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ABG > SEC Filings for ABG > Form 10-Q on 24-Oct-2012All Recent SEC Filings

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Quarterly Report

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation

Forward-Looking Information
Certain of the discussions and information included in this report may constitute "forward-looking statements" within the meaning of the federal securities laws. Forward-looking statements are statements that are not historical in nature and may include statements relating to our goals, plans and projections regarding industry and general economic trends, our expected financial position, results of operations or market position and our business strategy. Such statements can generally be identified by words such as "may," "target," "could," "would," "will," "should," "believe," "expect," "anticipate," "plan," "intend," "foresee" and other similar words or phrases. Forward-looking statements may also relate to our expectations and assumptions with respect to, among other things:

our ability to execute our business strategy;

our ability to further improve our operating cash flows, and the availability of capital and liquidity;

our estimated future capital expenditures;

the duration of the economic recovery process and its impact on our revenues and expenses;

our parts and service revenue due to, among other things, improvements in manufacturing quality, manufacturer recalls, the recently lower than historical seasonally adjusted annual rate ("SAAR") of new vehicle sales in the U.S. and any changes in business strategy and government regulations;

the variable nature of significant components of our cost structure;

our ability to decrease our exposure to regional economic downturns due to our geographic diversity and brand mix;

manufacturers' willingness to continue to use incentive programs to drive demand for their product offerings;

our ability to fully leverage our dealer management system in a cost-efficient manner;

our acquisition and divestiture strategies;

the continued availability of financing, including floor plan financing for inventory;

the ability of consumers to secure vehicle financing;

the growth of mid-line import and luxury brands over the long-term;

our ability to mitigate any future negative trends in new vehicle sales; and

our ability to increase our net income as a result of the foregoing and other factors.

Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual future results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Such factors include, but are not limited to:

our ability to execute our balanced automotive retailing and service business strategy;

changes in the mix, and total number, of vehicles we are able to sell;

changes in general economic and business conditions, including changes in consumer confidence levels, interest rates, consumer credit availability and employment levels;

changes in laws and regulations governing the operation of automobile franchises, including trade restrictions, consumer protections, accounting standards, taxation requirements and environmental laws;

changes in the price of oil and gasoline;

our ability to generate sufficient cash flows, maintain our liquidity and obtain additional funds for working capital, capital expenditures, acquisitions, debt maturities and other corporate purposes, if necessary;

our continued ability to comply with applicable covenants in various of our financing and lease agreements, or to obtain waivers of these covenants as necessary;

our relationships with, and the reputation and financial health and viability of, the vehicle manufacturers whose brands

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we sell, and their ability to design, manufacture, deliver and market their vehicles successfully;

significant disruptions in the production and delivery of vehicles and parts for any reason, including natural disasters, product recalls, work stoppages or other occurrences that are outside of our control;

adverse results from litigation or other similar proceedings involving us;

our relationship with, and the financial stability of, our lenders and lessors;

our ability to execute our initiatives and other strategies;

high levels of competition in our industry, which may create pricing and margin pressures on our products and services;

our ability to renew, and enter into new, framework and dealer agreements with vehicle manufacturers whose brands we sell, on terms acceptable to us;

our ability to attract and to retain key personnel;

our ability to leverage gains from our dealership portfolio; and

significant disruptions in the financial markets, which may impact our ability to access capital.

Many of these factors are beyond our ability to control or predict, and their ultimate impact could be material. Moreover, the factors set forth in the discussion and analysis below and under Item 1A entitled "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2011 and other cautionary statements made in this report should be read and considered as forward-looking statements subject to such uncertainties. Forward-looking statements speak only as of the date they are made, and we assume no obligation to update any forward-looking statements.

We are one of the largest automotive retailers in the United States, operating 97 franchises (77 dealership locations) in 18 metropolitan markets within 10 states as of September 30, 2012. 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 September 30, 2012, we offered 28 domestic and foreign brands of new vehicles. Our current brand mix is weighted 86% towards luxury and mid-line import brands, with the remaining 14% consisting of 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:

Coggin dealerships, operating primarily in Jacksonville, Fort Pierce and Orlando, Florida;

Courtesy dealerships operating in Tampa, Florida;

Crown dealerships operating in New Jersey, North Carolina, South Carolina and Virginia;

Nalley dealerships operating in Atlanta, Georgia;

McDavid dealerships operating in Austin, Dallas and Houston, Texas;

North Point dealerships operating in Little Rock, Arkansas;

Plaza dealerships operating in St. Louis, Missouri; and

Gray-Daniels dealerships operating in Jackson, Mississippi.

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").

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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 new vehicle revenue brand mix, which included approximately 49% of revenue from mid-line import brands and 37% of revenue from luxury brands in the third quarter of 2012, 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. We tend to generate more revenue and operating income in the second and third quarters than in the first and fourth quarters 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), generally allowing 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 has shown continued improvement in 2012 with new vehicle SAAR increasing to 14.3 million during the first nine months of 2012 as compared to 12.6 million during the first nine months of 2011. We continued to benefit from improving economic conditions in third quarter of 2012, which we attribute to increasing consumer confidence and the availability of credit at terms favorable to consumers. We believe that the overall economic recovery will continue to be fragile, and may be subject to further changes based on consumer confidence, unemployment levels 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 $265.3 million as of September 30, 2012, which consisted of cash and cash equivalents of $5.9 million, borrowing availability of $210.2 million under our revolving credit facilities and $49.2 million of availability under our floor plan offset account. For further discussion of our liquidity, please refer to "Liquidity and Capital Resources" below. We have no long-term debt maturities until October 2015, at which time two of our mortgage notes payable associated with certain of our properties in St. Louis, Missouri, will mature. As of September 30, 2012, the aggregate principal amount outstanding under these two mortgage notes payable was $20.0 million.

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Three Months Ended September 30, 2012 Compared to the Three Months Ended
September 30, 2011

                                              For the Three Months Ended
                                                     September 30,                Increase          %
                                                2012                2011         (Decrease)       Change
                                                    (Dollars in millions, except per share data)
New vehicle                               $      674.7         $      550.8     $     123.9          22  %
Used vehicle                                     335.6                318.5            17.1           5  %
Parts and service                                143.5                141.8             1.7           1  %
Finance and insurance, net                        44.1                 36.1             8.0          22  %
Total revenues                                 1,197.9              1,047.2           150.7          14  %
New vehicle                                       41.6                 38.7             2.9           7  %
Used vehicle                                      26.2                 24.2             2.0           8  %
Parts and service                                 83.2                 79.9             3.3           4  %
Finance and insurance, net                        44.1                 36.1             8.0          22  %
Total gross profit                               195.1                178.9            16.2           9  %
Selling, general and administrative              141.1                137.9             3.2           2  %
Depreciation and amortization                      5.5                  5.8            (0.3 )        (5 )%
Other operating (income) expense, net             (0.9 )                1.7            (2.6 )      (153 )%
Income from operations                            49.4                 33.5            15.9          47  %
Floor plan interest expense                       (3.0 )               (2.0 )           1.0          50  %
Other interest expense, net                       (8.6 )               (9.9 )          (1.3 )       (13 )%
Swap interest expense                             (1.3 )               (1.4 )          (0.1 )        (7 )%
Convertible debt discount amortization            (0.1 )               (0.1 )             -           -  %
Loss on extinguishment of long-term debt             -                 (0.4 )          (0.4 )         -  %
Total other expenses, net                        (13.0 )              (13.8 )          (0.8 )        (6 )%
Income before income taxes                        36.4                 19.7            16.7          85  %
INCOME TAX EXPENSE                                13.6                  7.4             6.2          84  %
INCOME FROM CONTINUING OPERATIONS                 22.8                 12.3            10.5          85  %
DISCONTINUED OPERATIONS, net of tax               (2.1 )                  -            (2.1 )         -  %
NET INCOME                                $       20.7         $       12.3     $       8.4          68  %
Income from continuing operations per
common share-Diluted                      $       0.72         $       0.38     $      0.34          89  %
Net income per common share-Diluted       $       0.66         $       0.38     $      0.28          74  %

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                                                            For the Three Months Ended September 30,
                                                                    2012                   2011
New vehicles                                                          56.3  %             52.6  %
Used retail vehicles                                                  23.5  %             25.7  %
Used vehicle wholesale                                                 4.5  %              4.8  %
Parts and service                                                     12.0  %             13.5  %
Finance and insurance, net                                             3.7  %              3.4  %
Total revenue                                                        100.0  %            100.0  %
New vehicles                                                          21.3  %             21.6  %
Used retail vehicles                                                  13.9  %             14.2  %
Used vehicle wholesale                                                (0.4 )%             (0.7 )%
Parts and service                                                     42.6  %             44.7  %
Finance and insurance, net                                            22.6  %             20.2  %
Total gross profit                                                   100.0  %            100.0  %
SG&A EXPENSES AS A PERCENTAGE OF GROSS PROFIT                         72.3  %             77.1  %

Net income and income from continuing operations increased by $8.4 million and $10.5 million, respectively, during the third quarter of 2012 as compared to the third quarter of 2011. The increase in income from continuing operations was primarily a result of (i) a $16.2 million (9%) increase in gross profit and (ii) a $2.6 million (153%) decrease in other operating expense, net, partially offset by a $3.2 million (2%) increase in SG&A expenses. Net income and income from continuing operations for the third quarter of 2011 were reduced by (i) $1.1 million, net of tax, due to expenses related to executive separation benefits,
(ii) a $0.2 million, net of tax, loss on the repurchase of $8.8 million of our 3% Senior Subordinated Convertible Notes due 2012 (the "3% Convertible Notes") and (iii) $0.2 million, net of tax, due to real estate related charges. The $16.2 million (9%) increase in total gross profit was driven by (i) an $8.0 million (22%) increase in F&I gross profit, (ii) a $3.3 million (4%) increase in parts and service gross profit and (iii) a $2.9 million (7%) increase in our gross profit from new vehicles. Our total gross profit margin decreased 80 basis points to 16.3%, primarily as a result of a mix shift to our lower margin new vehicle business. The $150.7 million (14%) increase in total revenue was primarily a result of a $123.9 million (22%) increase in new vehicle revenue and a $17.1 million (5%) increase in used vehicle revenue.

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New Vehicle-
                                               For the Three Months Ended
                                                     September 30,                Increase           %
                                                  2012             2011          (Decrease)        Change
                                                   (Dollars in millions, except for per vehicle data)
New vehicle revenue-same store(1)
Luxury                                       $       246.8     $    198.9     $       47.9            24  %
Mid-line import                                      332.1          255.3             76.8            30  %
Mid-line domestic                                     94.3           96.6             (2.3 )          (2 )%
Total new vehicle revenue-same store(1)              673.2          550.8            122.4            22  %
New vehicle revenue-acquisitions                       1.5              -
New vehicle revenue, as reported             $       674.7     $    550.8     $      123.9            22  %
Gross profit:
New vehicle gross profit-same store(1)
Luxury                                       $        18.3     $     15.2     $        3.1            20  %
Mid-line import                                       16.6           17.1             (0.5 )          (3 )%
Mid-line domestic                                      6.5            6.4              0.1             2  %
Total new vehicle gross profit-same store(1)          41.4           38.7              2.7             7  %
New vehicle gross profit-acquisitions                  0.2              -
New vehicle gross profit, as reported        $        41.6     $     38.7     $        2.9             7  %

                                               For the Three Months Ended
                                                     September 30,                Increase           %
                                                  2012             2011          (Decrease)        Change
New vehicle units:
New vehicle retail units-same store(1)
Luxury                                               5,074          4,046            1,028            25  %
Mid-line import                                     12,642          9,622            3,020            31  %
Mid-line domestic                                    2,595          2,469              126             5  %
Total new vehicle retail units-same store(1)        20,311         16,137            4,174            26  %
Fleet vehicles                                         537            700             (163 )         (23 )%
Total new vehicle units-same store(1)               20,848         16,837            4,011            24  %
New vehicle units-acquisitions                          20              -
New vehicle units-actual                            20,868         16,837            4,031            24  %

New Vehicle Metrics-
                                                    For the Three Months Ended
                                                          September 30,                                 %
                                                      2012               2011          Decrease       Change
Revenue per new vehicle sold-same store(1)      $     32,291         $    32,714     $    (423 )         (1 )%
Gross profit per new vehicle sold-same store(1) $      1,986         $     2,299     $    (313 )        (14 )%
New vehicle gross margin-same store(1)                   6.1 %               7.0 %        (0.9 )%       (13 )%


(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 $123.9 million (22%) increase in new vehicle revenue was primarily a result of an $76.8 million (30%) increase in revenue from our mid-line import brands and a $47.9 million (24%) increase in revenue from our luxury brands. Unit volumes for our mid-line import and luxury brands increased by 31% and 25%, respectively, resulting from improved inventory availability compared to depressed levels in the prior year following the natural disaster and related events in Japan and a general increase in consumer demand. New vehicle SAAR increased to 14.5 million for the third quarter of 2012, as compared

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to 12.7 million for the third quarter of 2011.
Total new vehicle gross profit increased by $2.9 million (7%), primarily driven by a $3.1 million (20%) increase in gross profit from our luxury brands. Our mid-line import brands, which experienced a 31% increase in unit volume, also experienced a 170 basis point decrease in gross profit margin when compared to the prior year period. Our same store gross profit per new vehicle sold decreased by $313 (14%), largely driven by a reduction in gross profit associated with our mid-line import vehicle sales, combined with a shift in our overall unit sales toward mid-line import brands when compared to the prior year period, when inventories of these brands were in short supply as a result of the natural disaster and related events in Japan. Our margins in the near future are expected to be primarily dependent upon market-based forces of supply and demand.

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Used Vehicle-
                                           For the Three Months Ended September
                                                           30,                                              %
                                                 2012                2011               Increase          Change
                                                     (Dollars in millions, except for per vehicle data)
Used vehicle retail revenues-same store(1) $      281.2         $      268.4       $           12.8           5 %
Used vehicle retail revenues-acquisitions           0.6                    -
Total used vehicle retail revenues                281.8                268.4                   13.4           5 %

Used vehicle wholesale revenues-same
store(1)                                           53.8                 50.1                    3.7           7 %
Used vehicle wholesale
revenues-acquisitions                                 -                    -
Total used vehicle wholesale revenues              53.8                 50.1                    3.7           7 %
Used vehicle revenue, as reported          $      335.6         $      318.5       $           17.1           5 %
Gross profit:
Used vehicle retail gross profit-same
store(1)                                   $       26.7         $       25.5       $            1.2           5 %
Used vehicle retail gross
profit-acquisitions                                 0.2                    -
Total used vehicle retail gross profit             26.9                 25.5                    1.4           5 %

Used vehicle wholesale gross profit-same
store(1)                                           (0.6 )               (1.3 )                  0.7          54 %
Used vehicle wholesale gross
profit-acquisitions                                (0.1 )                  -
Total used vehicle wholesale gross profit          (0.7 )               (1.3 )                  0.6          46 %
Used vehicle gross profit, as reported     $       26.2         $       24.2       $            2.0           8 %
Used vehicle retail units:
Used vehicle retail units-same store(1)          14,566               14,053                    513           4 %
Used vehicle retail units-acquisitions               19                    -
Used vehicle retail units-actual                 14,585               14,053                    532           4 %

Used Vehicle Metrics-
                                               For the Three Months Ended
                                                      September 30,                                %
                                                 2012               2011         Increase       Change
Revenue per used vehicle retailed-same
store(1)                                    $    19,305         $    19,099     $     206           1 %
Gross profit per used vehicle retailed-same
store(1)                                    $     1,833         $     1,815     $      18           1 %
Used vehicle retail gross margin-same
store(1)                                            9.5 %               9.5 %           - %         - %

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