FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 Commission file number: 1-13461 GROUP 1 AUTOMOTIVE, INC. (Exact name of Registrant as specified in its charter) Delaware 76-0506313 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 950 Echo Lane, Suite 100 Houston, Texas 77024 (Address of principal executive offices) (Zip code) (713) 647-5700 (Registrant's telephone number including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of October 31, 2001. <Table> <Caption> Title Outstanding ----- ----------- <S> <C> Common stock, par value $.01 22,745,337 </Table>
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (dollars in thousands) <Table> <Caption> SEPTEMBER 30, DECEMBER 31, 2001 2000 ----------- ----------- (unaudited) <S> <C> <C> ASSETS CURRENT ASSETS: Cash and cash equivalents ........................... $ 147,443 $ 140,878 Accounts and notes receivable, net .................. 40,391 39,709 Inventories, net .................................... 440,449 527,101 Deferred income taxes ............................... 10,323 7,661 Other assets ........................................ 4,017 5,190 ----------- ----------- Total current assets ......................... 642,623 720,539 ----------- ----------- PROPERTY AND EQUIPMENT, net ........................... 75,978 70,901 INTANGIBLE ASSETS, net ................................ 283,351 285,892 OTHER ASSETS .......................................... 25,112 22,221 ----------- ----------- Total assets ................................. $ 1,027,064 $ 1,099,553 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Floorplan notes payable ............................. $ 448,783 $ 536,707 Current maturities of long-term debt ................ 1,459 1,506 Accounts payable .................................... 64,431 57,872 Accrued expenses .................................... 76,910 69,685 ----------- ----------- Total current liabilities .................... 591,583 665,770 ----------- ----------- DEBT, net of current maturities ....................... 15,506 45,949 SENIOR SUBORDINATED NOTES ............................. 84,960 94,444 DEFERRED INCOME TAXES ................................. 9,511 8,668 OTHER LIABILITIES ..................................... 49,694 37,306 STOCKHOLDERS' EQUITY: Preferred stock, 1,000,000 shares authorized, none issued or outstanding ............................. -- -- Common stock, $.01 par value, 50,000,000 shares authorized, 19,698,782 and 21,260,227 issued ...... 197 213 Additional paid-in capital .......................... 151,852 170,683 Retained earnings ................................... 131,803 92,517 Accumulated other comprehensive loss ................ (2,212) -- Treasury stock, at cost, 346,110 and 1,494,488 shares (5,830) (15,997) ----------- ----------- Total stockholders' equity ................... 275,810 247,416 ----------- ----------- Total liabilities and stockholders' equity ... $ 1,027,064 $ 1,099,553 =========== =========== </Table> The accompanying notes are an integral part of these consolidated financial statements. 2
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS (dollars in thousands, except per share amounts) <Table> <Caption> THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------------- ---------------------------- 2001 2000 2001 2000 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> REVENUES: New vehicle ................................. $ 604,912 $ 588,328 $ 1,735,251 $ 1,659,564 Used vehicle ................................ 284,517 258,861 848,877 774,939 Parts and service ........................... 95,048 78,714 268,729 226,781 Other dealership revenues, net .............. 36,553 29,054 103,608 83,721 ------------ ------------ ------------ ------------ Total revenues ....................... 1,021,030 954,957 2,956,465 2,745,005 COST OF SALES: New vehicle ................................. 558,581 542,491 1,603,744 1,530,399 Used vehicle ................................ 261,478 237,416 778,658 711,732 Parts and service ........................... 42,499 36,065 119,842 102,842 ------------ ------------ ------------ ------------ Total cost of sales .................. 862,558 815,972 2,502,244 2,344,973 GROSS PROFIT .................................. 158,472 138,985 454,221 400,032 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES .................... 119,381 102,960 343,879 297,808 ------------ ------------ ------------ ------------ Income from operations before non-cash charges ............................. 39,091 36,025 110,342 102,224 DEPRECIATION EXPENSE .......................... 2,046 2,001 5,979 5,671 AMORTIZATION EXPENSE .......................... 2,278 2,084 6,829 6,222 ------------ ------------ ------------ ------------ Income from operations ............... 34,767 31,940 97,534 90,331 OTHER INCOME AND EXPENSES: Floorplan interest expense .................. (6,028) (9,302) (23,165) (27,257) Other interest expense, net ................. (3,132) (3,909) (11,054) (11,591) Other income, net ........................... 28 4 48 1,027 ------------ ------------ ------------ ------------ INCOME BEFORE INCOME TAXES .................... 25,635 18,733 63,363 52,510 PROVISION FOR INCOME TAXES .................... 9,741 7,119 24,078 19,954 ------------ ------------ ------------ ------------ NET INCOME .................................... $ 15,894 $ 11,614 $ 39,285 $ 32,556 ============ ============ ============ ============ Earnings per share: Basic ....................................... $ 0.81 $ 0.54 $ 2.01 $ 1.49 Diluted ..................................... $ 0.75 $ 0.54 $ 1.90 $ 1.47 Weighted average shares outstanding: Basic ....................................... 19,522,456 21,369,802 19,563,941 21,865,182 Diluted ..................................... 21,258,841 21,662,055 20,666,414 22,222,798 </Table> The accompanying notes are an integral part of these consolidated financial statements. 3
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) <Table> <Caption> NINE MONTHS ENDED SEPTEMBER 30, ---------------------- 2001 2000 --------- --------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income ..................................................... $ 39,285 $ 32,556 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ................................ 12,808 11,893 Deferred income taxes ........................................ (1,819) 861 Provision for doubtful accounts and uncollectible notes ...... 773 838 Loss (Gain) on sale of assets ................................ (17) 15 Gain on sale of franchise .................................... -- (1,048) Changes in assets and liabilities: Accounts receivable ........................................ (955) (11,125) Inventories ................................................ 82,221 2,342 Other assets ............................................... (3,122) 275 Floorplan notes payable .................................... (80,619) (6,564) Accounts payable and accrued expenses ...................... 37,952 11,463 --------- --------- Total adjustments ...................................... 47,222 8,950 --------- --------- Net cash provided by operating activities ...... 86,507 41,506 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Increase in notes receivable .................................. (2,035) (2,166) Collections on notes receivable ............................... 868 1,144 Purchases of property and equipment ........................... (11,812) (12,482) Proceeds from sales of property and equipment ................. 615 688 Proceeds from sales of franchises ............................. 5,373 9,700 Cash paid in acquisitions, net of cash received ............... (9,393) (39,917) --------- --------- Net cash used by investing activities .......... (16,384) (43,033) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net (payments) borrowings on acquisition tranche of revolving credit facility ................................... (29,595) 23,000 Principal payments of long-term debt .......................... (1,393) (5,457) Borrowings of long-term debt .................................. 154 766 Purchase of senior subordinated notes ......................... (9,601) (948) Proceeds from issuance of common stock to benefit plans ....... 2,655 2,822 Purchase of treasury stock .................................... (25,778) (17,924) --------- --------- Net cash provided (used) by financing activities (63,558) 2,259 --------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS ........................ 6,565 732 CASH AND CASH EQUIVALENTS, beginning of period ................... 140,878 118,824 --------- --------- CASH AND CASH EQUIVALENTS, end of period ......................... $ 147,443 $ 119,556 ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for - Interest ................................................ $ 34,097 $ 42,138 Taxes ................................................... $ 4,745 $ 14,147 </Table> The accompanying notes are an integral part of these consolidated financial statements. 4
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BUSINESS AND ORGANIZATION: Group 1 Automotive, Inc. is a leading operator in the automotive retailing industry. Group 1 Automotive, Inc. is a holding company with its primary operations and assets being its investments in its subsidiaries. These subsidiaries sell new and used cars and light trucks through their dealerships and Internet sites, provide maintenance and repair services and arrange vehicle finance, service and insurance contracts. Group 1 Automotive, Inc. and its subsidiaries are herein collectively referred to as the "Company" or "Group 1". 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Basis of Presentation/Reclassifications All acquisitions completed during the periods presented have been accounted for using the purchase method of accounting and their results of operations are included from the effective dates of the closings of the acquisitions. The allocations of purchase price to the assets acquired and liabilities assumed are initially assigned and recorded based on preliminary estimates of fair value and may be revised as additional information concerning the valuation of such assets and liabilities becomes available. All significant intercompany balances and transactions have been eliminated in consolidation. Interim Financial Information These interim financial statements are unaudited, and certain information normally included in financial statements prepared in accordance with generally accepted accounting principles has not been included herein. In the opinion of management, all adjustments necessary to fairly present the financial position, results of operations and cash flows with respect to the interim financial statements, have been properly included. Due to seasonality and other factors, the results of operations for the interim periods are not necessarily indicative of the results that will be realized for the entire fiscal year. Recent Accounting Pronouncements In June 2001, Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" was issued. SFAS No. 141 eliminates the use of the pooling-of-interests method of accounting for business combinations and establishes the purchase method as the only acceptable method. The Company adopted this statement effective July 1, 2001. Acquired intangible assets, if any, are separately recognized if, among other things, the benefit is obtained through contractual or other legal rights, such as franchise agreements. Goodwill is recorded only to the extent the purchase price for an entity exceeds the fair value of the net tangible assets and identifiable intangible assets acquired. In June 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" was issued. SFAS No. 142 changes the treatment of goodwill by no longer amortizing goodwill, and instead requiring, at least annually, an assessment for impairment by applying a fair-value based test. However, other identifiable intangible assets are to be separately recognized and amortized. The statement is effective for fiscal years beginning after December 15, 2001. The adoption of the statement will result in the elimination of approximately $7.4 million of goodwill amortization, annually, subsequent to December 31, 2001. Additionally, adoption could result in an impairment of goodwill, based on the new fair-value based test, which would be reflected as a cumulative effect of change in accounting principle on January 1, 2002. In August 2001, SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" was issued. SFAS 144 supercedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of" and Accounting Principles Board Opinion ("APB") No. 30, "Reporting the Results of Operations - Reporting the Effects of the Disposal of a Segment Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS 144 establishes a single accounting 5
model for assets to be disposed of by sale whether previously held and used or newly acquired. SFAS No. 144 retains the provisions of APB No. 30 for presentation of discontinued operations in the income statement, but broadens the presentation to include a component of an entity. SFAS 144 is effective for fiscal years beginning after December 15, 2001, and the interim periods within. The Company does not believe that the adoption of SFAS 144 will have a material impact on its consolidated results of operations or financial position. 3. EARNINGS PER SHARE: SFAS No. 128 requires the presentation of basic earnings per share and diluted earnings per share in financial statements of public enterprises. Under the provisions of this statement, basic earnings per share is computed based on weighted average shares outstanding and excludes dilutive securities. Diluted earnings per share is computed including the impacts of all potentially dilutive securities. The following table sets forth the shares outstanding for the earnings per share calculations: <Table> <Caption> THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------------- -------------------------- 2001 2000 2001 2000 ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> Common stock outstanding, beginning of period ................... 19,698,782 22,435,255 21,260,227 21,801,367 Weighted average common stock issued - Acquisitions ............................................... -- -- -- 633,888 Employee Stock Purchase Plan ............................... 69,224 87,502 154,017 164,552 Stock options exercised .................................... 25,117 1,695 47,779 2,082 Less: Weighted average treasury shares purchased and weighted average shares repurchased and cancelled (270,667) (1,154,650) (1,898,082) (736,707) ----------- ----------- ----------- ----------- Shares used in computing basic earnings per share ............... 19,522,456 21,369,802 19,563,941 21,865,182 Dilutive effect of stock options, net of assumed repurchase of treasury stock ............................... 1,736,385 292,253 1,102,473 357,616 ----------- ----------- ----------- ----------- Shares used in computing diluted earnings per share ............. 21,258,841 21,662,055 20,666,414 22,222,798 =========== =========== =========== =========== </Table> 4. SENIOR SUBORDINATED NOTES: The Company completed the offering of $100 million of its 10 7/8% Senior Subordinated Notes due 2009 (the "Notes") on March 5, 1999. The Notes pay interest semi-annually on March 1 and September 1, each year. Before March 1, 2002, the Company may redeem up to $35 million of the Notes with the proceeds of certain public offerings of common stock at a redemption price of 110.875% of the principal amount plus accrued interest to the redemption date. Additionally, the Company may redeem all or part of the Notes at redemption prices of 105.438%, 103.625%, 101.813% and 100.000% of the principal amount plus accrued interest during the twelve-month periods beginning March 1, of 2004, 2005, 2006, and 2007 and thereafter, respectively. The Notes are jointly and severally guaranteed, on an unsecured senior subordinated basis, by all subsidiaries of the Company (the "Subsidiary Guarantors"), other than certain minor subsidiaries. All of the Subsidiary Guarantors are wholly-owned subsidiaries of the Company. Certain manufacturers have minimum working capital guidelines, which may limit a subsidiary's ability to make distributions to the parent company. 6
5. INTEREST RATE SWAPS: Effective January 1, 2001, the Company adopted the provisions of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. During July 2001, the Company entered into an interest rate swap with a notional amount of $100 million, which converts interest based on 30-day LIBOR to a fixed rate of 4.4% for a two-year period. Based on the interest rates at September 30, 2001, the cash flow settlements to be paid by the Company for the next twelve months would total approximately $1.8 million. The Company entered into the swap to mitigate its exposure to fluctuations in interest rates and has designated the swap as a cash flow hedge. 6. COMPREHENSIVE INCOME: <Table> <Caption> THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------- -------------------- 2001 2000 2001 2000 -------- -------- -------- -------- (dollars in thousands) <S> <C> <C> <C> <C> Net income ...................................................... $ 15,894 $ 11,614 $ 39,285 $ 32,556 Other comprehensive income (loss): Change in fair value of interest rate swap, net of tax ...... (2,212) -- (2,212) -- -------- -------- -------- -------- Comprehensive income ............................................ $ 13,682 $ 11,614 $ 37,073 $ 32,556 ======== ======== ======== ======== </Table> 7. SUBSEQUENT EVENTS: During October 2001, the Company completed a stock offering of 3.3 million shares of common stock, with net proceeds of $99.0 million. The proceeds were used to repay borrowings under the Company's credit facility, which may be re-borrowed for general corporate purposes, including acquisitions. Had the offering been completed at September 30, 2001, the impact would have been to increase shareholder's equity from $275.8 million to $374.8 million, and reduce the long-term debt to capitalization ratio from 27% to 20%. During October 2001, the Company entered into a second interest rate swap to hedge its variable rate debt. The Company swapped $100 million of floating rate interest for a fixed rate of interest of 3.75%, for a period of three years. 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following should be read in conjunction with the response to Part I, Item 1 of this Report and our other filings with the Securities and Exchange Commission ("SEC"). OVERVIEW We are a leading operator in the $1 trillion automotive retailing industry. We operate automobile dealership franchises located in Texas, Oklahoma, Florida, New Mexico, Colorado, Georgia, Louisiana and Massachusetts. We sell new and used cars and light trucks, provide maintenance and repair services, sell replacement parts and arrange vehicle finance, service and insurance contracts. We also operate 22 collision service centers. We have diverse sources of revenues, including: new car sales, new truck sales, used car sales, used truck sales, manufacturer remarketed vehicle sales, parts sales, service sales, collision repair service sales, finance fees, vehicle service contract commissions, insurance commissions, documentary fees and after-market product sales. Sales revenues from new and used vehicle sales and parts and service sales include sales to retail customers, other dealerships and wholesalers. Other dealership revenues includes revenues from arranging financing, vehicle service and insurance contracts and documentary fees, net of a provision for anticipated chargebacks. Our total gross margin varies as our merchandise mix (the mix between new vehicle sales, used vehicle sales, parts and service sales, collision repair service sales and other dealership revenues) changes. Our gross margin on the sale of products and services generally varies significantly, with new vehicle sales generally resulting in the lowest gross margin and other dealership revenues generally resulting in the highest gross margin. When our new vehicle sales increase or decrease at a rate greater than our other revenue sources, our gross margin responds inversely. Factors such as seasonality, weather, cyclicality and manufacturers' advertising and incentives may impact our merchandise mix and, therefore, influence our gross margin. Selling, general and administrative expenses consist primarily of incentive-based compensation for sales, administrative, finance and general management personnel, rent, marketing, insurance and utilities. We believe that approximately 60% of our selling, general and administrative expenses are variable, allowing us to adjust our cost structure based on business trends. Interest expense consists of interest charges on interest-bearing debt, including floorplan inventory financing, net of interest income earned. We receive interest assistance from various of our manufacturers. This assistance, which is reflected as a reduction of cost of sales, generally equals between 80% and 90% of our floorplan interest expense. SELECTED OPERATIONAL AND FINANCIAL DATA FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2000 NEW VEHICLE DATA <Table> <Caption> (dollars in thousands, except per unit amounts) INCREASE/ PERCENT 2001 2000 (DECREASE) CHANGE ---- ---- ---------- ------ <S> <C> <C> <C> <C> Retail unit sales ................................ 23,354 23,728 (374) (1.6)% Retail sales revenues ............................ $604,912 $588,328 $ 16,584 2.8% Gross profit ..................................... $ 46,331 $ 45,837 $ 494 1.1% Average gross profit per retail unit sold ........ $ 1,984 $ 1,932 $ 52 2.7% Gross margin ..................................... 7.7% 7.8% (0.1)% </Table> 8
USED VEHICLE DATA <Table> <Caption> (dollars in thousands, except per unit amounts) INCREASE/ PERCENT 2001 2000 (DECREASE) CHANGE ---- ---- ---------- ------ <S> <C> <C> <C> <C> Retail unit sales ................................ 17,256 15,536 1,720 11.1% Total revenues ................................... $284,517 $258,861 $ 25,656 9.9% Retail sales revenues(1) ......................... $239,915 $207,263 $ 32,652 15.8% Gross profit ..................................... $ 23,039 $ 21,445 $ 1,594 7.4% Average gross profit per retail unit sold ........ $ 1,335 $ 1,380 $ (45) (3.3)% Retail gross margin .............................. 9.6% 10.3% (0.7)% </Table> - ---------- (1) Excludes used vehicle wholesale revenues, as these transactions facilitate retail vehicle sales and are not expected to generate profit. PARTS AND SERVICE DATA <Table> <Caption> (dollars in thousands) PERCENT 2001 2000 INCREASE CHANGE ---- ---- ---------- ------- <S> <C> <C> <C> <C> Sales revenues ................................... $95,048 $78,714 $16,334 20.8% Gross profit ..................................... $52,549 $42,649 $ 9,900 23.2% Gross margin ..................................... 55.3% 54.2% 1.1% </Table> OTHER DEALERSHIP REVENUES, NET <Table> <Caption> (dollars in thousands, except per unit amounts) INCREASE/ PERCENT 2001 2000 (DECREASE) CHANGE ---- ---- ---------- ------- <S> <C> <C> <C> <C> Retail new and used unit sales ................... 40,610 39,264 1,346 3.4% Retail sales revenues ............................ $ 36,553 $ 29,054 $ 7,499 25.8% Other dealership revenues, net per retail unit sold ............................... $ 900 $ 740 $ 160 21.6% </Table> SAME STORE REVENUES COMPARISON(1) <Table> <Caption> (dollars in thousands) INCREASE/ PERCENT 2001 2000 (DECREASE) CHANGE ---- ---- ---------- ------ <S> <C> <C> <C> <C> New vehicle ...................................... $573,041 $573,431 $ (390) (0.1)% Used vehicle ..................................... 263,376 249,649 13,727 5.5% Parts and service ................................ 86,363 75,930 10,433 13.7% Other dealership revenues, net ................... 33,509 28,111 5,398 19.2% -------- -------- -------- ---- Total revenues ................... $956,289 $927,121 $ 29,168 3.1% </Table> - ---------- (1) Includes only those dealerships owned during all of the months of both periods in the comparison. 9
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED WITH THREE MONTHS ENDED SEPTEMBER 30, 2000 REVENUES. Revenues increased $66.0 million, or 6.9%, to $1,021.0 million for the three months ended September 30, 2001, from $955.0 million for the three months ended September 30, 2000. Although new vehicle unit sales were stable, new vehicle revenues increased as trucks, which have a higher average selling price than cars, and luxury vehicles became a greater percentage of our business. The growth in used vehicle revenues was primarily attributable to expanded operations in Atlanta, Albuquerque, Boston and Houston and dealership operations acquired in Atlanta. The increase in parts and service revenues was due to strong same store sales growth in the Houston, Atlanta, Oklahoma and Boston markets, coupled with the additional dealership operations acquired. Other dealership revenues increased primarily due to increased sales training, company-wide benchmarking and a favorable interest rate environment. GROSS PROFIT. Gross profit increased $19.5 million, or 14.0%, to $158.5 million for the three months ended September 30, 2001, from $139.0 million for the three months ended September 30, 2000. The increase was attributable to increased revenues and an increase in gross margin from 14.6% for the three months ended September 30, 2000, to 15.5% for the three months ended September 30, 2001. The gross margin increased as lower margin new vehicle revenues decreased as a percentage of total revenues to 59.2% from 61.6%. The gross margin on retail used vehicle sales decreased to 9.6% from 10.3% due primarily to pressure on used vehicle values caused by aggressive incentives placed on new vehicles by the manufacturers. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased $16.4 million, or 15.9%, to $119.4 million for the three months ended September 30, 2001, from $103.0 million for the three months ended September 30, 2000. The increase was primarily attributable to the additional dealership operations acquired and increased variable expenses, including incentive pay to employees. Selling, general and administrative expenses increased as a percentage of gross profit to 75.3% from 74.1% due primarily to the additional dealership operations acquired and incentive compensation. INTEREST EXPENSE. Floorplan and other interest expense, net, decreased $4.0 million, or 30.3%, to $9.2 million for the three months ended September 30, 2001, from $13.2 million for the three months ended September 30, 2000. The decrease was due to a decline in interest rates. During the quarter there was a 307 basis point rate reduction of the average LIBOR as compared to the prior year. Partially offsetting the rate decrease was an increase in debt outstanding. The increase in debt outstanding was primarily attributable to the floorplan borrowings of the additional dealership operations acquired. SELECTED OPERATIONAL AND FINANCIAL DATA FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2000 NEW VEHICLE DATA <Table> <Caption> (dollars in thousands, except per unit amounts) INCREASE/ PERCENT 2001 2000 (DECREASE) CHANGE ---- ---- ---------- ------ <S> <C> <C> <C> <C> Retail unit sales ................................ 66,963 67,194 (231) (0.3)% Retail sales revenues ............................ $1,735,251 $1,659,564 $ 75,687 4.6% Gross profit ..................................... $ 131,507 $ 129,165 $ 2,342 1.8% Average gross profit per retail unit sold ........ $ 1,964 $ 1,922 $ 42 2.2% Gross margin ..................................... 7.6% 7.8% (0.2)% </Table> 10
USED VEHICLE DATA <Table> <Caption> (dollars in thousands, except per unit amounts) INCREASE/ PERCENT 2001 2000 (DECREASE) CHANGE ---- ---- ---------- ------ <S> <C> <C> <C> <C> Retail unit sales ................................ 50,784 45,817 4,967 10.8% Total revenues ................................... $848,877 $774,939 $ 73,938 9.5% Retail sales revenues(1) ......................... $704,218 $620,158 $ 84,060 13.6% Gross profit ..................................... $ 70,219 $ 63,207 $ 7,012 11.1% Average gross profit per retail unit sold ........ $ 1,383 $ 1,380 $ 3 0.2% Retail gross margin .............................. 10.0% 10.2% (0.2)% </Table> - ---------- (1) Excludes used vehicle wholesale revenues, as these transactions facilitate retail vehicle sales and are not expected to generate profit. PARTS AND SERVICE DATA <Table> <Caption> (dollars in thousands) PERCENT 2001 2000 INCREASE CHANGE ---- ---- -------- ------ <S> <C> <C> <C> <C> Sales revenues ..................... $268,729 $226,781 $ 41,948 18.5% Gross profit ....................... $148,887 $123,939 $ 24,948 20.1% Gross margin ....................... 55.4% 54.7% 0.7% </Table> OTHER DEALERSHIP REVENUES, NET <Table> <Caption> (dollars in thousands, except per unit amounts) PERCENT 2001 2000 INCREASE CHANGE ---- ---- -------- ------ <S> <C> <C> <C> <C> Retail new and used unit sales .............. 117,747 113,011 4,736 4.2% Retail sales revenues ....................... $103,608 $ 83,721 $ 19,887 23.8% Net revenues per retail unit sold ........... $ 880 $ 741 $ 139 18.8% </Table> SAME STORE REVENUES COMPARISON(1) <Table> <Caption> (dollars in thousands) PERCENT 2001 2000 INCREASE CHANGE ---- ---- -------- ------ <S> <C> <C> <C> <C> New vehicle ....................... $1,628,432 $1,608,871 $ 19,561 1.2% Used vehicle ...................... 779,735 742,275 37,460 5.0% Parts and service ................. 244,318 217,750 26,568 12.2% Other dealership revenues, net .... 95,500 79,218 16,282 20.6% ---------- ---------- ---------- ------- Total revenues .... $2,747,985 $2,648,114 $ 99,871 3.8% </Table> (1) Includes only those dealerships owned during all of the months of both periods in the comparison. 11
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 2000 REVENUES. Revenues increased $211.5 million, or 7.7%, to $2,956.5 million for the nine months ended September 30, 2001, from $2,745.0 million for the nine months ended September 30, 2000. Although new vehicle unit sales were stable, new vehicle revenues increased as trucks, which have a higher average selling price than cars, and luxury vehicles became a greater percentage of our business. The growth in used vehicle revenues was primarily attributable to expanded operations in Atlanta and Albuquerque and dealership operations acquired in Atlanta. The increase in parts and service revenues was due to strong same store growth in the Houston, south Florida, Oklahoma and Boston markets, coupled with the additional dealership operations acquired. Other dealership revenues increased primarily due to increased sales training, company-wide benchmarking and a favorable interest rate environment. GROSS PROFIT. Gross profit increased $54.2 million, or 13.6%, to $454.2 million for the nine months ended September 30, 2001, from $400.0 million for the nine months ended September 30, 2000. The increase was attributable to increased revenues and an increase in gross margin to 15.4% for the nine months ended September 30, 2001, from 14.6% for the nine months ended September 30, 2000. The gross margin increased as lower margin new vehicle revenues decreased as a percentage of total revenues to 58.7% from 60.5%. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased $46.1 million, or 15.5%, to $343.9 million for the nine months ended September 30, 2001, from $297.8 million for the nine months ended September 30, 2000. The increase was primarily attributable to the additional dealership operations acquired and increased variable expenses, including incentive pay to employees. Selling, general and administrative expenses increased as a percentage of gross profit to 75.7% from 74.4% due primarily to the additional dealership operations acquired and incentive compensation. INTEREST EXPENSE. Floorplan and other interest expense, net, decreased $4.6 million, or 11.9%, to $34.2 million for the nine months ended September 30, 2001, from $38.8 million for the nine months ended September 30, 2000. The decrease was due to a decline in interest rates. During the nine month period ended September 30, 2001, there was a 189 basis point rate reduction of the average LIBOR as compared to the prior year. Offsetting the rate decrease was an increase in average debt outstanding. The increase in debt outstanding was primarily attributable to the floorplan borrowings of the additional dealership operations acquired, additional floorplan borrowings due to excess inventory levels during the first three months of 2001 and borrowings related to share repurchases. OTHER INCOME, NET. Other income, net, decreased $979,000 to $48,000 for the nine months ended September 30, 2001, from $1,027,000 for the nine months ended September 30, 2000. The decrease is due primarily to a $1 million gain from the sale of a Chrysler franchise in Austin, Texas, in 2000. LIQUIDITY AND CAPITAL RESOURCES Our principal sources of liquidity are cash on hand, cash from operations, our credit facility, which includes the floorplan tranche and the acquisition tranche, and equity and debt offerings. CASH FLOWS OPERATING ACTIVITIES. During the first nine months of 2001 we generated cash flow from operations of approximately $86.5 million, an increase of $45.0 million compared to the same period in the prior year. Excluding working capital changes, cash flows from operating activities increased $5.9 million over the prior year period. INVESTING ACTIVITIES. During the first nine months of 2001 we used approximately $16.4 million in investing activities. We paid $11.8 million for purchases of property and equipment, of which $6.7 million was used for the purchase of land and construction of facilities for new or expanded operations. We have 12
used $9.4 million in acquisitions of two franchises and received $5.4 million from the sales of eight franchises, for which no gain or loss was recognized. FINANCING ACTIVITIES. During the first nine months of 2001 we used approximately $63.6 million in financing activities, primarily to repay borrowings under our credit facility and for purchases of our common stock and senior subordinates notes. WORKING CAPITAL. At September 30, 2001, we had working capital of $51.0 million. Historically, we have funded our operations with internally generated cash flow and borrowings. Certain manufacturers have minimum working capital guidelines, which may limit a subsidiary's ability to make distributions to the parent company. While we cannot guarantee it, based on current facts and circumstances, we believe we have adequate cash flows coupled with borrowings under our credit facility to fund our current operations. STOCK OFFERING During October 2001, we completed a 3.3 million share common stock offering at $31 per share, with net proceeds of $99.0 million. The proceeds were used to repay borrowings under our credit facility, which may be re-borrowed for general corporate purposes, including acquisitions. CREDIT FACILITY We have a $900 million credit facility, which matures in December 2003. The credit facility consists of two tranches: the floorplan and acquisition tranches. The acquisition tranche totals $200 million and, as of November 1, 2001, $200.0 million was available, subject to a cash flow calculation and the maintenance of certain financial ratios and various covenants. CAPITAL EXPENDITURES Our capital expenditures include expenditures to extend the useful life of current facilities and expenditures to start or expand operations. Historically, our annual capital expenditures, exclusive of new or expanded operations, have approximately equaled our annual depreciation charge. Expenditures relating to the construction or expansion of dealership facilities, generally, are driven by new franchises being awarded to us by a manufacturer or significant growth in sales at an existing facility. ACQUISITION FINANCING We anticipate investing between $20 million and $30 million in completing tuck-in acquisitions during 2001. We expect the cash needed to complete our acquisitions will come from the operating cash flows of our existing dealerships and borrowings under our current credit facility. We anticipate, subject to market conditions, increasing our acquisition activity during 2002. STOCK REPURCHASE The board of directors has authorized us to repurchase a portion of our stock, subject to management's judgment and the restrictions of our various debt agreements. Our agreements, subject to other covenants, allow us to spend approximately 33% of our cumulative net income to repurchase stock. During the first nine months of 2001, we repurchased approximately 735,000 shares for $12.2 million, excluding shares repurchased to fulfill obligations under our employee stock purchase plan. Management will continue to review its investment alternatives to determine when it is appropriate to repurchase stock. 13
CAUTIONARY STATEMENT ABOUT FORWARD LOOKING STATEMENTS This quarterly report includes certain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements include statements regarding our plans, goals, beliefs or current expectations, including those plans, goals, beliefs and expectations of our officers and directors with respect to, among other things: o the completion of pending and future acquisitions o operating cash flows and availability of capital o future stock repurchases o capital expenditures Any such forward-looking statements are not assurances of future performance and involve risks and uncertainties. Actual results may differ materially from anticipated results in the forward-looking statements for a number of reasons, including: o the future economic environment, including consumer confidence, may affect the demand for new and used vehicles and parts and service sales o regulatory environment, adverse legislation, or unexpected litigation o our principal automobile manufacturers, especially Ford and Toyota, may not continue to enjoy high customer satisfaction with their products and they may not continue to support and make high-demand vehicles available to us o requirements imposed on us by our manufacturers may affect our acquisitions and capital expenditures related to our dealership facilities o our dealership operations may not perform at expected levels or achieve expected improvements o we may not achieve expected future cost savings and our future costs could be higher than we expected o available capital resources and various debt agreements may limit our ability to repurchase shares. Any repurchases of our stock may be made, from time to time, in accordance with applicable securities laws, in the open market or in privately negotiated transactions at such time and in such amounts, as we consider appropriate o available capital resources may limit our ability to complete acquisitions o available capital resources may limit our ability to complete construction of new or expanded facilities This information and additional factors that could affect our operating results and performance are described in our filings with the SEC. We urge you to carefully consider those factors. All forward-looking statements attributable to us are qualified in their entirety by this cautionary statement. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The following information about our market sensitive financial instruments updates the information provided as of December 31, 2000, in our Annual Report on Form 10-K and constitutes a "forward-looking statement". Our major market risk exposure is changing interest rates. Our policy is to manage interest rates through use of a combination of fixed and floating rate debt. Interest rate swaps may be used to adjust interest rate exposures, when appropriate, based upon market conditions. These swaps are entered into with financial institutions with investment grade credit ratings, thereby minimizing the risk of credit loss. All items described are non-trading. Since December 31, 2000, our floorplan notes payable have decreased, primarily due to decreases in inventory levels. As of September 30, 2001, there was $5.7 million outstanding under the acquisition portion of the credit facility, a $29.6 million decrease since December 31, 2000. Subsequent to September 30, 2001, we completed a common stock offering for proceeds of $99.0 million. The proceeds were used 14
to pay off the balance outstanding under the acquisition portion of the credit facility, with the remainder being used to pay down a portion of the floorplan portion of the credit facility. During July 2001, we entered into a two-year interest rate swap with a notional amount of $100 million. Additionally, during October 2001, we entered into a three-year interest swap with a notional amount of $100 million. The effect of these swaps is to convert the interest rate on a portion of our borrowings from the 30-day LIBOR to a fixed rate of interest. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS From time to time, our dealerships are named in claims involving the manufacture of automobiles, contractual disputes and other matters arising in the ordinary course of business. Currently, no legal proceedings are pending against or involve us that, in our opinion, based on current known facts and circumstances, could reasonably be expected to have a material adverse effect on our financial position. ITEM 2. CHANGES IN SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION Charles Smith, a member of the Company's Board of Directors and Senior Vice President - Industry Relations, retired and resigned as a director and officer effective November 2, 2001. The Company and Mr. Smith have entered into a consulting agreement, which will pay Mr. Smith $8,333, per month, for three years. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A. EXHIBITS: 11.1 Statement re: computation of earnings per share is included under Note 3 to the financial statements. B. REPORTS ON FORM 8-K: None. 15
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Group 1 Automotive, Inc. November 13, 2001 By: /s/ Scott L. Thompson - ----------------- ----------------------------------------- Date Scott L. Thompson, Senior Vice President, Chief Financial Officer and Treasurer 16