|
Mercedes-Benz
|
|
|
4,897
|
|
|
|
5.9
|
|
|
|
6,512
|
|
|
|
5.9
|
|
Chrysler
|
|
|
4,127
|
|
|
|
5.0
|
|
|
|
6,626
|
|
|
|
6.0
|
|
General Motors
|
|
|
3,187
|
|
|
|
3.8
|
|
|
|
5,193
|
|
|
|
4.7
|
|
Other
|
|
|
3,963
|
|
|
|
4.8
|
|
|
|
3,778
|
|
|
|
3.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
83,182
|
|
|
|
100.0
|
%
|
|
|
110,705
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Some new vehicles we sell are purchased by customers under lease
or lease-type financing arrangements with third-party lenders.
New vehicle leases generally have shorter terms, bringing the
customer back to the market, and our dealerships specifically,
sooner than if the purchase was debt financed. In addition,
leasing provides our dealerships with a steady supply of
late-model, off-lease vehicles to be sold as used vehicles.
Generally, leased vehicles remain under factory warranty,
allowing the dealerships to provide repair services for the
contract term. However, the penetration of finance and insurance
product sales on leases tends to be less than in other financing
arrangements. We typically do not guarantee residual values on
lease transactions.
Used
Vehicle Sales
We sell used vehicles at each of our franchised dealerships. In
2009, we sold or leased 54,067 used vehicles at our dealerships,
and sold 27,793 used vehicles in wholesale markets. Our retail
sales of used vehicles accounted for approximately 12.6% of our
gross profit in 2009, while sales of vehicles in wholesale
markets accounted for approximately 0.3% of our gross profit in
2009. Used vehicles sold at retail typically generate higher
gross margins on a percentage basis than new vehicles because of
our ability to sell these vehicles at favorable prices due to
their limited comparability, which is dependent on a
vehicles age, mileage and condition, among other things.
Valuations also vary based on supply and demand factors, the
level of new vehicle incentives, the availability of retail
financing and general economic conditions.
Profit from the sale of used vehicles depends primarily on a
dealerships ability to obtain a high-quality supply of
used vehicles at reasonable prices and to effectively manage
that inventory. Our new vehicle operations provide our used
vehicle operations with a large supply of generally high-quality
trade-ins and off-lease vehicles, and is the best sources of
high-quality used vehicles. Our dealerships supplement their
used vehicle inventory with purchases at auctions, including
manufacturer-sponsored auctions available only to franchised
dealers, and from wholesalers. We continue to extensively
utilize a common used vehicle management software in all of our
dealerships to enhance the management of used vehicle inventory,
focusing on the more profitable retail used vehicle business and
deliberately reducing our wholesale used vehicle business. This
internet-based software tool enables our managers to make used
vehicle inventory decisions based on real time market valuation
data, and is an integral part of our used vehicle process. It
also allows us to leverage our size and local market presence by
expanding the pool from which used vehicles can be sold within a
given market or region, effectively broadening the demand for
our used vehicle inventory. In addition, this software supports
increased oversight of our assets in inventory, allowing us to
better control our exposure to used vehicles, the values of
which typically decline over time. Each of our dealerships
attempts to maintain no more than a 37 days supply of
used vehicles.
In addition to active management of the quality and age of our
used vehicle inventory, we have attempted to increase the
profitability of our used vehicle operations by participating in
manufacturer certification programs where available.
Manufacturer certified pre-owned vehicles typically sell at a
premium compared to other used vehicles and are available only
from franchised new vehicle dealerships. In some cases,
certified pre-owned
6
vehicles are eligible for manufacturer support, such as
subsidized finance rates and, in some cases, extension of the
manufacturer warranty. Our certified pre-owned vehicle sales
increased from 32.5% of total used retail sales in 2008 to 33.4%
in 2009.
Parts
and Service Sales
We sell replacement parts and provide maintenance and repair
services at each of our franchised dealerships and provide
collision repair services at the 24 collision centers we
operate. Our parts and service business accounted for
approximately 49.6% of our gross profit in 2009. We perform both
warranty and non-warranty service work at our dealerships,
primarily for the vehicle brand(s) sold at a particular
dealership. Warranty work accounted for approximately 19.4% of
the revenues from our parts and service business in 2009. Our
parts and service departments also perform used vehicle
reconditioning and new vehicle preparation services for which
they realize a profit when a vehicle is sold to a retail
customer.
The automotive repair industry is highly fragmented, with a
significant number of independent maintenance and repair
facilities in addition to those of the franchised dealerships.
We believe, however, that the increasing complexity of new
vehicles, especially in the area of electronics, has made it
difficult for many independent repair shops to retain the
expertise necessary to perform major or technical repairs. We
have made investments in obtaining, training and retaining
qualified technicians to work in our service and repair
facilities and in state of the art diagnostic and repair
equipment to be utilized by these technicians. Additionally,
manufacturers permit warranty work to be performed only at
franchised dealerships and there is a trend in the automobile
industry towards longer new vehicle warranty periods. As a
result, we believe an increasing percentage of all repair work
will be performed at franchised dealerships that have the
sophisticated equipment and skilled personnel necessary to
perform repairs and warranty work on todays complex
vehicles.
Our strategy to capture an increasing share of the parts and
service work performed by franchised dealerships includes the
following elements:
|
|
|
|
|
Focus on Customer Relationships; Emphasize Preventative
Maintenance. Our dealerships seek to retain new
and used vehicle customers as customers of our parts and service
departments. To accomplish this goal, we use computer systems
that track customers maintenance records and provide
advance notice to owners of vehicles purchased or serviced at
our dealerships when their vehicles are due for periodic
service. Our use of computer-based customer relationship
management tools increases the reach and effectiveness of our
marketing efforts, allowing us to target our promotional
offerings to areas in which service capacity is under-utilized
or profit margins are greatest. We continue to train our service
personnel to establish relationships with their service
customers to promote a long-term business relationship. To
further enhance access to our service facilities, we continue to
upgrade the technology that allows customers to schedule service
appointments utilizing the internet. We believe our parts and
service activities are an integral part of the customer service
experience, allowing us to create ongoing relationships with our
dealerships customers thereby deepening customer loyalty
to the dealership as a whole.
|
|
|
|
Sell Vehicle Service Contracts in Conjunction with Vehicle
Sales. Our finance and insurance sales
departments attempt to connect new and used vehicle customers
with vehicle service contracts, and thereby secure repeat
customer business for our parts and service departments.
|
|
|
|
Expansion of Collision Center Operations. We
plan to grow our collision center operations over the next
several years. Expansion in this segment of the business is not
restricted by franchise agreements or manufacturer
relationships. We have generally been satisfied with our recent
returns on these investments and believe that our concentration
of dealership operations in certain of the markets in which we
operate significantly enhances the profit model.
|
|
|
|
Efficient Management of Parts Inventory. Our
dealerships parts departments support their sales and
service departments, selling factory-approved parts for the
vehicle makes and models sold by a particular dealership. Parts
are either used in repairs made in the service department, sold
at retail to customers, or sold at wholesale to independent
repair shops and other franchised dealerships. Our dealerships
also frequently share parts with each other. Our dealerships
employ parts managers who oversee parts inventories and sales.
|
7
|
|
|
|
|
Software programs are used to monitor parts inventory to avoid
obsolete and unused parts to maximize sales and to take
advantage of manufacturer return procedures.
|
Finance
and Insurance Sales
Revenues from our finance and insurance operations consist
primarily of fees for arranging financing, vehicle service and
insurance contracts in connection with the retail purchase of a
new or used vehicle. Our finance and insurance business
accounted for approximately 17.6% of our gross profit in 2009.
We offer a wide variety of third-party finance, vehicle service
and insurance products in a convenient manner and at competitive
prices. To increase transparency to our customers, we offer all
of our products on menus that display pricing and other
information, allowing customers to choose the products that suit
their needs.
Financing. We arrange third-party purchase and
lease financing for our customers. In return, we receive a fee
from the third-party finance company upon completion of the
financing. These third-party finance companies include
manufacturers captive finance companies, selected
commercial banks and a variety of other third-parties, including
credit unions and regional auto finance companies. The fees we
receive are subject to chargeback, or repayment to the finance
company, if a customer defaults or prepays the retail
installment contract, typically during some limited time period
at the beginning of the contract term. We have negotiated
incentive programs with some finance companies pursuant to which
we receive additional fees upon reaching a certain volume of
business. Generally, we do not retain substantial credit risk
after a customer has received financing, though we do retain
limited credit risk in some circumstances.
Extended Warranty, Vehicle Service and Insurance
Products. We offer our customers a variety of
vehicle warranty and extended protection products in connection
with purchases of new and used vehicles, including:
|
|
|
|
|
extended warranties;
|
|
|
|
maintenance, or vehicle service, products and programs;
|
|
|
|
guaranteed asset protection (or GAP) insurance,
which covers the shortfall between a customers contract
balance and insurance payoff in the event of a total vehicle
loss; and
|
|
|
|
lease wear and tear insurance.
|
The products our dealerships currently offer are generally
underwritten and administered by independent third parties,
including the vehicle manufacturers captive finance
subsidiaries. Under our arrangements with the providers of these
products, we either sell these products on a straight commission
basis, or we sell the product, recognize commission and
participate in future underwriting profit, if any, pursuant to a
retrospective commission arrangement. These commissions may be
subject to chargeback, in full or in part, if the contract is
terminated prior to its scheduled maturity.
New
and Used Vehicle Inventory Financing
Our dealerships finance their inventory purchases through the
floorplan portion of our revolving credit facility and a
separate floorplan credit facility arrangement with one of the
manufacturers that we represent, Ford. Our revolving syndicated
credit arrangement matures in March 2012 and provides a total of
$1.35 billion of financing (the Revolving Credit
Facility). We can expand the Revolving Credit Facility to
its maximum commitment of $1.85 billion, subject to
participating lender approval. The Revolving Credit Facility
consists of two tranches: $1.0 billion for vehicle
inventory financing (the Floorplan Line), and
$350.0 million for acquisitions, capital expenditures and
working capital (the Acquisition Line). We utilize
the $1.0 billion tranche of our Floorplan Line to finance
up to 70% of the value of our used vehicle inventory and up to
100% of the value of all new vehicle inventory, other than new
vehicles produced by Ford and some of their affiliates. The
capacity under the Acquisition Line can be re-designated within
the overall $1.35 billion commitment. However, restrictions
on the availability of funds under the Acquisition Line are
governed by debt covenants in existence under the Revolving
Credit Facility. Additionally, our floorplan arrangement with
Ford Motor Credit Company provides $150.0 million of
floorplan financing capacity (the FMCC Facility). We
use the funds available under this arrangement to exclusively
finance our inventories of new Ford vehicles produced by the
lenders manufacturer affiliate. The FMCC Facility is an
8
arrangement that may be cancelled with 30 days notice by
either party. During June 2009, we amended our FMCC Facility to
reduce the available floorplan financing available from
$300.0 million to $150.0 million, with no change to
any other original terms or pricing related to the facility.
Should the FMCC facility no longer be available to us for
financing of our new Ford inventory, we could utilize the
available capacity under our Floorplan Line to finance this
inventory. In addition to the FMCC Facility, we finance certain
rental vehicles through separate arrangements with the
respective automobile manufacturers. We also utilize a credit
facility with BMW Financial Services for the financing of new,
used and rental inventories associated with our U.K. operations.
From 2006 through the early part of 2007, we had a similar
arrangement with DaimlerChrysler Services North America LLC (or
DaimlerChrysler) to exclusively finance our
inventories of new DaimlerChrysler vehicles produced by the
lenders manufacturer affiliate (or DaimlerChrysler
Facility) but, on February 28, 2007, the
DaimlerChrysler Facility matured and was not renewed. We used
borrowings under our Revolving Credit Facility to pay off the
outstanding balance under the DaimlerChrysler Facility at that
time. Most manufacturers offer interest assistance to offset a
portion of floorplan interest charges incurred in connection
with holding new vehicle inventory purchases, which we recognize
as a reduction of cost of new vehicle sales.
Acquisition
and Divestiture Program
We pursue an acquisition and divestiture program focused on the
following objectives:
|
|
|
|
|
enhancing brand and geographic diversity with a focus on import
and luxury brands;
|
|
|
|
creating economies of scale;
|
|
|
|
delivering a targeted return on investment; and
|
|
|
|
eliminating underperforming dealerships.
|
Since our inception, we have grown our business primarily
through acquisitions. Over the five-year period from
January 1, 2005 through December 31, 2009, we:
|
|
|
|
|
purchased 41 franchises with expected annual revenues, estimated
at the time of acquisition, of $1.7 billion;
|
|
|
|
disposed of 57 franchises with annual revenues of
$0.7 billion; and
|
|
|
|
were granted five new franchises by vehicle manufacturers.
|
Acquisition strategy. We seek to acquire
large, profitable, well-established dealerships that are leaders
in their markets to:
|
|
|
|
|
expand into geographic areas we do not currently serve;
|
|
|
|
expand our brand, product and service offerings in our existing
markets;
|
|
|
|
capitalize on economies of scale in our existing markets; and/or
|
|
|
|
increase operating efficiency and cost savings in areas such as
advertising, purchasing, data processing, personnel utilization
and the cost of floorplan financing.
|
We typically pursue dealerships with superior operational
management, whom we seek to retain. By retaining existing
personnel who have experience and in-depth knowledge of their
local market, we believe that we can mitigate the risks involved
with employing and training new and untested personnel. In
addition, our acquisition strategy includes the purchase of the
related real estate to provide maximum operating flexibility.
We continue to focus on the acquisition of dealerships or groups
of dealerships that offer opportunities for higher returns,
particularly import and luxury brands, which provide growth
opportunities for our parts and service operations, and will
strengthen our operations in geographic regions in which we
currently operate with attractive long-term economic prospects.
Recent Acquisitions. In 2009, we acquired two
luxury, two import and one domestic franchise with expected
annual revenues of $108.4 million. The new franchises
included: (i) a BMW dealership in Mobile, Alabama,
(ii) a Hyundai franchise in Houston, Texas, (iii) a
Hyundai franchise in New Orleans, Louisiana,
9
and (iv) a Lincoln and a Mercury franchise in Pembroke
Pines, Florida that were added to our existing Ford dealership.
Divestiture Strategy. We continually review
our investments in dealership portfolio for disposition
opportunities, based upon a number of criteria, including:
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the rate of return on our capital investment over a period of
time;
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location of the dealership in relation to existing markets and
our ability to leverage our cost structure;
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potential future capital investment requirements;
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the franchise; and
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existing real estate obligations, coupled with our ability to
exit those obligations.
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While it is our desire to only acquire profitable,
well-established dealerships, at times we have been requested,
in connection with the acquisition of a particular dealership
group, to acquire dealerships that do not fit our acquisition
strategy. We acquire such dealerships with the understanding
that we may need to divest of them at some future time. The
costs associated with such divestitures are included in our
analysis of whether we acquire all dealerships in the same
acquisition. Additionally, we may acquire a dealership whose
profitability is marginal, but which we believe can be increased
through various factors, such as: (i) change in management,
(ii) increase or improvement in facility operations,
(iii) relocation of facility based on demographic changes,
(iv) reduction in costs, or (v) sales training. If,
after a period of time, a dealerships profitability does
not positively respond, management will make the decision to
sell the dealership to a third party, or, in a rare case,
surrender the franchise back to the manufacturer. Management
constantly monitors the performance of all of our dealerships,
and routinely assesses the need for divestiture. In connection
with divestitures, we are sometimes required to incur additional
charges associated with lease terminations or the impairment of
long-lived assets. In 2009, we continued disposing of
under-performing dealerships and have again made this a focus
for 2010, as we continue to rationalize our dealership portfolio
and increase the overall profitability of our operations. We own
the real estate associated with the operation of approximately
30.6% of our dealerships. As such, in conjunction with the
disposition of certain of our dealerships, we may also dispose
of the associated real estate.
Recent Dispositions. During 2009, we sold
seven franchises and terminated one other with annual revenues
of $126.2 million.
Competition
We operate in a highly competitive industry. In each of our
markets, consumers have a number of choices in deciding where to
purchase a new or used vehicle and how the purchase will be
financed. Consumers also have options for the purchase of
related parts and accessories, as well as the service
maintenance and repair of vehicles. According to industry
sources, there are approximately 17,306 franchised automobile
dealerships and approximately 36,418 independent used vehicle
dealers in the retail automotive industry as of
December 31, 2009.
Our competitive success depends, in part, on national and
regional automobile-buying trends, local and regional economic
factors and other regional competitive pressures. Conditions and
competitive pressures affecting the markets in which we operate,
or in any new markets we enter, could adversely affect us,
although the retail automobile industry as a whole might not be
affected. Some of our competitors may have greater financial,
marketing and personnel resources and lower overhead and sales
costs than we do. We cannot guarantee that our operating
performance and our acquisition or disposition strategies will
be more effective than the strategies of our competitors.
New and Used Vehicles. We believe the
principal competitive factors in the automotive retailing
business are location, suitability of the facility,
on-site
management, the suitability of a franchise to the market in
which it is located, service, price and selection. In the new
vehicle market, our dealerships compete with other franchised
dealerships in their market areas, as well as auto brokers,
leasing companies, and Internet companies that provide referrals
to, or broker vehicle sales with, other dealerships or
customers. We are subject to competition from dealers that sell
the same brands of new vehicles that we sell and from dealers
that sell other brands of new vehicles that we
10
do not sell in a particular market. Our new vehicle dealer
competitors also have franchise agreements with the various
vehicle manufacturers and, as such, generally have access to new
vehicles on the same terms as we do. We do not have any cost
advantage in purchasing new vehicles from vehicle manufacturers,
and our franchise agreements do not grant us the exclusive right
to sell a manufacturers product within a given geographic
area.
In the used vehicle market, our dealerships compete both in
their local market and nationally, including over the Internet,
with other franchised dealers, large multi-location used vehicle
retailers, local independent used vehicle dealers, automobile
rental agencies and private parties for the supply and resale of
used vehicles.
Parts and Service. In the parts and service
market, our dealerships compete with other franchised dealers to
perform warranty repairs and sell factory replacement parts. Our
dealerships also compete with other automobile dealers,
franchised and independent service center chains, and
independent repair shops for non-warranty repair and maintenance
business. In addition, our dealerships sell replacement and
aftermarket parts both locally and nationally over the Internet
in competition with franchised and independent retail and
wholesale parts outlets. We believe the principal competitive
factors in the parts and service business are the quality of
customer service, the use of factory-approved replacement parts,
familiarity with a manufacturers brands and models,
convenience, access to technology required for certain repairs
and services (e.g., software patches, diagnostic equipment,
etc.), location, price, the competence of technicians and the
availability of training programs to enhance such expertise. A
number of regional or national chains offer selected parts and
services at prices that may be lower than ours.
Finance and Insurance. We face competition in
arranging financing for our customers vehicle purchases
from a broad range of financial institutions. Many financial
institutions now offer finance and insurance products over the
Internet, which may reduce our profits from the sale of these
products. We believe the principal competitive factors in the
finance and insurance business are convenience, interest rates,
product availability, product knowledge and flexibility in
contract length.
Acquisitions. We compete with other national
dealer groups and individual investors for acquisitions.
Increased competition, especially in certain of the luxury and
import brands, may raise the cost of acquisitions. We cannot
guarantee that there will be sufficient opportunities to
complete desired acquisitions, nor are we able to guarantee that
we will be able to complete acquisitions on terms acceptable to
us.
Financing
Arrangements
As of December 31, 2009, our total outstanding indebtedness
and lease and other obligations were $1,615.6 million,
including the following:
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$420.3 million under the Floorplan Line of our Revolving
Credit Facility;
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$402.5 million of future commitments under various
operating leases;
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$131.9 million in 2.25% convertible senior notes due 2036
(the 2.25% Notes);
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$73.3 million in 8.25% senior subordinated notes due
2013 (the 8.25% Notes);
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$74.6 million under our FMCC Facility;
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$192.7 million under our real estate credit facility (our
Mortgage Facility);
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$40.6 million under floorplan notes payable to various
manufacturer affiliates for foreign and rental vehicles;
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$60.6 million of various notes payable;
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$30.6 million of obligations from interest rate risk
management activities;
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$156.8 million of estimated interest payments on floorplan
notes payable and other long-term debt obligations;
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$17.3 million of letters of credit, to collateralize
certain obligations, issued under the Acquisition Line; and
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$14.4 million of other short and long-term purchase
commitments.
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11
As of December 31, 2009, we had the following amounts
available for additional borrowings under our various credit
facilities:
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$579.7 million under the Floorplan Line of our Revolving
Credit Facility, including $71.6 million of immediately
available funds;
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$158.2 million under the Acquisition Line of our Revolving
Credit Facility, which is limited based upon a borrowing base
calculation within certain debt covenants;
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$75.4 million under our FMCC Facility; and
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$42.3 million available for additional borrowings under the
Mortgage Facility.
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In addition, the indentures relating to our 8.25% Notes,
2.25% Notes and other debt instruments allow us to incur
additional indebtedness and enter into additional operating
leases, subject to certain conditions.
Stock
Repurchase Program
From time to time, our Board of Directors authorizes us to
repurchase shares of our common stock, subject to the
restrictions of various debt agreements and our judgment. In
August 2008, our Board of Directors authorized us to repurchase
a number of shares equivalent to the shares issued pursuant to
our employee stock purchase plan on a quarterly basis. All funds
for these repurchases came from employee contributions during
2008. Also in August 2008, our Board of Directors authorized the
repurchase of up to $20.0 million of additional common
shares. Pursuant to this authorization, a total of
37,300 shares were repurchased during 2008, at an average
price of $20.76 per share, or $0.8 million. Pursuant to
this latter authorization, no shares were repurchased during
2009.
Future repurchases are subject to the discretion of our Board of
Directors after considering our results of operations, financial
condition, cash flows, capital requirements, existing debt
covenants, outlook for our business, general business conditions
and other factors.
Dividends
On February 19, 2009, our Board of Directors indefinitely
suspended the payment of dividends due to economic uncertainty.
The payment of dividends in the future is subject to the
discretion of our Board of Directors, after considering our
results of operations, financial condition, cash flows, capital
requirements, outlook for our business, general business
conditions and other factors. See Note 15 to our
Consolidated Financial Statements for a description of
restrictions on the payment of dividends.
Relationships
and Agreements with our Manufacturers
Each of our dealerships operates under a franchise agreement
with a vehicle manufacturer (or authorized distributor). The
franchise agreements grant the franchised automobile dealership
a non-exclusive right to sell the manufacturers or
distributors brand of vehicles and offer related parts and
service within a specified market area. These franchise
agreements grant our dealerships the right to use the
manufacturers or distributors trademarks in
connection with their operations, and impose numerous
operational requirements and restrictions relating to, among
other things:
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inventory levels;
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working capital levels;
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the sales process;
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minimum sales performance requirements;
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customer satisfaction standards;
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marketing and branding;
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facility standards and signage;
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personnel;
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changes in management; and
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monthly financial reporting.
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Our dealerships franchise agreements are for various
terms, ranging from one year to indefinite. Each of our
franchise agreements may be terminated or not renewed by the
manufacturer for a variety of reasons, including unapproved
changes of ownership or management and performance deficiencies
in such areas as sales volume, sales effectiveness and customer
satisfaction. In most cases, manufacturers have renewed the
franchises upon expiration so long as the dealership is in
compliance with the terms of the agreement. From time to time,
certain manufacturers may assert sales and customer satisfaction
performance deficiencies under the terms of our framework and
franchise agreements at a limited number of our dealerships. We
work with these manufacturers to address any performance issues.
In general, the states in which we operate have automotive
dealership franchise laws that provide that, notwithstanding the
terms of any franchise agreement, it is unlawful for a
manufacturer to terminate or not renew a franchise unless
good cause exists. It generally is difficult for a
manufacturer to terminate, or not renew, a franchise under these
laws, which were designed to protect dealers. However, federal
law, including any federal bankruptcy law or any federal law
that may be passed to address the current economic crisis, may
preempt state law and allow manufacturers greater freedom to
terminate or not renew franchises. The current economic
recession has caused domestic manufacturers to critically
evaluate their respective dealer networks. Subject to the
current economic factors, we generally expect our franchise
agreements to survive for the foreseeable future and, when the
agreements do not have indefinite terms, anticipate routine
renewals of the agreements without substantial cost or
modification.
Our dealership service departments perform vehicle repairs and
service for customers under manufacturer warranties. We are
reimbursed for the repairs and service directly from the
manufacturer. Some manufacturers offer rebates to new vehicle
customers that we are required, under specific program rules, to
adequately document, support and typically are responsible for
collecting. In addition, from time to time, some manufacturers
provide us with incentives to sell certain models and levels of
inventory over designated periods of time. Under the terms of
our dealership franchise agreements, the respective
manufacturers are able to perform warranty, incentive and rebate
audits and charge us back for unsupported or non-qualifying
warranty repairs, rebates or incentives.
In addition to the individual dealership franchise agreements
discussed above, we have entered into framework agreements with
most major vehicle manufacturers and distributors. These
agreements impose a number of restrictions on our operations,
including our ability to make acquisitions and obtain financing,
and our management. These agreements also impose change of
control provisions related to the ownership of our common stock.
For a discussion of these restrictions and the risks related to
our relationships with vehicle manufacturers, please read
Risk Factors.
The following table sets forth the percentage of our new vehicle
retail unit sales attributable to the manufacturers that
accounted for approximately 10% or more of our new vehicle
retail unit sales:
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Percentage of New
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Vehicle Retail
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Units Sold
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during the
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Year Ended
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December 31,
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Manufacturer
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2009
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Toyota/Lexus/Scion
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36.6
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%
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Nissan/Infiniti
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12.8
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%
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Honda/Acura
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12.6
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%
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Governmental
Regulations
Automotive
and Other Laws and Regulations
We operate in a highly regulated industry. A number of state and
federal laws and regulations affect our business and the
business of our manufacturers. In every state in which we
operate, we must obtain various licenses in order to operate our
businesses, including dealer, sales and finance, and insurance
licenses issued by state
13
regulatory authorities. Numerous laws and regulations govern our
conduct of business, including those relating to our sales,
operations, financing, insurance, advertising and employment
practices. These laws and regulations include state franchise
laws and regulations, consumer protection laws, and other
extensive laws and regulations applicable to new and used motor
vehicle dealers, as well as a variety of other laws and
regulations. These laws also include federal and state
wage-hour,
anti-discrimination and other employment practices laws.
Our financing activities with customers are subject to federal
truth-in-lending,
consumer leasing and equal credit opportunity laws and
regulations, as well as state and local motor vehicle finance
laws, installment finance laws, usury laws and other installment
sales laws and regulations. Some states regulate finance fees
and charges that may be paid as a result of vehicle sales.
Claims arising out of actual or alleged violations of law may be
asserted against us, or our dealerships, by individuals or
governmental entities and may expose us to significant damages
or other penalties, including revocation or suspension of our
licenses to conduct dealership operations and fines.
Our operations are subject to the National Traffic and Motor
Vehicle Safety Act, Federal Motor Vehicle Safety Standards
promulgated by the United States Department of Transportation
and the rules and regulations of various state motor vehicle
regulatory agencies. The imported automobiles we purchase are
subject to United States customs duties, and in the ordinary
course of our business we may, from time to time, be subject to
claims for duties, penalties, liquidated damages or other
charges.
Our operations are subject to consumer protection laws known as
Lemon Laws. These laws typically require a manufacturer or
dealer to replace a new vehicle or accept it for a full refund
within one year after initial purchase if the vehicle does not
conform to the manufacturers express warranties and the
dealer or manufacturer, after a reasonable number of attempts,
is unable to correct or repair the defect. Federal laws require
various written disclosures to be provided on new vehicles,
including mileage and pricing information. We are aware that
several states are considering enacting consumer
bill-of-rights
statutes to provide further protection to the consumer which
could affect our profitability in such states.
Environmental,
Health and Safety Laws and Regulations
Our operations involve the use, handling, storage and
contracting for recycling
and/or
disposal of materials such as motor oil and filters,
transmission fluids, antifreeze, refrigerants, paints, thinners,
batteries, cleaning products, lubricants, degreasing agents,
tires and fuel. Consequently, our business is subject to a
complex variety of federal, state and local laws and regulations
governing management and disposal of materials and wastes,
protection of the environment and public health and safety.
These laws and regulations affect many aspects of our
operations, such as requiring the acquisition of permits or
other governmental approvals to conduct regulated activities,
restricting the manner in which we handle, recycle and dispose
of our wastes, incurring capital expenditures to construct,
maintain and upgrade equipment and facilities, and requiring
remedial actions to mitigate pollution caused by our operations
or attributable to former operations. Failure to comply with
these laws and regulations may result in the assessment of
administrative, civil and criminal penalties, imposition of
remedial obligations, and issuance of injunctions delaying,
restricting or prohibiting some or all of our operations. We may
not be able to recover some or any of these costs from insurance.
Most of our dealerships utilize aboveground storage tanks and,
to a lesser extent, underground storage tanks primarily for
petroleum-based products. Storage tanks are subject to testing,
containment, upgrading and removal requirements under the
Resource Conservation and Recovery Act, as amended, also known
as RCRA, and its state law counterparts. RCRA imposes
requirements relating to the handling and disposal of hazardous
wastes and non-hazardous solid wastes and requires us to comply
with stringent and costly requirements in connection with our
storage and recycling or disposal of the various used fluids,
paints, batteries, tires and fuels generated by our operations.
Clean-up or
other remedial action may be necessary in the event of leaks or
other unauthorized discharges from storage tanks or other
equipment operated by us. In addition, water quality protection
programs under the federal Water Pollution Control Act, as
amended, (commonly known as the Clean Water Act) and comparable
state and local programs govern certain wastewater and
stormwater discharges from our operations, which discharges may
require permitting. Similarly, certain sources of air emissions
from our operations may be subject to permitting, pursuant to
the federal Clean Air Act, as amended, and related state and
local laws. Certain health and safety standards promulgated by
the Occupational Safety and Health Administration of the United
States
14
Department of Labor and related state agencies are also
applicable to protection of the health and safety of our
employees.
A very few of our dealerships are parties to proceedings under
the Comprehensive Environmental Response, Compensation, and
Liability Act, as amended, or CERCLA, or comparable state laws
typically in connection with materials that were sent offsite to
former recycling, treatment
and/or
disposal facilities owned and operated by independent
businesses. CERCLA and comparable state laws impose strict and,
under certain circumstances, joint and several liability without
regard to fault or the legality of the original conduct on
certain classes of persons, referred to as potentially
responsible parties, who are alleged to have released
hazardous substances into the environment. Under CERCLA, these
potentially responsible parties may be responsible for the costs
of cleaning up the released hazardous substances, for damages to
natural resources, and for the costs of certain health studies
and it is not uncommon for third parties to file claims for
personal injury and property damage allegedly caused by the
release of the hazardous substances into the environment. We do
not believe the proceedings in which a few of our dealerships
are currently involved are material to our results of operations
or financial condition.
We generally conduct environmental studies on dealerships to be
acquired regardless of whether we are leasing or acquiring in
fee the underlying real property, and as necessary, implement
environmental management practices or remedial activities to
reduce the risk of noncompliance with environmental laws and
regulations. Nevertheless, we currently own or lease, and in
connection with our acquisition program anticipate in the future
owning or leasing, properties that in some instances have been
used for auto retailing and servicing for many years. These laws
apply regardless of whether we lease or purchase the land and
facilities. Although we have utilized operating and disposal
practices that were standard in the industry at the time, a risk
exists that petroleum products or wastes such as new and used
motor oil, transmission fluids, antifreeze, lubricants, solvents
and motor fuels could have been spilled or released on or under
the properties owned or leased by us or on or under other
locations where such materials were taken for recycling or
disposal. Further, we believe that structures found on some of
these properties may contain suspect asbestos-containing
materials, albeit in an undisturbed condition. In addition, many
of these properties have been operated by third parties whose
use, handling and disposal of such petroleum products or wastes
were not under our control. These properties and the materials
disposed or released on them may be subject to CERCLA, RCRA and
analogous state laws, pursuant to which we could be required to
remove or remediate previously disposed wastes or property
contamination or to perform remedial activities to prevent
future contamination.
Insurance
and Bonding
Our operations expose us to the risk of various liabilities,
including:
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claims by employees, customers or other third parties for
personal injury or property damage resulting from our
operations; and
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fines and civil and criminal penalties resulting from alleged
violations of federal and state laws or regulatory requirements.
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The automotive retailing business is also subject to substantial
risk of property loss as a result of the significant
concentration of property values at dealership locations. Under
self-insurance programs, we retain various levels of aggregate
loss limits, per claim deductibles and claims handling expenses
as part of our various insurance programs, including property
and casualty and employee medical benefits. In certain cases, we
insure costs in excess of our retained risk per claim under
various contracts with third-party insurance carriers. Actuarial
estimates for the portion of claims not covered by insurance are
based on historical claims experience, adjusted for current
trends and changes in claims-handling procedures. Risk retention
levels may change in the future as a result of changes in the
insurance market or other factors affecting the economics of our
insurance programs. Although we have, subject to certain
limitations and exclusions, substantial insurance, we cannot
assure that we will not be exposed to uninsured or underinsured
losses that could have a material adverse effect on our
business, financial condition, results of operations or cash
flows.
We make provisions for retained losses and deductibles by
reflecting charges to expense based upon periodic evaluations of
the estimated ultimate liabilities on reported and unreported
claims. The insurance companies that underwrite our insurance
require that we secure certain of our obligations for
self-insured exposures with collateral. Our collateral
requirements are set by the insurance companies and, to date,
have been satisfied by posting surety
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bonds, letters of credit
and/or cash
deposits. Our collateral requirements may change from time to
time based on, among other things, our total insured exposure
and the related self-insured retention assumed under the
policies.
Employees
We believe our relationships with our employees are favorable.
As of December 31, 2009, we employed 6,990 (Regular
Full-Time, Regular Part-Time and Temporary) people, of whom:
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699 were employed in managerial positions;
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1,360 were employed in non-managerial vehicle sales department
positions;
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3,600 were employed in non-managerial parts and service
department positions; and
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1,331 were employed in administrative support positions.
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75 of our employees in one region are represented by a
labor union. Because of our dependence on vehicle manufacturers,
we may be affected by labor strikes, work slowdowns and walkouts
at vehicle manufacturing facilities. Additionally, labor
strikes, work slowdowns and walkouts at businesses participating
in the distribution of manufacturers products may also
affect us.
Seasonality
We generally experience higher volumes of vehicle sales and
service in the second and third calendar quarters of each year.
This seasonality is generally attributable to consumer buying
trends and the timing of manufacturer new vehicle model
introductions. In addition, in some regions of the U.S., vehicle
purchases decline during the winter months due to inclement
weather. As a result, our revenues, cash flows and operating
income are typically lower in the first and fourth quarters and
higher in the second and third quarters. Other factors unrelated
to seasonality, such as changes in economic condition and
manufacturer incentive programs, may exaggerate seasonal or
cause counter-seasonal fluctuations in our revenues and
operating income.
Executive
Officers
Our executive officers serve at the pleasure of our Board of
Directors and are subject to annual appointment by our Board of
Directors at its first meeting following each annual meeting of
stockholders.
The following table sets forth certain information as of the
date of this Annual Report on
Form 10-K
regarding our current executive officers:
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Name
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Age
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Position
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Earl J. Hesterberg
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56
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President and Chief Executive Officer
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John C. Rickel
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48
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Senior Vice President and Chief Financial Officer
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Mark J. Iuppenlatz
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50
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Vice President, Corporate Development
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Darryl M. Burman
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51
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Vice President, General Counsel and Corporate Secretary
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J. Brooks OHara
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54
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Vice President, Human Resources
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Earl
J. Hesterberg
Mr. Hesterberg has served as our President and Chief
Executive Officer and as a director since April 9, 2005.
Prior to joining us, Mr. Hesterberg served as Group Vice
President, North America Marketing, Sales and Service for Ford
Motor Company since October 2004. From July 1999 to September
2004, he served as Vice President, Marketing, Sales and Service
for Ford of Europe. Mr. Hesterberg has also served as
President and Chief Executive Officer of Gulf States Toyota, and
held various senior sales, marketing, general management, and
parts and service positions with Nissan Motor Corporation in
U.S.A. and Nissan Europe. Mr. Hesterberg received his BA in
Psychology at Davidson College in 1975 and his MBA from Xavier
University in 1978.
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John
C. Rickel
Mr. Rickel was appointed Senior Vice President and Chief
Financial Officer in December 2005. From 1984 until joining us,
Mr. Rickel held a number of executive and managerial
positions of increasing responsibility with Ford Motor Company.
He most recently served as controller of Ford Americas, where he
was responsible for the financial management of Fords
western hemisphere automotive operations. Immediately prior to
that, he was chief financial officer of Ford Europe, where he
oversaw all accounting, financial planning, information
services, tax and investor relations activities. From 2002 to
2004, Mr. Rickel was also chairman of the board of Ford
Russia and a member of the board and the audit committee of Ford
Otosan, a publicly traded automotive company located in Turkey
and owned 41% by Ford Motor Company. Mr. Rickel received
his BSBA in 1982 and MBA in 1984 from The Ohio State University.
Mark
J. Iuppenlatz
Mr. Iuppenlatz was appointed Vice President, Corporate
Development effective January 1, 2010. Mr. Iuppenlatz
brings more than 20 years experience in acquisition and
real estate to the position, having served in a similar capacity
from 1999 to 2007 at Sonic Automotive. Mr. Iuppenlatz is
responsible for all dealership and real estate acquisitions
along with real estate and construction management.
Mr. Iuppenlatz previously served as managing partner of
Animas Valley Land & Water Co., a diversified real
estate development group. Mr. Iuppenlatz received his BBA
in Marketing from Michigan State University in 1981.
Darryl
M. Burman
Mr. Burman was appointed Vice President, General Counsel
and Corporate Secretary in December 2006. Prior to joining us,
Mr. Burman was a partner and head of the corporate and
securities practice in the Houston office of Epstein Becker
Green Wickliff & Hall, P.C. From September 1995
until September 2005, Mr. Burman served as the head of the
corporate and securities practice of Fant & Burman,
L.L.P. in Houston, Texas. Mr. Burman graduated from the
University of South Florida in 1980 and received his J.D. from
South Texas College of Law in 1983.
J.
Brooks OHara
Mr. OHara has served as Vice President, Human
Resources since February 2000. From 1997 until joining Group 1,
Mr. OHara was Corporate Manager of Organizational
Development at Valero Energy Corporation, an integrated refining
and marketing company. Prior to joining Valero,
Mr. OHara served for a number of years as Vice
President of Administration and Human Resources at Gulf States
Toyota, an independent national distributor of new Toyota
vehicles, parts and accessories. Mr. OHara is a
Senior Professional in Human Resources (SPHR).
Mr. OHara received his BS in Marketing from Florida
State University in 1978 and his MBA in 1991 from the University
of St. Thomas.
Internet
Web Site and Availability of Public Filings
Our Internet address is www.group1auto.com. We make the
following information available free of charge on our Internet
Web site:
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Annual Report on
Form 10-K;
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Quarterly Reports on
Form 10-Q;
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Current Reports on
Form 8-K;
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Amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act;
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Our Corporate Governance Guidelines;
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The charters for our Audit, Compensation, Finance/Risk
Management and Nominating/Governance Committees;
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Our Code of Conduct for Directors, Officers and
Employees; and
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Our Code of Ethics for our Chief Executive Officer, Chief
Financial Officer and Controller.
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We make our filings with the Securities and Exchange Commission
(SEC) available on our Web site as soon as
reasonably practicable after we electronically file such
material with, or furnish such material to, the SEC. We make our
SEC filings available via a link to our filings on the
SECs Web site. The above information is available in print
to anyone who requests it free of charge. In addition, the
public may read and copy any materials we file with the SEC at
the SECs Public Reference Room at 100 F. Street, N.E.,
Washington, DC 20549 and may obtain information on the operation
of the Public Reference Room by calling the SEC at
1-800-SEC-0330.
Certifications
We will timely provide the annual certification of our Chief
Executive Officer to the New York Stock Exchange. We filed last
years certification in June 2009. In addition, our Chief
Executive Officer and Chief Financial Officer each have signed
and filed the certifications under Section 302 of the
Sarbanes-Oxley Act of 2002 with this Annual Report on
Form 10-K.
The
current economic slowdown has had and could continue to have a
material adverse effect on our business, revenues and
profitability.
The automotive retail industry, and especially new vehicle unit
sales, is influenced by general economic conditions,
particularly consumer confidence, the level of personal
discretionary spending, interest rates, fuel prices,
unemployment rates and credit availability. During economic
downturns, retail new vehicle sales typically experience periods
of decline characterized by oversupply and weak demand. The
recent general economic slowdown, as well as tightening of the
credit markets and credit standards, volatility in consumer
preference around fuel-efficient vehicles in response to
volatile fuel prices and concern about domestic manufacturer
viability, has resulted in a difficult business environment.
And, as a result, the automotive retail industry has experienced
a significant decline in vehicle sales and margins. This decline
may continue and sales may stay depressed for an unknown period
of time. Such declines have had, and any further declines or
changes of this type could have, a material adverse effect on
our business, revenues, cash flows and profitability.
Fuel prices have remained volatile and may continue to affect
consumer preferences in connection with the purchase of our
vehicles. Rising fuel prices may make consumers less likely to
purchase larger, more expensive vehicles, such as sports utility
vehicles or luxury automobiles and more likely to purchase
smaller, less expensive and more fuel efficient vehicles.
Further increases or sharp declines in fuel prices could have a
material adverse effect on our business, revenues, cash flows
and profitability.
In addition, local economic, competitive and other conditions
affect the performance of our dealerships. Our revenues, cash
flows and profitability depend substantially on general economic
conditions and spending habits in those regions of the
U.S. where we maintain most of our operations.
Our
results of operations and financial condition have been and
could continue to be adversely affected by the conditions in the
credit markets in the U.S.
The recent turmoil in the credit markets has resulted in tighter
credit conditions and has adversely impacted our business. In
the automotive finance market, tight credit conditions have
resulted in a decrease in the availability of automotive loans
and leases and have led to more stringent lending conditions. As
a result, our new and used vehicle sales and margins have been
adversely impacted. If the unfavorable economic conditions
continue and the availability of automotive loans and leases
remains limited, we anticipate that our vehicle sales and
margins will continue to be adversely impacted.
A significant portion of vehicle buyers, particularly in the
used car market, finance their vehicle purchases.
Sub-prime
finance companies have historically provided financing for
consumers who, for a variety of reasons, including poor credit
histories and lack of a down payment, do not have access to more
traditional finance sources. Recent economic developments have
caused most
sub-prime
finance companies to tighten their credit standards and this
reduction in available credit has adversely affected our used
vehicle sales and margins. If
sub-prime
finance
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companies apply higher standards, if there is any further
tightening of credit standards used by
sub-prime
finance companies, or if there is additional decline in the
overall availability of credit in the
sub-prime
lending market, the ability of these consumers to purchase
vehicles could be limited, which could have a material adverse
effect on our used car business, revenues, cash flows and
profitability.
Market conditions could also make it more difficult for us to
raise additional capital or obtain additional financing to fund
capital expenditure projects or acquisitions. We cannot be
certain that additional funds will be available if needed and to
the extent required or, if available, on acceptable terms. If we
cannot raise necessary additional funds on acceptable terms,
there could be an adverse impact on our business and operations.
We also may not be able to fund expansion, take advantage of
future opportunities or respond to competitive pressures or
unanticipated requirements.
Our
success depends upon the continued viability and overall success
of a limited number of manufacturers.
We are subject to a concentration of risk in the event of
financial distress, merger, sale or bankruptcy, including
potential liquidation, of a major vehicle manufacturer.
Toyota/Lexus/Scion, Nissan/Infiniti, Honda/Acura, Ford,
BMW/Mini, Mercedes-Benz, Chrysler and General Motors dealerships
represented approximately 95.2% of our total new vehicle retail
units sold in 2009. In particular, sales of Toyota/Lexus/Scion
and Nissan/Infiniti new vehicles represented 49.4% of our new
vehicle unit sales in 2009. The success of our dealerships is
dependent on vehicle manufacturers in several key respects.
First, we rely exclusively on the various vehicle manufacturers
for our new vehicle inventory. Our ability to sell new vehicles
is dependent on a vehicle manufacturers ability to produce
and allocate to our dealerships an attractive, high-quality, and
desirable product mix at the right time in order to satisfy
customer demand. Second, manufacturers generally support their
franchisees by providing direct financial assistance in various
areas, including, among others, floorplan assistance and
advertising assistance. Third, manufacturers provide product
warranties and, in some cases, service contracts, to customers.
Our dealerships perform warranty and service contract work for
vehicles under manufacturer product warranties and service
contracts, and direct bill the manufacturer as opposed to
invoicing the customer. At any particular time, we have
significant receivables from manufacturers for warranty and
service work performed for customers, as well as for vehicle
incentives. In addition, we rely on manufacturers to varying
extents for original equipment manufactured replacement parts,
training, product brochures and point of sale materials, and
other items for our dealerships.
Vehicle manufacturers may be adversely impacted by economic
downturns or recessions, significant declines in the sales of
their new vehicles, increases in interest rates, adverse
fluctuations in currency exchange rates, declines in their
credit ratings, reductions in access to capital or credit labor
strikes or similar disruptions (including within their major
suppliers), supply shortages or rising raw material costs,
rising employee benefit costs, adverse publicity that may reduce
consumer demand for their products (including due to
bankruptcy), product defects, vehicle recall campaigns,
litigation, poor product mix or unappealing vehicle design,
governmental laws and regulations, or other adverse events.
These and other risks could materially adversely affect any
manufacturer and impact its ability to profitably design,
market, produce or distribute new vehicles, which in turn could
materially adversely affect our business, results of operations,
financial condition, stockholders equity, cash flows and
prospects. In 2008 and 2009, vehicle manufacturers, in
particular domestic manufacturers, were adversely impacted by
the unfavorable economic conditions in the U.S.
In the event or threat of a bankruptcy by a vehicle
manufacturer, among other things: (1) the manufacturer
could attempt to terminate all or certain of our franchises, and
we may not receive adequate compensation for them, (2) we
may not be able to collect some or all of our significant
receivables that are due from such manufacturer and we may be
subject to preference claims relating to payments made by such
manufacturer prior to bankruptcy, (3) we may not be able to
obtain financing for our new vehicle inventory, or arrange
financing for our customers for their vehicle purchases and
leases, with such manufacturers captive finance
subsidiary, which may cause us to finance our new vehicle
inventory, and arrange financing for our customers, with
alternate finance sources on less favorable terms, and
(4) consumer demand for such manufacturers products
could be materially adversely affected and could impact the
value of our inventory. These events may result in a partial or
complete write-down of our goodwill
and/or
intangible franchise rights with respect to any terminated
franchises and cause us to incur impairment
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charges related to operating leases
and/or
receivables due from such manufacturers or to record allowances
against the value of our new and used inventory.
If we
fail to obtain a desirable mix of popular new vehicles from
manufacturers our profitability can be affected.
We depend on the manufacturers to provide us with a desirable
mix of new vehicles. The most popular vehicles usually produce
the highest profit margins and are frequently difficult to
obtain from the manufacturers. If we cannot obtain sufficient
quantities of the most popular models, our profitability may be
adversely affected. Sales of less desirable models may reduce
our profit margins. Several manufacturers generally allocate
their vehicles among their franchised dealerships based on the
sales history of each dealership. If our dealerships experience
prolonged sales slumps relative to our competitors, these
manufacturers may cut back their allotments of popular vehicles
to our dealerships and new vehicle sales and profits may
decline. Similarly, the delivery of vehicles, particularly
newer, more popular vehicles, from manufacturers at a time later
than scheduled could lead to reduced sales during those periods.
Restrictions
in our agreements with manufacturers could negatively impact our
ability to obtain certain types of financings.
Provisions in our agreements with our manufacturers may, in the
future, restrict our ability to obtain certain types of
financing. A number of our manufacturers prohibit pledging the
stock of their franchised dealerships. For example, our
agreement with General Motors contains provisions prohibiting
pledging the stock of our General Motors franchised dealerships.
Our agreement with Ford permits us to pledge our Ford franchised
dealerships stock and assets, but only for Ford
dealership-related debt. Moreover, our Ford agreement permits
our Ford franchised dealerships to guarantee, and to use Ford
franchised dealership assets to secure our debt, but only for
Ford dealership-related debt. Ford waived that requirement with
respect to our March 1999 and August 2003 senior subordinated
notes offerings and the subsidiary guarantees of those notes.
Certain of our manufacturers require us to meet certain
financial ratios. Our failure to comply with these ratios gives
the manufacturers the right to reject proposed acquisitions, and
may give them the right to purchase their franchises for fair
value.
If
manufacturers discontinue or change sales incentives, warranties
and other promotional programs, our results of operations may be
materially adversely affected.
We depend on our manufacturers for sales incentives, warranties
and other programs that are intended to promote dealership sales
or support dealership profitability. Manufacturers historically
have made many changes to their incentive programs during each
year. Some of the key incentive programs include:
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customer rebates;
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dealer incentives on new vehicles;
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below-market financing on new vehicles and special leasing terms;
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warranties on new and used vehicles; and
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sponsorship of used vehicle sales by authorized new vehicle
dealers.
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A discontinuation or change in our manufacturers incentive
programs could adversely affect our business. Moreover, some
manufacturers use a dealerships CSI scores as a factor
governing participation in incentive programs. Failure to comply
with the CSI standards could adversely affect our participation
in dealership incentive programs, which could have a material
adverse effect on us.
If we
fail to obtain renewals of one or more of our franchise
agreements on favorable terms or substantial franchises are
terminated, our operations may be significantly
impaired.
Each of our dealerships operates under a franchise agreement
with one of our manufacturers (or authorized distributors).
Without a franchise agreement, we cannot obtain new vehicles
from a manufacturer, receive floorplan and advertising
assistance, access the manufacturers certified pre-owned
programs, perform warranty-related
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services or purchase parts at manufacturer pricing. As a result,
we are significantly dependent on our relationships with these
manufacturers, which exercise a great degree of influence over
our operations through the franchise agreements. Each of our
franchise agreements may be terminated or not renewed by the
manufacturer for a variety of reasons, including any unapproved
changes of ownership or management and other material breaches
of the franchise agreements. Manufacturers may also have a right
of first refusal if we seek to sell dealerships. We cannot
guarantee all of our franchise agreements will be renewed or
that the terms of the renewals will be as favorable to us as our
current agreements. In addition, actions taken by manufacturers
to exploit their bargaining position in negotiating the terms of
renewals of franchise agreements could also have a material
adverse effect on our revenues and profitability. Our results of
operations may be materially and adversely affected to the
extent that our franchise rights become compromised or our
operations restricted due to the terms of our franchise
agreements or if we lose substantial franchises.
Our franchise agreements do not give us the exclusive right to
sell a manufacturers product within a given geographic
area. Subject to state laws that are generally designed to
protect dealers, a manufacturer may grant another dealer a
franchise to start a new dealership near one of our locations,
or an existing dealership may move its dealership to a location
that would more directly compete against us. The location of new
dealerships near our existing dealerships could materially
adversely affect our operations and reduce the profitability of
our existing dealerships.
If
state dealer laws are repealed or weakened, our dealerships will
be more susceptible to termination, non-renewal or renegotiation
of their franchise agreements.
State dealer laws generally provide that a manufacturer may not
terminate or refuse to renew a franchise agreement unless it has
first provided the dealer with written notice setting forth good
cause and stating the grounds for termination or nonrenewal.
Some state dealer laws allow dealers to file protests or
petitions or attempt to comply with the manufacturers
criteria within the notice period to avoid the termination or
nonrenewal. Though unsuccessful to date, manufacturers
lobbying efforts may lead to the repeal or revision of state
dealer laws. If dealer laws are repealed in the states in which
we operate, manufacturers may be able to terminate our
franchises without providing advance notice, an opportunity to
cure or a showing of good cause. Without the protection of state
dealer laws, it may also be more difficult for our dealers to
renew their franchise agreements upon expiration.
In addition, these state dealer laws restrict the ability of
automobile manufacturers to directly enter the retail market in
the future. If manufacturers obtain the ability to directly
retail vehicles and do so in our markets, such competition could
have a material adverse effect on us.
Growth
in our revenues and earnings will be impacted by our ability to
acquire and successfully integrate and operate
dealerships.
Growth in our revenues and earnings depends substantially on our
ability to acquire and successfully integrate and operate
dealerships. We cannot guarantee that we will be able to
identify and acquire dealerships in the future. In addition, we
cannot guarantee that any acquisitions will be successful or on
terms and conditions consistent with past acquisitions.
Restrictions by our manufacturers, as well as covenants
contained in our debt instruments, may directly or indirectly
limit our ability to acquire additional dealerships. In
addition, increased competition for acquisitions may develop,
which could result in fewer acquisition opportunities available
to us and/or
higher acquisition prices. And, some of our competitors may have
greater financial resources than us.
We will continue to need substantial capital in order to acquire
additional automobile dealerships. In the past, we have financed
these acquisitions with a combination of cash flow from
operations, proceeds from borrowings under our credit
facilities, bond issuances, stock offerings, and the issuance of
our common stock to the sellers of the acquired dealerships.
We currently intend to finance future acquisitions by using cash
generated from operations, borrowings under our acquisition
lines, proceeds from debt
and/or
equity offerings and, in rare situations, issuing shares of our
common stock as partial consideration for acquired dealerships.
The use of common stock as consideration for acquisitions will
depend on three factors: (1) the market value of our common
stock at the time of the acquisition, (2) the willingness
of potential acquisition candidates to accept common stock as
part of the consideration for the
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sale of their businesses, and (3) our determination of what
is in our best interests. If potential acquisition candidates
are unwilling to accept our common stock, we will rely solely on
available cash or proceeds from debt or equity financings, which
could adversely affect our acquisition program. Accordingly, our
ability to make acquisitions could be adversely affected if the
price of our common stock is depressed or if our access to
capital is limited.
In addition, managing and integrating additional dealerships
into our existing mix of dealerships may result in substantial
costs, diversion of our managements attention, delays, or
other operational or financial problems. Acquisitions involve a
number of special risks, including, among other things:
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incurring significantly higher capital expenditures and
operating expenses;
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failing to integrate the operations and personnel of the
acquired dealerships;
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entering new markets with which we are not familiar;
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incurring undiscovered liabilities at acquired dealerships, in
the case of stock acquisitions;
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disrupting our ongoing business;
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failing to retain key personnel of the acquired dealerships;
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impairing relationships with employees, manufacturers and
customers; and
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incorrectly valuing acquired entities.
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All of these risks could have a material adverse effect on our
business, financial condition, cash flows and results of
operations. Although we conduct what we believe to be a prudent
level of investigation regarding the operating condition of the
businesses we purchase in light of the circumstances of each
transaction, an unavoidable level of risk remains regarding the
actual operating condition of these businesses.
Manufacturers
restrictions on acquisitions may limit our future
growth.
We must obtain the consent of the manufacturer prior to the
acquisition of any of its dealership franchises. Delays in
obtaining, or failing to obtain, manufacturer approvals for
dealership acquisitions could adversely affect our acquisition
program. Obtaining the consent of a manufacturer for the
acquisition of a dealership could take a significant amount of
time or might be rejected entirely. In determining whether to
approve an acquisition, manufacturers may consider many factors,
including the moral character and business experience of the
dealership principals and the financial condition, ownership
structure, customer satisfaction index scores and other
performance measures of our dealerships. Also, our manufacturers
attempt to measure customers satisfaction with automobile
dealerships through systems generally known as the customer
satisfaction index or CSI. Manufacturers may use these
performance indicators, as well as sales performance numbers, as
conditions for certain payments and as factors in evaluating
applications for additional acquisitions. The manufacturers have
modified the components of their CSI scores from time to time in
the past, and they may replace them with different systems at
any time. In unusual cases where performance indicators, such as
the ones described above, are not met to the satisfaction of the
manufacturer, certain manufacturers may either limit our ability
to acquire additional dealerships or require the disposal of
existing dealerships or both. From time to time, we have not met
all of the manufacturers requirements to make
acquisitions. To date, there have been no identified acquisition
opportunities that have been denied by any manufacturer.
However, we cannot be assured that all of our proposed future
acquisitions will be approved. In the event this was to occur,
this could adversely affect our acquisition strategy.
In addition, a manufacturer may limit the number of its
dealerships that we may own or the number that we may own in a
particular geographic area. If we reach a limitation imposed by
a manufacturer for a particular geographic market, we will be
unable to make additional acquisitions of that
manufacturers franchises in that market, which could limit
our ability to grow in that geographic area. In addition,
geographic limitations imposed by manufacturers could restrict
our ability to make geographic acquisitions involving markets
that overlap with those we already serve. We may acquire only
four primary Lexus dealerships or six outlets nationally,
including only two Lexus dealerships in any one of the four
Lexus geographic areas. We own three primary Lexus dealerships.
Also, we own the maximum number of Toyota dealerships we are
currently permitted to own in the Gulf States
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region, which is comprised of Texas, Oklahoma, Louisiana,
Mississippi and Arkansas, and in the Boston region, which is
comprised of Maine, Massachusetts, New Hampshire, Rhode Island
and Vermont.
If we
lose key personnel or are unable to attract additional qualified
personnel, our business could be adversely affected because we
rely on the industry knowledge and relationships of our key
personnel.
We believe our success depends to a significant extent upon the
efforts and abilities of our executive officers, senior
management and key employees, including our regional vice
presidents. Additionally, our business is dependent upon our
ability to continue to attract and retain qualified personnel,
including the management of acquired dealerships. The market for
qualified employees in the industry and in the regions in which
we operate, particularly for general managers and sales and
service personnel, is highly competitive and may subject us to
increased labor costs during periods of low unemployment. We do
not have employment agreements with most of our dealership
general managers and other key dealership personnel.
The unexpected or unanticipated loss of the services of one or
more members of our senior management team could have a material
adverse effect on us and materially impair the efficiency and
productivity of our operations. We do not have key man insurance
for any of our executive officers or key personnel. In addition,
the loss of any of our key employees or the failure to attract
qualified managers could have a material adverse effect on our
business and may materially impact the ability of our
dealerships to conduct their operations in accordance with our
national standards.
Substantial
competition in automotive sales and services may adversely
affect our profitability due to our need to lower prices to
sustain sales.
The automotive retail industry is highly competitive. Depending
on the geographic market, we compete with:
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franchised automotive dealerships in our markets that sell the
same or similar makes of new and used vehicles that we offer,
occasionally at lower prices than we do;
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other national or regional affiliated groups of franchised
dealerships
and/or of
used vehicle dealerships;
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private market buyers and sellers of used vehicles;
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Internet-based vehicle brokers that sell vehicles obtained from
franchised dealers directly to consumers;
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service center chain stores; and
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independent service and repair shops.
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We also compete with regional and national vehicle rental
companies that sell their used rental vehicles. In addition,
automobile manufacturers may directly enter the retail market in
the future, which could have a material adverse effect on us. As
we seek to acquire dealerships in new markets, we may face
significant competition as we strive to gain market share. Some
of our competitors may have greater financial, marketing and
personnel resources and lower overhead and sales costs than we
have. We do not have any cost advantage in purchasing new
vehicles from vehicle manufacturers and typically rely on
advertising, merchandising, sales expertise, service reputation
and dealership location in order to sell new vehicles. Our
franchise agreements do not grant us the exclusive right to sell
a manufacturers product within a given geographic area.
Our revenues and profitability may be materially and adversely
affected if competing dealerships expand their market share or
are awarded additional franchises by manufacturers that supply
our dealerships.
In addition to competition for vehicle sales, our dealerships
compete with franchised dealerships to perform warranty repairs
and with other automotive dealers, franchised and independent
service center chains and independent garages for non-warranty
repair and routine maintenance business. Our parts operations
compete with other automotive dealers, service stores and auto
parts retailers. We believe the principal competitive factors in
the parts and service business are the quality of customer
service, the use of factory-approved replacement parts,
familiarity with a manufacturers brands and models,
convenience, access to technology required for certain repairs
and services, location, price, the competence of technicians and
the availability of training programs to enhance such expertise.
A number of regional or national chains offer selected parts and
services at prices that may be lower
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than our dealerships prices. We also compete with a broad
range of financial institutions in arranging financing for our
customers vehicle purchases.
Some automobile manufacturers have acquired in the past, and may
attempt to acquire in the future, automotive dealerships in
certain states. Our revenues and profitability could be
materially adversely affected by the efforts of manufacturers to
enter the retail arena.
In addition, the Internet has become a significant part of the
advertising and sales process in our industry. Customers are
using the Internet as part of the sales process to compare
pricing for cars and related finance and insurance services,
which may reduce gross profit margins for new and used cars and
profits for related finance and insurance services. Some Web
sites offer vehicles for sale over the Internet without the
benefit of having a dealership franchise, although they must
currently source their vehicles from a franchised dealer. If
Internet new vehicle sales are allowed to be conducted without
the involvement of franchised dealers, or if dealerships are
able to effectively use the Internet to sell outside of their
markets, our business could be materially adversely affected. We
would also be materially adversely affected to the extent that
Internet companies acquire dealerships or align themselves with
our competitors dealerships.
Please see Business Competition for more
discussion of competition in our industry.
The
impairment of our goodwill, our indefinite-lived intangibles and
our other long-lived assets has had, and may have in the future,
a material adverse effect on our reported results of
operations.
We assess goodwill and other indefinite-lived intangibles for
impairment on an annual basis, or more frequently when events or
circumstances indicate that an impairment may have occurred. We
assess the carrying value of our long-lived assets when events
or circumstances indicate that an impairment may have occurred.
Based on the organization and management of our business, we
determined that each region qualified as reporting units for the
purpose of assessing goodwill for impairment. To determine the
fair value of our reporting units in assessing the carrying
value of our goodwill for impairment, we use a combination of
the discounted cash flow and market approaches. Included in this
analysis are assumptions regarding revenue growth rates, future
gross margin estimates, future selling, general and
administrative expense rates and our weighted average cost of
capital (WACC). We also must estimate residual
values at the end of the forecast period and future capital
expenditure requirements. Each of these assumptions requires us
to use our knowledge of (a) our industry, (b) our
recent transactions, and (c) reasonable performance
expectations for our operations. If any one of the above
assumptions changes, or fails to materialize, the resulting
decline in our estimated fair value could result in a material
impairment charge to the goodwill associated with the applicable
reporting unit, especially with respect to those operations
acquired prior to July 1, 2001.
We are required to evaluate the carrying value of our
indefinite-lived, intangible franchise rights at a dealership
level. To test the carrying value of each individual intangible
franchise right for impairment, we also use a discounted cash
flow based approach. Included in this analysis are assumptions,
at a dealership level, regarding revenue growth rates, future
gross margin estimates and future selling, general and
administrative expense rates. Using our WACC, estimated residual
values at the end of the forecast period and future capital
expenditure requirements, we calculate the fair value of each
dealerships franchise rights after considering estimated
values for tangible assets, working capital and workforce. If
any one of the above assumptions changes, or fails to
materialize, the resulting decline in our estimated fair value
could result in a material impairment charge to the intangible
franchise right associated with the applicable dealership.
We are required to evaluate the carrying value of our long-lived
assets at the lowest level of identifiable cash flows. To test
the carrying value of assets to be sold, we generally use
independent, third-party appraisals or pending transactions as
an estimate of fair value. In the event of an adverse change in
the real estate market, the resulting decline in our estimated
fair value could result in a material impairment charge to the
associated long-lived assets.
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Changes
in interest rates could adversely impact our
profitability.
All of the borrowings under our various credit facilities bear
interest based on a floating rate. Therefore, our interest
expense would increase with any rise in interest rates. We have
entered into derivative transactions to convert a portion of our
variable rate debt to fixed rates to partially mitigate this
risk. A rise in interest rates may also have the effect of
depressing demand in the interest rate sensitive aspects of our
business, particularly new and used vehicle sales, because many
of our customers finance their vehicle purchases. As a result, a
rise in interest rates may have the effect of simultaneously
increasing our costs and reducing our revenues. In addition, we
receive credit assistance from certain automobile manufacturers,
which is reflected as a reduction in cost of sales on our
statements of operations. Please see Quantitative and
Qualitative Disclosures about Market Risk for a discussion
regarding our interest rate sensitivity.
Natural
disasters and adverse weather events can disrupt our
business.
Our dealerships are concentrated in states and regions in the
U.S. in which actual or threatened natural disasters and
severe weather events (such as hurricanes, earthquakes and hail
storms) have in the past and may in the future disrupt our
dealership operations. A disruption in our operations may
adversely impact our business, results of operations, financial
condition and cash flows. In addition to business interruption,
the automotive retailing business is subject to substantial risk
of property loss due to the significant concentration of
property at dealership locations. Although we have, subject to
certain limitations and exclusions, substantial insurance,
including business interruption insurance, we cannot assure you
that we will not be exposed to uninsured or underinsured losses
that could have a material adverse effect on our business,
financial condition, results of operations or cash flows.
Climate
change legislation or regulations restricting emission of
greenhouse gases could result in increased operating
costs and reduced demand for the vehicles we sell.
On December 15, 2009, the U.S. Environmental
Protection Agency (EPA) published its findings that
emissions of carbon dioxide, methane and other greenhouse
gases present an endangerment to public health and the
environment because emissions of such gases are, according to
the EPA, contributing to warming of the earths atmosphere
and other climatic changes. These findings allow the EPA to
adopt and implement regulations that would restrict emissions of
greenhouse gases under existing provisions of the federal Clean
Air Act. Accordingly, the EPA has proposed regulations that
would require a reduction in emissions of greenhouse gases from
motor vehicles and could trigger permit review for greenhouse
gas emissions from certain stationary sources. In addition, on
October 30, 2009, the EPA published a final rule requiring
the reporting of greenhouse gas emissions from specified large
greenhouse gas emission sources in the United States, including
facilities that emit more than 25,000 tons of greenhouse gases
on an annual basis, beginning in 2011 for emissions occurring in
2010. At the state level, more than one-third of the states,
either individually or through multi-state regional initiatives,
already have begun implementing legal measures to reduce
emissions of greenhouse gases. The adoption and implementation
of any regulations imposing reporting obligations on, or
limiting emissions of greenhouse gases from, our equipment and
operations or from the vehicles that we sell could adversely
affect demand for those vehicles or require us to incur costs to
reduce emissions of greenhouse gases associated with our
operations.
We incur significant costs to comply with applicable
environmental, health and safety laws and regulations in the
ordinary course of our business. We do not anticipate, however,
that the costs of such compliance with current laws and
regulations will have a material adverse effect on our business,
results of operations, cash flows or financial condition,
although such outcome is possible given the nature of our
operations and the extensive environmental, public health and
safety regulatory framework, the clear trend of which is to
place more restrictions and limitations on activities that may
be perceived to affect the environment. Finally, we generally
conduct environmental studies on dealerships to be sold for the
purpose of determining our ongoing liability after the sale, if
any.
25
Our
insurance does not fully cover all of our operational risks, and
changes in the cost of insurance or the availability of
insurance could materially increase our insurance costs or
result in a decrease in our insurance coverage.
The operation of automobile dealerships is subject to compliance
with a wide range of laws and regulations and is subject to a
broad variety of risks. While we have insurance on our real
property, comprehensive coverage for our vehicle inventory,
general liability insurance, workers compensation
insurance, employee dishonesty coverage, employment practices
liability insurance, pollution coverage and errors and omissions
insurance in connection with vehicle sales and financing
activities, we are self-insured for a portion of our potential
liabilities. We purchase insurance policies for workers
compensation, liability, auto physical damage, property,
pollution, employee medical benefits and other risks consisting
of large deductibles
and/or
self-insured retentions.
In certain instances, our insurance may not fully cover an
insured loss depending on the magnitude and nature of the claim.
Additionally, changes in the cost of insurance or the
availability of insurance in the future could substantially
increase our costs to maintain our current level of coverage or
could cause us to reduce our insurance coverage and increase the
portion of our risks that we self-insure.
Our
indebtedness and lease obligations could materially adversely
affect our financial health, limit our ability to finance future
acquisitions and capital expenditures, and prevent us from
fulfilling our financial obligations.
Our indebtedness and lease obligations could impact us, in the
following ways:
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our ability to obtain additional financing for acquisitions,
capital expenditures, working capital or general corporate
purposes may be impaired in the future;
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a portion of our current cash flow from operations must be
dedicated to the payment of principal on our indebtedness,
thereby reducing the funds available to us for our operations
and other purposes;
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some of our borrowings are and will continue to be at variable
rates of interest, which exposes us to the risk of increasing
interest rates; and
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we may be more leveraged than some of our competitors, which may
place us at a relative competitive disadvantage and make us more
vulnerable to changing market conditions and regulations.
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Global financial markets and economic conditions have been, and
continue to be, disrupted and volatile. The debt and equity
capital markets have been exceedingly distressed. In particular,
availability of funds from those markets has diminished
significantly, while the cost of raising money in the debt and
equity capital markets has increased substantially. Also, as a
result of concerns about the stability of financial markets and
the solvency of counterparties, the cost of obtaining money from
the credit markets has increased as many lenders and
institutional investors have increased interest rates, enacted
tighter lending standards, refused to refinance existing debt at
maturity at all or on terms similar to current debt, and reduced
and, in some cases, ceased to provide funding to borrowers.
These issues, along with significant write-offs in the financial
services sector, the re-pricing of credit risk and the current
weak economic conditions have made, and will likely continue to
make, it difficult to obtain funding.
Our
inability to meet a financial covenant contained in our debt
agreements may adversely affect our liquidity, financial
condition or results of operations.
Our debt instruments contain numerous covenants that limit our
discretion with respect to business matters, including mergers
or acquisitions, paying dividends, repurchasing our common
stock, incurring additional debt or disposing of assets. A
breach of any of these covenants could result in a default under
the applicable agreement or indenture. In addition, a default
under one agreement or indenture could result in a default and
acceleration of our repayment obligations under the other
agreements or indentures under the cross default provisions in
those agreements or indentures. If a default or cross default
were to occur, we may be required to renegotiate the terms of
our indebtedness, which would likely be on less favorable terms
than our current terms and cause us to incur additional fees to
process. Alternatively, we may not be able to pay our debts or
borrow sufficient funds to refinance
26
them. As a result of this risk, we could be forced to take
actions that we otherwise would not take, or not take actions
that we otherwise might take, in order to comply with the
covenants in these agreements and indentures.
Our
U.K. operations are subject to risks associated with foreign
currency and exchange rate fluctuations.
In 2007, we expanded our operations into the U.K. As such, we
are exposed to additional risks related to such foreign
operations, including:
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currency and exchange rate fluctuations;
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foreign government regulative and potential changes;
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lack of franchise protection creating greater
competition; and
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tariffs, trade restrictions, prohibition on transfer of funds,
and international tax laws and treaties.
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Our Consolidated Financial Statements reflect that our results
of operations and financial position are reported in local
currency and are converted into U.S. dollars at the
applicable currency rate. Fluctuations in such currency rates
may have a material effect on our results of operations or
financial position as reported in U.S. dollars.
Certain
restrictions relating to our management and ownership of our
common stock could deter prospective acquirers from acquiring
control of us and adversely affect our ability to engage in
equity offerings.
As a condition to granting their consent to our previous
acquisitions and our initial public offering, some of our
manufacturers have imposed other restrictions on us. These
restrictions prohibit, among other things:
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any one person, who in the opinion of the manufacturer is
unqualified to own its franchised dealership or has interests
incompatible with the manufacturer, from acquiring more than a
specified percentage of our common stock (ranging from 20% to
50% depending on the particular manufacturers
restrictions) and this trigger level can fall to as low as 5% if
another vehicle manufacturer is the entity acquiring the
ownership interest or voting rights;
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certain material changes in our business or extraordinary
corporate transactions such as a merger or sale of a material
amount of our assets;
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the removal of a dealership general manager without the consent
of the manufacturer; and
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a change in control of our Board of Directors or a change in
management.
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Our manufacturers may also impose additional similar
restrictions on us in the future. Actions by our stockholders or
prospective stockholders, which would violate any of the above
restrictions are generally outside our control. If we are unable
to comply with or renegotiate these restrictions, we may be
forced to terminate or sell one or more franchises, which could
have a material adverse effect on us. These restrictions may
prevent or deter prospective acquirers from acquiring control of
us and, therefore, may adversely impact the value of our common
stock. These restrictions also may impede our ability to acquire
dealership groups, to raise required capital or to issue our
stock as consideration for future acquisitions.
Our
certificate of incorporation, bylaws and franchise agreements
contain provisions that make a takeover of us
difficult.
Our certificate of incorporation and bylaws could make it more
difficult for a third party to acquire control of us, even if
such change of control would be beneficial to our stockholders.
These include provisions:
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providing for a board of directors with staggered, three-year
terms, permitting the removal of a director from office only for
cause;
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allowing only the Board of Directors to set the number of
directors;
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requiring super-majority or class voting to affect certain
amendments to our certificate of incorporation and bylaws;
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27
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limiting the persons who may call special stockholders
meetings;
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limiting stockholder action by written consent;
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establishing advance notice requirements for nominations for
election to the board of directors or for proposing matters that
can be acted upon at stockholders meetings; and
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allowing our Board of Directors to issue shares of preferred
stock without stockholder approval.
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In addition, certain of our franchise agreements prohibit the
acquisition of more than a specified percentage of our common
stock without the consent of the relevant manufacturer. These
terms of our franchise agreements could also make it more
difficult for a third party to acquire control of us.
We can
issue preferred stock without stockholder approval, which could
materially adversely affect the rights of common
stockholders.
Our restated certificate of incorporation authorizes us to issue
blank check preferred stock, the designation,
number, voting powers, preferences, and rights of which may be
fixed or altered from time to time by our board of directors.
Accordingly, the board of directors has the authority, without
stockholder approval, to issue preferred stock with rights that
could materially adversely affect the voting power or other
rights of the common stock holders or the market value of the
common stock.
Governmental
Regulation pertaining to fuel economy (CAFE) standards may
affect the manufacturers ability to produce cost effective
vehicles.
The Energy Policy Conservation Act, enacted into law
by Congress in 1975, added Title V, Improving
Automotive Efficiency, to the Motor Vehicle Information
and Cost Savings Act and established Corporate Average Fuel
Economy (CAFE) standards for passenger cars and
light trucks. CAFE is the sales weighted average fuel economy,
expressed in miles per gallon (mpg) of a
manufacturers fleet of passenger cars or light trucks with
a gross vehicle weight rating of 8,500 pounds or less,
manufactured for sale in the U.S., for any given model year. The
Secretary of Transportation has delegated authority to establish
CAFE standards to the Administrator of the National Highway
Traffic Safety Administration (NHTSA). NHTSA is responsible for
establishing and amending the CAFE standards; promulgating
regulations concerning CAFE procedures, definitions and reports;
considering petitions for exemptions from standards for low
volume manufacturers and establishing unique standards for them;
enforcing fuel economy standards and regulations; responding to
petitions concerning domestic production by foreign
manufacturers and all other aspects of CAFE.
The primary goal of CAFE was to substantially increase passenger
car fuel efficiency. Congress has continuously increased the
standards since 1974, and, since mid-year 1990, the passenger
car standard was increased to 27.5 miles per gallon, which
it has remained at this level through 2009. The new law requires
passenger car fuel economy to rise to an industry average of
35 miles per gallon by 2020. Likewise, light truck CAFE
standards have been established over the years and significant
changes were adopted in November 2006. As of mid-year 2007, the
standard was increased to 22.2 miles per gallon and is
expected to be increased to about 24 miles per gallon by
2011.
The penalty for a manufacturers failure to meet the CAFE
standards is currently $5.50 per tenth of a mile per gallon for
each tenth under the target volume times the total volume of
those vehicles manufactured for a given model year.
Manufacturers can earn CAFE credits to offset
deficiencies in their CAFE performances. These credits can be
applied to any three consecutive model years immediately prior
to or subsequent to the model year in which the credits are
earned.
Failure of a manufacturer to develop passenger vehicles and
light trucks that meet CAFE standards could subject the
manufacturer to substantial penalties, increase the costs of
vehicles sold to us, and adversely affect our ability to market
and sell vehicles to meet consumer needs and desires.
Furthermore, Congress may continue to increase CAFE standards in
the future and such additional legislation may have an adverse
impact on the manufacturers and our business operations.
28
We are
subject to substantial regulation which may adversely affect our
profitability and significantly increase our costs in the
future.
A number of state and federal laws and regulations affect our
business. We are also subject to laws and regulations relating
to business corporations generally. Any failure to comply with
these laws and regulations may result in the assessment of
administrative, civil, or criminal penalties, the imposition of
remedial obligations or the issuance of injunctions limiting or
prohibiting our operations. In every state in which we operate,
we must obtain various licenses in order to operate our
businesses, including dealer, sales, finance and
insurance-related licenses issued by state authorities. These
laws also regulate our conduct of business, including our
advertising, operating, financing, employment and sales
practices. Other laws and regulations include state franchise
laws and regulations and other extensive laws and regulations
applicable to new and used motor vehicle dealers, as well as
federal and state
wage-hour,
anti-discrimination and other employment practices laws.
Furthermore, some states have initiated consumer bill of
rights statutes which involve increases in our costs
associated with the sale of vehicles, or decreases in some of
our profit centers.
Our financing activities with customers are subject to federal
truth-in-lending,
consumer leasing and equal credit opportunity laws and
regulations, as well as state and local motor vehicle finance
laws, installment finance laws, insurance laws, usury laws and
other installment sales laws and regulations. Some states
regulate finance fees and charges that may be paid as a result
of vehicle sales. Claims arising out of actual or alleged
violations of law may be asserted against us or our dealerships
by individuals or governmental entities and may expose us to
significant damages or other penalties, including revocation or
suspension of our licenses to conduct dealership operations and
fines.
Our operations are also subject to the National Traffic and
Motor Vehicle Safety Act, the Magnusson-Moss Warranty Act,
Federal Motor Vehicle Safety Standards promulgated by the United
States Department of Transportation and various state motor
vehicle regulatory agencies. The imported automobiles we
purchase are subject to U.S. customs duties and, in the
ordinary course of our business, we may, from time to time, be
subject to claims for duties, penalties, liquidated damages, or
other charges.
Our operations are subject to consumer protection laws known as
Lemon Laws. These laws typically require a manufacturer or
dealer to replace a new vehicle or accept it for a full refund
within one year after initial purchase if the vehicle does not
conform to the manufacturers express warranties and the
dealer or manufacturer, after a reasonable number of attempts,
is unable to correct or repair the defect. Federal laws require
various written disclosures to be provided on new vehicles,
including mileage and pricing information.
Possible penalties for violation of any of these laws or
regulations include revocation or suspension of our licenses and
civil or criminal fines and penalties. In addition, many laws
may give customers a private cause of action. Violation of these
laws, the cost of compliance with these laws, or changes in
these laws could result in adverse financial consequences to us.
Our
automotive dealerships are subject to stringent federal, state
and local environmental laws and regulations that may result in
claims and liabilities, which could be material.
We are subject to a wide range of federal, state and local
environmental laws and regulations, including those governing
discharges into the air and water, spills or releases onto soils
and into ground water, the operation and removal of underground
and aboveground storage tanks, and the investigation and
remediation of contamination. As with automotive dealerships
generally, and service, parts and body shop operations in
particular, our business involves the use, storage, handling and
contracting for recycling or disposal of hazardous substances or
wastes and other environmentally sensitive materials. These
environmental laws and regulations may impose numerous
obligations that are applicable to our operations including the
acquisition of permits to conduct regulated activities, the
incurrence of capital expenditures to limit or prevent releases
of materials from our storage tanks and other equipment that we
operate, and the imposition of substantial liabilities for
pollution resulting from our operations. Numerous governmental
authorities, such as the EPA, and analogous state agencies, have
the power to enforce compliance with these laws and regulations
and the permits issued under them, oftentimes requiring
difficult and costly actions. Failure to comply with these laws,
regulations, and permits may result in the assessment of
administrative, civil, and criminal penalties, the imposition of
remedial obligations, and the issuance of injunctions
29
limiting or preventing some or all of our operations. Similar to
many of our competitors, we have incurred and will continue to
incur, capital and operating expenditures and other costs in
complying with such laws and regulations.
There is risk of incurring significant environmental costs and
liabilities in the operation of our automotive dealerships due
to our handling of petroleum products and other materials
characterized as hazardous substances or hazardous wastes, the
threat of spills and releases arising in the course of
operations, especially from storage tanks, and the threat of
contamination arising from historical operations and waste
disposal practices, some of which may have been performed by
third parties not under our control. In addition, in connection
with our acquisitions, it is possible that we will assume or
become subject to new or unforeseen environmental costs or
liabilities, some of which may be material. In connection with
our dispositions, or prior dispositions made by companies we
acquire, we may retain exposure for environmental costs and
liabilities, some of which may be material. Moreover, the clear
trend in environmental regulation is to place more restrictions
and limitations on activities that may affect the environment
and, as a result, we may be required to make material additional
expenditures to comply with existing or future laws or
regulations, or as a result of the future discovery of
environmental conditions not in compliance with then applicable
law. Please see Business Governmental
Regulations Environmental, Health and Safety Laws
and Regulations and Risk
Factors Climate change legislation or
regulations restricting emission of greenhouse gases
could result in increased operating costs and reduced demand for
the vehicles as well for more discussion of the effect of
such laws and regulations on us.
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Item 1B.
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Unresolved
Staff Comments
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None.
30
We presently lease our corporate headquarters, which is located
at 800 Gessner, Houston, Texas. In addition, as of
December 31, 2009, we had 130 franchises situated in 98
dealership locations throughout 15 states in the
U.S. and in the U.K. As of December 31, 2009, we
leased 68 of these locations and owned the remainder. We have
one location in Massachusetts, one location in Alabama and one
location in Mississippi where we lease the land but own the
building facilities. These locations are included in the leased
column of the table below:
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Dealerships
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Region
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Geographic Location
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Owned
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Leased
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Eastern
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Massachusetts
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6
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4
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Maryland
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2
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New Hampshire
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3
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New Jersey
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3
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3
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New York
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1
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3
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Louisiana
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4
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Florida
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1
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1
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Georgia
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3
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1
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Mississippi
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3
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Alabama
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1
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1
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South Carolina
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1
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18
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23
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Central
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Texas
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4
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25
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Oklahoma
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1
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11
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Kansas
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2
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7
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36
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Western
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California
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2
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9
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International
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U.K.
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3
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Total
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30
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68
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We use a number of facilities to conduct our dealership
operations. Each of our dealerships may include facilities for
(1) new and used vehicle sales, (2) vehicle service
operations, (3) retail and wholesale parts operations,
(4) collision service operations, (5) storage and
(6) general office use. In the past, we tried to structure
our operations so as to avoid the ownership of real property. In
connection with our acquisitions, we generally sought to lease
rather than acquire the facilities on which the acquired
dealerships were located. We generally entered into lease
agreements with respect to such facilities that have
30-year
total terms with
15-year
initial terms and three five-year option periods, at our option.
As a result, we lease the majority of our facilities under
long-term operating leases. See Note 8 to our Consolidated
Financial Statements.
In March of 2007, we established a Mortgage Facility for the
primary purpose of acquiring land and buildings on which certain
of our existing dealerships are located or for newly acquired
land and buildings in which a new dealership is located. One of
our subsidiaries, Group 1 Realty, Inc., typically acquires the
property and acts as the landlord of our dealership operations.
During 2008 and 2009, due to slowing business conditions and
fewer acquisitions, we have slowed our dealership real estate
acquisition activity. For the year ended December 31, 2009,
we acquired $4.2 million of real estate in conjunction with
our dealership acquisitions. With these acquisitions, the
capitalized value of the real estate that we owned was
$391.9 million as of December 31, 2009.
31
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Item 3.
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Legal
Proceedings
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From time to time, our dealerships are named in various types of
litigation involving customer claims, employment matters, class
action claims, purported class action claims, as well as claims
involving the manufacturer of automobiles, contractual disputes
and other matters arising in the ordinary course of business.
Due to the nature of the automotive retailing business, we may
be involved in legal proceedings or suffer losses that could
have a material adverse effect on our business. In the normal
course of business, we are required to respond to customer,
employee and other third-party complaints. Amounts that have
been accrued or paid related to the settlement of litigation are
included in selling, general and administrative expenses in our
Consolidated Statements of Operations. In addition, the
manufacturers of the vehicles that we sell and service have
audit rights allowing them to review the validity of amounts
claimed for incentive, rebate or warranty-related items and
charge us back for amounts determined to be invalid rewards
under the manufacturers programs, subject to our right to
appeal any such decision. Amounts that have been accrued or paid
related to the settlement of manufacturer chargebacks of
recognized incentives and rebates are included in cost of sales
in our Consolidated Statements of Operations, while such amounts
for manufacturer chargebacks of recognized warranty-related
items are included as a reduction of revenues in our
Consolidated Statements of Operations.
Until 2007, our dealerships sold credit insurance policies to
its vehicle customers and received payments for these services
through relationships with insurance companies. Allegations were
made against these insurance companies with which we did
business, claiming that the insurance companies lacked adequate
monitoring processes and, as a result, failed to remit to
policyholders the appropriate amount of unearned premiums when
the policies were cancelled in conjunction with early payoffs of
the associated loan balances. As of February 12, 2010, we
have settled claims for an aggregate of $2.5 million
against our dealerships for the return of commissions on
premiums required to be refunded to customers, as required by
our contractual obligations with the insurance companies. The
commissions received on the sale of credit insurance products
are deferred and recognized as revenue over the life of the
policies, in accordance with the Financial Accounting Standards
Board (the FASB) Accounting Standards Codification
(ASC) Topic No. 944, Financial
Services-Insurance (ASC 944). As such, a
portion of the payouts was offset against deferred revenue,
while the remainder was recognized as a finance and insurance
chargeback expense. We believe that we have resolved all such
matters as of the date hereof, and no other claims or demands
for our dealerships to return, refund or repay such commissions.
While we cannot be certain whether future claims will be made,
we have no reason to believe amounts, if any, would be material.
Notwithstanding the foregoing, we are not party to any legal
proceedings, including class action lawsuits that, individually
or in the aggregate, are reasonably expected to have a material
adverse effect on our results of operations, financial condition
or cash flows. 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
our results of operations, financial condition or cash flows.
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Item 4.
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Submission
of Matters to a Vote of Security Holders
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None.
32
PART II
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Item 5.
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Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
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The common stock is listed on the New York Stock Exchange under
the symbol GPI. There were 75 holders of record of
our common stock as of February 9, 2010.
The following table presents the quarterly high and low sales
prices for our common stock, as reported on the New York Stock
Exchange Composite Tape under the symbol GPI and
dividends paid per common share for 2008 and 2009:
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High
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Low
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Dividends Paid
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2008:
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First Quarter
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$
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27.29
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$
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19.81
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$
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0.14
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Second Quarter
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29.64
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19.85
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0.14
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Third Quarter
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30.24
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|
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14.53
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0.05
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Fourth Quarter
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21.94
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4.34
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2009:
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First Quarter
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$
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15.50
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$
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7.14
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$
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Second Quarter
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26.55
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|
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13.44
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Third Quarter
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33.50
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|
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22.53
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Fourth Quarter
|
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35.30
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|
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23.95
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On February 19, 2009, our Board of Directors indefinitely
suspended the dividend, due to economic uncertainty. The payment
of dividends in the future is subject to the discretion of our
Board of Directors after considering our results of operations,
financial condition, cash flows, capital requirements, outlook
for our business, general business conditions and other factors.
Provisions of our credit facilities and our senior subordinated
notes require us to maintain certain financial ratios and limit
the amount of disbursements we may make outside the ordinary
course of business. These include limitations on the payment of
cash dividends and on stock repurchases, which are limited to a
percentage of cumulative net income. As of December 31,
2009, our 8.25% Notes were the most restrictive agreement
in this regard, limiting us to $19.5 million of such
payments. This amount will increase or decrease in future
periods by adding to the current limitation the sum of 50% of
our consolidated net income, if positive, and 100% of equity
issuances, less actual dividends or stock repurchases completed
in each quarterly period. Our Revolving Credit Facility matures
in 2012 and our 8.25% Notes mature in 2013.
33
Performance
Graph
The following Performance Graph and related information shall
not be deemed soliciting material or
filed with the SEC, nor shall such information be
incorporated by reference into any future filing under the
Securities Act of 1933 or the Exchange Act, each as amended,
except to the extent that we specifically incorporate it by
reference into such filing. The graph compares the performance
of our common stock to the S&P 500 Index and to a peer
group for our last five fiscal years. The members of the peer
group are Asbury Automotive Group, Inc., AutoNation, Inc.,
Lithia Motors, Inc., Penske Automotive Group, Inc. and Sonic
Automotive, Inc. The source for the information contained in
this table is Zacks Investment Research, Inc.
The returns of each member of the peer group are weighted
according to each members stock market capitalization as
of the beginning of each period measured. The graph assumes that
the value of the investment in our common stock, the S&P
500 Index and the peer group was $100 on the last trading day of
December 2004, and that all dividends were reinvested.
Performance data for Group 1, the S&P 500 Index and for the
peer group is provided as of the last trading day of each of our
last five fiscal years.
COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN
AMONG GROUP 1 AUTOMOTIVE, INC., S&P 500 INDEX AND A PEER
GROUP
TOTAL RETURN BASED ON $100 INITIAL INVESTMENT &
REINVESTMENT OF DIVIDENDS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Group 1
|
|
|
|
|
|
|
|
Measurement Date
|
|
Automotive, Inc.
|
|
|
S&P 500
|
|
|
Peer Group
|
|
|
December 2004
|
|
$
|
100.00
|
|
|
$
|
100.00
|
|
|
$
|
100.00
|
|
December 2005
|
|
|
99.77
|
|
|
|
104.89
|
|
|
|
114.11
|
|
December 2006
|
|
|
165.99
|
|
|
|
121.46
|
|
|
|
124.25
|
|
December 2007
|
|
|
77.45
|
|
|
|
128.13
|
|
|
|
88.26
|
|
December 2008
|
|
|
35.93
|
|
|
|
80.73
|
|
|
|
42.02
|
|
December 2009
|
|
|
94.57
|
|
|
|
102.08
|
|
|
|
85.30
|
|
Purchases
of Equity Securities by the Issuer
No shares of our common stock were repurchased during the three
months ended December 31, 2009. See
Business Stock Repurchase Program for
more information.
34
|
|
Item 6.
|
Selected
Financial Data
|
The following selected historical financial data as of
December 31, 2009, 2008, 2007, 2006, and 2005, and for the
five years in the period ended December 31, 2009, have been
derived from our audited Consolidated Financial Statements,
subject to certain reclassifications to make prior years conform
to the current year presentation, including discontinued
operations accounting and the accounting requirements for
convertible debt instruments that may be settled in cash upon
conversion made effective by the FASB in 2009. This selected
financial data should be read in conjunction with
Managements Discussion and Analysis of Financial
Condition and Results of Operations and the Consolidated
Financial Statements and related notes included elsewhere in
this Annual Report on
Form 10-K.
We have accounted for all of our dealership acquisitions using
the purchase method of accounting. As a result, we do not
include in our financial statements the results of operations of
these dealerships prior to the date we acquired them, which may
impact the comparability of the financial information presented.
Also, as a result of the effects of our acquisitions,
dispositions other potential factors in the future, the
historical financial information described in the selected
financial data and is not necessarily indicative of our results
of operations and financial position in the future or the
results of operations and financial position that would have
resulted had such transactions occurred at the beginning of the
periods presented in the selected financial data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
(In thousands, except per share amounts)
|
|
|
|
|
|
Income Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
4,525,707
|
|
|
$
|
5,654,087
|
|
|
$
|
6,260,217
|
|
|
$
|
5,940,729
|
|
|
$
|
5,795,248
|
|
Cost of sales
|
|
|
3,749,870
|
|
|
|
4,738,426
|
|
|
|
5,285,750
|
|
|
|
5,001,422
|
|
|
|
4,892,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
775,837
|
|
|
|
915,661
|
|
|
|
974,467
|
|
|
|
939,307
|
|
|
|
902,727
|
|
Selling, general and administrative expenses
|
|
|
621,048
|
|
|
|
739,430
|
|
|
|
758,877
|
|
|
|
717,786
|
|
|
|
716,317
|
|
Depreciation and amortization expense
|
|
|
25,828
|
|
|
|
25,652
|
|
|
|
20,438
|
|
|
|
17,694
|
|
|
|
18,469
|
|
Asset impairments
|
|
|
20,887
|
|
|
|
163,023
|
|
|
|
16,784
|
|
|
|
2,241
|
|
|
|
7,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
108,074
|
|
|
|
(12,444
|
)
|
|
|
178,368
|
|
|
|
201,586
|
|
|
|
160,334
|
|
Other income and (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floorplan interest expense
|
|
|
(32,345
|
)
|
|
|
(46,377
|
)
|
|
|
(46,822
|
)
|
|
|
(45,308
|
)
|
|
|
(36,840
|
)
|
Other interest expense, net
|
|
|
(29,075
|
)
|
|
|
(36,783
|
)
|
|
|
(30,068
|
)
|
|
|
(19,234
|
)
|
|
|
(14,712
|
)
|
Gain (loss) on redemption of long-term debt
|
|
|
8,211
|
|
|
|
18,126
|
|
|
|
(1,598
|
)
|
|
|
(488
|
)
|
|
|
|
|
Other income (expense), net
|
|
|
(14
|
)
|
|
|
302
|
|
|
|
560
|
|
|
|
629
|
|
|
|
282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
54,851
|
|
|
|
(77,176
|
)
|
|
|
100,440
|
|
|
|
137,185
|
|
|
|
109,064
|
|
Provision (benefit) for income taxes
|
|
|
20,006
|
|
|
|
(31,166
|
)
|
|
|
35,893
|
|
|
|
50,092
|
|
|
|
38,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations, before cumulative
effect of a change in accounting principle
|
|
|
34,845
|
|
|
|
(46,010
|
)
|
|
|
64,547
|
|
|
|
87,093
|
|
|
|
70,795
|
|
Loss related to discontinued operations, net of tax
|
|
|
|
|
|
|
(2,003
|
)
|
|
|
(1,132
|
)
|
|
|
(894
|
)
|
|
|
(526
|
)
|
Cumulative effect of a change in accounting principle, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,038
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
34,845
|
|
|
$
|
(48,013
|
)
|
|
$
|
63,415
|
|
|
$
|
86,199
|
|
|
$
|
54,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
(In thousands, except per share amounts)
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations, before cumulative
effect of a change in accounting principle
|
|
$
|
1.52
|
|
|
$
|
(2.04
|
)
|
|
$
|
2.77
|
|
|
$
|
3.61
|
|
|
$
|
2.97
|
|
Loss related to discontinued operations, net of tax
|
|
$
|
|
|
|
$
|
(0.09
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.03
|
)
|
Cumulative effect of a change in accounting principle, net of tax
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(0.67
|
)
|
Net income (loss)
|
|
$
|
1.52
|
|
|
$
|
(2.13
|
)
|
|
$
|
2.73
|
|
|
$
|
3.57
|
|
|
$
|
2.27
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of a change in accounting
principle
|
|
$
|
1.49
|
|
|
$
|
(2.03
|
)
|
|
$
|
2.76
|
|
|
$
|
3.56
|
|
|
$
|
2.92
|
|
Loss related to discontinued operations, net of tax
|
|
$
|
|
|
|
$
|
(0.09
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.02
|
)
|
Cumulative effect of a change in accounting principle, net of tax
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(0.66
|
)
|
Net income (loss)
|
|
$
|
1.49
|
|
|
$
|
(2.12
|
)
|
|
$
|
2.71
|
|
|
$
|
3.53
|
|
|
$
|
2.24
|
|
Dividends per share
|
|
$
|
|
|
|
$
|
0.47
|
|
|
$
|
0.56
|
|
|
$
|
0.55
|
|
|
$
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
22,888
|
|
|
|
22,513
|
|
|
|
23,270
|
|
|
|
24,146
|
|
|
|
23,866
|
|
Diluted
|
|
|
23,325
|
|
|
|
22,671
|
|
|
|
23,406
|
|
|
|
24,446
|
|
|
|
24,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$
|
103,225
|
|
|
$
|
92,128
|
|
|
$
|
184,705
|
|
|
$
|
232,140
|
|
|
$
|
133,246
|
|
Inventories
|
|
|
596,743
|
|
|
|
845,944
|
|
|
|
878,168
|
|
|
|
807,332
|
|
|
|
736,877
|
|
Total assets
|
|
|
1,969,414
|
|
|
|
2,288,114
|
|
|
|
2,506,104
|
|
|
|
2,120,137
|
|
|
|
1,835,859
|
|
Floorplan notes payable credit
facility(1)
|
|
|
420,319
|
|
|
|
693,692
|
|
|
|
648,469
|
|
|
|
423,007
|
|
|
|
393,459
|
|
Floorplan notes payable manufacturer affiliates
|
|
|
115,180
|
|
|
|
128,580
|
|
|
|
170,911
|
|
|
|
279,572
|
|
|
|
309,528
|
|
Acquisition line
|
|
|
|
|
|
|
50,000
|
|
|
|
135,000
|
|
|
|
|
|
|
|
|
|
Mortgage facility
|
|
|
192,727
|
|
|
|
177,998
|
|
|
|
131,317
|
|
|
|
|
|
|
|
|
|
Long-term debt, including current portion
|
|
|
265,769
|
|
|
|
322,319
|
|
|
|
329,109
|
|
|
|
330,513
|
|
|
|
158,860
|
|
Stockholders equity
|
|
|
720,156
|
|
|
|
662,117
|
|
|
|
741,765
|
|
|
|
754,661
|
|
|
|
626,793
|
|
Long-term debt to
capitalization(2)
|
|
|
39
|
%
|
|
|
45
|
%
|
|
|
45
|
%
|
|
|
30
|
%
|
|
|
20
|
%
|
|
|
|
(1) |
|
Includes immediately available
funds of $71.6 million, $44.9 million,
$64.5 million, $114.5 million and $47.6 million,
respectively, that we temporarily invest as an offset to the
gross outstanding borrowings.
|
|
(2) |
|
Includes the Acquisition Line,
Mortgage Facility and other long-term debt.
|
36
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operation
|
You should read the following discussion in conjunction with
Part I, including the matters set forth in the Risk
Factors section, and our Consolidated Financial Statements
and notes thereto included elsewhere in this Annual Report on
Form 10-K.
Overview
We are a leading operator in the automotive retail industry. As
of December 31, 2009, we owned and operated 124 franchises
at 95 dealership locations and 22 collision service centers in
the U.S. and six franchises at three dealerships and two
collision centers in the U.K. We market and sell an extensive
range of automotive products and services including new and used
vehicles and related financing, vehicle maintenance and repair
services, replacement parts, and warranty, insurance and
extended service contracts. Our operations are primarily located
in major metropolitan areas in Alabama, California, Florida,
Georgia, Kansas, Louisiana, Maryland, Massachusetts,
Mississippi, New Hampshire, New Jersey, New York, Oklahoma,
South Carolina and Texas in the U.S. and in the towns of
Brighton, Hailsham and Worthing in the U.K.
As of December 31, 2009, our retail network consisted of
the following three regions (with the number of dealerships they
comprised): (i) the Eastern (41 dealerships in Alabama,
Florida, Georgia, Louisiana, Maryland, Massachusetts,
Mississippi, New Hampshire, New Jersey, New York and South
Carolina), (ii) the Central (43 dealerships in Kansas,
Oklahoma and Texas), and (iii) the Western (11 dealerships
in California). Each region is managed by a regional vice
president who reports directly to our Chief Executive Officer
and is responsible for the overall performance of their regions,
as well as for overseeing the market directors and dealership
general managers that report to them. Each region is also
managed by a regional chief financial officer who reports
directly to our Chief Financial Officer. Our dealerships in the
U.K. are also managed locally with direct reporting
responsibilities to our corporate management team.
We typically seek to acquire large, profitable, well-established
and well-managed dealerships that are leaders in their
respective market areas. From January 1, 2005, through
December 31, 2009, we have acquired 41 franchises with
annual revenues of $1.7 billion, disposed of or terminated
57 franchises with annual revenues of $0.7 billion, and
been granted five new franchises by our manufacturers. In 2009
alone, we acquired two luxury, two import and one domestic
franchise with expected annual revenues of $108.4 million.
In the following discussion and analysis, we report certain
performance measures of our newly acquired dealerships
separately from those of our existing dealerships. Also during
2009, we disposed of seven domestic and one luxury franchise
with annual revenues of $126.2 million. We make disposition
decisions based principally on the rate of return on our capital
investment, the location of the dealership, our ability to
leverage our cost structure, the franchise and existing real
estate obligations.
Our operating results reflect the combined performance of each
of our interrelated business activities, which include the sale
of new vehicles, used vehicles, finance and insurance products,
and parts, service and collision repair services. Historically,
each of these activities has been directly or indirectly
impacted by a variety of supply/demand factors, including
vehicle inventories, consumer confidence, discretionary
spending, availability and affordability of consumer credit,
manufacturer incentives, weather patterns, fuel prices and
interest rates. For example, during periods of sustained
economic downturn or significant supply/demand imbalances, new
vehicle sales may be negatively impacted as consumers tend to
shift their purchases to used vehicles. Some consumers may even
delay their purchasing decisions altogether, electing instead to
repair their existing vehicles. In such cases, however, we
believe the new vehicle sales impact on our overall business is
mitigated by our ability to offer other products and services,
such as used vehicles and parts, service and collision repair
services, as well as our ability to reduce our costs in response
to lower sales.
We generally experience higher volumes of vehicle sales and
service in the second and third calendar quarters of each year.
This seasonality is generally attributable to consumer buying
trends and the timing of manufacturer new vehicle model
introductions. In addition, in some regions of the U.S., vehicle
purchases decline during the winter months due to inclement
weather. As a result, our revenues, cash flows and operating
income are typically lower in the first and fourth quarters and
higher in the second and third quarters. Other factors unrelated
to seasonality, such as changes in economic condition and
manufacturer incentive programs, may exaggerate seasonal or
cause counter-seasonal fluctuations in our revenues and
operating income.
37
Since September 2008, the U.S. and global economies have
suffered from, among other things, a substantial decline in
consumer confidence, a rise in unemployment and a tightening of
credit availability. As a result, the retail automotive industry
was negatively impacted by decreasing customer demand for new
and used vehicles, vehicle margin pressures and higher inventory
levels. In addition, the economic downturn has adversely
impacted the manufacturers that supply our new vehicle inventory
and some of our parts inventory, particularly the three domestic
manufacturers. Excluding the positive impact of the
U.S. government-sponsored Car Allowance Rebate System
(CARS) program on the automotive selling environment
during August 2009, consumer demand for new and used vehicles
seems to have stabilized. Given the depths of this downturn, a
recovery to historically normalized industry selling levels will
probably be extended.
In response to this challenging economic environment, we took a
number of steps to adjust our cost structure, strengthen our
cash balance and improve liquidity. We implemented significant
cost cuts in our ongoing operating structure, to appropriately
size our business and allow us to manage through this industry
downturn, including: wage cuts for our senior management team
and Board of Directors, as well as various other levels,
alterations to pay plans, headcount reductions and the
elimination or minimization of several other variable expenses
to align with current and projected operational results.
Specifically related to personnel expenses, we initiated various
wage cuts for the Board of Directors and senior management, as
well as for all other corporate employees and various other
regional, market and dealership level employees. In addition, we
suspended various employee benefits. Further, we reduced
headcount by 22% from the beginning of 2008. As it relates to
other variable expenses, our cost reductions were primarily
related to a decrease in overall advertising levels and a shift
to utilization of various in-house and email marketing tools, as
well as our ability to capitalize on declining media rates.
Other variable expense reductions also reflect initiatives
designed to reduce software solutions, contract labor, travel
and entertainment, delivery and loaner car expenses. For 2009,
these actions generated $118.4 million in cost savings from
2008 levels. Approximately 65% of the cost reductions were
personnel-related expenses and the remaining 35% are
attributable to advertising and other expenses. During the
economic downturn, we have used the cash that we generated from
our operations to pay down debt. Most notably, we redeemed a
portion of our 2.25% Notes with an aggregate par value of
$41.7 million during the year ended December 31, 2009.
To further improve liquidity, we reduced new vehicle inventory
levels by $260.7 million and our parts inventory levels by
$12.9 million during 2009, respectively. And, we continue
to closely scrutinize all planned future capital spending and
work closely with our manufacturer partners in this area. As a
result, 2009 capital spending, which consisted primarily of
required facility maintenance projects, totaled
$21.6 million, down significantly from 2008 levels of
$52.8 million.
Despite the challenging retail and economic environment, we
believe that opportunities exist in the marketplace to maintain
or improve profitability, including: (i) focusing on our
higher margin parts and service and finance and insurance
businesses, (ii) managing our inventory to meet customer
demands, and (iii) continuing to scrutinize cost reduction
initiatives. Efforts designed to maintain
and/or
improve the profitability of our parts and service business
focus on marketing efforts, strategic selling and operational
efficiencies. Within our finance and insurance business, our
profitability initiatives have primarily focused on the
minimization of product costs. As it relates to inventory
management, our local management teams are focused on the
balance between small inventory supply, which reduces inventory
carrying costs but increases the risk of not satisfying customer
demand, and large inventory supply, which increases inventory
carrying costs but decreases the risk of not satisfying customer
demand.
Amid the economic turmoil of 2009, Chrysler LLC
(Chrysler) and General Motors Corporation
(General Motors) filed for protection under the
bankruptcy laws of the U.S. At that time we owned and
operated eight Chrysler brand dealerships, all of which contain
Chrysler, Jeep and Dodge franchises, and seven General Motors
brand dealerships, five of which contain Chevrolet franchises
only and two of which contain Buick, Pontiac and GMC franchises.
And although both Chrysler and General Motors terminated a
number of their dealer franchise agreements in conjunction with
their respective bankruptcies and restructuring efforts, we
retained each of our dealership franchise agreements, with the
exception of Pontiac which is being discontinued as a brand.
While the comprehensive impact on us of the bankruptcies and
subsequent business restructurings of Chrysler and General
Motors will not be fully known for some time, we have continued
to collect our receivables from both Chrysler and General Motors
and did not experience a significant decline in the valuation of
our vehicle and parts inventory through December 31, 2009.
38
Also, during 2009, Chrysler Financial and GMAC, the two
financing subsidiaries of Chrysler and General Motors, separated
from their affiliated manufacturer entities. As a result, GMAC
continued to provide services to support the financing of
General Motors vehicle purchases and assumed support from
Chrysler Financial for the financing of Chrysler vehicle
purchases. Prior to these events, we relied upon Chrysler
Financial and GMAC to finance a portion of the new and used
retail vehicle sales for our customers. We will continue to rely
upon GMAC for these financing services. However, the operational
and financial impact of the separation of Chrysler Financial or
GMAC from their respective affiliated manufacturer and the
assumption by GMAC of Chrysler Financial financing support is
not predictable at this time, but could be adverse to us.
In January 2010, Toyota Motor Sales, U.S.A., Inc.
(Toyota) temporarily suspended the production and
sale of certain models representing about two-thirds of their
total unit sales in the U.S. and launched a recall to
address quality issues on those vehicles. In the near-term, this
recall could negatively impact our new and used vehicle sales.
And, longer term, Toyotas reputation for quality vehicles
could be permanently impaired, despite the efforts of Toyota to
quickly and effectively address these quality issues. In
contrast, our warranty parts and service business may be
bolstered while units in inventory and operation are repaired.
We are unable to estimate the longer term net impact of this
recall, but, since Toyota brands represented 36.6% of our unit
sales in 2009, it could be materially adverse to our financial
condition and results of operations.
For the year ended December 31, 2009, we realized a net
income of $34.8 million, or $1.49 per diluted share, and
for the years ended December 31, 2008 and 2007, we realized
net loss of $48.0 million, or $2.12 per diluted share, and
net income of $63.4 million, or $2.71 per diluted share,
respectively. In addition to the matters described above, the
following factors impacted our financial condition and results
of operations in 2009, 2008 and 2007:
Year
Ended December 31, 2009:
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Asset Impairments: We recognized a total of
$20.9 million in pretax impairment charges, primarily
related to the impairment of vacant properties that were held
for sale as of December 31, 2009, as well as other
long-term assets.
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Gain on Debt Redemption: In 2009, we redeemed
a portion of our 2.25% Notes with an aggregate par value of
$41.7 million and, as a result, recognized an
$8.7 million pretax gain and a proportionate reduction in
deferred tax assets relative to unamortized costs of the
purchased options acquired in conjunction with the initial
issuance. The cost of the options was deductible for tax
purposes as an original issue discount. In conjunction with
these repurchases, $0.4 million of the consideration was
attributed to the repurchase of the equity component of the
2.25% Notes and, as such, was recognized as an adjustment
to additional
paid-in-capital,
net of income taxes.
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Income Tax Benefit: We recognized an income
tax benefit of $2.0 million as a result of making a tax
election in 2009 that reduced income tax liability that we had
provided.
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Non-Cash Interest Expense: Our 2009 results
were negatively impacted by $5.4 million of non-cash
interest expense relative to the amortization of the discount
associated with our 2.25% Notes representing the impact of
the accounting for convertible debt as required by ASC Topic
No. 470, Debt (ASC 470).
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Year
Ended December 31, 2008:
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Asset Impairments: In the third quarter of
2008, we determined that the economic conditions and resulting
impact on the automotive retail industry, as well as the
uncertainty surrounding the going concern of the domestic
automobile manufacturers, indicated the potential for an
impairment of our goodwill and other indefinite-lived intangible
assets. In response to the identification of such triggering
events, we performed an interim impairment assessment of our
recorded values of goodwill and intangible franchise rights
utilizing our valuation model, which consists of a blend between
the market and income approaches. As a result of such
assessment, we determined that the fair values of certain
indefinite-lived intangible franchise rights were less than
their respective carrying values and recorded a pretax charge of
$37.1 million, primarily related to our domestic brand
franchises. Further, during the third quarter of 2008, we
identified potential impairment indicators relative to certain
of our real estate holdings, primarily associated with domestic
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39
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franchise terminations and other equipment, after giving
consideration to the likelihood that certain facilities would
not be sold or used by a prospective buyer as an automobile
dealership operation given market conditions. As a result, we
performed an impairment assessment of these long-lived assets
and determined that the respective carrying values exceeded
their estimated fair market values, as determined by third-party
appraisals and brokers opinions of value. Accordingly, we
recognized an $11.0 million pretax asset impairment charge.
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During the fourth quarter of 2008, we performed our annual
assessment of impairments relative to our goodwill and other
indefinite-lived intangible assets. As a result, we identified
additional impairments of our recorded value of intangible
franchise rights, primarily attributable to the continued
weakening of the U.S. economy, higher market risk premiums,
the negative impact of the economic recession on the automotive
retail industry and the growing uncertainty surrounding the
three domestic automobile manufacturers, all of which worsened
between our third and fourth quarter impairment assessments.
Specifically, with regards to the valuation assumptions utilized
in our income approach, we increased our WACC from the one
utilized in our impairment assessment during the third quarter
of 2008 and historical levels. In addition, because of the
negative selling trends experienced in the fourth quarter of
2008, we revised our 2009 industry sales outlook, or seasonally
adjusted annual rate (or SAAR), from the forecast
used in our third quarter assessment. Further, with regards to
the assumptions within our market approach, we utilized
historical market multiples of guideline companies for both
revenue and pretax net income. These multiples and the resulting
fair value estimates were adversely impacted by the declines in
stock values during much of 2008, including the fourth quarter.
As a result, we recognized a $114.8 million pretax
impairment charge in the fourth quarter of 2008, predominantly
related to franchises in our Western Region.
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Gain on Debt Redemption: In 2008, we redeemed
$28.3 million in aggregate par value of our
8.25% Notes and, as a result, recognized a
$0.9 million pretax gain. In addition, we redeemed
$63.0 million in aggregate par value of our
2.25% Notes and, as a result, recognized a
$17.2 million pretax gain and a proportionate reduction in
deferred tax assets relative to unamortized costs of the
purchased options acquired in conjunction with the initial
issuance. The cost of the options was deductible for tax
purposes as an original issue discount. No value was attributed
to the equity component of the 2.25% Notes at the time of
the redemption and, therefore, no adjustment to additional
paid-in-capital
was recognized.
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Lease Terminations: Our results for the year
ended December 31, 2008 were negatively impacted by a
$1.1 million pretax charge, related to the termination of a
dealership facility lease. The lease was terminated in
conjunction with the relocation of several of our dealership
franchises from one to multiple facilities.
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Discontinued Operations: During the year ended
December 31, 2008 we disposed of certain operations that
qualified for discontinued operations accounting treatment. The
necessary reclassifications have been made to our 2007
Consolidated Statement of Operations for year ended
December 31, 2007, as well as our 2007 Consolidated
Statement of Cash Flows for the year ended December 31,
2007, to reflect these operations as discontinued. In addition,
we have made reclassifications to the Consolidated Balance Sheet
as of December 31, 2007, which was derived from the audited
Consolidated Balance Sheet included in our Annual Report on
Form 10-K
for the fiscal year ended December 31, 2007 (2007
Form 10-K),
to properly reflect the discontinued operations.
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Non-Cash Interest Expense: Our 2008 results
were negatively impacted by $7.9 million of non-cash
interest expense relative to the amortization of the discount
associated with our 2.25% Notes representing the impact of
the accounting for convertible debt by ASC 470.
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Year
Ended December 31, 2007:
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Asset Impairments: In conjunction with our
annual impairment assessment of goodwill and indefinite-lived
intangible assets, we determined the carrying value of
indefinite-lived intangible franchise rights associated with six
of our dealerships to be impaired. Accordingly, we recognized a
$9.2 million pretax impairment charge in the fourth quarter
of 2007. Further, in conjunction with the sale of real estate
associated with one of our dealerships, we recognized a
$5.4 million pretax impairment charge. In addition,
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40
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we recognized a total of $2.2 million in additional pretax
impairment charges related to the impairment of fixed assets,
primarily associated with sold dealerships and terminated
franchises.
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Lease Terminations: During the first half of
2007, our results were negatively impacted by $4.3 million
of pretax charges as we terminated real estate leases associated
with the sale or termination of two of our domestic brand
franchises. In addition, we successfully completed the
conversion of all of our stores to operate on the ADP platform
for dealership management services. As a result, we recognized
$0.7 million in lease termination costs related to these
conversions.
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Loss on Bond Redemption: During the third
quarter 2007, we recognized a $1.6 million pretax charge on
the redemption of $36.4 million of our 8.25% Notes.
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Non-Cash Interest Expense: Our 2007 results
were negatively impacted by $7.3 million of non-cash
interest expense relative to the amortization of the discount
associated with our 2.25% Notes representing the impact of
the accounting for convertible debt by ASC 470.
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These items, and other variances between the periods presented,
are covered in the following discussion.
Key
Performance Indicators
The following table highlights certain of the key performance
indicators we use to manage our business:
Consolidated
Statistical Data
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For the Year Ended December 31,
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2009
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2008
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2007
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Unit Sales
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Retail Sales
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New Vehicle
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83,182
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110,705
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129,215
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Used Vehicle
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54,067
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61,971
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|
65,138
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|
|
|
|
|
|
|
|
|
|
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Total Retail Sales
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137,249
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|
172,676
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|
194,353
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Wholesale Sales
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27,793
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36,819
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|
44,289
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|
|
|
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|
|
|
|
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Total Vehicle Sales
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165,042
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209,495
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238,642
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Gross Margin
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New Vehicle Retail Sales
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6.1
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%
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6.3
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%
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6.7
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%
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Total Used Vehicle Sales
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8.9
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%
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8.3
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%
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8.8
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%
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Parts and Service Sales
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53.3
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%
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53.8
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%
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54.5
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%
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Total Gross Margin
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17.1
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%
|
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|
16.2
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%
|
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|
15.6
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%
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SG&A(1)
as a % of Gross Profit
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80.0
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%
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80.8
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%
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77.9
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%
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Operating Margin
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2.4
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%
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(0.2
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)%
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2.8
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%
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Pretax Margin
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1.2
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%
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(1.4
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)%
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1.6
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%
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Finance and Insurance Revenues per Retail Unit Sold
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|
$
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994
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$
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1,080
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$
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1,045
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|
|
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|
(1) |
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Selling, general and administrative
expenses.
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The following discussion briefly highlights certain of the
results and trends occurring within our business. Throughout the
following discussion, references are made to Same Store results
and variances, which are discussed in more detail in the
Results of Operations section that follows.
Declining consumer confidence, increasing unemployment, reduced
credit availability and weakening economic conditions negatively
impacted our operating results in 2009. The weakening economic
conditions started in late 2008 and resulted in excessive new
vehicle inventory across much of the industry as we entered
2009. During the first 6 months of 2009, the industry sold
out of the excessive inventory levels resulting in depressed new
vehicle gross margin levels. The CARS program significantly
stimulated new vehicle sales and gross margins in the third
quarter of 2009 and depleted new vehicle inventory levels. While
the margin impact of the CARS program was positive, it did not
fully offset the lower levels in the first six months of 2009.
We believe that our performance was generally consistent with
national retail results of the major brands we represent and the
overall blend of markets in which we operate. Our used vehicle
results are directly affected by economic conditions, the level
of manufacturer
41
incentives on new vehicles and new vehicle financing, the number
and quality of trade-ins and lease turn-ins and the availability
of consumer credit. The slowing new vehicle business sharply
affected the number of quality used vehicle trade-ins coming
into our dealerships in 2009 and made the sourcing of used
vehicles more challenging. We were forced to source a larger
percentage of our used vehicle inventory from auctions, which
has put pressure on our used retail margins. The tighter supply
and increased demand for used vehicles increased prices at the
auctions for most of 2009 and resulted in improved profitability
in the wholesale segment of our business. And, as the
differential between new and used vehicle sales prices shrank
towards the end of 2009, used vehicle demand weakened and
margins were further constricted. The used vehicle gross margin
in 2008 was negatively impacted by the shift in consumer
preference between cars and trucks due to the gasoline price
spike in the second quarter of 2008. Our consolidated finance
and insurance income per retail unit also felt the negative
impact of the declining economic conditions. However, our total
gross margin improved as a result of the increased margin in our
used vehicle business and the shift in business mix from our
lower margin vehicle business to our higher margin parts and
service business.
Our consolidated selling, general and administrative
(SG&A) expenses decreased in absolute dollars
as a result of the cost reductions we put in place starting in
the fourth quarter of 2008. As a percentage of gross profit,
SG&A expense declined from 2008, despite a 15.3% decline in
gross profit. Included in our SG&A expense decline for 2009
was $71.6 million of personnel-related cost savings and
$45.6 million of advertising and other variable expense
cuts.
The combination of these factors, coupled with a
$163.0 million impairment charge recognized in 2008 related
to our intangible franchise rights and certain of our real
estate holdings, contributed to a 260 basis point increase
in our operating margin. We recorded a $20.9 million
impairment charge in 2009, primarily related to real estate
holdings.
Our floorplan interest expense decreased 30.3% in 2009 compared
to 2008, primarily as a result of a decrease in our weighted
average borrowings. Other interest expense decreased 21.0% in
2009, primarily attributable to the redemption of a portion of
our 2.25% Notes in the fourth quarter of 2008 and the first
nine months of 2009. As a result, and including the reduced
level of gains on the repurchase of those 2.25% Notes in
2009 compared to 2008, our pretax margin increased
260 basis points in 2009.
We further address these items, and other variances between the
periods presented in the Results of Operations section below.
Recent
Accounting Pronouncements
Refer to the Recent Accounting Pronouncements section
within Note 2, Summary of Significant Accounting
Polices and Estimates, to our Consolidated Financial
Statements for a discussion of those most recent pronouncements
that impact us.
Critical
Accounting Policies and Accounting Estimates
The preparation of our financial statements in conformity with
generally accepted accounting principles requires management to
make certain estimates and assumptions. These estimates and
assumptions affect the reported amounts of assets and
liabilities, the disclosures of contingent assets and
liabilities at the balance sheet date and the amounts of
revenues and expenses recognized during the reporting period. We
analyze our estimates based on our historical experience and
various other assumptions that we believe to be reasonable under
the circumstances. However, actual results could differ from
such estimates. The following is a discussion of our critical
accounting estimates and policies
We have identified below what we believe to be the most
pervasive accounting policies and estimates that are of
particular importance to the portrayal of our financial
position, results of operations and cash flows. See Note 2
to our Consolidated Financial Statements for further discussion
of all our significant accounting policies and estimates.
Discontinued Operations. On June 30,
2008, we sold certain operations constituting our entire
dealership holdings in one particular market that qualified for
discontinued operations accounting and reporting treatment. In
42
order to reflect these operations as discontinued, the necessary
reclassifications have been made to our Consolidated Statements
of Operations, as well as our Consolidated Statements of Cash
Flows for the years ended December 31, 2008 and 2007.
Inventories. We carry new, used and
demonstrator vehicle inventories, as well as parts and
accessories inventories, at the lower of cost (determined on a
first-in,
first-out basis for parts and accessories) or market in the
Consolidated Balance Sheets. Vehicle inventory cost consists of
the amount paid to acquire the inventory, plus the cost of
reconditioning, cost of equipment added and transportation cost.
Additionally, we receive interest assistance from some of the
automobile manufacturers. This assistance is accounted for as a
vehicle purchase price discount and is reflected as a reduction
to the inventory cost on our Consolidated Balance Sheets and as
a reduction to cost of sales in our Statements of Operations as
the vehicles are sold. At December 31, 2009 and 2008,
inventory cost had been reduced by $3.3 million and
$6.0 million, respectively, for interest assistance
received from manufacturers. New vehicle cost of sales was
reduced by $20.0 million, $28.3 million and
$37.2 million for interest assistance received related to
vehicles sold for the years ended December 31, 2009, 2008
and 2007, respectively. The assistance ranged from approximately
49.9% to 87.0% of our floorplan interest expense over the past
three years.
As the market value of inventory typically declines over time,
we establish new and used vehicle reserves based on our
historical loss experience and considerations of current market
trends. These reserves are charged to cost of sales and reduce
the carrying value of inventory on hand. Used vehicles are
complex to value as there is no standardized source for
determining exact values and each vehicle and each market in
which we operate is unique. As a result, the value of each used
vehicle taken at trade-in, or purchased at auction, is
determined based on industry data, primarily accessed via our
used vehicle management software and the industry expertise of
the responsible used vehicle manager. Valuation risk is
mitigated, somewhat, by how quickly we turn this inventory. At
December 31, 2009, our used vehicle days supply was
31 days.
Goodwill. Goodwill represents the excess, at
the date of acquisition, of the purchase price of businesses
acquired over the fair value of the net tangible and intangible
assets acquired. We perform the annual impairment assessment of
goodwill by reporting unit at the end of each calendar year
using a fair-value based, two-step test. An impairment analysis
is done more frequently if certain events or circumstances arise
that would indicate a change in the fair value of the
non-financial asset has occurred (i.e., an impairment
indicator). As of December 31, 2009, we defined our
reporting units as each of our three regions in the
U.S. and the U.K.
We use a combination of the discounted cash flow, or income,
approach and the market approach to determine the fair value of
our reporting units. Included in the discounted cash flow are
assumptions regarding revenue growth rates, future gross
margins, future SG&A expenses and an estimated weighted
average cost of capital (or WACC). We also must
estimate residual values at the end of the forecast period and
future capital expenditure requirements. Specifically, with
regards to the valuation assumptions utilized in our income
approach as of December 31, 2009, we based our analysis on
a slow recovery back to normalized levels of a seasonally
adjusted annual rate (or SAAR) of 15.0 million
units by 2014. For the market approach, we utilize recent market
multiples of guideline companies for both revenue and pretax net
income. Each of these assumptions requires us to use our
knowledge of (1) the industry, (2) recent transactions
and (3) reasonable performance expectations for our
operations. We have concluded that these valuation inputs
qualify Goodwill to be categorized within Level 3 of our
ASC Topic No. 820, Fair Value of Measurements and
Disclosures (ASC 820) hierarchy framework (See
Note 16, Fair Value Measurements). If any one
of the above assumptions change, in some cases insignificantly,
or fails to materialize, the resulting decline in the estimated
fair value could result in a material impairment charge to the
goodwill associated with our reporting unit(s).
In evaluating goodwill for impairment, we compare the carrying
value of the net assets of each reporting unit to its respective
fair value. This represents the first step of the impairment
test. If the fair value of a reporting unit is less than the
carrying value of its net assets, we are then required to
proceed to step two of the impairment test. The second step
involves allocating the calculated fair value to all of the
tangible and identifiable intangible assets of the reporting
unit as if the calculated fair value was the purchase price of
the business combination. This allocation could result in
assigning value to intangible assets not previously recorded
separately from goodwill prior to the adoption of guidance
primarily codified within the ASC Topic No. 805,
Business Combinations (ASC 805), which
could result in less implied residual value assigned to goodwill
(see discussion regarding franchise rights
43
acquired prior to July 1, 2001, in Intangible
Franchise Rights below). We then compare the value of the
implied goodwill resulting from this second step to the carrying
value of the goodwill in the reporting unit. To the extent the
carrying value of the goodwill exceeds the implied fair value,
an impairment charge equal to the difference is recorded.
At December 31, 2009, 2008 and 2007, the fair value of each
of our reporting units exceeded the carrying value of its net
assets (i.e., step one of the impairment test). As a result, we
were not required to conduct the second step of the impairment
test. See Note 13, Intangible Franchise Rights and
Goodwill, for additional details regarding our goodwill.
Intangible Franchise Rights. Our only
significant identifiable intangible assets, other than goodwill,
are rights under franchise agreements with manufacturers, which
are recorded at an individual dealership level. We expect these
franchise agreements to continue for an indefinite period and,
when these agreements do not have indefinite terms, we believe
that renewal of these agreements can be obtained without
substantial cost. As such, we believe that our franchise
agreements will contribute to cash flows for an indefinite
period and, therefore, the carrying amount of franchise rights
are not amortized. Franchise rights acquired in business
acquisitions prior to July 1, 2001, were recorded and
amortized as part of goodwill and remain as part of goodwill at
December 31, 2009 and 2008 in the accompanying Consolidated
Balance Sheets. Since July 1, 2001, intangible franchise
rights acquired in business combinations have been recorded as
distinctly separate intangible assets and, in accordance with
guidance primarily codified within ASC Topic No. 350,
Intangibles Goodwill and Other
(ASC 350), we evaluate these franchise rights for
impairment annually, or more frequently if events or
circumstances indicate possible impairment has occurred.
To test the carrying value of each individual franchise right
for impairment, we use a discounted cash flow based approach.
Included in this analysis are assumptions, at a dealership
level, regarding the cash flows directly attributable to the
franchise right, revenue growth rates, future gross margins and
future SG&A expenses. Using an estimated WACC, estimated
residual values at the end of the forecast period and future
capital expenditure requirements, we calculate the fair value of
each dealerships franchise rights after considering
estimated values for tangible assets, working capital and
workforce. Accordingly, we have concluded that these valuation
inputs qualify intangible franchise rights to be categorized
within Level 3 of the ASC 820 hierarchy framework (See
Note 16, Fair Value Measurements).
If any one of the above assumptions change or fails to
materialize, the resulting decline in the intangible franchise
rights estimated fair value could result in an additional
impairment charge to the intangible franchise right associated
with the applicable dealership. See Note 10, Asset
Impairments, and Note 13, Intangible Franchise
Rights and Goodwill, for additional details regarding our
intangible franchise rights.
Retail Finance, Insurance and Vehicle Service Contract
Revenues Recognition. Revenues from vehicle
sales, parts sales and vehicle service are recognized upon
completion of the sale and delivery to the customer. Conditions
to completing a sale include having an agreement with the
customer, including pricing, and the sales price must be
reasonably expected to be collected.
We record the profit we receive for arranging vehicle fleet
transactions net in other finance and insurance revenues, net.
Since all sales of new vehicles must occur through franchised
new vehicle dealerships, the dealerships effectively act as
agents for the automobile manufacturers in completing sales of
vehicles to fleet customers. As these customers typically order
the vehicles, we have no significant general inventory risk.
Additionally, fleet customers generally receive special purchase
incentives from the automobile manufacturers and we receive only
a nominal fee for facilitating the transactions. Taxes collected
from customers and remitted to governmental agencies are not
included in total revenues.
We arrange financing for customers through various institutions
and receive financing fees based on the difference between the
loan rates charged to customers and predetermined financing
rates set by the financing institution. In addition, we receive
fees from the sale of insurance and vehicle service contracts to
customers. Further, through agreements with certain vehicle
service contract administrators, we earn volume incentive
rebates and interest income on reserves, as well as participate
in the underwriting profits of the products.
44
We may be charged back for unearned financing, insurance
contract or vehicle service contract fees in the event of early
termination of the contracts by customers. Revenues from these
fees are recorded at the time of the sale of the vehicles and a
reserve for future amounts which might be charged back is
established based on our historical chargeback results and the
termination provisions of the applicable contracts. While
chargeback results vary depending on the type of contract sold,
a 10% change in the historical chargeback results used in
determining estimates of future amounts which might be charged
back would have changed the reserve at December 31, 2009,
by $1.5 million.
We consolidate the operations of our reinsurance companies. We
reinsure the credit life and accident and health insurance
policies sold by our dealerships. All of the revenues and
related direct costs from the sales of these policies are
deferred and recognized over the life of the policies. During
2008, we terminated our offerings of credit life and accident
and health insurance policies. Investment of the net assets of
these companies are regulated by state insurance commissions and
consist of permitted investments, in general, government-backed
securities and obligations of government agencies. These
investments are classified as available-for-sale and are carried
at fair value. These investments, along with restricted cash
that is not invested, are classified as other long-term assets
in the accompanying consolidated balance sheets.
Self-Insured Property and Casualty
Reserves. We purchase insurance policies for
workers compensation, liability, auto physical damage,
property, pollution, employee medical benefits and other risks
consisting of large deductibles
and/or self
insured retentions.
We engage a third-party actuary to conduct a study of the
exposures under the self-insured portion of our workers
compensation and general liability insurance programs for all
open policy years. This actuarial study is updated on an annual
basis, and the appropriate adjustments are made to the accrual.
Actuarial estimates for the portion of claims not covered by
insurance are based on historical claims experience adjusted for
loss trending and loss development factors. Changes in the
frequency or severity of claims from historical levels could
influence our reserve for claims and our financial position,
results of operations and cash flows. A 10% change in the
actuarially determined loss rate per employee used in
determining our estimate of future losses would have changed the
reserve for these losses at December 31, 2009, by
$0.6 million.
For workers compensation and general liability insurance
policy years ended prior to October 31, 2005, this
component of our insurance program included aggregate retention
(stop loss) limits in addition to a per claim deductible limit
(the Stop Loss Plans). Due to historical experience
in both claims frequency and severity, the likelihood of
breaching the aggregate retention limits described above was
deemed remote, and as such, we elected not to purchase this stop
loss coverage for the policy year beginning November 1,
2005 and for each subsequent year (the No Stop Loss
Plans). Our exposure per claim under the No Stop Loss
Plans is limited to $1.0 million per occurrence, with
unlimited exposure on the number of claims up to
$1.0 million that we may incur.
Our maximum potential exposure under all of the Stop Loss Plans
originally totaled $42.9 million, before consideration of
amounts previously paid or accruals recorded related to our loss
projections. After consideration of the amounts paid or accrued,
the remaining potential loss exposure under the Stop Loss Plans
totals $12.6 million at December 31, 2009.
Fair Value of Financial Assets and
Liabilities. Our financial instruments consist
primarily of cash and cash equivalents,
contracts-in-transit
and vehicle receivables, accounts and notes receivable,
investments in debt and equity securities, accounts payable,
credit facilities, long-term debt and interest rate swaps. The
fair values of cash and cash equivalents,
contracts-in-transit
and vehicle receivables, accounts and notes receivable, accounts
payable, and credit facilities approximate their carrying values
due to the short-term nature of these instruments or the
existence of variable interest rates. Our investments in debt
and equity securities are classified as available-for-sale
securities and thus are carried at fair market value. As of
December 31, 2009 and 2008, the face value of our
outstanding 8.25% Senior Subordinated Notes due 2013
(8.25% Notes) was $74.6 million. The
8.25% Notes had a carrying value, net of applicable
discount, of $73.3 million and $73.0 million as of
December 31, 2009 and 2008, respectively, and a fair value,
based on quoted market prices, of $72.4 million and
$48.9 million, respectively. Also, as of December 31,
2009 and 2008, the face value of our outstanding
2.25% Notes was $182.8 million and
$224.5 million, respectively. The 2.25% Notes had a
carrying value, net of applicable discount, of
$131.9 million and $155.3 million, respectively, and a
fair value, based on quoted market prices, of
$143.5 million and
45
$95.1 million as of December 31, 2009 and 2008,
respectively. Our derivative financial instruments are recorded
at fair market value. See Notes 4 and 16 for further
details regarding our derivative financial instruments and fair
value measurements.
We maintain multiple trust accounts comprised of money market
funds with short-term investments in marketable securities, such
as U.S. government securities, commercial paper and bankers
acceptances, that have maturities of less than three months.
Also within the trust accounts, we hold investments in debt
instruments, such as government obligations and other fixed
income securities. We account for investments in marketable
securities and debt instruments under guidance primarily
codified within ASC Topic No. 320, Investments-Debt
and Equity Securities (ASC 320), which
establishes standards of financial accounting and reporting for
investments in equity instruments that have readily determinable
fair values and for all investments in debt securities. These
investments are designated as available-for-sale, measured at
fair value and classified as either cash and cash equivalents or
other assets in the accompanying Consolidated Balance Sheets
based upon maturity terms and certain contractual restrictions.
As these investments are fairly liquid, we believe our fair
value techniques accurately reflect their market values and are
subject to changes that are market driven and subject to demand
and supply of the financial instrument markets. The valuation
measurement inputs of these marketable securities represent
unadjusted quoted prices in active markets and, accordingly, has
classified such investments within Level 1 of the
ASC 820 hierarchy framework in Note 16. The debt
securities are measured based upon quoted market prices
utilizing public information, independent external valuations
from pricing services or third-party advisors. Accordingly, we
have concluded the valuation measurement inputs of these debt
securities to represent, at their lowest level, quoted market
prices for identical or similar assets in markets where there
are few transactions for the assets and have categorized such
investments within Level 2 of the ASC 820 hierarchy
framework in Note 16. The cost basis of the debt securities
as of December 31, 2009 and 2008 was $5.6 million and
$7.6 million, respectively.
Fair Value of Assets Acquired and Liabilities
Assumed. The values of assets acquired and
liabilities assumed in business combinations are estimated using
various assumptions. The most significant assumptions, and those
requiring the most judgment, involve the estimated fair values
of property and equipment and intangible franchise rights, with
the remaining attributable to goodwill, if any. We utilize
third-party experts to determine the fair values of property and
equipment purchased.
Income Taxes. Currently, we operate in 15
different states in the U.S. and in the U.K., each of which
has unique tax rates and payment calculations. As the amount of
income generated in each jurisdiction varies from period to
period, our estimated effective tax rate can vary based on the
proportion of taxable income generated in each jurisdiction.
We follow the liability method of accounting for income taxes in
accordance with ASC Topic No. 740, Income Taxes
(ASC 740). Under this method, deferred income taxes
are recorded based on differences between the financial
reporting and tax basis of assets and liabilities and are
measured using the enacted tax rates and laws that will be in
effect when the underlying assets are realized or liabilities
are settled. A valuation allowance reduces deferred tax assets
when it is more likely than not that some or all of the deferred
tax assets will not be realized.
Effective January 1, 2007, the FASB clarified the criteria
that an individual tax position must satisfy for some or all of
the benefits of that position to be recognized in a
companys financial statements. This guidance prescribes a
recognition threshold of more-likely-than-not, and a measurement
attribute for all tax positions taken or expected to be taken on
a tax return, in order to be recognized in the financial
statements (see Note 9 for additional information). No
cumulative adjustment was required to effect the adoption of
this pronouncement.
We have recognized deferred tax assets, net of valuation
allowances, that we believe will be realized, based primarily on
the assumption of future taxable income. As it relates to net
operating losses, a corresponding valuation allowance has been
established to the extent that we have determined that net
income attributable to certain states jurisdictions will not be
sufficient to realize the benefit.
Results
of Operations
The Same Store amounts presented below include the
results of dealerships for the identical months in each period
presented in the comparison, commencing with the first full
month in which the dealership was owned by us
46
and, in the case of dispositions, ending with the last full
month it was owned by us. For example, for a dealership acquired
in June 2008, the results from this dealership will appear in
our Same Store comparison beginning in 2009 for the period July
2009 through December 2009, when comparing to July 2008 through
December 2008 results. Depending on the periods being compared,
the dealerships included in Same Store will vary. For this
reason, the 2008 Same Store results that are compared to 2009
differ from those used in the comparison to 2007. Same Store
results also include the activities of our corporate
headquarters.
The following table summarizes our combined Same Store results
for the year ended December 31, 2009 as compared to 2008
and for the year ended December 31, 2008 compared to 2007.
Total
Same Store Data
(dollars in thousands, except per unit amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
2009
|
|
|
Change
|
|
|
2008
|
|
|
|
2008
|
|
|
Change
|
|
|
2007
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New vehicle retail
|
|
$
|
2,529,020
|
|
|
|
(24.2
|
)%
|
|
$
|
3,337,856
|
|
|
|
$
|
3,216,281
|
|
|
|
(16.8
|
)%
|
|
$
|
3,865,391
|
|
Used vehicle retail
|
|
|
962,757
|
|
|
|
(9.9
|
)%
|
|
|
1,068,824
|
|
|
|
|
1,025,487
|
|
|
|
(7.9
|
)%
|
|
|
1,113,970
|
|
Used vehicle wholesale
|
|
|
152,011
|
|
|
|
(33.6
|
)%
|
|
|
228,761
|
|
|
|
|
217,496
|
|
|
|
(28.4
|
)%
|
|
|
303,974
|
|
Parts and Service
|
|
|
716,632
|
|
|
|
(2.5
|
)%
|
|
|
735,055
|
|
|
|
|
700,896
|
|
|
|
2.1
|
%
|
|
|
686,700
|
|
Finance, insurance and other
|
|
|
135,910
|
|
|
|
(26.3
|
)%
|
|
|
184,362
|
|
|
|
|
181,624
|
|
|
|
(9.8
|
)%
|
|
|
201,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
4,496,330
|
|
|
|
(19.1
|
)%
|
|
$
|
5,554,858
|
|
|
|
$
|
5,341,784
|
|
|
|
(13.4
|
)%
|
|
$
|
6,171,350
|
|
Cost of Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New vehicle retail
|
|
$
|
2,375,439
|
|
|
|
(24.0
|
)%
|
|
$
|
3,126,232
|
|
|
|
$
|
3,014,560
|
|
|
|
(16.4
|
)%
|
|
$
|
3,606,658
|
|
Used vehicle retail
|
|
|
865,556
|
|
|
|
(9.5
|
)%
|
|
|
956,340
|
|
|
|
|
915,939
|
|
|
|
(7.0
|
)%
|
|
|
985,216
|
|
Used vehicle wholesale
|
|
|
149,661
|
|
|
|
(35.6
|
)%
|
|
|
232,418
|
|
|
|
|
221,434
|
|
|
|
(27.9
|
)%
|
|
|
307,084
|
|
Parts and Service
|
|
|
335,009
|
|
|
|
(1.4
|
)%
|
|
|
339,624
|
|
|
|
|
323,903
|
|
|
|
3.7
|
%
|
|
|
312,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales
|
|
$
|
3,725,665
|
|
|
|
(20.0
|
)%
|
|
$
|
4,654,614
|
|
|
|
$
|
4,475,836
|
|
|
|
(14.1
|
)%
|
|
$
|
5,211,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
770,665
|
|
|
|
(14.4
|
)%
|
|
$
|
900,244
|
|
|
|
$
|
865,948
|
|
|
|
(9.8
|
)%
|
|
$
|
960,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
expenses
|
|
$
|
615,030
|
|
|
|
(15.0
|
)%
|
|
$
|
723,166
|
|
|
|
$
|
700,191
|
|
|
|
(5.2
|
)%
|
|
$
|
738,564
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
expenses
|
|
$
|
25,652
|
|
|
|
1.8
|
%
|
|
$
|
25,208
|
|
|
|
$
|
23,936
|
|
|
|
21.6
|
%
|
|
$
|
19,684
|
|
Floorplan interest expense
|
|
$
|
32,248
|
|
|
|
(29.2
|
)%
|
|
$
|
45,547
|
|
|
|
$
|
44,095
|
|
|
|
(3.3
|
)%
|
|
$
|
45,577
|
|
Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Vehicle Retail
|
|
|
6.1
|
%
|
|
|
|
|
|
|
6.3
|
%
|
|
|
|
6.3
|
%
|
|
|
|
|
|
|
6.7
|
%
|
Used Vehicle
|
|
|
8.9
|
%
|
|
|
|
|
|
|
8.4
|
%
|
|
|
|
8.5
|
%
|
|
|
|
|
|
|
8.9
|
%
|
Parts and Service
|
|
|
53.3
|
%
|
|
|
|
|
|
|
53.8
|
%
|
|
|
|
53.8
|
%
|
|
|
|
|
|
|
54.5
|
%
|
Total Gross Margin
|
|
|
17.1
|
%
|
|
|
|
|
|
|
16.2
|
%
|
|
|
|
16.2
|
%
|
|
|
|
|
|
|
15.6
|
%
|
SG&A as a % of Gross Profit
|
|
|
79.8
|
%
|
|
|
|
|
|
|
80.3
|
%
|
|
|
|
80.9
|
%
|
|
|
|
|
|
|
76.9
|
%
|
Operating Margin
|
|
|
2.8
|
%
|
|
|
|
|
|
|
0.0
|
%
|
|
|
|
0.4
|
%
|
|
|
|
|
|
|
3.0
|
%
|
Finance and Insurance Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
per Retail Unit Sold
|
|
$
|
995
|
|
|
|
(8.5
|
)%
|
|
$
|
1,088
|
|
|
|
$
|
1,087
|
|
|
|
3.5
|
%
|
|
$
|
1,050
|
|
47
The discussion that follows provides explanation for the
variances noted above. In addition, each table presents by
primary income statement line item comparative financial and
non-financial data of our Same Store locations, those locations
acquired or disposed of (Transactions) during the
periods and the consolidated company for the years ended
December 31, 2009, 2008 and 2007.
New
Vehicle Retail Data
(dollars in thousands, except per unit amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
2009
|
|
|
Change
|
|
|
2008
|
|
|
|
2008
|
|
|
Change
|
|
|
2007
|
|
Retail Unit Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
|
82,810
|
|
|
|
(23.9
|
)%
|
|
|
108,884
|
|
|
|
|
107,181
|
|
|
|
(16.1
|
)%
|
|
|
127,725
|
|
Transactions
|
|
|
372
|
|
|
|
|
|
|
|
1,821
|
|
|
|
|
3,524
|
|
|
|
|
|
|
|
1,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
83,182
|
|
|
|
(24.9
|
)%
|
|
|
110,705
|
|
|
|
|
110,705
|
|
|
|
(14.3
|
)%
|
|
|
129,215
|
|
Retail Sales Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
$
|
2,529,020
|
|
|
|
(24.2
|
)%
|
|
$
|
3,337,856
|
|
|
|
$
|
3,216,281
|
|
|
|
(16.8
|
)%
|
|
$
|
3,865,391
|
|
Transactions
|
|
|
14,011
|
|
|
|
|
|
|
|
55,032
|
|
|
|
|
176,607
|
|
|
|
|
|
|
|
49,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,543,031
|
|
|
|
(25.0
|
)%
|
|
$
|
3,392,888
|
|
|
|
$
|
3,392,888
|
|
|
|
(13.3
|
)%
|
|
$
|
3,914,650
|
|
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
$
|
153,581
|
|
|
|
(27.4
|
)%
|
|
$
|
211,624
|
|
|
|
$
|
201,721
|
|
|
|
(22.0
|
)%
|
|
$
|
258,733
|
|
Transactions
|
|
|
653
|
|
|
|
|
|
|
|
3,132
|
|
|
|
|
13,035
|
|
|
|
|
|
|
|
3,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
154,234
|
|
|
|
(28.2
|
)%
|
|
$
|
214,756
|
|
|
|
$
|
214,756
|
|
|
|
(18.1
|
)%
|
|
$
|
262,322
|
|
Gross Profit per Retail
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unit Sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
$
|
1,855
|
|
|
|
(4.6
|
)%
|
|
$
|
1,944
|
|
|
|
$
|
1,882
|
|
|
|
(7.1
|
)%
|
|
$
|
2,026
|
|
Transactions
|
|
$
|
1,755
|
|
|
|
|
|
|
$
|
1,720
|
|
|
|
$
|
3,698
|
|
|
|
|
|
|
$
|
2,409
|
|
Total
|
|
$
|
1,854
|
|
|
|
(4.4
|
)%
|
|
$
|
1,940
|
|
|
|
$
|
1,940
|
|
|
|
(4.4
|
)%
|
|
$
|
2,030
|
|
Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
|
6.1
|
%
|
|
|
|
|
|
|
6.3
|
%
|
|
|
|
6.3
|
%
|
|
|
|
|
|
|
6.7
|
%
|
Transactions
|
|
|
4.7
|
%
|
|
|
|
|
|
|
5.7
|
%
|
|
|
|
7.4
|
%
|
|
|
|
|
|
|
7.3
|
%
|
Total
|
|
|
6.1
|
%
|
|
|
|
|
|
|
6.3
|
%
|
|
|
|
6.3
|
%
|
|
|
|
|
|
|
6.7
|
%
|
The following table sets forth our Same Store new vehicle retail
sales volume by manufacturer:
Same
Store New Vehicle Unit Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
2009
|
|
|
Change
|
|
|
2008
|
|
|
|
2008
|
|
|
Change
|
|
|
2007
|
|
Toyota
|
|
|
30,475
|
|
|
|
(21.5
|
)%
|
|
|
38,818
|
|
|
|
|
38,818
|
|
|
|
(17.8
|
)%
|
|
|
47,243
|
|
Nissan
|
|
|
10,684
|
|
|
|
(24.1
|
)
|
|
|
14,075
|
|
|
|
|
14,075
|
|
|
|
(13.2
|
)
|
|
|
16,218
|
|
Honda
|
|
|
10,477
|
|
|
|
(32.3
|
)
|
|
|
15,473
|
|
|
|
|
15,473
|
|
|
|
(3.8
|
)
|
|
|
16,081
|
|
BMW
|
|
|
7,840
|
|
|
|
(18.4
|
)
|
|
|
9,602
|
|
|
|
|
8,481
|
|
|
|
(1.8
|
)
|
|
|
8,640
|
|
Ford
|
|
|
7,171
|
|
|
|
(25.3
|
)
|
|
|
9,596
|
|
|
|
|
10,560
|
|
|
|
(29.6
|
)
|
|
|
14,999
|
|
Mercedes-Benz
|
|
|
4,897
|
|
|
|
(24.8
|
)
|
|
|
6,512
|
|
|
|
|
4,261
|
|
|
|
4.2
|
|
|
|
4,089
|
|
Chrysler
|
|
|
4,116
|
|
|
|
(34.3
|
)
|
|
|
6,264
|
|
|
|
|
6,625
|
|
|
|
(31.0
|
)
|
|
|
9,600
|
|
General Motors
|
|
|
3,187
|
|
|
|
(36.0
|
)
|
|
|
4,980
|
|
|
|
|
5,175
|
|
|
|
(25.4
|
)
|
|
|
6,934
|
|
Other
|
|
|
3,963
|
|
|
|
11.2
|
|
|
|
3,564
|
|
|
|
|
3,713
|
|
|
|
(5.3
|
)
|
|
|
3,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
82,810
|
|
|
|
(23.9
|
)
|
|
|
108,884
|
|
|
|
|
107,181
|
|
|
|
(16.1
|
)
|
|
|
127,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48
The following table sets forth our top 10 Same Store brands,
based on retail unit sales volume, and the percentage changes
from year to year, which we believe are generally consistent
with the overall retail market performance of those brands in
the areas where we operate:
Same
Store New Vehicle Unit Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
2009
|
|
|
Change
|
|
|
2008
|
|
|
|
2008
|
|
|
Change
|
|
|
2007
|
|
Toyota
|
|
|
25,079
|
|
|
|
(19.7
|
)%
|
|
|
31,249
|
|
|
|
|
31,249
|
|
|
|
(18.0
|
)%
|
|
|
38,089
|
|
Nissan
|
|
|
9,943
|
|
|
|
(22.8
|
)
|
|
|
12,884
|
|
|
|
|
12,884
|
|
|
|
(13.8
|
)
|
|
|
14,941
|
|
Honda
|
|
|
8,766
|
|
|
|
(31.9
|
)
|
|
|
12,864
|
|
|
|
|
12,864
|
|
|
|
(0.9
|
)
|
|
|
12,983
|
|
Ford
|
|
|
6,275
|
|
|
|
(25.5
|
)
|
|
|
8,425
|
|
|
|
|
9,120
|
|
|
|
(30.8
|
)
|
|
|
13,171
|
|
BMW
|
|
|
5,958
|
|
|
|
(21.5
|
)
|
|
|
7,585
|
|
|
|
|
6,916
|
|
|
|
(5.5
|
)
|
|
|
7,319
|
|
Lexus
|
|
|
4,570
|
|
|
|
(21.1
|
)
|
|
|
5,789
|
|
|
|
|
5,789
|
|
|
|
(18.0
|
)
|
|
|
7,063
|
|
Dodge
|
|
|
2,533
|
|
|
|
(35.4
|
)
|
|
|
3,921
|
|
|
|
|
4,174
|
|
|
|
(25.1
|
)
|
|
|
5,572
|
|
Mercedes-Benz
|
|
|
4,692
|
|
|
|
(20.1
|
)
|
|
|
5,869
|
|
|
|
|
3,625
|
|
|
|
(10.9
|
)
|
|
|
4,069
|
|
Chevrolet
|
|
|
2,268
|
|
|
|
(36.0
|
)
|
|
|
3,543
|
|
|
|
|
3,543
|
|
|
|
(28.9
|
)
|
|
|
4,981
|
|
Acura
|
|
|
1,711
|
|
|
|
(34.4
|
)
|
|
|
2,609
|
|
|
|
|
2,609
|
|
|
|
(15.8
|
)
|
|
|
3,098
|
|
Other
|
|
|
11,015
|
|
|
|
(22.1
|
)
|
|
|
14,146
|
|
|
|
|
14,408
|
|
|
|
(12.4
|
)
|
|
|
16,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
82,810
|
|
|
|
(23.9
|
)
|
|
|
108,884
|
|
|
|
|
107,181
|
|
|
|
(16.1
|
)
|
|
|
127,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2009, Same Store new
vehicle unit sales and revenues declined 23.9% and 24.2%,
respectively, as compared to the corresponding period in 2008,
which was generally consistent with industry declines. The
combination of slowing economic conditions, declining consumer
confidence, higher jobless rates, tightened credit standards and
industry wide pressure to lower vehicle inventory levels led to
lower sales and extremely competitive pricing. Partially
offsetting these negative economic conditions throughout 2009
was the impact of the CARS program, which had a positive effect
on our third quarter results. We sold 4,874 qualifying new
vehicle units under the CARS program.
We experienced unit sales decreases in each of the major brands
that we represent. Our retail car unit sales declined by 22.7%
in 2009, while our retail truck unit sales declined by 25.6%, as
compared with the same period in 2008. We believe that our
performance is generally consistent with national retail results
of the brands we represent and the overall markets in which we
operate. The level of retail sales, as well as our own ability
to retain or grow market share during future periods, is
difficult to predict.
Our Same Store new vehicle revenues declined 16.8% from 2007 to
2008, on a similar percentage decrease in Same Store retail unit
sales. Slowing economic conditions and declining consumer
confidence impacted overall new vehicle demand in the
U.S. And, on a regional basis, we experienced weakness
particularly in the California and Florida markets. Our
predominantly car franchises were negatively impacted by the
slowing economy in 2008 resulting in an aggregate decrease in
unit sales of cars by 11.8% from 2007 levels. Same Store
revenues from our import and luxury brands fell 12.8% and 12.6%
from 2007 to 2008, on 13.1% and 8.5% less retail units,
respectively. Further, during most of 2008, customer preferences
shifted away from less fuel-efficient vehicles and as a result,
most segments of our new vehicle business were negatively
impacted. Our Same Store unit sales in our truck lines decreased
21.1% from 2007 to 2008. Same Store revenues from our
truck-heavy domestic franchises were down 30.1% from 2007 to
2008.
Our Same Store gross margin on new vehicle retail sales
decreased 20 basis points from 2008 to 2009. The rapid
fall-off in demand across the nation led to significant
build-ups of
new vehicle inventories across all brands, putting significant
pressure on margins in the first half of 2009. In addition the
bankruptcies of Chrysler and General Motors further pressured
margins as dealers moved aggressively to reduce their
inventories of these brands. For the year ended
December 31, 2009 compared to 2008, our Same Store gross
profit per retail unit (PRU) declined 4.6%
49
to $1,855, representing a 14.1% decrease for our domestic brands
and a 6.2% decline for our luxury brands. Gross profit per
retail unit sold for our import brands in 2009 was consistent
with prior year.
Our Same Store gross margin on new vehicle retail sales
decreased 40 basis points from 2007 to 2008. Depressed
economic conditions in many of the markets in which we operate
were exacerbated by the financial crises of September 2008 and
following. As a result, we experienced a decline in new vehicle
sales that pressured our margins. We experienced a decrease in
Same Store new vehicle gross margin in most of our major brands.
Further depressing new vehicle margins in 2008 was the shift in
customer preference towards more fuel-efficient vehicles during
most of the year, which largely affected our truck-dependent
domestic brands, as well as the truck lines of our import
brands. For the year ended December 31, 2008 compared to
2007, our Same Store gross profit per retail unit
(PRU) declined 7.1% to $1,882, representing a 13.6%
decline in PRU for our domestic nameplates, a 10.0% decrease in
PRU for our luxury brands and a 3.6% decline in PRU from our
import nameplates.
Most manufacturers offer interest assistance to offset floorplan
interest charges incurred in connection with inventory
purchases. This assistance varies by manufacturer, but generally
provides for a defined amount regardless of our actual floorplan
interest rate or the length of time for which the inventory is
financed. The amount of interest assistance we recognize in a
given period is primarily a function of: (1) the mix of
units being sold, as domestic brands tend to provide more
assistance, (2) the specific terms of the respective
manufacturers interest assistance programs and market
interest rates, (3) the average wholesale price of
inventory sold, and (4) our rate of inventory turn. To
further mitigate our exposure to interest rate fluctuations, we
have entered into interest rate swaps with an aggregate notional
amount of $550.0 million as of December 31, 2009, at a
weighted average LIBOR interest rate of 4.7%. We record the
majority of the impact of the periodic settlements of these
swaps as a component of floorplan interest expense, effectively
hedging a substantial portion of our total floorplan interest
expense and mitigating the impact of interest rate fluctuations.
As a result, in this declining interest rate environment, our
interest assistance recognized as a percent of total floorplan
interest expense has declined. Over the past three years, this
assistance as a percentage of our total consolidated floorplan
interest expense has ranged from 87.0% in the third quarter of
2007 to 49.9% in the fourth quarter of 2008. We record these
incentives as a reduction of new vehicle cost of sales as the
vehicles are sold, which therefore impact the gross profit and
gross margin detailed above. The total assistance recognized in
cost of goods sold during the years ended December 31,
2009, 2008 and 2007, was $20.0 million, $28.3 million
and $37.2 million, respectively.
We continue to aggressively manage our new vehicle inventory in
response to the rapidly changing market conditions. As a result,
and coupled with the success of the CARS program in the third
quarter of 2009, we reduced our new vehicle inventory levels by
$264.8 million, or 38.2%, from $692.7 million as of
December 31, 2008 to $427.9 million as of
December 31, 2009. Further, we made significant progress in
aligning our inventory mix with demand, as the new truck
percentage of inventory declined from 46.4% as of
December 31, 2008 to 33.5% as of December 31, 2009.
Finally, our consolidated days supply of new vehicle
inventory decreased to 56 days at December 31, 2009
from 94 days at December 31, 2008.
50
Used
Vehicle Retail Data
(dollars in thousands, except per unit amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
2009
|
|
|
Change
|
|
|
2008
|
|
|
|
2008
|
|
|
Change
|
|
|
2007
|
|
Retail Unit Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
|
53,753
|
|
|
|
(11.3
|
)%
|
|
|
60,634
|
|
|
|
|
59,835
|
|
|
|
(6.6
|
)%
|
|
|
64,039
|
|
Transactions
|
|
|
314
|
|
|
|
|
|
|
|
1,337
|
|
|
|
|
2,136
|
|
|
|
|
|
|
|
1,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
54,067
|
|
|
|
(12.8
|
)%
|
|
|
61,971
|
|
|
|
|
61,971
|
|
|
|
(4.9
|
)%
|
|
|
65,138
|
|
Retail Sales Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
$
|
962,757
|
|
|
|
(9.9
|
)%
|
|
$
|
1,068,824
|
|
|
|
$
|
1,025,487
|
|
|
|
(7.9
|
)%
|
|
$
|
1,113,970
|
|
Transactions
|
|
|
7,857
|
|
|
|
|
|
|
|
21,735
|
|
|
|
|
65,072
|
|
|
|
|
|
|
|
18,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
970,614
|
|
|
|
(11.0
|
)%
|
|
$
|
1,090,559
|
|
|
|
$
|
1,090,559
|
|
|
|
(3.7
|
)%
|
|
$
|
1,132,413
|
|
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
$
|
97,201
|
|
|
|
(13.6
|
)%
|
|
$
|
112,484
|
|
|
|
$
|
109,548
|
|
|
|
(14.9
|
)%
|
|
$
|
128,754
|
|
Transactions
|
|
|
833
|
|
|
|
|
|
|
|
2,359
|
|
|
|
|
5,295
|
|
|
|
|
|
|
|
2,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
98,034
|
|
|
|
(14.6
|
)%
|
|
$
|
114,843
|
|
|
|
$
|
114,843
|
|
|
|
(12.5
|
)%
|
|
$
|
131,234
|
|
Gross Profit per Retail
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unit Sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
$
|
1,808
|
|
|
|
(2.5
|
)%
|
|
$
|
1,855
|
|
|
|
$
|
1,831
|
|
|
|
(9.0
|
)%
|
|
$
|
2,011
|
|
Transactions
|
|
$
|
2,653
|
|
|
|
|
|
|
$
|
1,764
|
|
|
|
$
|
2,479
|
|
|
|
|
|
|
$
|
2,257
|
|
Total
|
|
$
|
1,813
|
|
|
|
(2.2
|
)%
|
|
$
|
1,853
|
|
|
|
$
|
1,853
|
|
|
|
(8.0
|
)%
|
|
$
|
2,015
|
|
Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
|
10.1
|
%
|
|
|
|
|
|
|
10.5
|
%
|
|
|
|
10.7
|
%
|
|
|
|
|
|
|
11.6
|
%
|
Transactions
|
|
|
10.6
|
%
|
|
|
|
|
|
|
10.9
|
%
|
|
|
|
8.1
|
%
|
|
|
|
|
|
|
13.4
|
%
|
Total
|
|
|
10.1
|
%
|
|
|
|
|
|
|
10.5
|
%
|
|
|
|
10.5
|
%
|
|
|
|
|
|
|
11.6
|
%
|
51
Used
Vehicle Wholesale Data
(dollars in thousands, except per unit amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
2009
|
|
|
Change
|
|
|
2008
|
|
|
|
2008
|
|
|
Change
|
|
|
2007
|
|
Wholesale Unit Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
|
27,654
|
|
|
|
(23.3
|
)%
|
|
|
36,064
|
|
|
|
|
35,607
|
|
|
|
(18.1
|
)%
|
|
|
43,460
|
|
Transactions
|
|
|
139
|
|
|
|
|
|
|
|
755
|
|
|
|
|
1,212
|
|
|
|
|
|
|
|
829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
27,793
|
|
|
|
(24.5
|
)%
|
|
|
36,819
|
|
|
|
|
36,819
|
|
|
|
(16.9
|
)%
|
|
|
44,289
|
|
Wholesale Sales Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
$
|
152,011
|
|
|
|
(33.6
|
)%
|
|
$
|
228,761
|
|
|
|
$
|
217,496
|
|
|
|
(28.4
|
)%
|
|
$
|
303,974
|
|
Transactions
|
|
|
1,057
|
|
|
|
|
|
|
|
4,501
|
|
|
|
|
15,766
|
|
|
|
|
|
|
|
6,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
153,068
|
|
|
|
(34.4
|
)%
|
|
$
|
233,262
|
|
|
|
$
|
233,262
|
|
|
|
(24.8
|
)%
|
|
$
|
310,173
|
|
Gross Profit (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
$
|
2,350
|
|
|
|
164.3
|
%
|
|
$
|
(3,657
|
)
|
|
|
$
|
(3,938
|
)
|
|
|
(26.6
|
)%
|
|
$
|
(3,110
|
)
|
Transactions
|
|
|
(46
|
)
|
|
|
|
|
|
|
(685
|
)
|
|
|
|
(404
|
)
|
|
|
|
|
|
|
(485
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,304
|
|
|
|
153.1
|
%
|
|
$
|
(4,342
|
)
|
|
|
$
|
(4,342
|
)
|
|
|
(20.8
|
)%
|
|
$
|
(3,595
|
)
|
Gross Profit (Loss) per
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale Unit Sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
$
|
85
|
|
|
|
184.2
|
%
|
|
$
|
(101
|
)
|
|
|
$
|
(111
|
)
|
|
|
(54.2
|
)%
|
|
$
|
(72
|
)
|
Transactions
|
|
$
|
(331
|
)
|
|
|
|
|
|
$
|
(907
|
)
|
|
|
$
|
(333
|
)
|
|
|
|
|
|
$
|
(585
|
)
|
Total
|
|
$
|
83
|
|
|
|
170.3
|
%
|
|
$
|
(118
|
)
|
|
|
$
|
(118
|
)
|
|
|
(45.7
|
)%
|
|
$
|
(81
|
)
|
Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
|
1.5
|
%
|
|
|
|
|
|
|
(1.6
|
)%
|
|
|
|
(1.8
|
)%
|
|
|
|
|
|
|
(1.0
|
)%
|
Transactions
|
|
|
(4.4
|
)%
|
|
|
|
|
|
|
(15.2
|
)%
|
|
|
|
(2.6
|
)%
|
|
|
|
|
|
|
(7.8
|
)%
|
Total
|
|
|
1.5
|
%
|
|
|
|
|
|
|
(1.9
|
)%
|
|
|
|
(1.9
|
)%
|
|
|
|
|
|
|
(1.2
|
)%
|
52
Total
Used Vehicle Data
(dollars in thousands, except per unit amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
2009
|
|
|
Change
|
|
|
2008
|
|
|
|
2008
|
|
|
Change
|
|
|
2007
|
|
Used Vehicle Unit Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
|
81,407
|
|
|
|
(15.8
|
)%
|
|
|
96,698
|
|
|
|
|
95,442
|
|
|
|
(11.2
|
)%
|
|
|
107,499
|
|
Transactions
|
|
|
453
|
|
|
|
|
|
|
|
2,092
|
|
|
|
|
3,348
|
|
|
|
|
|
|
|
1,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
81,860
|
|
|
|
(17.1
|
)%
|
|
|
98,790
|
|
|
|
|
98,790
|
|
|
|
(9.7
|
)%
|
|
|
109,427
|
|
Sales Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
$
|
1,114,768
|
|
|
|
(14.1
|
)%
|
|
$
|
1,297,585
|
|
|
|
$
|
1,242,983
|
|
|
|
(12.3
|
)%
|
|
$
|
1,417,944
|
|
Transactions
|
|
|
8,914
|
|
|
|
|
|
|
|
26,236
|
|
|
|
|
80,838
|
|
|
|
|
|
|
|
24,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,123,682
|
|
|
|
(15.1
|
)%
|
|
$
|
1,323,821
|
|
|
|
$
|
1,323,821
|
|
|
|
(8.2
|
)%
|
|
$
|
1,442,586
|
|
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
$
|
99,551
|
|
|
|
(8.5
|
)%
|
|
$
|
108,827
|
|
|
|
$
|
105,610
|
|
|
|
(15.9
|
)%
|
|
$
|
125,644
|
|
Transactions
|
|
|
787
|
|
|
|
|
|
|
|
1,674
|
|
|
|
|
4,891
|
|
|
|
|
|
|
|
1,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
100,338
|
|
|
|
(9.2
|
)%
|
|
$
|
110,501
|
|
|
|
$
|
110,501
|
|
|
|
(13.4
|
)%
|
|
$
|
127,639
|
|
Gross Profit per Used
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vehicle Unit Sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
$
|
1,223
|
|
|
|
8.7
|
%
|
|
$
|
1,125
|
|
|
|
$
|
1,107
|
|
|
|
(5.3
|
)%
|
|
$
|
1,169
|
|
Transactions
|
|
$
|
1,737
|
|
|
|
|
|
|
$
|
800
|
|
|
|
$
|
1,461
|
|
|
|
|
|
|
$
|
1,035
|
|
Total
|
|
$
|
1,226
|
|
|
|
9.6
|
%
|
|
$
|
1,119
|
|
|
|
$
|
1,119
|
|
|
|
(4.0
|
)%
|
|
$
|
1,166
|
|
Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
|
8.9
|
%
|
|
|
|
|
|
|
8.4
|
%
|
|
|
|
8.5
|
%
|
|
|
|
|
|
|
8.9
|
%
|
Transactions
|
|
|
8.8
|
%
|
|
|
|
|
|
|
6.4
|
%
|
|
|
|
6.1
|
%
|
|
|
|
|
|
|
8.1
|
%
|
Total
|
|
|
8.9
|
%
|
|
|
|
|
|
|
8.3
|
%
|
|
|
|
8.3
|
%
|
|
|
|
|
|
|
8.8
|
%
|
In addition to factors such as general economic conditions and
consumer confidence, our used vehicle business is affected by
the level of manufacturer incentives on new vehicles and new
vehicle financing, the number and quality of trade-ins and lease
turn-ins, the availability of consumer credit and our ability to
effectively manage the level and quality of our overall used
vehicle inventory. The same economic and consumer confidence
issues that have slowed our new vehicle business have also
negatively impacted used vehicle sales, and as a result our Same
Store used retail unit sales and revenues declined 11.3% and
9.9%, respectively, in 2009 as compared to 2008. Further, since
the new vehicle business is our best source of used vehicle
inventory and that business has suffered a sustained slowdown,
we are more challenged to source used vehicles profitably for
our customers. And, even though the CARS program resulted in an
influx of new vehicle customers during the third quarter of
2009, sourcing of used retail inventory was not improved due to
the nature of the CARS program, which required all trade-ins to
be destroyed. Despite the challenging economic times, we
continue to improve our certified pre-owned (CPO)
volume as a percentage of total retail sales. CPO units
represented 33.3% of total Same Store used retail units for 2009
as compared to 32.8% in 2008. As a result, our Same Store retail
used vehicle gross profit PRU decreased 2.5% from $1,855 in 2008
to $1,808 in 2009, while our Same Store gross margin decreased
40 basis points over the same period.
Our Same Store retail unit sales decreased 6.6% from 2007 to
2008, to 59,835 units and Same Store retail revenues fell
7.9%. Pressure on new vehicle margins translated into pressure
on used vehicle margins, as well. In addition, the shift in
customer preferences away from trucks in 2008 placed added
pressure on our retail used vehicle profits. As a result, our
Same Store retail used vehicle PRU declined 9.0% from $2,011 in
2007 to $1,831 in 2008, while our Same Store gross margin shrank
90 basis points over the same period.
Our continued focus on used vehicle sales and inventory
management processes coupled with the lack of availability of
used vehicles industry wide has shifted more of our used vehicle
sales mix from the wholesale business to the traditionally more
profitable retail sales. In addition, the qualified trade-ins
under the CARS
53
program were required to be destroyed, further depressing our
used wholesale business. Correspondingly, our Same Store
wholesale unit sales decreased 23.3% from 2008 to 2009 to
27,654 units, while Same Store wholesale revenues decreased
33.6% to $152.0 million for the same period. For the year
ended December 31, 2008, compared to 2007, Same Store
wholesale unit sales decreased 18.1% to 35,607 units and
Same Store wholesale revenues fell 28.4% to $217.5 million,
primarily due to our inventory management processes.
The overall increase in used vehicle profits for 2009 was
reflective of an improvement in used vehicle wholesale values,
resulting from a general supply shortage and increased dealer
demand, partially offset by lower retail results. Because of the
limited availability of quality used vehicles, the price of
vehicles sold at auction increased, leading to higher profits
and margins in our wholesale vehicles. Assuming that the
stabilization of used vehicle values continues and used vehicle
supply catches up with demand, we would expect the wholesale
gross profit per unit to return to more normal levels, closer to
break-even.
We continuously work to optimize our used vehicle inventory
levels to provide adequate supply and selection. Our days
supply of used vehicle inventory increased to 31 days at
December 31, 2009 from 25 days from December 31,
2008. This was a decrease from 35 days at December 31,
2007.
Parts
and Service Data
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
2009
|
|
|
Change
|
|
|
2008
|
|
|
|
2008
|
|
|
Change
|
|
|
2007
|
|
Parts and Service Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
$
|
716,632
|
|
|
|
(2.5
|
)%
|
|
$
|
735,055
|
|
|
|
$
|
700,896
|
|
|
|
2.1
|
%
|
|
$
|
686,700
|
|
Transactions
|
|
|
5,933
|
|
|
|
|
|
|
|
15,768
|
|
|
|
|
49,927
|
|
|
|
|
|
|
|
13,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
722,565
|
|
|
|
(3.8
|
)%
|
|
$
|
750,823
|
|
|
|
$
|
750,823
|
|
|
|
7.3
|
%
|
|
$
|
699,906
|
|
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
$
|
381,623
|
|
|
|
(3.5
|
)%
|
|
$
|
395,431
|
|
|
|
$
|
376,993
|
|
|
|
0.7
|
%
|
|
$
|
374,380
|
|
Transactions
|
|
|
3,213
|
|
|
|
|
|
|
|
8,418
|
|
|
|
|
26,856
|
|
|
|
|
|
|
|
7,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
384,836
|
|
|
|
(4.7
|
)%
|
|
$
|
403,849
|
|
|
|
$
|
403,849
|
|
|
|
5.9
|
%
|
|
$
|
381,431
|
|
Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
|
53.3
|
%
|
|
|
|
|
|
|
53.8
|
%
|
|
|
|
53.8
|
%
|
|
|
|
|
|
|
54.5
|
%
|
Transactions
|
|
|
54.2
|
%
|
|
|
|
|
|
|
53.4
|
%
|
|
|
|
53.8
|
%
|
|
|
|
|
|
|
53.4
|
%
|
Total
|
|
|
53.3
|
%
|
|
|
|
|
|
|
53.8
|
%
|
|
|
|
53.8
|
%
|
|
|
|
|
|
|
54.5
|
%
|
Our Same Store parts and service revenues decreased 2.5% during
2009, primarily driven by a 6.2% decrease in wholesale parts
sales and a 1.3% decline in customer-pay parts and service
sales, as well as a 2.1% decline in warranty parts and service
sales and a 1.6% decline in collision revenues.
The decline in our Same Store warranty parts and service
revenues was primarily the result of certain manufacturer
quality issues in 2008 that were rectified in 2009. Our Same
Store wholesale parts business declined in 2009 primarily due to
the negative impact of the economy on many of the second-tier
collision centers and mechanical repair shops with which we do
business and our decision to tighten our credit standards in
this area. The decline in our customer-pay parts and service
business during 2009 was primarily driven by lighter traffic in
our domestic brand dealerships. Same Store collision revenues
were negatively impacted in 2009 by the closure of a body shop
facility in our Eastern region.
Same Store parts and service gross profit for 2009 decreased
3.5% from 2008, while our 2009 parts and service margins
decreased 50 basis points to 53.3%. These decreases were
primarily due to the negative impact of declining new and used
vehicle sales on our internal parts and service volume.
During 2008, our Same Store parts and service revenues increased
2.1% as compared to 2007. We realized Same Store revenue
improvements in each of our parts and service business segments.
Our customer-pay parts and service business increased 2.0%,
while our warranty-related parts and service sales increased
1.5%. Revenues from
54
our customer-pay parts and service business improved as a result
of the improvements in both our import and luxury brands of 4.3%
and 4.4%, respectively, partially offset by a 4.6% decline in
customer-pay parts and service revenues from our domestic
brands. Our Same Store warranty-related parts and service
revenues improved 5.5% and 0.4% within our import and luxury
brands, respectively, from 2007 to 2008. These improvements were
partially offset by a decrease of 1.6% in our domestic
warranty-related revenues. Further, our Same Store collision
revenues increased 4.8% compared to 2007 and our wholesale parts
sales increased 1.2%.
Same Store parts and service gross profits increased 0.7% from
2007 to 2008, reflecting the improvements that we made to our
parts and service business processes in 2008. Same Store parts
and service gross margin fell 70 basis points to 53.8% from
2007 to 2008, primarily as a result of the increase in our
collision business, which generates relatively lower margins
than our customer-pay and warranty business, and the negative
impact of declining new and used vehicle sales on our internal
parts and service volume.
Finance
and Insurance Data
(dollars in thousands, except per unit amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
2009
|
|
|
Change
|
|
|
2008
|
|
|
|
2008
|
|
|
Change
|
|
|
2007
|
|
Retail New and Used Unit Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
|
136,563
|
|
|
|
(19.4
|
)%
|
|
|
169,518
|
|
|
|
|
167,016
|
|
|
|
(12.9
|
)%
|
|
|
191,764
|
|
Transactions
|
|
|
686
|
|
|
|
|
|
|
|
3,158
|
|
|
|
|
5,660
|
|
|
|
|
|
|
|
2,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
137,249
|
|
|
|
(20.5
|
)%
|
|
|
172,676
|
|
|
|
|
172,676
|
|
|
|
(11.2
|
)%
|
|
|
194,353
|
|
Retail Finance Fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
$
|
42,854
|
|
|
|
(31.8
|
)%
|
|
$
|
62,830
|
|
|
|
$
|
61,011
|
|
|
|
(14.7
|
)%
|
|
$
|
71,523
|
|
Transactions
|
|
|
194
|
|
|
|
|
|
|
|
1,028
|
|
|
|
|
2,847
|
|
|
|
|
|
|
|
807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
43,048
|
|
|
|
(32.6
|
)%
|
|
$
|
63,858
|
|
|
|
$
|
63,858
|
|
|
|
(11.7
|
)%
|
|
$
|
72,330
|
|
Vehicle Service Contract Fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
$
|
57,458
|
|
|
|
(23.1
|
)%
|
|
$
|
74,740
|
|
|
|
$
|
74,537
|
|
|
|
(12.4
|
)%
|
|
$
|
85,053
|
|
Transactions
|
|
|
112
|
|
|
|
|
|
|
|
657
|
|
|
|
|
860
|
|
|
|
|
|
|
|
445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
57,570
|
|
|
|
(23.6
|
)%
|
|
$
|
75,397
|
|
|
|
$
|
75,397
|
|
|
|
(11.8
|
)%
|
|
$
|
85,498
|
|
Insurance and Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
$
|
35,598
|
|
|
|
(23.9
|
)%
|
|
$
|
46,792
|
|
|
|
$
|
46,076
|
|
|
|
3.0
|
%
|
|
$
|
44,739
|
|
Transactions
|
|
|
213
|
|
|
|
|
|
|
|
508
|
|
|
|
|
1,224
|
|
|
|
|
|
|
|
508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
35,811
|
|
|
|
(24.3
|
)%
|
|
$
|
47,300
|
|
|
|
$
|
47,300
|
|
|
|
4.5
|
%
|
|
$
|
45,247
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
$
|
135,910
|
|
|
|
(26.3
|
)%
|
|
$
|
184,362
|
|
|
|
$
|
181,624
|
|
|
|
(9.8
|
)%
|
|
$
|
201,315
|
|
Transactions
|
|
|
519
|
|
|
|
|
|
|
|
2,193
|
|
|
|
|
4,931
|
|
|
|
|
|
|
|
1,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
136,429
|
|
|
|
(26.9
|
)%
|
|
$
|
186,555
|
|
|
|
$
|
186,555
|
|
|
|
(8.1
|
)%
|
|
$
|
203,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance and Insurance Revenues per Unit Sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
$
|
995
|
|
|
|
(8.5
|
)%
|
|
$
|
1,088
|
|
|
|
$
|
1,087
|
|
|
|
3.5
|
%
|
|
$
|
1,050
|
|
Transactions
|
|
$
|
757
|
|
|
|
|
|
|
$
|
694
|
|
|
|
$
|
871
|
|
|
|
|
|
|
$
|
680
|
|
Total
|
|
$
|
994
|
|
|
|
(8.0
|
)%
|
|
$
|
1,080
|
|
|
|
$
|
1,080
|
|
|
|
3.3
|
%
|
|
$
|
1,045
|
|
Our Same Store finance and insurance revenues decreased by 26.3%
and our Same Store revenues per unit sold decreased 8.5%, or
$93, to $995 per retail unit sold for 2009, as compared to 2008.
In particular, our Same Store retail finance fees declined 31.8%
to $42.9 million compared to 2008, primarily due to a 19.4%
decline in Same Store retail unit sales and an 11.7% decline in
finance income per contract, as well as a decline in our finance
penetration rates. Our Same Store vehicle service contract fees
declined 23.1% and our revenues from insurance and other
F&I products fell 23.9% for 2009, when compared 2008. Both
of these declines were primarily the result of the lower retail
unit sales for the year.
55
Our Same Store total finance and insurance revenues decreased
9.8% in 2008 as compared to 2007, which was more than explained
by the impact of the decline in retail units. Partially
offsetting this decrease, our product penetration rates improved
in 2008 from 2007 levels, and our Same Store revenues per unit
sold increased 3.5% in 2008 to $1,087 per unit from 2007 levels.
Same Store retail finance fees declined 14.7% in 2008 as
compared to 2007, which was also primarily due to the 12.9%
decline in Same Store retail unit sales. As a partial offset,
penetration rates for our retail finance products improved in
2008 compared to 2007. Our continued efforts to reduce the cost
of our vehicle service contract offerings resulted in an
increase in income per vehicle service contract sold. These
improvements, coupled with increased product penetration rates
of our vehicle service contract offerings, partially offset the
impact of the decline in retail units. Same Store revenues from
insurance and other F&I products rose 3.0% in 2008 from
2007 primarily as a result of the improvements that we have made
to the cost structure of many of these products, as well as
improved product penetration rates.
Selling,
General and Administrative Data
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
2009
|
|
|
Change
|
|
|
2008
|
|
|
|
2008
|
|
|
Change
|
|
|
2007
|
|
Personnel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
$
|
360,257
|
|
|
|
(15.5
|
)%
|
|
$
|
426,167
|
|
|
|
$
|
411,701
|
|
|
|
(6.8
|
)%
|
|
$
|
441,775
|
|
Transactions
|
|
|
2,894
|
|
|
|
|
|
|
|
8,619
|
|
|
|
|
23,085
|
|
|
|
|
|
|
|
8,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
363,151
|
|
|
|
(16.5
|
)%
|
|
$
|
434,786
|
|
|
|
$
|
434,786
|
|
|
|
(3.3
|
)%
|
|
$
|
449,809
|
|
Advertising
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
$
|
36,093
|
|
|
|
(29.0
|
)%
|
|
$
|
50,827
|
|
|
|
$
|
49,921
|
|
|
|
(12.1
|
)%
|
|
$
|
56,810
|
|
Transactions
|
|
|
474
|
|
|
|
|
|
|
|
1,291
|
|
|
|
|
2,197
|
|
|
|
|
|
|
|
1,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
36,567
|
|
|
|
(29.8
|
)%
|
|
$
|
52,118
|
|
|
|
$
|
52,118
|
|
|
|
(10.1
|
)%
|
|
$
|
57,942
|
|
Rent and Facility Costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
$
|
89,162
|
|
|
|
1.5
|
%
|
|
$
|
87,879
|
|
|
|
$
|
88,270
|
|
|
|
(0.9
|
)%
|
|
$
|
89,077
|
|
Transactions
|
|
|
1,035
|
|
|
|
|
|
|
|
3,423
|
|
|
|
|
3,032
|
|
|
|
|
|
|
|
3,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
90,197
|
|
|
|
(1.2
|
)%
|
|
$
|
91,302
|
|
|
|
$
|
91,302
|
|
|
|
(1.4
|
)%
|
|
$
|
92,623
|
|
Other SG&A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
$
|
129,518
|
|
|
|
(18.2
|
)%
|
|
$
|
158,293
|
|
|
|
$
|
150,299
|
|
|
|
(0.4
|
)%
|
|
$
|
150,902
|
|
Transactions
|
|
|
1,615
|
|
|
|
|
|
|
|
2,931
|
|
|
|
|
10,925
|
|
|
|
|
|
|
|
7,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
131,133
|
|
|
|
(18.7
|
)%
|
|
$
|
161,224
|
|
|
|
$
|
161,224
|
|
|
|
1.7
|
%
|
|
$
|
158,503
|
|
Total SG&A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
$
|
615,030
|
|
|
|
(15.0
|
)%
|
|
$
|
723,166
|
|
|
|
$
|
700,191
|
|
|
|
(5.2
|
)%
|
|
$
|
738,564
|
|
Transactions
|
|
|
6,018
|
|
|
|
|
|
|
|
16,264
|
|
|
|
|
39,239
|
|
|
|
|
|
|
|
20,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
621,048
|
|
|
|
(16.0
|
)%
|
|
$
|
739,430
|
|
|
|
$
|
739,430
|
|
|
|
(2.6
|
)%
|
|
$
|
758,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
$
|
770,665
|
|
|
|
(14.4
|
)%
|
|
$
|
900,244
|
|
|
|
$
|
865,948
|
|
|
|
(9.8
|
)%
|
|
$
|
960,072
|
|
Transactions
|
|
|
5,172
|
|
|
|
|
|
|
|
15,417
|
|
|
|
|
49,713
|
|
|
|
|
|
|
|
14,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
775,837
|
|
|
|
(15.3
|
)%
|
|
$
|
915,661
|
|
|
|
$
|
915,661
|
|
|
|
(6.0
|
)%
|
|
$
|
974,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SG&A as % of Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Stores
|
|
|
79.8
|
%
|
|
|
|
|
|
|
80.3
|
%
|
|
|
|
80.9
|
%
|
|
|
|
|
|
|
76.9
|
%
|
Transactions
|
|
|
116.4
|
%
|
|
|
|
|
|
|
105.5
|
%
|
|
|
|
78.9
|
%
|
|
|
|
|
|
|
141.1
|
%
|
Total
|
|
|
80.0
|
%
|
|
|
|
|
|
|
80.8
|
%
|
|
|
|
80.8
|
%
|
|
|
|
|
|
|
77.9
|
%
|
Employees
|
|
|
7,000
|
|
|
|
|
|
|
|
7,700
|
|
|
|
|
7,700
|
|
|
|
|
|
|
|
8,900
|
|
Our selling, general and administrative expenses
(SG&A) consist primarily of salaries,
commissions and incentive-based compensation, as well as rent,
advertising, insurance, benefits, utilities and other fixed
expenses. We believe that the majority of our personnel and all
of our advertising expenses are variable and can be adjusted in
response to changing business conditions given time.
56
In response to the increasingly challenging automotive retailing
environment, we implemented significant cost reduction actions
during the fourth quarter of 2008. These actions, which were
completed in the first quarter of 2009, continued to provide
significant benefit throughout 2009. As a result, we reduced the
absolute dollars of Same Store SG&A for 2009 by
$108.1 million from 2008. Specifically, we made difficult,
but necessary, changes to the personnel side of our organization
in reaction to the sustained decline in the new and used vehicle
sales environment, reducing headcount by 1,900 employees
since the beginning of 2008. We also made adjustments to salary
levels and pay plans. As a result, our Same Store personnel
expenses declined by $65.9 million for as compared to 2008.
In addition, we continue to critically evaluate our advertising
spending to ensure that we utilize the most cost efficient
methods available. As a result, our net advertising expenses
decreased by $14.7 million as compared to 2008. Our Same
Store other SG&A decreased $28.8 million in 2009 as
compared 2008, primarily due to reductions in vehicle delivery
expenses and outside services. We are aggressively pursuing
opportunities that take advantage of our size and negotiating
leverage with our vendors and service providers.
Due to the significant improvements that we made in our spending
levels, our Same Store SG&A decreased as a percentage of
gross profit from 80.3% for the year ended December 31,
2008 to 79.8% in the comparable period of 2009, despite a 14.4%
decline in Same Store gross profit.
In response to the economic slowdown in 2008, and particularly
the financial crisis that resulted in the fourth quarter of the
year, we initiated various cost saving initiatives, including
changes in variable compensation pay plans and personnel
reductions. As a result, our Same Store personnel expenses
declined by 6.8% in 2008 compared to 2007. Advertising expense
is managed locally and will vary period to period based upon
current trends, market factors and other circumstances in each
individual market. In reaction to operating trends, adjustments
were made to our advertising spending resulting in a decrease in
our gross advertising expenses of 12.1% for 2008, partially
offset by a 12.2% decrease in the manufacturers
advertising assistance, which we record as a reduction of
advertising expense when earned. Our Same Store rent and
facility costs remained relatively flat in 2008 as compared to
2007, as increases resulting from the relocation of facilities,
lease renewals and the addition of properties for operational
expansion were offset by the impact of our purchase of real
estate associated with several dealership locations during the
period. Other SG&A consists primarily of insurance,
freight, supplies, professional fees, loaner car expenses,
vehicle delivery expenses, software licenses and other data
processing costs, and miscellaneous other operating costs not
related to personnel, advertising, or facilities. Our Same Store
Other SG&A decreased 0.4% to $150.3 million in 2008
compared to 2007, as several tactical efforts were initiated in
2008 that were designed to reduce our outside services costs
without sacrificing business performance, customer satisfaction
and profitability.
Dealer
Management System Conversion
On March 30, 2006, we announced that ADP would become the
sole dealership management system (or DMS) provider
for our existing dealerships. We successfully completed the
conversion of all of our dealerships to operate on the ADP
platform in 2007 and recognized an additional $0.7 million
in lease termination costs related to these conversions. This
conversion is another key enabler in supporting efforts to
standardize backroom processes and share best practices across
all of our dealerships.
Depreciation
and Amortization Data
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
% Change
|
|
|
2008
|
|
|
|
2008
|
|
|
% Change
|
|
|
2007
|
|
Same Stores
|
|
$
|
25,652
|
|
|
|
1.8
|
%
|
|
$
|
25,208
|
|
|
|
$
|
23,936
|
|
|
|
21.6
|
%
|
|
$
|
19,684
|
|
Transactions
|
|
|
176
|
|
|
|
|
|
|
|
444
|
|
|
|
|
1,716
|
|
|
|
|
|
|
|
754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
25,828
|
|
|
|
0.7
|
%
|
|
$
|
25,652
|
|
|
|
$
|
25,652
|
|
|
|
25.5
|
%
|
|
$
|
20,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our Same Store depreciation and amortization expense increased
1.8% for the year ended December 31, 2009, primarily as a
result of the completion of several facility improvements in the
latter part of 2008. These improvements, which include the
expansion of several of our service and collision centers, are
designed to enhance the profitability of our dealerships and the
overall customer experience. We continue to critically evaluate
57
all planned future capital spending, working closely with our
manufacturer partners to maximize the return on our investments.
Our Same Store depreciation and amortization expense increased
21.6% in 2008 as compared to 2007, primarily due to a similar
increase in our gross property and equipment holdings, as we
strategically move from leasing to owning more of our
dealership-related real estate.
Impairment
of Assets
We did not identify an impairment of our recorded intangible
franchise rights in 2009, nor our recorded goodwill in 2009,
2008 or 2007. We perform an annual review of the fair value of
our goodwill and indefinite-lived intangible assets. We also
perform interim reviews for impairment when evidence exists that
the carrying value of such assets may not be recoverable. During
the third quarter of 2008, certain triggering events such as the
recent economic conditions and the resulting impact on the
automotive industry were identified. Accordingly, we performed
an interim impairments assessment of the recorded
indefinite-lived intangible asset values. As a result of this
assessment, we determined that the fair values of certain of our
indefinite-lived intangible franchise rights related to
seventeen dealerships, primarily domestic franchises, were less
than their respective carrying values and recorded an impairment
charge of $37.1 million. Additionally, during the fourth
quarter of 2008, we performed our annual assessment of goodwill
and indefinite-lived intangible assets and determined that the
fair values of indefinite-lived intangible franchise rights
related to seven of our dealerships did not exceed their
carrying values and that impairment charges were required. The
majority of the $114.8 million charge related to franchises
within our Western Region, which continued to suffer the
greatest effect of the recent economic downturn. In aggregate,
we recorded $151.9 million of pretax impairment charges
during 2008 relative to our intangible franchise rights. As a
result of our 2007 annual assessment, we determined that the
carrying values of indefinite-lived intangible franchise rights
related to six of our dealerships were impaired. Accordingly, we
recorded a $9.2 million of pretax impairment charge during
the fourth quarter of 2007.
For long-lived assets, we review for impairment whenever there
is evidence that the carrying amount of such assets may not be
recoverable. In 2009, we identified triggering events relative
to real estate held for sale, due primarily to adverse real
estate market conditions and, as a fall out of the Chrysler and
General Motors bankruptcies and plans to close SAAB, Saturn,
Pontiac and other brands, the recent availability of a
significant number of similar properties. We reviewed the
carrying value of such assets in comparison with the respective
estimated fair market values as determined by third party
appraisal and brokers opinion of value. Accordingly, we
recorded a $13.8 million pretax asset impairment. Also,
during 2009 we determined that the carrying value of certain
other long-term assets was impaired and, as a result, pretax
impairment charges of $7.1 million were recognized. In the
third quarter of 2008, we identified triggering events relative
to real estate, primarily associated with domestic franchise
terminations and other equipment holdings. We reviewed the
carrying value of such assets in comparison with the respective
estimated fair market values as determined by third party
appraisal and brokers opinion of value. Accordingly, we
recorded an $11.1 million pretax asset impairment charge in
the third quarter of 2008. In 2007, in connection with the sale
of the real estate associated with one of our dealerships, we
recognized a $5.4 million pretax impairment charge. Also,
we determined that the fair value of certain long-lived assets
was less than their respective carrying values and, as a result,
pretax impairment charges of $2.2 million were recognized.
Floorplan
Interest Expense
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
% Change
|
|
|
2008
|
|
|
|
2008
|
|
|
% Change
|
|
|
2007
|
|
Same Stores
|
|
$
|
32,248
|
|
|
|
(29.2
|
)%
|
|
$
|
45,547
|
|
|
|
$
|
44,095
|
|
|
|
(3.3
|
)%
|
|
$
|
45,577
|
|
Transactions
|
|
|
97
|
|
|
|
|
|
|
|
830
|
|
|
|
|
2,282
|
|
|
|
|
|
|
|
1,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
32,345
|
|
|
|
(30.3
|
)%
|
|
$
|
46,377
|
|
|
|
$
|
46,377
|
|
|
|
(1.0
|
)%
|
|
$
|
46,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Memo:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturers assistance
|
|
$
|
20,039
|
|
|
|
(29.2
|
)%
|
|
$
|
28,311
|
|
|
|
$
|
28,311
|
|
|
|
(23.8
|
)%
|
|
$
|
37,171
|
|
58
Our floorplan interest expense fluctuates with changes in
borrowings outstanding and interest rates, which are based on
1-month
LIBOR (or Prime in some cases) plus a spread. We typically
utilize excess cash on hand to pay down our floorplan
borrowings, and the resulting interest earned is recognized as
an offset to our gross floorplan interest expense. Mitigating
the impact of interest rate fluctuations, we employ an interest
rate hedging strategy, whereby we swap variable interest rate
exposure for a fixed interest rate over the term of the variable
interest rate debt. As of December 31, 2009, we had
interest rate swaps in place for an aggregate notional amount of
$550.0 million that fixed our underlying LIBOR rate at a
weighted average rate of 4.7%. The majority of the monthly
settlements of these interest rate swap liabilities are
recognized as floorplan interest expense.
Our Same Store floorplan interest expense decreased 29.2% for
the year ended December 31, 2009, compared to 2008. The
decrease for 2009 reflects a $315.5 million decrease in our
weighted average floorplan borrowings outstanding, partially
offset by a 66 basis point increase in our weighted average
floorplan interest rates between the respective periods,
including the impact of our interest rate swaps. The Same Store
floorplan interest expense declined 3.3% in 2008 when compared
to 2007, due to a decrease in our weighted average floorplan
interest rates, including the impact of our interest rate swaps,
which was partially offset by a $124.0 million increase in
our weighted average floorplan borrowings outstanding for 2008.
Other
Interest Expense, net
Other net interest expense, which consists of interest charges
on our Mortgage Facility, our Acquisition Line and our other
long-term debt, partially offset by interest income, decreased
$7.7 million, or 21.0%, to $29.1 million for the year
ended December 31, 2009. This decrease is primarily
attributable to a $86.2 million decrease in our weighted
average borrowings from the comparable period in 2008, as a
result of $51.7 million in aggregate face value repurchases
of our 2.25% Notes that we have executed since the end of
the fourth quarter of 2008, as well as the payoff of all
borrowings outstanding on our Acquisition Line. Further, the
decline in other interest expense for 2009 was the result of a
238 basis point decrease in our weighted average interest
rate on our Mortgage Facility. Included in other interest
expense for the years ended December 31, 2009 and 2008 is
non-cash, discount amortization expense of $5.4 million and
$7.9 million, respectively, representing the impact of the
accounting for convertible debt as required by ASC 470. Based on
the level of 2.25% Notes outstanding as of
December 31, 2009, we anticipate that the ongoing annual
impact of this accounting standard will be to increase non-cash
interest expense by $7.5 million.
From 2007 to 2008, other net interest expense increased
$6.7 million primarily attributable to a
$159.7 million increase in our weighted average borrowings
from the comparable period in 2007, as we continued the
execution of our strategy to own more of the dealership-related
real estate. Weighted average borrowings outstanding under our
Mortgage Facility increased $103.7 million from
December 31, 2007. Other real estate related borrowings
increased in 2008 by $47.0 million from the balance at
December 31, 2007. In addition, our weighted average
borrowings increased for 2008 as a result of our borrowings
under the Acquisition Line of our Revolving Credit Facility,
primarily initiated to fund the acquisition of several
dealership operations in the fourth quarter of 2007. Partially
offsetting the increased interest expense from these borrowings,
we redeemed $28.3 million of our 8.25% Notes and
$63.0 million in aggregate face value of our
2.25% Notes in 2008. Other net interest expense for the
year ended December 31, 2007 included $7.3 million of
non-cash discount amortization, representing the impact of the
accounting for convertible debt as required by ASC 470.
Gain/Loss
on Redemption of Debt
During the year ended December 31, 2009, we repurchased
$41.7 million par value of our outstanding 2.25% Notes
for $20.9 million in cash, excluding $0.2 million of
accrued interest, and realized a net gain of $8.7 million.
In conjunction with the repurchases, $12.6 million of
discounts, underwriters fees and debt issuance costs were
written off. The unamortized cost of the related purchased
options acquired at the time the repurchased convertible notes
were issued, of $13.4 million, which was deductible as
original issue discount for tax purposes, was taken into account
in determining the tax gain. Accordingly, we recorded a
proportionate reduction in our deferred tax assets. In
conjunction with these repurchases, $0.4 million of the
consideration was attributed to the repurchase of the equity
component of the 2.25% Notes and, as such, was recognized
as an adjustment to additional
paid-in-capital,
net of income taxes.
59
During the second quarter of 2009, we refinanced certain real
estate related debt through borrowings from our Mortgage
Facility. In conjunction with the refinancing, we paid down the
total amount borrowed by $4.1 million and recognized an
aggregate prepayment penalty of $0.5 million.
During the year ended December 31, 2008, we repurchased
$28.3 million par value of our outstanding 8.25% Notes
and realized a net gain of $0.9 million. Also, during the
fourth quarter of 2008, we repurchased $63.0 million par
value of our outstanding 2.25% Notes and realized a net
gain of $17.2 million.
Provision
for Income Taxes
For the year ended December 31, 2009, we recorded a tax
provision of $20.0 million for income from continuing
operations. The 2009 effective tax rate of 36.5% differed from
the 2008 effective tax rate of 40.4% primarily due to the
changes in certain state tax laws and rates, the mix of our
pretax income from continuing operations from the taxable state
jurisdictions in which we operate, as well as the benefit
recognized in conjunction with a tax election made during 2009.
For the year ended December 31, 2008, we recorded a benefit
of $31.2 million in respect of our loss from continuing
operations, primarily due to the significant asset impairment
charges recorded in 2008. This included a tax provision of
$6.5 million relating to the $17.2 million gain
recorded for the repurchase of a portion of our 2.25% Notes
during the fourth quarter. The 2008 effective tax rate of 40.4%
differed from the 2007 effective tax rate of 35.7% primarily due
to the mix of our pretax net income (loss) among various taxable
state jurisdictions and the 2007 impact of the benefit received
from the tax deductible goodwill related to dealership
operations.
We believe that it is more likely than not that our deferred tax
assets, net of valuation allowances provided, will be realized,
based primarily on the assumption of future taxable income. We
expect our effective tax rate in 2010 will be approximately
39.0%.
As of December 31, 2009, we had net deferred tax
liabilities totaling $19.3 million relating to the
differences between the financial reporting and tax basis of
assets and liabilities, which are expected to reverse in the
future. Included in this amount are $45.9 million of
deferred tax liabilities relating to intangibles for goodwill
and franchise rights that are deductible for tax purposes that
will not reverse unless the related intangibles are disposed.
Liquidity
and Capital Resources
Our liquidity and capital resources are primarily derived from
cash on hand, cash temporarily invested as a pay down of
Floorplan Line levels, cash from operations, borrowings under
our credit facilities, which provide vehicle floorplan
financing, working capital and dealership and real estate
acquisition financing, and proceeds from debt and equity
offerings. Based on current facts and circumstances, we believe
we have adequate cash flow, coupled with available borrowing
capacity, to fund our current operations, capital expenditures
and acquisition program for 2010. If economic and business
conditions deteriorate further or if our capital expenditures or
acquisition plans for 2010 change, we may need to access the
private or public capital markets to obtain additional funding.
Sources
of Liquidity and Capital Resources
Cash on Hand. As of December 31, 2009,
our total cash on hand was $13.2 million. The balance of
cash on hand excludes $71.6 million of immediately
available funds used to pay down our Floorplan Line. We use the
pay down of our Floorplan Line as our primary channel for the
short-term investment of excess cash.
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Cash Flows. The following table sets forth
selected historical information from our statement of cash flows
from continuing operations:
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For the Year Ended December 31,
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2009
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2008
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2007
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(In thousands)
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Net cash provided by operating activities
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$
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354,674
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$
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183,746
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$
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10,997
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Net cash used in investing activities
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(3,997
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)
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(164,712
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)
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(392,966
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)
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Net cash provided by (used in) financing activities
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(361,430
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)
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(12,887
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)
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375,790
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Effect of exchange rate changes on cash
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830
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(5,826
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)
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(33
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)
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Net increase (decrease) in cash and cash equivalents
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$
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(9,923
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)
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$
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321
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$
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(6,212
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)
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With respect to all new vehicle floorplan borrowings, the
manufacturers of the vehicles draft our credit facilities
directly with no cash flow to or from us. With respect to
borrowings for used vehicle financing, we choose which vehicles
to finance and the funds flow directly to us from the lender.
All borrowings from, and repayments to, lenders affiliated with
our vehicle manufacturers (excluding the cash flows from or to
manufacturer-affiliated lenders participating in our syndicated
lending group) are presented within Cash Flows from Operating
Activities on the Consolidated Statements of Cash Flows and all
borrowings from, and repayments to, the syndicated lending group
under our Revolving Credit Facility (including the cash flows
from or to manufacturer-affiliated lenders participating in the
facility) are presented within Cash Flows from Financing
Activities.
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Operating activities. For the year ended
December 31, 2009, we generated $354.7 million in net
cash flow from operating activities, primarily driven by net
income from continuing operations of $34.8 million,
$235.9 million in net changes in operating assets and
liabilities, and significant non-cash adjustments related to
deferred income taxes of $29.6 million, depreciation and
amortization of $25.8 million, asset impairments of
$20.9 million and stock-based compensation of
$8.9 million. Included in the net changes in operating
assets and liabilities is $243.0 million of cash flow
provided by reductions in inventory levels and
$27.4 million of cash flow from collections of vehicle
receivables,
contracts-in-transit,
accounts and notes receivables, partially offset by
$14.1 million of net repayments to manufacturer-affiliated
floorplan lenders. In addition, cash flow from operating
activities includes an adjustment of $8.2 million for gains
from redemptions of $41.7 million of par value of our
2.25% Notes, which is considered a cash flow from financing
activities.
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For the year ended December 31, 2008, we realized
$183.7 million in net cash from operating activities,
primarily driven by net income, after adding back significant
non-cash adjustments related to depreciation and amortization of
$25.7 million and asset impairments of $163.0 million.
Also contributing to the positive cash flow from operating
activities was a net change in our operating assets and
liabilities of $70.3 million. Cash flow from operating
activities was adjusted for net gains of $18.1 million
related to the repurchase of our 8.25% Notes and
2.25% Notes, which is reflected as a financing activity. In
addition, cash flow from operating activities was adjusted for
an increase in our deferred income tax assets of
$28.4 million, related primarily to the impairment of our
intangible franchise assets.
For the year ended December 31, 2007, we realized
$11.0 million in net cash from operating activities,
primarily driven by net income, after adding back significant
non-cash adjustments related to depreciation and amortization of
$20.4 million, deferred income taxes of $13.6 million
and asset impairments of $16.8 million. Substantially
offsetting the positive cash flow from these operating
activities, the net change in our operating assets and
liabilities resulted in a cash outflow of $121.8 million,
which was principally the result of our decision not to renew
the floorplan financing arrangement with DaimlerChrysler in
February 2007 and to use $112.1 million of borrowings from
our Revolving Credit Facility to close the DaimlerChrysler
Facility. The result of this decision was a decrease in
operating cash flow and increase in financing cash flow for the
year ended December 31, 2007.
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Investing activities. During 2009, we used
$4.0 million in investing activities, primarily as a result
of $16.3 million paid for acquisitions, net of cash
received, and $21.6 million for the purchase of property
and equipment. These cash outflows were partially offset by
$30.3 million in proceeds from the sales of franchises,
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property and equipment. The $16.3 million used for
acquisitions consisted primarily of $5.9 million for
inventory acquired as part of our dealership acquisition and
$4.2 million to purchase the associated dealership real
estate. The $30.3 million in proceeds from the sales of
franchises, property and equipment included $12.3 million
for inventory sold as part of our dealership dispositions and
$14.7 million in consideration received for the associated
dealership real estate.
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During 2008, we used $164.7 million in investing
activities, primarily as a result of $48.6 million paid for
acquisitions, net of cash received, and $142.8 million for
the purchase of property and equipment. The $48.6 million
used for acquisitions consisted of $16.7 million to
purchase the associated dealership real estate, of which
$15.0 million was ultimately financed through a loan
agreement with BMW, and $9.8 million to pay off the
sellers floorplan borrowings. The $142.8 million of
the property and equipment purchases consisted of
$90.0 million for the purchase of land and existing
buildings, of which $32.3 million was financed through our
Mortgage Facility, and $52.8 million for the construction
of new or expanded facilities, imaging projects required by the
manufacturer and replacement of dealership equipment.
During 2007, we used $393.0 million in investing
activities, primarily as a result of $281.8 million paid
for acquisitions, net of cash received, and $146.5 million
for the purchase of property and equipment. The
$281.8 million used for acquisitions consisted of
$75.0 million to purchase the associated dealership real
estate, of which $49.7 million was ultimately financed
through our Mortgage Facility, and $72.9 million to pay off
the sellers floorplan borrowings. The $146.5 million
of the property and equipment purchases consisted of
$76.2 million for the purchase of land and existing
buildings, of which $66.6 million was financed through our
Mortgage Facility, and $70.3 million for the construction
of new or expanded facilities, imaging projects required by the
manufacturer and replacement of dealership equipment.
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Financing activities. During 2009, we used
$361.4 million in financing activities, primarily due to
$273.4 million in net repayments under the Floorplan Line
of our Revolving Credit Facility, $50.0 million in net
repayments under the Acquisition Line of our Revolving Credit
Facility, $20.9 million of cash to repurchase
$41.7 million par value of our outstanding
2.25% Notes, and $19.7 million to repay a portion of
our outstanding Mortgage Facility. Included in the
$34.5 million of borrowings on our Mortgage Facility, we
refinanced our March 2008 and June 2008 Real Estate Notes
through borrowings on our Mortgage Facility of
$27.9 million. In conjunction with the refinancing, we paid
down the total amount borrowed by $4.1 million and
recognized an aggregate prepayment penalty of $0.5 million.
Included in the $273.4 million of net repayments under the
Floorplan Line of our Revolving Credit Facility is a net cash
outflow of $26.7 million due to an increase in our
floorplan offset account.
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During 2008, we used $12.9 million in financing activities,
primarily due to $85.0 million in net repayments under the
Acquisition Line of our Revolving Credit Facility,
$52.8 million of cash to repurchase $28.3 million par
value of our outstanding 8.25% Notes and $63.0 million
par value of our outstanding 2.25% Notes,
$11.0 million in dividends paid during the year and
$7.5 million in principal repayments of long-term debt.
Partially offsetting this amount are $50.2 million of
borrowing of long-term debt related to real estate purchases,
$46.7 million of net borrowings under our Mortgage
Facility, and $44.0 million in net borrowings under the
Floorplan Line of our Revolving Credit Facility. Included in the
$44.0 million of net borrowings related to the Floorplan
Line of our Revolving Credit Facility is a net cash inflow of
$19.7 million due to a decrease in our floorplan offset
account.
During 2007, we obtained $375.8 million from financing
activities, consisting of $225.5 million in net borrowings
under the Floorplan Line of our Revolving Credit Facility,
$135.0 million in net borrowings under the Acquisition Line
of our Revolving Credit Facility utilized to fund the dealership
acquisitions consummated in the fourth quarter of 2007 and
$131.3 million of net borrowings under our Mortgage
Facility as we continued to implement our strategy of
strategically acquiring the real estate associated with our
dealership operations. Included in the $225.5 million of
net borrowings related to the Floorplan Line of our Revolving
Credit Facility is a net cash inflow of $49.9 million due
to a decrease in our floorplan offset account. Partially
offsetting this positive cash flow, we used $63.0 million
of cash to repurchase outstanding
62
common stock and $36.9 million of cash to repurchase
$36.4 million par value of our outstanding 8.25% Notes.
Working Capital. At December 31, 2009, we
had working capital of $103.2 million. Changes in our
working capital are driven primarily by changes in floorplan
notes payable outstanding. Borrowings on our new vehicle
floorplan notes payable, subject to agreed upon pay-off terms,
are equal to 100% of the factory invoice of the vehicles.
Borrowings on our used vehicle floorplan notes payable, subject
to agreed upon pay-off terms, are limited to 70% of the
aggregate book value of our used vehicle inventory. At times, we
have made payments on our floorplan notes payable using excess
cash flow from operations and the proceeds of debt and equity
offerings. As needed, we re-borrow the amounts later, up to the
limits on the floorplan notes payable discussed below, for
working capital, acquisitions, capital expenditures or general
corporate purposes.
Credit Facilities. Our various credit
facilities are used to finance the purchase of inventory and
real estate, provide acquisition funding and provide working
capital for general corporate purposes. Our three facilities
currently provide us with a total of $1.15 billion of
borrowing capacity for inventory floorplan financing,
$235.0 million for real estate purchases, and an additional
$350.0 million for acquisitions, capital expenditures
and/or other
general corporate purposes.
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Revolving Credit Facility. Our Revolving
Credit Facility provides total borrowing capacity of
$1.35 billion, is comprised of 22 major financial
institutions, including three manufacturer-affiliated finance
companies (Toyota, Nissan and BMW), and matures in March 2012.
We can expand the Revolving Credit Facility to its maximum
commitment of $1.85 billion, subject to participating
lender approval. This Revolving Credit Facility consists of two
tranches: (1) $1.0 billion for floorplan financing,
which we refer to as the Floorplan Line, and
(2) $350.0 million for acquisitions, capital
expenditures and general corporate purposes, including the
issuance of letters of credit. We refer to this tranche as the
Acquisition Line. The Floorplan Line bears interest at rates
equal to
1-month
LIBOR plus 87.5 basis points for new vehicle inventory and
LIBOR plus 97.5 basis points for used vehicle inventory.
The Acquisition Line bears interest at LIBOR plus a margin that
ranges from 150 to 225 basis points, depending on our
leverage ratio. Up to half of the Acquisition Line can be
borrowed in either Euros or Pound Sterling. The capacity under
the Acquisition Line can be redesignated to the Floorplan Line
within the overall $1.35 billion commitment. The first
$37.5 million of available funds on the Acquisition Line
carry a 0.20% per annum commitment fee, while the balance of the
available funds carry a commitment fee ranging from 0.25% to
0.375% per annum depending on our leverage ratio. The Floorplan
Line requires a 0.20% commitment fee on the unused portion. In
conjunction with the amendment to the Revolving Credit Facility
on March 19, 2007, we capitalized $2.3 million of
related costs that are being amortized over the term of the
facility.
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As of December 31, 2009 and 2008, after considering
outstanding balances, we had $579.7 million and
$306.3 million of available floorplan capacity under the
Floorplan Line, respectively. Included in the
$579.7 million and $306.3 million available balance
under the Floorplan Line was $71.6 million and
$44.9 million of immediately available funds, respectively.
The weighted average interest rate on the Floorplan Line was
1.1%, 1.4% and 5.6% as of December 31, 2009, 2008 and 2007
respectively. We had no outstanding Acquisition Line borrowings
at December 31, 2009 and $50.0 million outstanding at
December 31, 2008. After considering $17.3 million of
outstanding letters of credit, for 2009 and 2008, and other
factors included in our available borrowings base calculation,
there was $158.2 million and $106.0 million of
available borrowings capacity under the Acquisition Line as of
December 31, 2009 and 2008, respectively. The interest rate
on the Acquisition Line was 2.5%, 2.4% and 6.6% as of
December 31, 2009, 2008 and 2007, respectively. The amount
of available borrowing capacity under the Acquisition Line may
be limited from time to time based upon certain debt covenants.
All of our domestic dealership-owning subsidiaries are
co-borrowers under the Revolving Credit Facility. The Revolving
Credit Facility contains a number of significant covenants that,
among other things, restrict our ability to make disbursements
outside of the ordinary course of business, dispose of assets,
incur additional indebtedness, create liens on assets, make
investments and engage in mergers or consolidations. We are also
required to comply with specified financial tests and ratios
defined in the Revolving Credit Facility, such as fixed-charge
coverage, current ratio, leverage, and a minimum equity
requirement, among
63
others including additional maintenance requirements. As of
December 31, 2009 and 2008, we were in compliance with
these covenants, including:
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As of December 31,
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2009
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Required
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Actual
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Senior secured leverage ratio
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< 2.75
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1.31
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Total leverage ratio
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< 4.50
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3.29
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Fixed charge coverage ratio
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> 1.25
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1.76
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Current Ratio
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> 1.15
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1.34
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Based upon our current operating and financial projections, we
believe that we will remain compliant with such covenants in the
future. However, a violation of one of our covenants could force
us to renegotiate the terms of our Revolving Credit Facility,
which could have a material adverse effect on our future
financial position and results of operations. Under the terms of
our Revolving Credit Facility, we are limited in our ability to
make cash dividend payments to our stockholders and to
repurchase shares of our outstanding stock. The amount available
for cash dividends and share repurchases will increase in future
periods by 50% of our cumulative net income (as defined in terms
of the Revolving Credit Facility), the net proceeds from stock
option exercises and certain other items, and decrease by
subsequent payments for cash dividends and share repurchases.
Amounts borrowed under the Floorplan Line of our Revolving
Credit Facility must be repaid upon the sale of the specific
vehicle financed, and in no case may a borrowing for a vehicle
remain outstanding greater than one year.
Our obligations under the Revolving Credit Facility are secured
by essentially all of our domestic personal property (other than
equity interest in dealership-owning subsidiaries) including all
motor vehicle inventory and proceeds from the disposition of
dealership-owning subsidiaries. In January 2009, we amended our
Revolving Credit Facility to, among other things, exclude the
impact of the changes to the accounting requirements for
convertible debt instruments that may be settled in cash upon
conversion made by the FASB in January (see Note 2,
Summary of Significant Accounting Policies and
Estimates) from all covenant calculations.