The above acquisitions
were accounted for under the purchase method of accounting. Pro forma results
of operations, assuming the above acquisitions and the previously disclosed
2006 acquisitions occurred as of January 1, 2006, were as follows (in
thousands, except per share amounts):
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Total
revenues
|
|
$
|
862,165
|
|
$
|
927,618
|
|
$
|
2,540,222
|
|
$
|
2,645,255
|
|
Net
income
|
|
11,282
|
|
10,188
|
|
26,372
|
|
30,557
|
|
Basic
earnings per share
|
|
0.58
|
|
0.52
|
|
1.35
|
|
1.57
|
|
Diluted
earnings per share
|
|
0.53
|
|
0.48
|
|
1.26
|
|
1.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Volkswagen/Audi
store in Boise, Idaho was acquired through an exchange with Peterson Motor
Company in which we traded a Chevrolet store and, in addition to the
Volkswagen/Audi store, received $1.6 million in cash.
There are no future
contingent payouts related to the 2007 acquisitions and no portion of the
purchase price was paid with our equity securities. During the first nine
months of 2007, we acquired the five stores and the Jeep franchise discussed
above for $17.1 million in cash and value of exchanged franchise, which
included $10.3 million of goodwill and $4.2 million of other, primarily
indefinite lived, intangible assets. The purchase price for the balance of the
assets acquired was funded by borrowings. In addition, we acquired new vehicle
inventory and associated floorplan debt in the amount of $14.8 million in
connection with the above acquisitions.
Within one year from
the purchase date of each store, we may update the value allocated to its
purchased assets and the resulting goodwill balances as a result of information
received regarding the valuation of such assets and liabilities that was not
available at the time of purchase in accordance with SFAS No. 141, Business
Combinations. All of the goodwill from the above acquisitions is expected to
be deductible for tax purposes.
Note
6. Dividend Payments
Our Board of Directors
declared dividends of $0.14 per share on our Class A and Class B common stock,
which were paid in January 2007, April 2007 and July 2007, and totaled
approximately $2.7 million to $2.8 million each.
Note 7. Stock-Based Compensation
In the first quarter of
2007, we issued our annual non-qualified stock option grants to executive
officers and restricted stock grants to other employees. The non-qualified
stock option grants cover a total of 108,000 shares of our common stock and
were granted at the fair market value on the date of grant at $28.34 per share.
These options vest 100% on the fifth anniversary of the grant date and expire
on the sixth anniversary. Restricted stock grants covering 60,821 shares of our
common stock were also granted and have varying vesting provisions with full
vesting occurring between four and five years. Total compensation related to
these stock-based awards was $2.1 million as calculated pursuant to the fair
value methods prescribed by Statement of Financial Accounting Standards (SFAS)
No. 123R, Share-Based Payments. Of the $2.1 million, approximately $0.4 million
will be recognized in 2007.
In the second quarter of
2007, we granted 5,600 shares of common stock to members of our Board of
Directors and one consultant. The fair market value on the date of grant was
$27.13 per share and the shares were 100% vested on the date of grant. Total
compensation expense related to these shares in the second quarter of 2007 was
$152,000.
Note
8. Discontinued Operations
We continually monitor
the performance of each of our stores and make determinations to sell a store based
primarily on return on capital criteria. When a store meets the criteria
of held for sale, as defined in SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, the results of operations are reclassified
into discontinued operations. All stores included in discontinued operations
7
Phillips/Allen
Cases
On November 25, 2003,
Aimee Phillips filed a lawsuit in the U.S. District Court for the District of
Oregon (Case No. 03-3109-HO) against Lithia Motors, Inc. and two of its wholly-owned
subsidiaries alleging violations of state and federal RICO laws, the Oregon
Unfair Trade Practices Act (UTPA) and common law fraud. Ms. Phillips seeks
damages, attorneys fees and injunctive relief. Ms. Phillips complaint stems
from her purchase of a Toyota Tacoma pick-up truck on July 6, 2002. On May 14,
2004, we filed an answer to Ms. Phillips Complaint. This case was
consolidated with the Allen case described below and has a similar current
procedural status.
On April 28, 2004, Robert
Allen and 29 other plaintiffs (Allen Plaintiffs) filed a lawsuit in the U.S.
District Court for the District of Oregon (Case No. 04-3032-HO) against Lithia
Motors, Inc. and three of its wholly-owned subsidiaries alleging violations of
state and federal RICO laws, the Oregon UTPA and common law fraud. The Allen
Plaintiffs seek damages, attorneys fees and injunctive relief. The Allen
Plaintiffs Complaint stems from vehicle purchases made at Lithia stores
between July 2000 and April 2001. On August 27, 2004, we filed a Motion to
Dismiss the Complaint. On May 26, 2005, the Court entered an Order
granting Defendants Motion to Dismiss plaintiffs state and federal RICO
claims with prejudice. The Court declined to exercise supplemental
jurisdiction over plaintiffs UTPA and fraud claims. Plaintiffs filed a
Motion to Reconsider the dismissal Order. On August 23, 2005, the Court granted
Plaintiffs Motion for Reconsideration and permitted the filing of a Second
Amended Complaint (SAC). On September 21, 2005, the Allen Plaintiffs, along
with Ms. Phillips, filed the SAC. In this complaint, the Allen plaintiffs
seek actual damages that total less than $500,000, trebled, approximately $3.0
million in mental distress claims, trebled, punitive damages of $15.0 million,
attorneys fees and injunctive relief. The SAC added as defendants certain
officers and employees of Lithia. In addition, the SAC added a claim for relief
based on the Truth in Lending Act (TILA). On November 14, 2005 we filed a
second Motion to Dismiss the Complaint and a Motion to Compel Arbitration. In
two subsequent rulings, the Court has dismissed all claims except those under
Oregons Unfair Trade Practices Act and a single fraud claim for a named
individual. We believe the actions of the court have significantly
narrowed the claims and potential damages sought by the plaintiffs. Lithias
motion to Compel Arbitration of Plaintiffs remaining claims was denied.
We have filed a Notice of Appeal relating to the denial of our Motion to Compel
Arbitration. This appeal is currently pending before the Ninth Circuit Court of
Appeals (No. 07-35670).
On September 23, 2005,
Maria Anabel Aripe and 19 other plaintiffs (Aripe Plaintiffs) filed a lawsuit
in the U.S. District Court for the District of Oregon (Case No. 05-3083-HO)
against Lithia Motors, Inc., 12 of its wholly-owned subsidiaries and certain
officers and employees of Lithia, alleging violations of state and federal RICO
laws, the Oregon UTPA, common law fraud and TILA. The Aripe Plaintiffs seek actual
damages of less than $600,000, trebled, approximately $3.7 million in mental
distress claims, trebled, punitive damages of $12.6 million, attorneys fees
and injunctive relief. The Aripe Plaintiffs Complaint stems from vehicle
purchases made at Lithia stores between May 2001 and August 2005 and is
substantially similar to the allegations made in the Allen case. On April 18, 2006, the Court stayed the
proceedings in the Aripe case, pending resolution of certain motions in the
Allen case. The relevant motions in the
Allen case have now been resolved, and we anticipate that the stay in the Aripe
case will soon be lifted.
Alaska
Used Vehicles Sales Disclosures
On May 30, 2006 four of our wholly owned subsidiaries located in Alaska were served with a lawsuit alleging that the stores failed to comply with Alaska law relating to various disclosures required to be made during the sale of a used vehicle. The complaint was filed by Jackie Lee Neese et al v. Lithia Chrysler Jeep of Anchorage, Inc. et al in the Superior Court for the State of Alaska at Anchorage, case number 3AN-06-04815CI. The complainants seek to represent other similarly situated customers. The court has not certified the suit as a class action. During the pendency of this case, the State of Alaska brought charges against Lithias subsidiaries alleging the same factual allegations. The company settled the State action which the company believes resolves the disputes. However, the plaintiffs in the private action moved to intervene in the State of Alaska matter. The court denied their request and the plaintiffs have filed an appeal with the Alaska Supreme Court challenging that denial. Both the private cause of
10
action, as well as the implementation of the settlement with the State of Alaska, have been stayed pending a ruling in the appeal.
Washington
State B&O Tax Suit
On October 19, 2005, Marcia Johnson and Theron Johnson, on their own
behalf and on behalf of all other similarly situated individuals and entities
(the Johnson Plaintiffs), filed suit in the Superior Court for the State of
Washington, Spokane County (Case No. 05205059-9) against Lithia Motors, Inc.
and one of its wholly-owned subsidiaries, individually and as representatives of
a proposed defendant class of other motor vehicle dealers. The Johnson
plaintiffs seek declaratory and injunctive relief, and damages, for defendants
alleged practice of itemizing and collecting the Washington State Business and
Occupation Tax (B&O Tax) from customers buying vehicles from defendants -
a practice the Johnson plaintiffs allege is prohibited by state law.
The allegations in the Johnson case involved legal issues similar to
those that were litigated in another case filed in the State of Washington (
Nelson vs. Appleway Chevrolet, Inc
., i.e.,
the Nelson case). By agreement of the parties, the Johnson case was
stayed while the Nelson case was appealed to the Washington State Supreme
Court.
In April 2007, the Washington Supreme Court upheld the lower court
decisions in favor of the plaintiffs in the Nelson case. The decision was
based on the Appleway dealers practice of adding a B&O tax charge to a
vehicles purchase price after the customer and the dealer reached agreement on
the vehicles price.
Shortly after Lithia and its subsidiary filed for summary judgment, the
Johnson plaintiffs filed an amended complaint adding an allegation that the
defendants actions also violated Washingtons Consumer Protection Act.
In addition to compensatory damages, the Johnson plaintiffs seek treble damages
up to $10,000 for each alleged violation of the Act.
The Johnson plaintiffs then cross-moved for partial summary judgment,
contending that the Supreme Courts decision in the Nelson case established
that Lithia and its subsidiary had violated Washingtons tax and Consumer
Protection Act laws. After hearing oral argument on the motions, the trial
court judge on October 12, 2007, issued an oral ruling in favor of the Johnsons
and against the Lithia subsidiary. The court denied Lithias and its
subsidiarys summary judgment motion. The case has not yet been certified
as a class action.
Because
Lithias subsidiary negotiated with the Johnson plaintiffs over a proposed
B&O tax charge before reaching agreement on a purchase price for the
Johnsons new vehicle, Lithia and its subsidiary believe its action did not
violate the law. Lithia and its subsidiary believe the Supreme Courts
decision in the Nelson case establishes that the subsidiarys practice was
permissible under Washington tax law. Accordingly, Lithia and its
subsidiary believe upon appellate review, the decision rendered by the trial
court judge will be overturned although no assurances can be provided. We do
not believe that the ultimate resolution of the case will have a material
adverse impact on our consolidated financial statements.
We intend to vigorously
defend all matters and management believes that the likelihood of a judgment
for the amount of damages sought in any of the cases is remote.
Note
14. Subsequent Event
Dividend
In October 2007, we
announced a dividend on our Class A and Class B common stock of $0.14 per share
for the third quarter of 2007. The dividend, which totaled approximately $2.8
million, was paid on October 29, 2007 to shareholders of record on October 15,
2007.
11
Item 2.
Managements Discussion and
Analysis of Financial Condition and Results of Operations
Forward Looking Statements and
Risk Factors
Some
of the statements in this Form 10-Q constitute forward-looking statements. In
some cases, you can identify forward-looking statements by terms such as may,
will, should, expect, plan, intend, forecast, anticipate, believe,
estimate, predict, potential, and continue or the negative of these
terms or other comparable terminology. The forward-looking statements contained
in this Form 10-Q involve known and unknown risks, uncertainties and situations
that may cause our actual results, level of activity, performance or
achievements to be materially different from any future results, levels of activity,
performance or achievements expressed or implied by these statements. Some of
the important factors that could cause actual results to differ from our
expectations are discussed in Item 1A to our 2006 Form 10-K, which was filed
with the Securities and Exchange Commission on March 9, 2007. These risk
factors have not significantly changed since the filing of the 2006 Form 10-K.
Although
we believe that the expectations reflected in the forward-looking statements
are reasonable, we cannot guarantee future results, levels of activity,
performance or achievements. You should not place undue reliance on these
forward-looking statements.
Overview
We are a leading operator
of automotive franchises and retailer of new and used vehicles and
services. As of November 6, 2007, we
offered 30 brands of new vehicles in 108 stores in the Western United States
and over the Internet. We sell new and used cars and light trucks; sell
replacement parts; provide vehicle maintenance, warranty, paint and repair services;
and arrange related financing, service contracts, protection products and
credit insurance for our automotive customers.
We currently achieve
gross profit margins above industry averages by selling a higher ratio of
retail used vehicles to new vehicles and by arranging finance and extended
warranty contracts for a greater percentage of our customers.
Our acquisition model is
focused on acquiring new vehicle stores where the store is the dominant or the
only franchise of that brand in the market. Our goal is to improve the
operations of all four departments of every store we acquire. Since 1996, our
ability to integrate the stores that we acquire continues to improve. We have
also developed a better process for identifying acquisition targets that fit our
operating model. Our cash position, substantial lines of credit, plus an
experienced and well-trained staff are all available to facilitate our
continued growth as opportunities develop.
Our current new vehicle
revenue mix is weighted towards domestic brands at approximately 60%. Our
strategy is to target a more balanced mix between our domestic, import and
luxury brands in the years ahead. Approximately 65% of our acquisition revenues
in the last four quarters were from import and luxury brands, contributing to
an improvement in our import/domestic mix, especially as we continue to dispose
of our lowest performing domestic stores.
In keeping with this
model, we acquired five stores and one franchise in the first ten months of
2007 with total estimated annual revenues of approximately $115 million. At
November 6, 2007, we had three stores held for sale with their results of
operations displayed as discontinued operations. Combined annual revenues of
stores disposed of during 2007 and those held for sale at November 6, 2007 were
approximately $167 million.
We
expect that manufacturers will continue to offer incentives on new vehicle
sales during the remainder of 2007 through a combination of repricing
strategies, rebates, lease programs, early lease cancellation programs and low
interest rate loans to consumers. To complement the manufacturers incentive
strategy, we employ a volume-based strategy for our new vehicle sales.
12
We have completed, or are
currently working on, the following initiatives that we expect will improve our
operations in future periods:
Under the automated car deal process, our
showrooms are equipped with interactive personal computers, which allows the
salesperson to quickly and efficiently enter data and interact with the
customer to speed up the sales process;
Improved functionality of our centralized
inventory control and procurement process;
IT initiatives related to centralizing certain
office functions, leading to an approximately 20% reduction in office staff at
the stores;
In August 2007, we opened our first stand-alone
used vehicle store, L2 Auto, in Loveland, Colorado and should open the next two
by the end of 2007;
Our Assured
Vehicle Selling Program has been fully installed in several locations and will
be rolled out to the rest of our stores by the end of the first quarter of
2008. With our new Assured Sales Program, all of our vehicles will have Drive
it Now Pricing. All of our vehicle sales will have a 3 day return policy,
100% money back guarantee. In addition, our used vehicles have an if it
breaks, we fix it guarantee. There is no deductible and our guarantee is
valid for 60 days or 3,000 miles; and
A cost-cutting
initiative in our stores including staffing, employee bonuses, advertising and
travel is expected to have a significant impact on selling, general and
administrative expense in the fourth quarter of 2007 and into 2008.
Results
of Continuing Operations
Certain
revenue, gross margin and gross profit information by product line was as
follows:
Three Months Ended September 30, 2007
|
|
Percent of
Total Revenues
|
|
Gross
Margin
|
|
Percent of Total
Gross Profit
|
|
New vehicle
|
|
57.6
|
%
|
7.6
|
%
|
26.1
|
%
|
Used vehicle, retail
|
|
21.4
|
|
14.9
|
|
18.9
|
|
Used vehicle, wholesale
|
|
5.5
|
|
0.5
|
|
0.2
|
|
Finance and insurance(1)
|
|
3.8
|
|
100.0
|
|
22.6
|
|
Service, body and parts
|
|
11.4
|
|
47.3
|
|
32.0
|
|
Fleet and other
|
|
0.3
|
|
14.3
|
|
0.2
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2006
|
|
Percent of
Total Revenues
|
|
Gross
Margin
|
|
Percent of Total
Gross Profit
|
|
New vehicle
|
|
58.5
|
%
|
7.6
|
%
|
26.9
|
%
|
Used vehicle, retail
|
|
22.0
|
|
14.4
|
|
19.1
|
|
Used vehicle, wholesale
|
|
5.2
|
|
1.1
|
|
0.3
|
|
Finance and insurance(1)
|
|
3.9
|
|
100.0
|
|
23.5
|
|
Service, body and parts
|
|
10.2
|
|
48.6
|
|
29.9
|
|
Fleet and other.
|
|
0.2
|
|
20.7
|
|
0.3
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2007
|
|
Percent of
Total Revenues
|
|
Gross
Margin
|
|
Percent of Total
Gross Profit
|
|
New vehicle
|
|
57.5
|
%
|
7.5
|
%
|
25.4
|
%
|
Used vehicle, retail
|
|
22.0
|
|
15.0
|
|
19.3
|
|
Used vehicle, wholesale
|
|
5.1
|
|
2.3
|
|
0.7
|
|
Finance and insurance(1)
|
|
3.8
|
|
100.0
|
|
22.3
|
|
Service, body and parts
|
|
11.4
|
|
47.6
|
|
32.0
|
|
Fleet and other.
|
|
0.2
|
|
25.0
|
|
0.3
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2006
|
|
Percent of
Total Revenues
|
|
Gross
Margin
|
|
Percent of Total
Gross Profit
|
|
New vehicle
|
|
58.1
|
%
|
7.6
|
%
|
26.1
|
%
|
Used vehicle, retail
|
|
22.7
|
|
15.2
|
|
20.3
|
|
Used vehicle, wholesale
|
|
4.7
|
|
2.9
|
|
0.7
|
|
Finance and insurance(1)
|
|
3.9
|
|
100.0
|
|
22.8
|
|
Service, body and parts
|
|
10.4
|
|
48.6
|
|
29.8
|
|
Fleet and other.
|
|
0.2
|
|
32.1
|
|
0.3
|
|
(1)
Commissions reported net
of anticipated cancellations.
13
The following table sets
forth selected condensed financial data, expressed as a percentage of total
revenues for the periods indicated.
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
Lithia
Motors, Inc. (1)
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
New
vehicle
|
|
57.6
|
%
|
58.5
|
%
|
57.5
|
%
|
58.1
|
%
|
Used
vehicle, retail
|
|
21.4
|
|
22.0
|
|
22.0
|
|
22.7
|
|
Used
vehicle, wholesale
|
|
5.5
|
|
5.2
|
|
5.1
|
|
4.7
|
|
Finance
and insurance
|
|
3.8
|
|
3.9
|
|
3.8
|
|
3.9
|
|
Service,
body and parts
|
|
11.4
|
|
10.2
|
|
11.4
|
|
10.4
|
|
Fleet
and other
|
|
0.3
|
|
0.2
|
|
0.2
|
|
0.2
|
|
Total
revenues
|
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
Gross
profit
|
|
16.8
|
|
16.6
|
|
17.0
|
|
17.0
|
|
Selling,
general and administrative expenses
|
|
12.5
|
|
12.3
|
|
13.0
|
|
12.7
|
|
Depreciation
and amortization
|
|
0.7
|
|
0.5
|
|
0.6
|
|
0.5
|
|
Operating
income
|
|
3.7
|
|
3.9
|
|
3.4
|
|
3.8
|
|
Floorplan
interest expense
|
|
1.0
|
|
1.5
|
|
1.0
|
|
1.1
|
|
Other
interest expense
|
|
0.6
|
|
0.4
|
|
0.6
|
|
0.4
|
|
Other,
net
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before taxes
|
|
2.2
|
|
2.0
|
|
1.9
|
|
2.4
|
|
Income
tax expense
|
|
0.9
|
|
0.7
|
|
0.8
|
|
0.9
|
|
Income
from continuing operations
|
|
1.3
|
%
|
1.3
|
%
|
1.2
|
%
|
1.4
|
%
|
(1)
The percentages may not add due to
rounding.
The
following tables set forth the changes in our operating results from continuing
operations in the three and nine-month periods ended September 30, 2007
compared to the three and nine-month periods ended September 30, 2006 (dollars
in thousands, except per vehicle and per unit amounts):
|
|
Three Months Ended
September 30,
|
|
Increase
|
|
%
Increase
|
|
|
|
2007
|
|
2006
|
|
(Decrease)
|
|
(Decrease)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
New
vehicle
|
|
$
|
494,882
|
|
$
|
488,113
|
|
$
|
6,769
|
|
1.4
|
%
|
Used
vehicle, retail
|
|
184,319
|
|
183,574
|
|
745
|
|
0.4
|
|
Used
vehicle, wholesale
|
|
47,549
|
|
42,894
|
|
4,655
|
|
10.9
|
|
Finance
and insurance
|
|
32,701
|
|
32,644
|
|
57
|
|
0.2
|
|
Service,
body and parts
|
|
97,913
|
|
85,360
|
|
12,553
|
|
14.7
|
|
Fleet
and other
|
|
2,343
|
|
1,832
|
|
511
|
|
27.9
|
|
Total
revenues
|
|
859,707
|
|
834,417
|
|
25,290
|
|
3.0
|
|
Cost
of sales
|
|
715,016
|
|
695,657
|
|
19,359
|
|
2.8
|
|
Gross
profit
|
|
144,691
|
|
138,760
|
|
5,931
|
|
4.3
|
|
Selling,
general and administrative
|
|
107,387
|
|
102,225
|
|
5,162
|
|
5.0
|
|
Depreciation
and amortization
|
|
5,289
|
|
4,204
|
|
1,085
|
|
25.8
|
|
Operating
income
|
|
32,015
|
|
32,331
|
|
(316
|
)
|
(1.0
|
)
|
Floorplan
interest expense
|
|
(8,236
|
)
|
(12,358
|
)
|
(4,122
|
)
|
(33.4
|
)
|
Other
interest expense
|
|
(4,900
|
)
|
(3,482
|
)
|
1,418
|
|
40.7
|
|
Other,
net
|
|
144
|
|
128
|
|
16
|
|
12.5
|
|
Income
from continuing operations before taxes
|
|
19,023
|
|
16,619
|
|
2,404
|
|
14.5
|
|
Income
tax expense
|
|
7,713
|
|
5,933
|
|
1,780
|
|
30.0
|
|
Income
from continuing operations
|
|
$
|
11,310
|
|
$
|
10,686
|
|
$
|
624
|
|
5.8
|
%
|
|
|
|
|
|
|
|
|
|
|
New
units sold
|
|
16,884
|
|
17,860
|
|
(976
|
)
|
(5.5%
|
)
|
Average
selling price per new vehicle
|
|
$
|
29,311
|
|
$
|
27,330
|
|
$
|
1,981
|
|
7.2
|
|
|
|
|
|
|
|
|
|
|
|
Used
retail units sold
|
|
10,928
|
|
11,395
|
|
(467
|
)
|
(4.1
|
)
|
Average
selling price per used retail vehicle
|
|
$
|
16,867
|
|
$
|
16,110
|
|
$
|
757
|
|
4.7
|
|
|
|
|
|
|
|
|
|
|
|
Used
wholesale units sold
|
|
7,364
|
|
7,218
|
|
146
|
|
2.0
|
|
Average
selling price per used wholesale vehicle
|
|
$
|
6,457
|
|
$
|
5,943
|
|
$
|
514
|
|
8.6
|
|
|
|
|
|
|
|
|
|
|
|
Finance
and insurance income per retail unit
|
|
$
|
1,176
|
|
$
|
1,116
|
|
$
|
60
|
|
5.4
|
|
14
|
|
Nine Months Ended
September 30,
|
|
Increase
|
|
%
Increase
|
|
|
|
2007
|
|
2006
|
|
(Decrease)
|
|
(Decrease)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
New
vehicle
|
|
$
|
1,447,623
|
|
$
|
1,360,912
|
|
$
|
86,711
|
|
6.4
|
%
|
Used
vehicle, retail
|
|
553,708
|
|
530,392
|
|
23,316
|
|
4.4
|
|
Used
vehicle, wholesale
|
|
130,130
|
|
111,345
|
|
18,785
|
|
16.9
|
|
Finance
and insurance
|
|
95,488
|
|
90,549
|
|
4,939
|
|
5.5
|
|
Service,
body and parts
|
|
288,020
|
|
244,045
|
|
43,975
|
|
18.0
|
|
Fleet
and other
|
|
4,339
|
|
3,781
|
|
558
|
|
14.8
|
|
Total
revenues
|
|
2,519,308
|
|
2,341,024
|
|
178,284
|
|
7.6
|
|
Cost
of sales
|
|
2,090,893
|
|
1,943,164
|
|
147,729
|
|
7.6
|
|
Gross
profit
|
|
428,415
|
|
397,860
|
|
30,555
|
|
7.7
|
|
Selling,
general and administrative
|
|
326,500
|
|
296,241
|
|
30,259
|
|
10.2
|
|
Depreciation
and amortization
|
|
15,149
|
|
12,052
|
|
3,097
|
|
25.7
|
|
Operating
income
|
|
86,766
|
|
89,567
|
|
(2,801
|
)
|
(3.1
|
)
|
Floorplan
interest expense
|
|
(24,070
|
)
|
(25,219
|
)
|
(1,149
|
)
|
(4.6
|
)
|
Other
interest expense
|
|
(14,567
|
)
|
(9,817
|
)
|
4,750
|
|
48.4
|
|
Other,
net
|
|
469
|
|
765
|
|
(296
|
)
|
(38.7
|
)
|
Income
from continuing operations before taxes
|
|
48,598
|
|
55,296
|
|
(6,698
|
)
|
(12.1
|
)
|
Income
tax expense
|
|
19,411
|
|
21,670
|
|
(2,259
|
)
|
(10.4
|
)
|
Income
from continuing operations
|
|
$
|
29,187
|
|
$
|
33,626
|
|
$
|
(4,439
|
)
|
(13.2%
|
)
|
|
|
|
|
|
|
|
|
|
|
New units
sold
|
|
50,049
|
|
49,658
|
|
391
|
|
0.8
|
%
|
Average
selling price per new vehicle
|
|
$
|
28,924
|
|
$
|
27,406
|
|
$
|
1,518
|
|
5.5
|
|
|
|
|
|
|
|
|
|
|
|
Used
retail units sold
|
|
33,375
|
|
32,939
|
|
436
|
|
1.3
|
|
Average
selling price per used retail vehicle
|
|
$
|
16,591
|
|
$
|
16,102
|
|
$
|
489
|
|
3.0
|
|
|
|
|
|
|
|
|
|
|
|
Used
wholesale units sold
|
|
20,051
|
|
18,392
|
|
1,659
|
|
9.0
|
|
Average
selling price per used wholesale vehicle
|
|
$
|
6,490
|
|
$
|
6,054
|
|
$
|
436
|
|
7.2
|
|
|
|
|
|
|
|
|
|
|
|
Finance
and insurance income per retail unit
|
|
$
|
1,145
|
|
$
|
1,096
|
|
$
|
49
|
|
4.5
|
|
Revenues
Total
revenues increased 3.0% and 7.6%, respectively, in the three and nine-month
periods ended September 30, 2007 compared to the same periods of 2006, as a
result of acquisitions, partially offset by a 5.6% and a 3.1% decrease,
respectively, in same-store sales, excluding fleet. The nine-month period ended
September 30, 2007 faced a difficult comparison with the comparable period of
2006 when total same-store sales grew by 4.5%. The decreases in the 2007
periods were also impacted by a weak retail sales environment, especially with
our domestic brands. This is related to the ripple effect from the struggling
housing market, high gas prices and consumer debt pressures.
Same-store
sales percentage increases (decreases) were as follows:
|
|
Three months ended
September 30, 2007 vs.
three months ended
September 30, 2006
|
|
Nine months ended
September 30, 2007 vs.
nine months ended
September 30, 2006
|
|
New
vehicle retail, excluding fleet
|
|
(6.6
|
)%
|
(4.3
|
)%
|
Used
vehicle, retail
|
|
(8.6
|
)
|
(5.8
|
)
|
Used
vehicle, wholesale
|
|
1.6
|
|
6.5
|
|
Total
vehicle sales, excluding fleet
|
|
(6.6
|
)
|
(4.1
|
)
|
Finance
and insurance
|
|
(5.9
|
)
|
(1.7
|
)
|
Service,
body and parts
|
|
3.3
|
|
4.5
|
|
Total
sales, excluding fleet
|
|
(5.6
|
)
|
(3.1
|
)
|
Same-store
sales are calculated for stores that were in operation as of September 30,
2006, and only including the months of operations for both comparable periods.
For example, a store acquired in July 2006 would be included in same-store
operating data beginning in August 2006, after its first full complete
comparable month of operation. Thus, operating results for same-store
comparisons would include only the periods of August through September of
both comparable years.
15
New
vehicle same-store sales declined 6.6% and 4.3%, respectively, in the three and
nine-month periods ended September 30, 2007 compared to the same periods of
2006. The decreases were primarily due to a challenging sales environment in
the first nine months of 2007 and declining sales of domestic manufacturers
vehicles that represent a large percentage of our new vehicle sales. Prior year
comparisons were high due to aggressive manufacturer incentive programs, which
have not been sustained at those high levels in 2007. Same-store unit sales
were down 11.6% and 7.9%, respectively, in the three and nine-month periods
ended September 30, 2007 compared to the same periods of 2006. The decreases in
same-store unit sales were partially offset by a 5.7% and a 3.9% increase, respectively,
in same-store average selling prices.
Used
retail vehicle same-store sales declined 8.6% and 5.8%, respectively, in the
three and nine-month periods ended September 30, 2007 compared to the same
periods of 2006. The decreases in same-store sales were primarily due to the
challenging sales environment mentioned above. Same-store retail unit sales
decreased 11.5% and 7.4%, respectively, in the three and nine-month periods
ended September 30, 2007 compared to the same periods of 2006. These same-store
decreases were partially offset by a 3.3% and a 1.7% increase in same-store
average selling prices.
Used
wholesale vehicle same-store sales increased 1.6% and 6.5%, respectively, in
the three and nine-month periods ended September 30, 2007 compared to the same
periods of 2006. Same-store unit sales declined 5.6% and 0.5%, respectively, in
the three and nine-month periods ended September 30, 2007 compared to the same
periods of 2006. Same-store average selling price increased 7.6% and 7.0%,
respectively, in the same periods.
Same-store
finance and insurance sales were negatively affected in the three and
nine-month periods ended September 30, 2007 compared to the same periods of
2006 by decreases in same-store vehicle unit sales, which lowered the overall
opportunity for finance and insurance sales. This was offset by a 6.5% and a
6.6% increase, respectively, in the finance and insurance sales per unit in the
three and nine-month periods ended September 30, 2007 compared to the same
periods of 2006.
The
increases in same-store service, body and parts sales in the three and
nine-month periods ended September 30, 2007 compared to the same periods of
2006 were primarily due to a 3.1% and a 4.6% increase, respectively, in the
customer-paid portion of the business. The customer-paid portion of the
business excludes warranty and currently represents approximately 82% of total
service, body and parts sales. In addition, we realized a 4.2% and a 4.1%
increase, respectively, in same-store warranty sales.
Penetration
rates for certain products were as follows:
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Finance
and insurance
|
|
76
|
%
|
75
|
%
|
75
|
%
|
78
|
%
|
Service
contracts
|
|
41
|
|
42
|
|
42
|
|
42
|
|
Lifetime
oil change and filter
|
|
36
|
|
39
|
|
37
|
|
39
|
|
Gross
Profit
Gross
profit increased $5.9 million and $30.6 million, respectively, in the three and
nine-month periods ended September 30, 2007 compared to the same periods of
2006 due to increased total revenues in both periods and an increase of 20
basis points in the overall gross profit margin in the three-month period ended
September 30, 2007 compared to the same period of 2006. Gross margins have been
relatively stable despite the difficult retail sales environment
16
Our
gross profit margins by business lines are detailed in the tables below:
|
|
Three Months Ended September
30,
|
|
Basis
|
|
|
|
2007
|
|
2006
|
|
Point Change*
|
|
New vehicle
|
|
7.6
|
%
|
7.6
|
%
|
|
bp
|
Retail used vehicle
|
|
14.9
|
|
14.4
|
|
50
|
|
Wholesale used vehicle
|
|
0.5
|
|
1.1
|
|
(60
|
)
|
Finance and insurance
|
|
100.0
|
|
100.0
|
|
|
|
Service, body and parts
|
|
47.3
|
|
48.6
|
|
(130
|
)
|
Overall
|
|
16.8
|
|
16.6
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
Basis
|
|
|
|
2007
|
|
2006
|
|
Point Change*
|
|
New vehicle
|
|
7.5
|
%
|
7.6
|
%
|
(10
|
)
bp
|
Retail used vehicle
|
|
15.0
|
|
15.2
|
|
(20
|
)
|
Wholesale used vehicle
|
|
2.3
|
|
2.9
|
|
(60
|
)
|
Finance and insurance
|
|
100.0
|
|
100.0
|
|
|
|
Service, body and parts
|
|
47.6
|
|
48.6
|
|
(100
|
)
|
Overall
|
|
17.0
|
|
17.0
|
|
|
|
* A basis point is equal to 1/100
th
of one
percent.
Gross
profit margins in the service, body and parts business line decreased in the
three and nine-month periods ended September 30, 2007 compared to the same
periods of 2006 partially due to a shift in mix towards selling more parts and
accessories, which carry lower margins than the service side of the business.
Selling,
General and Administrative Expense
Selling,
general and administrative expense (SG&A) includes salaries and related
personnel expenses, facility lease expense, advertising (net of manufacturer
cooperative advertising credits), legal, accounting, professional services and
general corporate expenses.
SG&A
increased $5.2 million and $30.3 million, respectively, in the three and
nine-month periods ended September 30, 2007 compared to same periods of 2006.
SG&A increased to 12.5% and 13.0% of revenue, respectively, in the three
and nine-month periods ended September 30, 2007 compared to 12.3% and 12.7%,
respectively, in the comparable periods of 2006.
The
increases in dollars spent were primarily due to the following:
|
|
Three months ended
September 30, 2007 vs.
three months ended
September 30, 2006
|
|
Nine months ended
September 30, 2007 vs.
nine months ended
September 30, 2006
|
|
Increase
related to acquisitions
|
|
$
|
8.8 million
|
|
$
|
31.4 million
|
|
Savings
in salaries and bonuses
|
|
(3.3) million
|
|
(3.8) million
|
|
Savings
in advertising expense
|
|
(1.3) million
|
|
(2.0) million
|
|
Other
expenses
|
|
1.0 million
|
|
4.7 million
|
|
|
|
|
|
|
|
|
|
Two
of our largest expenses, sales compensation and advertising, as a percentage of
gross profit were down 90 basis points and 80 basis points, respectively, in
the three and nine-month periods ended September 30, 2007 compared with the
same periods of 2006. These declines were primarily due to managements focus
on expense control at our stores and savings related to our operational
initiatives.
SG&A
as a percentage of gross profit is an industry standard for measuring
performance relative to SG&A. As a result of expenses detailed above, as
well as costs related to our investments in personnel for our centralization
efforts, L2 Auto and the other initiatives, SG&A as a percentage of gross
profit increased by 50 basis points and 170 basis points, respectively, in the
three and nine-month periods ended September 30, 2007 compared to the same
periods of 2006.
17
SG&A
as a percentage of gross profit was as follows:
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
74.2
|
%
|
73.7
|
%
|
76.2
|
%
|
74.5
|
%
|
Our
5-year third quarter and year-to-date historical average was 72.4% and 75.2%,
respectively. We anticipate achieving a positive long-term impact related to
the investment in our initiatives by a reduction in SG&A as a percentage of
gross profit in future periods.
Depreciation and Amortization
Depreciation
and amortization increased $1.1 million and $3.1 million, respectively, in the
three and nine-month periods ended September 30, 2007 compared to the same
periods of 2006 due to the addition of property and equipment primarily related
to our acquisitions, as well as improvements to existing facilities and
equipment costs related to our initiatives. We expect this expense to grow as
we continue to upgrade facilities and equipment in future years.
Income
from Operations
Operating margins
declined by 20 basis points and 40 basis points, respectively, in the three and
nine-month periods ended September 30, 2007 to 3.7% and 3.4%, respectively,
from 3.9% and 3.8%, respectively, in the comparable periods of 2006. The
decreases were due primarily to the increased SG&A and depreciation and
amortization as discussed above.
Floorplan
Interest Expense
Floorplan interest expense decreased $4.1 million
and $1.1 million, respectively, in the three and nine-month periods ended
September 30, 2007 compared to the same periods of 2006. In the three and
nine-month periods ended September 30, 2006, we recorded a $2.3 million charge
and a $0.2 million benefit, respectively, to interest expense related to our
interest rate swaps. In 2007, we designated our interest rate swaps as cash
flow hedging instruments and, accordingly, changes in the fair value of our
interest rate swaps were recorded in Accumulated Other Comprehensive Income.
Additionally, a decrease of $0.6 million and an increase of $0.8 million,
respectively, resulted from changes in the average interest rates on our
floorplan facilities. We also realized a decrease of $1.2 million and $2.2
million, respectively, as a result of decreases in the average outstanding
balances of our floorplan facilities.
Other
Interest Expense
Other interest expense
includes interest on our senior subordinated convertible notes, debt incurred
related to acquisitions, real estate mortgages and our working capital,
acquisition and used vehicle line of credit.
Other
interest expense
increased $1.4 million and $4.8 million, respectively, in the three and
nine-month periods ended September 30, 2007 compared to the same periods of
2006. Changes in the average
outstanding balances resulted in increases of approximately $1.4 million and
$4.9 million, respectively. The weighted average interest rates on our debt
remained relatively unchanged, resulting in minimal savings. Interest expense related
to the $85.0 million of senior subordinated convertible notes that were issued
in May 2004 currently totals approximately $765,000 per quarter, which consists
of $611,000 of contractual interest and $154,000 of amortization of debt
issuance costs.
Other interest expense
was reduced by $1.0 million and $2.4 million, respectively, due to the benefit
of capitalized interest on construction projects for the three and nine-month
periods ended September 30, 2007 and $0.5 million and $1.1 million, respectively,
for the comparable periods of 2006.
Income
Tax Expense
Our effective tax rate
was 40.5% and 39.9%, respectively, in the three and nine-month periods ended
September 30, 2007 compared to 35.7% and 39.2%, respectively, in the comparable
periods of 2006. Our
18
federal income tax rate
is 35% and our state income tax rate is currently 3.03%, which varies with the
mix of states where our stores are located. We also have certain
non-deductible expenses and other adjustments that increase our effective rate. Our tax rate in the nine-month period
ended September 30, 2006 included a reduction in amounts provided for
identified tax contingencies.
Income
from Continuing Operations
Income from continuing operations was flat in the
three-month period ended September 30, 2007 compared to the same period of 2006
and declined by 20 basis points in the nine-month period ended September 30,
2007 compared to the same period of 2006 as a result of the increased SG&A,
increased depreciation and amortization and increased other interest expense
being offset by decreased floorplan interest expense as discussed above.
Discontinued Operations
During the first nine
months of 2007, we added three stores and one body shop to those classified as
discontinued operations. In the third quarter of 2007, we disposed of two of
the stores that were held for sale. As of September 30, 2007 and December 31,
2006, we had three and two stores, respectively, held for sale and classified
within assets and liabilities held for sale. Results of operations of these
stores are shown within discontinued operations on the consolidated statements
of operations. The body shop was closed and is not held for sale. Certain
financial information related to discontinued operations was as follows (in
thousands):
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Revenue
|
|
$
|
25,164
|
|
$
|
46,003
|
|
$
|
101,115
|
|
$
|
145,311
|
|
Pre-tax
loss from discontinued operations
|
|
$
|
(564
|
)
|
$
|
(278
|
)
|
$
|
(1,189
|
)
|
$
|
(3,040
|
)
|
Net
gain (loss) on disposal activities
|
|
412
|
|
|
|
(3,693
|
)
|
|
|
|
|
(152
|
)
|
(278
|
)
|
(4,882
|
)
|
(3,040
|
)
|
Income
tax benefit
|
|
79
|
|
108
|
|
1,950
|
|
1,189
|
|
Loss
from discontinued operations, net of income taxes
|
|
$
|
(73
|
)
|
$
|
(170
|
)
|
$
|
(2,932
|
)
|
$
|
(1,851
|
)
|
Amount
of goodwill and other intangible assets disposed of
|
|
$
|
8,722
|
|
$
|
|
|
$
|
8,722
|
|
$
|
3,552
|
|
The pre-tax loss in the
nine-month period ended September 30, 2006 included legal settlements related
to stores in California that were sold in prior years.
Interest expense is
allocated to stores classified as discontinued operations for actual flooring
interest expense directly related to the new vehicles in the store. Interest
expense related to our working capital, acquisition and used vehicle credit
facility is allocated based on the amount of assets pledged towards the total
borrowing base.
Assets held for sale
included the following (in thousands):
|
|
September 30,
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
Inventories
|
|
$
|
12,503
|
|
$
|
11,594
|
|
Property,
plant and equipment
|
|
10,429
|
|
2,949
|
|
Goodwill
and other intangible assets
|
|
893
|
|
942
|
|
|
|
$
|
23,825
|
|
$
|
15,485
|
|
Liabilities held for sale
included the following (in thousands):
|
|
September 30,
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
Floorplan
notes payable
|
|
$
|
10,848
|
|
$
|
9,605
|
|
Real
estate debt
|
|
7,525
|
|
2,005
|
|
|
|
$
|
18,373
|
|
$
|
11,610
|
|
19
Seasonality and Quarterly
Fluctuations
Historically, our sales
have been lower in the first and fourth quarters of each year due to consumer
purchasing patterns during the holiday season, inclement weather in certain of
our markets and the reduced number of business days during the holiday season.
As a result, financial performance is expected to be lower during the first and
fourth quarters than during the second and third quarters of each fiscal year.
We believe that interest rates, levels of consumer debt, consumer confidence
and manufacturer sales incentives, as well as general economic conditions, also
contribute to fluctuations in sales and operating results. Acquisitions have
also been a contributor to fluctuations in our operating results from quarter
to quarter.
Liquidity and Capital Resources
Our principal needs for
capital resources are to finance acquisitions and capital expenditures, as well
as for working capital and the funding of our cash dividend payments. We have
relied primarily upon internally generated cash flows from operations,
borrowings under our credit agreements and the proceeds from public equity and
private debt offerings to finance operations and expansion. We believe that our
available cash, cash equivalents, available lines of credit and cash flows from
operations will be sufficient to meet our anticipated operating expenses,
capital requirements, projected acquisitions and current level of cash
dividends for at least the next 12 months from September 30, 2007. Beyond 12
months from September 30, 2007, we anticipate the need for possible additional
financing options to augment our existing cash and working capital line of
credit to accommodate our growth strategy.
Interest rates on all of
the facilities below ranged from 6.27% to 7.12% at September 30, 2007. Amounts
outstanding on the lines at September 30, 2007, together with amounts remaining
available under such lines were as follows (in thousands):
|
|
Outstanding at
September 30, 2007
|
|
Remaining
Availability as of
September 30, 2007
|
|
New
and program vehicle lines
|
|
$
|
437,607
|
|
$
|
|
(1)
|
Working
capital, acquisition and used vehicle credit facility
|
|
137,000
|
|
87,066
|
(2)
|
|
|
$
|
574,607
|
|
$
|
87,066
|
|
(1)
There
are no formal limits on the new and program vehicle lines with certain lenders.
(2)
Reduced
by $934,000 for outstanding letters of credit.
Flooring
Notes Payable
Our inventories
decreased to $559.3 million at September 30, 2007 from $603.3 million at
December 31, 2006. We have maintained a disciplined inventory approach
throughout the first nine months of 2007. As a result, our days supply of new
vehicles at September 30, 2007 was 16 days below September 30, 2006, flat with
our average historical September 30 balances and two days below our December
31, 2006 levels.
Our new vehicle flooring
notes payable decreased to $437.6 million at September 30, 2007 from $499.7
million at December 31, 2006. New vehicles are financed at approximately 100%.
Share
Repurchase and Dividends
Our Board of Directors
declared dividends of $0.14 per share on our Class A and Class B common stock,
which were paid in January 2007, April 2007, July 2007 and October 2007, and
totaled approximately $2.7 million to $2.8 million each. We anticipate
recommending to the Board of Directors the approval of a cash dividend each
quarter.
In June 2000, our Board
of Directors authorized the repurchase of up to 1,000,000 shares of our Class A
common stock. Through September 30, 2007, we have purchased a total of 478,631
shares under this program, of which 221,800 were purchased during the first
nine months of 2007. We may continue to
20
repurchase shares from
time to time in the future as conditions warrant. The recent change in the tax law tends to equalize the benefits of
dividends and share repurchases as a means to return capital or earnings to
shareholders. As a result, we believe it is now advantageous to shareholders to
have a dividend in place. With the dividend, we are able to offer an immediate
and tangible return to our shareholders.
Credit
Facility
We have a working
capital, acquisition and used vehicle credit facility with U.S. Bank National
Association, DaimlerChrysler Financial Services Americas LLC (DCFS) and
Toyota Motor Credit Corporation (TMCC), totaling up to $225 million (the Credit
Facility), which expires August 31, 2009. We anticipate increasing the
aggregate amount of this facility as part of our annual renewal process in the
fourth quarter of 2007. Loans are guaranteed by all of our subsidiaries and are
secured by new vehicle inventory, used vehicle and parts inventory, equipment
other than fixtures, deposit accounts, accounts receivable, investment property
and other intangible personal property. Stock and other equity interests of our
subsidiary stores and certain other subsidiaries are excluded. The lenders
security interest in new vehicle inventory is subordinated to the interests of
floorplan financing lenders, including DCFS and TMCC. The agreement for this
facility provides for events of default that include nonpayment, breach of
covenants, a change of control and certain cross-defaults with other
indebtedness. In the event of a default, the agreement provides that the
lenders may declare the entire principal balance immediately due, foreclose on
collateral and increase the applicable interest rate to the revolving loan rate
plus 3 percent, among other remedies.
Our working capital,
acquisition and used vehicle credit facility decreased to $137.0 million at
September 30, 2007 from $144.0 million at December 31, 2006 primarily due to
the timing of payments, partially offset by acquisitions, capital expenditures
related to our initiatives and the development of L2 Auto.
Vehicle
Flooring
Ford Motor Credit,
General Motors Acceptance Corporation (GMAC), Volkswagen Credit and BMW
Financial Services NA, LLC have agreed to floor all of our new vehicles for
their respective brands. DCFS and TMCC serve as the primary lenders for their
respective brands and substantially all other brands. The new vehicle lines are
secured by new vehicle inventory of the relevant brands. Vehicles financed by lenders
not directly associated with the manufacturer are classified as floorplan notes
payable: non-trade and are included as a financing activity in our statements
of cash flows. Vehicles financed by lenders directly associated with the
manufacturer are classified as floorplan notes payable and are included as an
operating activity.
On November 30, 2006,
General Motors (GM) completed the sale of a majority equity stake in GMAC to
an investment consortium. Although GMAC will continue to be the exclusive
provider of GM financial products and services and continues to have the
relationships with GM, a majority equity stake in GMAC has been sold to an
independent third-party and GM has indicated in its public filings that it no
longer controls the GMAC entity. As a result, we will be treating new
vehicles financed by GMAC after the change in ownership control as floorplan
notes payable: non-trade and related changes as a financing activity in our
statements of cash flows. Vehicles financed prior to this change in
control will continue to be classified as floorplan notes payable: trade, with
related changes reflected as operating activities in our statements of cash
flows, since these GMAC vehicle financings occurred while GM retained control
of GMAC as its captive finance subsidiary.
Debt
Covenants
We are subject to
certain financial and restrictive covenants for all of our debt agreements. The
Credit Facility agreement includes financial and restrictive covenants typical
of such agreements such as requirements to maintain a minimum total net worth,
minimum current ratio, fixed charge coverage ratio and cash flow leverage ratio
requirements. The covenants restrict us from incurring additional indebtedness,
making investments, selling or acquiring assets and granting security interests
in our assets. At September 30, 2007, we were in compliance with all of the
financial and restrictive covenants.
21
In addition, cash
dividends are limited to $15 million per fiscal year and repurchases by us of
our common stock are limited to $20 million per fiscal year.
We expect to be in
compliance with the covenants for all of our debt agreements in the foreseeable
future. In the event that we are unable to meet such requirements, and any
available cure period has passed, the lender may require an acceleration of
payment, increase the interest rate or limit our ability to borrow or pay cash
dividends.
2.875%
Senior Subordinated Convertible Notes due 2014
We also have outstanding
$85.0 million of 2.875% senior subordinated convertible notes due 2014. We will
also pay contingent interest on the notes during any six-month interest period
beginning May 1, 2009, in which the trading price of the notes for a specified
period of time equals or exceeds 120% of the principal amount of the notes. The
notes are convertible into shares of our Class A common stock at a price of
$37.24 per share upon the satisfaction of certain conditions and upon the
occurrence of certain events as follows:
if, prior to
May 1, 2009, and during any calendar quarter, the closing sale price of our
common stock exceeds 120% of the conversion price for at least 20 trading days
in the 30 consecutive trading days ending on the last trading day of the
preceding calendar quarter;
if, after
May 1, 2009, the closing sale price of
our common stock exceeds 120% of the conversion price;
if, during
the five business day period after any five consecutive trading day period in
which the trading price per $1,000 principal amount of notes for each day of
such period was less than 98% of the product of the closing sale price of our
common stock and the number of shares issuable upon conversion of $1,000
principal amount of the notes;
if the notes
have been called for redemption; or
upon certain
specified corporate events.
A declaration and
payment of a dividend in excess of $0.08 per share per quarter will result in
additional adjustments in the conversion rate for the notes if such cumulative
adjustment exceeds 1% of the current conversion rate. The current conversion
rate per $1,000 of notes is 26.8556.
The notes are redeemable
at our option beginning May 6, 2009 at the redemption price of 100% of the
principal amount plus any accrued interest. The holders of the notes can
require us to repurchase all or some of the notes on May 1, 2009 and upon
certain events constituting a fundamental change or a termination of trading. A
fundamental change is any transaction or event in which all or substantially
all of our common stock is exchanged for, converted into, acquired for, or
constitutes solely the right to receive, consideration that is not all, or
substantially all, common stock that is listed on, or immediately after the
transaction or event, will be listed on, a United States national securities
exchange. A termination of trading will have occurred if our common stock is
not listed for trading on a national securities exchange or the Nasdaq National
Market.
Our earnings to fixed
charge coverage ratio, as defined in the senior subordinated convertible notes,
was 1.98 for the quarter ended September 30, 2007.
Capital
Commitments
We had capital
commitments of $41.5 million at September 30, 2007 for the construction of five
new facilities, an addition to one existing facility and one remodel. Of
the new facilities, two are replacing existing facilities. We anticipate
incurring $18.2 million in the remainder of 2007 and the remaining $23.3
million in 2008. We expect to pay for the construction out of existing cash
balances and borrowings on our line of credit until completion of the projects,
at which time we anticipate securing long-term financing and general borrowings
from third party lenders for 70% to 90% of the amounts expended.
We anticipate
approximately $30 million in non-financeable capital expenditures in 2008,
which is similar to our anticipated 2007 amount.
22
In addition to the
above, in the next 1 to 3 years, we have approximately $95 million to $105
million in planned capital expenditures under consideration for various new
facilities and remodeling projects. These projects are still in the planning
stage or are awaiting approvals from governmental agencies or manufacturers. We
feel that these projects are a critical part of our future growth strategy. We
anticipate the need for additional financing options to augment our working
capital line of credit to accommodate this growth strategy.
There were no
significant changes to our other contractual payment obligations from those
reported in our 2006 Form 10-K as filed
with the Securities and Exchange Commission on March 9, 2007.
Critical Accounting Policies and
Use of Estimates
We reaffirm our critical accounting policies and use of estimates as described in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 9, 2007
.
Item 3.
Quantitative and Qualitative Disclosures
About Market Risk
There have been no
material changes in our reported market risks or risk management policies since
the filing of our 2006 Annual Report on Form 10-K, which was filed with the
Securities and Exchange Commission on March 9, 2007.
Item 4.
Controls and Procedures
Changes
in Internal Control Over Financial Reporting
There has been no change
in our internal control over financial reporting that occurred during our last
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
Evaluation of
Disclosure Controls and Procedures
Our management evaluated,
with the participation and under the supervision of our Chief Executive Officer
and Chief Financial Officer, the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this Quarterly Report on Form
10-Q. Based on this evaluation, our Chief Executive Officer and our Chief
Financial Officer concluded that our disclosure controls and procedures are
effective to ensure that information we are required to disclose in reports
that we file or submit under the Securities Exchange Act of 1934 is accumulated
and communicated to our management, including our President and Chief Executive
Officer and our Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure and that such information is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms.
23