Item 1. Business
We are one of the largest automotive retailers in the United States, operating 104 franchises (83 dealership locations) as of December 31, 2014. We offer an extensive range of automotive products and services, including:
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new and used vehicles;
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vehicle maintenance;
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replacement parts and collision repair services;
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new and used vehicle financing; and
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aftermarket products such as insurance, warranty and service contracts.
Asbury Automotive Group, Inc. was incorporated in the State of Delaware on February 15, 2002, and our stock is listed on the New York Stock Exchange under the ticker symbol “ABG.”
General Description of Our Operations
As of December 31, 2014, we operated dealerships in 18 metropolitan markets throughout the United States. We have developed our dealership portfolio through the acquisition of large, locally-branded dealership groups operating throughout the United States. We have complemented these large dealership group acquisitions with the purchase of numerous single point dealerships and smaller dealership groups in and surrounding our then-existing market areas. Our retail network is made of up dealerships operating primarily under eight locally-branded dealership groups. The following chart gives a detailed breakdown of our markets, brand names and franchises as of December 31, 2014:
Brand Names
Markets
Franchises
Nalley Automotive Group
Atlanta, GA
Acura, Audi, Bentley, BMW, Ford, Honda, Hyundai, Infiniti(a), Kia, Lexus(a), Nissan, Toyota(a), Volkswagen
Courtesy Autogroup
Tampa, FL
Chrysler, Dodge, Honda, Hyundai, Infiniti, Jeep, Kia, Mercedes-Benz, Nissan, Toyota, smart, Sprinter
Coggin Automotive Group
Jacksonville, FL
Honda(a), Nissan(a), Toyota, Chevrolet, Buick, GMC
Orlando, FL
Ford, Honda(a), Hyundai, Lincoln
Fort Pierce, FL
Acura, BMW, Honda, Mercedes-Benz
Crown Automotive Company
Princeton, NJ
BMW, MINI
Greensboro, NC
Acura, BMW, Chrysler, Dodge, Honda, Jeep, Nissan, Volvo
Durham, NC
Honda
Fayetteville, NC
Dodge, Ford
Richmond, VA
Acura, BMW(a), MINI
Charlottesville, VA
BMW
Greenville, SC
Jaguar, Land Rover, Lexus, Nissan, Porsche, Toyota, Volvo
David McDavid Auto Group
Dallas/Fort Worth, TX
Acura, Ford, Honda(a), Lincoln
Houston, TX
Nissan
Austin, TX
Acura
North Point Auto Group
Little Rock, AR
BMW, Ford, Lincoln, Mazda, Nissan(a), Toyota, Volkswagen, Volvo
Gray-Daniels Auto Family
Jackson, MS
Chevrolet, Ford, Lincoln, Nissan(a), Toyota
Plaza Motor Company
St. Louis, MO
Audi, BMW, Infiniti, Jaguar, Land Rover, Lexus, Mercedes-Benz(a), Porsche, smart, Sprinter(a)
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(a)
This market has two of these franchises
In addition, we own and operate three stand-alone used vehicle stores under the “Q auto” brand name in Florida.
Our operations provide a diverse revenue base that we believe mitigates the impact of fluctuating new vehicle sales volumes and our broad geographic footprint, as well as diversification among manufacturers, decrease our exposure to regional economic downturns and manufacturer-specific risks such as warranty issues or production disruption. While new vehicle sales generate the majority of our revenue, used vehicle retail sales, parts and service and finance and insurance provide significantly
higher profit margins, and therefore account for the majority of our profitability and have been historically more stable throughout economic cycles.
New Vehicle Sales
As of December 31, 2014, our dealerships represented a diverse portfolio of 29 American, European and Asian brands. Our new vehicle sales consist of the sale of new vehicles to individual retail customers (“new vehicle retail”) and the sale of new vehicles to commercial customers (“fleet”) (the terms "new vehicle retail" and "fleet" being together referred to as "new"). New vehicle revenue and new vehicle gross profit consist of revenue and gross profit from new vehicle retail and fleet sales. In 2014, we sold 95,564 new vehicles through our dealerships. We evaluate the results of our new vehicle sales based on unit volumes and gross profit per vehicle sold. Our new vehicle revenues represented 55% of our total revenues and 21% of our total gross profit for the year ended December 31, 2014.
Our new vehicle revenues include new vehicle sale and lease transactions arranged by our dealerships with third parties. We believe leases provide a number of benefits. As a result of fixed-period lease terms, customers who lease new vehicles have historically returned to our dealerships more frequently than customers who purchase new vehicles. In addition, because third-party lessors frequently give the leasing dealerships the first option to purchase vehicles returned by their customers at lease-end, leases typically provide us with an additional source of late-model vehicles for our used vehicle inventory. Generally, leased vehicles remain under manufacturer warranty for the term of the lease, which results in additional parts and services revenue, as authorized dealerships are typically relied upon to provide warranty repair service to the lessee throughout the lease term.
Used Vehicle Sales
We sell used vehicles at all of our dealership locations. Used vehicle sales include the sale of used vehicles to individual retail customers (“used retail”) and the sale of used vehicles to other dealers at auction (“wholesale”) (the terms “used retail” and “wholesale” being together referred to as “used”). In 2014, we sold 75,173 used retail vehicles through our dealerships. We evaluate the results of our used vehicle sales based on unit volumes and gross profit per vehicle sold. Our used retail vehicle business, which generally has higher gross margins than our new vehicle business, accounted for approximately 26% of our total revenues and 13% of our total gross profit for the year ended December 31, 2014. Wholesale sales represented 4% of our total revenues, but did not have a material impact on our total gross profit for the year ended December 31, 2014.
Gross profit from the sale of used vehicles depends primarily on the ability of our dealerships to obtain a high quality supply of used vehicles and the use of advanced technology to manage our inventory. Our new vehicle operations typically provide our used vehicle operations with a large supply of high quality trade-ins and off-lease vehicles, which we believe are good sources of attractive used vehicle inventory. We also purchase a significant portion of our used vehicle inventory at auctions restricted to new vehicle dealers (offering off-lease, rental and fleet vehicles) and “open” auctions that offer vehicles sold by other dealers and repossessed vehicles. We make every effort to sell our used vehicle inventory to retail customers, either through the dealership of origin or through another of our dealerships. Our used vehicle inventory is sold as wholesale if a vehicle is not sold at retail. The reconditioning of used vehicles also generates gross profit for our parts and service departments, which is recognized upon the sale of the used vehicle.
Parts and Service
We provide vehicle maintenance and repair services in the markets of all of our franchised dealerships, primarily for the vehicle brands sold at those dealerships. In addition, we sell replacement parts and maintained 25 free-standing collision repair centers either on the premises of, or in close proximity to, our dealerships as of December 31, 2014. Our parts and service business accounted for approximately 11% of our total revenues and 43% of our total gross profit for the year ended December 31, 2014. Historically, parts and service revenues have been more stable than those from vehicle sales. Industry-wide, parts and service revenues have consistently increased over time primarily due to the increased cost of maintaining vehicles, the added technical complexity of vehicles and the increasing number of vehicles on the road.
The automotive parts and service industry tends to be highly fragmented, with franchised dealerships and independent repair shops competing for this business. We believe, however, that the increased use of advanced technology in vehicles is making it difficult for independent repair shops to compete effectively for our parts and service business. These independent repair shops may not be able to invest in the equipment and training necessary to perform major or technical repairs, especially as such repairs relate to luxury and mid-line imports, which comprise a significant majority of our new vehicle retail sales. We believe our parts and service business is also well-positioned to benefit from the service work potentially generated through the sale of extended service contracts to customers who purchase new and used vehicles from us, as historically these customers have tended to have their vehicles serviced at the location where they purchase extended service contracts. Additionally, vehicle manufacturers generally require manufacturer warranty work to be performed only at franchised dealerships. As a result, unlike
independent service stations or independent and superstore used car dealerships with service operations, our franchised dealerships are authorized to perform work covered by manufacturer warranties on increasingly technologically complex vehicles.
Finance and Insurance
We refer to the finance and insurance portion of our business as "F&I." Through our F&I business, we arrange, and receive commissions for, third-party financing of the sale or lease of new and used vehicles to customers, as well as offer a number of aftermarket products, as described below. We also generate F&I revenues from the receipt of certain marketing fees paid to us under agreements with preferred lenders. Our F&I business generated approximately 4% of our total revenues and 23% of our total gross profit for the year ended December 31, 2014.
The following is a brief description of our significant F&I product offerings:
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Extended service contracts - covers certain repair work after the expiration of the manufacturer warranty;
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Guaranteed asset protection ("GAP") debt cancellation - covers the customer after a total loss for the difference between the value of the vehicle and the outstanding loan or lease obligation after insurance proceeds;
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Prepaid maintenance - covers certain routine maintenance work, such as (i) oil changes, (ii) cleaning and adjusting of brakes, (iii) multi-point vehicle inspections and (iv) tire rotations; and
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Credit life and disability - covers the remaining amounts due on an auto loan or a lease in the event of death or disability.
We earn sales-based commissions from third-party lenders, including manufacturer captive finance subsidiaries, on substantially all of the financing that we arrange on behalf of our customers. We may be charged back (“chargebacks”) for these commissions in the event a finance contract is canceled or repaid, typically within the first 90 days of such contract. We arranged customer financing on approximately 69% of the vehicles we sold during the year ended December 31, 2014. We do not retain any material liability for the credit risk associated with these purchase and lease transactions after the completion of the transactions.
Similarly, we may be required to refund a portion of our profit relating to the sale of service contracts, maintenance and insurance and other products in the event of early cancellation. We do not, however, bear any risk related to insurance payments, which are borne by third parties. We receive discounted pricing compared to smaller competitors in our local markets on many of the service contracts, maintenance and insurance products that we provide as a result of our size and sales volume. Historically, chargebacks on finance and service contracts, maintenance and insurance products have totaled between 9% and 14% of total F&I revenue.
We are party to a number of “preferred lender agreements.” Under the terms of these preferred lender agreements, each lender has agreed to provide a marketing fee to us above the standard commission rate for each loan that our dealerships places with that lender. Furthermore, many of the service contracts and insurance products we sell result in underwriting profits and investment income for us based on portfolio performance. The underwriting profits and investment income, if any, represent the amount of funds available to pay future claims in excess of what is actually used to pay claims on the related policies. These payments are determined by the lenders based upon an agreed-upon earnings schedule.
Recent Developments
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. The Restated Master Loan Agreement provides for term loans to certain of the Company’s subsidiaries that are borrowers under the Restated Master Loan Agreement (collectively, the “Borrowers”) in an aggregate amount not to exceed $100.0 million, subject to customary terms and conditions. The Borrowers under the Restated Master Loan Facility may borrow thereunder from time to time during the period beginning on February 3, 2015 until and including February 1, 2016 (the “Draw Termination Date”). As of February 3, 2015, there was $17.1 million outstanding under the Restated Master Loan Facility.
Business Strategy
Focus on Brand Mix, Strategic Markets and Diversification
We classify our new vehicle retail sales into the following categories: luxury, mid-line import, and mid-line domestic. We continue to believe that our diversified brand mix is well positioned for long-term growth in the United States, primarily based on the expectation of continued broadening of product offerings from our manufacturing partners and the continued delivery of high quality products and services to our customers.
Our physical locations encompassed 18 different metropolitan markets at 83 locations in the following 10 states as of December 31, 2014: Arkansas, Florida, Georgia, Mississippi, Missouri, New Jersey, North Carolina, South Carolina, Texas and Virginia. We believe that our broad geographic coverage decreases our exposure to regional economic downturns. Additionally, we believe that our diversification among manufacturers decreases our exposure to manufacturer-specific risks such as recalls, warranty issues, product defects, negative publicity, production disruption and a manufacturer’s inability to produce attractive high quality and desirable products.
The following table reflects (i) the number of franchises and (ii) the percent of new vehicle revenues represented by each class of franchise as of December 31, 2014:
* Franchise accounted for less than 1% of new vehicle revenues for the year ended December 31, 2014
Maintain Disciplined Cost Structure and Emphasize Expense Control
We continually focus on expense control at our dealerships. We are constantly evaluating our cost structure, and believe we are well positioned to manage our costs in the future by:
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continuing to centralize our financial and information processing systems;
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deploying information technology and best practices across our dealership network;
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further capitalizing on our scale through negotiating contracts with certain of our vendors on a national basis; and
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maintaining a performance-based compensation structure.
In order to mitigate the impact of significant fluctuations in vehicle sales, we tie management and employee compensation at various operational levels to performance through incentive-based pay systems based on various metrics. For example, a portion of management's stock-based compensation is typically based on various performance criteria relative to our peer group, including, profitability growth, productivity improvement and return on invested capital measures. We also compensate our general managers, department managers and sales and other dealership personnel with incentive pay, based on metrics such as dealership profitability, departmental profitability and individual performance, as appropriate.
Flexible and Prudent Capital Allocation
Our capital allocation decisions are primarily based on our desire to maintain sufficient liquidity and a prudent capital structure. We continuously evaluate our liquidity and capital resources based upon (i) our cash and cash equivalents on hand, (ii) the funds that we expect to generate through future operations, (iii) current and expected borrowing availability under our credit facilities and mortgage financings, (iv) amounts in our new vehicle floor plan notes payable offset accounts and (v) the potential impact of any contemplated or pending future capital deployments, including, but not limited to, financings, acquisitions, dispositions or other capital expenditures. As part of our balanced approach, we continuously evaluate capital deployment opportunities that we believe will maximize the value of our Company, including:
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investing in our business and technology;
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acquiring dealerships that meet our internal return threshold;
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repurchasing shares of our common stock in the open market; and
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purchasing properties currently under lease at various times.
We may at some time in the future return some portion of capital to our shareholders through the payment of dividends.
Focus on Higher Margin Products and Services
While new vehicle sales are critical to drawing customers to our dealerships, parts and service, used vehicle retail sales, and F&I generally provide significantly higher profit margins and account for the majority of our profitability. In order to maximize the growth of these higher margin businesses, we have discipline-specific executives at both the corporate and dealership levels who focus on increasing the penetration of current services and expanding the breadth of our offerings to customers.
Local Management of Dealership Operations
We believe that local management of dealership operations enables our retail network to provide market-specific responses to sales, customer service and inventory requirements. The general manager of each of our dealerships is responsible for the operations, personnel and financial performance of that dealership as well as other day-to-day operations. We believe our general managers’ familiarity with their respective markets enables them to effectively run day-to-day operations, market to customers and recruit new employees. The general manager of each dealership is supported, in most cases, by a new vehicle sales manager, a used vehicle sales manager, an F&I manager, and a parts and service manager. Our dealership management teams typically have many years of experience in the automotive retail industry. This management structure is complemented by support from our market-based management teams and the corporate office, which we refer to as the Dealership Support Center (“DSC”), through centralized technology and processes as well as financial oversight.
Centralized Administrative and Strategic Functions
Our DSC management is responsible for our capital expenditure and operating strategy while the implementation of our operating strategy rests with our market-based management teams and each dealership management team based on the policies and procedures established by DSC management. DSC management and our market-based management teams continuously evaluate the financial and operating results of our dealerships, as well as each dealership’s geographical location, and from time to time, make decisions to evaluate new technologies and/or processes to further refine our operational processes.
As part of our investment in our IT systems, we have deployed a common dealer management system (“DMS”). We believe a single DMS provides the foundation for future efficiencies and creates a more efficient retail operation.
We consolidate financial, accounting and operational data received from our dealerships through customized financial products. Our IT approach enables us to integrate and aggregate information from our dealerships. Through the combination of a common DMS and our corporate financial products, management has access to the financial, accounting and operational data throughout the organization.
Commitment to Customer Service
We are focused on providing a high level of customer service and have designed our dealerships' services to meet the needs of an increasingly sophisticated and demanding automotive consumer. We endeavor to establish relationships that we believe will result in both repeat business and additional business through customer referrals. Furthermore, we provide our dealership managers with appropriate incentives to employ efficient selling approaches, engage in extensive follow-up to develop long-term relationships with customers and extensively train our sales staff to meet customer needs.
We continually evaluate opportunities, and implement appropriate new technologies, to improve the buying experience for our customers, and believe that our ability to share best practices across our multi-jurisdictional platform gives us an advantage over independent dealerships. For example, we have implemented a common customer relations management tool in all of our dealerships to facilitate communications with customers before, during and after the sale. We continue to invest in technologies designed to improve our sales process and employee productivity, all with the goal of improving the customer experience.
In addition, our higher margin parts and service operations are an integral part of our overall approach to customer service, providing an opportunity to foster ongoing relationships and improve customer loyalty. We continue to train our technicians and service advisers on processes and technologies to both educate our customers on their service needs and alternatives and ensure that our customers continue to receive excellent service. We also evaluate and implement programs, such as our national tire program and our clear advantage windshield wiper program, to draw customers into our service lanes and enhance our customer retention.
Marketing
Consistent with our local management strategy, our advertising and marketing efforts are generally focused at the local market level, with the aim of building our business with a broad base of repeat, referral and new customers. Historically, we have spent the majority percentage of our advertising dollars on traditional media advertising such as television, radio or newspaper. However, we are experiencing a continued shift toward digital internet-based advertising, including lead generation created through search engine marketing, website optimization and third party websites. Recognizing the fact that customers are increasing their use of internet based interactive tools to make buying decisions, we continue to invest in the development of our e-commerce strategy by:
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focusing on online brand development and website optimization;
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performing research to better understand the online consumer and their decision to visit one site versus another; and
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increasing marketing spend share on digital marketing.
We also use numerous review sites and social media channels to assist our marketing efforts and to make sure we are meeting the needs of our customers. We use common marketing materials for our brand names developed by professional advertising agencies. Our total advertising expense from continuing operations was $34.0 million for the year ended December 31, 2014, which equaled an average of $199 per retail vehicle sold. In addition, manufacturers’ direct advertising spending in support of their brands has historically been a significant component of the total amount spent on new car advertising in the United States.
Competition
The automotive retail and service industry is highly competitive with respect to price, service, location and selection. Our competition includes:
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franchised automotive dealerships in our markets that sell the same or similar new and used vehicles;
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privately negotiated sales of used vehicles;
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other used vehicle retailers, including regional and national vehicle rental companies;
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Internet-based used vehicle brokers that sell used vehicles to consumers;
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service center and parts supply chain stores; and
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independent service and repair shops.
For new vehicle sales, our dealerships compete with other franchised dealerships, primarily in their regions. We do not have any cost advantage in purchasing new vehicles from manufacturers. Instead, we rely on our advertising and merchandising, sales expertise, service reputation, strong local branding and location of our dealerships to assist in the sale of new vehicles. Our used vehicle operations compete with other franchised dealers, large used car retail consolidators, regional and national vehicle rental companies, independent used car dealers, Internet-based vehicle brokers and private parties for supply and resale of used vehicles.
We compete with other franchised dealers to perform warranty repairs and with other automobile dealers and franchised and independent service centers for non-warranty repair and routine maintenance business. We compete with other automobile dealers, service stores and auto parts retailers in our parts operations. We believe that the principal competitive factors in parts and service sales are our ability to use factory-approved replacement parts, our competitive prices, our familiarity with a manufacturer’s brands and models, and the quality of our customer service.
In arranging financing for our customers’ vehicle purchases, we compete with a broad range of financial institutions. In addition, many financial institutions are now offering F&I products through the Internet, which has increased competition and may reduce our profits on certain of these items. We believe that the principal competitive factors in providing financing are convenience, interest rates and flexibility in contract length.
In addition, given our desire to hire experienced, talented and successful individuals, the market for qualified employees in the industry and in the regions in which we operate, particularly for general managers and sales and service personnel, is highly competitive. As a result, we also compete with franchised dealers and other large automotive retailers for talented personnel.
Seasonality
The automobile industry has historically been subject to seasonal variations in revenues. Demand for vehicles is generally lowest during the first quarter of each year and, accordingly, we expect our revenues and operating results generally to be lower in the first quarter. We typically experience higher sales of luxury vehicles, which have higher average selling prices and gross profit per vehicle retailed, in the fourth quarter. Revenue and operating results may be impacted significantly from quarter to quarter by changing economic conditions, vehicle manufacturer incentive programs, or adverse weather events.
Dealer and Framework Agreements
Each of our dealerships operates pursuant to a dealer agreement between the dealership and the manufacturer (or in some cases the distributor) of each brand of new vehicles sold and/or serviced at the dealership. A typical dealer agreement specifies the locations at which the dealer has the right and obligation to sell the manufacturer’s vehicles and related parts and products and/or to perform certain approved services. Each dealer agreement also governs the use of the manufacturer’s trademarks and service marks.
The allocation of new vehicles among dealerships is subject to the discretion of the manufacturer, and generally does not guarantee the dealership exclusivity within a given territory or otherwise. Most dealer agreements impose requirements on substantially all aspects of the dealer’s operations. For example, most of our dealer agreements contain provisions and standards related to, among other things, the following:
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inventories of new vehicles and manufacturer replacement parts;
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maintenance of minimum net working capital requirements, and in some cases, minimum net worth requirements;
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achievement of certain sales and customer satisfaction targets;
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advertising and marketing practices;
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facilities and signs;
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products offered to customers;
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dealership management;
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personnel training;
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information systems;
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geographic market, including but not limited to requirements to meet sales and service targets within an assigned market area, geographic limitations on where the dealership may locate or advertise, and restrictions on the export of vehicles; and
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dealership monthly and annual financial reporting.
In addition to requirements under dealer agreements, we are subject to provisions contained in supplemental agreements, framework agreements, dealer addenda and manufacturers’ policies, collectively referred to as “framework agreements.” Framework agreements impose requirements on us in addition to those described above. Such agreements also define other standards and limitations, including:
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company-wide performance criteria;
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capitalization requirements;
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limitations on changes in our ownership or management;
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limitations on the number of a particular manufacturer’s franchises owned by us;
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restrictions or prohibitions on our ability to pledge the stock of certain of our subsidiaries; and
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conditions for consent to proposed acquisitions, including sales and customer satisfaction criteria, as well as limitations on the total local, regional and national market share percentage that would be represented by a particular manufacturer’s franchises owned by us after giving effect to a proposed acquisition.
Some dealer agreements and framework agreements grant the manufacturer the right to purchase its dealerships from us under certain circumstances, including upon the occurrence of an extraordinary corporate transaction without the manufacturer’s prior consent or a material breach of the framework agreement. Some of our dealer agreements and framework agreements also give the manufacturer a right of first refusal if we propose to sell any dealership representing the manufacturer’s brands to a third party. These agreements may also attempt to limit the protections available under applicable state laws and require us to resolve disputes through binding arbitration.
Certain of our dealer agreements expire after a specified period of time, ranging from one year to eight years, while other of our agreements have a perpetual term. We expect that we will be able to renew expiring agreements in the ordinary course of business. However, typical dealer agreements give the manufacturer the right to terminate or the option of non-renewal of the dealer agreement under certain circumstances, including:
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insolvency or bankruptcy of the dealership;
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failure to adequately operate the dealership or to maintain required capitalization levels;
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impairment of the reputation or financial condition of the dealership;
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change of control of the dealership without manufacturer approval (including certain material changes in the composition of our Board of Directors during a specified time period, the acquisition of 20% or more of our voting stock by another vehicle manufacturer or distributor, or the acquisition of 50% or more of our voting stock by a person, entity or group not affiliated with the vehicle manufacturer or distributor);
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certain extraordinary corporate transactions such as a merger or sale of all or substantially all of our assets;
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failure to complete facility upgrades required by the manufacturer or agreed to by the dealer; or
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material breach of other provisions of a dealer agreement.
While one or more of our dealer agreements may be terminated or not renewed due to a number of circumstances, it may be possible to negotiate a waiver of termination or non-renewal with the manufacturer. Notwithstanding that, however, no assurances can be provided that upon the termination or attempted termination, or nonrenewal of any agreement, we will be able to enter into new agreements, or waivers to any agreement, on acceptable terms, in a timely manner, or at all. Our loss of
any one or more of our dealer agreements, whether as a result of termination, expiration or otherwise, could have a material adverse effect on our revenues and results of operations.
Applicable state laws generally provide that an automobile manufacturer may not terminate or refuse to renew a dealer agreement unless it has first provided the dealer with written notice setting forth “good cause” and stating the grounds for termination or non-renewal. Some state laws allow dealers to file protests or petitions or allow them to attempt to comply with the manufacturer's criteria within a notice period to avoid the termination or non-renewal. Our framework agreements with certain manufacturers contain provisions that, among other things, attempt to limit the protections available to dealers under these laws and, though unsuccessful to date, manufacturers' ongoing lobbying efforts may lead to the repeal or revision of these laws. If these laws are repealed in the states in which we operate, manufacturers may be able to terminate our franchises without providing advance notice, an opportunity to cure or a showing of good cause. Without the protection of these laws, it may also be more difficult for us to renew our dealer agreements upon expiration. Changes in laws that provide manufacturers the ability to terminate our dealer agreements could materially adversely affect our business, financial condition and results of operations. Furthermore, if a manufacturer seeks protection from creditors in bankruptcy, courts have held that the federal bankruptcy laws may supersede these laws, resulting in either the termination, non-renewal or rejection of franchises by such manufacturers, which, in turn, could materially adversely affect our business, financial condition and results of operations.
Regulations
We operate in a highly regulated industry. Under various state laws each of our dealerships must obtain one or more licenses in order to establish, operate or relocate a dealership or operate an automotive repair service in such state. In addition, we are subject to numerous complex federal, state and local laws regulating the conduct of our business, including with respect to:
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advertising;
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motor vehicle and retail installment sales practices;
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leasing;
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sales of finance, insurance and vehicle protection products;
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consumer credit;
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unfair and deceptive trade practices;
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consumer protection;
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consumer privacy;
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money laundering;
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environmental matters;
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land use and zoning;
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health and safety; and
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employment practices.
We actively make efforts to assure we are in compliance with the laws and related regulations that affect our business.
Environmental Matters
We are subject to a wide range of environmental laws and regulations, including those governing discharges into water, air emissions, storage of petroleum substances and chemicals, handling and disposal of solid and hazardous wastes, remediation of various types of contamination, and otherwise relating to health, safety and protection of the environment. For example and without creating an exhaustive list: as with automobile dealerships generally, and service and parts and collision repair center operations in particular, our business involves the generation, use, handling and disposal of hazardous or toxic substances and wastes and the use of above ground and underground storage tanks (ASTs and USTs). Operations involving the management of wastes and the use of ASTs and USTs are subject to requirements of the Resource Conservation and Recovery Act, analogous state statutes, and their implementing regulations. Pursuant to these laws, federal and state environmental agencies have established approved methods for handling, storing, treating, transporting and disposing of regulated substances and wastes with which we must comply. We also are subject to laws and regulations governing responses to any releases of contamination at or from our facilities or at facilities that receive our hazardous wastes for treatment or disposal. The Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) and similar state statutes, can impose strict and joint and
several liability for cleanup costs on those that are considered to have contributed to the release of a “hazardous substance.” We also are subject to the Clean Water Act, analogous state statutes, and their implementing regulations which, among other things, prohibit discharges of pollutants into regulated waters without permits, require containment of potential discharges of oil or hazardous substances, and require preparation of spill contingency plans. Currently, we are not aware of any non-compliance with these or any other environmental requirements applicable to our operations, nor are we aware of any material remedial liabilities to which we are subject.
We have incurred, and will continue to incur, costs and capital expenditures in complying with these laws and regulations and to obtain and maintain all necessary environmental permits. We believe that our operations currently are being conducted in substantial compliance with all applicable environmental laws. From time to time we may experience incidents and encounter conditions that are not in compliance with environmental laws and regulations. We occasionally receive notices from environmental agencies of various potential violations of environmental laws or regulations. In such cases, we work with the agencies to address any issues and to implement appropriate corrective action when necessary. However, none of our dealerships has been subject to any material environmental liabilities in the past, nor do we know of any fact or condition that would result in any material environmental liabilities being incurred in the future. Based on presently known information and existing accrued environmental reserves, We do not expect environmental expenditures to have a material adverse effect on its business or financial condition. However, Our operations entail risks in these areas, and we could incur material costs or liabilities in the future.
Employees
As of December 31, 2014, we employed approximately 8,300 people. We believe our relationship with our employees is favorable. Although only a small percentage of our employees are represented by a labor union, certain of our facilities are located in areas of high union concentration, and such facilities are susceptible to union-organizing activity. Although we have not experienced any strikes or walkouts at our operations, because of our dependence on vehicle manufacturers, we may be affected adversely by labor strikes, work slowdowns and walkouts at vehicle manufacturers’ production facilities and transportation modes that are outside of our control.
Insurance
Because of the vehicle inventory and the nature of the automotive retail business, automobile retail dealerships generally require significant levels of insurance covering a broad variety of risks. Our insurance program includes multiple umbrella policies with a total per occurrence and aggregate limit of $102.0 million. We are self-insured for certain employee medical claims and maintain stop loss insurance for individual claims. We have large deductible insurance programs in place for workers compensation, property and general liability claims.
Item 1A.
Item 1A. Risk Factors
In addition to the other information contained, referred to or incorporated by reference into this report, you should consider carefully the following factors when evaluating our business. Any of these risks, or the occurrence of any of the events described in these risk factors, could cause our actual future results, performance or achievements to be materially different from or could materially adversely affect our business, financial condition or results of operations. In addition, other risks or uncertainties not presently known to us or that we currently do not deem material could arise, any of which could also materially adversely affect us.
Future economic uncertainty, or a downturn in the automotive retail environment, could present challenges for our dealerships and could materially adversely affect our business and our ability to implement our strategy.
The automotive retail industry has shown continued and significant improvement in recent periods from the unprecedented challenging environment which began in 2008. Notwithstanding this, the timing and extent of a long-term industry and general economic recovery continues to be uncertain. Future economic conditions, including increased unemployment or underemployment levels, could materially adversely affect our business and results of operations. In addition, if consumer financing becomes more difficult or expensive to obtain, the new vehicle seasonally adjusted annual rate ("SAAR") could be negatively impacted, which in turn could further material adversely impact our results of operations, our cash flows and ultimately our liquidity.
If we are unable to generate sufficient operating cash flows, we may not be able to execute our business strategy. We may also be required to enter into certain extraordinary transactions in order to generate additional cash, which may include, but not be limited to, selling certain of our dealerships or other assets or increasing borrowings under our existing, or any future, credit facilities. There can be no assurance that, if necessary, we will be able to enter into any such transactions in a timely manner or
on reasonable terms, if at all. Furthermore, in the event we were required to sell dealership assets, the sale of any material portion of such assets could have a material adverse effect on our revenue and profitability.
Our dealerships’ profitability depends in large part upon customer demand for the particular vehicle lines they carry, and the availability to us of such popular vehicles.
The profitability of our dealerships depends in large part on customer demand for the vehicle lines they carry. Historically, we have generated most of our revenue through new vehicle sales. New vehicle sales also tend to lead to sales of higher-margin products and services such as finance and insurance products and parts and related service.
As a result, our success is dependent upon our ability to obtain a desirable mix of popular new vehicles from manufacturers. More popular vehicles may often be difficult to obtain from manufacturers. Manufacturers generally allocate their vehicles among their franchised dealerships based on the sales history of each dealership, and in some instances on the level of capital expenditures associated with such dealerships. If our dealerships experience prolonged periods of sales declines or do not make adequate capital expenditures, those manufacturers may reduce their allotments of popular vehicles to our dealerships and, as a result, our new vehicle sales and profits may decline.
Changes or declines in consumer demand, or delays in nonessential services, due to general economic conditions, changes in preferences, or otherwise, could materially adversely affect our revenues and results of operations.
Our business is heavily dependent on consumer demand and preferences, and our key partners' respective abilities to adapt to changes in consumer demand and preferences. Further, retail vehicle sales are cyclical and historically have experienced periodic downturns characterized by oversupply and weak demand. These cycles are often dependent on general economic conditions and consumer confidence, as well as levels of discretionary personal income, credit availability and interest rates. In addition, a general reduction in demand for new vehicles, or an oversupply of such vehicles, could result in a need for us to sell vehicles at a lower price, reducing our revenue per new vehicle sold and our new vehicle margins. In addition, in recent years fuel prices have been unstable and at some points reached historically high levels. Despite a recent decline in oil prices, gasoline prices could increase in the future, which could cause a reduction in automobile purchases and a shift in buying patterns from less fuel-efficient luxury or SUV models (which typically provide higher profit margins to automotive retailers) to smaller, more fuel-efficient and economical vehicles (which typically have lower profit margins). A shift in preferences by consumers to smaller, more economical vehicles due to pricing, fuel costs or otherwise may have a material adverse effect on our revenues and results of operations. In the recent past, we have also seen the price of used vehicles generally increase, creating an increased demand for new vehicles. A relative increase in new vehicle sales versus used vehicle sales could have an adverse effect on our results of operations as used vehicle sales have traditionally produced relatively higher profit margins than new vehicle sales for our business.
While a decline in vehicle purchases in some instances creates additional demand for parts and services due to the aging of, and increased wear and tear on existing vehicles, in difficult economic conditions, people often delay nonessential service and repairs on their vehicles. Delays on the service and repairs of vehicles due to a decline in economic conditions or otherwise could have a material adverse effect on the revenues and results of operations of our parts and service business, which has traditionally produced higher profit margins for our business relative to vehicle sales.
If our brand mix becomes significantly concentrated, and the manufacturer of one or more of those brands experiences any disruptions in its operations or a decrease in consumer demand for its vehicles, or otherwise develops a poor reputation, there could be a material adverse effect on our revenues, operational results or profitability.
Although we have sought to limit our dependence on any one vehicle brand, there can be no assurance that our brand mix will be appropriate or sufficiently diverse to protect us from a significant decline in the desirability of vehicles manufactured by a particular manufacturer. At December 31, 2014, our new vehicle revenue brand mix consists of 47% from mid-line import brands, 39% from luxury brands, and 14% from domestic brands. For the year ended December 31, 2014, brands representing 5% or more of our revenues from new vehicle sales were as follows:
If a manufacturer fails to produce desirable vehicles or develops a reputation for producing undesirable vehicles, and we own dealerships that sell that manufacturer’s vehicles, our revenues from those dealerships could be adversely affected as consumers shift their vehicle purchases away from that brand. Likewise, if the manufacturer experiences any disruption in its ability to produce vehicles, thus limiting the supply of vehicles to our dealerships, it could have a material adverse effect on our revenues, results of operations and profitability. If the profitability at certain of our dealerships is adversely affected, there could be a significant reduction of our cash flows, which in turn could result in impairments of such dealership's properties and/or intangible assets.
Despite our current level of outstanding indebtedness, we may be able to incur substantially more debt. Our existing, and future, debt may limit our flexibility to manage our business. Furthermore, we must generate sufficient cash to service our debt, or our business and financial condition may be materially adversely affected.
We and our subsidiaries may have the ability to incur substantial additional debt in the future to finance, among other things, acquisitions, working capital and capital expenditures, and new and used vehicle inventory, as well as to refinance new and used vehicle inventory, subject in each case to the restrictions contained in our debt instruments and other agreements existing at the time such indebtedness is incurred. The specific restrictions that could potentially limit the additional amount of debt we could incur are the leverage covenants contained in various of our debt agreements.
Our debt service obligations could have important consequences to us for the foreseeable future, including the following:
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our ability to obtain additional financing for acquisitions, capital expenditures, working capital or other general corporate purposes may be impaired;
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a substantial portion of our cash flow from operating activities must be dedicated to the payment of principal and interest on our debt, thereby reducing the funds available to us for our operations and other corporate purposes;
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some of our borrowings are and will continue to be at variable rates of interest, which exposes us to risks of interest rate increases; and
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we may be or become substantially more leveraged than some of our competitors, which may place us at a relative competitive disadvantage and make us more vulnerable to changes in market conditions and governmental regulations.
As a result of the foregoing and other potential limitations, our debt obligations may limit our ability to take strategic actions that would otherwise enable us to manage our business, in a manner in which we otherwise would, absent such limitations, which could materially adversely affect our business, financial condition and results of operations.
Under several of our debt, mortgage, lease and framework agreements, we are required to maintain compliance with certain financial and other covenants. Our failure to comply with certain covenants in these agreements could adversely affect our ability to access our borrowing capacity, subject us to acceleration of our outstanding debt or result in a cross default on other indebtedness, and adversely affect our ability to conduct our business.
There are operating and financial restrictions and covenants in certain of our debt and mortgage agreements, including the agreement governing our senior credit facility, the indenture governing our senior notes and our mortgage agreements and related mortgage guarantees, as well as certain other agreements to which we are a party that may adversely affect our ability to finance our future operations or capital needs or to pursue certain business activities. These limit, among other things, our ability to incur certain additional debt, create certain liens or other encumbrances, and make certain payments (including
dividends and repurchases of our common stock and for investments). Certain of these agreements also require us to maintain compliance with certain financial ratios. In many cases, our compliance with these restrictions and covenants is tested giving pro forma effect to certain proposed transactions.
If we are unable to comply with any applicable financial or other covenants after giving effect to certain proposed transactions or otherwise, we may not be able to complete such proposed transactions or may be required to seek waivers of or modifications to our covenants from our creditors, or we may need to undertake one or more transactions designed to generate proceeds sufficient to repay our debt. Obtaining such waivers or modifications often requires the payment to creditors of significant fees and requires significant time and attention of management. We cannot give any assurance that we would be able to successfully take any necessary actions at times, or on terms acceptable to us.
Our failure to comply with any of these covenants in the future could constitute a default under the relevant agreement, which could, 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 repay those borrowings; (iii) entitle the creditors under such agreement to foreclose on the property securing the relevant indebtedness; 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, mortgage, or other agreements could trigger cross default provisions in one or more of our other debt or mortgage agreements.
In addition to the financial and other covenants contained in our various debt or mortgage agreements, a number of our dealerships are located on properties that we lease. Certain of the leases governing such properties have certain covenants with which we must comply. If we fail to comply with the covenants under our leases, the respective landlords could, among exercising other remedies, terminate the leases and seek significant cash damages, or evict us from the applicable properties.
Similarly, our failure to comply with any financial or other covenants in any of our framework agreements would give the relevant manufacturer certain rights, including the right to reject proposed acquisitions, and may give it the right to repurchase its franchises from us. Events that give rise to such rights, and our inability to acquire additional dealerships or the requirement that we sell one or more of our dealerships at any time, could inhibit the growth of our business, and could have a material adverse effect on our business, financial condition and results of operations.
Manufacturers may also have the right to restrict our ability to provide guarantees of our operating companies, pledges of the capital stock of our subsidiaries and liens on our assets, which could materially adversely impact our ability to obtain financing for our business and operations on favorable terms or at desired levels, if at all.
Our capital costs and our results of operations may be materially and adversely affected by increases in interest rates.
We generally finance our purchases of new vehicle inventory, have the ability to finance the purchases of used vehicle inventory and have the availability to borrow funds for working capital using senior secured credit facilities under which we pay interest at variable rates. Therefore, our interest expense from variable rate debt will rise with increases in interest rates. In addition, a significant rise in interest rates may also have the effect of depressing demand in the interest rate sensitive aspects of our business, particularly new and used vehicle sales, because most of our customers finance their vehicle purchases. As a result, rising interest rates may have the effect of simultaneously increasing our capital costs and reducing our revenues. Given our debt composition as of December 31, 2014, each one percent increase in market interest rates would increase our total annual interest expense, including floor plan interest, by as much as $7.7 million. When considered in connection with reduced expected sales as and if interest rates increase, any such increase could materially adversely affect our business, financial condition and results of operations.
Our business may be materially adversely affected by unfavorable conditions in one or more of our local markets, even if those conditions are not prominent nationally.
Our overall corporate results are also subject to local economic, competitive and other conditions prevailing in the various geographic markets in which we operate. Our dealerships are currently located in the Atlanta, Austin, Charlottesville, Dallas-Fort Worth, Durham, Fayetteville, Fort Pierce, Greensboro, Greenville, Houston, Jackson, Jacksonville, Little Rock, Orlando, Princeton, Richmond, St. Louis and Tampa markets. If economic conditions remain uncertain, we experience a decline in the value of our local brands for any reason, consumer vehicle demand decreases or competition for services offered by automotive retailers remains significant in any of these markets, or any of these factors becomes exacerbated, our business could be materially adversely affected.
We are a holding company and as a result are dependent on our operating subsidiaries to generate sufficient cash and distribute cash to us to service our indebtedness and fund our ongoing operations.
Our ability to make payments on our indebtedness and fund our ongoing operations depends on our operating subsidiaries’
ability to generate cash in the future and distribute that cash to us. It is possible that our subsidiaries may not generate cash from operations in an amount sufficient to enable us to service our indebtedness. In addition, many of our subsidiaries are required to comply with the provisions of franchise agreements, dealer agreements, other agreements with manufacturers, mortgages, and credit facility providers. Many of these agreements contain minimum working capital or net worth requirements, and are subject to change at least annually. Although the requirements contained in these agreements did not restrict our subsidiaries from distributing cash to us as of December 31, 2014, unexpected changes to our franchise agreements, dealer agreements or other agreements with manufacturers could require us to alter the manner in which we distribute or use cash. If our operating subsidiaries are unable to generate and distribute sufficient cash to us to service our indebtedness and fund our ongoing operations, our financial condition may be materially adversely affected.
Our vehicle sales, results of operations and financial condition may be materially adversely affected by depressed levels of available consumer financing.
The majority of vehicle purchases are financed. During and as a result of the recent global economic downturn, consumers experienced a decline in the availability of credit. In addition, manufacturers decreased the availability of leases or, in some instances, terminated leasing programs altogether. The reduced availability of credit to consumers contributed to the decline in our vehicle sales in past periods. Reductions in available credit or increased costs of credit could result in a decline in our vehicle sales, which would have a material adverse effect on our results of operations and financial condition.
Sub-prime lenders have historically provided financing to those buyers who, for various reasons, do not have access to traditional financing, including those buyers who have a poor credit history or lack the down payment necessary to purchase a vehicle. During the recent economic downturn, sub-prime lenders became more stringent with their credit standards, which made it more difficult for consumers needing sub-prime financing to obtain credit in these periods. Recently, the automotive retail markets have experienced an increase in the availability of credit from subprime lenders. However, if market conditions cause the subprime lenders to tighten credit standards, or if interest rates increase, the ability of these consumers to purchase vehicles again could become limited, resulting in a decline in our vehicle sales, which, in turn, could have a material adverse effect on our results of operations and financial condition.
Adverse conditions affecting the manufacturers of the vehicles that we sell may negatively impact our revenues and profitability.
Our ability to successfully market vehicles to the public depends to a great extent on aspects of manufacturers’ operations. Vehicle manufacturers have in the recent past been adversely affected by the considerable uncertainty in the U.S. and international economic climate. In addition to challenges created by uncertain economic conditions, we remain vulnerable to other matters that may impact the manufacturers of the vehicles we sell. For example, other factors outside of our control that could negatively affect vehicle manufacturers include:
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changes in their respective financial condition;
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changes in their respective marketing efforts;
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changes in their respective reputation for quality;
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manufacturer and other product defects, including recalls;
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changes in their respective management;
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disruptions in the production and delivery of vehicles and parts due to natural disasters or other reasons that are outside of our control; and
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issues with respect to labor relations.
Adverse conditions that materially affect a vehicle manufacturer and impact its ability to profitably design, market, produce or distribute desirable new vehicles could in turn materially adversely affect our ability to (i) sell vehicles produced by that manufacturer, (ii) obtain or finance our desired new vehicle inventories, (iii) access or benefit from manufacturer financial assistance programs, (iv) collect in full or on a timely basis any amounts due therefrom, and/or (v) obtain other goods and services provided by the impacted manufacturer. Our business, results of operations, financial condition, cash flows, and
prospects could be materially adversely affected as a result of any event that has an adverse effect on any vehicle manufacturers or distributors.
In addition, if a vehicle manufacturer seeks protection from creditors in bankruptcy or similar proceedings, (i) the manufacturer could seek to terminate or reject all or certain of our franchises, (ii) if the manufacturer is successful in terminating all or certain of our franchises, we may not receive adequate compensation for those franchises, (iii) our cost to obtain financing for our new vehicle inventory may increase or no longer be available from such manufacturer’s captive finance subsidiary, (iv) consumer demand for such manufacturer’s products could be materially adversely affected, especially if costs related to improving such manufacturer’s financial condition are imputed to the price of its products, (v) there may be a significant disruption in the availability of consumer credit to purchase or lease vehicles or negative changes in the terms of such financing, which may negatively impact our sales, or (vi) there may be a reduction in the value of receivables and inventory associated with that manufacturer, among other things. The occurrence of any one or more of these events could have a material adverse effect on our business or results of operations.
A decline in our credit rating or a general disruption in the credit markets could negatively impact our liquidity and ability to conduct our operations.
A deterioration of our credit rating, or a general disruption in the credit markets, could limit our ability to obtain credit on favorable terms. In addition, in the recent past, global financial markets and economic conditions have been disruptive and volatile, and continue to be uncertain. These issues, along with significant write-offs in the financial services sector, the re-pricing of certain credit risks and continued uncertain economic conditions in certain industries and sectors may make it more difficult for us to obtain funding at any given time.
Our inability to access necessary or desirable funding, or to enter into certain related transactions, at times and at costs deemed appropriate by us, could have a negative impact on our liquidity and our ability to conduct our operations.
We currently maintain a senior secured credit facility with a syndicate of banks, and we have hedge transactions in place with a number of counterparties that we believe are financially stable. However, if any of the financial institutions that have extended credit commitments to us or have entered into hedge or similar transactions with us are adversely affected by continued uncertain conditions in the U.S. and international capital markets, they may become unable or unwilling to fulfill their obligations to us, which also could have a material adverse effect on our liquidity and our ability to conduct our operations.
Government regulations and environmental regulation compliance costs may adversely affect our business.
We are, and expect to continue to be, subject to a wide range of federal, state and local laws and regulations, including local licensing requirements. These laws regulate the conduct of our business, including:
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motor vehicle and retail installment sales practices;
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leasing;
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sales of finance, insurance and vehicle protection products;
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consumer credit;
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unfair and deceptive trade practices;
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consumer protection;
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consumer privacy;
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money laundering;
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advertising;
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land use and zoning;
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environmental matters;
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health and safety; and
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employment practices.
In every state in which we operate, we must obtain certain licenses issued by state authorities in order to operate our businesses, including dealer, sales, finance and insurance-related licenses. State laws also regulate our conduct of business, including our advertising, operating, financing, employment and sales practices. Other laws and regulations include state franchise laws and regulations and other extensive laws and regulations applicable to new and used automobile dealers. The enactment of new laws and regulations that materially impair or restrict our sales, finance and insurance, or other operations could have a material adverse effect on our business, results of operations, financial condition, cash flows, and prospects. In addition, in 2010 the Dodd-Frank Wall Street Reform and Consumer Protection Act established the Consumer Financial Protection Bureau (the “CFPB”), which has broad regulatory powers. The CFPB is an independent federal agency funded by the United States Federal Reserve and has limited oversight from the U.S. Congress. Although automotive dealers are generally excluded from coverage under the CFPB, the Dodd-Frank Act and future regulatory actions by the CFPB could lead to additional, indirect regulation of automotive dealers through its regulation of automotive finance companies and other financial institutions.
In March 2013, the CFPB issued guidance regarding the way in which the practice of compensating automotive dealerships for arranging customer financing through discretionary markups of wholesale rates offered by financial institutions, also known as the “dealer participation,” may pose a material risk of violating The Equal Credit Opportunity Act (the “ECOA”). In its guidance, the CFPB has encouraged compliance with the ECOA for financial institutions under its jurisdiction. This compliance may include the institutions changing their dealer compensation practices such as by eliminating automotive dealership discretion in marking up buy rates. Other steps financial institutions may take to comply with the ECOA could include imposing controls on automotive dealerships regarding the dealer participation and monitoring and addressing the consequences of dealer participation policies. The CFPB and the U.S. Department of Justice have also conducted and may in the future continue to conduct investigations that may affect financial institutions that serve as lenders to the automotive dealership industry. Increased monitoring on behalf of financial institutions, any additional steps taken by them to control automotive dealerships and these practices and any additional investigations could substantially restrict our ability to generate revenue from arranging financing for our customers for the purchase of vehicles, which could have a material adverse effect on our business and results of operations.
Our financing activities are subject to federal truth-in-lending, consumer leasing and equal credit opportunity laws and regulations, as well as state and local motor vehicle finance laws, installment finance laws, insurance laws, usury laws and other installment sales laws and regulations. Some states regulate finance, documentation and administrative fees that may be charged in connection with vehicle sales. Claims arising out of actual or alleged violations of law may be asserted against us or our dealerships by individuals or governmental entities and may expose us to significant damages or other penalties, including revocation or suspension of our licenses to conduct dealership operations and fines. In recent years, private plaintiffs and state attorneys general in the United States have increased their scrutiny of advertising, sales, and finance and insurance activities in the sale and leasing of motor vehicles. These activities have led many lenders to limit the amounts that may be charged to customers as fee income for these activities. If these or similar activities were to significantly restrict our ability to generate revenue from arranging financing for our customers, we could be adversely affected.
Our operations are also subject to the National Traffic and Motor Vehicle Safety Act, the Magnusson-Moss Warranty Act, Federal Motor Vehicle Safety Standards promulgated by the United States Department of Transportation and various state motor vehicle regulatory agencies. The imported automobiles we purchase are subject to U.S. customs duties and, in the ordinary course of our business, we may, from time to time, be subject to claims for duties, penalties, liquidated damages, or other charges.
If we or any of our employees at any individual dealership violate or are alleged to violate laws and regulations applicable to them or protecting consumers generally, we could be subject to individual claims or consumer class actions, administrative, civil or criminal investigations or actions and adverse publicity. Such actions could expose us to substantial monetary damages and legal defense costs, injunctive relief and criminal and civil fines and penalties, including suspension or revocation of our licenses and franchises to conduct dealership operations.
Likewise, employees and former employees are protected by a variety of employment-related laws and regulations relating to, among other things, wages and discrimination. Allegations of a violation could subject us to individual claims or consumer class actions, administrative investigations or adverse publicity. Such actions could expose us to substantial monetary damages and legal defense costs, injunctive relief and civil fines and penalties, and damage our reputation and sales.
Environmental laws and regulations govern, among other things, discharges into the air and water, storage of petroleum substances and chemicals, the handling and disposal of solid and hazardous wastes, investigation and remediation of contamination, and otherwise protective of health, safety and the environment. Similar to many of our competitors, we have incurred and expect to continue to incur capital and operating expenditures and other costs in complying with such federal and
state statutes. In addition, we may become subject to broad liabilities arising out of contamination at our currently and formerly owned or operated facilities, at locations to which hazardous substances were transported from such facilities, and at such locations related to entities formerly affiliated with us. For some such potential liabilities, we believe we are entitled to indemnification from other entities. However, we cannot assure you that such entities will view their obligations as we do or will be able or willing to satisfy them. Failure to comply with applicable laws and regulations, or significant additional expenditures required to maintain compliance therewith, could have a material adverse effect on our business, results of operations, financial condition or cash flows. Nonetheless, none of our dealerships has been subject to any material environmental liabilities in the past, nor do we know of any fact or condition that would result in any material environmental liabilities being incurred in the future.
A significant judgment against us or the imposition of a significant fine could have a material adverse effect on our business, financial condition and future prospects. We further expect that, from time to time, new laws and regulations, particularly in the environmental area will be enacted, and compliance with such laws, or penalties for failure to comply, could significantly increase our costs. However, none of our dealerships has been subject to any material environmental liabilities in the past, nor do we know of any fact or condition that would result in any material environmental liabilities being incurred in the future. Based on presently known information and existing accrued environmental reserves, Asbury does not expect environmental expenditures to have a material adverse effect on its business or financial condition.
A data security breach with regard to personally identifiable information ("PII") about our customers or employees could negatively affect operations and result in high costs.
In the ordinary course of business, we and our partners receive significant PII about our customers in order to complete the sale or service of a vehicle and related products. We also receive PII from our employees. Numerous state and federal regulations, as well as payment card industry and other vendor standards, govern the collection and maintenance of PII from consumers and other individuals. Although many companies across many industries are affected by malicious efforts to obtain access to PII, news reports suggest that the automotive dealership industry is a particular target of identity thieves. Moreover, there are numerous opportunities for a data security breach, including cyber-security breaches, burglary, lost or misplaced data, scams, or misappropriation of data by employees, vendors or unaffiliated third parties. In recent periods, well-known retailers and other businesses have reported significant security breaches that resulted in undetected and unauthorized access to their systems, which resulted in compromising personal customer data.
Because cyber-attacks are increasing in number and sophistication and despite the security measures we have in place and any additional measures we may implement or adopt in the future, our facilities and systems, and those of our third-party service providers, could be vulnerable to security breaches, computer viruses, lost or misplaced data, programming errors, scams, burglary, human errors, acts of vandalism, or other events. Alleged or actual data security breaches can increase costs of doing business, negatively affect customer satisfaction and loyalty, expose us to negative publicity, individual claims or consumer class actions, administrative, civil or criminal investigations or actions, and infringe on proprietary information, any of which could have a material adverse effect on our business, financial condition or results of operations.
Substantial competition in automobile sales and services may materially adversely affect our profitability.
The automotive retail and service industry is highly competitive with respect to price, service, location and selection. Our competition includes:
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franchised automobile dealerships in our markets that sell the same or similar new and used vehicles;
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privately negotiated sales of used vehicles;
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other used vehicle retailers, including regional and national vehicle rental companies;
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Internet-based used vehicle brokers that sell used vehicles to consumers;
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service center and parts supply chain stores; and
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independent service and repair shops.
We do not have any cost advantage over other retailers in purchasing new vehicles from manufacturers. We typically rely on our advertising, merchandising, sales expertise, service reputation, strong local branding and dealership location to sell new and used vehicles. Further, our dealer agreements do not grant us the exclusive right to sell a manufacturer’s product within a given geographic area. Our revenues and profitability may be materially adversely affected if competing dealerships expand their market share or additional franchises are awarded in our markets in ways that negatively impact our sales.
If vehicle manufacturers reduce or discontinue sales incentive, warranty or other promotional programs, our results of operations, cash flows and financial condition may be materially adversely affected.
We benefit from certain sales incentive, warranty and other promotional programs of vehicle manufacturers that are intended to promote and support their respective new vehicle sales. Key incentive programs include:
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customer rebates on new vehicles;
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dealer incentives on new vehicles;
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special financing or leasing terms;
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warranties on new and used vehicles; and
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sponsorship of used vehicle sales by authorized new vehicle dealers.
Manufacturers often make many changes to their incentive programs. Any reduction or discontinuation of key manufacturers’ incentive programs for any reason, including a supply and demand imbalance, may reduce our sales volume which, in turn, could have a material adverse effect on our results of operations, cash flows and financial condition.
If we fail to obtain renewals of one or more of our dealer agreements on acceptable terms, if certain of our franchises are terminated, if certain manufacturers’ rights under their agreements with us are triggered, or if the geographic areas of any of our franchises are altered, our business, financial condition and results of operations may be materially adversely affected.
Each of our dealerships operates under the terms of a dealer agreement with the manufacturer (or manufacturer-authorized distributor) of each new vehicle brand it carries and/or is authorized to service, and we operate under additional framework agreements with some vehicle manufacturers, which contain additional requirements that govern the particular vehicle manufacturer’s franchises. Our dealerships may obtain new vehicles from manufacturers, service vehicles, sell new vehicles and display vehicle manufacturers’ trademarks only to the extent permitted under these agreements. As a result of the terms of our dealer, framework and related agreements and our dependence on the rights granted by the manufacturers, the manufacturers have the right to exercise a great deal of control over our day-to-day operations, and the terms of these agreements may impose limitations on key aspects of our operations, including acquisition strategy and capital spending.
Our dealer agreements may be terminated or not renewed by manufacturers for a number of reasons, and many of the manufacturers have the right to direct us to divest our dealerships if there is a default under the franchise agreement, an unapproved change of control (including certain material changes in the composition of our Board of Directors during a specified time period, the acquisition of 20% or more of our voting stock by another vehicle manufacturer or distributor, or the acquisition of 50% or more of our voting stock by a person, entity or group not affiliated with the vehicle manufacturer or distributor), or certain other unapproved events (including certain extraordinary corporate transactions such as a merger or sale of all or substantially all of our assets).
Our dealer agreements are scheduled to expire at various times. Although we expect that these agreements will be renewed in the ordinary course of business, there can be no assurances that we will be able to renew these agreements on a timely basis or on acceptable terms or at all. Most of our dealer agreements also provide the manufacturer with a right of first refusal to purchase any of the manufacturer’s franchises we seek to sell. Our business, financial condition and results of operations may be materially adversely affected to the extent that our rights become compromised or our operations are restricted due to the terms of our dealer or framework agreements or if we lose franchises representing a significant percentage of our revenues.
Our dealer agreements do not give us the exclusive right to a given geographic area. Manufacturers can establish new franchises or relocate existing franchises, subject to applicable state franchise laws. The establishment or relocation of franchises in our markets could have a material adverse effect on the business, financial condition and results of operations of our dealerships in the market in which the action is taken.
Our failure to meet consumer satisfaction, financial or sales performance or facilities requirements specified by manufacturers may adversely affect our ability to acquire new dealerships and our profitability.
Many manufacturers attempt to measure customers’ satisfaction with their experience in our sales and service departments through rating systems that are generally known in the automotive retailing industry as consumer satisfaction indices (“CSI”). The use of CSI ratings by manufacturers is in addition to their contractual rights to monitor the financial and sales performance of our dealerships. At the time we acquire a dealership or enter into a new dealer or framework agreement, manufacturers will often establish sales or performance criteria for that dealership. In accordance with the terms of these agreements, these criteria
have been modified by various manufacturers in the past, and we cannot assure you that they will not be further modified or replaced by different criteria in the future. Some of our dealerships have had difficulty meeting these criteria in the past. We cannot assure you that any of our dealerships will be able to comply with these criteria in the future.
Also, manufacturers often impose facilities requirements on our dealerships. Among other things, manufacturers may require us to move or renovate our dealerships to meet certain image standards. Image standards have been modified by manufacturers in the past, and we cannot assure you that the standards will not be further modified or replaced by different criteria in the future. These commitments could require significant capital expenditures, which could have an adverse affect on our profitability.
In accordance with the terms of an applicable framework agreement, a manufacturer may use these criteria as factors in evaluating any application we may make for acquisitions of additional dealerships. A manufacturer may refuse to consent to our acquisition of one of its franchises if it determines our dealerships do not comply with its performance criteria. This would impede our ability to execute acquisitions and limit our ability to grow. In addition, we receive payments and incentives from certain manufacturers based, in part, on our CSI ratings, and future payments may be materially reduced or eliminated if our CSI ratings do not meet stated criteria.
Manufacturers’ actions in connection with any proposed acquisitions or divestitures may limit our future growth and impact our business, financial condition or results of operations.
We are generally required to obtain manufacturer consent before we can acquire dealerships selling a manufacturer’s automobiles. In addition, as described above, many of our dealer and framework agreements require that we meet certain CSI ratings and sales performance criteria as a condition to additional dealership acquisitions. We cannot assure you that we will be able to meet these performance criteria at any applicable time or that manufacturers will consent to future acquisitions, which may prevent us from being able to take advantage of strategic opportunities, and may limit our ability to expand our business. The process of obtaining a manufacturer’s consent can take a significant amount of time. Delays in consummating acquisitions caused by this process may negatively affect our ability to acquire dealerships that we believe would produce acquisition synergies and integrate well into our overall strategy. In addition, manufacturers typically establish minimum capital requirements for each of their dealerships on a case-by-case basis. As a condition to granting consent to a proposed acquisition, a manufacturer may require us to remodel or upgrade our facilities and capitalize the subject dealership at levels we would not otherwise choose to fund, causing us to divert our financial resources away from uses that management believes may be of higher long-term value to us. Furthermore, the exercise by a manufacturer of its right of first refusal to acquire a dealership may prevent us from acquiring dealerships that we otherwise would acquire, which could have an adverse effect on our ability to grow through acquisitions, and therefore materially adversely impact our business, financial condition and results of operations.
Likewise, from time to time, we may determine that it is in our best interest to divest one or more of our dealerships. Parties that are interested in acquiring any dealership may also be required to obtain the consent of the manufacturer. The refusal by the manufacturer to approve a potential buyer may delay the sale of that dealership, and would require us to find another potential buyer or wait until the buyer is able to meet the requirements of the manufacturer. A delay in the sale of a dealership could have a negative impact on our business, financial condition or results of operations.
Additionally, many vehicle manufacturers place limits on the total number of franchises that any group of affiliated dealerships may own. Certain manufacturers place limits on the number of franchises or share of total brand vehicle sales that may be maintained by an affiliated dealership group on a national, regional or local basis, as well as limits on store ownership in contiguous markets. If we reach any of these limits, we may be prevented from making further acquisitions, which could adversely affect our future growth.
If state laws that protect automotive retailers are repealed, weakened or superseded by our framework agreements with manufacturers, our dealerships will be more susceptible to termination, non-renewal or renegotiation of their dealer agreements.
Applicable state laws generally provide that an automobile manufacturer may not terminate or refuse to renew a dealer agreement unless it has first provided the dealer with written notice setting forth “good cause” and stating the grounds for termination or non-renewal. Some state laws allow dealers to file protests or petitions or allow them to attempt to comply with the manufacturer’s criteria within a notice period to avoid the termination or non-renewal. Our framework agreements with certain manufacturers contain provisions that, among other things, attempt to limit the protections available to dealers under these laws, and, though unsuccessful to date, manufacturers’ ongoing lobbying efforts may lead to the repeal or revision of these laws. If these laws are repealed in the states in which we operate, manufacturers may be able to terminate our franchises without providing advance notice, an opportunity to cure or a showing of good cause. Without the protection of these state laws, it may also be more difficult for us to renew our dealer agreements upon expiration. Changes in laws that provide manufacturers the ability to terminate our dealer agreements could materially adversely affect our business, financial condition
and results of operations. Furthermore, if a manufacturer seeks protection from creditors in bankruptcy, courts have held that the federal bankruptcy laws may supersede the state laws that protect automotive retailers resulting in either the termination, non-renewal or rejection of franchises by such manufacturers, which, in turn, could materially adversely affect our business, financial condition and results of operations.
Manufacturers’ restrictions regarding a change in our stock ownership may result in the termination or forced sale of our franchises, which may have a number of impacts on us, including adversely impacting our business, financial condition and results of operations, or even deterring an acquisition of us.
Some of our dealer agreements and framework agreements with manufacturers prohibit transfers of any ownership interests of a dealership or, in some cases, its parent, without the applicable manufacturer’s consent. Our agreements with some manufacturers provide that, under certain circumstances, the manufacturer would have the right to terminate our agreement or force a sale of our franchise if a person or entity acquires an ownership interest in us above a specified level or if a person or entity acquires the right to vote a specified percentage of our common stock without the approval of the applicable manufacturer. Triggers of these clauses are often based upon actions by our stockholders and are generally outside of our control, and may result in the termination or non-renewal of our dealer and framework agreements or forced sale of one or more franchises, which may have a material adverse effect on us. These restrictions may also prevent or deter prospective acquirers from acquiring control of us and, therefore, may adversely impact the value of our common stock.
Our business may be materially adversely affected by import product restrictions, foreign trade risks and currency valuations that may impair our ability to sell foreign vehicles or parts profitably.
A 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 import duties, exchange rates, trade restrictions, work stoppages, natural or man-made disasters, and general political and socio-economic conditions in other 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. Relative weakness of the U.S. dollar against foreign currencies in the future may result in an increase in costs to us and in the retail price of such vehicles or parts, which could discourage consumers from purchasing such vehicles and adversely impact our profitability.
If we are unable to acquire and successfully integrate additional dealerships, we may be unable to realize desired results and be required to divert resources from comparatively more profitable operations.
We believe that the automotive retailing industry is a mature industry whose sales are significantly impacted by the prevailing economic climate, both nationally and in local markets. Accordingly, we believe that our future growth depends in part on our ability to manage expansion, control costs in our operations and acquire and effectively and efficiently integrate acquired dealerships into our organization. When seeking to acquire and acquiring other dealerships, we face risks commonly encountered with growth through acquisitions. These risks include, but are not limited to:
•
failing to obtain manufacturers’ consents to acquisitions of additional franchises;
•
incurring significant transaction related costs for both completed and failed acquisitions;
•
incurring significantly higher capital expenditures and operating expenses;
•
failing to integrate the operations and personnel of the acquired dealerships and impairing relationships with employees;
•
incorrectly valuing entities to be acquired or incurring undisclosed liabilities at acquired dealerships;
•
disrupting our ongoing business and diverting our management resources to newly acquired dealerships;
•
failing to achieve expected performance levels; and
•
impairing relationships with manufacturers and customers as a result of changes in management.
We may not adequately anticipate all the demands that our growth will impose on our personnel, procedures and structures, including our financial and reporting control systems, data processing systems and management structure. Moreover, our failure to retain qualified management personnel at any acquired dealership may increase the risks associated with integrating the acquired dealership. If we cannot adequately anticipate and respond to these demands, we may fail to realize acquisition synergies and our resources will be focused on incorporating new operations into our structure rather than on areas that may be more profitable.
There is competition to acquire automotive dealerships, and we may not be able to grow our business through acquisitions if attractive targets are not available or if market values result in prices at levels that we do not believe offer an acceptable rate of return.
We believe that the U.S. automotive retailing market is fragmented and offers many potential acquisition candidates. However, we often compete with several other national, regional and local dealership groups, and other strategic and financial buyers, some of which may have greater financial resources, in evaluating potential acquisition candidates. Competition for attractive acquisition targets may result in fewer acquisition opportunities for us, and increased acquisition costs. We may have to forego acquisition opportunities to the extent that we cannot negotiate any such acquisitions on acceptable terms.
Property loss or other uninsured liabilities at some of our dealerships could impact our financial condition and results of operations.
We are subject to substantial risk of property loss due to the significant concentration of property at dealership locations, including vehicles and parts. We have historically experienced business interruptions from time to time at several of our dealerships due to adverse weather conditions or other extraordinary events, such as hurricanes in Florida and tornadoes and hail storms in Texas and Mississippi. Concentration of property at dealership locations also makes the automotive retail business particularly vulnerable to theft, fraud and misappropriation of assets. Illegal or unethical conduct by employees, customers, vendors and unaffiliated third parties can result in loss of assets, disrupt operations, impact brand reputation, jeopardize manufacturer and other relationships, result in the imposition of fines or penalties, and subject us to governmental investigations or lawsuits.
Other potential liabilities arising out of our operations may involve claims by employees, customers or third parties for personal injury or property damage and potential fines and penalties in connection with alleged violations of regulatory requirements. To the extent we experience events such as these, or others, our financial condition and results of operations may be materially adversely impacted.
While we maintain insurance to protect against a number of losses, this insurance coverage often contains significant deductibles which we must pay prior to obtaining insurance coverage. In addition, we “self-insure” a portion of our potential liabilities, meaning we do not carry insurance from a third party for such liabilities, and are wholly responsible for any related losses including for certain potential liabilities that some states prohibit the maintenance of insurance to protect against.
In certain instances, our insurance may not fully cover a loss depending on the applicable deductible or the magnitude and nature of the claim. Additionally, changes in the cost or availability of insurance in the future could substantially increase our costs to maintain our current level of coverage or could cause us to reduce our insurance coverage and increase our self-insured risks. To the extent we incur significant additional costs for insurance, suffer losses that are not covered by in-force insurance or suffer losses for which we are self-insured, our financial condition and results of operations could be materially adversely impacted.
Business interruptions at our dealerships due to a failure of any of our management information systems, could have a material adverse effect on our business, results of operations, financial condition and cash flow.
We rely on management information systems at our dealerships which are licensed from third parties and are used in all aspects of our sales and service efforts, as well as in the preparation of our consolidated financial and operating data. All of our dealerships currently operate on a common dealer management system DMS. Our business could be significantly disrupted if (i) the DMS fails to integrate with other third party management information systems, customer relations management tools or other software, or to the extent any of these systems become unavailable to us for an extended period of time, or (ii) if our relationship with our DMS provider or any other third-party provider deteriorates. Any such significant disruption in our business could materially adversely affect our business, results of operations, financial condition and cash flow.
Further healthcare reform legislation could adversely affect our future profitability and financial condition.
Rising healthcare costs and interest in universal healthcare coverage in the United States have resulted in significant healthcare reforms in recent years. For example, The Patient Protection and Affordable Care Act, signed into law in 2010, may further increase our annual employee health care costs in the near term. We cannot predict the extent of the effect that any future state or federal healthcare legislation or regulation will have on us. However, any further expansion in government’s role in the U.S. healthcare industry could result in significant additional long-term costs to us, which could in turn adversely affect our future profitability and financial condition.
Governmental regulation pertaining to fuel economy standards may affect a manufacturer’s ability to produce cost effective vehicles, which could impact our sales.
The Energy Policy Conservation Act, enacted into law by Congress in 1975, added Title V, “Improving Automotive Efficiency,” to the Motor Vehicle Information and Cost Savings Act and established Corporate Average Fuel Economy (“CAFE”) standards for passenger cars and light trucks. CAFE is the sales weighted average fuel economy, expressed in miles per gallon (mpg) of a manufacturer’s fleet of passenger cars or light trucks with a gross vehicle weight rating of 8,500 pounds or less, manufactured for sale in the U.S., for any given model year.
The primary goal of CAFE was to substantially increase passenger car fuel efficiency. Congress has continuously increased the standards since 1974 and, since mid-year 1990, the passenger car standard was increased to 27.5 miles per gallon, a level at which it remained through 2010. Passenger car fuel economy is now required to rise to an industry average of 54.5 miles per gallon by 2025. Likewise, significant changes to light truck CAFE standards have been established over the years.
The penalty for a manufacturer’s failure to meet the CAFE standards is currently $5.50 per tenth of a mile per gallon for each tenth under the target volume times the total volume of those vehicles manufactured for a given model year.
In 2010, the U.S. Environmental Protection Agency (the “EPA”) and the Department of Transportation’s National Highway Traffic Safety Administration (the “NHTSA”) issued final rules establishing new standards for light-duty vehicles aimed at reducing greenhouse gas emissions and improving fuel economy. Under the joint final rule, the EPA finalized greenhouse gas emissions standards under the Clean Air Act, and the NHTSA finalized CAFE standards under the Energy Policy and Conservation Act, as amended. These standards apply to passenger cars, light-duty trucks, and medium-duty passenger vehicles, in model years 2017 through 2025.
Failure of a manufacturer to develop passenger vehicles and light trucks that meet CAFE standards could subject the manufacturer to substantial penalties, increase the cost of vehicles sold to us, and adversely affect our ability to market and sell vehicles to meet consumer needs and desires. Furthermore, Congress may continue to increase CAFE standards in the future and such additional legislation may have a further adverse impact on vehicle manufacturers and our business.
Climate change legislation or regulations restricting emission of “greenhouse gases” could result in increased operating costs and reduced demand for the vehicles we sell.
The U.S. Environmental Protection Agency (“EPA”) has published its findings that emissions of carbon dioxide, methane and other “greenhouse gases” present an endangerment to public health and the environment because emissions of such gases are contributing to warming of the earth’s atmosphere and other climatic changes. These findings allow EPA to adopt and implement regulations that would restrict emissions of greenhouse gases under existing provisions of the federal Clean Air Act. Accordingly, EPA has proposed regulations that would require a reduction in emissions of greenhouse gases from motor vehicles and could trigger permit review for greenhouse gas emissions from certain stationary sources. EPA’s proposed regulations requiring permit review for greenhouse gas emissions from certain stationary sources is currently under review at the Supreme Court of the United States. The outcome of that review is uncertain. In addition, on October 30, 2009, the EPA published a final rule requiring the reporting of greenhouse gas emissions from specified large greenhouse gas emission sources in the United States, including facilities that emit more than 25,000 tons of greenhouse gases on an annual basis, beginning in 2011 for emissions occurring in 2010. More than one-third of the states, either individually or through multi−state regional initiatives, have begun implementing legal measures to require reduction of emissions of greenhouse gases. The adoption and implementation of any regulations imposing reporting obligations on, or limiting emissions of greenhouse gases from, our facilities, equipment and operations could require us to incur costs to reduce emissions of greenhouse gases associated with our operations. In addition, similar regulations imposed on the owners of the vehicles that we sell could adversely affect demand for certain vehicles.
The loss of key personnel may adversely affect our business.
Our success depends, to a significant degree, upon the continued contributions of our management team. Manufacturer dealer or framework agreements may require the prior approval of the applicable manufacturer before any change is made in dealership general managers or other management positions. The loss of the services of one or more of these key employees may materially impair the profitability of our operations, or may result in a violation of an applicable dealer or framework agreement.
In addition, we may need to hire additional managers or other key personnel from time to time. In some instances, potential acquisitions are more viable to us if we are able to retain experienced managers or obtain replacement managers should the owner or manager of an acquired dealership not continue to manage the business. The market for qualified employees in the industry and in the regions in which we operate, particularly for general managers and sales and service personnel, is highly
competitive and may subject us to increased labor costs during periods of low unemployment. The loss of the services of key employees or the inability to attract additional qualified managers may adversely affect the ability of our dealerships to conduct their operations in accordance with the standards set by us or the manufacturers.
We depend on our executive officers as well as other key personnel. Although our CEO and COO have entered into agreements relating to their employment with us, most of our key personnel are not bound by employment agreements, and those with employment agreements are bound only for a limited period of time. Further, we do not maintain “key man” life insurance policies on any of our executive officers or key personnel. If we are unable to retain our key personnel, we may be unable to successfully develop and implement our business plans, which may have a material adverse effect on our business.
We are, and will continue to be, subject to legal and administrative proceedings, which, if the outcomes are adverse to us, could materially adversely affect our business, results of operations, financial condition, cash flows, and prospects.
We are involved and will continue to be involved in numerous legal proceedings arising out of the conduct of our business, including litigation with customers, employment-related lawsuits, class actions, purported class actions, and actions brought by governmental authorities. We do not believe that the ultimate resolution of these matters will have a material adverse effect on our business, results of operations, financial condition, or cash flows. However, the results of these matters cannot be predicted with certainty, and an unfavorable resolution of one or more of these matters could have a material adverse effect on our business, results of operations, financial condition and cash flows.
Our business is seasonal, and events occurring during seasons in which revenues are typically higher may disproportionately affect our results of operations and financial condition.
The automobile industry has historically been subject to seasonal variations in revenues. Demand for vehicles is generally lowest during the first quarter of each year and, accordingly, we expect our revenues and operating results generally to be lower in the first quarter. We typically experience higher sales of luxury vehicles, which have higher average selling prices and gross profit per vehicle retailed, in the fourth quarter. Revenue and operating results may be adversely impacted significantly from quarter to quarter by changing economic conditions, vehicle manufacturer incentive programs, or actual or threatened severe weather events.
Item 1B.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Item 2. Properties
We lease our corporate headquarters, which are located at 2905 Premiere Parkway, NW, Suite 300, Duluth, Georgia. In addition, as of December 31, 2014, our operations encompassed 83 dealership locations throughout 10 states. As of December 31, 2014, we leased 29 of these locations and owned the remaining locations. We have one location in Mississippi and one location in Missouri where we lease the underlying land but own the building facilities on that land. These locations are included in the leased column of the table below. In addition, we operate 25 collision repair centers. We lease 11 of these collision repair centers and own the remaining repair center locations. In addition, we operate three stand-alone used vehicle stores under the “Q auto” brand name in Florida, of which two are owned and one is leased.
________________________________________
(a)
Includes one dealership that leases a new vehicle facility and operates a separate used vehicle facility that is owned.
Item 3.
Item 3. Legal Proceedings
From time to time, we and our dealerships may become involved in various claims relating to, and arising out of our business and our operations. These claims may involve, but are not limited to, financial and other audits by vehicle manufacturers, lenders and certain federal, state and local government authorities, which relate primarily to (a) incentive and warranty payments received from vehicle manufacturers, or allegations of violations of manufacturer agreements or policies, (b) compliance with lender rules and covenants and (c) 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, can relate to, but are not limited to, the practice of charging administrative fees, employment-related matters, truth-in-lending practices, 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.
Item 4.
Item 4. Mine Safety Disclosures
Not applicable.
PART II. FINANCIAL INFORMATION
Item 5.
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is traded on the New York Stock Exchange (the “NYSE”) under the symbol “ABG”. Quarterly information concerning our high and low closing sales price per share of our common stock as reported by the NYSE is as follows:
We did not pay any dividends during any of these periods. On February 20, 2015, the last reported sale price of our common stock on the NYSE was $78.87 per share, and there were approximately 94 record holders of our common stock.
Effective January 1, 2013, our Board of Directors authorized the repurchase of up to $50.0 million of the Company's common stock in open market transactions (the “2013 Repurchase Plan”). Subsequently, on January 30, 2014, our Board of Directors terminated the 2013 Repurchase Plan and authorized a new share repurchase program (the “2014 Repurchase Plan”). During 2014, we repurchased an aggregate of 2,349,494 shares of our common stock for $161.4 million under the 2013 Plan and 2014 Repurchase Plan, as amended to date.
As of January 28, 2015, we have the authority to repurchase up to an aggregate of $300.0 million of common stock under the 2014 Plan. The 2014 Repurchase Plan has no stated expiration date and any associated repurchases may be completed in open market, or privately negotiated, transactions from time to time. Any repurchases will be subject to applicable limitations in our debt or other financing agreements and may be existence from time to time.
In December 2014, we amended our credit agreement with Bank of America, N.A. (“Bank of America”), as administrative agent, and the other agents and lenders party thereto (the “Restated Credit Agreement”) to revise the covenant restricting our ability to make certain restricted payments, including payments to repurchase additional shares of our common stock, among other things, to generally be consistent with the covenant governing such payments as contained in the Indenture governing our 6.0% Notes (the “Indenture”). The Restated Credit Agreement and the Indenture currently allow for restricted payments without limit so long as our consolidated total leverage ratio (as defined in the Restated Credit Agreement and the Indenture) is
no greater than 3.0 to 1 after giving effect to such proposed restricted payments. In the event that our consolidated total leverage ratio does (or would) exceed 3.0 to 1, the Restated Credit Agreement and the Indenture would then also allow for restricted payments under the following mutually exclusive parameters, subject to certain exclusions:
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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 fixed charge coverage ratio 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 Restated Credit Agreement 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 purchases made and dividends paid on or after December 4, 2014.
The following table sets forth information about our share repurchases during each month in the quarter ended December 31, 2014.
(1) Amount increased on January 15, 2015 as described above
PERFORMANCE GRAPH
The following graph furnished by the Company shows the value as of December 31, 2014, of a $100 investment in the Company’s common stock made on December 31, 2009 (with dividends reinvested), as compared with similar investments based on (i) the value of the S&P 500 Index (with dividends reinvested) and (ii) the value of a market-weighted Peer Group Index composed of the common stock of AutoNation, Inc., Sonic Automotive, Inc., Group 1 Automotive, Inc., Penske Automotive Group, Inc. and Lithia Motors, Inc., in each case on a “total return” basis assuming reinvestment of dividends. The market-weighted Peer Group Index values were calculated from the beginning of the performance period. The historical stock performance shown below is not necessarily indicative of future expected performance.
The forgoing graph is not, and shall not be deemed to be, filed as part of the Company's annual report on Form 10-K. Such graph is not, and will not be deemed, filed or incorporated by reference into any filing of the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent specifically incorporated by reference therein by the Company.
Item 6.
Item 6. Selected Financial Data
The following table sets forth selected consolidated financial data as of and for the five years ended December 31, 2014. The accompanying income statement data for the years ended December 31, 2013, 2012, 2011, and 2010 have been reclassified to reflect the status of our discontinued operations as of December 31, 2014. In addition, certain reclassifications of amounts previously reported have been made to the accompanying income statement data in order to conform to current presentation. The following information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Company’s consolidated financial statements and the notes thereto, included elsewhere in this this annual report on Form 10-K.
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(a)
Includes amounts classified as assets held for sale on our consolidated balance sheets.
(b)
Includes amounts classified as liabilities associated with assets held for sale on our consolidated balance sheets.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
We are one of the largest automotive retailers in the United States, operating 104 franchises (83 dealership locations) in 18 metropolitan markets within 10 states as of December 31, 2014. We offer an extensive range of automotive products and services, including new and used vehicles; vehicle maintenance, replacement parts and collision repair services; and financing, insurance and service contracts. As of December 31, 2014, we offered 29 domestic and foreign brands of new vehicles. Our current new vehicle revenue brand mix consists of 47% mid-line, 39% luxury and 14% domestic brands. We also operate 25 collision repair centers that serve customers in our local markets.
Our retail network is made up of dealerships operating primarily under the following locally-branded dealership groups:
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Coggin dealerships, operating primarily in Jacksonville, Fort Pierce and Orlando, Florida;
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Courtesy dealerships operating in Tampa, Florida;
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Crown dealerships operating in New Jersey, North Carolina, South Carolina and Virginia;
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Nalley dealerships operating in metropolitan Atlanta, Georgia;
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McDavid dealerships operating in Austin, Dallas and Houston, Texas;
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North Point dealerships operating in the Little Rock, Arkansas area;
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Plaza dealerships operating in metropolitan St. Louis, Missouri; and
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Gray-Daniels dealerships operating in the Jackson, Mississippi area.
In addition, we own and operate three stand-alone used vehicle stores under the “Q auto” brand name in Florida.
Our revenues are derived primarily from: (i) the sale of new vehicles to individual retail customers (“new vehicle retail”) and commercial customers (“fleet”) (the terms “new vehicle retail” and “fleet” being together referred to as “new”); (ii) the sale of used vehicles to individual retail customers (“used retail”) and to other dealers at auction (“wholesale”) (the terms “used retail” and “wholesale” being together referred to as “used”); (iii) maintenance and collision repair services and the sale of automotive parts (together referred to as “parts and service”); and (iv) the arrangement of vehicle financing and the sale of a number of aftermarket products, such as insurance and service contracts (collectively referred to as “F&I”). We evaluate the results of our new and used vehicle sales based on unit volumes and gross profit per vehicle sold, our parts and service operations based on aggregate gross profit, and F&I based on dealership generated F&I gross profit per vehicle sold. We assess the organic growth of our revenue and gross profit by comparing the year-to-year results of stores that we have operated for at least twelve full months (“same store”).
Our organic growth is dependent upon the execution of our balanced automotive retailing and service business strategy, the continued strength of our brand mix and the production of desirable vehicles by automobile manufacturers whose brands we sell. Our vehicle sales have historically fluctuated with product availability as well as local and national economic conditions, including consumer confidence, availability of consumer credit, fuel prices and employment levels. We believe that the impact on our business of any future negative trends in new vehicle sales would be partially mitigated by (i) the expected relative stability of our parts and service operations over the long-term, (ii) the variable nature of significant components of our cost structure and (iii) our brand mix. Historically, our brand mix has been less affected by market volatility than the U.S. automobile industry as a whole. We believe that our diversified new vehicle revenue brand mix, which included approximately 47% from mid-line import brands, 39% from luxury brands and 14% from domestic brands in 2014, is well positioned for growth over the long term.
Our operating results are generally subject to changes in the economic environment as well as seasonal variations. Historically, we have generated more revenue and operating income in the second, third and fourth quarters than in the first quarter of the calendar year. Generally, the seasonal variations in our operations are caused by factors related to weather conditions, changes in manufacturer incentive programs, model changeovers and consumer buying patterns, among other things.
Our gross profit margin varies with our revenue mix. The sale of new vehicles generally results in lower gross profit margin than used vehicle sales and sales of parts and service. As a result, when used vehicle and parts and service revenue increase as a percentage of total revenue, we expect our overall gross profit margin to increase.
Selling, general and administrative (“SG&A”) expenses consist primarily of fixed and incentive-based compensation, advertising, rent, insurance, utilities and other customary operating expenses. A significant portion of our cost structure is
variable (such as sales commissions), or controllable (such as advertising), which we believe better allows us to adapt to changes in the retail environment over the long-term. We evaluate commissions paid to salespeople as a percentage of retail vehicle gross profit and all other SG&A expenses in the aggregate as a percentage of total gross profit, with the exception of advertising expense, which we evaluate on a per vehicle retailed ("PVR") basis.
The United States automotive retail market showed continued improvement in 2014, with new vehicle SAAR increasing to 16.5 million as compared to 15.6 million in 2013. We continued to benefit from improving economic conditions in 2014, which we attribute to improved consumer confidence, the continued availability of credit at terms favorable to consumers resulting primarily from the current low interest rate environment, continued incremental improvements in overall unemployment levels, favorable fuel prices and the age of the U.S. automotive fleet. We believe that the overall economic recovery will continue to be fragile, and may be subject to further changes based on consumer confidence, interest rates, unemployment levels, instability in fuel prices and other macro-economic factors as the long-term prospects for, and the timing of, a return to a stronger economy continue to be difficult to predict.
We had total available liquidity of $285.0 million as of December 31, 2014, which consisted of cash and cash equivalents of $2.9 million, $25.9 million of availability under our floor plan offset account, and borrowing availability of $164.7 million and $91.5 million under our revolving credit facility and our used vehicle revolving floor plan facility, respectively. For further discussion of our liquidity, please refer to “Liquidity and Capital Resources” below.
RESULTS OF OPERATIONS
The Year Ended December 31, 2014 Compared to the Year Ended December 31, 2013
______________________________
NM-Not Meaningful
Net income and income from continuing operations increased by $2.5 million (2%) and $10.9 million (11%), respectively, during 2014 as compared to 2013. The increase in income from continuing operations was primarily the result of a $91.2 million (10%) increase in gross profit, which was partially offset by a $53.8 million (9%) increase in SG&A expenses, a $31.9 million loss in connection with the redemption of our $300.0 million of 8.375% Senior Subordinated Notes due 2020 (the “8.375% Notes”) and a $6.8 million (11%) increase in income tax expense. Income from continuing operations in 2013 was negatively impacted by a $6.8 million loss on the redemption of our $143.2 million of 7.625% Senior Subordinated Notes due 2017 (the “7.625% Notes”) and $7.8 million in other operating expenses due primarily to real estate related charges. Net income for 2013 was positively impacted by the sale of one franchise (one dealership location), which resulted in an $8.9 million net-of-tax gain, which is included in discontinued operations, net.
Gross profit increased across all four of our business lines and was driven by (i) a $44.5 million (12%) increase in parts and service gross profit, (ii) a $22.1 million (11%) increase in F&I gross profit, (iii) a $17.0 million (9%) increase in new vehicle gross profit, and (iv) a $7.6 million (6%) increase in used vehicle gross profit. Our total gross profit margin increased 10 basis points to 16.5%, primarily as a result of a 170 basis point increase in our same store parts and service gross margin.
The $532.8 million (10%) increase in total revenue was primarily a result of (i) a $278.4 million (9%) increase in new vehicle revenue and (ii) a $177.3 million (11%) increase in used vehicle revenue.
New Vehicle-
New Vehicle Metrics-
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(1)
Same store amounts consist of information from dealerships for the identical months of each period presented in the comparison, commencing with the first full month in which the dealership was owned by us.
The $278.4 million (9%) increase in new vehicle revenue was primarily a result of a 6% increase in same store new vehicle unit sales, combined with a 1% increase in same store revenue per new vehicle sold. Our total new vehicle revenue also benefited from $62.5 million derived from acquisitions. Same store unit volumes for our luxury, mid-line import and domestic brands increased 9%, 5%, and 3%, respectively, reflecting (i) an increase in consumer demand, (ii) the continued availability of credit at terms favorable to our customers and (iii) an improvement in the availability of new vehicle inventory from which to
choose. New vehicle SAAR increased by 6% to 16.5 million in 2014 as compared to 15.6 million in 2013, which contributed to the unit volume increases in each of our three brand segments.
Total new vehicle gross profit increased by $17.0 million (9%), driven by the 6% increase in same store new vehicle unit sales, a 1% increase in same store gross profit per vehicle sold, and $4.0 million in gross profit derived from acquisitions. Our same store gross profit margin was 6.1% for both 2014 and 2013.
Used Vehicle-
Used Vehicle Metrics-
______________________________
(1)
Same store amounts consist of information from dealerships for the identical months of each period presented in the comparison, commencing with the first full month in which the dealership was owned by us.
The $177.3 million (11%) increase in used vehicle revenue was the result of a $117.0 million (9%) increase in same store used vehicle retail revenue, a $13.5 million (7%) increase in same store used vehicle wholesale revenue and $46.8 million in retail and wholesale revenues derived from acquisitions and new stores. 2014 same store used retail unit sales increased by 3,414 units (5%) over 2013 and same store revenue per used vehicle retailed increased by $678 (3%) to $20,474 per unit. The 5% increase in same store used vehicle retail unit sales reflects increased consumer demand, the continued availability of credit at terms favorable to the customer and the ongoing impact of our "Asbury 1-2-1" program, a volume-driven initiative with a
goal of retailing one used vehicle for every new vehicle retailed. This program is designed to drive not only used retail volume, but to increase revenues from associated parts and service reconditioning and F&I as well.
The $7.9 million (6%) increase in used vehicle retail gross profit was driven primarily by an 8% increase in used vehicle retail units, partially off set by a 40 basis point decrease in our same store used vehicle retail gross margin. Our used vehicle retail margin pressures were created by the general increase in the supply of used vehicles as a result of customer trade-ins and vehicles coming off lease, as well as our focus on selling more used vehicles as retail units instead of wholesale units.
We believe that our used vehicle inventory continues to be well-aligned with current consumer demand, with approximately
35 days of supply in our inventory as of December 31, 2014.
Parts and Service-
______________________________
(1)
Same store amounts consist of information from dealerships for the identical months of each period presented in the comparison, commencing with the first full month in which the dealership was owned by us.
The $55.0 million (9%) increase in parts and service revenue was the result of (i) a $31.6 million (8%) increase in same store customer pay revenue, (ii) a $11.3 million (12%) increase in same store warranty revenue, (iii) a $4.0 million (4%) increase in wholesale parts and (iv) $8.1 million derived from acquisitions.
The 170 basis point increase in our same store parts and service gross margin was primarily the result of increases in our higher margin parts and service businesses, including reconditioning and preparation of vehicles, warranty work and customer pay. The $15.4 million (18%) increase in reconditioning and preparation gross profit was primarily driven by a 5% increase in our same store used vehicle retail unit sales and a 6% increase in our same store new vehicle retail unit sales and increases in the amount of work being performed per vehicle. Gross profit associated with warranty work increased by $8.0 million (16%), partially due to certain manufacturer recalls that occurred during 2014, as well as increased units in operation as sales of new vehicles in the United States have continued to increase over the past few years.
We continue to focus on increasing our parts and service revenue, and specifically our customer pay business, over the long-term by (i) continuing to invest in additional service capacity, where appropriate, (ii) upgrading equipment, (iii) focusing on improving customer retention and customer satisfaction and (iv) capitalizing on our dealer training programs.
Finance and Insurance, net-
______________________________
(1)
Same store amounts consist of information from dealerships for the identical months of each period presented in the comparison, commencing with the first full month in which the dealership was owned by us.
F&I increased by $22.1 million (11%) during 2014 as compared to 2013, primarily due to a 5% increase in same store retail unit sales and $7.5 million derived from acquisitions and other new stores. The $18 (1%) increase in same store F&I per vehicle sold was primarily attributable to improvement in the number of F&I contracts sold as a percentage of retail unit sales (also known as our F&I penetration rate), which was driven by (i) the improved availability of consumer credit, which allowed more of our customers to take advantage of a broader array of F&I products, (ii) the addition of key personnel to our F&I management team and (iii) our continued focus on improving the F&I results at our lower-performing stores through our F&I training programs, which include implementing a certification process and certain best practices initiatives.
Selling, General and Administrative Expense-
______________________________
(1)
Same store amounts consist of information from dealerships for the identical months of each period presented in the comparison, commencing with the first full month in which the dealership was owned by us.
Same store SG&A expense as a percentage of gross profit was 69.1% for 2014 compared to 70.5% for 2013. The 140 basis point decrease was primarily attributable to a 60 basis point decrease in personnel costs as a result of further leveraging our fixed cost structure and a 50 basis point decrease in rent expense primarily as a result of our purchase of certain previously leased real estate throughout 2013 and early 2014.
We continue to be engaged in numerous productivity initiatives designed to further reduce our fixed cost structure and improve our profitability and are currently focused on fully leveraging our single dealer management system with our other technology platforms and centralizing additional back office processes. We also continuously evaluate opportunities to purchase real estate properties that we lease.
Depreciation and Amortization Expense -
The $2.1 million (9%) increase in depreciation and amortization expense during 2014 when compared to 2013 was primarily the result of (i) our purchase of certain previously leased real estate throughout 2013 and early 2014, (ii) additional fixed assets acquired in acquisitions and (iii) the completion of certain construction projects that resulted in newly depreciable assets placed into service during 2014.
Other Operating Expense, net -
Other operating expense, net includes gains and losses from the sale of property and equipment, income derived from lease arrangements and other non-core operating items. During 2014, we recognized $1.3 million of charges related to property and equipment disposals. During 2013, we recognized (i) approximately $5.5 million of lease termination charges as a result of our purchase of certain previously leased real estate and (ii) $1.8 million of charges related to property and equipment disposals.
Floor Plan Interest Expense -
The $0.1 million (1)% decrease in floor plan interest expense during 2014 when compared to 2013 was primarily the result of lower interest rates partially offset by generally higher new vehicle inventory levels, including new vehicle inventory associated with recent acquisitions.
Other Interest Expense -
Other interest expense decreased $0.1 million from $39.0 million in 2013 to $38.9 million in 2014. During 2014 our mortgage interest expense increased approximately $4.5 million (59%) as result of our decision to mortgage certain owned dealership properties, the majority of which was completed during the second half of 2013 and throughout 2014. Offsetting the increase in mortgage interest expense was a $4.3 million decrease in our Senior Subordinated Notes interest expense, due primarily to the redemption of our 7.625% Notes in September of 2013.
Swap Interest Expense -
We have historically entered into various derivative financial instruments, including fair value and cash flow interest rate swaps, which have been designed to provide hedges against changes in fair value of certain debt obligations and variable rate cash flows. Our earnings have been impacted by these interest rate swaps in the form of (i) amounts reclassified from AOCI to earnings for active swaps, (ii) amortization of amounts reclassified from AOCI to earnings for terminated cash flow swaps and (iii) amortization of terminated fair value swaps. The pre-tax impact on earnings related to our various derivative financial instruments during 2014 and 2013 was $2.0 million and $2.5 million, respectively. The $0.5 million decrease in swap interest expense during 2014 when compared to 2013 is primarily the result of a $1.9 million decrease in amortization expense of a previously terminated swap, partially offset by approximately $1.4 million of additional swap expense as a result of an interest rate swap entered into during the fourth quarter of 2013.
Loss on Extinguishment of Long-Term Debt -
During 2014, we recognized a $31.9 million loss on the redemption of all of the $300.0 million of our outstanding 8.375% Notes, consisting of (i) $33.9 million of premiums paid to and redeem the 8.375% Notes in accordance with the terms thereof, (ii) a $6.1 million write-off of unamortized debt issuance costs associated with the 8.375% Notes and (iii) $0.1 million of third-party costs associated with the redemption of the 8.375% Notes, partially offset by $8.2 million in unamortized premium associated with our 8.375% Notes.
During 2013, we recognized a $6.8 million loss on the redemption of all of the $143.2 million of our outstanding 7.625% Notes, consisting of (i) $3.6 million of premiums paid pursuant to the terms of the redemption notice, (ii) a $3.1 million write-off of unamortized debt issuance costs associated with the 7.625% Notes and (iii) $0.1 million of third-party costs associated with the redemption of the 7.625% Notes.
Income Tax Expense-
The $6.8 million (11%) increase in income tax expense was primarily a result of the $17.7 million (11%) increase in income before income taxes in 2014 compared to 2013. Our effective tax rate was 38.8% for both 2013 and 2014. Our effective tax rate is highly dependent on our level of income before income taxes and permanent differences between book and tax income.
As a result, it is difficult to project our overall effective tax rate for any given period. Based upon our current expectation of 2015 income before income taxes, we expect our effective income tax rate will be between 38% and 40% in 2015.
Discontinued Operations-
The $0.4 million, net of tax, net loss from discontinued operations in 2014 consist of net operating losses of franchises sold prior to December 31, 2014, including rent and other expenses of idle facilities.
During 2013, we sold one franchise (one dealership location) that was classified as discontinued operations. The $8.0 million, net of tax, net gain from discontinued operations in 2013 includes an $8.9 million, net of tax, gain on the sale of one franchise (one dealership location), which was partially offset by $0.9 million, net of tax, of net operating losses of franchises sold prior to December 31, 2014, including rent and other expenses of idle facilities.
We continuously evaluate the financial and operating results of our dealerships, as well as each dealership’s geographical location, and may continue to refine our dealership portfolio through strategic acquisitions or divestitures from time to time.
In April 2014, the Financial Accounting Standards Board (the “FASB”) issued an accounting standard that raises the threshold for disposals to qualify as discontinued operations and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. The standard revised the definition of a discontinued operation to cover only asset disposals that are considered to be a strategic shift with a major impact on an entity's operations and finances, such as the disposal of a major geographic area or a significant line of business. We adopted the standard in January 2015. We expect that any future disposals of our dealerships will not be reported as discontinued operations and that the results of operations of any such disposed dealerships, including revenues, costs and any gains or losses on disposal, will be classified as continuing operations within our Consolidated Statements of Income for all periods presented through the date of disposition.
RESULTS OF OPERATIONS
The Year Ended December 31, 2013 Compared to the Year Ended December 31, 2012
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NM- Not Meaningful
Net income and income from continuing operations increased by $26.9 million (33%) and $17.8 million (21%), respectively, during 2013 as compared to 2012. The increase in income from continuing operations was primarily the result of a $112.2 million (15%) increase in gross profit, which was partially offset by (i) a $62.9 million (11%) increase in SG&A expenses, (ii) a $6.8 million loss on the redemption of our 7.625% Notes and (iii) a $7.4 million increase in other operating expense due primarily to real estate related charges. Net income for 2013 was positively impacted by by the sale of one franchise (one dealership location), which resulted in an $8.9 million net-of-tax gain, which is included in discontinued operations, net.
Gross profit increased across all four of our business lines and was driven by (i) $41.1 million (13%) increase in parts and service gross profit, (ii) a $40.3 million (24%) increase in F&I gross profit, (iii) a $16.0 million (15%) increase in used vehicle gross profit and (iv) a $14.8 million (9%) increase in new vehicle gross profit. Our total gross profit margin decreased 10 basis points to16.4%, primarily as a result of (i) a 30 basis point decrease in our same store new vehicle retail gross margin and (ii) a 60 basis point decrease in our same store used vehicle retail gross margin, which was partially offset by a 230 basis point increase in our same store parts and service gross margin.
The $693.1 million (15%) increase in total revenue was primarily a result of (i) an $343.9 million (13%) increase in new vehicle revenue, (ii) a $262.6 million (20%) increase in used vehicle revenue.
New Vehicle-
New Vehicle Metrics-
______________________________
(1)
Same store amounts consist of information from dealerships for the identical months of each period presented in the comparison, commencing with the first full month in which the dealership was owned by us.
The $343.9 million (13%) increase in new vehicle revenue was primarily a result of a 7% increase in same store new vehicle unit sales, combined with a 3% increase in same store revenue per new vehicle sold. Our total new vehicle revenue also benefited from $63.8 million derived from acquisitions. Same store unit volumes for our luxury, mid-line import and domestic brands increased 13%, 7%, and 9% respectively, reflecting (i) a general increase in consumer demand, (ii) the continued availability of credit at terms favorable to our customers and (iii) an improvement in the availability of new vehicle inventory
from which to choose. New vehicle SAAR increased by 8% to 15.6 million for 2013 as compared to 14.5 million in 2012, which contributed to the unit volume increase in each of our three brand segments.
Total new vehicle gross profit increased by $14.8 million (9%), primarily driven by the 7% increase in same store new vehicle unit sales as well as a $4.0 million in gross profit derived from acquisitions. Partially offsetting these increases was a 30 basis point (5%) decrease in our same store new vehicle gross profit margin. Our same store gross profit per new vehicle sold decreased by $17 (1%), largely driven by our luxury brands.
Used Vehicle-
Used Vehicle Metrics-
______________________________
(1)
Same store amounts consist of information from dealerships for the identical months of each period presented in the comparison, commencing with the first full month in which the dealership was owned by us.
The $262.6 million (20%) increase in used vehicle revenue was the result of an 18% increase in the same store used vehicle retail unit sales, a 3% increase in same store revenue per used vehicle retailed and $3.0 million derived from acquisitions. These increases were partially off set by a $10.3 million (5%) decrease in used vehicle wholesale revenue. The 18% increase in same store used vehicle retail unit sales reflects increased consumer demand, the continued availability of credit at terms favorable to the customer and the ongoing impact of our Asbury 1-2-1 program.
The $17.6 million (17%) increase in used vehicle retail gross profit was driven primarily by higher unit volumes, partially offset by a 60 basis point decrease in our same store used vehicle retail gross margin. The decrease in our same store used vehicle gross margin can partially be attributed to margin pressures created by the general increase in the supply of used vehicles as a result of customer trade-ins and vehicles coming off lease. During 2013, we also increased our focus on selling more used vehicles as retail units instead of wholesale units as a result of our ongoing Asbury 1-2-1 program, which primarily accounts for the $13.3 million (7%) decrease in same store wholesale revenue.
Parts and Service-
______________________________
(1)
Same store amounts consist of information from dealerships for the identical months of each period presented in the comparison, commencing with the first full month in which the dealership was owned by us.
The $46.3 million (8%) increase in parts and service revenue was primarily due to (i) a $18.4 million (5%) increase in same store customer pay revenue, (ii) a $13.0 million (16%) increase in same store warranty revenue and (iii) $11.3 million derived from acquisitions. The 230 basis point increase in our same store parts and service gross margin was primarily the result of increases in our higher margin parts and service businesses, including a 24% increase in gross profit from reconditioning and preparation of vehicles, a 22% increase in warranty gross profit and a 5% increase in our customer pay parts and service gross profit. The $16.1 million increase in reconditioning and preparation gross profit was primarily driven by a 18% increase in our same store used vehicle retail unit sales and a 7% increase in our same store new vehicle retail unit sales. Gross profit associated with warranty work increased by $8.7 million (22%), partially due to certain manufacturer recalls that occurred during 2013, as well as increased units in operation as sales of new vehicles in the United States continued to increase over the past few years.
Finance and Insurance, net-
______________________________
(1)
Same store amounts consist of information from dealerships for the identical months of each period presented in the comparison, commencing with the first full month in which the dealership was owned by us.
F&I increased by $40.3 million (24%) during 2013 as compared to 2012, primarily due to (i) a 13% increase in same store retail unit sales, (ii) an 8% increase in F&I per vehicle sold and (iii) $5.8 million derived from acquisitions. The $96 increase in F&I per vehicle sold was primarily attributable to improvement in the number of F&I contracts sold as a percentage of retail unit sales (also known as our F&I penetration rate), which was driven by (i) the improving availability of consumer credit, which allowed more of our customers to take advantage of a broader array of F&I products, (ii) the addition of key personnel to our F&I management team and (iii) our continued focus on improving the F&I results at our lower-performing stores through our F&I training programs, which include implementing a certification process and certain best practices initiatives.
Selling, General and Administrative Expense-
______________________________
(1)
Same store amounts consist of information from dealerships for the identical months of each period presented in the comparison, commencing with the first full month in which the dealership was owned by us.
Same store SG&A expense as a percentage of gross profit was 70.7% for 2013 as compared to 72.6% for 2012. The 190 basis point decrease was primarily attributable to (i) a 70 basis point decrease in personnel costs as a result of further leveraging our fixed cost structure, (ii) a 80 basis point decrease in rent expense primarily as a result of our purchase of certain previously lease real estate during the second half of 2012 and throughout 2013.
Depreciation and Amortization Expense -
The $1.7 million (8%) increase in depreciation and amortization expense during 2013 when compared to 2012 was primarily the result of our purchase of certain previously leased real estate during the second half of 2012 and throughout 2013.
Other Operating Expense net -
Other operating expense, net includes gains and losses from the sale of property and equipment, income derived from lease arrangements and other non-core operating items. During 2013, we recognized (i) $5.5 million of lease termination charges as a result of our purchase of certain previously leased real estate and (ii) $1.8 million of charges related to property and equipment disposals. During 2012, we recognized approximately $1.8 million of lease termination charges as a result of our purchase of certain previously leased real estate which was partially offset by approximately $1.4 million of income related to insurance proceeds.
Floor Plan Interest Expense -
The $0.9 million (8%) increase in floor plan interest expense during 2013 when compared to 2012 was primarily the result of generally higher new vehicle inventory levels as well as additional new vehicle inventory associated with recent acquisitions.
Other Interest Expense -
The $3.4 million (10%) increase in other interest expense was primarily due to a $3.7 million increase in our mortgage interest expense as result of our decision to mortgage certain owned dealership properties, the majority of which was completed during the second half of 2012 and throughout 2013. In June 2013, we completed an add-on issuance of $100.0 million aggregate principal amount of 8.375% Notes. In September 2013, we used proceeds from this offering and borrowings under our real estate credit agreement to redeem all of our 7.625% Notes.
Swap Interest Expense -
We have historically entered into various derivative financial instruments, including fair value and cash flow interest rate swaps, which have been designed to provide hedges against changes in fair value of certain debt obligations and variable rate cash flows. Our earnings have been impacted by these interest rate swaps in the form of (i) amounts reclassified from AOCI to earnings for active swaps, (ii) amortization of amounts reclassified from AOCI to earnings for terminated cash flow swaps and (iii) amortization of terminated fair value swaps. The pre-tax impact on earnings related to our various derivative financial instruments during 2013 and 2012 was $2.5 million and $5.0 million, respectively. The $2.5 million decrease in swap interest expense during 2013 when compared to 2012 is primarily the result of a $2.8 million decrease in amortization expense of a previously terminated swap during the second quarter of 2013, partially offset by approximately $0.3 million of additional swap expense as a result of an interest rate swap entered into during the fourth quarter of 2013.
Loss on Extinguishment of Long-Term Debt -
During 2013, we recognized a $6.8 million loss on the redemption of all of the $143.2 million of our outstanding 7.625% Notes, consisting of (i) $3.6 million of premiums paid pursuant to the terms of the redemption notice, (ii) a $3.1 million write-off of unamortized debt issuance costs associated with the 7.625% Notes and (iii) $0.1 million of third-party costs associated with the redemption of the 7.625% Notes.
Income Tax Expense-
The $14.2 million (28%) increase in income tax expense was primarily a result of the $32.0 million (24%) increase in income before income taxes in 2013 as compared to 2012. Our effective tax rate increased from 37.5% in 2012 to 38.8% in 2013, primarily as a result of (i) a decrease in tax exempt income in 2013 compared to 2012 and (ii) a release of certain tax reserves in 2012.
Discontinued Operations-
During 2013, we sold one franchise (one dealership location) that was classified as discontinued operations. The $8.0 million, net of tax, net gain from discontinued operations in 2013 includes an $8.9 million, net of tax, gain on the sale of one franchise (one dealership location), which was partially offset by $0.9 million, net of tax, of net operating losses of franchises sold prior to December 31, 2013, including rent and other expenses of idle facilities.
During 2012, we sold two franchises (two dealership locations) that were classified as discontinued operations and closed two additional franchises, one of which was classified as discontinued operations. The $1.1 million, net of tax, net loss from discontinued operations in 2012 includes (i) $1.2 million, net of tax, of impairment expense related to certain property not used
in our operations, (ii) a $0.5 million, net of tax, loss related to the disposal of certain property not used in our operations, (iii) a $0.5 million, net of tax, lease termination charge related to a former dealership location and (iv) $0.2 million, net of tax, of net operating losses of franchises sold prior to December 31, 2013, consisting primarily of rent and other expenses of idle facilities. These losses were partially offset by (a) $0.6 million, net of tax, of income related to proceeds received from the elimination of one of our franchises and (b) a $0.7 million, net of tax, gain on the sale of the two franchises.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2014, we had total available liquidity of $285.0 million, which consisted of cash and cash equivalents of $2.9 million, $25.9 million of availability under our floor plan offset account, and borrowing availability of $164.7 million and $91.5 million under our revolving credit facility and our used vehicle revolving floor plan facility, respectively. The total borrowing capacity under our revolving credit facilities is limited by borrowing base calculations and, from time to time, may be further limited by our required compliance with certain financial covenants. As of December 31, 2014, these financial covenants did not further limit our availability under our credit facilities. For more information on our financial covenants, see “Covenants” below.
We continually evaluate our liquidity and capital resources based upon (i) our cash and cash equivalents on hand, (ii) the
funds that we expect to generate through future operations, (iii) current and expected borrowing availability under our revolving
credit facilities, our floor plan facilities and our mortgage financings, (iv) amounts in our new vehicle floor plan notes payable
offset account and (v) the potential impact of our capital allocation strategy and any contemplated or pending future
transactions, including, but not limited to, financings, acquisitions, dispositions, equity and/or debt repurchases or other capital
expenditures. We believe we will have sufficient liquidity to meet our debt service and working capital requirements;
commitments and contingencies; debt repayment, maturity and repurchase obligations; acquisitions; capital expenditures; and
any operating requirements for at least the next twelve months.
We currently have the following material credit facilities, floor plan facilities, real estate credit agreement, mortgage notes and senior subordinated notes. For a more detailed description of the material terms of our senior secured credit facilities, real estate credit agreement, mortgage notes and senior subordinated notes, refer to the “Floor Plan Notes Payable” and “Long-Term Debt” footnotes in the accompanying consolidated financial statements.
•
Revolving credit facility - a $175.0 million senior secured revolving credit facility for, among other things, acquisitions, working capital and capital expenditures, including a $50.0 million sublimit for letters of credit. Our borrowing capacity under the revolving credit facility is limited by a borrowing base calculation and any outstanding letters of credit. As of December 31, 2014, we had $10.3 million in outstanding letters of credit, resulting in $164.7 million of borrowing availability under our revolving credit facility. There were no amounts drawn under our revolving credit facility as of December 31, 2014.
•
New inventory floor plan facilities - an $825.0 million senior secured new vehicle revolving floor plan facility. In connection with the new vehicle floor plan facility, we established an account with Bank of America, N.A. (“Bank of America”) that allows us to transfer cash to an account as an offset to floor plan notes payable (a “floor plan offset account”). 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. As of December 31, 2014, we had $25.9 million in this floor plan offset account. We also have a floor plan facility with Ford to purchase new Ford and Lincoln vehicle inventory, as well as facilities with certain other manufacturers for loaner vehicles. Neither our floor plan facility with Ford nor our facilities for loaner vehicles have stated borrowing limitations. As of December 31, 2014, we had $650.3 million, net, outstanding under our senior secured new vehicle revolving floor plan facility and $116.5 million outstanding under our floor plan facility with Ford.
•
Used vehicle floor plan facility - a $100.0 million senior secured used vehicle revolving floor plan facility to finance the acquisition of used vehicle inventory and for, among other things, other working capital and capital expenditures, as well as to refinance used vehicles. Our borrowing capacity under the used vehicle floor plan facility is limited by a borrowing base calculation. As of December 31, 2014, we had $2.0 million outstanding under our used vehicle revolving floor plan facility, which was drawn for general corporate purposes, and $91.5 million of remaining borrowing availability under our used vehicle revolving floor plan facility.
•
Real estate credit agreement - a real estate term loan credit agreement with an initial principal value of $75.0 million collateralized by first priority liens, subject to certain permitted exceptions, on all of the real property financed
thereunder. As of December 31, 2014, the outstanding balance under the real estate credit agreement was $71.5 million.
•
Mortgage notes - as of December 31, 2014, we had $232.3 million of mortgage note obligations (excluding amounts outstanding under our real estate credit agreement). Included in the $232.3 million of mortgage note obligations was $190.5 million financed by captive finance companies affiliated with our manufacturing partners. These obligations are collateralized by the related real estate at our applicable owned dealership locations.
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6.0% Senior Subordinated Notes due 2024 (“6.0% Notes”) - as of December 31, 2014 we had $400.0 million in aggregate principal amount of our 6.0% Notes outstanding. We are required to pay interest on the 6.0% Notes on June 15 and December 15 of each year until their maturity on December 15, 2024. For additional information on the 6.0% Notes, see “Debt Refinancing Activities” below.
Under the terms of the senior secured credit facilities and certain mortgage notes payable, our ability to incur new indebtedness is currently limited to (i) permitted floor plan indebtedness, (ii) certain refinancings, refunds, renewals or extensions of existing indebtedness, and (iii) other customary permitted indebtedness.
Debt Refinancing Activities
In December 2014, we completed a refinancing of certain of our long-term debt, which included the issuance of $400.0 million of our 6.0% Notes, the proceeds of which were primarily used to redeem all of our outstanding $300.0 million aggregate principal amount of 8.375% Notes. In connection therewith, we entered into an amendment to our Credit Agreement (defined below) which amendment revised the covenant restricting the Company's ability to make certain restricted payments, including payments to purchase shares of common stock, to generally be consistent with the covenant governing such payments as contained in the Indenture, as described below.
We recognized a $31.9 million loss in connection with this refinancing, which is included in Loss on Extinguishment of Long-Term Debt, net on the accompanying Consolidated Statements of Income and consisted of (i) $33.9 million of premiums in connection with the redemption of the 8.375% Notes, (ii) a $6.1 million write-off of unamortized debt issuance costs associated with the 8.375% Notes and (iii) $0.1 million of third-party costs associated with the redemption of the 8.375% Notes, partially offset by $8.2 million in unamortized premium associated with our 8.375% Notes.
The indenture governing the 6.0% Notes (the “Indenture”) provides us with additional flexibility to make certain restricted payments, including payments to repurchase additional shares of our common stock than what was contained in the indenture governing our 8.375% Notes.
Credit Agreement
We and certain of our subsidiaries are party to a credit agreement with Bank of America, N.A. (“Bank of America”), as administrative agent, and the other agents and lenders party thereto (the “Restated Credit Agreement”). The Restated Credit Agreement provides for our senior secured credit facilities, consisting of:
•a $175.0 million revolving credit facility with a $50.0 million sublimit for letters of credit;
•an $825.0 million new vehicle revolving floor plan facility; and
•a $100.0 million used vehicle revolving floor plan facility
Each of the above provisions is subject to limitations on borrowing availability as set out in the Restated Credit Agreement. The Restated Credit Agreement matures, and all amounts outstanding thereunder will be due and payable, on August 8, 2018.
In October 2014, we amended the Restated Credit Agreement, effectively increasing our ability to repurchase shares of our common stock and pay cash dividends. In December 2014, we further amended the Restated Credit Agreement to, among other things, align the restricted payment covenants under the Restated Credit Agreement with those under the Indenture and to thus provide us with additional flexibility to make certain restricted payments, including payments to repurchase additional shares of our common stock. We paid approximately $0.7 million in fees in connection with these amendments, which were capitalized and are being amortized to Other Interest Expense and Floor Plan Interest Expense over the remaining term of the Restated Credit Agreement.
Our ability to make these restricted payments under the Restated Credit Agreement and Indenture are subject to a number of important qualifications described under “-Covenants” below.
Subject to the compliance with certain conditions, the Restated Credit Agreement provides that we and our dealership subsidiaries that are borrowers under the senior secured credit facilities (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 revolving credit facility by up to $50.0 million without lender consent. The Restated Credit Agreement also provides that 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 new vehicle floor plan facility or the used vehicle floor plan facility by up to $250.0 million in the aggregate without lender consent and also subject to the compliance with certain conditions.
Borrowings under the revolving credit facility bear interest, at our option, based on LIBOR plus 1.75% to 2.75% or the Base Rate plus 0.75% to 1.75%, in each case based on our total lease adjusted leverage ratio. 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 1.0%.
Borrowings under the new vehicle revolving floor plan facility bear interest, at our option, based on LIBOR plus 1.25% or the Base Rate plus 0.25%. Borrowings under the used vehicle revolving floor plan facility bear interest, at our option, 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 senior secured credit facilities, the Borrowers are required to pay a commitment fee on the total commitments under the senior secured credit facilities. The fees for commitments under the new vehicle revolving floor plan facility and the used vehicle revolving floor plan facility are 0.20% per annum and 0.25% per annum, respectively, and are payable on a quarterly basis.
The representations and covenants contained in the Restated Credit Agreement are customary for financing transactions of this nature including, among others, a requirement to comply with a minimum consolidated current ratio and consolidated fixed charge coverage ratio (each as defined in the Restated Credit Agreement) and a maximum consolidated total lease adjusted leverage ratio, in each case as set out in the Restated 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. See “Covenants” below.
Mortgage Financings
During 2014, we entered into eight fixed rate mortgage notes payable which are collateralized by the related real estate at eight of our owned dealership locations. The initial principal amount of the mortgage notes payable was $73.2 million. In connection with our entrance into these mortgage notes payable, we paid approximately $0.8 million in debt issuance costs, which were capitalized and are being amortized to Other Interest Expense over the terms of the related mortgage notes payable. All eight mortgages were financed by the captive finance companies affiliated with two of our manufacturing partners.
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. The Restated Master Loan Agreement provides for term loans to certain of the Company’s subsidiaries that are borrowers under the Restated Master Loan Agreement (collectively, the “Real Estate Borrowers”) in an aggregate amount not to exceed $100.0 million (the “Restated Master Loan Facility”), subject to customary terms and conditions.
Borrowings under the Restated Master Loan Facility are guaranteed by the Company pursuant to a second amended and restated unconditional guaranty (the “Company Guaranty”), and each operating dealership subsidiary of the Company whose real estate is financed under the Restated Master Loan Facility, and are collateralized by first priority liens, subject to certain permitted exceptions, on all of the real property financed under the Restated Master Loan Agreement.
The Borrowers under the Restated Master Loan Facility may borrow thereunder from time to time during the period beginning on February 3, 2015 until and including February 1, 2016 (the “Draw Termination Date”). As of February 2015, there was $17.1 million outstanding under the Restated Master Loan Facility, which amount was outstanding under the Master Loan Agreement prior to its amendment and restatement. The proceeds from future borrowings under from the Restated Master Loan Facility are expected to be used to for general corporate purposes. Term loans under the Restated Master Loan Facility bear interest based on LIBOR plus 2.50%. After the Draw Termination Date, the Borrowers are 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 February 1, 2025. The Borrowers can voluntarily prepay any loan in whole or in part any time without premium or penalty.
Covenants
We are subject to a number of customary covenants in our various debt and lease agreements, including those described below. We were in compliance with all of our covenants as of December 31, 2014. 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 was 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 Restated Credit Agreement include, among others, a requirement to comply with a minimum consolidated current ratio and consolidated fixed charge coverage ratio (each as defined in the Restated Credit Agreement) and a maximum consolidated total lease adjusted leverage ratio, in each case as set out in the Restated Credit Agreement. In addition, certain other covenants could restrict our ability to incur additional debt, pay dividends or acquire or dispose of assets.
As discussed above, we amended our Restated Credit Agreement in December 2014 to revise the covenant restricting our ability to make certain restricted payments, including payments to repurchase additional shares of our common stock, among other things, to generally be consistent with the covenant governing such payments as contained in the Indenture. The Restated Credit Agreement and the Indenture currently allow for restricted payments without limit so long as our consolidated total leverage ratio (as defined in the Restated Credit Agreement and the Indenture) is no greater than 3.0 to 1 after giving effect to such proposed restricted payments. In the event that our consolidated total leverage ratio does (or would) exceed 3.0 to 1, the Restated Credit Agreement 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 fixed charge coverage ratio 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 Restated Credit Agreement 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 purchases made and dividends paid on or after December 4, 2014.
The Restated Credit Agreement 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, we could be required to immediately repay all amounts outstanding under the applicable facility.
The representations, warranties and covenants contained in the Restated Master Loan Agreement, the Company Guaranty and the related documents include, 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 Restated Master Loan 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 Borrowers or, failing such compliance, the Company, could be required to immediately repay all amounts outstanding under the Restated Master Loan Facility.
Certain of our lease agreements also require compliance with various financial covenants and incorporate by reference the financial covenants set forth in the Restated Credit Agreement. 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: (a) termination of the applicable lease and/or other leases with the same or an affiliated landlord under a cross-default provision, (b) eviction from the premises; and (c) the landlord having a claim for various damages.
Share Repurchases and Dividend Restrictions
Our ability to repurchase shares or pay dividends on our common stock is subject to our compliance with the covenants and restrictions described in “Covenants” above.
Effective January 1, 2013, our Board of Directors authorized the repurchase of up to $50.0 million of the Company's common stock in open market transactions (the “2013 Repurchase Plan”). Subsequently, on January 30, 2014, our Board of Directors terminated the 2013 Repurchase Plan and authorized a new share repurchase program (the “2014 Repurchase Plan”).
During 2014, we repurchased an aggregate of 2,349,494 shares of our common stock for $161.4 million under the 2013 Plan and 2014 Repurchase Plan, as amended to date.
As of January 28, 2015, we have the authority to repurchase up to an aggregate of $300.0 million of common stock under the 2014 Plan. The 2014 Repurchase Plan has no stated expiration date and any associated repurchases may be completed in open market, or privately negotiated, transactions from time to time. Any repurchases will be subject to applicable limitations in our debt or other financing agreements and may be existence from time to time.
During 2014, we also repurchased 123,774 shares of our common stock for $6.3 million from employees in connection with a net share settlement feature of employee equity-based awards.
Contractual Obligations
As of December 31, 2014, we had the following contractual obligations (in millions):
(a)
Includes variable interest calculated using an estimated LIBOR rate of 0.17%, and assumes that borrowings will not be refinanced upon maturity.
Cash Flows
Classification of Cash Flows Associated with Floor Plan Notes Payable
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 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. Repayments of Floor Plan Notes Payable - Trade associated with divestitures are classified as an operating activity. Repayments of Floor Plan Notes Payable - Non-Trade associated with divestitures are classified as a financing activity.
Floor plan borrowings are required by all vehicle manufacturers for the purchase of new vehicles, and all floor plan lenders require amounts borrowed for the purchase of a vehicle to be repaid within a short time period after the related vehicle is sold. As a result, we believe that it is important to understand the relationship between the cash flows of all of our floor plan notes payable and new vehicle inventory in order to understand our working capital and operating cash flow and to be able to compare our operating cash flow to that of our competitors (i.e., if our competitors have a different mix of trade and non-trade floor plan financing as compared to us). In addition, we include all floor plan borrowings and repayments in our internal operating cash flow forecasts. As a result, we use the non-GAAP measure “cash provided by (used in) operating activities, as adjusted” (defined below) to compare our results to forecasts. We believe that splitting the cash flows of floor plan notes payable between operating activities and financing activities, while all new vehicle inventory activity is included in operating activities, results in significantly different operating cash flow than if all the cash flows of floor plan notes payable were classified together in operating activities.
During the fourth quarter of 2014, our floor plan facility with Ford terminated in accordance with its terms on the maturity date thereof. At that time, all amounts outstanding thereunder were repaid with an equivalent amount of additional borrowings under our senior secured new vehicle revolving floor plan facility. We subsequently re-established our floor plan facility with
Ford, and thus repaid all amounts outstanding under our new vehicle revolving floor plan facility related to Ford vehicles with an equivalent amount of borrowings under the re-established Ford floor plan facility.
Cash provided by operating activities, as adjusted, includes borrowings and repayments of floor plan notes payable to lenders not affiliated with the manufacturer from which we purchase the related new vehicles and all floor plan notes payable relating to pre-owned vehicles. Cash provided by operating activities, as adjusted, has material limitations, and therefore, may not be comparable to similarly titled measures of other companies and should not be considered in isolation, or as a substitute for analysis of our operating results in accordance with GAAP. In order to compensate for these potential limitations we also review the related GAAP measures.
We have provided below a reconciliation of cash flow from operating activities, as if all changes in floor plan notes payable, except for (i) borrowings associated with acquisitions and repayments associated with divestitures and (ii) borrowings and repayments associated with the purchase of used vehicle inventory, were classified as an operating activity.
Operating Activities-
Net cash provided by operating activities totaled $84.2 million and $50.7 million for the years ended December 31, 2014 and 2013. Net cash used in operating activities totaled $20.7 million for the year ended December 31, 2012. Net cash provided by operating activities, as adjusted, totaled $193.2 million, $72.6 million and $114.7 million for the years ended December 31, 2014, 2013 and 2012, respectively. Net cash provided by operating activities, as adjusted, includes net income, adjustments to reconcile net income to net cash used in operating activities and changes in working capital, including changes in floor plan notes payable and inventory.
The $120.6 million increase in our net cash provided by operating activities, as adjusted, for the year ended December 31, 2014 compared to the year ended December 31, 2013 was primarily the result of the following:
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$126.8 million related to a decrease in inventory, net of floor plan notes payable, primarily as a result of an $87.1 million net increase in our floor plan borrowings during 2014 and a $37.3 million net increase in inventory in 2014 compared to 2013 related to acquisitions included in investing activities; and
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$40.8 million increase in net income adjusted for non-cash items primarily attributable to the $31.9 million loss on debt extinguishment in 2014.
The increase in our cash provided by operating activities, as adjusted, was partially offset by:
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$8.6 million related to a decrease in accounts payable and accrued expenses during 2014 when compared to 2013;
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$22.2 million related to a net increase in other current assets, primarily related to an increase in our loaner vehicle inventory and the turnover of that inventory; and
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$13.3 million related to (i) sales volume and the timing of collection of accounts receivable and contracts-in-transit and (ii) a decrease in proceeds from the sale of accounts receivable during 2014 as compared to 2013.
The $42.1 million decrease in our net cash provided by operating activities, as adjusted, for the year ended December 31, 2013 compared to the year ended December 31, 2012 was primarily the result of the following:
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$53.2 million related to an increase in inventory, net of floor plan notes payable, primarily as a result of (i) a $31.7 million increase in our floor plan offset account during 2013 and (ii) a $27.2 million increase in our used vehicle inventory in 2013 as compared to 2012;
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$23.5 million related to a decrease in accounts payable and accrued expenses during 2013 when compared to 2012; and
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$23.0 million related to a net increase in other current assets, primarily related to an increase in our loaner vehicle inventory and the turnover of that inventory.
The decrease in our cash provided by operating activities, as adjusted, was partially offset by:
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$32.2 million increase in net income adjusted for non-cash items; and
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$24.6 million related to sales volume and the timing of collection of accounts receivable and contracts-in-transit during 2013 as compared to 2012.
Investing Activities-
Net cash used in investing activities totaled $230.8 million, $125.5 million and $113.5 million for the years ended December 31, 2014, 2013 and 2012, respectively. Cash flows from investing activities relate primarily to capital expenditures, acquisition and divestiture activity and sales of property and equipment.
Capital expenditures, excluding the purchase of real estate, lease buyouts and capitalized interest, were $57.5 million, $49.9 million and $56.4 million for the years ended December 31, 2014, 2013, and 2012, respectively. Purchases of real estate totaled $15.9 million, $10.7 million and $12.6 million for the years ended December 31, 2014, 2013, and 2012, respectively. In addition, we purchased previously leased property for $5.0 million, $35.7 million and $17.5 million during the years ended December 31, 2014, 2013, and 2012, respectively. Capital expenditures and purchases of real estate in 2014 included capital investment in our previously announced stand-alone used vehicle stores branded as “Q auto”. We opened three Q auto stores in 2014.
We expect that capital expenditures during 2015 will total approximately $45.0 million to upgrade our existing facilities, expand our service capacity and invest in technology and equipment. As part of our capital allocation strategy, we continuously evaluate opportunities to purchase properties currently under lease. No assurances can be provided that we will have or be able to access capital at times or on terms in amounts deemed necessary to execute this strategy.
During the year ended December 31, 2014, we acquired four franchises (three dealership locations) for an aggregate purchase price of $152.2 million, of which $45.7 million was financed with floor plan borrowings. During the year ended December 31, 2013, we acquired three franchises (three dealership locations) for an aggregate purchase price of $61.8 million and during the year ended December 31, 2012, we acquired two franchises (two dealership locations) for an aggregate purchase price of $34.7 million.
Proceeds from the sale of assets totaled $0.6 million, $33.9 million and $8.6 million for the years ended December 31, 2014, 2013 and 2012, respectively. Included in the proceeds from the sale of assets for the years ended December 31, 2013 and 2012, were $7.5 million and $5.7 million associated with the sale of inventory in connection with the sale of one franchises (one dealership location) and two franchises (two dealership locations), respectively.
Financing Activities-
Net cash provided by financing activities totaled $144.1 million, $74.0 million and $129.0 million for the years ended December 31, 2014, 2013 and 2012, respectively.
During the years ended December 31, 2014, 2013 and 2012, we had non-trade floor plan borrowings of $3.72 billion, $3.18 billion and $2.98 billion, respectively. Included in the $3.72 billion and $2.98 billion of non-trade floor plan borrowings were $18.4 million and $2.9 million decreases in our floor plan offset account for the years ended December 31, 2014 and 2012, respectively. In addition, during 2014 and 2013 we had non-trade floor plan borrowings of $45.7 million and $11.3 million related to our acquisition of four franchises (three dealership locations) and three franchises (three dealership locations), respectively. The majority of our floor plan notes are payable to parties unaffiliated with the entities from which we purchase our new vehicle inventory, with the exception of floor plan notes payable relating to the financing of new Ford and Lincoln vehicles.
During the years ended December 31, 2014, 2013 and 2012, we made non-trade floor plan repayments of $3.61 billion, $3.16 billion, and $2.85 billion respectively. Included in the $3.16 billion, of non-trade floor plan repayments was a $31.7 million increase in our floor plan offset account for the year ended December 31, 2013. In addition, during the years ended December 31, 2013 and 2012 we made non-trade floor plan repayments of $5.4 million and $4.6 million related to the divestitures of one franchises (one dealership location) and two franchises (two dealership locations), respectively.
Proceeds from borrowings totaled $473.2 million for the year ended December 31, 2014 and consisted of (i) $400 million of gross proceeds associated with our previously disclosed December 2014 Offering (prior to deducting the initial purchasers' discounts and expenses) and (ii) $73.2 million related to eight fixed rate mortgage notes payable, collateralized by the related real estate at eight of our owned dealership locations with captive finance companies affiliated with two of our manufacturing partners. We paid a total of $8.7 million in debt issuance costs associated with these borrowings.
Proceeds from borrowings totaled $237.2 million for the year ended December 31, 2013 and consisted of (i) $109.7 million of gross proceeds associated with our previously disclosed June 2013 Offering (prior to deducting the initial purchasers' discounts and expenses), (ii) $75.0 million under our previously disclosed real estate credit agreement and (iii) five fixed rate mortgage notes payable with an aggregate initial principal amount of $52.5 million. We paid a total of $7.0 million in debt issuance costs associated with these borrowings.
During the year ended December 31, 2012 we entered into eight fixed rate mortgage notes payable which were collateralized by the related real estate at eight of our owned dealership locations. The total initial principal amount of the mortgage notes payable was $66.2 million. We paid $0.7 million in total debt issuance costs associated with these mortgages.
Repayments of borrowings totaled $311.0 million, $151.9 million and $59.1 million for the years ended December 31, 2014, 2013 and 2012, respectively. Included in repayments for the year ended December 31, 2014 is $300.0 million related to the previously disclosed redemption of our outstanding 8.375% Notes, which were redeemed in December 2014 and scheduled mortgage repayments. Included in repayments for the year ended December 31, 2013 is $143.2 million related to the previously disclosed redemption of our outstanding 7.625% Notes, which were redeemed in September 2013 and scheduled mortgage repayments. During the year ended December 31, 2012, we repaid $41.0 million of mortgage notes payable prior to their associated maturity and the remaining $15.1 million in aggregate principal amount of our 3% Convertible Notes, which matured in September 2012.
During 2014, we repurchased a total of 2,349,494 shares of our common stock under our authorized repurchase programs for a total of $161.4 million and 123,774 shares of our common stock for $6.3 million from employees in connection with a net share settlement feature of employee equity-based awards.
Off Balance Sheet Arrangements
We had no off balance sheet arrangements during any of the periods presented other than those disclosed in Note 19 and 20 of our accompanying consolidated financial statements.
APPLICATION OF CRITICAL ACCOUNTING ESTIMATES
Preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and reported amounts of revenues and expenses during the periods presented. Actual amounts could differ from those estimates. On an ongoing basis, management evaluates their estimates and assumptions and the effects of any such revisions are reflected in the financial statements in the period in which they are determined to be necessary. The accounting estimates described below are those that require management judgments, and therefore are critical to understanding our results of operations. Management has discussed the development and selection of these accounting estimates and the related disclosures with the audit committee of our board of directors.
Deferred Income Taxes-
Estimates and judgments are used in the calculation of certain tax liabilities and in the determination of the recoverability of certain deferred tax assets. In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. We regularly evaluate the recoverability of our deferred tax assets and, if necessary, provide valuation allowances to offset portions of deferred tax assets due to uncertainty surrounding the future realization of such deferred tax assets. Valuation allowances are based on historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences, and the implementation of tax-planning strategies. We would establish a valuation allowance in the period we determine it is more likely than not that deferred tax assets will or will not be realized. If a change in circumstances results in a change in our ability to realize our deferred tax assets, our tax provision would be adjusted in the period when the change in circumstances occurs.
F&I Chargeback Reserve-
We receive commissions from the sale of vehicle service contracts, credit life insurance and disability insurance to customers. In addition, we receive commissions from financing institutions for arranging customer financing. We may be
charged back (“chargebacks”) for finance, insurance or vehicle service contract commissions in the event a customer prepays or defaults on a retail sales contract or cancels an insurance or warranty contract. The revenues from financing fees and commissions are recorded at the time the vehicles are sold and a reserve for future chargebacks is established based on historical operating results and the termination provisions of the applicable contracts. This data is evaluated on a product-by-product basis. Our loss histories vary depending on the product but generally total between 9% and 14% of F&I revenues. Our F&I chargebacks from continuing operations for the years ended December 31, 2014, 2013, and 2012 were $31.0 million, $29.6 million, and $21.3 million, respectively. Our chargeback reserves were $31.3 million and $26.4 million as of December 31, 2014 and December 31, 2013, respectively. Total chargebacks as a percentage of F&I revenue for the years ended December 31, 2014 and 2013, were 12% and 13%, respectively. A 1% change in our estimate for all our products would have changed finance and insurance, net on our accompanying Consolidated Statement of Income for the year ended December 31, 2014 by approximately $2.6 million.
Used Vehicle Inventory Lower of Cost or Market Reserves-
Our used vehicle inventory is stated at the lower of cost or market. We use the specific identification method to value our used vehicle inventories. We maintain a reserve for specific inventory units where cost basis exceeds fair value. In assessing lower of cost or market 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 for used vehicles. We also review and consider the following metrics related to used vehicle sales (both on a recent and longer-term historical basis): (a) days of supply in our used vehicle inventory, (b) used vehicle units sold at less than original cost as a percentage of total used vehicles sold and (c) 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 or market, 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.
Our used vehicle sales histories have indicated that our losses range between 3% and 4% of our original used vehicle inventory cost.
As of December 31, 2014, each 1% change in our estimate would change our used vehicle reserve by approximately $1.5 million.
Insurance Reserves-
We are self-insured for certain employee medical claims and maintain stop loss insurance for individual claims. We have large deductible insurance programs in place for workers compensation, property and general liability claims. We maintain and review at least monthly our claim and loss history to assist in assessing our 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. As of December 31, 2014 and December 31, 2013, we had $14.4 million and $15.8 million, respectively, of insurance reserves for both known and unknown employee medical, workers compensation, property and general liability claims. Expenses associated with employee medical, workers compensation, property and general liability claims from continuing operations, including premiums for insurance coverage, for the years ended December 31, 2014, 2013 and 2012, totaled $27.1 million, $25.2 million and $23.2 million, respectively.
Manufacturer Franchise Rights-
Our only significant identifiable intangible assets, other than goodwill, are rights under franchise agreements with manufacturers, which are recorded at an individual dealership level. The fair market value of our manufacturer franchise rights is determined at the acquisition date through discounting the projected cash flows specific to each franchise. We have
determined that manufacturer franchise rights have an indefinite life as there are no legal, contractual, economic 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. Due to the fact that manufacturer franchise rights are specific to the location in which we acquire a dealership, we have determined that the dealership is the unit of account for purposes of testing franchise rights for impairment. We do not amortize manufacturer franchise rights.
We review indefinite lived manufacturer franchise rights for impairment annually on October 1st of each year, or more often if events or circumstances indicate that impairment may have occurred. We are subject to financial statement risk to the extent that manufacturer franchise rights become impaired due to decreases in fair market value of our individual franchises.
The significant estimates and assumptions used by management in assessing the recoverability of manufacturer franchise rights are estimated future cash flows, present value discount rate, and other factors. Any changes in these estimates or assumptions could result in an impairment charge. The estimates of future cash flows, based on reasonable and supportable assumptions and projections, require management’s subjective judgment. Depending on the assumptions and estimates used, the estimated future cash flows projected in the evaluations of manufacturer franchise rights can vary within a range of outcomes.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We are exposed to market risk from changes in interest rates on a significant portion of our outstanding indebtedness. Based on $766.7 million of total variable interest rate debt (including floor plan notes payable) outstanding as of December 31, 2014, a 1% change in interest rates could result in a change of as much as $7.7 million to our annual other interest expense.
We received $27.7 million of floor plan assistance from certain automobile manufacturers during 2014. Floor plan assistance reduced cost of sales (including amounts classified as discontinued operations) for the year ended December 31, 2014 by $27.6 million and reduced new vehicle inventory by $6.3 million and $6.2 million as of December 31, 2014 and December 31, 2013, respectively. Although we can provide no assurance as to the amount of future floor plan assistance, it is our expectation, based on historical data that an increase in prevailing interest rates would result in increased floor plan assistance from certain automobile manufacturers.
Hedging Risk
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 through maturity in September 2023. The notional value of this swap was $71.5 million as of December 31, 2014 and is reducing over its remaining term to $38.7 million at maturity.
We are also party to an interest rate swap agreement which had a notional principal amount of $17.2 million as of December 31, 2014. This swap was designed to provide a hedge against changes in variable interest rate cash flows through maturity in October 2015. The notional value of this swap is reducing over the remaining term to $16.1 million at maturity. This interest rate swap qualifies for cash flow hedge accounting treatment and does not, and will not, contain any ineffectiveness.
For additional information about the effect of our derivative instruments on the accompanying consolidated financial statements, see Note 14 “Financial Instruments and Fair Value” of the notes thereto.
Item 8.
Item 8.Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON THE CONSOLIDATED FINANCIAL STATEMENTS
The Board of Directors and Shareholders of
Asbury Automotive Group, Inc.
We have audited the accompanying consolidated balance sheets of Asbury Automotive Group, Inc. as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2014. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Asbury Automotive Group, Inc. at December 31, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Asbury Automotive Group, Inc.'s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 24, 2015 expressed an unqualified opinion thereon.
/s/ Ernst &Young LLP
Atlanta, Georgia
February 24, 2015
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Board of Directors and Shareholders of
Asbury Automotive Group, Inc.
We have audited Asbury Automotive Group, Inc.’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Asbury Automotive Group, Inc’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s 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 of compliance with the policies or procedures may deteriorate.
As indicated in the accompanying Management’s Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of three franchises acquired during 2014, which are included in the 2014 consolidated financial statements of Asbury Automotive Group, Inc. and constituted approximately $97.3 million of consolidated assets as of December 31, 2014 and approximately $44.4 million of revenues for the year then ended. Our audit of internal control over financial reporting of Asbury Automotive Group, Inc. also did not include an evaluation of the internal control over financial reporting of the three franchises.
In our opinion, Asbury Automotive Group, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Asbury Automotive Group, Inc. as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2014 of Asbury Automotive Group, Inc. and our report dated February 24, 2015 expressed an unqualified opinion thereon.
/s/ Ernst &Young LLP
Atlanta, Georgia
February 24, 2015
ASBURY AUTOMOTIVE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except par value and share data)
See accompanying Notes to Consolidated Financial Statements
ASBURY AUTOMOTIVE GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share data)
See accompanying Notes to Consolidated Financial Statements
ASBURY AUTOMOTIVE GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
See accompanying Notes to Consolidated Financial Statements
ASBURY AUTOMOTIVE GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Dollars in millions)
See accompanying Notes to Consolidated Financial Statements
ASBURY AUTOMOTIVE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
See Note 18 for supplemental cash flow information
See accompanying Notes to Consolidated Financial Statements
ASBURY AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(December 31, 2014, 2013 and 2012)
1. DESCRIPTION OF BUSINESS
We are one of the largest automotive retailers in the United States, operating 104 franchises (83 dealership locations) in 18 metropolitan markets within 10 states as of December 31, 2014. We offer an extensive range of automotive products and services, including new and used vehicles; vehicle maintenance, replacement parts and collision repair services; and financing, insurance and service contracts. As of December 31, 2014, we offered 29 domestic and foreign brands of new vehicles. Our current new vehicle revenue brand mix consists of 47% mid-line imports, 39% luxury, and 14% domestic brands. We also operate 25 collision repair centers that serve customers in our local markets.
Our retail network is made up of dealerships operating primarily under the following locally-branded dealership groups:
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Coggin dealerships, operating primarily in Jacksonville, Fort Pierce and Orlando, Florida;
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Courtesy dealerships operating in Tampa, Florida;
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Crown dealerships operating in New Jersey, North Carolina, South Carolina and Virginia;
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Nalley dealerships operating in metropolitan Atlanta, Georgia;
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McDavid dealerships operating in Austin, Dallas and Houston, Texas;
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North Point dealerships operating in the Little Rock, Arkansas area;
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Plaza dealerships operating in metropolitan St. Louis, Missouri; and
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Gray-Daniels dealerships operating in the Jackson, Mississippi area.
In addition, we own and operate three stand-alone used vehicle stores under the “Q auto” brand name in Florida.
Our operating results are generally subject to changes in the economic environment as well as seasonal variations. Historically, we have generated more revenue and operating income in the second, third and fourth quarters than in the first quarter of the calendar year. Generally, the seasonal variations in our operations are caused by factors related to weather conditions, changes in manufacturer incentive programs, model changeovers and consumer buying patterns, among other things.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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. In addition, certain reclassifications of amounts previously reported have been made to the accompanying Consolidated Financial Statements in order to conform to current presentation.
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 and 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, certain assumptions related to intangible and long-lived assets, reserves for insurance programs, reserves for certain legal or similar proceedings relating to our business operations, realization of deferred tax assets and reserves for estimated tax liabilities.
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. Amounts due from contracts-in-transit are generally collected within two weeks following the date of sale of the related vehicle.
Inventories
Inventories are stated at the lower of cost or market. We use the specific identification method to value vehicle inventories and the “first-in, first-out” method (“FIFO”) to account for our parts inventories. We maintain a reserve for specific used vehicles where cost basis exceeds market value. 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 specific new vehicle inventory. In assessing lower of cost or market 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 for used vehicles. We also review and consider the following metrics related to used vehicle sales (both on a recent and longer-term historical basis): (a) days of supply in our used vehicle inventory, (b) used vehicle units sold at less than original cost as a percentage of total used vehicles sold and (c) 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 or market, 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 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 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 and Discontinued Operations, net of tax, 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):
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 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 to result 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. As a result of impairment tests conducted in 2014, 2013 and 2012, we recorded only immaterial impairments of certain of our property and equipment in those periods.
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.
Acquisitions
Acquisitions are accounted for under the acquisition method of accounting and the assets acquired and liabilities assumed are recorded at their fair value as of the acquisition dates. The 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 the businesses acquired over the fair market value of the 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 rights under franchise agreements with manufacturers, which are recorded at an individual dealership level. The fair market value of our manufacturer franchise rights, which are included in Other Long Term Assets on the accompanying Consolidated Balance Sheets, is determined at the acquisition date through 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.
We do not amortize goodwill and other intangible assets that are deemed to have indefinite lives. We review goodwill and manufacturer franchise rights for impairment annually as of October 1st of each year, or more often if events or circumstances indicate that impairment may have occurred. We are subject to financial statement risk to the extent that manufacturer franchise rights become impaired due to decreases in fair market value of our individual franchises or to the extent that goodwill becomes impaired due to decreases in the fair market value of our automotive retail business.
We completed our annual intangible impairment tests as of October 1, 2014, and no impairment of goodwill or other intangible assets was recognized as a result of such tests.
Debt Issuance Costs
Debt issuance costs are capitalized and included in Other Current Assets and Other Long-Term Assets in the accompanying Consolidated Balance Sheets. Debt issuance costs are amortized to Other Interest Expense, net and Floor Plan Interest Expense in the accompanying Consolidated Statements of Income through maturity using either the effective interest method or straight line method.
Derivative Instruments and Hedging Activities
From time to time, we utilize derivative financial instruments to manage our capital structure and interest rate risk. The types of risks hedged are those relating to the variability of cash flows and changes in the fair value of our financial instruments caused by movements in interest rates. We document our risk management strategy and assess hedge effectiveness at the 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 cash flow 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 same 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 interest expense in the accompanying Consolidated Statements of Income.
Insurance
We are self-insured for employee medical claims and maintain stop loss insurance for large-dollar individual claims. We have large 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.
Revenue Recognition
Revenue from the sale of new and used vehicles (which excludes sales tax) is recognized upon the latest of delivery, passage of title, signing of the sales contract or approval of financing. Revenue from the sale of parts, service and collision repair work (which excludes sales tax) is recognized upon delivery of parts to the customer or at the time vehicle service or repair work is completed, as applicable. Manufacturer incentives and rebates, including manufacturer holdbacks, floor plan interest assistance and certain advertising assistance, are recognized as a reduction of new vehicle cost of sales at the time the related vehicles are sold.
We receive commissions from third-party lending and insurance institutions for arranging customer financing and from the sale of vehicle service contracts, credit life insurance and disability insurance, and other insurance, to customers (collectively “F&I”). We may be charged back (“chargebacks”) for F&I commissions in the event a contract is prepaid, defaulted upon or terminated. F&I commissions are recorded at the time a vehicle is sold and a reserve for future chargebacks is established based on historical chargeback experience and the termination provisions of the applicable contract. F&I commissions, net of estimated future chargebacks, are included in Finance and Insurance, net in the accompanying Consolidated Statements of Income.
Internal Profit
Revenues and expenses associated with the 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. 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.
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. Advertising expense from continuing operations totaled $34.0 million, $32.8 million and $27.8 million for the years ended December 31, 2014, 2013 and 2012, net of earned advertising credits of $16.2 million, $13.5 million and $11.8 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 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.
Discontinued Operations
Certain amounts reflected in the accompanying Consolidated Balance Sheets have been classified as Assets Held for Sale or Liabilities Associated with Assets Held for Sale, with such classification beginning on the date that the assets and associated liabilities were first considered held for sale.
We report franchises and ancillary businesses as discontinued operations when it is evident that the operations and cash flows of a franchise or ancillary business being actively marketed for sale will be eliminated from our on-going operations and that we will not have any significant continuing involvement in its operations. We do not classify franchises as discontinued operations if we believe that the cash flows generated by the franchise will be replaced by expanded operations of our remaining franchises within the respective local market area.
Amounts in the accompanying Consolidated Statements of Income for the years ended December 31, 2013 and December 31, 2012 have been reclassified to reflect the results of franchises sold or closed during 2014, as if we had classified those franchises as discontinued operations for all years presented.
For more information regarding a recent accounting pronouncement that we believe will impact our reporting related to potential future dealership disposals beginning in January 2015, please refer to “Recent Accounting Pronouncements” below.
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 are classified as a financing activity. 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. Repayments of Floor Plan Notes Payable - Trade associated with divestitures are classified as an operating activity. Repayments of Floor Plan Notes Payable - Non-Trade associated with divestitures are classified as a financing activity.
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 “Credit Agreement”). Loaner vehicles are initially used by our service department for only a short period of time (typically six to twelve months) before we seek to sell them. Therefore, we classify the acquisition of loaner vehicles and the related borrowings and repayments as operating activities in the accompanying Consolidated Statements of Cash Flows. The cash outflow to acquire loaner vehicles is presented in Other Current Assets in the accompanying Consolidated Statements of Cash Flows. Borrowings and repayments of loaner vehicle notes payable are presented in Accounts Payable and Accrued Liabilities in the accompanying Consolidated Statements of Cash Flows. When loaner vehicles are taken out of loaner status they are transferred to used vehicle inventory at amortized cost, which is reflected as a non-cash transfer in the accompanying Consolidated Statements of Cash Flows. The cash inflow from the sale of loaner vehicles is reflected in Inventories in the accompanying Consolidated Statements of Cash Flows.
Business and Credit Concentration Risk
Financial instruments, which potentially subject us to concentration of credit risk, consist principally of cash deposits. We maintain cash balances at financial institutions with strong credit ratings. Generally, amounts invested with financial institutions are in excess of FDIC insurance limits.
We have substantial debt service obligations. As of December 31, 2014, we had total debt of $707.4 million, excluding floor plan notes payable on our accompanying Consolidated Balance Sheet. 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 credit agreement governing our senior secured credit facilities and the indenture governing our 6.0% Senior Subordinated Notes due 2024 (the “6.0% Notes”). 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 credit agreement governing our senior secured credit facilities, the indenture governing our 6.0% Notes (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, 2014, brands representing 5% or more of our revenues from new vehicle sales were as follows:
No other brand accounted for more than 5% of our total new vehicle revenue for the year ended December 31, 2014.
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 comparatively similar margins), (ii) offer similar products and services (all of our markets 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 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 April 2014, the Financial Accounting Standards Board (the “FASB”) issued an accounting standard that raises the threshold for disposals to qualify as discontinued operations and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. The standard revised the definition of a discontinued operation to cover only asset disposals that are considered to be a strategic shift with a major impact on an entity's operations and finances, such as the disposal of a major geographic area or a significant line of business. Application of the standard, which is to be applied prospectively, is required for fiscal years beginning on or after December 15, 2014, and for interim periods within that year. We adopted the standard in January 2015. We expect that any future disposals of our dealerships will not be reported as discontinued operations and that the results of operations of any such disposed dealerships, including revenues, costs and any gains or losses on disposal, will be classified as continuing operations within our Consolidated Statements of Income for all periods presented through the date of disposition.
In May 2014, the FASB issued their new standard on revenue recognition. The new standard will supersede existing revenue recognition guidance and apply to all entities that enter into contracts to provide goods or services to customers. The guidance also addresses the measurement and recognition of gains and losses on the sale of certain non-financial assets, such as
real estate, property and equipment. The new standard will become effective beginning with the first quarter of 2017 and can be adopted either retrospectively to each reporting period presented or as a cumulative effect adjustment as of the date of adoption. We are currently evaluating the impact of adopting this new guidance on our consolidated financial statements.
3. ACQUISITIONS
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 purchase price over the estimated fair values of the identifiable net assets acquired recorded as goodwill.
During the year ended December 31, 2014, we acquired four franchises (three dealership locations) for an aggregate purchase price of $152.2 million. We financed these acquisitions with $106.5 million of cash and $45.7 million of floor plan borrowings for the purchase of the related new vehicle inventory. The aggregate purchase price and related cash financing figures above include $6.9 million of cash that was held in escrow as of December 31, 2014 related to the purchase of certain real estate that was finalized subsequent to December 31, 2014.
During year ended December 31, 2013, we acquired three franchises (three dealership locations) for an aggregate purchase price of $61.8 million. We financed these acquisitions with $50.5 million of cash and $11.3 million of floor plan borrowings for the purchase of the related new vehicle inventory
Below is the preliminary allocation of purchase price for acquisitions completed during 2014 and 2013. The $59.4 million and $29.6 million of goodwill and manufacturer franchise rights associated with our 2014 and 2013 acquisitions will be deductible for federal and state income taxes ratably over a 15 year period.
4. ACCOUNTS RECEIVABLE
During 2014 we had agreements to sell certain of our trade receivables, without recourse as to credit risk, in an amount not to exceed $25.0 million annually. The receivables are sold at a discount, which is included in Selling, General and Administrative expense in the accompanying Consolidated Statements of Income. The discounts totaled $0.1 million, $0.3 million and $0.4 million for the years ended December 31, 2014, 2013 and 2012, respectively. During the years ended December 31, 2014, 2013 and 2012, we sold $2.6 million, $13.8 million and $18.7 million of receivables, respectively, under these agreements and were reflected as reductions of trade accounts receivable.
5. INVENTORIES
Inventories consisted of the following:
The lower of cost or market reserves reduced total inventory cost by $6.4 million and $6.0 million as of December 31, 2014 and December 31, 2013, respectively. As of December 31, 2014 and December 31, 2013, certain automobile manufacturer incentives reduced new vehicle inventory cost by $8.0 million and $7.4 million, respectively, and reduced new vehicle cost of sales from continuing operations for the years ended December 31, 2014, 2013 and 2012 by $30.3 million, $28.0 million, $23.9 million respectively.
6. ASSETS AND LIABILITIES HELD FOR SALE
Assets and liabilities classified as held for sale include (i) assets and liabilities associated with discontinued operations held for sale at each balance sheet date and (ii) real estate not currently used in our operations that we are actively marketing to sell and the related mortgage notes payable, if applicable.
During the year ended December 31, 2014, we added two vacant land parcels with a book value of $3.1 million to assets held for sale. Due to information obtained during then-current marketing efforts, we performed impairment tests during the fourth quarter of 2014. We compared the carrying value of certain of our assets held for sale to estimates of fair value. Accordingly, we recorded a $0.9 million non-cash impairment charge based on a market approach using Level 2 fair value inputs. The total impairment charge related to certain property not currently used in our operations and was recognized in Other Operating Expense, net in our Consolidated Statements of Income.
During the year ended December 31, 2014, we sold one vacant property with a net book value of $0.6 million. In addition, during the year ended December 31, 2014 we removed one vacant property with a net book value of $4.2 million from assets held for sale as a result of our decision to potentially employ this property for future use.
During the year ended December 31, 2013, we sold one franchise (one dealership location). There were no assets or liabilities associated with pending dispositions during the years ended December 31, 2014 and 2013.
Real estate not currently used in our operations that we are actively marketing to sell totaled $6.4 million and $9.1 million as of December 31, 2014 and December 31, 2013, respectively. There were no liabilities associated with our real estate assets held for sale as of December 31, 2014 or December 31, 2013.
7. OTHER CURRENT ASSETS
Other current assets consist of the following:
8. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consist of the following:
During the years ended December 31, 2014, 2013 and 2012, we capitalized $0.8 million, $1.3 million and $0.9 million, respectively, of interest in connection with various capital projects to upgrade or remodel our facilities. Depreciation and capital
lease amortization expense from continuing operations was $26.4 million, $24.3 million and $22.6 million for the years ended December 31, 2014, 2013 and 2012, respectively.
We have multiple mortgage agreements with various lenders. For a detailed description of our mortgage agreements, refer to our “Long-Term Debt” footnote below. As of December 31, 2014 and 2013, we had total mortgage notes payable outstanding of $303.8 million and $241.5 million, respectively, of which $71.5 million and $75.0 million, were due under a real estate credit agreement described in further detail in our “Long-Term Debt” footnote below. These obligations were collateralized by the related real estate with a carrying value of $477.1 million and $361.4 million as of December 31, 2014 and 2013, respectively.
Due to information obtained during then-current marketing efforts, we performed certain interim period impairment tests during 2014 and 2012. We compared the carrying value of our assets held for sale to estimates of fair value determined with the assistance of third-party broker opinions of value and third-party desktop appraisals. The impairment tests indicated an impairment of certain of our property and equipment. Accordingly, we recognized impairment expenses of $0.9 million and $2.3 million during 2014 and 2012, respectively, based on market approaches using Level 2 fair value inputs.
Impairment expense of $0.9 million for the year ended December 31, 2014 was recognized in Other Operating Expense, net on the Consolidated Statements of Income. Of the $2.3 million of impairment expense for the year ended December 31, 2012 $0.3 million was recognized in Other Operating Expense, net and $2.0 million was recognized in Discontinued Operations, net in our Consolidated Statements of Income.
9. GOODWILL
Our acquisitions have resulted in the recording of goodwill, which 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. The changes in the carrying amount of goodwill for the years ended December 31, 2014 and 2013 are as follows:
10. OTHER LONG-TERM ASSETS
Other Long-Term Assets consist of the following:
11. FLOOR PLAN NOTES PAYABLE
We and certain of our subsidiaries are party to a credit agreement with Bank of America, N.A. (“Bank of America”), as administrative agent, and the lenders party thereto (the “Restated Credit Agreement”). The Restated Credit Agreement provides for our senior secured credit facilities, consisting of:
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a $175.0 million revolving credit facility with a $50.0 million sublimit for letters of credit (discussed further below under our “Long Term Debt” footnote);
•an $825.0 million new vehicle revolving floor plan facility; and
•a $100.0 million used vehicle revolving floor plan facility
Each of the above provisions is subject to limitations on borrowing availability as set out in the Restated Credit Agreement. The Restated Credit Agreement matures, and all amounts outstanding thereunder will be due and payable, on August 8, 2018.
Amounts outstanding under these senior secured credit facilities are guaranteed by each existing, and will be guaranteed by each future, direct and indirect domestic subsidiary of the Company, other than, at our option, any immaterial subsidiary. Amounts outstanding under the new vehicle revolving floor plan facility and the used vehicle revolving floor plan facility are each also guaranteed by the Company. The obligations under each of the revolving credit facility and the used vehicle revolving 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 revolving 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 revolving floor plan facility.
The interest rates on borrowings under the new vehicle and used vehicle floor plan facilities are one-month London Interbank Offered Rate ("LIBOR") plus 1.25% and one-month LIBOR plus 1.50%, respectively.
Subject to the compliance with certain conditions, the Restated Credit Agreement provides that we and our dealership subsidiaries that are borrowers thereunder (collectively, the “Borrowers”) have the ability, at our option and subject to the receipt of additional commitments from existing or new lenders, to increase the size of the new vehicle floor plan facility or the used vehicle floor plan facility by up to $250.0 million in the aggregate without lender consent.
In addition to the payment of interest on borrowings outstanding under the senior secured credit facilities, the Borrowers are required to pay a commitment fee on the total commitments under the senior secured credit facilities. The fees for commitments under the new vehicle revolving floor plan facility and the used vehicle revolving floor plan facility are 0.20% per annum and 0.25% per annum, respectively, and are payable on a quarterly basis.
We consider floor plan notes payable to a party that is affiliated with the entity from which we purchase our new vehicle inventory “Floor plan notes payable-trade” and all other floor plan notes payable “Floor plan notes payable-non-trade.” The majority of our floor plan notes are payable to parties unaffiliated with the entities from which we purchase our new vehicle inventory, with the exception of floor plan notes payable relating to the financing of new Ford and Lincoln vehicles, and certain loaner vehicles. As of December 31, 2014, we had $116.5 million of floor plan notes payable-trade and $650.3 million of floor plan notes payable-non-trade outstanding.
During the fourth quarter of 2014, our floor plan facility with Ford terminated in accordance with its terms on the maturity date thereof. At that time, all amounts outstanding thereunder were repaid with an equivalent amount of additional borrowings under our senior secured new vehicle revolving floor plan facility. We subsequently re-established our floor plan facility with Ford, and thus repaid all amounts outstanding under our new vehicle revolving floor plan facility related to Ford vehicles with an equivalent amount of borrowings under the re-established Ford floor plan facility.
As of December 31, 2014 and 2013, we had a total of $766.8 million and $609.5 million of floor plan notes payable outstanding.
In connection with our new vehicle floor plan facility, we have established an account with Bank of America that allows us to transfer cash to an account as an offset to floor plan notes payable (a “floor plan offset account”). 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 floor plan offset account into our operating cash accounts within one to two days. As of December 31, 2014 and 2013 we had $25.9 million and $44.3 million, respectively in this floor plan offset account.
See the “Covenants” section below under our “Long Term Debt” footnote for a description of the representations, covenants and events of default contained in the Restated Credit Agreement.
12. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following:
13. LONG-TERM DEBT
Long-term debt consists of the following:
The aggregate maturities of long-term debt as of December 31, 2014, are as follows (in millions):
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Loss on Extinguishment of Long-Term Debt
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 all of our outstanding $300.0 million aggregate principal amount 8.375% Senior Subordinated Notes due 2020 (the “8.375% Notes”).
We recognized a $31.9 million loss in connection with this refinancing, which is included in Loss on Extinguishment of Long-Term Debt, net on the accompanying Consolidated Statements of Income and consisted of (i) $33.9 million of premiums in connection with the redemption of the 8.375% Notes, (ii) a $6.1 million write-off of unamortized debt issuance costs associated with the 8.375% Notes and (iii) $0.1 million of third-party costs associated with the redemption of the 8.375% Notes, partially offset by $8.2 million in unamortized premium associated with our 8.375% Notes.
6.0% Senior Subordinated Notes due 2024
We issued $400.0 million aggregate principal amount of 6.0% Notes on December 4, 2014. The 6.0% Notes mature on December 15, 2024. Interest accrues on the 6.0% Notes from December 4, 2014, and interest is payable semiannually, on June 15 and December 15 of each year. The first interest payment date is June 15, 2015. We may redeem some or all of the 6.0% Notes at any time after December 15, 2019 at redemption prices specified in the Indenture. We may also redeem up to 35% of the aggregate principal amount of the 6.0% Notes using the proceeds from certain equity offerings completed before December 15, 2017. In addition, we may redeem some or all of the 6.0% Notes at any time prior to December 15, 2019 at a price equal to 100% of the principal amount thereof plus a make whole premium set forth in the Indenture, and accrued and unpaid interest. If we sell certain of our assets or experience specific kinds of changes of control, we must offer to repurchase the 6.0% Notes. We paid $7.1 million of underwriting and other fees in connection with this issuance, which is being amortized as interest expense over the remaining term of the 6% Notes.
Our 6.0% Notes are fully and unconditionally guaranteed, on a joint-and-several basis, by all of our current wholly-owned subsidiaries and will be so guaranteed by all of our future domestic subsidiaries that have outstanding, incur or guarantee any other indebtedness. Any subsidiary of the Company other than the subsidiary guarantors are immaterial. The terms of our 6.0% Notes, in certain circumstances, restrict our ability to, among other things, incur additional indebtedness, pay dividends, repurchase our common stock or merge or sell all or substantially all our assets.
8.375% Senior Subordinated Notes due 2020
On December 4, 2014, we completed a tender offer and consent solicitation pursuant to which we repurchased approximately $234.2 million of our outstanding 8.375% Notes. On December 26, 2014, we completed the redemption of the remaining approximately $65.8 million of outstanding 8.375% Notes.
Restated Credit Agreement
On October 16, 2014, the Company and certain of its subsidiaries entered into the Restated Credit Agreement. The Restated Credit Agreement amended and restated in its entirety the Company’s pre-existing senior secured credit agreement, dated as of August 8, 2013 (as amended) 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.
As discussed above under our “Floor Plan Notes Payable” footnote, the Credit Agreement includes a $175.0 million revolving credit facility with a $50.0 million sublimit for letters of credit. Under the revolving credit facility, subject to a borrowing base, we may (i) borrow up to $175.0 million, which amount may be increased, at our option and subject to the receipt of additional commitments from existing or new lenders to up to $225.0 million in total credit availability and (ii) request Bank of America to issue letters of credit on our behalf up to $50.0 million. Availability under the revolving credit facility is, in part, a function of our borrowing base. Availability is reduced on a dollar-for-dollar basis by the aggregate face amount of any outstanding letters of credit. Based on the borrowing base calculation and the $10.3 million of outstanding letters of credit as of December 31, 2014, our available borrowings were limited to $164.7 million as of December 31, 2014. As of December 31, 2014, we did not have any borrowings outstanding under the revolving credit facility. 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.
Amounts outstanding under the Restated Credit Agreement are guaranteed by each existing, and will be guaranteed by each future, direct and indirect domestic subsidiary of the Company, other than, at our option, any immaterial subsidiary. Amounts outstanding under the new vehicle revolving floor plan facility and the used vehicle revolving floor plan facility thereunder are each also guaranteed by the Company. The obligations under each of the revolving credit facility and the used vehicle revolving 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 revolving floor plan facility thereunder are collateralized by liens on substantially all of the present and future assets, other than real property, of the borrowers under the new vehicle revolving floor plan facility.
Borrowings under the revolving credit facility bear interest, at our option, based on LIBOR plus 1.75% to 2.75% or the Base Rate plus 0.75% to 1.75%, in each case based on our total lease adjusted leverage ratio. The Base Rate is the highest of the (i) Bank of America, N.A. prime rate, (ii) Federal Funds rate plus 0.50%, and (iii) one month LIBOR plus 1.0%.
In addition to the payment of interest on borrowings outstanding under the senior secured credit facilities, the Borrowers are required to pay a commitment fee on the total commitments under the senior secured credit facilities. The fees for commitments under the new vehicle revolving floor plan facility and the used vehicle revolving floor plan facility are 0.20% per annum and 0.25% per annum, respectively, and are payable on a quarterly basis.
The representations and covenants contained in the Restated Credit Agreement are customary for financing transactions of this nature including, among others, a requirement to comply with a minimum consolidated current ratio and consolidated fixed charge coverage ratio (each as defined in the Restated Credit Agreement) and a maximum consolidated total lease adjusted leverage ratio, in each case as set out in the Restated 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. See “Covenants” below.
On December 4, 2014 and in connection with the issuance of the 6.0% Notes, the Restated Credit Agreement was amended to revise the covenant restricting the Company's ability to make certain restricted payments, including payments to repurchase shares of its common stock, among other things, to generally be consistent with the covenant governing such payments as contained in the Indenture.
In connection with the amendment and restatement of the Restated Credit Agreement, and subsequent amendment, in 2014 we paid approximately $0.7 million in amendment costs, which were capitalized and are being amortized to Other Interest Expense over the remaining term of the Restated Credit Agreement.
Real Estate Credit Agreement
Asbury and certain of its subsidiaries are currently party to a real estate term loan credit agreement with Bank of America, as lender. The real estate credit agreement provides for term loans in an aggregate amount not to exceed $75.0 million, subject to customary terms and conditions. Term loans under the real estate credit agreement bear interest, at the option of the Company, based on the LIBOR plus 2.50% or the Base Rate (as described below) plus 1.50%. 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 1.0%. 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 real estate credit agreement are guaranteed by each of our operating dealership subsidiaries whose real estate is financed under the real estate credit agreement, and collateralized by first priority liens, subject to certain permitted exceptions, on all of the real property financed thereunder.
Borrowings under the real estate credit agreement are guaranteed by each operating dealership subsidiary of the Company whose real estate is financed under the real estate credit agreement, and collateralized by first priority liens, subject to certain permitted exceptions, on all of the real property financed thereunder.
The representations and covenants contained in the 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 maximum consolidated total lease adjusted leverage ratio, in each case as set out in the real estate 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 real estate credit agreement also contains 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 amounts outstanding under the real estate credit agreement.
Mortgage Financing
During the year ended December 31, 2014, we also entered into eight fixed rate mortgage notes payable, which were collateralized by the related real estate at eight of our owned dealership locations. The total initial principal amount of the mortgage notes payable was $73.2 million. In connection with our entrance into these mortgage notes payable, we paid approximately $0.8 million in debt issuance costs, which were capitalized and are being amortized to Other Interest Expense over the terms of the related mortgage notes payable. All eight mortgages were financed by the captive finance companies affiliated with two of our manufacturing partners, and are classified as "Captive Mortgages" in the table below.
As of December 31, 2014, we were party to a master loan agreement with Wells Fargo Bank, N.A. (“Wells Fargo”, and the master loan agreement being referred to as the “Master Loan Agreement”). As of December 31, 2014, our obligation under the Master Loan Agreement consisted of a single mortgage for certain of our properties in St. Louis, Missouri.
The Master Loan Agreement also contained 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 Master Loan Agreement); and (iii) enter into any sale-leaseback transactions in connection with the underlying properties.
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, 2014 and 2013:
For a description of the January 2015 amendment and restatement of the Master Loan Agreement, see Note 24, “Subsequent Events.”
Stock Repurchase and Dividend Restrictions
As discussed above, we amended our Restated Credit Agreement in December 2014 to revise the covenant restricting our ability to make certain restricted payments, including payments to repurchase additional shares of our common stock, among other things, to generally be consistent with the covenant governing such payments as contained in the Indenture. The Restated Credit Agreement and the Indenture currently allow for restricted payments without limit so long as our consolidated total leverage ratio (as defined in the Restated Credit Agreement and the Indenture) giving effect to such payment is no greater than 3.0 to 1 after giving effect to such proposed restricted payments. In the event that our consolidated total leverage ratio does (or would) exceed 3.0 to 1, the Restated Credit Agreement 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 fixed charge coverage ratio 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 Restated Credit Agreement 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.
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 2014. 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 Restated Credit Agreement are customary for financing transactions of this nature including, among others, a requirement to comply with a minimum consolidated current ratio and consolidated fixed charge coverage ratio (each as defined in the Restated Credit Agreement) and a maximum consolidated total lease adjusted leverage ratio, in each case as set out in the Restated Credit Agreement. In addition, certain other covenants could restrict our ability to incur additional debt, pay dividends or acquire or dispose of assets.
The Restated Credit Agreement 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 revolving 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, we could be required to immediately repay all amounts outstanding under the applicable facility.
Our guarantees under the 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.
Certain of our lease agreements also require compliance with various financial covenants and incorporate by reference the
financial covenants set forth in the Restated Credit Agreement. 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: (a) termination of the applicable lease and/or other leases with the same or an affiliated landlord under a cross-default provision, (b) eviction from the premises; and (c) the landlord having a claim for various damages.
Asbury Automotive Group, Inc. is 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 which have not guaranteed such notes are “minor” (as defined in Rule 3-10(h) of Regulation S-X). As of December 31, 2014, there were no significant restrictions on the ability of our subsidiaries to distribute cash to us or our guarantor subsidiaries.
14. FINANCIAL INSTRUMENTS AND FAIR VALUE
In determining fair value, we use various valuation approaches, including market, income and/or cost 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 cash flow swap instruments, exchange-traded debt securities that are not actively traded or do not have a high trading volume and mortgage notes payable.
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 fair value of non-financial assets and non-financial liabilities in purchase acquisitions and those used in assessing impairment of manufacturer 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 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 agreements. 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 market value of our subordinated long-term debt is based on reported market prices which reflect 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 which reflect Level 2 inputs. A summary of the carrying values and fair values of our 6.0% Notes, our 8.375% Notes and our mortgage notes payable is as follows:
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 through maturity in September 2023. The notional value of this swap was $71.5 million as of December 31, 2014 and is reducing over its remaining term to $38.7 million at maturity.
We are also party to an interest rate swap agreement that had a notional principal amount of $17.2 million as of December 31, 2014. This swap is designed to provide a hedge against changes in variable interest rate cash flows through maturity in October 2015. The notional value of this swap is reducing over the remaining term to $16.1 million at maturity.
Both of our interest rate swaps qualify for cash flow hedge accounting treatment and do not, and will not, contain any ineffectiveness.
Information about the effect of derivative instruments on the accompanying Consolidated Statements of Income, including the impact on Accumulated Other Comprehensive Income ("AOCI") (in millions):
On the basis of yield curve conditions as of December 31, 2014 and including assumptions about future changes in fair value, we anticipate that the amount expected to be reclassified out of AOCI into earnings in the next 12 calendar months will be a loss of $1.7 million.
Fair value estimates reflect a credit adjustment to the discount rate applied to all expected cash flows under the swaps. Other than that assumption, all other inputs reflect Level 2 inputs.
Market Risk Disclosures as of December 31, 2014:
Instruments entered into for trading purposes-None
Instruments entered into for hedging purposes (in millions)-
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* The total fair value of our swaps is a $2.7 million net liability, of which $1.8 million is included in Accounts Payable and Accrued Liabilities and $0.9 million is included in Other Long-Term Liabilities on the accompanying Consolidated Balance Sheet.
Market Risk Disclosures as of December 31, 2013:
Instruments entered into for trading purposes-None
Instruments entered into for hedging purposes (in millions)-
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* The total fair value of our swap is a $0.3 million net asset, of which $1.9 million is included in Accounts Payable and Accrued Liabilities, $0.1 million is included in Other Long-Term Liabilities and $2.3 million is included in Other Long-Term Assets on the accompanying Consolidated Balance Sheet.
Valuation Techniques
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. As such, the carrying amounts for these swaps are designated to be Level 2 fair values and totaled $2.7 million and $0.3 million as of December 31, 2014 and 2013, respectively. The carrying value of these swaps is included in Other Long-Term Liabilities, Other Long-Term Assets and Other Current Liabilities on the accompanying Consolidated Balance Sheet as of December 31, 2014.
The fair value of assets held for sale used to determine the impairment expenses we incurred in 2014 and 2012 were determined with the assistance of third-party broker opinions of value and third-party desktop appraisals and are designated to be Level 2 fair values.
15. INCOME TAXES
The components of income tax expense from continuing operations are as follows:
A reconciliation of the statutory federal rate to the effective tax rate from continuing operations is as follows:
The tax effects of temporary differences representing deferred tax assets (liabilities) result principally from the following:
As of December 31, 2014, our state operating losses of $0.2 million, before federal benefit, are set to expire, or to be used, between 2014 and 2021.
As of December 31, 2014, 2013 and 2012, the net amount of our unrecognized tax benefits was $0.3 million, all of which, if recognized, would affect our effective tax rate.
Generally we recognize interest and penalties related to unrecognized tax benefits in income tax expense. However, no amount for interest or penalties are included in the liability for unrecognized tax benefits as of December 31, 2014.
The statute of limitations related to the consolidated Federal income tax return is closed for all tax years up to and including 2010.
The expiration of the statute of limitations related to the various state income tax returns that we and our subsidiaries file varies by state. The 2010 through 2013 tax years generally remain subject to examination by most state tax authorities. We do not anticipate any material changes related to unrecognized tax benefits, individually or in the aggregate, to occur within the next twelve months.
16. OTHER LONG-TERM LIABILITIES
Other long-term liabilities consist of the following:
17. DISCONTINUED OPERATIONS AND DIVESTITURES
As of December 31, 2014, there were no franchises pending disposition. Operating expenses in the table below include rent and other expenses of idle facilities previously associated with businesses sold or closed prior to December 31, 2014.
The following tables provide further information regarding our discontinued operations as of December 31, 2014, and includes the results of businesses sold prior to December 31, 2014:
18. SUPPLEMENTAL CASH FLOW INFORMATION
During the years ended December 31, 2014, 2013 and 2012, we made interest payments, including amounts capitalized, totaling $52.5 million, $52.4 million and $46.1 million, respectively. Included in these interest payments are $12.1 million, $12.2 million and $10.5 million, of floor plan interest payments for the years ended December 31, 2014, 2013 and 2012, respectively.
During the years ended December 31, 2014, 2013 and 2012, we made income tax payments, net of refunds received, totaling $55.8 million, $60.1 million and $32.8 million, respectively.
During the years ended December 31, 2014, 2013 and 2012, we transferred $79.5 million, $61.9 million and $54.6 million, respectively, of loaner vehicles from Other Current Assets to Inventory on our Consolidated Balance Sheets.
Until February 2012, we sponsored the Asbury Automotive Wealth Accumulation Plan (the “Deferred Compensation Plan”) wherein eligible employees, generally those at senior levels, could elect to defer a portion of their annual compensation. In February 2012, our Board of Directors elected to terminate the Deferred Compensation Plan. During the year ended December 31, 2013, we (i) received a $7.8 million lump sum distribution as a result of the termination of the Deferred Compensation Plan and (ii) used these proceeds to relieve our corresponding $7.8 million total liability to the Deferred Compensation Plan's participants.
The following items are included in Other Adjustments, net to reconcile net income to cash flow from operating activities:
19. LEASE OBLIGATIONS
We lease various facilities, real estate and equipment primarily under operating lease agreements, most of which have remaining terms from one to twenty years. Certain of our leases contain renewal options and rent escalation clauses. We record rent expense on a straight-line basis over the life of the lease for lease agreements where the rent escalates at fixed rates over time. Rent expense from continuing operations totaled $30.8 million, $32.9 million and $35.5 million for the years ended December 31, 2014, 2013 and 2012, respectively. As of December 31, 2014, we had one significant capital lease obligation totaling approximately $3.6 million. This lease was entered into in 2011, and is being amortized over 20 years.
During the year ended December 31, 2014, we entered into two transactions in which we purchased various previously leased real estate for a total purchase price of $5.4 million. These transactions included the termination of the related lease obligations, resulting in losses of $0.1 million, which is included in Other Operating Expense, net in our Consolidated Statement of Income for the year ended December 31, 2014.
During the year ended December 31, 2013, we entered into two transactions in which we purchased various previously
leased real estate for a total purchase price of $35.7 million. These transactions included the termination of the related lease
obligations, resulting in losses of $5.5 million, which is included in Other Operating Expense, net on our Consolidated Statement of Income for year ended December 31, 2013.
During the year ended December 31, 2012, we entered into four transactions in which we purchased various previously leased real estate for a total purchase price of $17.5 million. These transactions included the termination of the related lease obligation, resulting in losses of $1.8 million, which is included in Other Operating Expense, net on our Consolidated Statement of Income for year ended December 31, 2012.
Future minimum payments under long-term, non-cancellable operating leases as of December 31, 2014, are as follows:
Certain of our lease agreements include financial covenants and incorporate by reference the financial covenants set forth in the Restated Credit Agreement. 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: (a) termination of the applicable lease and/or other leases with the same or an affiliated landlord under a cross-default provision, (b) eviction from the premises; and (c) the landlord having a claim for various damages.
20. 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, lenders and certain federal, state and local government authorities, which have historically related primarily to (a) incentive and warranty payments received from vehicle manufacturers, or allegations of violations of manufacturer agreements or policies, (b) compliance with lender rules and covenants and (c) 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 $10.3 million of letters of credit outstanding as of December 31, 2014, which are required by certain of our insurance providers. In addition, as of December 31, 2014, 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.
21. RELATED PARTY TRANSACTIONS
During the years ended December 31, 2014, 2013 and 2012, we were party to certain agreements with a former member of our board of directors and a former member of our management team. These agreements primarily involved long term operating leases of dealership facilities. We believe that the rental transactions related to these agreements were on terms comparable to those that could be obtained from unaffiliated third parties. For the years ended December 31, 2014, 2013 and 2012, we made rental payments totaling $2.2 million to these individuals or entities controlled by these individuals.
22. SHARE-BASED COMPENSATION AND EMPLOYEE BENEFIT PLANS
We have established three share-based compensation plans (the “Plans”) under which we have historically granted non-qualified stock options, performance share units, restricted share units and shares of restricted stock to our directors, officers and employees at fair market value on the date of the grant. Stock options generally vest ratably over three years from the date of grant and expire ten years from the date of grant. Performance share units vest after three years or ratably over three years from the date of grant for performance share units granted to date. The actual number of shares earned by a holder of performance share units may range from 0% to 150% of the target number of shares to be granted to the holder, depending on
the achievement of certain performance criteria over a defined period of time. Restricted stock provides the holder voting and forfeitable dividend rights prior to vesting. Restricted stock grants to our officers and employees vest ratably over three years from the date of grant, while restricted stock grants to members of our board of directors vest immediately upon the date of grant. Restricted share units vest ratably over three years from the date of grant. Since inception, we have granted a total of 5.8 million non-qualified stock options, 1.7 million performance share units, 1.4 million shares of restricted stock and 0.1 million of restricted share units. In addition, there were approximately 1.3 million share-based awards available for grant under our share-based compensation plans as of December 31, 2014.
We issue new shares of our common stock upon the exercise of stock options or vesting of performance share units, restricted stock or restricted share units. In addition, in connection with the vesting of performance share units, restricted stock or restricted share units, we expect to repurchase a portion of the shares issued equal to the amount of employee income tax withholding.
The fair value of each option award was estimated on the date of grant using the Black Scholes option valuation model. The fair value of each performance share unit and restricted stock award was calculated using the closing market price of our common stock on the date of grant. Expected volatilities are based on the historical volatility of our common stock. We use historical data to estimate the rate of option exercises and employee turnover within the valuation model. The expected term of options granted represents the period of time that the related options are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
We have recognized $8.6 million ($3.5 million tax benefit), $9.0 million ($3.5 million tax benefit) and $7.1 million ($2.7 million tax benefit) in stock-based compensation expense for the years ended December 31, 2014, 2013 and 2012, respectively. As of December 31, 2014, there was $10.2 million of total unrecognized share-based compensation expense related to non-vested share-based awards granted under the Plans, and we expect to recognize $5.1 million of this expense in 2015, $3.0 million in 2016 and $2.1 million in 2017.
A summary of options outstanding and exercisable under the Plans as of December 31, 2014, changes during the year then ended and changes during the years ended December 31, 2013 and 2012 is presented below:
Net cash received from option exercises for the year ended December 31, 2014 was $0.1 million. The actual intrinsic value of options exercised during the years ended December 31, 2014, 2013 and 2012 was $0.4 million, $0.4 million and $13.2 million, respectively. The actual tax benefit realized for the tax deductions from option exercises during the years ended December 31, 2014, 2013 and 2012 was $0.2 million, $0.1 million and $4.4 million, respectively.
A summary of performance share units and restricted stock as of December 31, 2014, changes during the year then ended and changes during the years ended December 31, 2013 and 2012 is presented below:
___________________________
* Maximum of 256,181 issuable upon attaining certain performance metrics.
Each performance share unit provides an opportunity for the employee 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 committee of our board of directors. The actual number of shares earned may range from 0% to 150% of the target number of shares depending upon achievement of the performance goals.
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 60 days of service to the Company. 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 2014 to $17,500 or $23,000 if age 50 or more; however, we limit participant contributions for employees considered Highly Compensated Employees with an annual salary or base
salary equal to or greater than $115,000 to $10,000 per year or $15,500 if age 50 or more. After one year of employment, we match 37.5% of employees' contributions up to 4% of their eligible compensation, with a maximum match of $1,725 per participant. Beginning on January 1, 2009, we suspended our matching contributions for Highly Compensated Employees with an annual salary equal to or greater than $115,000. Employer contributions vest by graded schedule over four years after the date of hire. Expenses from continuing operations related to employer matching contributions totaled $1.3 million, $1.1 million and $0.5 million for the years ended December 31, 2014, 2013 and 2012, respectively.
Deferred Compensation Plan
We have historically sponsored the Deferred Compensation Plan wherein eligible employees, generally those at senior levels, may elect to defer a portion of their annual compensation. In February 2012, our Board of Directors elected to terminate the Deferred Compensation Plan. During 2013, we (i) received a $7.8 million lump sum distribution as a result of the termination of the Deferred Compensation Plan and (ii) used these proceeds to relieve our corresponding $7.8 million total liability to the Deferred Compensation Plan's participants.
23. CONDENSED QUARTERLY REVENUES AND EARNINGS (UNAUDITED):
____________________________
(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, 2013 were increased by $8.9 million, net of tax, or $0.29 per diluted share, as a result of a gain on the sale of a mid-line import store.
(3)
Results for the three months ended September 30, 2013 were decreased by $4.2 million, net of tax, or $0.14 per diluted share, as a result of a loss on extinguishment of debt.
(4)
Results for the three months ended December 31, 2014 were decreased by $19.5 million, net of tax, or $0.66 per diluted share, as a result of a loss on extinguishment of debt.
24. SUBSEQUENT EVENTS
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. The Restated Master Loan Agreement provides for term loans to certain of the Company’s subsidiaries that are borrowers under the Restated Master Loan Agreement (collectively, the “Borrowers”) in an aggregate amount not to exceed $100.0 million (the “Restated Master Loan Facility”), subject to customary terms and conditions. Borrowings under the Restated Master Loan Facility are guaranteed by the Company pursuant to a second amended and restated unconditional guaranty (the “Company Guaranty”), and each operating dealership subsidiary of the Company whose real estate is financed under the Restated Master Loan Facility, and collateralized by first priority liens, subject to certain permitted exceptions, on all of the real property financed under the Restated Master Loan Agreement. The Borrowers under the Restated Master Loan Facility may borrow thereunder from time to time during the period beginning on February 3, 2015 until and including February 1, 2016 (the “Draw Termination Date”). As of February 3, 2015, there was $17.1 million outstanding
under the Restated Master Loan Facility, which amounts were outstanding immediately prior to the amendment and restatement of the Restated Master Loan Agreement. The proceeds from any future borrowings under from the Restated Master Loan Facility are expected to be used for general corporate purposes.
Loans under the Restated Master Loan Facility bear interest based on the London Interbank Offered Rate plus 2.50%. After the 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 February 1, 2025. The Borrowers can voluntarily prepay any loan in whole or in part any time without premium or penalty.
The representations, warranties and covenants contained in the Restated 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 Restated Master Loan 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 Borrowers or, failing such compliance, the Company, could be required to immediately repay all amounts outstanding under the Restated Master Loan Facility.
Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
As of the end of the period covered by this report, the Company conducted an evaluation, under the supervision and with the participation of the Company’s principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s 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, the Company’s 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 the Company in reports it files or submits 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 their 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. The Company’s 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 13a-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 officers and the principal financial officer assessed the effectiveness of our internal control over financial reporting as of December 31, 2014. 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, 2014. 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 2014, we acquired substantially all of the assets, including certain real estate, of four franchises (three dealership locations). As permitted by Securities and Exchange Commission guidance, the scope of our Section 404 evaluation for the fiscal year ended December 31, 2014 does not include an evaluation of the internal control over financial reporting of these acquired operations. Final results of the four acquired franchises are included in our consolidated financial statements from the date of acquisition. The four franchises represented approximately $97.3 million of our $2.2 billion consolidated assets as of December 31, 2014 and approximately $44.4 million of our $5.9 billion consolidated revenues for the year then ended.
From the acquisition date to December 31, 2014, the processes and systems of the acquired operations were discrete and did not significantly impact 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 the Company’s internal control over financial reporting during the quarter ended December 31, 2014 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B.
Item 9B. Other Information.
None.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance.
Reference is made to the information to be set forth in the “Proposal No. 1 Election of Directors,” “Governance of the Company,” “2014 Director Compensation Table-Code of Business Conduct and Ethics and Corporate Governance Guidelines,” “Section 16(a) Beneficial Ownership Reporting Compliance” and “Executive Officers” sections of our Proxy Statement to be filed within 120 days after the end of our fiscal year, which information is incorporated herein by reference.
Item 11.
Item 11. Executive Compensation.
Reference is made to the information to be set forth in the “Compensation Discussion & Analysis,” “Compensation and Human Resources Committee Report,” “Compensation Committee Interlocks and Insider Participation,” "Executive Compensation," "2014 Director Compensation Table" and "Governance of the Company" sections of our Proxy Statement to be filed within 120 days after the end of our fiscal year, which information is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Reference is made to the information to be set forth in the “Securities Owned by Management and Certain Beneficial Owners” and “Securities Authorized for Issuance under Equity Compensation Plans” sections of our Proxy Statement to be filed within 120 days after the end of our fiscal year, which information is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Reference is made to the information to be set forth in the “Related Person Transactions” and “Governance of the Company” sections of our Proxy Statement to be filed within 120 days after the end of our fiscal year, which information is incorporated herein by reference.
Item 14.
Item 14. Principal Accountant Fees and Services.
Reference is made to the information to be set forth in the "Independent Auditors' Fees" section of our Proxy Statement to be filed within 120 days after the end of our fiscal year, which information is incorporated herein by reference.
PART IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules.
(a)
The following documents are filed as a part of this report on Form 10-K:
(1)
Financial Statements: See index to Consolidated Financial Statements.
(2)
Financial Statement Schedules: None required.
(3)
Exhibits required to be filed by Item 601 of Regulation S-K:
The Exhibits listed below are identified by numbers corresponding to the Exhibit Table of Item 601 of Regulation S-K.
Exhibit
Number
Description of Documents
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
*
Incorporated by reference.
**
Management contract or compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Asbury Automotive Group, Inc.
Date: February 24, 2015
By:
/s/ Craig T. Monaghan
Name:
Craig T. Monaghan
Title:
Chief Executive Officer and President
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Craig T. Monaghan and Keith R. Style, and each of them, acting individually, as his or her true and lawful attorney-in-fact, each with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K for the year ended December 31, 2014, and other documents in connection herewith and therewith, and to file the same, with all exhibits thereto, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection herewith and therewith and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
INDEX TO EXHIBITS