NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(December 31,
2018
,
2017
, and
2016
)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
We are one of the largest automotive retailers in the United States. As of
December 31, 2018
, we owned and operated
97
new vehicle franchises (
83
dealership locations), representing
29
brands of automobiles, and
25
collision centers, in
17
metropolitan markets, within
nine
states. Our stores offer an extensive range of automotive products and services, including new and used vehicles, repair and maintenance services, collision repair services, and finance and insurance products. As of
December 31, 2018
, our new vehicle revenue brand mix consisted of
47%
imports,
33%
luxury, and
20%
domestic brands.
Our operating results are generally subject to seasonal variations. Demand for new vehicles is generally highest during the second, third, and fourth quarters of each year and, accordingly, we expect our revenues to generally be higher during these periods. In addition, we typically experience higher sales of luxury vehicles in the fourth quarter, which have higher average selling prices and gross profit per vehicle retailed. Revenues and operating results may be impacted significantly from quarter to quarter by changing economic conditions, vehicle manufacturer incentive programs, or adverse weather events.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"), and reflect the consolidated accounts of Asbury Automotive Group, Inc. and our wholly owned subsidiaries. All intercompany transactions have been eliminated in consolidation. If necessary, reclassifications of amounts previously reported have been made to the accompanying Consolidated Financial Statements in order to conform to current presentation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the periods presented. Actual results could differ materially from these estimates. Estimates and assumptions are reviewed quarterly, and the effects of any revisions are reflected in the consolidated financial statements in the period they are determined to be necessary. Significant estimates made in the accompanying consolidated financial statements include, but are not limited to, those relating to inventory valuation reserves, reserves for chargebacks against revenue recognized from the sale of finance and insurance products, reserves for insurance programs, certain assumptions related to intangible and long-lived assets, and reserves for certain legal or similar proceedings relating to our business operations.
Cash and Cash Equivalents
Cash and cash equivalents include investments in money market accounts and short-term certificates of deposit, which have maturity dates of less than
90
days when purchased.
Contracts-In-Transit
Contracts-in-transit represent receivables from third-party finance companies for the portion of new and used vehicle purchase price financed by customers through sources arranged by us.
Inventories
Inventories are stated at the lower of cost and net realizable value. We use the specific identification method to value vehicle inventories and the "first-in, first-out" method ("FIFO") to account for our parts inventories. Our new vehicle sales histories have indicated that the vast majority of the new vehicles we sell are sold for, or in excess of, our cost to purchase those vehicles. Therefore, we generally do not maintain a reserve for new vehicle inventory. We maintain a reserve for used vehicle inventory where cost basis exceeds net realizable value. In assessing lower of cost and net realizable value for used vehicles, we consider (i) the aging of our used vehicles, (ii) historical sales experience of used vehicles, and (iii) current market conditions and trends in used vehicle sales. We also review and consider the following metrics related to used vehicle sales (both on a recent and longer-term historical basis): (i) days of supply in our used vehicle inventory, (ii) used vehicle units sold at less than original cost as a percentage of total used vehicles sold, and (iii) average vehicle selling price of used vehicle units sold at less than original cost. We then determine the appropriate level of reserve required to reduce our used vehicle inventory to the lower of cost and net realizable value, and record the resulting adjustment in the period in which we determine a loss has
occurred. The level of reserve determined to be appropriate for each reporting period is considered to be a permanent inventory write-down, and therefore is only released upon the sale of the related inventory.
We receive assistance from certain automobile manufacturers in the form of advertising and floor plan interest credits. Manufacturer advertising credits that are reimbursements of costs associated with specific advertising programs are recognized as a reduction of advertising expense in the period they are earned. All other manufacturer advertising and floor plan interest credits are accounted for as purchase discounts, and are recorded as a reduction of inventory and recognized as a reduction to New Vehicle Cost of Sales in the accompanying Consolidated Statements of Income in the period the related vehicle is sold.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives. Depreciation is included in Depreciation and Amortization on the accompanying Consolidated Statements of Income. Leasehold improvements are capitalized and amortized over the lesser of the life of the lease or the useful life of the related asset. The ranges of estimated useful lives are as follows (in years):
|
|
|
Buildings and improvements
|
10-40
|
Machinery and equipment
|
5-10
|
Furniture and fixtures
|
3-10
|
Company vehicles
|
3-5
|
Expenditures for major additions or improvements, which extend the useful lives of assets, are capitalized. Minor replacements, maintenance and repairs, which do not improve or extend the lives of such assets, are expensed as incurred. We capitalize interest on borrowings during the active construction period of capital projects. Capitalized interest is added to the cost of the assets and is depreciated over the estimated useful lives of the assets.
We review property and equipment for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. When we test our long-lived assets for impairment, we first compare the carrying amount of the underlying assets to their net recoverable value by reviewing the undiscounted cash flows expected from the use and eventual disposition of the underlying assets. If the carrying amount of the underlying assets is less than their net recoverable value, then we calculate an impairment equal to the excess of the carrying amount over the fair market value, and the impairment loss would be charged to operations in the period identified. We did not record an impairment of our property and equipment in
2018
,
2017
, and
2016
.
Acquisitions
Acquisitions are accounted for under the acquisition method of accounting, and the assets acquired and liabilities assumed are recorded at their fair value, at the acquisition date. The results of operations of acquired dealerships are included in the accompanying Consolidated Statements of Income, commencing on the date of acquisition.
Goodwill and Other Intangible Assets
Goodwill represents the excess cost of an acquired business over the fair market value of its identifiable net assets. We have determined that, based on how we integrate acquisitions into our business, how the components of our business share resources and interact with one another, and how we review the results of our operations, that we have several geographic market-based operating segments. We have determined that the dealerships in each of our operating segments are components that are aggregated into several geographic market-based reporting units for the purpose of testing goodwill for impairment, as they (i) have similar economic characteristics, (ii) offer similar products and services (all of our dealerships offer new and used vehicles, service, parts and third-party finance and insurance products), (iii) have similar customers, (iv) have similar distribution and marketing practices (all of our dealerships distribute products and services through dealership facilities that market to customers in similar ways), and (v) operate under similar regulatory environments.
Our only significant identifiable intangible assets, other than goodwill, are our rights under franchise agreements with manufacturers, which are recorded at an individual franchise level. The fair value of our manufacturer franchise rights are determined at the acquisition date, by discounting the projected cash flows specific to each franchise. We have determined that manufacturer franchise rights have an indefinite life, as there are no economic, contractual or other factors that limit their useful lives, and they are expected to generate cash flows indefinitely due to the historically long lives of the manufacturers' brand names. Furthermore, to the extent that any agreements evidencing our manufacturer franchise rights would expire, we expect that we would be able to renew those agreements in the ordinary course of business.
Goodwill and manufacturer franchise rights are deemed to have indefinite lives and therefore are not subject to amortization. We review goodwill and manufacturer franchise rights for impairment annually as of October 1
st
, or more often if events or circumstances indicate that impairment may have occurred. We are subject to financial statement risk to the extent that goodwill becomes impaired due to decreases in the fair value of our automotive retail business or manufacturer franchise rights become impaired due to decreases in the fair value of our individual franchises.
Debt Issuance Costs
Debt issuance costs are presented as a contra-liability within Current Maturities of Long-Term Debt or Long-Term Debt on our Consolidated Balance Sheets, except for debt issuance costs associated with our line-of-credit arrangements, which are presented as an asset within Other Current Assets or Other Long-Term Assets on our Consolidated Balance Sheets. Debt issuance costs are amortized to Floor Plan Interest Expense and Other Interest Expense, net in the accompanying Consolidated Statements of Income through maturity using the effective interest method.
Derivative Instruments and Hedging Activities
From time to time, we utilize derivative financial instruments to manage our interest rate risk. The types of risks hedged are those relating to the variability of cash flows caused by fluctuations in interest rates. We document our risk management strategy and assess hedge effectiveness at each interest rate swaps inception and during the term of each hedge. Derivatives are reported at fair value on the accompanying Consolidated Balance Sheets.
The effective portion of the gain or loss on our hedges is reported as a component of Accumulated Other Comprehensive Loss on the accompanying Consolidated Balance Sheets, and reclassified to Swap Interest Expense in the accompanying Consolidated Statements of Income in the period during which the hedged transaction affects earnings.
Measurements of hedge effectiveness are based on comparisons between the gains or losses of the actual interest rate swaps and the gains or losses of hypothetical interest rate swaps, which have the same critical terms of the defined hedged items. Ineffective portions of these interest rate swaps are reported as a component of Swap Interest Expense in the accompanying Consolidated Statements of Income, in the period during which any ineffectiveness is identified.
Insurance
We are self-insured for employee medical claims and maintain stop-loss insurance for large-dollar individual claims. We have high deductible insurance programs for workers compensation, property and general liability claims. We maintain and review our claim and loss history to assist in assessing our expected future liability for these claims. We also use professional service providers, such as account administrators and actuaries, to help us accumulate and assess this information. Provisions for retained losses and deductibles are made by charges to expense based upon periodic evaluations of the estimated ultimate liabilities on reported and unreported claims.
Revenue Recognition
The Company adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606) and all subsequent amendments issued thereafter (collectively "ASC 606"), on January 1, 2018. Refer to Note 2 "Revenue Recognition" for additional information related to the impact of the Company’s adoption of ASC 606.
Internal Profit
Revenues and expenses associated with internal work performed by our parts and service departments on new and used vehicle inventory are eliminated in consolidation. The gross profit earned by our parts and service departments for internal work performed is included as a reduction of Parts and Service Cost of Sales on the accompanying Consolidated Statements of Income upon the sale of the vehicle. The costs incurred by our new and used vehicle departments for work performed by our parts and service departments is included in either New Vehicle Cost of Sales or Used Vehicle Cost of Sales on the accompanying Consolidated Statements of Income, depending on the classification of the vehicle serviced. We maintain a reserve to eliminate the internal profit on vehicles that have not been sold.
Share-Based Compensation
We record share-based compensation expense under the fair value method on a straight-line basis over the vesting period, unless the awards are subject to performance conditions, in which case we recognize the expense over the requisite service period of each separate vesting tranche. In addition, we account for the forfeiture of share-based awards as they occur.
Share Repurchases
Share repurchases may be made from time-to-time in open market transactions or through privately negotiated transactions under the authorization approved by the Board of Directors. Periodically, the Company may retire repurchased shares of common stock previously held by the Company as Treasury Shares. In accordance with our accounting policy, we allocate any excess share repurchase price over par value between additional paid-in capital, which is limited to amounts initially recorded for the same issue, and retained earnings.
During the year ended December 31, 2018, the Company retired
89,967
shares of its common stock repurchased pursuant to the Repurchase Program ("Retired Shares") and previously held by the Company as Treasury Shares in the amount of
$5.9 million
.
Earnings per Common Share
Basic earnings per common share is computed by dividing net income by the weighted-average common shares outstanding during the period. Diluted earnings per common share is computed by dividing net income by the weighted-average common shares and common share equivalents outstanding during the period. For all periods presented, there were no adjustments to the numerator necessary to compute diluted earnings per share.
Advertising
We expense costs of advertising as incurred and production costs when the advertising initially takes place, net of certain advertising credits and other discounts received from certain automobile manufacturers. Advertising expense from continuing operations totaled
$30.6 million
,
$30.3 million
and
$34.0 million
for the years ended
December 31, 2018
,
2017
and
2016
, which was net of earned advertising credits of
$21.0 million
,
$18.0 million
, and
$16.8 million
, respectively, and is included in Selling, General, and Administrative expense in the accompanying Consolidated Statements of Income.
Income Taxes
We use the liability method to account for income taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of differences between the carrying amounts of assets and liabilities and their respective tax basis using currently enacted tax rates. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period when the change is enacted. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion or all the deferred tax assets will not be realized.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Act. The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, a reduction in the U.S. federal corporate income tax rate from 35% to 21%. In 2017, we remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. The provisional amount recorded related to the remeasurement of our deferred tax balance resulted in a
$7.9 million
reduction to our net deferred tax liability as of December 31, 2017.
The staff of the U.S. Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 ("SAB 118") on December 22, 2017, which provided guidance on accounting for the income tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from December 22, 2017, the Tax Act enactment date, for companies to complete the accounting under ASC 740, Income Taxes ("ASC 740"). In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete.
During the third quarter of 2018, the IRS released Notice 2018-68, which clarified a number of changes made to Section 162(m) of the Code by the Tax Act. As a result of this new guidance, we recorded
$0.6 million
of additional income tax expense related to an adjustment to the deferred tax asset for certain components of share-based compensation. After considering the additional guidance issued by the U.S. Treasury Department, state tax authorities and other standard-setting bodies we have completed our accounting for the Tax Act.
Assets Held for Sale and Liabilities Associated with Assets Held for Sale
Certain amounts have been classified as Assets Held for Sale as of
December 31, 2018
and
2017
in the accompanying Consolidated Balance Sheets. Assets and liabilities classified as held for sale include assets and liabilities associated with pending dealership disposals, real estate not currently used in our operations that we are actively marketing to sell, and any related mortgage notes payable, if applicable. Classification as held for sale begins on the date that we have met all of the criteria for classification as held for sale.
At the time of classifying assets as held for sale, we compare the carrying value of these assets to estimates of fair value to assess for impairment. We compare the carrying value to estimates of fair value utilizing the assistance of third-party broker opinions of value and third-party desktop appraisals to assist in our fair value estimates related to real estate properties.
Statements of Cash Flows
Borrowings and repayments of floor plan notes payable to a lender unaffiliated with the manufacturer from which we purchase a particular new vehicle ("Non-Trade") and all floor plan notes payable relating to pre-owned vehicles (together referred to as "Floor Plan Notes Payable—Non-Trade"), are classified as financing activities on the accompanying Consolidated Statements of Cash Flows, with borrowings reflected separately from repayments. The net change in floor plan notes payable to a lender affiliated with the manufacturer from which we purchase a particular new vehicle (collectively referred to as "Floor Plan Notes Payable—Trade") is classified as an operating activity on the accompanying Consolidated Statements of Cash Flows. Borrowings of floor plan notes payable associated with inventory acquired in connection with all acquisitions and repayments made in connection with all divestitures are classified as a financing activity in the accompanying Consolidated Statement of Cash Flows. Cash flows related to floor plan notes payable included in operating activities differ from cash flows related to floor plan notes payable included in financing activities only to the extent that the former are payable to a lender affiliated with the manufacturer from which we purchased the related inventory, while the latter are payable to a lender not affiliated with the manufacturer from which we purchased the related inventory.
Loaner vehicles account for a significant portion of Other Current Assets. We acquire loaner vehicles either with available cash or through borrowings from either our manufacturer affiliated lenders or through our senior secured credit agreement with Bank of America, as administrative agent, and the other agents and lenders party thereto (the "2016 Senior Credit Facility"). Loaner vehicles are initially used by our service department for only a short period of time (typically
6
to
12
months) before we seek to sell them. Therefore, we classify the acquisition of loaner vehicles in Other Current Assets and the borrowings and repayments of loaner vehicle notes payable in Accounts Payable and Accrued Liabilities in the accompanying Consolidated Statements of Cash Flows. Loaner vehicles are depreciated over the service period to their estimated value. At the end of the loaner service period, loaner vehicles are transferred from Other Current Assets to used vehicle inventory. These transfers are reflected as non-cash transfers between Other Current Assets and Inventory in the accompanying Consolidated Statements of Cash Flows.
Business and Credit Concentration Risk
Financial instruments, which potentially subject us to a concentration of credit risk, consist principally of cash deposits. We maintain cash balances at financial institutions with strong credit ratings. Generally, amounts maintained with these financial institutions are in excess of FDIC insurance limits.
We have substantial debt service obligations. As of
December 31, 2018
, we had total debt of
$910.1 million
, excluding floor plan notes payable, the debt premium on the 6.0% Senior Subordinated Notes due 2024 ("6.0% Notes"), and debt issuance costs. In addition, we and our subsidiaries have the ability to obtain additional debt from time to time to finance acquisitions, real property purchases, capital expenditures, share repurchases or for other purposes, although such borrowings are subject to the restrictions contained in the second amended and restated senior secured credit agreement with Bank of America, N.A. ("Bank of America"), as administrative agent, and the other lenders party thereto (the "2016 Senior Credit Facility"), the indenture governing our
6.0%
Senior Subordinated Notes due 2024 (the "Indenture"), and our other debt instruments. We will have substantial debt service obligations, consisting of required cash payments of principal and interest, for the foreseeable future.
We are subject to operating and financial restrictions and covenants in certain of our leases and in our debt instruments, including the 2016 Senior Credit Facility, the Indenture, and the credit agreements covering our mortgage obligations. These agreements contain restrictions on, among other things, our ability to incur additional indebtedness, to create liens or other encumbrances, and to make certain payments (including dividends and repurchases of our shares and investments). These agreements may also require us to maintain compliance with certain financial and other ratios. Our failure to comply with any of these covenants in the future would constitute a default under the relevant agreement, which would, depending on the relevant agreement, (i) entitle the creditors under such agreement to terminate our ability to borrow under the relevant agreement and accelerate our obligations to repay outstanding borrowings; (ii) require us to apply our available cash to repay these borrowings; (iii) entitle the creditors under such agreement to foreclose on the property securing the relevant indebtedness; and/or (iv) prevent us from making debt service payments on certain of our other indebtedness, any of which would have a material adverse effect on our business, financial condition or results of operations. In many cases, a default under one of our debt or mortgage, agreements could trigger cross-default provisions in one or more of our other debt or mortgages.
A number of our dealerships are located on properties that we lease. Each of the leases governing such properties has certain covenants with which we must comply. If we fail to comply with the covenants under our leases, the respective landlords could terminate the leases and seek damages from us.
Concentrations of credit risk with respect to contracts-in-transit and accounts receivable are limited primarily to automotive manufacturers and financial institutions. Credit risk arising from receivables from commercial customers is minimal due to the large number of customers comprising our customer base.
A significant portion of our new vehicle sales are derived from a limited number of automotive manufacturers. For the year ended
December 31, 2018
, manufacturers representing
5%
or more of our revenues from new vehicle sales were as follows:
|
|
|
|
|
Manufacturer (Vehicle Brands):
|
|
% of Total
New Vehicle
Revenues
|
American Honda Motor Co., Inc.
(Honda and Acura)
|
|
23.7
|
%
|
Toyota Motor Sales, U.S.A., Inc.
(Toyota and Lexus)
|
|
18.4
|
%
|
Nissan North America, Inc.
(Nissan and Infiniti)
|
|
14.4
|
%
|
Ford Motor Company
(Ford and Lincoln)
|
|
11.1
|
%
|
Mercedes-Benz USA, LLC (
Mercedes-Benz, Smart and Sprinter
)
|
|
6.5
|
%
|
BMW of North America, LLC
(BMW and Mini)
|
|
5.6
|
%
|
No other manufacturers individually accounted for more than
5%
of our total new vehicle revenue for the year ended
December 31, 2018
.
Segment Reporting
Our operations are organized by management into geographic market-based dealership groups. Our Chief Operating Decision Maker is our Chief Executive Officer who manages the business, regularly reviews financial information and allocates resources at the geographic market level. The geographic operating segments have been aggregated into
one
reportable segment as their operations (i) have similar economic characteristics (our markets all have similar long-term average gross margins), (ii) offer similar products and services (all of our markets offer new and used vehicles, parts and service, and third-party finance and insurance products), (iii) have similar customers, (iv) have similar distribution and marketing practices (all of our markets distribute products and services through dealership facilities that market to customers in similar ways), and (v) operate under similar regulatory environments.
Recent Accounting Pronouncements
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
.
The amendments in this update address several specific cash flow issues with the objective of reducing the diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments in this update were effective for interim and annual periods beginning after December 15, 2017 and include retrospective application. The Company adopted this update on January 1, 2018. The adoption of this update did not have a material impact to our consolidated financial statements for the years ended December 31, 2018, 2017, and 2016.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The amendments in this update clarify the definition of a business in order to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments in this update were to be applied prospectively and were effective for interim and annual periods beginning after December 15, 2017. The Company adopted this update on January 1, 2018. The adoption of this update did not have a material impact to our consolidated financial statements for the
year ended December 31, 2018
.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The new standard, and its related amendments, establishes a right-of-use model ("ROU") that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with the classification affecting the pattern and classification of expense recognition reflected in the income statement. A modified retrospective transition approach is required, applying the new standard to all leases existing either as of the effective date or as of the beginning of the earliest comparative period presented in the financial statements at the date of adoption.
The new standard is effective for us on January 1, 2019 and the Company plans to adopt the new standard using the effective date method as the date of initial application. As a result, financial information and disclosures will not be updated under the new standard for periods ending prior to January 1, 2019. Moreover, the Company expects to elect the package of practical expedients to use in transition, which permits us not to reassess under the new standard our prior conclusions about lease identification and lease classification. In addition, we expect to elect the short-term lease exemption for all leases that qualify as well as the practical expedient to not separate lease and non-lease components for all leases.
The adoption of the new standard will have a material impact to our consolidated financial statements due to the recognition of ROU assets and liabilities for real estate and equipment leases on our consolidated balance sheet. In preparation for adoption of the new standard, the Company established an implementation team to assist with the implementation of key controls for transition as well as controls related to on-going accounting considerations. The Company is currently in the process of finalizing the transition amounts of ROU assets and liabilities that will be recorded on the balance sheet as a result of the adoption of the new standard.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This update is intended to simplify hedge accounting by better aligning how an entity’s risk management activities and hedging relationships are presented in its financial statements and simplifies the application of hedge accounting guidance in certain situations and is effective for the Company on January 1, 2019. This update expands and refines hedge accounting for both non-financial and financial risk components and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. For cash flow hedges existing at the adoption date, this update requires adoption on a modified retrospective basis with a cumulative-effect adjustment to retained earnings as of the effective date. The amendments to presentation guidance and disclosure requirements are required to be adopted prospectively. We are currently evaluating this update and the significance of any impact this update may have to our consolidated financial statements.
2. REVENUE RECOGNITION
On January 1, 2018, the Company adopted ASC 606 using the modified retrospective method for all contracts not completed as of the date of adoption. We recognized the cumulative effect of initially applying the new revenue standard as an adjustment to retained earnings as of January 1, 2018. Therefore, prior period comparative information has not been adjusted and continues to be reported under accounting standards ("previous guidance" or "ASC 605") in effect for those periods.
Disaggregation of Revenue
The following table summarizes revenue from contracts with customers for the
twelve months ended December 31, 2018
:
|
|
|
|
|
|
For the Year Ended December 31, 2018
|
Revenue:
|
|
New vehicle
|
$
|
3,788.7
|
|
Used vehicle retail
|
1,783.3
|
|
Used vehicle wholesale
|
189.1
|
|
New and used vehicle
|
5,761.1
|
|
Sale of vehicle parts and accessories
|
139.2
|
|
Vehicle repair and maintenance services
|
681.8
|
|
Parts and services
|
821.0
|
|
Finance and insurance, net
|
292.3
|
|
Total revenue
|
$
|
6,874.4
|
|
The Company satisfies performance obligations either over time or at a point in time as discussed in further detail below. Revenue is recognized at the time the related performance obligation is satisfied by transferring a promised good or service to a customer. Sales and other taxes we collect concurrent with revenue-producing activities are excluded from revenue.
New vehicle and used vehicle retail
Revenue from the sale of new and used vehicles (which excludes sales and other taxes) is recognized when the terms of the customer contract are satisfied which generally occurs with the signing of the sales contract and transfer of control of the vehicle to the customer. Incidental items that are immaterial in the context of the contract are accrued at the time of sale.
Used vehicle wholesale
Proceeds from the sale of these vehicles are recognized in used vehicle revenue upon transfer of control to end-users at auction.
Sale of vehicle parts and accessories
The Company recognizes revenue upon transfer of control to the customer which occurs at a point in time. When the Company performs shipping and handling activities after the transfer of control to the customer (e.g., when control transfers prior to delivery), they are considered as fulfillment activities, and accordingly, the costs are accrued for when the related revenue is recognized.
Vehicle repair and maintenance services
The Company provides vehicle repair and maintenance services to its customers pursuant to the terms and conditions included within the customer contract ("repair order"). Satisfaction of this performance obligation creates an asset with no alternative use for which an enforceable right to payment for performance to date exists within our contractual agreements. As such, the Company recognizes revenue over time as the Company satisfies its performance obligation. Additionally, the Company has determined that parts and labor are not individually distinct in the context of a repair order and therefore are treated as a single performance obligation.
Finance and Insurance, net
We receive commissions from third-party lending and insurance institutions for arranging customer financing and from the sale of vehicle service contracts, guaranteed auto protection (known as "GAP") insurance, and other insurance, to end-users. Finance and insurance commission revenue is recognized at the point of sale since our performance obligation is to arrange financing or facilitating the sale of a third party’s products or services to our customers.
The Company’s commission arrangements with third-party lenders and insurance administrators consists of fixed ("upfront") and variable consideration. Variable consideration includes commission chargebacks ("chargebacks") in the event a contract is prepaid, defaulted upon, or terminated by the end-user. The Company reserves for future chargebacks based on historical chargeback experience and the termination provisions of the applicable contract and these reserves are established in the same period that the related revenue is recognized.
We also participate in future profits pursuant to retrospective commission arrangements, which meet the definition of variable consideration, for certain insurance products associated with a third-party portfolio. The Company estimates the amount of variable consideration to be included in the transaction price based on historical payment trends and further constrains the variable consideration such that it is probable that a significant reversal of previously recognized revenue will not occur. In making these assessments the Company considers the likelihood and magnitude of a potential reversal of revenue and updates its assessment when uncertainties associated with the constraint are removed.
Financial Statement Impact of Adopting ASC 606
The Company adopted ASC 606 using the modified retrospective method. The cumulative effect of applying the new guidance to all contracts with customers that were not completed as of January 1, 2018 was recorded as an adjustment to retained earnings as of the adoption date. As a result of applying the modified retrospective method to adopt the new revenue guidance, the following adjustments were made to accounts on the Company's Condensed Consolidated Balance Sheet as of January 1, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Reported
|
|
Adjustments
|
|
Balance at
|
|
December 31, 2017
|
|
Vehicle Repair and Maintenance Services
|
|
Finance and Insurance, net
|
|
January 1, 2018
|
|
(In millions)
|
Assets:
|
|
|
|
|
|
|
|
Inventories
|
$
|
826.0
|
|
|
$
|
(4.1
|
)
|
|
$
|
—
|
|
|
$
|
821.9
|
|
Other current assets
|
119.3
|
|
|
6.4
|
|
|
10.0
|
|
|
135.7
|
|
Liabilities:
|
|
|
|
|
|
|
|
Deferred income taxes
|
$
|
12.5
|
|
|
$
|
0.6
|
|
|
$
|
2.5
|
|
|
$
|
15.6
|
|
Equity:
|
|
|
|
|
|
|
|
Retained earnings
|
$
|
750.3
|
|
|
$
|
1.7
|
|
|
$
|
7.5
|
|
|
$
|
759.5
|
|
Vehicle repair and maintenance services
Under the previous guidance, revenue was recognized at the time all repairs were completed. Under ASC 606, revenue is recognized as the Company satisfies its performance obligation. The amounts reflected within the table above relate to the Company’s measure of progress for open contracts as of January 1, 2018. In addition, contract assets are reported within Other Current Assets on the Company's Consolidated Balance Sheets.
Finance and Insurance, net
Under the previous guidance, retrospective commissions were not fixed or determinable, and as a result, the associated revenue was recognized on a cash basis. Under ASC 606, the Company recognizes an estimate of the variable consideration to be received, subject to constraint, as it satisfies its performance obligation. As the Company’s performance obligation is satisfied at the time of arranging the insurance product sale, the Company recorded a contract asset and corresponding increase to retained earnings based on an estimate, subject to constraint, of amounts expected to be received associated with previously satisfied performance obligations.
Impact of New Revenue Guidance on Financial Statement Line Items
In accordance with the new revenue standard requirements, the disclosure of the impact of adoption on our Consolidated Balance Sheets and Statements of Income was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
As Reported
|
|
Amounts Under ASC 605
|
|
Effect of Change Increase/(Decrease)
|
|
(In millions)
|
Balance Sheet:
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
Accounts receivable
|
$
|
130.3
|
|
|
$
|
143.6
|
|
|
$
|
(13.3
|
)
|
Inventories
|
1,067.6
|
|
|
1,070.2
|
|
|
(2.6
|
)
|
Other current assets
|
122.2
|
|
|
107.5
|
|
|
14.7
|
|
Liabilities:
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
$
|
298.4
|
|
|
$
|
298.5
|
|
|
$
|
(0.1
|
)
|
Deferred income taxes
|
21.7
|
|
|
18.6
|
|
|
3.1
|
|
Equity:
|
|
|
|
|
|
Retained earnings
|
$
|
922.7
|
|
|
$
|
926.9
|
|
|
$
|
(4.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2018
|
|
As Reported
|
|
Amounts Under ASC 605
|
|
Effect of Change Increase/(Decrease)
|
|
(In millions, except per share data)
|
Statement of Income:
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
Parts and service
|
$
|
821.0
|
|
|
$
|
823.3
|
|
|
$
|
(2.3
|
)
|
Finance and insurance, net
|
292.3
|
|
|
291.7
|
|
|
0.6
|
|
Cost of Sales:
|
|
|
|
|
|
Parts and service
|
305.2
|
|
|
306.7
|
|
|
(1.5
|
)
|
Income before income taxes
|
224.8
|
|
|
225.0
|
|
|
(0.2
|
)
|
Income tax expense
|
56.8
|
|
|
56.9
|
|
|
(0.1
|
)
|
Net income
|
$
|
168.0
|
|
|
$
|
168.1
|
|
|
$
|
(0.1
|
)
|
Earnings Per Common Share:
|
|
|
|
|
|
Basic
|
$
|
8.36
|
|
|
$
|
8.36
|
|
|
$
|
—
|
|
Diluted
|
$
|
8.28
|
|
|
$
|
8.28
|
|
|
$
|
—
|
|
The following summarizes the changes to the Company’s Condensed Consolidated Statements of Income for the
year ended December 31, 2018
as a result of the adoption of ASC 606 on January 1, 2018 compared to if the Company had continued to recognize revenues under ASC 605:
|
|
•
|
ASC 606 accelerated the recognition of revenue and costs related to open vehicle repair orders in which recognition was previously deferred until the completion of the repair order. For the
year ended December 31, 2018
, gross profit decreased $
0.8 million
due to differences in open repair orders as of
December 31, 2018
compared to open repair orders as of December 31, 2017.
|
|
|
•
|
ASC 606 accelerated the timing of recognition of certain retro-commission arrangements (i.e. variable consideration) reported within finance and insurance, net. Under ASC 605, retro-commission income was recorded at the time it was received from our third-party provider. For the
year ended December 31, 2018
, net revenue increased
$0.6 million
due to the difference between the amounts received compared to the Company's estimate of variable consideration, subject to a constraint, for products arranged during the same comparative period.
|
Contract Assets
Changes in contract assets during the period are reflected in the table below. Contract assets related to vehicle repair and maintenance services are transferred to receivables when a repair order is completed and invoiced to the customer.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vehicle Repair and Maintenance Services
|
|
Finance and Insurance, net
|
|
Total
|
|
(In millions)
|
Contract Assets (Current), January 1, 2018
|
$
|
6.4
|
|
|
$
|
10.0
|
|
|
$
|
16.4
|
|
Transferred to receivables from contract assets recognized at the beginning of the period
|
(6.4
|
)
|
|
(3.2
|
)
|
|
(9.6
|
)
|
Increases related to revenue recognized, inclusive of adjustments to constraint, during the period
|
5.1
|
|
|
2.6
|
|
|
7.7
|
|
Contract Assets (Current), March 31, 2018
|
5.1
|
|
|
9.4
|
|
|
14.5
|
|
Transferred to receivables from contract assets recognized at the beginning of the period
|
(5.1
|
)
|
|
(3.2
|
)
|
|
(8.3
|
)
|
Increases related to revenue recognized, inclusive of adjustments to constraint, during the period
|
4.0
|
|
|
2.7
|
|
|
6.7
|
|
Contract Assets (Current), June 30, 2018
|
4.0
|
|
|
8.9
|
|
|
12.9
|
|
Transferred to receivables from contract assets recognized at the beginning of the period
|
(4.0
|
)
|
|
(3.0
|
)
|
|
(7.0
|
)
|
Increases related to revenue recognized, inclusive of adjustments to constraint, during the period
|
4.3
|
|
|
3.1
|
|
|
7.4
|
|
Contract Assets (Current), September 30, 2018
|
4.3
|
|
|
9.0
|
|
|
13.3
|
|
Transferred to receivables from contract assets recognized at the beginning of the period
|
$
|
(4.3
|
)
|
|
$
|
(3.9
|
)
|
|
$
|
(8.2
|
)
|
Increases related to revenue recognized, inclusive of adjustments to constraint, during the period
|
$
|
4.1
|
|
|
$
|
5.5
|
|
|
$
|
9.6
|
|
Contract Assets (Current), December 31, 2018
|
$
|
4.1
|
|
|
$
|
10.6
|
|
|
$
|
14.7
|
|
3. ACQUISITIONS AND DIVESTITURES
Results of acquired dealerships are included in our accompanying Consolidated Statements of Income commencing on the date of acquisition. Our acquisitions are accounted for using the acquisition method of accounting, which requires, among other things, that the assets acquired and liabilities assumed be recognized at their acquisition date fair values, with any excess of the consideration transferred over the estimated fair values of the identifiable net assets acquired recorded as goodwill. Goodwill is an asset representing operational synergies and future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized.
During the year ended December 31,
2018
, we acquired the assets of
one
franchise (
one
dealership location) in the Indianapolis, Indiana market and
two
franchises (
two
dealership locations) in the Atlanta, Georgia market for a combined aggregate purchase price of $
93.2 million
. Consideration paid (or payable) to fund these acquisitions included $
68.6 million
of cash, $
22.7 million
of floor plan borrowings for the purchase of the related new vehicle inventory, and purchase price holdbacks of $
1.9 million
for potential indemnity claims made by us with respect to the acquired franchises.
During the year ended December 31,
2017
, we acquired the assets of
two
franchises (
two
dealership locations) and
one
collision center in the Indianapolis, Indiana market for an aggregate purchase price of
$80.1 million
. We financed these acquisitions with
$55.0 million
of cash and
$25.1 million
of floor plan borrowings for the purchase of the related new vehicle inventory. We did not acquire any dealerships during the year ended December 31, 2016.
Below is the allocation of purchase price for these acquisitions. Goodwill and manufacturer franchise rights associated with our acquisitions will be deductible for federal and state income tax purposes ratably over a
15
-year period.
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2018
|
|
2017
|
|
(In millions)
|
Inventory
|
$
|
27.3
|
|
|
$
|
25.9
|
|
Real estate
|
23.5
|
|
|
12.2
|
|
Property and equipment
|
0.6
|
|
|
1.4
|
|
Goodwill
|
20.4
|
|
|
32.7
|
|
Manufacturer franchise rights
|
19.9
|
|
|
6.2
|
|
Loaner vehicles
|
1.7
|
|
|
3.2
|
|
Liabilities assumed
|
(0.2
|
)
|
|
$
|
(1.5
|
)
|
Total purchase price
|
$
|
93.2
|
|
|
$
|
80.1
|
|
We did not divest any dealerships during the years ended December 31,
2018
and
2017
.
During the year ended December 31,
2016
, we sold the remaining
five
franchises (
four
dealership locations) and
two
collision centers in the Little Rock, Arkansas market. We recorded a gain associated with the sale of the franchises totaling
$45.5 million
(
$28.4 million
net of tax) in our accompanying Consolidated Statements of Income. Our 2016 divestitures are not considered significant subsidiaries as defined in Rule 1-02(w) of Regulation S-X.
4. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2018
|
|
2017
|
|
(In millions)
|
Vehicle receivables
|
$
|
45.7
|
|
|
$
|
48.3
|
|
Manufacturer receivables
|
51.2
|
|
|
47.0
|
|
Other receivables
|
34.7
|
|
|
34.8
|
|
Total accounts receivable
|
131.6
|
|
|
130.1
|
|
Less—Allowance for doubtful accounts
|
(1.3
|
)
|
|
(1.6
|
)
|
Accounts receivable, net
|
$
|
130.3
|
|
|
$
|
128.5
|
|
5. INVENTORIES
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2018
|
|
2017
|
|
(In millions)
|
New vehicles
|
$
|
867.2
|
|
|
$
|
646.5
|
|
Used vehicles
|
158.9
|
|
|
135.9
|
|
Parts and accessories
|
41.5
|
|
|
43.6
|
|
Total inventories
|
$
|
1,067.6
|
|
|
$
|
826.0
|
|
The lower of cost and net realizable value reserves reduced total inventory cost by
$6.1 million
and
$5.7 million
as of
December 31, 2018
and
December 31, 2017
, respectively. As of
December 31, 2018
and
December 31, 2017
, certain automobile manufacturer incentives reduced new vehicle inventory cost by
$10.1 million
and
$7.4 million
, respectively, and reduced new vehicle cost of sales from continuing operations for the years ended
December 31, 2018
,
2017
, and
2016
by
$42.4 million
,
$40.1 million
, and
$40.6 million
, respectively.
6. ASSETS HELD FOR SALE
Assets held for sale, comprising real estate not currently used in our operations and that we are actively marketing to sell, totaled
$26.3 million
and
$30.3 million
as of
December 31, 2018
and
2017
, respectively. There were no liabilities associated with the real estate assets held for sale. Additionally, during the years ended
December 31, 2018
and
2017
, we sold
two
vacant properties each year with total net book values of
$4.0 million
and
$5.7 million
, respectively. In January 2019, the Company's Board of Directors authorized Management's request for approval to divest of one dealership location. The Company is currently in negotiations with a potential buyer for this dealership.
During the year ended
December 31, 2016
, we recorded
$2.7 million
of impairment expense related to real estate properties we were actively marketing to sell, based on offers received from prospective buyers and third-party brokers' opinions of value. We did not record any impairment expense associated with real estate properties that we were actively marketing to sell during the years ended
December 31, 2018
or
2017
.
In addition to the above impairments, during the year ended
December 31, 2016
, we recognized a
$0.9 million
non-cash impairment associated with a lease buyout and lease termination related to real estate not classified as held for sale. This was recorded in Other Operating (income) expenses, net in our accompanying Consolidated Statements of Income.
7. OTHER CURRENT ASSETS
Other current assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2018
|
|
2017
|
|
(In millions)
|
Service loaner vehicles
|
$
|
87.0
|
|
|
$
|
85.4
|
|
Contract Assets (see Note 2)
|
14.7
|
|
|
—
|
|
Prepaid expenses
|
5.9
|
|
|
5.2
|
|
Prepaid taxes
|
9.1
|
|
|
19.5
|
|
Other
|
5.5
|
|
|
9.2
|
|
Other current assets
|
$
|
122.2
|
|
|
$
|
119.3
|
|
8. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2018
|
|
2017
|
|
(In millions)
|
Land
|
$
|
330.4
|
|
|
$
|
303.9
|
|
Buildings and leasehold improvements
|
617.5
|
|
|
582.0
|
|
Machinery and equipment
|
94.8
|
|
|
93.7
|
|
Furniture and fixtures
|
62.2
|
|
|
61.7
|
|
Company vehicles
|
8.8
|
|
|
8.8
|
|
Construction in progress
|
30.1
|
|
|
22.4
|
|
Gross property and equipment
|
1,143.8
|
|
|
1,072.5
|
|
Less—Accumulated depreciation
|
(257.7
|
)
|
|
(238.3
|
)
|
Property and equipment, net
|
$
|
886.1
|
|
|
$
|
834.2
|
|
During the years ended
December 31, 2018
,
2017
, and
2016
, we capitalized
$0.5 million
,
$0.2 million
, and
$1.1 million
, respectively, of interest in connection with various capital projects to upgrade or remodel our facilities. Depreciation expense was
$33.7 million
,
$32.1 million
, and
$30.7 million
for the years ended
December 31, 2018
,
2017
, and
2016
, respectively.
9. GOODWILL AND INTANGIBLE FRANCHISE RIGHTS
Our acquisitions have resulted in the recording of goodwill and intangible franchise rights. Goodwill is an asset representing operational synergies and future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. Intangible franchise rights is an asset representing our rights under franchise agreements with vehicle manufacturers. The changes in goodwill and intangible franchise rights for the years ended
December 31, 2018
and
2017
are as follows:
|
|
|
|
|
|
Goodwill
|
|
(In millions)
|
Balance as of December 31, 2016 (a)
|
$
|
128.1
|
|
Acquisitions
|
32.7
|
|
Balance as of December 31, 2017 (a)
|
160.8
|
|
Acquisitions
|
20.4
|
|
Balance as of December 31, 2018 (a)
|
$
|
181.2
|
|
______________________________
|
|
(a)
|
Net of accumulated impairment losses of
$537.7 million
recorded prior to the year ended
December 31, 2016
.
|
|
|
|
|
|
|
Intangible Franchise Rights
|
|
(In millions)
|
Balance as of December 31, 2016
|
$
|
48.5
|
|
Acquisitions
|
6.2
|
|
Impairments
|
(5.1
|
)
|
Balance as of December 31, 2017
|
$
|
49.6
|
|
Acquisitions
|
$
|
19.9
|
|
Impairments
|
$
|
(3.7
|
)
|
Balance as of December 31, 2018
|
$
|
65.8
|
|
Goodwill and intangible franchise rights are tested annually as of October 1st or more frequently in the event that facts and circumstances indicate a triggering event has occurred.
Goodwill impairment is recognized based on the difference between the carrying value of a reporting unit and its fair value. We elected to perform a qualitative assessment for our October 1, 2018 goodwill impairment testing and determined that it was more likely than not that the fair value exceeded the carrying value of our reporting units. The Company elected to perform a quantitative assessment for our October 1, 2017 goodwill impairment assessment and concluded the fair value of each our reporting units exceeded its carrying value.
The quantitative impairment test for franchise rights includes comparison of the estimated fair value to the carrying value for each of our intangible franchise rights. The Company estimates fair value by using a discounted cash flow model (income approach) based on assumptions related to the cash flows directly attributable to the franchise. These assumptions include revenue growth rates, working capital requirements, weighted average cost of capital, future gross margins, and future selling, general, and administrative expenses.
We elected to perform a quantitative assessment for our October 1, 2018 and 2017 franchise rights impairment testing. In connection with our testing, we identified the carrying values of certain of our intangible franchise rights exceeded fair value, and as a result, recognized
$3.7 million
and
$5.1 million
in pre-tax non-cash impairment charges during the years ended December 31, 2018 and 2017, respectively.
10. FLOOR PLAN NOTES PAYABLE—TRADE
We consider floor plan notes payable to a party that is affiliated with the entity from which we purchase our new vehicle inventory as Floor Plan Notes Payable—Trade on our Consolidated Balance Sheets. Floor plan notes payable—trade, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2018
|
|
2017
|
|
(In millions)
|
Floor plan notes payable—trade
|
$
|
125.3
|
|
|
$
|
114.8
|
|
Floor plan notes payable offset account
|
(11.3
|
)
|
|
(10.6
|
)
|
Total floor plan notes payable—trade, net
|
$
|
114.0
|
|
|
$
|
104.2
|
|
We have a floor plan facility with the Ford Motor Credit Company ("Ford Credit") to purchase new Ford and Lincoln vehicle inventory. Our floor plan facility with Ford Credit matures on December 5, 2019 and does not have a stated borrowing limitation.
We established a floor plan offset account with Ford Credit, that allows us to transfer cash as an offset to floor plan notes payable. These transfers reduce the amount of outstanding new vehicle floor plan notes payable that would otherwise accrue interest, while retaining the ability to transfer amounts from the offset account into our operating cash accounts within one to two days. As a result of using our floor plan offset account, we experience a reduction in Floor Plan Interest Expense on our Consolidated Statements of Income.
The representations and covenants contained in the agreement governing our floor plan facility with Ford Credit are customary for financing transactions of this nature. Further, the agreement governing our floor plan facility with Ford Credit also provides for events of default that are customary for financing transactions of this nature, including cross-defaults to other material indebtedness. Upon the occurrence of an event of default, the Company could be required to immediately repay all outstanding amounts under our floor plan facility with Ford Credit.
11. FLOOR PLAN NOTES PAYABLE—NON-TRADE
We consider floor plan notes payable to a party that is not affiliated with the entity from which we purchase our new vehicle inventory as Floor Plan Notes Payable—Non-Trade on our Consolidated Balance Sheets. Floor plan notes payable—non-trade, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2018
|
|
2017
|
|
(In millions)
|
Floor plan notes payable—new non-trade
|
$
|
843.0
|
|
|
$
|
666.6
|
|
Floor plan notes payable—used non-trade
|
30.0
|
|
|
—
|
|
Floor plan notes payable offset account
|
(20.9
|
)
|
|
(38.7
|
)
|
Total floor plan notes payable—non-trade, net
|
$
|
852.1
|
|
|
$
|
627.9
|
|
On July 25, 2016, the Company and certain of its subsidiaries entered into a second amended and restated senior secured credit agreement with Bank of America, as administrative agent, and the other lenders party thereto. The 2016 Senior Credit Facility amended and restated the Company's pre-existing senior secured credit agreement, dated as of August 8, 2013, by and among the Company and certain of its subsidiaries and Bank of America, as administrative agent, and the other agents and lenders party thereto (the "Restated Credit Agreement").
The 2016 Senior Credit Facility provides for the following, in each case subject to limitations on availability as set forth therein:
|
|
•
|
a
$250.0 million
revolving credit facility (the "Revolving Credit Facility") with a
$50.0 million
sublimit for letters of credit;
|
|
|
•
|
a
$900.0 million
new vehicle revolving floor plan facility (the "New Vehicle Floor Plan Facility"); and
|
|
|
•
|
a
$150.0 million
used vehicle revolving floor plan facility (the "Used Vehicle Floor Plan Facility").
|
Subject to compliance with certain conditions, the agreement governing the 2016 Senior Credit Facility provides that the Company and its subsidiaries that are borrowers under the 2016 Senior Credit Facility (collectively, the "Borrowers") have the ability, at their option and subject to the receipt of additional commitments from existing or new lenders, to increase the size of the facilities by up to
$325.0 million
in the aggregate without lender consent.
At our option, we have the ability to re-designate a portion of our availability under our Revolving Credit Facility to the New Vehicle Floor Plan facility or the Used Vehicle Floor Plan Facility. The maximum amount we are allowed to re-designate is determined based on our current borrowing availability, less
$50.0 million
. In addition, we are able to re-designate any amounts moved to the New Vehicle Floor Plan Facility or Used Vehicle Floor Plan Facility back to the Revolving Credit Facility. As of
December 31, 2018
, we re-designated
$190.0 million
of availability under our Revolving Credit Facility to our New Vehicle Floor Plan Facility. We re-designated this amount to take advantage of the lower commitment fee rates on our new vehicle floor plan facility when compared to our revolving credit facility.
In connection, with the New Vehicle Floor Plan Facility, we established an account with Bank of America that allows us to transfer cash as an offset to floor plan notes payable. These transfers reduce the amount of outstanding new vehicle floor plan notes payable that would otherwise accrue interest, while retaining the ability to transfer amounts from the offset account into our operating cash accounts within one to two days. As a result of the use of our floor plan offset account, we experience a reduction in Floor Plan Interest Expense on our Consolidated Statements of Income.
In addition to using proceeds from borrowings under the 2016 Senior Credit Facility to repay amounts outstanding under the Restated Credit Agreement, proceeds from borrowings from time to time under the (i) Revolving Credit Facility may be used for, among other things, acquisitions, working capital and capital expenditures; (ii) New Vehicle Floor Plan Facility may be used to finance the acquisition of new vehicle inventory and to refinance new vehicle inventory at acquired dealerships; and (iii) Used Vehicle Floor Plan Facility may be used to finance the acquisition of used vehicle inventory and for, among other things, other working capital and capital expenditures.
Borrowings under the 2016 Senior Credit Facility bear interest, at the option of the Company, based on the London Interbank Offered Rate ("LIBOR") or the Base Rate, in each case plus an Applicable Margin. The Base Rate is the highest of the (i) Bank of America prime rate, (ii) Federal Funds rate plus
0.50%
, and (iii) one month LIBOR plus
1.00%
. Borrowings under the New Vehicle Floor Plan Facility bear interest, at the option of the Company, based on LIBOR plus
1.25%
or the Base Rate plus
0.25%
. Borrowings under the Used Vehicle Floor Plan Facility bear interest, at the option of the Company, based on LIBOR plus
1.50%
or the Base Rate plus
0.50%
. In addition to the payment of interest on borrowings outstanding under the 2016 Senior Credit Facility, we are required to pay a quarterly commitment fee of
0.15%
per year on both the New Vehicle Facility Floor Plan and the Used Vehicle Facility Floor Plan Facility.
The 2016 Senior Credit Facility is guaranteed by each existing, and will be guaranteed by each future, direct and indirect domestic subsidiary of the Company, other than, at the option of the Company, certain immaterial subsidiaries. The 2016 Senior Credit Facility is also guaranteed by the Company. The obligations under each of the Revolving Credit Facility and the Used Vehicle Floor Plan Facility are collateralized by liens on substantially all of the present and future assets, other than real property, of the Company and the guarantors. The obligations under the New Vehicle Floor Plan Facility are collateralized by liens on substantially all of the present and future assets, other than real property, of the Borrowers under the New Vehicle Floor Plan Facility.
Each of the above provisions is subject to limitations on borrowing availability as set out in the 2016 Senior Credit Facility. Based on these borrowing base limitations, as of
December 31, 2018
we had
$78.6 million
of borrowing availability under our used vehicle revolving floor plan facility. The 2016 Senior Credit Facility matures, and all amounts outstanding thereunder will be due and payable, on July 25, 2021.
See the "Representations and Covenants" section below under our "Long-Term Debt" footnote for a description of the representations, covenants and events of default contained in the 2016 Senior Credit Facility.
12. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2018
|
|
2017
|
|
(In millions)
|
Accounts payable
|
$
|
81.9
|
|
|
$
|
92.4
|
|
Loaner vehicle notes payable
|
87.5
|
|
|
86.8
|
|
Accrued compensation
|
27.6
|
|
|
24.9
|
|
Accrued finance and insurance chargebacks
|
23.0
|
|
|
23.3
|
|
Accrued insurance
|
20.9
|
|
|
20.4
|
|
Taxes payable
|
23.7
|
|
|
26.6
|
|
Accrued advertising
|
3.9
|
|
|
6.5
|
|
Accrued interest
|
6.6
|
|
|
5.1
|
|
Other
|
23.3
|
|
|
27.2
|
|
Accounts payable and accrued liabilities
|
$
|
298.4
|
|
|
$
|
313.2
|
|
13. LONG-TERM DEBT
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
2018
|
|
2017
|
(In millions)
|
6.0% Senior Subordinated Notes due 2024
|
$
|
600.0
|
|
|
$
|
600.0
|
|
Mortgage notes payable bearing interest at fixed rates (the weighted average interest rates were 5.2% and 5.4% for the years ended December 31, 2018 and 2017, respectively)
|
132.2
|
|
|
139.1
|
|
2018 Bank of America Facility
|
25.7
|
|
|
—
|
|
2018 Wells Fargo Master Loan Facility
|
25.0
|
|
|
—
|
|
Prior real estate credit agreement
|
40.8
|
|
|
48.5
|
|
Restated master loan agreement
|
83.3
|
|
|
88.5
|
|
Capital lease obligations
|
3.1
|
|
|
3.2
|
|
Total debt outstanding
|
910.1
|
|
|
879.3
|
|
Add—unamortized premium on 6.0% Senior Subordinated Notes due 2024
|
6.0
|
|
|
6.8
|
|
Less—debt issuance costs
|
(10.8
|
)
|
|
(10.6
|
)
|
Long-term debt, including current portion
|
905.3
|
|
|
875.5
|
|
Less—current portion, net of current portion of debt issuance costs
|
(38.8
|
)
|
|
(12.9
|
)
|
Long-term debt
|
$
|
866.5
|
|
|
$
|
862.6
|
|
The aggregate maturities of long-term debt as of
December 31, 2018
are as follows (in millions):
|
|
|
|
|
2019
|
$
|
40.8
|
|
2020
|
33.9
|
|
2021
|
17.2
|
|
2022
|
32.0
|
|
2023
|
53.9
|
|
Thereafter
|
732.3
|
|
Total maturities of long-term debt
|
$
|
910.1
|
|
6.0% Senior Subordinated Notes due 2024
In December 2014, we completed a refinancing of certain of our long-term debt, which included the issuance of
$400.0
million of 6.0% Notes, the proceeds of which were used to redeem the
$300.0 million
in outstanding aggregate principal of our 8.375% Senior Subordinated Notes due 2020 (the "
8.375%
Notes").
In October 2015, we completed an add-on issuance of
$200.0 million
aggregate principal amount of our
6.0%
Notes at a price of
104.25%
of par, plus accrued interest from June 15, 2015 (the "October 2015 Offering"). After deducting the initial purchasers' discounts and expenses we received net proceeds of approximately
$210.2 million
from this offering. The $
8.5
million premium paid by the initial purchasers of the 6.0% Notes was recorded as a component of Long-Term Debt on our Consolidated Balance Sheet and is being amortized as a reduction of interest expense over the remaining term of the 6.0% Notes. Based on the amortization of the debt premium, the effective interest rate on the
6.0%
Notes issued in the October 2015 Offering is
5.41%
. In addition, we capitalized
$3.8 million
of costs associated with the issuance and sale of the 6.0% Notes, of which
$2.8 million
of underwriters fees were withheld from the proceeds received from the issuance. These costs are being amortized to interest expense over the remaining term of the 6.0% Notes using the effective interest method.
We are a holding company with no independent assets or operations. For all relevant periods presented, our 6.0% Notes have been fully and unconditionally guaranteed, on a joint and several basis, by substantially all of our subsidiaries. Any subsidiaries that have not guaranteed such notes are "minor" (as defined in Rule 3-10(h) of Regulation S-X). As of
December 31, 2018
, there were no significant restrictions on the ability of our subsidiaries to distribute cash to us or our guarantor subsidiaries.
Mortgage Notes Payable
We have multiple mortgage agreements with finance companies affiliated with our vehicle manufacturers ("captive mortgages") and other lenders. As of
December 31, 2018
and
2017
, we had total mortgage notes payable outstanding of
$132.2 million
and
$139.1 million
, respectively, which are collateralized by the associated real estate.
2018 Bank of America Facility
The Bank of America Credit Agreement provides for term loans to certain of the Company’s subsidiaries that are borrowers under the Bank of America Credit Agreement in an aggregate amount not to exceed $
128.1
million ("Bank of America Facility"), subject to customary terms and conditions.
The borrowers under the Bank of America Credit Agreement may borrow thereunder from time to time during the period beginning on November 13, 2018 until and including November 12, 2019. On November 13, 2018, certain of the borrowers borrowed an aggregate amount of
$25.7 million
under the Bank of America Credit Agreement, a portion of which was used to repay certain existing mortgage indebtedness outstanding on the Prior Real Estate Credit Agreement.
Term loans under the Bank of America Facility bear interest, at the option of the Company, based on the London Interbank Offered Rate ("LIBOR") plus
1.90%
or the Base Rate (as described below) plus
0.90%
. The Base Rate is the highest of (i) the Federal Funds rate plus
0.50%
, (ii) the Bank of America prime rate, and (iii) one month LIBOR plus
1.00%
. The Company is required to make quarterly principal payments of
1.25%
of the initial amount of each loan on a twenty year repayment schedule, with a balloon repayment of the outstanding principal amount of loans due on November 13, 2025, subject to an earlier maturity if the Company’s existing senior secured credit facility matures or is not otherwise refinanced by certain dates.
Borrowings under the Bank of America Facility are guaranteed by each applicable operating dealership subsidiary of the Company and all of the real property financed by such operating dealership under the Bank of America Facility is collateralized by first priority liens, subject to certain permitted exceptions.
2018 Wells Fargo Master Loan Facility
The Wells Fargo Master Loan Agreement provides for term loans to certain of the Company’s subsidiaries that are borrowers under the Wells Fargo Master Loan Agreement in an aggregate amount not to exceed
$100.0
million (the "Wells Fargo Master Loan Facility"), subject to customary terms and conditions.
The borrowers under the Wells Fargo Master Loan Agreement may borrow thereunder from time to time during the period beginning on November 16, 2018 until and including December 31, 2019 (the "Wells Fargo Draw Termination Date"). On November 16, 2018, certain of the borrowers borrowed an aggregate amount of
$25.0 million
under the Wells Fargo Master Loan Facility, the proceeds of which were used for general corporate purposes.
Loans under the Wells Fargo Master Loan Facility bear interest based on LIBOR plus
1.85%
. After the Wells Fargo Draw Termination Date, the borrowers will be required to make 108 equal monthly principal payments based on a hypothetical 19 year amortization schedule, with a balloon repayment of the outstanding principal amount of loans due on December 1, 2028. The borrowers can voluntarily prepay any loan in whole or in part any time without premium or penalty.
Borrowings under the Wells Fargo Master Loan Facility are guaranteed by the Company pursuant to a unconditional guaranty (the "Company Guaranty"), and all of the real property financed by any operating dealership subsidiary of the Company under the Wells Fargo Master Loan Facility, is collateralized by first priority liens, subject to certain permitted exceptions.
Prior Real Estate Credit Agreement
We are also party to a separate real estate term loan credit agreement with Bank of America, as the lender (the "Prior Real Estate Credit Agreement"). The Prior Real Estate Credit Agreement provides for term loans in an aggregate amount not to exceed
$75.0 million
, subject to customary terms and conditions. Concurrent with the execution of the Bank of America Facility, the Prior Real Estate Credit Agreement was modified to incorporate the pricing terms provided within the Bank of America Facility. Accordingly, term loans under the Prior Real Estate Credit Agreement bear interest, at our option, based on the LIBOR plus
1.90
% or the Base Rate (as described below) plus
0.90
%. The Base Rate is the highest of (i) the Federal Funds rate plus
0.50%
, (ii) the Bank of America prime rate, and (iii) one month LIBOR plus
1.00%
. We are required to make quarterly principal payments of
1.25%
of the initial amount of each loan on a twenty year repayment schedule, with a balloon repayment of the outstanding principal amount of loans due on September 26, 2023, subject to an earlier maturity if our existing revolving credit facility matures or is not otherwise refinanced by certain dates.
Borrowings under the Prior Real Estate Credit Agreement are guaranteed by each operating dealership subsidiary of ours whose real estate is financed under the Prior Real Estate Credit Agreement, and collateralized by first priority liens, subject to certain permitted exceptions, on all of the real property financed thereunder.
Restated Master Loan Agreement
On February 3, 2015, certain of our subsidiaries entered into an amended and restated master loan agreement (the "Restated Master Loan Agreement") with Wells Fargo. In June 2015, we made additional borrowings under the Restated Master Loan Agreement with Wells Fargo, resulting in our having drawn the full
$100.0 million
(the "Restated Master Loan Facility") of availability thereunder. Concurrent with execution of the Wells Fargo Master Loan Facility, the Restated Master Loan Agreement was modified to incorporate the pricing terms provided within the Wells Fargo Master Loan Facility. Accordingly, loans under the Restated Master Loan Agreement bear interest based on LIBOR plus
1.85%
.
Below is a summary of our outstanding mortgage notes payable, the carrying values of the related collateralized real estate, and years of maturity as of
December 31, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
As of December 31, 2017
|
Mortgage Agreement
|
|
Aggregate Principal Outstanding
|
|
Carrying Value of Collateralized Related Real Estate
|
|
Maturity Dates
|
|
Aggregate Principal Outstanding
|
|
Carrying Value of Collateralized Related Real Estate
|
|
Maturity Dates
|
Captive mortgages
|
|
$
|
111.6
|
|
|
$
|
185.5
|
|
|
2019-2024
|
|
$
|
116.8
|
|
|
$
|
179.3
|
|
|
2018-2024
|
Other mortgage debt
|
|
20.6
|
|
|
43.3
|
|
|
2020-2022
|
|
22.3
|
|
|
45.3
|
|
|
2018-2022
|
2018 Bank of America Facility
|
|
25.7
|
|
|
137.2
|
|
|
2025
|
|
—
|
|
|
—
|
|
|
|
2018 Wells Fargo Master Loan Facility
|
|
25.0
|
|
|
114.3
|
|
|
2028
|
|
—
|
|
|
—
|
|
|
|
Prior real estate credit agreement
|
|
40.8
|
|
|
82.2
|
|
|
2023
|
|
48.5
|
|
|
89.8
|
|
|
2023
|
Restated master loan agreement
|
|
83.3
|
|
|
130.2
|
|
|
2025
|
|
88.5
|
|
|
132.7
|
|
|
2025
|
Total mortgage debt
|
|
$
|
307.0
|
|
|
$
|
692.7
|
|
|
|
|
$
|
276.1
|
|
|
$
|
447.1
|
|
|
|
Revolving Credit Facility
As discussed above under our "Floor Plan Notes Payable—Non-Trade" footnote, the 2016 Senior Credit Facility includes a
$250.0 million
Revolving Credit Facility. We may request Bank of America to issue letters of credit on our behalf thereunder up to
$50.0 million
. Availability under the Revolving Credit Facility is limited by borrowing base calculations. Availability is reduced on a dollar-for-dollar basis by the aggregate face amount of any outstanding letters of credit. As of
December 31, 2018
, we re-designated
$190.0 million
of borrowing capacity from our Revolving Credit Facility to our New Vehicle Revolving Floor Plan Facility, resulting in
$60.0 million
of borrowing capacity. In addition, we had
$13.0 million
in outstanding letters of credit, resulting in
$47.0 million
of borrowing availability as of
December 31, 2018
. Proceeds from borrowings from time to time under the revolving credit facility may be used for among other things, acquisitions, working capital and capital expenditures.
Borrowings under the 2016 Senior Credit Facility bear interest, at the option of the Company, based on LIBOR or the Base Rate, in each case plus an Applicable Margin (as defined in the 2016 Senior Credit Facility). The Base Rate is the highest of the
(i) Bank of America prime rate, (ii) Federal Funds rate plus
0.50%
, and (iii) one month LIBOR plus
1.00%
. The Applicable Margin, for borrowings under the Revolving Credit Facility, ranges from
1.25%
to
2.50%
for LIBOR loans and
0.25%
to
1.50%
for Base Rate loans, in each case based on the Company's total lease adjusted leverage ratio. In addition to the payment of interest on borrowings outstanding under the 2016 Senior Credit Facility, we are required to pay a quarterly commitment fee between
0.20%
and
0.45%
per year, based on the Company's total lease adjusted leverage ratio on the Revolving Credit Facility.
Stock Repurchase and Dividend Restrictions
The 2016 Senior Credit Facility and the Indenture currently allow for restricted payments without limit so long as our consolidated total leverage ratio (as defined in the 2016 Senior Credit Facility and the Indenture) is not greater than
3.0
to 1.0 after giving effect to such proposed restricted payments. Restricted payments generally include items such as dividends, share repurchases, unscheduled repayments of subordinated debt, or purchases of certain investments. In the event that our consolidated total leverage ratio does (or would) exceed
3.0
to 1.0, the 2016 Senior Credit Facility and the Indenture would then also allow for restricted payments under the following mutually exclusive parameters, subject to certain exclusions:
|
|
•
|
Restricted payments in an aggregate amount not to exceed
$20.0 million
in any fiscal year;
|
|
|
•
|
General restricted payments allowance of
$150.0 million
; and
|
|
|
•
|
Subject to our continued compliance with a minimum consolidated current ratio, a consolidated fixed charge coverage ratio and a maximum consolidated total lease adjusted leverage ratio, in each case as set out in the Indenture, restricted payments capacity additions (or subtractions if negative) equal to (i)
50%
of our net income (as defined in the 2016 Senior Credit Facility and the Indenture) beginning on October 1, 2014 and ending on the date of the most recently completed fiscal quarter (the "Measurement Period"), plus (ii)
100%
of any cash proceeds we receive from the sale of equity interests during the Measurement Period, minus (iii) the dollar amount of share repurchases made and dividends paid on or after December 4, 2014.
|
Representations and Covenants
We are subject to a number of covenants in our various debt and lease agreements, including those described below. We were in compliance with all of our covenants throughout
2018
. Failure to comply with any of our debt covenants would constitute a default under the relevant debt agreements, which would entitle the lenders under such agreements to terminate our ability to borrow under the relevant agreements and accelerate our obligations to repay outstanding borrowings, if any, unless compliance with the covenants is waived. In many cases, defaults under one of our agreements could trigger cross-default provisions in our other agreements. If we are unable to remain in compliance with our financial or other covenants, we would be required to seek waivers or modifications of our covenants from our lenders, or we would need to raise debt and/or equity financing or sell assets to generate proceeds sufficient to repay such debt. We cannot give any assurance that we would be able to successfully take any of these actions on terms, or at times, that may be necessary or desirable.
The representations and covenants contained in the Bank of America Credit Agreement are customary for financing transactions of this nature, including, among others, a requirement to comply with a minimum consolidated current ratio, minimum consolidated fixed charge coverage ratio and maximum consolidated total lease adjusted leverage ratio, in each case as set out in the Bank of America Credit Agreement. In addition, certain other covenants could restrict the Company’s ability to incur additional debt, pay dividends or acquire or dispose of assets. The Bank of America Credit Agreement also provides for events of default that are customary for financing transactions of this nature, including cross-defaults to other material indebtedness. Upon the occurrence of an event of default, the Company could be required by the Bank of America Facility to immediately repay all amounts outstanding thereunder.
The representations, warranties and covenants contained in the Wells Fargo Master Loan Agreement, the Company Guaranty and the related documents are customary for financing transactions of this nature, including, among others, a requirement to comply with a minimum consolidated current ratio, minimum consolidated fixed charge coverage ratio and maximum consolidated total lease adjusted leverage ratio, in each case as set out in the Company Guaranty. In addition, certain other covenants could restrict the Company’s ability to incur additional debt, pay dividends or acquire or dispose of assets.
The representations and covenants contained in the Prior Real Estate Credit Agreement are customary for financing transactions of this nature including, among others, a requirement to comply with a minimum consolidated current ratio, minimum consolidated fixed charge coverage ratio, and a maximum consolidated total lease adjusted leverage ratio, in each case as set out in the Prior Real Estate Credit Agreement. In addition, certain other covenants could restrict our ability to incur additional debt, pay dividends or acquire or dispose of assets.
Our guarantees under the Restated Master Loan Agreement also require compliance with certain financial covenants, including a consolidated current ratio, consolidated fixed charge coverage ratio, and an adjusted net worth calculation. Further,
the Restated Master Loan Agreement contains customary representations and warranties and the guarantees under such agreements contain negative covenants, including, among other things, covenants not to, with permitted exceptions, (i) incur any additional debt; (ii) create any additional liens on the Property, as defined in the Restated Master Loan Agreement; and (iii) enter into any sale-leaseback transactions in connection with the underlying properties.
The representations and covenants contained in the agreement governing the 2016 Senior Credit Facility are customary for financing transactions of this nature including, among others, a requirement to comply with a minimum consolidated current ratio, minimum consolidated fixed charge coverage ratio and maximum consolidated total lease adjusted leverage ratio, in each case as set out in the agreement governing the 2016 Senior Credit Facility. In addition, certain other covenants could restrict the Company's ability to incur additional debt, pay dividends or acquire or dispose of assets.
The agreement governing the 2016 Senior Credit Facility also provides for events of default that are customary for financing transactions of this nature, including cross-defaults to other material indebtedness. In certain instances, an event of default under either the Revolving Credit Facility or the Used Vehicle Floor Plan Facility could be, or result in, an event of default under the New Vehicle Floor Plan Facility, and vice versa. Upon the occurrence of an event of default, the Company could be required to immediately repay all amounts outstanding under the applicable facility.
14. FINANCIAL INSTRUMENTS AND FAIR VALUE
In determining fair value, we use various valuation approaches, including market and income approaches. Accounting standards establish a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from independent sources. Unobservable inputs are inputs that reflect our assumptions about the assumptions market participants would use in pricing the asset or liability, developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs as follows:
Level 1-Valuations based on quoted prices in active markets for identical assets or liabilities that we have the ability to access.
Level 2-Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly. Assets and liabilities utilizing Level 2 inputs include interest rate swap instruments, exchange-traded debt securities that are not actively traded or do not have a high trading volume, mortgage notes payable, and certain real estate properties on a non-recurring basis.
Level 3-Valuations based on inputs that are unobservable and significant to the overall fair value measurement. Asset and liability measurements utilizing Level 3 inputs include those used in estimating the fair value of certain non-financial assets and non-financial liabilities in purchase acquisitions and those used in the assessment of impairment for goodwill and intangible franchise rights.
The availability of observable inputs can vary and is affected by a wide variety of factors. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment required to determine fair value is greatest for instruments categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed is determined based on the lowest level input that is significant to the fair value measurement.
Fair value is a market-based exit price measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, our assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. We use inputs that are current as of the measurement date, including during periods of significant market fluctuations.
Financial instruments consist primarily of cash and cash equivalents, contracts-in-transit, accounts receivable, cash surrender value of corporate-owned life insurance policies, accounts payable, floor plan notes payable, subordinated long-term debt, mortgage notes payable, and interest rate swap instruments. The carrying values of our financial instruments, with the exception of subordinated long-term debt and mortgage notes payable, approximate fair value due to (i) their short-term nature, (ii) recently completed market transactions, or (iii) existence of variable interest rates, which approximate market rates. The fair value of our subordinated long-term debt is based on reported market prices in an inactive market that reflects Level 2 inputs. We estimate the fair value of our mortgage notes payable using a present value technique based on current market interest rates for similar types of financial instruments that reflect Level 2 inputs.
A summary of the carrying values and fair values of our
6.0%
Notes and our mortgage notes payable is as follows:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2018
|
|
2017
|
|
(In millions)
|
Carrying Value:
|
|
|
|
6.0% Senior Subordinated Notes due 2024
|
$
|
606.0
|
|
|
$
|
606.8
|
|
Mortgage notes payable
|
307.0
|
|
|
276.1
|
|
Total carrying value
|
$
|
913.0
|
|
|
$
|
882.9
|
|
|
|
|
|
Fair Value:
|
|
|
|
6.0% Senior Subordinated Notes due 2024
|
$
|
570.0
|
|
|
$
|
625.5
|
|
Mortgage notes payable
|
306.7
|
|
|
275.3
|
|
Total fair value
|
$
|
876.7
|
|
|
$
|
900.8
|
|
Interest Rate Swap Agreements
In June 2015, we entered into an interest rate swap agreement with a notional principal amount of
$100.0 million
. This swap was designed to provide a hedge against changes in variable rate cash flows regarding fluctuations in the one month LIBOR rate, through maturity in February 2025. The notional values of this swap as of
December 31, 2018
and
2017
, were
$85.1 million
and
$90.4 million
, respectively, and the notional value will reduce over its remaining term to
$53.1 million
at maturity.
In November 2013, we entered into an interest rate swap agreement with a notional principal amount of
$75.0 million
. This swap was designed to provide a hedge against changes in variable rate cash flows regarding fluctuations in the one month LIBOR rate, through maturity in September 2023. The notional values of this swap as of
December 31, 2018
and
2017
, were
$56.5 million
and
$60.2 million
, respectively, and the notional value will reduce over its remaining term to
$38.7 million
at maturity.
The fair value of cash flow swaps is calculated as the present value of expected future cash flows, determined on the basis of forward interest rates and present value factors. Fair value estimates reflect a credit adjustment to the discount rate applied to all expected cash flows under the swaps. Other than this input, all other inputs used in the valuation for these swaps are designated to be Level 2 fair values. The fair value related to the swaps for the years ended
December 31, 2018
and
2017
, reflect an asset of
$0.6 million
and liability of
$1.7 million
, respectively. The following table provides information regarding the fair value of our interest rate swap agreements and the impact on the Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2018
|
|
2017
|
|
(In millions)
|
Other current assets
|
$
|
(0.2
|
)
|
|
$
|
—
|
|
Accounts payable and accrued liabilities
|
—
|
|
|
1.0
|
|
Other long-term (assets) liabilities
|
(0.4
|
)
|
|
0.7
|
|
Total fair value
|
$
|
(0.6
|
)
|
|
$
|
1.7
|
|
All of our interest rate swaps qualify for cash flow hedge accounting treatment. For the years ended
December 31, 2018
,
2017
, and
2016
, neither of our cash flow swaps contained any ineffectiveness, nor was any ineffectiveness recognized in earnings. Information about the effect of our interest rate swap agreements on the accompanying Consolidated Statements of Income and Consolidated Statements of Comprehensive Income, are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
Results Recognized in Accumulated Other Comprehensive Loss
(Effective Portion)
|
|
Location of Results Reclassified from Accumulated Other Comprehensive Loss
to Earnings
|
|
Results Reclassified from Accumulated Other Comprehensive Loss
to Earnings
|
2018
|
|
$
|
1.8
|
|
|
Swap interest expense
|
|
$
|
(0.5
|
)
|
2017
|
|
$
|
(0.1
|
)
|
|
Swap interest expense
|
|
$
|
(2.0
|
)
|
2016
|
|
$
|
(0.8
|
)
|
|
Swap interest expense
|
|
$
|
(3.1
|
)
|
On the basis of yield curve conditions as of
December 31, 2018
and including assumptions about future changes in fair value, we expect the amount to be reclassified out of Accumulated Other Comprehensive Loss into earnings within the next 12 months will be income of
$0.2 million
.
15. INCOME TAXES
The components of income tax expense from continuing operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
|
(In millions)
|
Current:
|
|
|
|
|
|
Federal
|
$
|
43.8
|
|
|
$
|
59.1
|
|
|
$
|
83.8
|
|
State
|
7.1
|
|
|
8.3
|
|
|
10.7
|
|
Total current income tax expense
|
50.9
|
|
|
67.4
|
|
|
94.5
|
|
Deferred:
|
|
|
|
|
|
Federal
|
3.9
|
|
|
1.2
|
|
|
4.9
|
|
State
|
2.0
|
|
|
1.4
|
|
|
1.2
|
|
Total deferred income tax expense
|
5.9
|
|
|
2.6
|
|
|
6.1
|
|
Total income tax expense
|
$
|
56.8
|
|
|
$
|
70.0
|
|
|
$
|
100.6
|
|
A reconciliation of the statutory federal rate to the effective tax rate from continuing operations is as follows (dollar amounts shown in millions)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2018
|
|
%
|
|
2017
|
|
%
|
|
2016
|
|
%
|
Income tax provision at the statutory rate
|
$
|
47.2
|
|
|
21.0
|
|
$
|
73.2
|
|
|
35.0
|
|
|
$
|
93.7
|
|
|
35.0
|
|
State income tax expense, net of federal benefit
|
8.7
|
|
|
3.9
|
|
6.4
|
|
|
3.0
|
|
|
7.8
|
|
|
2.9
|
|
Non-deductible / non-tax items
|
0.4
|
|
|
0.2
|
|
(0.3
|
)
|
|
(0.1
|
)
|
|
0.2
|
|
|
0.1
|
|
Effect of enactment of tax reform
|
0.6
|
|
|
0.2
|
|
(7.9
|
)
|
|
(3.8
|
)
|
|
—
|
|
|
—
|
|
Adjustments and settlements
|
—
|
|
|
—
|
|
(0.6
|
)
|
|
(0.3
|
)
|
|
(0.8
|
)
|
|
(0.3
|
)
|
Other, net
|
(0.1
|
)
|
|
—
|
|
(0.8
|
)
|
|
(0.3
|
)
|
|
(0.3
|
)
|
|
(0.1
|
)
|
Income tax expense
|
$
|
56.8
|
|
|
25.3
|
|
$
|
70.0
|
|
|
33.5
|
|
|
$
|
100.6
|
|
|
37.6
|
|
Deferred income tax asset and liability components consisted of the following:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2018
|
|
2017
|
|
(In millions)
|
Deferred income tax assets:
|
|
|
|
F&I chargeback liabilities
|
$
|
11.0
|
|
|
$
|
11.1
|
|
Other accrued liabilities
|
3.2
|
|
|
3.4
|
|
Stock-based compensation
|
2.4
|
|
|
3.9
|
|
Other, net
|
3.9
|
|
|
5.5
|
|
Total deferred income tax assets
|
20.5
|
|
|
23.9
|
|
Deferred income tax liabilities:
|
|
|
|
Intangible asset amortization
|
(12.5
|
)
|
|
(8.4
|
)
|
Depreciation
|
(26.4
|
)
|
|
(27.1
|
)
|
Other, net
|
(3.3
|
)
|
|
(0.9
|
)
|
Total deferred income tax liabilities
|
(42.2
|
)
|
|
(36.4
|
)
|
Net deferred income tax liabilities
|
$
|
(21.7
|
)
|
|
$
|
(12.5
|
)
|
There were no valuation allowances recorded against the deferred tax assets as of
December 31, 2018
or
2017
. As of
December 31, 2018
and
2017
, we had pre-paid income taxes of
$4.6 million
and
$15.2 million
, respectively, which were included in Other Current Assets.
As of December 31, 2016, the net amount of our unrecognized tax benefits was
$0.8 million
, which if recognized, would not impact our effective tax rate. There was no unrecognized tax benefits as of
December 31, 2018
or 2017.
The statutes of limitations related to our consolidated Federal income tax returns are closed for all tax years up to and including 2014. The expiration of the statutes of limitations related to the various state income tax returns that we and our subsidiaries file varies by state. The 2011 through 2017 tax years generally remain subject to examination by most state tax authorities. We believe that our tax positions comply with applicable tax law and that we have adequately provided for these matters.
Tax Reform
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Act. The Tax Act made broad and complex changes to the U.S. tax code that affects 2017, including, but not limited to, accelerated depreciation that will allow for full expensing of qualified property. The Tax Act also established new tax laws including a reduction in the U.S. federal corporate income tax rate from 35% to 21%.
The SEC staff issued SAB 118 on December 22, 2017, which provided guidance on accounting for the tax effects of the Tax Act. SAB 118 allowed for a measurement period, not extend beyond one year from the Tax Act enactment date, for companies to complete the accounting under ASC 740, Income Taxes.
In 2017, we remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which was generally 21%. We recorded a
$7.9 million
reduction to our net deferred tax liability for the year ended December 31, 2017 related to the remeasurement of our deferred tax balance.
During the third quarter of 2018, the IRS released Notice 2018-68, which clarified a number of changes made to Section 162(m) of the Code by the Tax Act. As a result of this new guidance, we recorded
$0.6 million
of additional income tax expense related to an adjustment to the December 31, 2017 deferred tax asset for certain components of share-based compensation. After considering the additional guidance issued by the U.S. Treasury Department, state tax authorities and other standard-setting bodies we have completed our accounting for the Tax Act.
16. OTHER LONG-TERM LIABILITIES
Other long-term liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2018
|
|
2017
|
|
(In millions)
|
Accrued finance and insurance chargebacks
|
$
|
21.2
|
|
|
$
|
20.4
|
|
Deferred rent
|
4.5
|
|
|
5.0
|
|
Swap fair value
|
—
|
|
|
0.7
|
|
Unclaimed property
|
3.3
|
|
|
3.0
|
|
Other
|
1.7
|
|
|
0.1
|
|
Other long-term liabilities
|
$
|
30.7
|
|
|
$
|
29.2
|
|
17. SUPPLEMENTAL CASH FLOW INFORMATION
During the years ended
December 31, 2018
,
2017
, and
2016
, we made interest payments, including amounts capitalized, totaling
$82.5 million
,
$76.0 million
, and
$73.8 million
, respectively. Included in these interest payments are
$31.2 million
,
$22.3 million
, and
$19.1 million
, of floor plan interest payments for the years ended
December 31, 2018
,
2017
, and
2016
, respectively.
During the years ended
December 31, 2018
,
2017
, and
2016
we made income tax payments, net of refunds received, totaling
$40.4 million
,
$102.7 million
, and
$79.6 million
, respectively.
During the years ended
December 31, 2018
,
2017
, and
2016
, we transferred
$193.9 million
,
$156.2 million
, and
$121.9 million
, respectively, of loaner vehicles from Other Current Assets to Inventory on our Consolidated Balance Sheets.
There were
no
divestitures during the years ended
December 31, 2018
and
2017
. During the year ended December 31, 2016, we received
$114.3 million
of proceeds from the sale of dealerships, and
$13.1 million
of mortgage note repayments were paid directly by the buyer as part of these divestitures.
During the year ended
December 31, 2017
, we had non-cash investing and financing activities of
$4.1 million
related to purchases of real estate properties that were previously leased.
The following items are included in Other Adjustments, net to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Amortization of debt issuance costs
|
$
|
2.5
|
|
|
$
|
3.2
|
|
|
$
|
2.6
|
|
Loss on disposal of fixed assets
|
0.9
|
|
|
2.1
|
|
|
0.4
|
|
Other individually immaterial items
|
(0.3
|
)
|
|
(1.0
|
)
|
|
1.1
|
|
Other adjustments, net
|
$
|
3.1
|
|
|
$
|
4.3
|
|
|
$
|
4.1
|
|
18. LEASE OBLIGATIONS
We lease real estate and equipment primarily under operating lease agreements, most of which have terms ranging from
one
to
twenty
years. Escalation clauses, lease payments dependent on existing rates/indexes, and other lease incentives are included in the minimum lease payments and are recognized on a straight-line basis over the minimum lease term. Rent expense under such arrangements totaled
$25.6 million
,
$26.7 million
, and
$29.9 million
for the years ended
December 31, 2018
,
2017
, and
2016
, respectively.
During the year ended December 31, 2018, we entered into
one
transaction in which we purchased previously leased real estate for
$4.4 million
.
During the year ended December 31, 2017, we entered into
two
transactions in which we purchased previously leased real estate for an aggregate purchase price of
$9.5 million
. These transactions included the termination of the related lease obligations, resulting in
$0.2 million
of lease termination charges, which were included in Other operating (income) expenses, net in our Consolidated Statement of Income for the year ended December 31, 2017.
During the year ended December 31, 2016, we entered into
three
transactions in which we purchased previously leased real estate for an aggregate purchase price of
$19.6 million
. These transactions included the termination of the related lease obligations, resulting in
$2.1 million
of lease termination charges and
$0.9 million
of real estate impairment charges, which were based on the associated property appraisals. Both the lease termination charges and the real estate impairment charges were included in Other operating (income) expenses, net in our Consolidated Statement of Income for the year ended December 31, 2016.
Future minimum payments under non-cancelable leases with initial terms in excess of one year at
December 31, 2018
, are as follows:
|
|
|
|
|
|
|
|
|
|
Capital
|
|
Operating
|
|
(In millions)
|
2019
|
$
|
0.4
|
|
|
$
|
22.5
|
|
2020
|
0.4
|
|
|
22.2
|
|
2021
|
0.4
|
|
|
19.2
|
|
2022
|
0.4
|
|
|
14.0
|
|
2023
|
0.4
|
|
|
6.0
|
|
Thereafter
|
2.8
|
|
|
25.5
|
|
Total minimum lease payments
|
4.8
|
|
|
109.4
|
|
Less: Amounts representing interest
|
(1.7
|
)
|
|
N/A
|
|
|
$
|
3.1
|
|
|
$
|
109.4
|
|
Certain of our lease agreements include financial covenants and incorporate by reference the financial covenants set forth in the 2016 Senior Credit Facility. A breach of any of these covenants could immediately give rise to certain landlord remedies under our various lease agreements, the most severe of which include the following: (i) termination of the applicable lease and/or other leases with the same or an affiliated landlord under a cross-default provision, (ii) eviction from the premises; and (iii) the landlord having a claim for various damages.
19. COMMITMENTS AND CONTINGENCIES
Our dealerships are party to dealer and framework agreements with applicable vehicle manufacturers. In accordance with these agreements, each dealership has certain rights and is subject to restrictions typical in the industry. The ability of these manufacturers to influence the operations of the dealerships or the loss of any of these agreements could have a materially negative impact on our operating results.
In some instances, manufacturers may have the right, and may direct us, to implement costly capital improvements to dealerships as a condition to entering into, renewing, or extending franchise agreements with them. Manufacturers also typically require that their franchises meet specific standards of appearance. These factors, either alone or in combination, could cause us to use our financial resources on capital projects that we might not have planned for or otherwise determined to undertake.
From time to time, we and our dealerships are or may become involved in various claims relating to, and arising out of, our business and our operations. These claims may involve, but not be limited to, financial and other audits by vehicle manufacturers or lenders and certain federal, state, and local government authorities, which have historically related primarily to (i) incentive and warranty payments received from vehicle manufacturers, or allegations of violations of manufacturer agreements or policies, (ii) compliance with lender rules and covenants, and (iii) payments made to government authorities relating to federal, state, and local taxes, as well as compliance with other government regulations. Claims may also arise through litigation, government proceedings, and other dispute resolution processes. Such claims, including class actions, could relate to, but may not be limited to, the practice of charging administrative fees and other fees and commissions, employment-related matters, truth-in-lending and other dealer assisted financing obligations, contractual disputes, actions brought by governmental authorities, and other matters. We evaluate pending and threatened claims and establish loss contingency reserves based upon outcomes we currently believe to be probable and reasonably estimable.
We believe we have adequately accrued for the potential impact of loss contingencies that are probable and reasonably estimable. Based on our review of the various types of claims currently known to us, there is no indication of material reasonably possible losses in excess of amounts accrued in the aggregate. We currently do not anticipate that any known claim will materially adversely affect our financial condition, liquidity, or results of operations. However, the outcome of any matter cannot be predicted with certainty, and an unfavorable resolution of one or more matters presently known or arising in the future could have a material adverse effect on our financial condition, liquidity, or results of operations.
A significant portion of our business involves the sale of vehicles, parts, or vehicles composed of parts that are manufactured outside the United States. As a result, our operations are subject to customary risks of importing merchandise, including fluctuations in the relative values of currencies, import duties, exchange controls, trade restrictions, work stoppages, and general political and socio-economic conditions in foreign countries. The United States or the countries from which our products are imported may, from time to time, impose new quotas, duties, tariffs, or other restrictions; or adjust presently prevailing quotas, duties, or tariffs, which may affect our operations, and our ability to purchase imported vehicles and/or parts at reasonable prices.
Substantially all of our facilities are subject to federal, state and local provisions regarding the discharge of materials into the environment. Compliance with these provisions has not had, nor do we expect such compliance to have, any material effect upon our capital expenditures, net earnings, financial condition, liquidity or competitive position. We believe that our current practices and procedures for the control and disposition of such materials comply with applicable federal, state, and local requirements. No assurances can be provided, however, that future laws or regulations, or changes in existing laws or regulations, would not require us to expend significant resources in order to comply therewith.
We had
$13.0 million
of letters of credit outstanding as of
December 31, 2018
, which are required by certain of our insurance providers. In addition, as of
December 31, 2018
, we maintained a
$5.0 million
surety bond line in the ordinary course of our business. Our letters of credit and surety bond line are considered to be off balance sheet arrangements.
Our other material commitments include (i) floor plan notes payable, (ii) operating leases, (iii) long-term debt and (iv) interest on long-term debt, as described elsewhere herein.
20. SHARE-BASED COMPENSATION AND EMPLOYEE BENEFIT PLANS
On March 13, 2012, our Board of Directors, upon the recommendation of our Compensation and Human Resources Committee, approved the 2012 Equity Incentive Plan (the "Plan"). On April 18, 2012, our shareholders approved the Plan, which replaced our previous equity incentive plan. The Plan expires on March 13, 2022 and provides for the grant of options, performance share units, restricted share units, and shares of restricted stock to our directors, officers, and employees in the total amount of
1.5 million
shares. Since the inception of the Plan, we have granted
0.8 million
performance share units and
0.8 million
shares of restricted stock. There have been
0.8 million
shares that have either been forfeited or repurchased in
association with the net share settlement of employee share-based awards, both of which are added back to shares available for grant. As such, there were approximately
0.8 million
shares available for grant in accordance with the Plan as of
December 31, 2018
.
We issue shares of our common stock upon the vesting of performance share units or restricted stock. These shares are issued from our authorized and not outstanding common stock. In addition, in connection with the vesting of performance share units or restricted stock, we expect to repurchase a portion of the shares issued equal to the amount of employee income tax withholding.
We have recognized
$10.5 million
(
$2.6 million
tax benefit),
$13.6 million
(
$4.5 million
tax benefit), and
$12.0 million
(
$4.5 million
tax benefit) in share-based compensation expense for the years ended
December 31, 2018
,
2017
, and
2016
, respectively. As of
December 31, 2018
, there was
$10.3 million
of total unrecognized share-based compensation expense related to non-vested share-based awards granted under the Plan, and the weighted average period over which it is expected to be recognized is
2.15
years. Further, we expect to recognize
$6.3 million
of this expense in 2019,
$3.3 million
in 2020, and
$0.7 million
in 2021.
Performance Share Units
During the year ended
December 31, 2018
, the Compensation and Human Resources Committee of the Board of Directors approved the grant of up to
101,802
performance share units, which represents
150%
of the target award. Performance share units provide an opportunity for the employee-recipient to receive a number of shares of our common stock based on our performance during a specified year period following the grant as measured against objective performance goals as determined by the Compensation and Human Resources Committee of our Board of Directors. The actual number of units earned may range from
0%
to
150%
of the target number of units depending upon achievement of the performance goals. Performance share units vest in
three
equal annual installments with one-third of the award vesting on each of the (i) later of the first anniversary of the grant date, or the date the Compensation and Human Resources Committee determines the actual award, (ii) second anniversary of the grant date and (iii) third anniversary of the grant date. Upon vesting, each performance share unit equals one share of common stock of the Company. Compensation cost for performance share units is based on the closing price of our common stock on the date of grant and the ultimate performance level achieved, and is recognized on a graded basis over the
three
-year vesting period.
The following table summarizes information about performance share units for
2018
:
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average Grant Date
Fair Value
|
Non-vested at January 1, 2018
|
229,651
|
|
|
$
|
57.21
|
|
Granted
|
101,802
|
|
|
68.50
|
|
Vested
|
(95,472
|
)
|
|
59.27
|
|
Forfeited or unearned
|
(30,245
|
)
|
|
56.64
|
|
Non-vested at December 31, 2018
|
205,736
|
|
|
$
|
61.28
|
|
The weighted average grant-date fair value of performance share units and total fair value of performance share units vested are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Weighted average grant-date fair value of performance share units granted
|
$
|
68.50
|
|
|
$
|
65.65
|
|
|
$
|
46.70
|
|
Total fair value of performance share units vested (in millions)
|
$
|
6.4
|
|
|
$
|
6.5
|
|
|
$
|
6.0
|
|
Restricted Stock Awards
During the year ended
December 31, 2018
, the Compensation and Human Resources Committee of the Board of Directors approved the grant of
71,575
shares of restricted stock. Restricted stock awards vest in
three
equal annual installments commencing on the first anniversary of the grant date. Compensation cost for restricted stock awards is based on the closing price of our common stock on the date of grant and is recognized on a straight-line basis over the
three
-year vesting period.
The following table summarizes information about restricted stock awards for
2018
:
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average Grant
Date Fair Value
|
Non-vested at January 1, 2018
|
224,826
|
|
|
$
|
60.36
|
|
Granted
|
71,575
|
|
|
71.18
|
|
Vested
|
(82,961
|
)
|
|
61.34
|
|
Forfeited
|
(14,664
|
)
|
|
63.09
|
|
Non-vested at December 31, 2018
|
198,776
|
|
|
$
|
63.65
|
|
The weighted average grant-date fair value of restricted stock awards and total fair value of restricted stock awards vested are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Weighted average grant-date fair value of restricted stock granted
|
$
|
71.18
|
|
|
$
|
63.64
|
|
|
$
|
47.07
|
|
Total fair value of restricted stock awards vested (in millions)
|
$
|
5.5
|
|
|
$
|
5.3
|
|
|
$
|
3.7
|
|
Employee Retirement Plan
We sponsor the Asbury Automotive Retirement Savings Plan (the "Retirement Savings Plan"), a 401(k) plan, for eligible employees. Employees are eligible to participate in the Retirement Savings Plan on or after
12
weeks of service with us. Employees electing to participate in the Retirement Savings Plan may contribute up to
75%
of their annual eligible compensation. IRS rules limited total participant contributions during
2018
to
$18,500
, or
$24,500
if age 50 or more. For non-highly compensated employees, after
one
year of employment we match
50%
of employees' contributions up to
4%
of their eligible compensation. Employer contributions vest on a graded basis over
4
years after the date of hire. Expenses from continuing operations related to employer matching contributions totaled
$3.2 million
,
$3.0 million
, and
$2.7 million
for the years ended
December 31, 2018
,
2017
, and
2016
, respectively.
21. CONDENSED QUARTERLY REVENUES AND EARNINGS (UNAUDITED):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
(In millions, except per share data)
|
2017:
|
|
|
|
|
|
|
|
Revenues
|
$
|
1,551.7
|
|
|
$
|
1,631.8
|
|
|
$
|
1,602.1
|
|
|
$
|
1,670.9
|
|
Gross profit
|
$
|
260.1
|
|
|
$
|
267.1
|
|
|
$
|
260.3
|
|
|
$
|
268.4
|
|
Net income (2)(3)(4)
|
$
|
34.0
|
|
|
$
|
31.9
|
|
|
$
|
30.7
|
|
|
$
|
42.5
|
|
Net income per common share:
|
|
|
|
|
|
|
|
Basic (1)(2)(3)(4)
|
$
|
1.62
|
|
|
$
|
1.53
|
|
|
$
|
1.49
|
|
|
$
|
2.06
|
|
Diluted (1)(2)(3)(4)
|
$
|
1.61
|
|
|
$
|
1.52
|
|
|
$
|
1.48
|
|
|
$
|
2.03
|
|
2018:
|
|
|
|
|
|
|
|
Revenues
|
$
|
1,609.2
|
|
|
$
|
1,723.6
|
|
|
$
|
1,757.4
|
|
|
$
|
1,784.2
|
|
Gross profit
|
$
|
265.4
|
|
|
$
|
277.8
|
|
|
$
|
278.0
|
|
|
$
|
281.8
|
|
Net income (5)(6)(7)
|
$
|
40.1
|
|
|
$
|
43.2
|
|
|
$
|
44.3
|
|
|
$
|
40.4
|
|
Net income per common share:
|
|
|
|
|
|
|
|
Basic (1)(5)(6)(7)
|
$
|
1.95
|
|
|
$
|
2.13
|
|
|
$
|
2.22
|
|
|
$
|
2.09
|
|
Diluted (1)(5)(6)(7)
|
$
|
1.93
|
|
|
$
|
2.11
|
|
|
$
|
2.18
|
|
|
$
|
2.06
|
|
____________________________
|
|
(1)
|
The sum of income per common share for the four quarters does not equal total income per common share due to changes in the average number of shares outstanding during the respective periods.
|
|
|
(2)
|
Results for the three months ended March 31, 2017 were increased by
$0.6 million
as a result of gains from legal settlements, net of tax, or
$0.03
per basic and diluted share.
|
|
|
(3)
|
Results for the three months ended June 30, 2017 were increased by $
0.5 million
from investment income, partially offset by a
$1.8 million
loss on real estate-related charges, all previous items were net of tax, or
$0.06
per basic and diluted share.
|
|
|
(4)
|
Results for the three months ended December 31, 2017 were increased by a
$7.9 million
income tax benefit, partially offset by
$3.2 million
of franchise rights impairment, net of tax, or
$0.22
per basic and diluted share, respectively, in the aggregate.
|
|
|
(5)
|
Results for the three months ended June 30, 2018 were increased by
$0.5 million
as a result of gains from legal settlements, net of tax, or
$0.03
per basic and diluted share.
|
|
|
(6)
|
Results for the three months ended June 30, 2018 were decreased by
$0.6 million
as a result of an adjustment to the deferred tax asset related to certain components of share-based compensation, net of tax, or
$0.03
per basic and diluted share.
|
|
|
(7)
|
Results for the three months ended December 31, 2018 were decreased by a
$2.8 million
franchise rights impairment, net of tax, or
$0.14
per basic and diluted share, respectively, in the aggregate.
|
22. SUBSEQUENT EVENTS
In February 2019, the Company closed on the acquisition of
four
stores in the Indianapolis market, increasing our total stores in the Indianapolis market to
six
.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act"). Based on this evaluation, our principal executive officer and principal financial officer concluded that as of the end of such period such disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is (i) recorded, processed, summarized, and reported within the time period specified in the rules and forms of the U.S. Securities and Exchange Commission, and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding disclosure. Management necessarily applies its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding management's control objectives. Management, including the principal executive officer and the principal financial officer, does not expect that our disclosure controls and procedures can prevent all possible errors or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that objectives of the control system are met. There are inherent limitations in all control systems, including the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Additionally, controls can be circumvented by the intentional acts of one or more persons. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and while our disclosure controls and procedures are designed to be effective under circumstances where they should reasonably be expected to operate effectively, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in any control system, misstatements due to possible errors or fraud may occur and not be detected.
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over our company's financial reporting, as such term is defined in Exchange Act Rule 13(a)-15(f). Our internal control system was designed to provide reasonable assurance to our management and our board of directors regarding the preparation and fair presentation of published financial statements. Our internal control over financial reporting also includes those policies and procedures that:
|
|
•
|
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
|
|
|
•
|
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
|
|
|
•
|
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use, or disposition of our assets that could have a material effect on the financial statements.
|
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree or compliance with the policies or procedures may deteriorate. Our management, including the principal executive officer and the principal financial officer, assessed the effectiveness of our internal control over financial reporting as of
December 31, 2018
. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013 framework). Our assessment included a review of the documentation of controls, evaluation of the design effectiveness of controls and testing of the effectiveness of controls. Based on our assessment under the framework in Internal Control—Integrated Framework issued by COSO, our management concluded that our internal control over financial reporting was effective as of
December 31, 2018
. Our auditors, Ernst & Young LLP, an independent registered public accounting firm, have audited and reported on our consolidated financial statements and on the effectiveness of our internal controls over financial reporting. Their reports are contained herein.
During 2018, we acquired substantially all of the assets, including certain real estate, of three franchises (three dealership locations). As permitted by the Securities and Exchange Commission, the scope of our Section 404 evaluation for the fiscal year ended December 31, 2018 does not include an evaluation of the internal control over financial reporting of these acquired operations. The results for these acquisitions are included in our consolidated financial statements from the date of acquisition and represented approximately $105.3 million of consolidated assets as of December 31, 2018, and approximately $166.8 million of consolidated revenues for the year then ended.
From the acquisition dates to December 31, 2018, the processes and systems of the acquired operations did not significantly impact the internal control over financial reporting of the Company and our other consolidated subsidiaries.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended
December 31, 2018
that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
Item 9B. Other Information
None.