NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(December 31, 2019, 2018, and 2017)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
We are one of the largest automotive retailers in the United States. As of December 31, 2019, we owned and operated 107 new vehicle franchises (88 dealership locations), representing 31 brands of automobiles, and 25 collision centers, in 17 metropolitan markets, within ten states. Our stores offer an extensive range of automotive products and services, including new and used vehicles, parts and services, which includes repair and maintenance services, replacement parts and collision repair services, and finance and insurance products. For the year ended December 31, 2019, our new vehicle revenue brand mix consisted of 45% imports, 34% luxury, and 21% domestic brands.
Our operating results are generally subject to seasonal variations. Demand for new vehicles is generally highest during the second, third, and fourth quarters of each year and, accordingly, we expect our revenues to generally be higher during these periods. In addition, we typically experience higher sales of luxury vehicles in the fourth quarter, which have higher average selling prices and gross profit per vehicle retailed. Revenues and operating results may be impacted significantly from quarter to quarter by changing economic conditions, vehicle manufacturer incentive programs, or adverse weather events.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"), and reflect the consolidated accounts of Asbury Automotive Group, Inc. and our wholly owned subsidiaries. All intercompany transactions have been eliminated in consolidation. If necessary, reclassifications of amounts previously reported have been made to the accompanying Consolidated Financial Statements in order to conform to current presentation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the periods presented. Actual results could differ materially from these estimates. Estimates and assumptions are reviewed quarterly, and the effects of any revisions are reflected in the consolidated financial statements in the period they are determined to be necessary. Significant estimates made in the accompanying Consolidated Financial Statements include, but are not limited to, those relating to inventory valuation reserves, reserves for chargebacks against revenue recognized from the sale of finance and insurance products, reserves for insurance programs, certain assumptions related to intangible and long-lived assets, and reserves for certain legal or similar proceedings relating to our business operations.
Cash and Cash Equivalents
Cash and cash equivalents include investments in money market accounts and short-term certificates of deposit, which have maturity dates of less than 90 days when purchased.
Contracts-In-Transit
Contracts-in-transit represent receivables from third-party finance companies for the portion of new and used vehicle purchase price financed by customers through sources arranged by us.
Inventories
Inventories are stated at the lower of cost and net realizable value. We use the specific identification method to value vehicle inventories and the "first-in, first-out" method ("FIFO") to account for our parts inventories. Our new vehicle sales histories have indicated that the vast majority of the new vehicles we sell are sold for, or in excess of, our cost to purchase those vehicles. Therefore, we generally do not maintain a reserve for new vehicle inventory. We maintain a reserve for used vehicle inventory where cost basis exceeds net realizable value. In assessing lower of cost and net realizable value for used vehicles, we consider (i) the aging of our used vehicles, (ii) historical sales experience of used vehicles, and (iii) current market conditions and trends in used vehicle sales. We also review and consider the following metrics related to used vehicle sales (both on a recent and longer-term historical basis): (i) days of supply in our used vehicle inventory, (ii) used vehicle units sold at less than original cost as a percentage of total used vehicles sold, and (iii) average vehicle selling price of used vehicle units sold at less than original cost. We then determine the appropriate level of reserve required to reduce our used vehicle inventory to the lower of cost and net realizable value, and record the resulting adjustment in the period in which we determine a loss has
occurred. The level of reserve determined to be appropriate for each reporting period is considered to be a permanent inventory write-down, and therefore is only released upon the sale of the related inventory.
We receive assistance from certain automobile manufacturers in the form of advertising and floor plan interest credits. Manufacturer advertising credits that are reimbursements of costs associated with specific advertising programs are recognized as a reduction of advertising expense in the period they are earned. All other manufacturer advertising and floor plan interest credits are accounted for as purchase discounts, and are recorded as a reduction of inventory and recognized as a reduction to New vehicle cost of sales in the accompanying Consolidated Statements of Income in the period the related vehicle is sold.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives. Depreciation is included in Depreciation and amortization on the accompanying Consolidated Statements of Income. Leasehold improvements are capitalized and amortized over the lesser of the remaining lease term or the useful life of the related asset. The ranges of estimated useful lives are as follows (in years):
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Buildings and improvements
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10-40
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Machinery and equipment
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5-10
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Furniture and fixtures
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3-10
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Company vehicles
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3-5
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Expenditures for major additions or improvements, which extend the useful lives of assets, are capitalized. Minor replacements, maintenance and repairs, which do not improve or extend the lives of such assets, are expensed as incurred. We capitalize interest on borrowings during the active construction period of capital projects. Capitalized interest is added to the cost of the assets and is depreciated over the estimated useful lives of the assets.
We review property and equipment for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. When we test our long-lived assets for impairment, we first compare the carrying amount of the underlying assets to their net recoverable value by reviewing the undiscounted cash flows expected from the use and eventual disposition of the underlying assets. If the carrying amount of the underlying assets is less than their net recoverable value, then we calculate an impairment equal to the excess of the carrying amount over the fair market value, and the impairment loss would be charged to operations in the period identified. We did not record an impairment of our property and equipment in 2019, 2018, and 2017.
Acquisitions
Acquisitions are accounted for under the acquisition method of accounting and the assets acquired and liabilities assumed are recorded at their fair value at the acquisition date. The results of operations of acquired dealerships are included in the accompanying Consolidated Statements of Income, commencing on the date of acquisition.
Goodwill and Other Intangible Assets
Goodwill represents the excess cost of an acquired business over the estimated fair market value of its identifiable net assets. We have determined that, based on how we integrate acquisitions into our business, how the components of our business share resources and interact with one another, and how we review the results of our operations, that we have several geographic market-based operating segments. We have determined that the dealerships in each of our operating segments are components that are aggregated into several geographic market-based reporting units for the purpose of testing goodwill for impairment, as they (i) have similar economic characteristics, (ii) offer similar products and services (all of our dealerships offer new and used vehicles, service, parts and third-party finance and insurance products), (iii) have similar customers, (iv) have similar distribution and marketing practices (all of our dealerships distribute products and services through dealership facilities that market to customers in similar ways), and (v) operate under similar regulatory environments.
Our only significant identifiable intangible assets, other than goodwill, are our rights under franchise agreements with manufacturers, which are recorded at an individual franchise level. The fair value of our manufacturer franchise rights are determined at the acquisition date, by discounting the projected cash flows specific to each franchise. We have determined that manufacturer franchise rights have an indefinite life, as there are no economic, contractual or other factors that limit their useful lives, and they are expected to generate cash flows indefinitely due to the historically long lives of the manufacturers' brand names. Furthermore, to the extent that any agreements evidencing our manufacturer franchise rights would expire, we expect that we would be able to renew those agreements in the ordinary course of business.
Goodwill and manufacturer franchise rights are deemed to have indefinite lives and therefore are not subject to amortization. We review goodwill and manufacturer franchise rights for impairment annually as of October 1st, or more often if events or circumstances indicate that impairment may have occurred. We are subject to financial statement risk to the extent that goodwill becomes impaired due to decreases in the fair value of our automotive retail business or manufacturer franchise rights become impaired due to decreases in the fair value of our individual franchises.
Debt Issuance Costs
Debt issuance costs are presented as a contra-liability within Current maturities of long-term debt or Long-term debt on our Consolidated Balance Sheets, except for debt issuance costs associated with our line-of-credit arrangements, which are presented as an asset within Other current assets or Other long-term assets on our Consolidated Balance Sheets. Debt issuance costs are amortized to Floor plan interest expense and Other interest expense, net in the accompanying Consolidated Statements of Income through maturity using the effective interest method or the straight-line method for our line-of-credit arrangements.
Derivative Instruments and Hedging Activities
From time to time, we utilize derivative financial instruments to manage our interest rate risk. The types of risks hedged are those relating to the variability of cash flows caused by fluctuations in interest rates. We document our risk management strategy and assess hedge effectiveness at each interest rate swaps inception and during the term of each hedge. Derivatives are reported at fair value on the accompanying Consolidated Balance Sheets.
The unrealized gain or losses on our hedges is reported as a component of Accumulated Other Comprehensive Loss on the accompanying Consolidated Balance Sheets, and reclassified to Other interest expense, net in the accompanying Consolidated Statements of Income in the period during which the hedged transaction affects earnings.
Insurance
We are self-insured for employee medical claims and maintain stop-loss insurance for large-dollar individual claims. We have high deductible insurance programs for workers compensation, property and general liability claims. We maintain and review our claim and loss history to assist in assessing our expected future liability for these claims. We also use professional service providers, such as account administrators and actuaries, to help us accumulate and assess this information. Provisions for retained losses and deductibles are made by charges to expense based upon periodic evaluations of the estimated ultimate liabilities on reported and unreported claims.
Revenue Recognition
Please refer to Note 2 "Revenue Recognition" within the accompanying Consolidated Financial Statements.
Internal Profit
Revenues and expenses associated with internal work performed by our parts and service departments on new and used vehicle inventory are eliminated in consolidation. The gross profit earned by our parts and service departments for internal work performed is included as a reduction of Parts and service cost of sales on the accompanying Consolidated Statements of Income upon the sale of the vehicle. The costs incurred by our new and used vehicle departments for work performed by our parts and service departments is included in either New vehicle cost of sales or Used vehicle cost of sales on the accompanying Consolidated Statements of Income, depending on the classification of the vehicle serviced. We eliminate the internal profit on vehicles that remain in inventory.
Share-Based Compensation
We record share-based compensation expense under the fair value method on a straight-line basis over the vesting period, unless the awards are subject to performance conditions, in which case we recognize the expense over the requisite service period of each separate vesting tranche. In addition, we account for the forfeiture of share-based awards as they occur.
Share Repurchases
Share repurchases may be made from time-to-time in open market transactions or through privately negotiated transactions
under the authorization approved by the Board of Directors. Periodically, the Company may retire repurchased shares of
common stock previously held by the Company as treasury stock. In accordance with our accounting policy, we allocate any
excess share repurchase price over par value between additional paid-in capital, which is limited to amounts initially recorded
for the same issue, and retained earnings.
During the year ended December 31, 2019, the Company retired 202,379 shares of its common stock repurchased pursuant to the Repurchase Program ("Retired Shares") and previously held by the Company as Treasury Shares in the amount of $15.3 million.
Earnings per Common Share
Basic earnings per common share is computed by dividing net income by the weighted-average common shares outstanding during the period. Diluted earnings per common share is computed by dividing net income by the weighted-average common shares and common share equivalents outstanding during the period. For all periods presented, there were no adjustments to the numerator necessary to compute diluted earnings per share.
Advertising
We expense costs of advertising as incurred and production costs when the advertising initially takes place, net of certain advertising credits and other discounts received from certain automobile manufacturers. Advertising expense from continuing operations totaled $34.4 million, $30.6 million and $30.3 million for the years ended December 31, 2019, 2018 and 2017, which was net of earned advertising credits of $21.1 million, $21.0 million, and $18.0 million, respectively, and is included in Selling, general, and administrative expense in the accompanying Consolidated Statements of Income.
Income Taxes
We use the liability method to account for income taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of differences between the carrying amounts of assets and liabilities and their respective tax basis using currently enacted tax rates. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period when the change is enacted. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion or all the deferred tax assets will not be realized.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Act. The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, a reduction in the U.S. federal corporate income tax rate from 35% to 21%. In 2017, we remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. The provisional amount recorded related to the remeasurement of our deferred tax balance resulted in a $7.9 million reduction to our net deferred tax liability as of December 31, 2017.
The staff of the U.S. Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 ("SAB 118") on December 22, 2017, which provided guidance on accounting for the income tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from December 22, 2017, the Tax Act enactment date, for companies to complete the accounting under ASC 740, Income Taxes ("ASC 740"). In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete.
During the third quarter of 2018, the IRS released Notice 2018-68, which clarified a number of changes made to Section 162(m) of the Code by the Tax Act. As a result of this new guidance, we recorded $0.6 million of additional income tax expense related to an adjustment to the deferred tax asset for certain components of share-based compensation. After considering the additional guidance issued by the U.S. Treasury Department, state tax authorities and other standard-setting bodies we have completed our accounting for the Tax Act.
Assets Held for Sale and Liabilities Associated with Assets Held for Sale
Certain amounts have been classified as Assets held for sale as of December 31, 2019 and 2018 in the accompanying Consolidated Balance Sheets. Assets and liabilities classified as held for sale include assets and liabilities associated with pending dealership disposals, real estate we are actively marketing to sell, and any related mortgage notes payable or other liabilities, if applicable. Classification as held for sale begins on the date that we have met all of the criteria for classification as held for sale.
At the time of classifying assets as held for sale, we compare the carrying value of these assets to estimates of fair value to assess for impairment. We compare the carrying value to estimates of fair value utilizing the assistance of third-party broker opinions of value and third-party desktop appraisals to assist in our fair value estimates related to real estate properties.
Statements of Cash Flows
Borrowings and repayments of floor plan notes payable to a lender unaffiliated with the manufacturer from which we purchase a particular new vehicle ("Non-Trade") and all floor plan notes payable relating to pre-owned vehicles (together
referred to as "Floor Plan Notes Payable—Non-Trade"), are classified as financing activities on the accompanying Consolidated Statements of Cash Flows, with borrowings reflected separately from repayments. The net change in floor plan notes payable to a lender affiliated with the manufacturer from which we purchase a particular new vehicle (collectively referred to as "Floor Plan Notes Payable—Trade") is classified as an operating activity on the accompanying Consolidated Statements of Cash Flows. Borrowings of floor plan notes payable associated with inventory acquired in connection with all acquisitions and repayments made in connection with all divestitures are classified as a financing activity in the accompanying Consolidated Statement of Cash Flows. Cash flows related to floor plan notes payable included in operating activities differ from cash flows related to floor plan notes payable included in financing activities only to the extent that the former are payable to a lender affiliated with the manufacturer from which we purchased the related inventory, while the latter are payable to a lender not affiliated with the manufacturer from which we purchased the related inventory.
Loaner vehicles account for a significant portion of Other current assets. We acquire loaner vehicles either with available cash or through borrowings from either our manufacturer affiliated lenders or through our senior secured credit agreement with Bank of America, as administrative agent, and the other agents and lenders party thereto (as amended, the "2019 Senior Credit Facility"). Loaner vehicles are initially used by our service department for only a short period of time (typically 6 to 12 months) before we seek to sell them. Therefore, we classify the acquisition of loaner vehicles in Other current assets and the borrowings and repayments of loaner vehicle notes payable in Accounts payable and accrued liabilities in the accompanying Consolidated Statements of Cash Flows. Loaner vehicles are depreciated over the service period to their estimated value. At the end of the loaner service period, loaner vehicles are transferred from Other current assets to used vehicle inventory. These transfers are reflected as non-cash transfers between Other current Assets and Inventory in the accompanying Consolidated Statements of Cash Flows.
Business and Credit Concentration Risk
Financial instruments, which potentially subject us to a concentration of credit risk, consist principally of cash deposits. We maintain cash balances at financial institutions with strong credit ratings. Generally, amounts maintained with these financial institutions are in excess of FDIC insurance limits.
We have substantial debt service obligations. As of December 31, 2019, we had total debt of $943.3 million, which excluded both $28.1 million mortgage notes payable classified as Liabilities associated with assets held for sale and floor plan notes payable, the debt premium on the 6.0% Senior Subordinated Notes due 2024 ("6.0% Notes"), and debt issuance costs. In addition, we and our subsidiaries have the ability to obtain additional debt from time to time to finance acquisitions, real property purchases, capital expenditures, share repurchases or for other purposes, although such borrowings are subject to the restrictions contained in the third amended and restated senior secured credit agreement with Bank of America, N.A. ("Bank of America"), as administrative agent, and the other lenders party thereto (the "2019 Senior Credit Facility"), the indenture governing our 6.0% Senior Subordinated Notes due 2024 (the "Indenture"), and our other debt instruments. We will have substantial debt service obligations, consisting of required cash payments of principal and interest, for the foreseeable future.
We are subject to operating and financial restrictions and covenants in certain of our leases and in our debt instruments, including the 2019 Senior Credit Facility, the Indentures, 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, 2019, manufacturers representing 5% or more of our revenues from new vehicle sales were as follows:
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Manufacturer (Vehicle Brands):
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% of Total
New Vehicle
Revenues
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American Honda Motor Co., Inc. (Honda and Acura)
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|
22
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%
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|
Toyota Motor Sales, U.S.A., Inc. (Toyota and Lexus)
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|
20
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%
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|
Nissan North America, Inc. (Nissan and Infiniti)
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|
11
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%
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|
Ford Motor Company (Ford and Lincoln)
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|
10
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%
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|
Mercedes-Benz USA, LLC (Mercedes-Benz, smart and Sprinter)
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7
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%
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BMW of North America, LLC (BMW and Mini)
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|
6
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%
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No other manufacturers individually accounted for more than 5% of our total new vehicle revenue for the year ended December 31, 2019.
Segment Reporting
Our operations are organized by management into geographic market-based dealership groups. Our Chief Operating Decision Maker is our Chief Executive Officer who manages the business, regularly reviews financial information and allocates resources at the geographic market level. The geographic operating segments have been aggregated into one reportable segment as their operations (i) have similar economic characteristics (our markets all have similar long-term average gross margins), (ii) offer similar products and services (all of our markets offer new and used vehicles, parts and service, and third-party finance and insurance products), (iii) have similar customers, (iv) have similar distribution and marketing practices (all of our markets distribute products and services through dealership facilities that market to customers in similar ways), and (v) operate under similar regulatory environments.
Recent Accounting Pronouncements
Effective January 1, 2019, the Company adopted the new lease accounting guidance in Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842) (“ASC 842”). For additional information, please refer to Note 18 "Leases" within the accompanying Notes to Consolidated Financial Statements for additional information.
Effective January 1, 2019, the Company adopted ASU No. 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income ("ASU 2018-02")." ASU 2018-02 allows entities to elect to reclassify the income tax effects resulting from the Tax Cuts and Jobs Act on items within accumulated other comprehensive income to retained earnings. The Company elected to reclassify $0.2 million related to the change in deferred taxes associated with our cash flow hedges from accumulated other comprehensive income to retained earnings. This reclassification was recognized as a cumulative effect adjustment in the Consolidated Statements of Shareholders' Equity.
On January 1, 2019, the Company adopted ASU No. 2017-12, "Derivatives and Hedging" (Topic 815): Targeted Improvements to Accounting for Hedging Activities ("ASU 2017-12"). This update is intended to simplify hedge accounting by better aligning how an entity's risk management activities and hedging relationships are presented in its financial statements and simplifies the application of hedge accounting guidance in certain situations. This update expands and refines hedge accounting for both non-financial and financial risk components and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. For cash flow hedges existing at the adoption date, this update required adoption on a modified retrospective basis with a cumulative-effect adjustment to retained earnings as of the effective date and the amendments to presentation guidance and disclosure requirements are required to be adopted prospectively. The adoption of this update did not have a material impact on our Consolidated Financial Statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments- Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"), which requires an entity to assess impairment of its financial instruments based on its estimate of expected credit losses versus the current incurred loss model. The provisions of ASU 2016-13 are effective for fiscal years beginning after December 15, 2019. Entities are required to apply these changes through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. We are in the process of finalizing our evaluation of the impact from the adoption of the provisions this ASU will have on our Consolidated Financial Statements; however, do not expect the impact from the adoption to be material.
2. REVENUE RECOGNITION
The Company satisfies performance obligations either over time or at a point in time as discussed in further detail below. Revenue is recognized at the time the related performance obligation is satisfied by transferring a promised good or performing a service to a customer. Sales and other taxes we collect concurrent with revenue-producing activities are excluded from revenue.
Disaggregation of Revenue
Revenue from contracts with customers consists of the following:
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For the year ended December 31,
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2019
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2018
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|
Revenue:
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New vehicle
|
$
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3,863.3
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|
$
|
3,788.7
|
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|
Used vehicle retail
|
1,941.3
|
|
|
1,783.3
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|
Used vehicle wholesale
|
190.3
|
|
|
189.1
|
|
|
New and used vehicle
|
5,994.9
|
|
|
5,761.1
|
|
|
Sale of vehicle parts and accessories
|
148.8
|
|
|
139.2
|
|
|
Vehicle repair and maintenance services
|
750.6
|
|
|
681.8
|
|
|
Parts and services
|
899.4
|
|
|
821.0
|
|
|
Finance and insurance, net
|
316.0
|
|
|
292.3
|
|
|
Total revenue
|
$
|
7,210.3
|
|
|
$
|
6,874.4
|
|
New vehicle and used vehicle retail
Revenue from the sale of new and used vehicles (which excludes sales and other taxes) is recognized when the terms of the customer contract are satisfied which generally occurs with the signing of the sales contract and transfer of control of the vehicle to the customer. Costs associated with incidental items that are immaterial in the context of the contract are accrued at the time of sale.
Used vehicle wholesale
Proceeds from the sale of these vehicles are recognized in used vehicle revenue upon transfer of control to end-users at auction.
Sale of vehicle parts and accessories
The Company recognizes revenue upon transfer of control to the customer which occurs at a point in time. When the Company performs shipping and handling activities after the transfer of control to the customer (e.g., when control transfers prior to delivery), they are considered as fulfillment activities, and accordingly, the costs are accrued for when the related revenue is recognized.
Vehicle repair and maintenance services
The Company provides vehicle repair and maintenance services to its customers pursuant to the terms and conditions included within the customer contract ("repair order"). Satisfaction of this performance obligation creates an asset with no alternative use for which an enforceable right to payment for performance to date exists within our contractual agreements. As such, the Company recognizes revenue over time as the Company satisfies its performance obligation. Additionally, the Company has determined that parts and labor are not individually distinct in the context of a repair order and therefore treated as a single performance obligation.
Finance and Insurance, net
We receive commissions from third-party lending and insurance institutions for arranging customer financing and from the sale of vehicle service contracts, guaranteed asset protection (known as "GAP") debt cancellation, and other insurance, to end-users. Finance and insurance commission revenue is recognized at the point of sale since our performance obligation is to arrange financing or facilitating the sale of a third party's products or services to our customers.
The Company's commission arrangements with third-party lenders and insurance administrators consists of fixed ("upfront") and variable consideration. Variable consideration includes commission chargebacks ("chargebacks") in the event a contract is prepaid, defaulted upon, or terminated by the end-user. The Company reserves for future chargebacks based on historical chargeback experience and the termination provisions of the applicable contract and these reserves are established in the same period that the related revenue is recognized.
We also participate in future profits pursuant to retrospective commission arrangements, which meet the definition of variable consideration, for certain insurance products associated with a third-party portfolio. The Company estimates the amount of variable consideration to be included in the transaction price based on historical payment trends and further constrains the variable consideration such that it is probable that a significant reversal of previously recognized revenue will not occur. In making these assessments the Company considers the likelihood and magnitude of a potential reversal of revenue and updates its assessment when uncertainties associated with the constraint are removed.
Contract Assets
Changes in contract assets during the period are reflected in the table below. Contract assets related to vehicle repair and maintenance services are transferred to receivables when a repair order is completed and invoiced to the customer.
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|
|
|
|
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Vehicle Repair and Maintenance Services
|
|
Finance and Insurance, net
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Total
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(In millions)
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Contract Assets (Current), January 1, 2019
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$
|
4.1
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|
|
$
|
10.6
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|
|
$
|
14.7
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|
|
Transferred to receivables from contract assets recognized at the beginning of the period
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(4.1
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)
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|
(3.3
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)
|
|
(7.4
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)
|
|
Increases related to revenue recognized, inclusive of adjustments to constraint, during the period
|
4.4
|
|
|
3.3
|
|
|
7.7
|
|
|
Contract Assets (Current), March 31, 2019
|
4.4
|
|
|
10.6
|
|
|
15.0
|
|
|
Transferred to receivables from contract assets recognized at the beginning of the period
|
(4.4
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)
|
|
(3.2
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)
|
|
(7.6
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)
|
|
Increases related to revenue recognized, inclusive of adjustments to constraint, during the period
|
4.8
|
|
|
4.6
|
|
|
9.4
|
|
|
Contract Assets (Current), June 30, 2019
|
4.8
|
|
|
12.0
|
|
|
16.8
|
|
|
Transferred to receivables from contract assets recognized at the beginning of the period
|
(4.8
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)
|
|
(2.6
|
)
|
|
(7.4
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)
|
|
Increases related to revenue recognized, inclusive of adjustments to constraint, during the period
|
4.9
|
|
|
2.1
|
|
|
7.0
|
|
|
Contract Assets (Current), September 30, 2019
|
4.9
|
|
|
11.5
|
|
|
16.4
|
|
|
Transferred to receivables from contract assets recognized at the beginning of the period
|
$
|
(4.9
|
)
|
|
$
|
(3.9
|
)
|
|
$
|
(8.8
|
)
|
|
Increases related to revenue recognized, inclusive of adjustments to constraint, during the period
|
$
|
4.8
|
|
|
$
|
4.7
|
|
|
$
|
9.5
|
|
|
Contract Assets (Current), December 31, 2019
|
$
|
4.8
|
|
|
$
|
12.3
|
|
|
$
|
17.1
|
|
3. ACQUISITIONS AND DIVESTITURES
Results of acquired dealerships are included in our accompanying Consolidated Statements of Income commencing on the date of acquisition. Our acquisitions are accounted for such that the assets acquired and liabilities assumed are recognized at their acquisition date fair values, with any excess of the consideration transferred over the estimated fair values of the identifiable net assets acquired recorded as goodwill. Goodwill is an asset representing operational synergies and future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. The fair value of our manufacturer franchise rights are determined as of the acquisition date, by discounting the projected cash flows specific to each franchise. Included in this analysis are market participant assumptions related to the cash flows directly attributable to the franchise rights, including year-over-year and terminal growth rates, working capital requirements, weighted average cost of capital, future gross margins, and future selling, general, and administrative expenses.
During the year ended December 31, 2019, we acquired the assets of nine franchises (five dealership locations) and one collision center in the Indianapolis, Indiana market and one franchise (one dealership location) in the Denver, Colorado market for a combined purchase price of $210.4 million. We funded these acquisitions with an aggregate of $153.9 million of cash and $55.3 million of floor plan borrowings for the purchase of the related new vehicle inventory. In the aggregate, these acquisitions included purchase price holdbacks of $1.2 million for potential indemnity claims made by us with respect to the acquired franchises. In addition to the acquisition amounts above, we released $0.8 million of purchase price holdbacks related to a prior year acquisition.
During the year ended December 31, 2018, we acquired the assets of one franchise (one dealership location) in the Indianapolis, Indiana market and two franchises (two dealership locations) in the Atlanta, Georgia market for a combined aggregate purchase price of $93.2 million. Consideration payable to fund these acquisitions included $68.6 million of cash, $22.7 million of floor plan borrowings for the purchase of the related new vehicle inventory, and purchase price holdbacks of $1.9 million for potential indemnity claims made by us with respect to the acquired franchises.
During the year ended December 31, 2017, we acquired the assets of two franchises (two dealership locations) and one collision center in the Indianapolis, Indiana market for an aggregate purchase price of $80.1 million. We funded these acquisitions with $55.0 million of cash and $25.1 million of floor plan borrowings for the purchase of the related new vehicle inventory.
Below is the allocation of purchase price for the acquisitions for the years ended December 31, 2019 and 2018. Goodwill and manufacturer franchise rights associated with our acquisitions will be deductible for federal and state income tax purposes ratably over a 15-year period.
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2019
|
|
2018
|
|
|
(In millions)
|
|
Inventory
|
$
|
70.9
|
|
|
$
|
27.3
|
|
|
Real estate
|
43.1
|
|
|
23.5
|
|
|
Property and equipment
|
4.5
|
|
|
0.6
|
|
|
Goodwill
|
25.9
|
|
|
20.4
|
|
|
Manufacturer franchise rights
|
65.3
|
|
|
19.9
|
|
|
Loaner vehicles
|
1.5
|
|
|
1.7
|
|
|
Liabilities assumed
|
(0.8
|
)
|
|
$
|
(0.2
|
)
|
|
Total purchase price
|
$
|
210.4
|
|
|
$
|
93.2
|
|
On December 11, 2019, we announced the acquisition of substantially all of the assets of the businesses of the Park Place Dealership family of entities (collectively, "Park Place") pursuant to that certain Asset Purchase Agreement, dated as of December 11, 2019, among the Company, Park Place and the other parties thereto (the "Asset Purchase Agreement"), and related agreements and transactions (collectively, the "Acquisition"). See Note 23 "Subsequent Events" of the Notes to Consolidated Financial Statements for more information
During the year ended December 31, 2019, we sold one franchise (one dealership location) and one collision center in the Houston, Texas market. The Company divested $30.1 million of assets, which primarily consisted of inventory and property and equipment, resulting in a pre-tax gain of $11.7 million, which is presented in our accompanying Consolidated Statements of Income as Gain on divestitures. The divested business would not be considered a significant subsidiary as defined in Rule 1-02(w) of Regulation S-X.
We did not divest any dealerships during the years ended December 31, 2018 and 2017.
4. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2019
|
|
2018
|
|
|
(In millions)
|
|
Vehicle receivables
|
$
|
44.8
|
|
|
$
|
45.7
|
|
|
Manufacturer receivables
|
50.4
|
|
|
51.2
|
|
|
Other receivables
|
42.4
|
|
|
34.7
|
|
|
Total accounts receivable
|
137.6
|
|
|
131.6
|
|
|
Less—Allowance for doubtful accounts
|
(1.4
|
)
|
|
(1.3
|
)
|
|
Accounts receivable, net
|
$
|
136.2
|
|
|
$
|
130.3
|
|
5. INVENTORIES
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2019
|
|
2018
|
|
|
(In millions)
|
|
New vehicles
|
$
|
802.6
|
|
|
$
|
867.2
|
|
|
Used vehicles
|
140.1
|
|
|
158.9
|
|
|
Parts and accessories
|
42.3
|
|
|
41.5
|
|
|
Total inventories
|
$
|
985.0
|
|
|
$
|
1,067.6
|
|
The lower of cost and net realizable value reserves reduced total inventory cost by $6.1 million as of December 31, 2019 and December 31, 2018. In addition to inventories shown above, we had $67.7 million of inventories classified as Assets held for sale on the accompanying Consolidated Balance Sheet as of December 31, 2019, associated with pending dealership disposals. As of December 31, 2019 and December 31, 2018, certain automobile manufacturer incentives reduced new vehicle inventory cost by $9.6 million and $10.1 million, respectively, and reduced new vehicle cost of sales from continuing operations for the years ended December 31, 2019, 2018, and 2017 by $45.7 million, $42.4 million, and $40.1 million, respectively.
6. ASSETS HELD FOR SALE
Assets and liabilities classified as held for sale include (i) assets and liabilities associated with pending dealership disposals,(ii) real estate not currently used in our operations that we are actively marketing to sell and (iii) the related mortgage notes payable, if applicable.
A summary of assets held for sale and liabilities associated with assets held for sale is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2019
|
|
2018
|
|
Assets:
|
|
|
|
|
Inventory
|
$
|
67.7
|
|
|
$
|
—
|
|
|
Loaners, net
|
3.0
|
|
|
—
|
|
|
Property and equipment, net
|
69.0
|
|
|
26.3
|
|
|
Operating lease right-of-use assets
|
6.9
|
|
|
—
|
|
|
Goodwill
|
5.3
|
|
|
—
|
|
|
Franchise rights
|
2.3
|
|
|
—
|
|
|
Total Assets held for sale
|
154.2
|
|
|
26.3
|
|
|
Liabilities:
|
|
|
|
|
Floor plan notes payable—trade
|
21.9
|
|
|
—
|
|
|
Floor plan notes payable—non-trade
|
40.9
|
|
|
—
|
|
|
Loaners/ Notes payable
|
3.1
|
|
|
—
|
|
|
Current maturities of long-term debt
|
0.3
|
|
|
—
|
|
|
Current maturities of operating leases
|
4.2
|
|
|
—
|
|
|
Long-term debt
|
27.8
|
|
|
—
|
|
|
Operating lease liabilities
|
2.7
|
|
|
—
|
|
|
Total Liabilities associated with assets held for sale
|
100.9
|
|
|
—
|
|
|
Net assets held for sale
|
$
|
53.3
|
|
|
$
|
26.3
|
|
As of December 31, 2019, there were seven franchises (six dealership locations) and one collision center pending disposition, with assets and liabilities totaling $115.3 million and $92.6 million, respectively. In January 2020, the Company's Board of Directors authorized Management's request for approval to divest of one dealership location. The Company is currently in negotiations with a potential buyer for this dealership.
Real estate assets held for sale not currently used in our operations and other real estate assets, totaled $38.9 million and $26.3 million as of December 31, 2019 and December 31, 2018, respectively. As of December 31, 2019 there was $8.3 million of mortgage payable and as of December 31, 2018, no liabilities associated with these real estate assets held for sale.
Additionally, during the years ended December 31, 2019 and 2018, we sold two vacant properties with a net book value of $14.6 million and two vacant properties with total net book values of $4.0 million, respectively.
We did not record any impairment expense associated with real estate properties that we were actively marketing to sell during the years ended December 31, 2019 or 2018.
7. OTHER CURRENT ASSETS
Other current assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2019
|
|
2018
|
|
|
(In millions)
|
|
Loaner vehicles
|
$
|
83.8
|
|
|
$
|
87.0
|
|
|
Contract assets (see Note 2)
|
17.1
|
|
|
14.7
|
|
|
Deposits
|
11.0
|
|
|
0.6
|
|
|
Prepaid expenses
|
5.8
|
|
|
5.9
|
|
|
Prepaid taxes
|
4.7
|
|
|
9.1
|
|
|
Other
|
6.6
|
|
|
4.9
|
|
|
Other current assets
|
$
|
129.0
|
|
|
$
|
122.2
|
|
8. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2019
|
|
2018
|
|
|
(In millions)
|
|
Land
|
$
|
343.8
|
|
|
$
|
330.4
|
|
|
Buildings and leasehold improvements
|
622.9
|
|
|
617.5
|
|
|
Machinery and equipment
|
99.8
|
|
|
94.8
|
|
|
Furniture and fixtures
|
63.9
|
|
|
62.2
|
|
|
Company vehicles
|
8.1
|
|
|
8.8
|
|
|
Construction in progress
|
42.4
|
|
|
30.1
|
|
|
Gross property and equipment
|
1,180.9
|
|
|
1,143.8
|
|
|
Less—Accumulated depreciation
|
(271.2
|
)
|
|
(257.7
|
)
|
|
Property and equipment, net (a)
|
$
|
909.7
|
|
|
$
|
886.1
|
|
______________________________
(a) Amounts reflected for Property and equipment, net as of December 31, 2019 and 2018, excluded $69.0 million and $26.3 million, respectively classified as Assets held for sale. In addition, Property and equipment, net as of December 31, 2019 and 2018 included finance and capital leases of $14.6 million and $2.3 million, respectively.
During the years ended December 31, 2019, 2018, and 2017, we capitalized $0.6 million, $0.5 million, and $0.2 million, respectively, of interest in connection with various capital projects to upgrade or remodel our facilities. Depreciation expense was $36.2 million, $33.7 million, and $32.1 million for the years ended December 31, 2019, 2018, and 2017, respectively.
9. GOODWILL AND INTANGIBLE FRANCHISE RIGHTS
Our acquisitions have resulted in the recording of goodwill and intangible franchise rights. Goodwill is an asset representing operational synergies and future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. Intangible franchise rights is an asset representing our rights under franchise agreements with vehicle manufacturers. The changes in goodwill and intangible franchise rights for the years ended December 31, 2019 and 2018 are as follows:
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
(In millions)
|
|
Balance as of December 31, 2017 (a)
|
$
|
160.8
|
|
|
Acquisitions
|
20.4
|
|
|
Balance as of December 31, 2018 (a)
|
181.2
|
|
|
Acquisitions
|
25.9
|
|
|
Divestitures
|
(0.1
|
)
|
|
Reclassified to assets held for sale
|
(5.3
|
)
|
|
Balance as of December 31, 2019 (a)
|
$
|
201.7
|
|
_____________________________
|
|
|
|
(a)
|
Net of accumulated impairment losses of $537.7 million recorded prior to the year ended December 31, 2017.
|
|
|
|
|
|
|
|
|
|
Intangible Franchise Rights
|
|
|
(In millions)
|
|
Balance as of December 31, 2017
|
$
|
49.6
|
|
|
Acquisitions
|
19.9
|
|
|
Impairments
|
(3.7
|
)
|
|
Balance as of December 31, 2018
|
$
|
65.8
|
|
|
Acquisitions
|
65.3
|
|
|
Impairments
|
(7.1
|
)
|
|
Reclassified to assets held for sale
|
(2.3
|
)
|
|
Balance as of December 31, 2019
|
$
|
121.7
|
|
Goodwill and intangible franchise rights are tested annually as of October 1st or more frequently in the event that facts and circumstances indicate a triggering event has occurred.
Goodwill impairment is recognized based on the difference between the carrying value of a reporting unit and its fair value. We elected to perform a qualitative assessment as of October 1, 2019 for all but one reporting unit for which we performed a quantitative assessment. We elected a qualitative assessment for our October 1, 2018 goodwill impairment testing and determined for both assessments as of October 1, 2019 and 2018, that it was more likely than not that the fair value exceeded the carrying value of our reporting units.
The quantitative impairment test for franchise rights includes comparison of the estimated fair value to the carrying value for each of our intangible franchise rights. The Company estimates fair value by using a discounted cash flow model (income approach) based on market participant assumptions related to the cash flows directly attributable to the franchise. These assumptions include year-over-year and terminal growth rates, working capital requirements, weighted average cost of capital, future gross margins, and future selling, general, and administrative expenses.
We elected to perform a quantitative assessment for our October 1, 2019 and 2018 franchise rights impairment testing. In connection with our testing, we identified the carrying values of certain of our intangible franchise rights exceeded fair value, and as a result, recognized $7.1 million and $3.7 million in pre-tax non-cash impairment charges during the years ended December 31, 2019 and 2018, respectively.
10. FLOOR PLAN NOTES PAYABLE—TRADE
We consider floor plan notes payable to a party that is affiliated with the entity from which we purchase our new vehicle inventory as Floor Plan Notes Payable—Trade on our Consolidated Balance Sheets. Floor plan notes payable—trade, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2019
|
|
2018
|
|
|
(In millions)
|
|
Floor plan notes payable—trade (a)
|
$
|
146.5
|
|
|
$
|
125.3
|
|
|
Floor plan notes payable offset account
|
(16.2
|
)
|
|
(11.3
|
)
|
|
Total floor plan notes payable—trade, net
|
$
|
130.3
|
|
|
$
|
114.0
|
|
____________________________
(a) Amounts reflected for floor plan notes payable—trade as of December 31, 2019, excluded $21.9 million classified as Liabilities associated with assets held for sale.
We have a floor plan facility with the Ford Motor Credit Company ("Ford Credit") to purchase new Ford and Lincoln vehicle inventory. Our floor plan facility with Ford Credit was amended in December 2019 to extend the maturity date from December 5, 2019 to May 31, 2020. This floor plan facility does not have a stated borrowing limitation.
We established a floor plan offset account with Ford Credit, that allows us to transfer cash as an offset to floor plan notes payable. These transfers reduce the amount of outstanding new vehicle floor plan notes payable that would otherwise accrue interest, while retaining the ability to transfer amounts from the offset account into our operating cash accounts within one to two days. As a result of using our floor plan offset account, we experience a reduction in Floor plan interest expense on our Consolidated Statements of Income.
The representations and covenants contained in the agreement governing our floor plan facility with Ford Credit are customary for financing transactions of this nature. Further, the agreement governing our floor plan facility with Ford Credit also provides for events of default that are customary for financing transactions of this nature, including cross-defaults to other material indebtedness. Upon the occurrence of an event of default, the Company could be required to immediately repay all outstanding amounts under our floor plan facility with Ford Credit.
11. FLOOR PLAN NOTES PAYABLE—NON-TRADE
We consider floor plan notes payable to a party that is not affiliated with the entity from which we purchase our new vehicle inventory as Floor Plan Notes Payable—Non-Trade on our Consolidated Balance Sheets. Floor plan notes payable—non-trade, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2019
|
|
2018
|
|
|
(In millions)
|
|
Floor plan notes payable—new non-trade
|
$
|
773.6
|
|
|
$
|
843.0
|
|
|
Floor plan notes payable—used non-trade
|
—
|
|
|
30.0
|
|
|
Floor plan notes payable offset account
|
(115.9
|
)
|
|
(20.9
|
)
|
|
Total floor plan notes payable—non-trade, net
|
$
|
657.7
|
|
|
$
|
852.1
|
|
____________________________
(a) Amounts reflected for floor plan notes payable—new non-trade as of December 31, 2019, excluded $40.9 million classified as Liabilities associated with assets held for sale.
On September 25, 2019, the Company and certain of its subsidiaries entered into a third amended and restated credit agreement with Bank of America, N.A. ("Bank of America"), as administrative agent, and the other lenders party thereto (the "2019 Senior Credit Facility"). The 2019 Senior Credit Facility amended and restated the Company's pre-existing second amended and restated credit agreement, dated as of July 25, 2016.
The 2019 Senior Credit Facility provides for the following, in each case subject to limitations on availability as set forth therein:
|
|
|
|
•
|
a $250.0 million revolving credit facility (the "Revolving Credit Facility") including a $50.0 million sub-limit for letters of credit;
|
|
|
|
|
•
|
a $1.04 billion new vehicle revolving floor plan facility (the "New Vehicle Floor Plan Facility"); and
|
|
|
|
|
•
|
a $160.0 million used vehicle revolving floor plan facility (the "Used Vehicle Floor Plan Facility").
|
Proceeds from borrowings under the 2019 Senior Credit Facility will be used, among other things, (i) to finance the purchase of new and used vehicles by the Company and certain of its subsidiaries, (ii) for working capital needs of the Company and certain of its subsidiaries, and (iii) for other general corporate purposes of the Company and certain of its subsidiaries.
Subject to compliance with certain conditions, the 2019 Senior Credit Agreement provides that we 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 facilities by up to $350.0 million in the aggregate without lender consent.
In addition, we have the ability to convert a portion of our availability under the Revolving Credit Facility to the New Vehicle Floor Plan Facility or the Used Vehicle Floor Plan Facility. The maximum amount we are allowed to convert is determined based on our aggregate revolving commitment under the Revolving Credit Facility, less $50.0 million. In addition, we are able to convert any amounts moved to the New Vehicle Floor Plan Facility or Used Vehicle Floor Plan Facility back to the Revolving Credit Facility. As of December 31, 2019, we converted $190.0 million of availability under our Revolving Credit Facility to our New Vehicle Floor Plan Facility. We converted this amount to take advantage of the lower commitment fee rates on our new vehicle floor plan facility when compared to our revolving credit facility.
In connection, with the New Vehicle Floor Plan Facility, we continue to maintain an offset account with Bank of America that allows us to transfer cash as an offset to floor plan notes payable. These transfers reduce the amount of outstanding new vehicle floor plan notes payable that would otherwise accrue interest, while retaining the ability to transfer amounts from the offset account into our operating cash accounts within one to two days. As a result of the use of our floor plan offset account, we experience a reduction in Floor plan interest expense on our Consolidated Statements of Income.
Borrowings under the 2019 Senior Credit Facility bear interest, at our option, based on the London Interbank Offered Rate ("LIBOR") or the Base Rate, in each case plus an Applicable Rate. The Base Rate is the highest of (i) the Federal Funds Rate plus 0.50%, (ii) the Bank of America prime rate, and (iii) one month LIBOR plus 1.00%. Applicable Rate means with respect to the Revolving Credit Facility, a range from 1.00% to 2.00% for LIBOR loans and 0.15% to 1.00% for Base Rate loans, in each case based on the Company's consolidated total lease adjusted leverage ratio. Borrowings under the New Vehicle Floorplan Facility bear interest, at our option, based on LIBOR plus 1.10% or the Base Rate plus 0.10%. Borrowings under the Used Vehicle Floorplan Facility bear interest, at our option, based on LIBOR plus 1.40% or the Base Rate plus 0.40%.
In addition to the payment of interest on borrowings outstanding under the 2019 Senior Credit Facility, we are required to pay a quarterly commitment fee on total unused commitments thereunder. The fee for unused commitments under the Revolving Credit Facility is between 0.15% and 0.40% per year, based on the Company's total lease adjusted leverage ratio, and the fee for unused commitments under the New Vehicle Facility Floor Plan and the Used Vehicle Facility Floor Plan Facility is 0.15% per year.
The 2019 Senior Credit Facility matures, and all amounts outstanding thereunder will be due and payable, on September 25, 2024.
The representations and covenants contained in the 2019 Senior 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 2019 Senior 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 2019 Senior 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 Floorplan Facility could be, or result in, an event of default under the New Vehicle Floorplan Facility, and vice versa. Upon the occurrence of an event of default, the Company could be required to immediately repay all amounts outstanding under the applicable facility.
We have established a floor plan notes payable offset account with Ford Motor Credit Company that allows us to transfer cash to the account as an offset of our outstanding Floor Plan Notes Payable—Trade. Additionally, we have a similar floor plan offset account with Bank of America that allows us to offset our outstanding Floor Plan Notes Payable—Non-Trade. These
accounts allow us to transfer cash to reduce the amount of outstanding floor plan notes payable that would otherwise accrue interest, while retaining the ability to transfer amounts from the floor plan offset accounts into our operating cash accounts within one to two days. As of December 31, 2019 and December 31, 2018 we had $132.1 million and $32.2 million, respectively, in these floorplan offset accounts.
See the "Representations and Covenants" section below under our "Long-Term Debt" footnote for a description of the representations, covenants and events of default contained in the 2019 Senior Credit Facility.
12. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2019
|
|
2018
|
|
|
(In millions)
|
|
Accounts payable
|
$
|
81.7
|
|
|
$
|
81.9
|
|
|
Loaner vehicles notes payable (a)
|
83.9
|
|
|
87.5
|
|
|
Accrued compensation
|
30.5
|
|
|
27.6
|
|
|
Accrued finance and insurance chargebacks
|
22.9
|
|
|
23.0
|
|
|
Accrued insurance
|
25.3
|
|
|
20.9
|
|
|
Taxes payable
|
30.5
|
|
|
23.7
|
|
|
Accrued advertising
|
5.1
|
|
|
3.9
|
|
|
Accrued interest
|
6.0
|
|
|
6.6
|
|
|
Other
|
22.8
|
|
|
23.3
|
|
|
Accounts payable and accrued liabilities
|
$
|
308.7
|
|
|
$
|
298.4
|
|
____________________________
(a) Amounts reflected for Loaner vehicles notes payable as of December 31, 2019, excluded $3.1 million classified as Liabilities associated with assets held for sale.
13. LONG-TERM DEBT
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2019
|
|
2018
|
|
(In millions)
|
|
6.0% Senior Subordinated Notes due 2024
|
$
|
600.0
|
|
|
$
|
600.0
|
|
|
Mortgage notes payable bearing interest at fixed rates (the weighted average interest rates were 5.3% and 5.2% for the years ended December 31, 2019 and 2018, respectively)
|
100.5
|
|
|
132.2
|
|
|
2018 BofA Real Estate Facility (a)
|
88.3
|
|
|
25.7
|
|
|
2018 Wells Fargo Master Loan Facility
|
25.0
|
|
|
25.0
|
|
|
2013 BofA Real Estate Facility
|
35.5
|
|
|
40.8
|
|
|
2015 Wells Fargo Master Loan Facility (b)
|
76.8
|
|
|
83.3
|
|
|
Finance lease liability
|
17.2
|
|
|
3.1
|
|
|
Total debt outstanding
|
943.3
|
|
|
910.1
|
|
|
Add—unamortized premium on 6.0% Senior Subordinated Notes due 2024
|
5.1
|
|
|
6.0
|
|
|
Less—debt issuance costs
|
(9.0
|
)
|
|
(10.8
|
)
|
|
Long-term debt, including current portion
|
939.4
|
|
|
905.3
|
|
|
Less—current portion, net of debt issuance costs
|
(32.4
|
)
|
|
(38.8
|
)
|
|
Long-term debt
|
$
|
907.0
|
|
|
$
|
866.5
|
|
____________________________
(a) Amounts reflected for the 2018 BofA Real Estate Facility as of December 31, 2019, exclude $26.6 million classified as Liabilities associated with assets held for sale.
(b) Amounts reflected for the 2015 Wells Fargo Master Loan Facility as of December 31, 2019, exclude $1.5 million classified as Liabilities associated with assets held for sale.
The aggregate maturities of long-term debt as of December 31, 2019 are as follows (in millions):
|
|
|
|
|
|
|
|
2020
|
$
|
35.7
|
|
|
2021
|
35.0
|
|
|
2022
|
33.2
|
|
|
2023
|
53.2
|
|
|
2024
|
648.6
|
|
|
Thereafter
|
165.7
|
|
|
Total maturities of long-term debt
|
$
|
971.4
|
|
____________________________
Includes amounts classified as Liabilities associated with assets held for sale.
6.0% Senior Subordinated Notes due 2024
In December 2014, we completed a refinancing of certain of our long-term debt, which included the issuance of $400.0 million of 6.0% Notes, the proceeds of which were used to redeem the $300.0 million in outstanding aggregate principal of our 8.375% Senior Subordinated Notes due 2020 (the "8.375% Notes").
In October 2015, we completed an add-on issuance of $200.0 million aggregate principal amount of our 6.0% Notes at a price of 104.25% of par, plus accrued interest from June 15, 2015 (the "October 2015 Offering"). After deducting the initial purchasers' discounts and expenses we received net proceeds of approximately $210.2 million from this offering. The $8.5 million premium paid by the initial purchasers of the 6.0% Notes was recorded as a component of Long-Term Debt on our Consolidated Balance Sheet and is being amortized as a reduction of interest expense over the remaining term of the 6.0% Notes. Based on the amortization of the debt premium, the effective interest rate on the 6.0% Notes issued in the October 2015 Offering is 5.41%. In addition, we capitalized $3.8 million of costs associated with the issuance and sale of the 6.0% Notes, of which $2.8 million of underwriters fees were withheld from the proceeds received from the issuance. These costs are being amortized to interest expense over the remaining term of the 6.0% Notes using the effective interest method.
We are a holding company with no independent assets or operations. For all relevant periods presented, our 6.0% Notes have been fully and unconditionally guaranteed, on a joint and several basis, by substantially all of our subsidiaries. Any subsidiaries that have not guaranteed such notes are "minor" (as defined in Rule 3-10(h) of Regulation S-X). As of December 31, 2019, there were no significant restrictions on the ability of our subsidiaries to distribute cash to us or our guarantor subsidiaries.
Mortgage Notes Payable
We have multiple mortgage agreements with finance companies affiliated with our vehicle manufacturers ("captive mortgages") and other lenders. As of December 31, 2019 and 2018, we had total mortgage notes payable outstanding of $100.5 million and $132.2 million, respectively, which are collateralized by the associated real estate.
2018 BofA Real Estate Facility
On November 13, 2018, we entered into a real estate term loan credit agreement (as amended, restated or supplemented from time to time, the “2018 BofA Real Estate Credit Agreement”) with Bank of America, as lender, providing for term loans in an aggregate amount not to exceed $128.1 million, subject to customary terms and conditions (the “2018 BofA Real Estate Facility”). Our right to make draws under the 2018 BofA Real Estate Facility terminated on November 13, 2019. Term loans under our 2018 BofA Real Estate Facility bear interest, at our option, based on LIBOR plus 1.90% or the Base Rate (as described below) plus 0.50%. 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 November 13, 2025. Borrowings under the 2018 BofA Real Estate Facility are guaranteed by each of our operating dealership subsidiaries whose real estate is financed under the 2018 BofA Real Estate Facility, and are collateralized by first priority liens, subject to certain permitted exceptions, on all of the real property financed thereunder.
As of December 31, 2019 and 2018, we had $88.3 million and $25.7 million, respectively, in term loans outstanding under the 2018 BofA Real Estate Facility.
2018 Wells Fargo Master Loan Facility
On November 16, 2018, certain of our subsidiaries entered into a master loan agreement (the “2018 Wells Fargo Master Loan Agreement” and, together with the 2013 BofA Real Estate Credit Agreement, the 2015 Wells Fargo Master Loan Agreement and the 2018 BofA Real Estate Agreement, the “Existing Real Estate Credit Agreements”) with Wells Fargo Bank, National Association, as lender, which provides for term loans to certain of our subsidiaries that are borrowers under the Wells Fargo Master Loan Agreement in an aggregate amount not to exceed $100.0 million (the "Wells Fargo Master Loan Facility"), subject to customary terms and conditions (the “2018 Wells Fargo Master Loan Facility” and, together with the 2013 BofA Real Estate Facility, the 2015 Wells Fargo Master Loan Facility and the 2018 BofA Real Estate Facility, the “Existing Real Estate Facilities”). Our right to make draws under the 2018 Wells Fargo Master Loan Facility will terminate on June 30, 2020. Term loans under the 2018 Wells Fargo Master Loan Facility bear interest based on LIBOR plus an applicable margin based on a pricing grid ranging from 1.50% per annum to 1.85% per annum based on our consolidated total lease adjusted leverage ratio. We are required to make quarterly principal payments with respect to the initial amount of each loan in 108 equal monthly principal payments based on a hypothetical 19 year amortization schedule, with a balloon repayment of the outstanding principal amount of loans due on December 1, 2028. Borrowings under the 2018 Wells Fargo Master Loan Facility can be voluntarily prepaid in whole or in part any time without premium or penalty. Borrowings under the 2018 Wells Fargo Master Loan Facility are guaranteed by us pursuant to an unconditional guaranty, and all of the real property financed by any of our operating dealership subsidiaries under the 2018 Wells Fargo Master Loan Facility is collateralized by first priority liens, subject to certain permitted exceptions.
As of December 31, 2019 and 2018, we had $25.0 million outstanding borrowings under the 2018 Wells Fargo Master Loan Facility.
2013 BofA Real Estate Facility
On September 26, 2013, we entered into a real estate term loan credit agreement (the “2013 BofA Real Estate Credit Agreement”) with Bank of America, N.A. (“Bank of America”), as lender, providing for term loans in an aggregate amount not to exceed $75.0 million, subject to customary terms and conditions (the “2013 BofA Real Estate Facility”). Term loans under our 2013 BofA Real Estate Facility bear interest, at our option, based on LIBOR plus 1.50% or the Base Rate (as described below) plus 0.50%. 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%. Our right to make draws under the 2013 BofA Real Estate Facility terminated on December 26, 2013. 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. Borrowings under the 2013 BofA Real Estate Facility are guaranteed by each of our operating dealership subsidiaries whose real estate is financed under the 2013 BofA Real Estate Facility, and are collateralized by first priority liens, subject to certain permitted exceptions, on all of the real property financed thereunder.
As of December 31, 2019 and 2018, we had $35.5 million and $40.8 million, respectively, in term loans outstanding under the 2013 BofA Real Estate Facility.
2015 Wells Fargo Master Loan Facility
On February 3, 2015, certain of our subsidiaries entered into an amended and restated master loan agreement (as amended, restated or supplemented from time to time, the “2015 Wells Fargo Master Loan Agreement”) with Wells Fargo Bank, National Association (“Wells Fargo”), as lender, which provides form term loans to certain of our subsidiaries that are borrowers under the 2015 Wells Fargo Master Loan Agreement in an aggregate amount not to exceed $100.0 million (the “2015 Wells Fargo Master Loan Facility”). Our right to make draws under the 2015 Wells Fargo Master Loan Facility terminated on February 1, 2016. Term loans under the 2015 Wells Fargo Master Loan Facility bear interest based on LIBOR plus 1.85%. We are required to make quarterly principal payments with respect to the initial amount of each loan in 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. Borrowings under the 2015 Wells Fargo Master Loan Facility can be voluntarily prepaid in whole or in part any time without premium or penalty. Borrowings under the 2015 Wells Fargo Master Loan Facility are guaranteed by us pursuant to an unconditional guaranty, and all of the real property financed by any of our operating dealership subsidiaries under the 2015 Wells Fargo Master Loan Facility is collateralized by first priority liens, subject to certain permitted exceptions.
As of December 31, 2019 and 2018, we had $76.8 million and $83.3 million, respectively, outstanding under the 2015 Wells Fargo Master Loan Facility.
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, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
As of December 31, 2018
|
|
Mortgage Agreement
|
|
Aggregate Principal Outstanding
|
|
Carrying Value of Collateralized Related Real Estate
|
|
Maturity Dates
|
|
Aggregate Principal Outstanding
|
|
Carrying Value of Collateralized Related Real Estate
|
|
Maturity Dates
|
|
Captive mortgages
|
|
$
|
80.8
|
|
|
$
|
182.1
|
|
|
2020-2024
|
|
$
|
111.6
|
|
|
$
|
185.5
|
|
|
2019-2024
|
|
Other mortgage debt
|
|
19.7
|
|
|
43.9
|
|
|
2020-2022
|
|
20.6
|
|
|
43.3
|
|
|
2020-2022
|
|
2018 BofA Real Estate Facility (a)
|
|
88.3
|
|
|
123.6
|
|
|
2025
|
|
25.7
|
|
|
137.2
|
|
|
2025
|
|
2018 Wells Fargo Master Loan Facility
|
|
25.0
|
|
|
113.7
|
|
|
2028
|
|
25.0
|
|
|
114.3
|
|
|
2028
|
|
2013 BofA Real Estate Facility
|
|
35.5
|
|
|
74.6
|
|
|
2023
|
|
40.8
|
|
|
82.2
|
|
|
2023
|
|
2015 Wells Fargo Master Loan Facility (b)
|
|
76.8
|
|
|
120.6
|
|
|
2025
|
|
83.3
|
|
|
130.2
|
|
|
2025
|
|
Total mortgage debt
|
|
$
|
326.1
|
|
|
$
|
658.5
|
|
|
|
|
$
|
307.0
|
|
|
$
|
692.7
|
|
|
|
____________________________
(a) Amounts reflected for the 2018 BofA Real Estate Facility as of December 31, 2019, exclude $26.6 million classified as Liabilities associated with assets held for sale.
(b) Amounts reflected for the 2015 Wells Fargo Master Loan Facility as of December 31, 2019, exclude $1.5 million classified as Liabilities associated with assets held for sale.
Revolving Credit Facility
As discussed above under our "Floor Plan Notes Payable—Non-Trade" footnote, the 2019 Senior Credit Facility includes a $250.0 million Revolving Credit Facility. We may request Bank of America to issue letters of credit on our behalf thereunder up to $50.0 million. Availability under the Revolving Credit Facility is limited by borrowing base calculations. Availability is reduced on a dollar-for-dollar basis by the aggregate face amount of any outstanding letters of credit. As of December 31, 2019, we converted $190.0 million of borrowing capacity from our Revolving Credit Facility to our New Vehicle Revolving Floor Plan Facility, resulting in $60.0 million of borrowing capacity. In addition, we had $12.7 million in outstanding letters of credit, resulting in $47.3 million of borrowing availability as of December 31, 2019. Proceeds from borrowings from time to time under the revolving credit facility may be used for among other things, acquisitions, working capital and capital expenditures.
Borrowings under the 2019 Senior Credit Facility bear interest, at our option, based on LIBOR or the Base Rate, in each case plus an Applicable Rate. The Base Rate is the highest of (i) the Federal Funds Rate plus 0.50%, (ii) the Bank of America prime rate, and (iii) one month LIBOR plus 1.00%. Applicable Rate means with respect to the Revolving Credit Facility, (i) until the Company delivers a certificate with respect to its consolidated total lease adjusted leverage ratio as of September 30, 2019 to Bank of America, as administrative agent, 1.25% for LIBOR loans and 0.25% for Base Rate loans and (ii) thereafter a range from 1.00% to 2.00% for LIBOR loans and 0.15% to 1.00% for Base Rate loans, in each case based on the Company's consolidated total lease adjusted leverage ratio. Borrowings under the New Vehicle Floorplan Facility bear interest, at our option, based on LIBOR plus 1.10% or the Base Rate plus 0.10%. Borrowings under the Used Vehicle Floorplan Facility bear interest, at our option, based on LIBOR plus 1.40% or the Base Rate plus 0.40%.
Stock Repurchase and Dividend Restrictions
The 2019 Senior Credit Facility and the Indenture currently allow for restricted payments without limit so long as our consolidated total leverage ratio (as defined in the 2019 Senior Credit Facility and the Indenture) is not greater than 3.0 to 1.0 after giving effect to such proposed restricted payments. Restricted payments generally include items such as dividends and share repurchases, and solely with respect to the Indenture, unscheduled repayments of subordinated debt, or the making of certain investments. In the event that our consolidated total leverage ratio does (or would) exceed 3.0 to 1.0, the 2019 Senior Credit Facility and the Indenture would then also allow for restricted payments under the following mutually exclusive parameters, subject to certain exclusions:
|
|
|
|
•
|
Share repurchases in an aggregate amount not to exceed $20.0 million in any fiscal year;
|
|
|
|
|
•
|
General restricted payments allowance of $150.0 million; and
|
|
|
|
|
•
|
Subject to our continued compliance with a minimum consolidated current ratio, a consolidated fixed charge coverage ratio and a maximum consolidated total lease adjusted leverage ratio, in each case as set out in the Indenture, restricted payments capacity additions (or subtractions if negative) equal to (i) 50% of our net income (as defined in the 2019 Senior Credit Facility and the Indenture beginning on October 1, 2014 and ending on the date of the most recently completed fiscal quarter (the "Measurement Period"), plus (ii) 100% of any cash proceeds we receive from the sale of equity interests during the Measurement Period, minus (iii) the dollar amount of share repurchases made and dividends paid on or after October 1, 2014, subject to certain exceptions.
|
Representations and Covenants
We are subject to a number of covenants in our various debt and lease agreements, including those described below. We were in compliance with all of our covenants throughout 2019. 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 agreement governing the 2019 Senior Credit Facility are customary for financing transactions of this nature including, among others, a requirement to comply with a minimum consolidated current ratio, minimum consolidated fixed charge coverage ratio and maximum consolidated total lease adjusted leverage ratio, in each case as set out in the agreement governing the 2019 Senior Credit Facility. In addition, certain other covenants could restrict the Company's ability to incur additional debt, pay dividends or acquire or dispose of assets.
The agreement governing the 2019 Senior Credit Facility also provides for events of default that are customary for financing transactions of this nature, including cross-defaults to other material indebtedness. In certain instances, an event of default under either the Revolving Credit Facility or the Used Vehicle Floor Plan Facility could be, or result in, an event of default under the New Vehicle Floor Plan Facility, and vice versa. Upon the occurrence of an event of default, the Company could be required to immediately repay all amounts outstanding under the applicable facility.
The representations and covenants contained in the agreement governing the 2019 Senior Credit Facility are customary for financing transactions of this nature including, among others, a requirement to comply with a minimum consolidated current ratio, minimum consolidated fixed charge coverage ratio and maximum consolidated total lease adjusted leverage ratio, in each case as set out in the agreement governing the 2019 Senior Credit Facility. In addition, certain other covenants could restrict the Company's ability to incur additional debt, pay dividends or acquire or dispose of assets.
The agreement governing the 2019 Senior Credit Facility also provides for events of default that are customary for financing transactions of this nature, including cross-defaults to other material indebtedness. In certain instances, an event of default under either the Revolving Credit Facility or the Used Vehicle Floor Plan Facility could be, or result in, an event of default under the New Vehicle Floor Plan Facility, and vice versa. Upon the occurrence of an event of default, the Company could be required to immediately repay all amounts outstanding under the applicable facility.
The representations and covenants contained in the 2018 BofA 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 2018 BofA Real Estate Credit Agreement. In addition, certain other covenants could restrict our ability to incur additional debt, pay dividends or acquire or dispose of assets. The 2018 BofA Real Estate Credit Agreement also provides for events of default that are customary for financing transactions of this nature, including cross-defaults to other material indebtedness. Upon the occurrence of an event of default, we could be required by the 2018 BofA Real Estate Credit Agreement to immediately repay all amounts outstanding thereunder.
The representations, warranties and covenants contained in the 2018 Wells Fargo Master Loan Agreement 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 addition, certain other covenants could restrict our ability to incur additional debt, pay dividends or acquire or dispose of assets. The 2018 Wells Fargo 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, we could be required by the 2018 Wells Fargo Master Loan Facility to immediately repay all amounts outstanding thereunder.
The representations, warranties and covenants contained in the 2015 Wells Fargo Master Loan Agreement 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 addition, certain other covenants could restrict our ability to incur additional debt, pay dividends or acquire or dispose of assets. The 2015 Wells Fargo 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, we could be required by the 2015 Wells Fargo Master Loan Facility to immediately repay all amounts outstanding thereunder.
The representations and covenants contained in the 2013 BofA 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 2013 BofA Real Estate Credit Agreement. In addition, certain other covenants could restrict our ability to incur additional debt, pay dividends or acquire or dispose of assets. The 2018 BofA Real Estate Credit Agreement also provides for events of default that are customary for financing transactions of this nature, including cross-defaults to other material
indebtedness. Upon the occurrence of an event of default, we could be required by the 2013 BofA Real Estate Credit Agreement to immediately repay all amounts outstanding thereunder.
14. FINANCIAL INSTRUMENTS AND FAIR VALUE
In determining fair value, we use various valuation approaches, including market and income approaches. Accounting standards establish a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from independent sources. Unobservable inputs are inputs that reflect our assumptions about the assumptions market participants would use in pricing the asset or liability, developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs as follows:
Level 1-Valuations based on quoted prices in active markets for identical assets or liabilities that we have the ability to access.
Level 2-Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly. Assets and liabilities utilizing Level 2 inputs include interest rate swap instruments, exchange-traded debt securities that are not actively traded or do not have a high trading volume, mortgage notes payable, and certain real estate properties on a non-recurring basis.
Level 3-Valuations based on inputs that are unobservable and significant to the overall fair value measurement. Asset and liability measurements utilizing Level 3 inputs include those used in estimating the fair value of certain non-financial assets and non-financial liabilities in purchase acquisitions and those used in the assessment of impairment for goodwill and intangible franchise rights.
The availability of observable inputs can vary and is affected by a wide variety of factors. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment required to determine fair value is greatest for instruments categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed is determined based on the lowest level input that is significant to the fair value measurement.
Fair value is a market-based exit price measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, our assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. We use inputs that are current as of the measurement date, including during periods of significant market fluctuations.
Financial instruments consist primarily of cash and cash equivalents, contracts-in-transit, accounts receivable, cash surrender value of corporate-owned life insurance policies, accounts payable, floor plan notes payable, subordinated long-term debt, mortgage notes payable, and interest rate swap instruments. The carrying values of our financial instruments, with the exception of subordinated long-term debt and mortgage notes payable, approximate fair value due to (i) their short-term nature, (ii) recently completed market transactions, or (iii) existence of variable interest rates, which approximate market rates. The fair value of our subordinated long-term debt is based on reported market prices in an inactive market that reflects Level 2 inputs. We estimate the fair value of our mortgage notes payable using a present value technique based on current market interest rates for similar types of financial instruments that reflect Level 2 inputs.
A summary of the carrying values and fair values of our 6.0% Notes and our mortgage notes payable is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2019
|
|
2018
|
|
|
(In millions)
|
|
Carrying Value:
|
|
|
|
|
6.0% Senior Subordinated Notes due 2024
|
$
|
598.8
|
|
|
$
|
606.0
|
|
|
Mortgage notes payable (a)
|
323.4
|
|
|
307.0
|
|
|
Total carrying value
|
$
|
922.2
|
|
|
$
|
913.0
|
|
|
|
|
|
|
|
Fair Value:
|
|
|
|
|
6.0% Senior Subordinated Notes due 2024
|
$
|
619.5
|
|
|
$
|
570.0
|
|
|
Mortgage notes payable (a)
|
364.2
|
|
|
306.7
|
|
|
Total fair value
|
$
|
983.7
|
|
|
$
|
876.7
|
|
____________________________
(a) Excludes amounts classified as Liabilities associated with assets held for sale.
Interest Rate Swap Agreements
In June 2015, we entered into an interest rate swap agreement with a notional principal amount of $100.0 million. This swap was designed to provide a hedge against changes in variable rate cash flows regarding fluctuations in the one month LIBOR, through maturity in February 2025. The notional values of this swap as of December 31, 2019 and 2018, were $79.8 million and $85.1 million, respectively, and the notional value will reduce over its remaining term to $53.1 million at maturity.
In November 2013, we entered into an interest rate swap agreement with a notional principal amount of $75.0 million. This swap was designed to provide a hedge against changes in variable rate cash flows regarding fluctuations in the one month LIBOR, through maturity in September 2023. The notional values of this swap as of December 31, 2019 and 2018, were $52.7 million and $56.5 million, respectively, and the notional value will reduce over its remaining term to $38.7 million at maturity.
The fair value of cash flow swaps is calculated as the present value of expected future cash flows, determined on the basis of forward interest rates and present value factors. Fair value estimates reflect a credit adjustment to the discount rate applied to all expected cash flows under the swaps. Other than this input, all other inputs used in the valuation for these swaps are designated to be Level 2 fair values. The fair value of our swaps for the years ended December 31, 2019 and 2018, reflect a liability of $3.8 million and an asset of $0.6 million, respectively.
The following table provides information regarding the fair value of our interest rate swap agreements and the impact on the Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2019
|
|
2018
|
|
|
(In millions)
|
|
Other current liabilities/(assets)
|
$
|
0.9
|
|
|
$
|
(0.2
|
)
|
|
Other long-term liabilities/(assets)
|
2.9
|
|
|
(0.4
|
)
|
|
Total fair value
|
$
|
3.8
|
|
|
$
|
(0.6
|
)
|
Both of our interest rate swaps qualify for cash flow hedge accounting treatment. These interest rate swaps are marked to market at each reporting date and any unrealized gain or losses are included in accumulated other comprehensive income and reclassified to interest expense in the same period or periods during which the hedged transactions affect earnings. Information about the effects of our interest rate swap agreements on the accompanying Consolidated Statements of Income and Consolidated Statements of Comprehensive Income, are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
Results Recognized in Accumulated Other Comprehensive Loss
(Effective Portion)
|
|
Location of Results Reclassified from Accumulated Other Comprehensive Loss
to Earnings
|
|
Results Reclassified from Accumulated Other Comprehensive Loss
to Earnings
|
|
2019
|
|
$
|
(4.4
|
)
|
|
Other interest expense, net
|
|
$
|
—
|
|
|
2018
|
|
$
|
1.8
|
|
|
Swap interest expense
|
|
$
|
(0.5
|
)
|
|
2017
|
|
$
|
(0.1
|
)
|
|
Swap interest expense
|
|
$
|
(2.0
|
)
|
On the basis of yield curve conditions as of December 31, 2019 and including assumptions about future changes in fair value, we expect the amount to be reclassified out of Accumulated other comprehensive loss into earnings within the next 12 months will be losses of $0.9 million.
15. INCOME TAXES
The components of income tax expense from continuing operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
(In millions)
|
|
Current:
|
|
|
|
|
|
|
Federal
|
$
|
46.3
|
|
|
$
|
43.8
|
|
|
$
|
59.1
|
|
|
State
|
8.0
|
|
|
7.1
|
|
|
8.3
|
|
|
Total current income tax expense
|
54.3
|
|
|
50.9
|
|
|
67.4
|
|
|
Deferred:
|
|
|
|
|
|
|
Federal
|
5.5
|
|
|
3.9
|
|
|
1.2
|
|
|
State
|
(0.3
|
)
|
|
2.0
|
|
|
1.4
|
|
|
Total deferred income tax expense
|
5.2
|
|
|
5.9
|
|
|
2.6
|
|
|
Total income tax expense
|
$
|
59.5
|
|
|
$
|
56.8
|
|
|
$
|
70.0
|
|
A reconciliation of the statutory federal rate to the effective tax rate from continuing operations is as follows (dollar amounts shown in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2019
|
|
%
|
|
2018
|
|
%
|
|
2017
|
|
%
|
|
Income tax provision at the statutory rate
|
$
|
51.2
|
|
|
21.0
|
|
$
|
47.2
|
|
|
21.0
|
|
$
|
73.2
|
|
|
35.0
|
|
|
State income tax expense, net of federal benefit
|
7.8
|
|
|
3.2
|
|
8.7
|
|
|
3.9
|
|
6.4
|
|
|
3.0
|
|
|
Non-deductible / non-tax items
|
0.6
|
|
|
0.2
|
|
0.4
|
|
|
0.2
|
|
(0.3
|
)
|
|
(0.1
|
)
|
|
Effect of enactment of tax reform
|
—
|
|
|
—
|
|
0.6
|
|
|
0.2
|
|
(7.9
|
)
|
|
(3.8
|
)
|
|
Adjustments and settlements
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
(0.6
|
)
|
|
(0.3
|
)
|
|
Other, net
|
(0.1
|
)
|
|
—
|
|
(0.1
|
)
|
|
—
|
|
(0.8
|
)
|
|
(0.3
|
)
|
|
Income tax expense
|
$
|
59.5
|
|
|
24.4
|
|
$
|
56.8
|
|
|
25.3
|
|
$
|
70.0
|
|
|
33.5
|
|
Deferred income tax asset and liability components consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2019
|
|
2018
|
|
|
(In millions)
|
|
Deferred income tax assets:
|
|
|
|
|
F&I chargeback liabilities
|
$
|
11.8
|
|
|
$
|
11.0
|
|
|
Other accrued liabilities
|
2.1
|
|
|
3.2
|
|
|
Stock-based compensation
|
2.2
|
|
|
2.4
|
|
|
Operating lease right-of-use assets
|
18.7
|
|
|
—
|
|
|
Other, net
|
9.0
|
|
|
3.9
|
|
|
Total deferred income tax assets
|
43.8
|
|
|
20.5
|
|
|
Deferred income tax liabilities:
|
|
|
|
|
Intangible asset amortization
|
(16.4
|
)
|
|
(12.5
|
)
|
|
Depreciation
|
(33.4
|
)
|
|
(26.4
|
)
|
|
Operating lease liabilities
|
(17.7
|
)
|
|
—
|
|
|
Other, net
|
(2.3
|
)
|
|
(3.3
|
)
|
|
Total deferred income tax liabilities
|
(69.8
|
)
|
|
(42.2
|
)
|
|
Net deferred income tax liabilities
|
$
|
(26.0
|
)
|
|
$
|
(21.7
|
)
|
There were no valuation allowances recorded against the deferred tax assets as of December 31, 2019 or 2018.
As of December 31, 2019, we had income taxes payable of $1.3 million, which is included in Accounts payable and accrued liabilities.
As of December 31, 2018, we had pre-paid income taxes of $4.6 million which was included in Other current assets.
There was no unrecognized tax benefits as of December 31, 2019, 2018 or 2017.
The statutes of limitations related to our consolidated Federal income tax returns are closed for all tax years up to and including 2015. The expiration of the statutes of limitations related to the various state income tax returns that we and our subsidiaries file varies by state. The 2012 through 2018 tax years generally remain subject to examination by most state tax authorities. We believe that our tax positions comply with applicable tax law and that we have adequately provided for these matters.
Tax Reform
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Act. The Tax Act made broad and complex changes to the U.S. tax code that affects 2017, including, but not limited to, accelerated depreciation that will allow for full expensing of qualified property. The Tax Act also established new tax laws including a reduction in the U.S. federal corporate income tax rate from 35% to 21%.
The SEC staff issued SAB 118 on December 22, 2017, which provided guidance on accounting for the tax effects of the Tax Act. SAB 118 allowed for a measurement period, not to extend beyond one year from the Tax Act enactment date, for companies to complete the accounting under ASC 740, Income Taxes.
In 2017, we remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which was generally 21%. We recorded a $7.9 million reduction to our net deferred tax liability for the year ended December 31, 2017 related to the remeasurement of our deferred tax balance.
During the third quarter of 2018, the IRS released Notice 2018-68, which clarified a number of changes made to Section 162(m) of the Code by the Tax Act. As a result of this new guidance, we recorded $0.6 million of additional income tax expense related to an adjustment to the December 31, 2017 deferred tax asset for certain components of share-based compensation. After considering the additional guidance issued by the U.S. Treasury Department, state tax authorities and other standard-setting bodies, we completed our accounting for the Tax Act in 2018.
16. OTHER LONG-TERM LIABILITIES
Other long-term liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2019
|
|
2018
|
|
|
(In millions)
|
|
Accrued finance and insurance chargebacks
|
$
|
22.9
|
|
|
$
|
21.2
|
|
|
Deferred rent
|
—
|
|
|
4.5
|
|
|
Interest rate swap
|
2.9
|
|
|
—
|
|
|
Unclaimed property
|
2.9
|
|
|
3.3
|
|
|
Other
|
3.7
|
|
|
1.7
|
|
|
Other long-term liabilities
|
$
|
32.4
|
|
|
$
|
30.7
|
|
17. SUPPLEMENTAL CASH FLOW INFORMATION
During the years ended December 31, 2019, 2018, and 2017, we made interest payments, including amounts capitalized, totaling $91.2 million, $82.5 million, and $76.0 million, respectively. Included in these interest payments are $38.6 million, $31.2 million, and $22.3 million, of floor plan interest payments for the years ended December 31, 2019, 2018, and 2017, respectively.
During the years ended December 31, 2019, 2018, and 2017 we made income tax payments, net of refunds received, totaling $48.4 million, $40.4 million, and $102.7 million, respectively.
During the years ended December 31, 2019, 2018, and 2017, we transferred $141.0 million, $193.9 million, and $156.2 million, respectively, of loaner vehicles from Other current assets to Inventory on our Consolidated Balance Sheets.
During the year ended December 31, 2017, we had non-cash investing and financing activities of $4.1 million related to purchases of real estate properties that were previously leased.
The following items are included in Other adjustments, net to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
|
Amortization of debt issuance costs
|
$
|
2.5
|
|
|
$
|
2.5
|
|
|
$
|
3.2
|
|
|
Loss on disposal of fixed assets
|
2.6
|
|
|
0.9
|
|
|
2.1
|
|
|
Other individually immaterial items
|
(0.3
|
)
|
|
(0.3
|
)
|
|
(1.0
|
)
|
|
Other adjustments, net
|
$
|
4.8
|
|
|
$
|
3.1
|
|
|
$
|
4.3
|
|
18. LEASES
Effective January 1, 2019, the Company adopted the new lease accounting guidance in ASC 842. The new standard establishes a right-of-use ("ROU") model that requires a lessee to record an ROU asset and a lease liability on the balance sheet for all leases with terms in excess of 12 months. Leases are classified as either finance or operating, with classification impacting the pattern of expense recognition in the income statement.
The Company elected the package of practical expedients permitted in ASC 842. Accordingly, the Company accounted for its existing operating leases as an operating lease under the new guidance, without reassessing (a) whether the contract contains a lease under ASC 842, (b) whether classification of the operating lease would be different in accordance with ASC 842, or (c) whether the unamortized initial direct costs before transition adjustments (as of December 31, 2018) would have met the definition of initial direct costs in ASC 842 at lease commencement. In addition, the Company opted for the transition relief method specified in Accounting Standards Update No. 2018-11, which allowed for the effective date of the new leases standard as the date of initial application on transition. As a result of this election the Company (a) did not adjust comparative period financial information for the effects of ASC 842; (b) made the new required lease disclosures for periods after the effective date; and (c) carried forward our ASC 840 disclosures - see Note 19 "Leases (Prior to Adoption of ASC 842)" for comparative periods. As a result of the adoption of ASC 842, the Company recorded a right-of-use asset of $86.9 million, which represents the lease liability reduced for deferred rent amounts of $4.4 million and a lease liability of $91.3 million, which represents the present value of remaining lease payments, discounted using the Company’s incremental borrowing rates based on the remaining lease terms.
We lease real estate and equipment primarily under operating lease agreements. For leases with terms in excess of 12 months, we record a ROU asset and lease liability based on the present value of lease payments over the lease term. Escalation clauses, lease payments dependent on existing rates/indexes, renewal options, and purchase options are included within the determination of lease payments when appropriate. We have elected the practical expedient not to separate lease and non-lease components for all leases that qualify, except for information technology assets that are embedded within service agreements (such as software license arrangements).
When available, the implicit rate is utilized to discount lease payments to present value; however, substantially all of our leases do not provide a readily determinable implicit rate. Therefore, we estimate our incremental borrowing rate to discount the lease payments based on information available at lease commencement.
Balance Sheet Presentation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
Leases
|
|
Classification
|
|
December 31, 2019
|
|
|
|
|
|
(In millions)
|
|
Assets:
|
|
|
|
|
|
Current
|
|
|
|
|
|
Operating
|
|
Operating lease right-of-use assets
|
|
$
|
65.6
|
|
|
Operating
|
|
Assets held for sale
|
|
6.9
|
|
|
Non-Current
|
|
|
|
|
|
Finance
|
|
Property and equipment, net
|
|
14.6
|
|
|
Total right-of-use assets
|
|
|
|
$
|
87.1
|
|
|
Liabilities:
|
|
|
|
|
|
Current
|
|
|
|
|
|
Operating
|
|
Current maturities of operating leases
|
|
$
|
17.0
|
|
|
Operating
|
|
Liabilities held for sale
|
|
4.2
|
|
|
Finance
|
|
Current maturities of long-term debt
|
|
0.6
|
|
|
Non-Current
|
|
|
|
|
|
Operating
|
|
Operating lease liabilities
|
|
52.6
|
|
|
Operating
|
|
Liabilities held for sale
|
|
2.7
|
|
|
Finance
|
|
Long-term debt
|
|
16.6
|
|
|
Total lease liabilities
|
|
|
|
$
|
93.7
|
|
Lease Term and Discount Rate
|
|
|
|
|
|
|
|
As of
|
|
|
December 31, 2019
|
|
Weighted Average Lease Term - Operating Leases
|
5.7 years
|
|
|
Weighted Average Lease Term - Finance Lease
|
1.2 years
|
|
|
Weighted Average Discount Rate - Operating Leases
|
4.7
|
%
|
|
Weighted Average Discount Rate - Finance Lease
|
4.1
|
%
|
Lease Costs
The following table provides certain information related to the lease costs for finance and operating leases during the year ended December 31, 2019.
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2019
|
|
|
(In millions)
|
|
Finance lease cost (Interest)
|
|
$
|
0.7
|
|
|
Operating lease cost
|
|
23.3
|
|
|
Short-term lease cost
|
|
2.7
|
|
|
Variable lease cost
|
|
1.0
|
|
|
|
|
$
|
27.7
|
|
Supplemental Cash Flow Information
The following table presents supplemental cash flow information for leases during the year ended December 31, 2019.
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2019
|
|
|
(In millions)
|
|
Supplemental Cash Flow:
|
|
|
|
Cash paid for amounts included in the measurements of lease liabilities
|
|
|
|
Operating cash flows from finance lease
|
|
$
|
0.7
|
|
|
Operating cash flows from operating leases
|
|
$
|
23.7
|
|
|
Financing cash flows from finance lease
|
|
$
|
0.4
|
|
|
Right-of-use assets obtained in exchange for new finance lease liabilities
|
|
$
|
17.7
|
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
|
$
|
14.4
|
|
|
Changes to finance lease right-of-use asset resulting from lease reassessment event
|
|
$
|
(3.1
|
)
|
During the twelve months ended December 31, 2019, we reassessed and remeasured an existing real estate lease, which was previously accounted for as an operating lease and finance lease for the land and building elements, respectively, due to the presence of a purchase price option which we concluded we are now reasonably certain to exercise. As reflected within the table above, we reduced a portion of the new finance lease right-of-use asset based on the existing finance lease liability at the time of remeasurement.
The table below reconciles the undiscounted cash flows for each of the first five years and total of the remaining years to the finance lease liabilities and operating lease liabilities as of December 31, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance
|
|
Operating
|
|
|
(In millions)
|
|
2020
|
$
|
1.3
|
|
|
$
|
24.2
|
|
|
2021
|
16.8
|
|
|
21.1
|
|
|
2022
|
—
|
|
|
15.7
|
|
|
2023
|
—
|
|
|
7.6
|
|
|
2024
|
—
|
|
|
3.8
|
|
|
Thereafter
|
—
|
|
|
17.4
|
|
|
Total minimum lease payments
|
$
|
18.1
|
|
|
$
|
89.8
|
|
|
Less: Amount of lease payments representing interest
|
(0.9
|
)
|
|
(13.3
|
)
|
|
Present value of future minimum lease payments
|
$
|
17.2
|
|
|
$
|
76.5
|
|
|
Less: current obligations under leases
|
(0.6
|
)
|
|
(21.2
|
)
|
|
Long-term lease obligation
|
$
|
16.6
|
|
|
$
|
55.3
|
|
Certain of our lease agreements include financial covenants and incorporate by reference the financial covenants set forth in the 2019 Senior Credit Facility. A breach of any of these covenants could immediately give rise to certain landlord remedies under our various lease agreements, the most severe of which include the following: (i) termination of the applicable lease and/or other leases with the same or an affiliated landlord under a cross-default provision, (ii) eviction from the premises; and (iii) the landlord having a claim for various damages.
19. LEASES (PRIOR TO ADOPTION OF ASC 842)
We lease real estate and equipment primarily under operating lease agreements, most of which have terms ranging from one to twenty years. Escalation clauses, lease payments dependent on existing rates/indexes, and other lease incentives are included in the minimum lease payments and are recognized on a straight-line basis over the minimum lease term. Rent expense under such arrangements totaled $25.6 million and $26.7 million for the years ended December 31, 2018, and 2017, respectively.
During the year ended December 31, 2018, we entered into one transaction in which we purchased previously leased real estate for $4.4 million.
During the year ended December 31, 2017, we entered into two transactions in which we purchased previously leased real estate for an aggregate purchase price of $9.5 million. These transactions included the termination of the related lease
obligations, resulting in $0.2 million of lease termination charges, which were included in Other operating (income) expenses, net in our Consolidated Statement of Income for the year ended December 31, 2017.
Future minimum payments under non-cancelable leases with initial terms in excess of one year at December 31, 2018, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
|
|
Operating
|
|
|
(In millions)
|
|
2019
|
$
|
0.4
|
|
|
$
|
22.5
|
|
|
2020
|
0.4
|
|
|
22.2
|
|
|
2021
|
0.4
|
|
|
19.2
|
|
|
2022
|
0.4
|
|
|
14.0
|
|
|
2023
|
0.4
|
|
|
6.0
|
|
|
Thereafter
|
2.8
|
|
|
25.5
|
|
|
Total minimum lease payments
|
$
|
4.8
|
|
|
$
|
109.4
|
|
|
Less: Amounts representing interest
|
(1.7
|
)
|
|
N/A
|
|
|
|
$
|
3.1
|
|
|
$
|
109.4
|
|
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 or lenders and certain federal, state, and local government authorities, which have historically related primarily to (i) incentive and warranty payments received from vehicle manufacturers, or allegations of violations of manufacturer agreements or policies, (ii) compliance with lender rules and covenants, and (iii) payments made to government authorities relating to federal, state, and local taxes, as well as compliance with other government regulations. Claims may also arise through litigation, government proceedings, and other dispute resolution processes. Such claims, including class actions, could relate to, but may not be limited to, the practice of charging administrative fees and other fees and commissions, employment-related matters, truth-in-lending and other dealer assisted financing obligations, contractual disputes, actions brought by governmental authorities, and other matters. We evaluate pending and threatened claims and establish loss contingency reserves based upon outcomes we currently believe to be probable and reasonably estimable.
We believe we have adequately accrued for the potential impact of loss contingencies that are probable and reasonably estimable. Based on our review of the various types of claims currently known to us, there is no indication of material reasonably possible losses in excess of amounts accrued in the aggregate. We currently do not anticipate that any known claim will materially adversely affect our financial condition, liquidity, or results of operations. However, the outcome of any matter cannot be predicted with certainty, and an unfavorable resolution of one or more matters presently known or arising in the future could have a material adverse effect on our financial condition, liquidity, or results of operations.
A significant portion of our business involves the sale of vehicles, parts, or vehicles composed of parts that are manufactured outside the United States. As a result, our operations are subject to customary risks of importing merchandise, including fluctuations in the relative values of currencies, import duties, exchange controls, trade restrictions, work stoppages, and general political and socio-economic conditions in foreign countries. The United States or the countries from which our products are imported may, from time to time, impose new quotas, duties, tariffs, or other restrictions; or adjust presently prevailing quotas, duties, or tariffs, which may affect our operations, and our ability to purchase imported vehicles and/or parts at reasonable prices.
Substantially all of our facilities are subject to federal, state and local provisions regarding the discharge of materials into the environment. Compliance with these provisions has not had, nor do we expect such compliance to have, any material effect
upon our capital expenditures, net earnings, financial condition, liquidity or competitive position. We believe that our current practices and procedures for the control and disposition of such materials comply with applicable federal, state, and local requirements. No assurances can be provided, however, that future laws or regulations, or changes in existing laws or regulations, would not require us to expend significant resources in order to comply therewith.
We had $12.7 million of letters of credit outstanding as of December 31, 2019, which are required by certain of our insurance providers. In addition, as of December 31, 2019, we maintained a $5.1 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. SHARE-BASED COMPENSATION AND EMPLOYEE BENEFIT PLANS
On March 13, 2012, our Board of Directors, upon the recommendation of our Compensation and Human Resources Committee, approved the 2012 Equity Incentive Plan (the "2012 Plan"). On April 18, 2012, our shareholders approved the 2012 Plan, which replaced our previous equity incentive plan. The 2012 Plan expires on March 13, 2022 and provides for the grant of options, performance share units, restricted share units, and shares of restricted stock to our directors, officers, and employees in the total amount of 1.5 million shares. On April 17, 2019, the stockholders of the Company approved the Asbury Automotive Group, Inc. 2019 Equity and Incentive Compensation Plan (the "2019 Plan") and authorized a total of 1,590,000 shares of common stock for issuance under the 2019 Plan ("Plan Shares"). The Plan Shares include 641,363 shares of common stock which remained unissued under the 2012 Plan. No further grants of awards will be made under the 2012 Plan; however outstanding awards under the 2012 Plan will continue in effect in accordance with their terms and conditions. There were approximately 1.6 million shares available for grant in accordance with the 2019 Plan as of December 31, 2019.
We issue shares of our common stock upon the vesting of performance share units or restricted stock. These shares are issued from our authorized and not outstanding common stock. In addition, in connection with the vesting of performance share units or restricted stock, we expect to repurchase a portion of the shares issued equal to the amount of employee income tax withholding.
We have recognized $12.5 million ($3.1 million tax benefit), $10.5 million ($2.6 million tax benefit), and $13.6 million ($4.5 million tax benefit) in share-based compensation expense for the years ended December 31, 2019, 2018, and 2017, respectively. As of December 31, 2019, there was $11.9 million of total unrecognized share-based compensation expense related to non-vested share-based awards granted under the 2012 Plan, and the weighted average period over which it is expected to be recognized is 2.13 years. Further, we expect to recognize $6.8 million of this expense in 2020, $3.3 million in 2021, and $1.8 million in 2022.
Performance Share Units
During the year ended December 31, 2019, the Compensation and Human Resources Committee of the Board of Directors approved the grant of up to 134,758 performance share units, which represents 150% of the target award. Performance share units provide an opportunity for the employee-recipient to receive a number of shares of our common stock based on our performance during a specified year period following the grant as measured against objective performance goals as determined by the Compensation and Human Resources Committee of our Board of Directors. The actual number of units earned may range from 0% to 150% of the target number of units depending upon achievement of the performance goals. Performance share units vest in three equal annual installments with one-third of the award vesting on each of the (i) later of the first anniversary of the grant date, or the date the Compensation and Human Resources Committee determines the actual award, (ii) second anniversary of the grant date and (iii) third anniversary of the grant date. Upon vesting, each performance share unit equals one share of common stock of the Company. Compensation cost for performance share units is based on the closing price of our common stock on the date of grant and the ultimate performance level achieved, and is recognized on a graded basis over the three-year vesting period.
The following table summarizes information about performance share units for 2019:
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average Grant Date
Fair Value
|
|
Non-vested at January 1, 2019
|
205,736
|
|
|
$
|
61.28
|
|
|
Granted
|
134,758
|
|
|
69.67
|
|
|
Vested
|
(101,377
|
)
|
|
58.87
|
|
|
Forfeited or unearned
|
(33,827
|
)
|
|
66.49
|
|
|
Non-vested at December 31, 2019
|
205,290
|
|
|
$
|
66.92
|
|
The weighted average grant-date fair value of performance share units and total fair value of performance share units vested are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
|
Weighted average grant-date fair value of performance share units granted
|
$
|
69.67
|
|
|
$
|
68.50
|
|
|
$
|
65.65
|
|
|
Total fair value of performance share units vested (in millions)
|
$
|
6.0
|
|
|
$
|
6.4
|
|
|
$
|
6.5
|
|
Restricted Stock Awards
During the year ended December 31, 2019, the Compensation and Human Resources Committee of the Board of Directors approved the grant of 122,167 shares of restricted stock. Restricted stock awards vest in three equal annual installments commencing on the first anniversary of the grant date. Compensation cost for restricted stock awards is based on the closing price of our common stock on the date of grant and is recognized on a straight-line basis over the three-year vesting period.
The following table summarizes information about restricted stock awards for 2019:
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average Grant
Date Fair Value
|
|
Non-vested at January 1, 2019
|
198,776
|
|
|
$
|
63.65
|
|
|
Granted
|
122,167
|
|
|
69.18
|
|
|
Vested
|
(85,759
|
)
|
|
59.76
|
|
|
Forfeited
|
(31,713
|
)
|
|
67.14
|
|
|
Non-vested at December 31, 2019
|
203,471
|
|
|
$
|
68.06
|
|
The weighted average grant-date fair value of restricted stock awards and total fair value of restricted stock awards vested are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
|
Weighted average grant-date fair value of restricted stock granted
|
$
|
69.18
|
|
|
$
|
71.18
|
|
|
$
|
63.64
|
|
|
Total fair value of restricted stock awards vested (in millions)
|
$
|
5.1
|
|
|
$
|
5.5
|
|
|
$
|
5.3
|
|
Employee Retirement Plan
We sponsor the Asbury Automotive Retirement Savings Plan (the "Retirement Savings Plan"), a 401(k) plan, for eligible employees. 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 2019 to $18,500, or $24,500 if age 50 or more. For non-highly compensated employees, after one year of employment we match 50% of employees' contributions up to 4% of their eligible compensation. Employer contributions vest on a graded basis over 4 years after the date of hire. Expenses from continuing operations related to employer matching contributions totaled $3.7 million, $3.2 million, and $3.0 million for the years ended December 31, 2019, 2018, and 2017, respectively.
22. CONDENSED QUARTERLY REVENUES AND EARNINGS (UNAUDITED):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
|
(In millions, except per share data)
|
|
2018:
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
1,609.2
|
|
|
$
|
1,723.6
|
|
|
$
|
1,757.4
|
|
|
$
|
1,784.2
|
|
|
Gross profit
|
$
|
265.4
|
|
|
$
|
277.8
|
|
|
$
|
278.0
|
|
|
$
|
281.8
|
|
|
Net income (2)(3)(4)
|
$
|
40.1
|
|
|
$
|
43.2
|
|
|
$
|
44.3
|
|
|
$
|
40.4
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
Basic (1)(2)(3)(4)
|
$
|
1.95
|
|
|
$
|
2.13
|
|
|
$
|
2.22
|
|
|
$
|
2.09
|
|
|
Diluted (1)(2)(3)(4)
|
$
|
1.93
|
|
|
$
|
2.11
|
|
|
$
|
2.18
|
|
|
$
|
2.06
|
|
|
2019:
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
1,670.8
|
|
|
$
|
1,803.5
|
|
|
$
|
1,842.0
|
|
|
$
|
1,894.0
|
|
|
Gross profit
|
$
|
279.2
|
|
|
$
|
295.0
|
|
|
$
|
293.1
|
|
|
$
|
301.6
|
|
|
Net income (5)(6)(7)
|
$
|
40.9
|
|
|
$
|
54.9
|
|
|
$
|
45.0
|
|
|
$
|
43.6
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
Basic (1)(5)(6)(7)
|
$
|
2.13
|
|
|
$
|
2.87
|
|
|
$
|
2.36
|
|
|
$
|
2.28
|
|
|
Diluted (1)(5)(6)(7)
|
$
|
2.11
|
|
|
$
|
2.84
|
|
|
$
|
2.33
|
|
|
$
|
2.26
|
|
____________________________
|
|
|
|
(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 June 30, 2018 were increased by $0.5 million as a result of gains from legal settlements, net of tax, or $0.03 per basic and diluted share.
|
|
|
|
|
(3)
|
Results for the three months ended September 30, 2018 were decreased by $0.6 million as a result of an adjustment to the deferred tax asset related to certain components of share-based compensation, net of tax, or $0.03 per basic and diluted share.
|
|
|
|
|
(4)
|
Results for the three months ended December 31, 2018 were decreased by a $2.8 million franchise rights impairment, net of tax, or $0.14 per basic and diluted share, respectively, in the aggregate.
|
|
|
|
|
(5)
|
Results for the three months ended March 30, 2019 were decreased by $1.8 million as a result of fixed assets write-off, net of tax, or $0.09 per basic and diluted share.
|
|
|
|
|
(6)
|
Results for the three months ended June 30, 2019 were increased by $9.0 million as a result of a gain on a divested dealership and real estate, net of tax, or $0.46 per basic and diluted share.
|
|
|
|
|
(7)
|
Results for the three months ended December 31, 2019 were decreased by $5.3 million franchise rights impairment, net of tax, or $0.27 per basic and diluted share.
|
23. SUBSEQUENT EVENTS
Park Place Acquisition
On December 11, 2019, we entered into an Asset Purchase Agreement and a Real Estate Purchase Agreement with certain members of the Park Place Dealership family of entities, to acquire substantially all of the assets of, and certain real property related to the businesses described in the Asset Purchase Agreement for a purchase price of approximately $1.0 billion (excluding vehicle inventory), reflecting $785.0 million of goodwill, approximately $215.0 million for real estate and leaseholds and approximately $30 million for parts and fixed assets (the "Acquisition"). This Acquisition is expected to close during the first quarter of 2020.
Park Place, based in Dallas, Texas, is one of the country's largest luxury dealer groups, with an attractive portfolio of high volume, award-winning, luxury dealerships and high-quality real estate. Park Place consists of a collection of:
|
|
|
|
•
|
ten luxury dealerships, including one dealership scheduled to open in the first quarter of 2020;
|
|
|
|
|
•
|
an auto auction business for wholesaling used cars; and
|
|
|
|
|
•
|
a subscription service platform that offers customers access to a range of luxury vehicles for a monthly fee.
|
New Senior Notes
On February 19, 2020, the Company completed its offering of senior unsecured notes, consisting of $525.0 million aggregate principal amount of 4.50% Senior Notes due 2028 (the “2028 Notes”) and $600.0 million aggregate principal amount of 4.75% Senior Notes due 2030 (the “2030 Notes” and, together with the 2028 Notes, the “Notes”). The 2028 Notes and 2030 Notes mature on March 1, 2028 and March 1, 2030, respectively. Interest is payable semiannually, on March 1 and September 1 of each year. The New Senior Notes were offered, together with additional borrowings and cash on hand, to (i) fund, if consummated, the acquisition of substantially all of the assets of Park Place, (ii) redeem all of our outstanding $600.0 million aggregate principal amount of the 6.0% Notes and (iii) pay fees and expenses in connection with the foregoing.
New BofA Real Estate Facility
In connection with the Acquisition, on February 7, 2020 we entered into the New BofA Real Estate Facility, which will provide for term loans in an aggregate amount not to exceed $280.6 million, and is expected to mature seven years from the initial funding of the facility. Borrowings under the New BofA Real Estate Facility are expected to be guaranteed by us and each of our operating dealership subsidiaries that own or lease the real estate being financed under the New BofA Real Estate Facility, and are expected to be collateralized by first priority liens, subject to certain permitted exceptions, on all of the real property financed thereunder. In connection with the Acquisition, we intend to borrow $216.6 million under the New BofA Real Estate Facility, and have the ability to make a single draw of an additional amount up to 80% of the appraised value of the property expected to be acquired at or after the consummation of the Acquisition.
Amendments to 2019 Senior Credit Facility
In connection with the Acquisition, we have obtained amendments, among other things, to (1) increase the aggregate commitments under the Revolving Credit Facility to $350.0 million, (2) increase the aggregate commitments under the New Vehicle Floorplan Facility to $1.35 billion and (3) increase the aggregate commitments under the Used Vehicle Floorplan Facility to $200.0 million. These amendments to increase the aggregate commitments will become effective concurrently with the consummation of the Acquisition. In connection with the consummation of the Acquisition, we intend to borrow approximately $387 million under the 2019 Senior Credit Facility with respect to existing Park Place vehicle inventory, consisting of approximately $237 million under the New Vehicle Floor Plan Facility and approximately $150 million under the Used Vehicle Floor Plan Facility.
Conditional Redemption Notice for Existing Notes
On February 3, 2020, we issued a conditional notice of redemption to the holders of our 6% Notes, notifying such holders that we intend to redeem all of the 6% Notes on March 4, 2020. The redemption of the 6% Notes is conditioned upon the consummation of the Acquisition. If redeemed, the 6% Notes will be redeemed at 103% of par, plus accrued and unpaid interest to, but excluding, the date of redemption. We will pay a redemption premium in connection with the redemption of the 6% Notes of $18.0 million.
Other
In January 2020, we closed on the acquisition of a dealership (comprising three franchises) in the Denver, Colorado market which increases the number of dealerships and franchises in that market to two and four, respectively.