SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO ___________
COMMISSION FILE NUMBER: 1-13107
AUTONATION, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 73-1105145
(STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NO.)
110 S.E. 6TH STREET
FT. LAUDERDALE, FLORIDA 33301
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (954) 769-6000
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 [ ]
On October 26, 2001 the registrant had 324,967,303 outstanding shares of
common stock, par value $.01 per share.
AUTONATION, INC.
INDEX
PART I. FINANCIAL INFORMATION
PAGE
----
ITEM 1. FINANCIAL STATEMENTS
Unaudited Condensed Consolidated Balance Sheets as
of September 30, 2001 and December 31, 2000.......................... 3
Unaudited Condensed Consolidated Income Statements
for the Three and Nine Months Ended September 30, 2001 and 2000...... 4
Unaudited Condensed Consolidated Statement of Shareholders'
Equity for the Nine Months Ended September 30, 2001.................. 5
Unaudited Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 2001 and 2000................ 6
Notes to Unaudited Condensed Consolidated Financial Statements.......... 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................ 19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.............. 30
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS....................................................... 31
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................................ 32
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AUTONATION, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
2001 2000
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents .................................. $ 89.1 $ 84.6
Receivables, net ........................................... 980.2 1,126.7
Inventory .................................................. 2,248.8 2,774.4
Other current assets ....................................... 64.6 67.0
----------- ----------
Total Current Assets ................................. 3,382.7 4,052.7
INVESTMENTS, INCLUDING RESTRICTED ASSETS ...................... 226.8 199.6
PROPERTY AND EQUIPMENT, NET ................................... 1,545.3 1,538.1
INTANGIBLE ASSETS, NET ........................................ 2,881.1 2,920.2
OTHER ASSETS .................................................. 117.2 156.7
----------- ----------
Total Assets .......................................... $ 8,153.1 $ 8,867.3
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Floorplan notes payable .................................... $ 1,921.2 $ 2,454.0
Accounts payable ........................................... 141.2 143.2
Notes payable and current maturities of
long-term debt ........................................... 8.3 6.8
Other current liabilities .................................. 572.3 574.6
----------- ----------
Total Current Liabilities ............................ 2,643.0 3,178.6
LONG-TERM DEBT, NET OF CURRENT MATURITIES ..................... 611.3 850.4
DEFERRED INCOME TAXES ......................................... 890.9 877.2
OTHER LIABILITIES ............................................. 129.4 118.6
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, par value $.01 per share;
5,000,000 shares authorized; none issued ................. -- --
Common stock, par value $.01 per share;
1,500,000,000 shares authorized;
475,912,937 and 475,559,195 shares
issued including shares held in
treasury, respectively ................................. 4.8 4.8
Additional paid-in capital ................................. 4,666.5 4,664.7
Retained earnings .......................................... 874.7 649.3
Accumulated other comprehensive income ..................... 2.0 1.0
Treasury stock, at cost; 148,719,609 and
127,473,709 shares held, respectively .................... (1,669.5) (1,477.3)
----------- ----------
Total Shareholders' Equity ............................ 3,878.5 3,842.5
----------- ----------
Total Liabilities and Shareholders' Equity ............ $ 8,153.1 $ 8,867.3
=========== ==========
The accompanying notes are an integral part of these statements.
3
AUTONATION, INC.
UNAUDITED CONDENSED CONSOLIDATED INCOME STATEMENTS
(IN MILLIONS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- -----------------------------
2001 2000 2001 2000
----------- ----------- ------------ ------------
REVENUE ....................................................... $ 5,011.5 $ 5,338.1 $ 14,840.6 $ 15,907.8
COST OF OPERATIONS ............................................ 4,252.2 4,560.7 12,588.2 13,594.3
----------- ----------- ------------ ------------
GROSS MARGIN .................................................. 759.3 777.4 2,252.4 2,313.5
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES .................. 554.8 547.3 1,649.4 1,650.4
DEPRECIATION .................................................. 18.0 14.6 50.0 42.4
AMORTIZATION .................................................. 20.4 20.4 60.8 58.7
RESTRUCTURING AND IMPAIRMENT EXPENSE (RECOVERY), NET .......... (.6) (2.2) 8.1 (2.2)
OTHER GAINS ................................................... (.3) -- (19.3) --
----------- ----------- ------------ ------------
OPERATING INCOME .............................................. 167.0 197.3 503.4 564.2
FLOORPLAN INTEREST EXPENSE .................................... (26.8) (47.8) (107.8) (146.8)
OTHER INTEREST EXPENSE ........................................ (11.2) (13.8) (30.6) (36.2)
INTEREST INCOME ............................................... 2.5 3.0 6.1 11.7
OTHER INCOME (EXPENSE), NET ................................... (1.6) 10.3 (2.4) 14.1
----------- ----------- ------------ ------------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES ......... 129.9 149.0 368.7 407.0
PROVISION FOR INCOME TAXES .................................... 50.7 55.9 143.3 152.6
----------- ----------- ------------ ------------
INCOME FROM CONTINUING OPERATIONS ............................. 79.2 93.1 225.4 254.4
INCOME FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES ...... -- -- -- 1.8
----------- ----------- ------------ ------------
NET INCOME .................................................... $ 79.2 $ 93.1 $ 225.4 $ 256.2
=========== =========== ============ ============
BASIC EARNINGS PER SHARE:
Continuing operations ................................... $ .24 $ .26 $ .67 $ .70
Discontinued operations ................................. -- -- -- .01
----------- ----------- ------------ ------------
Net income .............................................. $ .24 $ .26 $ .67 $ .71
=========== =========== ============ ============
Weighted-average common shares outstanding .............. 331.2 361.3 336.5 363.2
=========== =========== ============ ============
DILUTED EARNINGS PER SHARE:
Continuing operations ................................... $ .24 $ .26 $ .67 $ .70
Discontinued operations ................................. -- -- -- .01
----------- ----------- ------------ ------------
Net income .............................................. $ .24 $ .26 $ .67 $ .71
=========== =========== ============ ============
Weighted-average common shares outstanding .............. 333.4 361.3 338.2 363.4
=========== =========== ============ ============
The accompanying notes are an integral part of these statements.
4
AUTONATION, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
(IN MILLIONS)
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY
STOCK CAPITAL EARNINGS INCOME STOCK TOTAL
------- ----------- -------- ------------- --------- ---------
BALANCE AT DECEMBER 31, 2000 ...... $4.8 $4,664.7 $649.3 $1.0 $(1,477.3) $3,842.5
Purchases of treasury stock .. -- -- -- -- (192.2) (192.2)
Exercise of stock options
and warrants ............... -- 2.5 -- -- -- 2.5
Other comprehensive income ... -- -- -- 1.0 -- 1.0
Other ........................ -- (.7) -- -- -- (.7)
Net income ................... -- -- 225.4 -- -- 225.4
---- -------- ------ ---- --------- --------
BALANCE AT SEPTEMBER 30, 2001 ..... $4.8 $4,666.5 $874.7 $2.0 $(1,669.5) $3,878.5
==== ======== ====== ==== ========= ========
The accompanying notes are an integral part of these statements.
5
AUTONATION, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2001 2000
--------- ---------
CASH PROVIDED BY OPERATING ACTIVITIES:
Net income .............................................. $ 225.4 $ 256.2
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ........................ 110.8 101.1
Amortization of debt issue costs and discounts ....... 1.0 1.3
Deferred income tax provision ........................ 14.3 53.4
Non-cash restructuring and impairment charges, net ... 8.1 (2.2)
Other gains .......................................... (19.3) --
Gain on sale of marketable securities, net ........... (.3) (19.3)
Income from discontinued operations .................. -- (1.8)
Other ................................................ (2.1) (1.7)
Changes in assets and liabilities, net of effects
from business combinations:
Receivables .................................... 60.8 (66.0)
Inventory ...................................... 472.9 357.8
Other assets ................................... 7.2 (38.6)
Floorplan notes payable ........................ (493.0) (231.8)
Accounts payable and accrued liabilities ....... (19.6) (163.7)
Other liabilities .............................. 43.2 86.2
--------- ---------
409.4 330.9
--------- ---------
CASH PROVIDED BY INVESTING ACTIVITIES:
Purchases of property and equipment ..................... (86.3) (82.8)
Proceeds from sale of property and equipment
and assets held for sale ............................. 78.0 112.7
Funding of installment loan receivables, net of
collections .......................................... (444.2) (451.4)
Proceeds from sales of installment loan
receivables .......................................... 514.0 585.1
Net changes in restricted cash .......................... 110.7 (63.4)
Purchases of restricted investments ...................... (152.1) (.8)
Sales of restricted investments ......................... 14.2 82.7
Cash used in business acquisitions, net of
cash acquired ........................................ (83.2) (242.8)
Cash received from business divestitures ................ 61.2 77.5
Other ................................................... 3.3 (.5)
--------- ---------
15.6 16.3
--------- ---------
CASH USED IN FINANCING ACTIVITIES:
Net payments under revolving credit facilities .......... (615.0) --
Purchases of treasury stock ............................. (187.2) (110.7)
Proceeds from sale leaseback financing .................. -- 52.1
Payments of notes payable and long-term debt ............ (55.5) (168.8)
Proceeds from issuance of unsecured senior notes ........ 434.7 --
Other ................................................... 2.5 1.2
--------- ---------
(420.5) (226.2)
--------- ---------
CASH PROVIDED BY CONTINUING OPERATIONS ..................... 4.5 121.0
CASH USED IN DISCONTINUED OPERATIONS ....................... -- (223.4)
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ........... 4.5 (102.4)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD,
INCLUDING CASH AND CASH EQUIVALENTS OF
DISCONTINUED OPERATIONS OF $17.4 IN 2000 ................ 84.6 238.2
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................. $ 89.1 $ 135.8
========= =========
The accompanying notes are an integral part of these statements.
6
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN MILLIONS, EXCEPT PER SHARE DATA)
1. INTERIM FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements
include the accounts of AutoNation, Inc. and its subsidiaries (the "Company")
and have been prepared by the Company pursuant to the rules and regulations of
the Securities and Exchange Commission. All significant intercompany accounts
and transactions have been eliminated. Certain information related to the
Company's organization, significant accounting policies and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted. These unaudited condensed consolidated financial statements reflect, in
the opinion of management, all material adjustments (which include only normal
recurring adjustments) necessary to fairly state, in all material respects, the
financial position and the results of operations for the periods presented and
the disclosures herein are adequate to make the information presented not
misleading in any material respect.
Operating results for interim periods are not necessarily indicative of
the results that can be expected for a full year. These interim financial
statements should be read in conjunction with the Company's audited consolidated
financial statements and notes thereto included in the Company's most recent
Annual Report on Form 10-K.
As discussed in Note 14, Discontinued Operations, the Company's former
automotive rental businesses, organized under ANC Rental Corporation ("ANC
Rental"), have been accounted for as discontinued operations in the accompanying
unaudited condensed consolidated financial statements and accordingly, the
operating results of ANC Rental for the periods prior to disposition have been
classified as discontinued operations in the accompanying unaudited condensed
consolidated financial statements presented.
In order to maintain consistency and comparability between periods
presented, certain amounts have been reclassified from the previously reported
financial statements to conform with the financial statement presentation of the
current period.
2. INVENTORY AND FLOORPLAN NOTES PAYABLE
Inventory consists of the following:
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
New vehicles............................... $1,759.1 $2,301.0
Used vehicles.............................. 338.4 317.9
Parts, accessories and other............... 151.3 155.5
-------- --------
$2,248.8 $2,774.4
======== ========
At September 30, 2001 and December 31, 2000, floorplan notes payable
totaled $1.92 billion and $2.45 billion, respectively. The Company finances
vehicle inventory through secured floorplan facilities at a LIBOR-based rate of
interest with manufacturers' captive finance subsidiaries, as well as
independent financial institutions. As of September 30, 2001, capacity under the
floorplan credit facilities was approximately $3.50 billion.
3. INVESTMENTS
Investments consist of the following:
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
Restricted cash and investments............ $ 195.4 $ 160.8
Marketable securities...................... 3.7 5.2
Equity method investments.................. 27.7 33.6
--------- ---------
$ 226.8 $ 199.6
========= =========
At September 30, 2001, $195.4 million of cash and investments are
restricted under certain insurance programs. These investments consist primarily
of marketable corporate and government debt securities that are classified as
available-for-sale.
7
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
4. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consist of the following:
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
Revolving credit facilities ...................... $ -- $ 615.0
Senior unsecured notes, net of unamortized
discount of $5.6 million ..................... 444.4 --
Other debt ....................................... 175.2 242.2
-------- --------
619.6 857.2
Less: current portion ........................... (8.3) (6.8)
-------- --------
Long-term debt, net of current maturities $ 611.3 $ 850.4
======== ========
The Company had a multi-year unsecured revolving credit facility which
provided $1.0 billion of financing and was scheduled to mature in April 2002.
This facility was repaid in full and terminated on August 10, 2001. Another
facility provided $250.0 million of borrowing capacity until its termination on
June 29, 2001. On August 10, 2001, the Company entered into two new senior
secured revolving credit facilities with an aggregate borrowing capacity of
$500.0 million. The 364-day revolving credit facility provides borrowings up to
$200.0 million at a LIBOR-based interest rate. The five-year facility provides
borrowings up to $300.0 million at a LIBOR-based interest rate. These facilities
are secured by a pledge of the capital stock of certain subsidiaries of the
Company, which directly or indirectly own substantially all of the Company's
dealerships, and are guaranteed by substantially all of the Company's
subsidiaries.
On August 10, 2001, the Company sold $450.0 million of 9.0% senior
unsecured notes due August 1, 2008 at a price of 98.731% of face value. The
notes are guaranteed by substantially all of the Company's subsidiaries. The
Company used the net proceeds of the offering to repay outstanding amounts under
the $1.0 billion revolving credit facility and certain other debt. The Company
will use any remaining proceeds as well as any amounts drawn under the new
revolving credit facilities for capital expenditures, strategic acquisitions,
working capital and other general corporate purposes.
Within the meaning of Regulation S-X, Rule 3-10, AutoNation, Inc. (the
parent company) has no independent assets or operations, the guarantees of its
subsidiaries are full and unconditional and joint and several, and any
subsidiaries other than the guarantor subsidiaries are minor.
At September 30, 2001, the Company had $116.0 million outstanding under
a mortgage facility with an automotive manufacturer's captive finance
subsidiary. This facility has a ten-year term and an aggregate capacity of
$150.0 million. In October 2001, the Company entered into another mortgage
facility with a separate automotive manufacturer's captive finance subsidiary
with a five-year term and an aggregate capacity of $150.0 million. Both
facilities bear interest at a LIBOR-based interest rate and are secured by
mortgages on certain of the Company's dealerships' real property.
8
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company's new credit facilities and the indenture for the Company's
senior notes contain numerous customary financial and operating covenants that
place certain restrictions on the Company, including the Company's ability to
incur additional indebtedness, to create liens or other encumbrances, to make
certain payments (including dividends and share repurchases), acquisitions or
investments, and to dispose of certain assets and merge or consolidate with
other entities. The new credit facilities and the indenture also require the
Company to meet certain customary financial ratios and tests.
5. SHAREHOLDERS' EQUITY
During the three months ended September 30, 2001, the Company
repurchased 6.2 million shares of its common stock for an aggregate purchase
price of $63.1 million. During the nine months ended September 30, 2001, the
Company repurchased 21.2 million shares of its common stock for an aggregate
purchase price of $192.2 million. Through September 30, 2001, an aggregate of
148.9 million shares of common stock have been acquired under the Company's
share repurchase programs for an aggregate purchase price of $1.67 billion,
leaving approximately $74.9 million available for share repurchases under the
programs. In October 2001, the Company's Board of Directors authorized an
additional $250.0 million share repurchase program.
6. INCOME TAXES
Income taxes have been provided based upon the Company's anticipated
annual effective income tax rate.
Over the past four years, the Company has engaged in certain
transactions that are of a type that the Internal Revenue Service has recently
indicated it intends to challenge. A significant amount of the Company's
deferred tax liabilities relates to these transactions. The Company believes
that its tax returns appropriately reflect such transactions. However, at the
present time, the Company is unable to predict the outcome of any challenge if
the IRS determines to challenge the tax reporting of such transactions. An
unfavorable settlement or adverse resolution of these matters could have a
material adverse effect on the Company's financial condition, results of
operations, cash flows and assets.
7. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the
weighted-average number of common shares outstanding during the period. Diluted
earnings per share is based on the combined weighted-average number of common
shares and common share equivalents outstanding which include, where
appropriate, the assumed exercise or conversion of options and warrants.
The computation of weighted-average common and common equivalent shares
used in the calculation of basic and diluted earnings per share is shown below:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -------------------
2001 2000 2001 2000
------ ------ ------ -------
Weighted-average common shares outstanding used to
calculate basic earnings per share......................... 331.2 361.3 336.5 363.2
Effect of dilutive options and warrants...................... 2.2 -- 1.7 .2
----- ----- ----- -----
Weighted-average common and common equivalent shares used to
calculate diluted earnings per share....................... 333.4 361.3 338.2 363.4
===== ===== ===== =====
At September 30, 2001 and 2000, the Company had approximately 58.5
million and 57.2 million stock options outstanding, respectively, of which 47.2
million and 56.9 million, respectively, have been excluded from the computation
of diluted earnings per share since they are anti-dilutive.
9
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
8. COMPREHENSIVE INCOME
Comprehensive income (loss) is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ---------------------
2001 2000 2001 2000
------ ------- ------- -------
Net income.................................. $ 79.2 $ 93.1 $ 225.4 $ 256.2
Other comprehensive income (loss)........... 1.8 (2.7) 1.0 1.3
------ ------- ------- -------
Comprehensive income........................ $ 81.0 $ 90.4 $ 226.4 $ 257.5
====== ======= ======= =======
9. BUSINESS ACQUISITIONS AND DIVESTITURES
Businesses acquired through September 30, 2001 are accounted for under
the purchase method of accounting and are included in the unaudited condensed
consolidated financial statements from the date of acquisition.
During the nine months ended September 30, 2001 and 2000, the Company
acquired various automotive retail businesses. The Company paid approximately
$72.7 million and $122.5 million, respectively, in cash for these acquisitions
as part of its acquisition strategy to target single dealerships or dealership
groups in key existing markets. During the nine months ended September 30, 2001
and 2000, the Company also paid approximately $10.5 million and $120.3 million,
respectively, in deferred purchase price for certain prior year automotive
retail acquisitions.
The preliminary purchase price allocations for business combinations
relating to continuing operations for the nine months ended September 30, were
as follows:
2001 2000
------- -------
Property and equipment.................................. $ 27.0 $ 7.0
Intangible and other assets............................. 41.8 120.1
Working capital......................................... 4.3 67.7
Debt assumed............................................ (.8) (69.9)
Other................................................... .4 (2.4)
------- -------
Cash used in acquisitions, net of cash acquired......... $ 72.7 $ 122.5
======= =======
10
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
In the normal course of business, the Company will periodically divest
of dealerships that do not meet certain operational, financial, and strategic
criteria. In April 2001, the Company completed the sale of its Flemington dealer
group, resulting in a pre-tax gain of $19.1 million which was included in Other
Gains in the accompanying 2001 Unaudited Condensed Consolidated Income
Statements. Revenue for the operations disposed or to be disposed was $147.5
million and $774.0 million during the nine months ended September 30, 2001 and
2000, respectively. Operating income (loss) for the operations disposed or to be
disposed was ($.2) million and $20.6 million for the nine months ended September
30, 2001 and 2000, respectively.
10. INSTALLMENT LOAN RECEIVABLES AND ASSET SECURITIZATIONS
The Company securitizes installment loan receivables through a $625.0
million commercial paper warehouse facility with unrelated financial
institutions. In September 2001, the Company decreased the capacity of the
commercial paper warehouse facility from $1.0 billion to $625.0 million. The
warehouse facility has a renewable 364-day term and requires an annual
securitization transaction to reduce the outstanding indebtedness. During the
nine months ended September 30, 2001, the Company sold installment loan
receivables of $397.5 million under this program, net of retained interests. At
September 30, 2001, $75.4 million was outstanding under this program, net of
retained interests.
The Company also securitizes installment loan receivables through a
non-consolidated special purpose entity, which issues asset-backed notes. In
September 2001, the Company completed a subsequent shelf registration providing
an additional $1.5 billion in capacity which, when added to the previous
remaining shelf capacity of $521.5 million, brought total capacity to $2.0
billion. Subsequently, in September 2001, a securitization for $850.0 million
was completed and the proceeds from these notes were used to refinance
installment loans under the warehouse facility and additional loans held by the
Company. The Company provides credit enhancements related to these notes in the
form of a 1% over-collateralization, a reserve fund and a third party surety
bond. These transactions typically result in the recording of a securization
asset in the form of an interest-only strip, which represents the present value
of the estimated future residual cash flows from securitized receivables.
Interest-only strips are carried at fair value. Certain of the Company's
interest-only strips are marked to fair value with unrealized gains or losses
being recorded directly to income. Other of the Company's interest-only strips
are marked to fair value with unrealized gains or losses being recorded through
other comprehensive income unless an other-than-temporary impairment occurs in
the valuation of the interest-only strip, in which case the impairment is
recorded directly to income.
For the nine months ended September 30, 2001 and 2000, the Company
recognized pre-tax gains (losses) of $7.0 million and ($.4) million,
respectively, on the securitization of installment loan receivables which has
been included in Revenue in the accompanying Unaudited Condensed Consolidated
Income Statements. At September 30, 2001, $1.5 billion in asset-backed notes
were outstanding and there is an additional $1.2 billion authorized to be issued
under the current shelf registration.
11
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The key economic assumptions used in measuring the retained interests
and initial gains or losses at the date of securitization resulting from
securitizations completed during the nine months ended September 30, 2001 were
as follows:
Description: Assumption(1)
-------------
Voluntary prepayment speed (ABS)....................... 1.15%
Weighted-average life (in years)....................... 1.80
Expected credit losses (annual rate)................... 1.17%
Discount rate on residual cash flows (annual rate)..... 7.96%
Yield (annual interest rate on receivables)............ 11.30%
Rate to investors (annual rate)........................ 4.38%
(1) The weighted-average rates for securitizations entered into during the
period for securitizations of loans with similar characteristics.
At September 30, 2001, the carrying value (current fair value) of
retained interests in securitized installment loans was $146.0 million which
is included in Receivables, net, in the Unaudited Condensed Consolidated
Balance Sheet. Included in retained interests in securitized installment loans
are interest-only strips valued at $101.9 million with a weighted-average life
of 1.50 years. At September 30, 2001, the sensitivity of the current fair
value of the residual cash flows to immediate 10 percent and 20 percent
unfavorable changes in assumptions are presented in the table below. These
sensitivities are hypothetical and should not be considered to be predictive
of future performance. As the figures indicate, the change in fair value based
on a ten percent variation in assumptions cannot necessarily be extrapolated
because the relationship of the change in assumption to the change in fair
value may not be linear. Also, in this table, the effect of a variation in a
particular assumption on the fair value of residual cash flows is calculated
independently from any change in another assumption. In reality, changes in
one factor may contribute to changes in another (for example, increases in
market interest rates may result in lower prepayments and increased credit
losses), which might magnify or counteract the sensitivities. Furthermore, the
disclosed estimated fair values should not be considered indicative of future
earnings on these assets. The current rate assumptions below reflect the
expected performance of the total loans securitized as of September 30, 2001.
$ Effect on Interest-only Strip of
----------------------------------
Current 10% Change 20% Change
Rate Assumption in Assumption in Assumption
--------------- ------------- -------------
Voluntary prepayment speed (ABS).................... 1.15% $3.4 $ 6.9
Expected credit losses (annual rate)................ 1.33% $2.5 $ 5.0
Discount rate on residual cash flows (annual rate).. 7.12% $1.2 $ 2.4
Variable rate to warehouse investors (annual rate).. 5.12% $ .6 $ 1.2
As of September 30, 2001, the Company had expected static pool credit
losses on its total portfolio of 2.86%.
12
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The rate at which the Company is originating loans has slowed during
2001 due to the implementation of more restrictive credit policies and, more
recently, unprecedented levels of financing incentives being offered by vehicle
manufacturers. In addition, eroding consumer confidence, increasing
unemployment, and the risk of a further softening economy could increase
consumer credit risk. As such, the Company is currently considering strategic
alternatives to its consumer loan origination business. Management believes that
its retained interests in securitized installment loans of $146.0 million as of
September 30, 2001 are fairly stated. However, a change in strategy regarding
the Company's consumer loan origination business and/or a continuation or
worsening in the economic factors mentioned above could have a material adverse
impact on the value of these retained interests.
11. DERIVATIVE FINANCIAL INSTRUMENTS
Effective January 1, 2001, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"), as amended. SFAS 133
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS 133 requires that changes in the derivative
instrument's fair value be recognized currently in earnings. The accounting for
the portion reported in earnings due to changes in fair value of the derivative
instrument depends on whether the derivative qualifies as a hedge. If the
derivative instrument does not qualify as a hedge, the gains or losses are
reported in earnings when they occur. Special accounting for qualifying hedges
allows a derivative instrument's gains and losses to offset related results on
the hedged item in earnings, to the extent effective, and requires that a
company formally document, designate, and assess the effectiveness of
transactions that receive hedge accounting.
The Company maintains an overall risk management strategy that utilizes
a variety of interest rate financial instruments to mitigate its exposure to
fluctuations caused by volatility in interest rates. The Company does not use
derivative financial instruments for trading purposes.
The Company has entered into certain interest rate derivative
transactions with certain financial institutions to manage the impact of
interest rate changes on securitized installment loan receivables. These
derivative transactions consist of a series of interest rate caps and floors at
the same strike price with an aggregate notional amount of $84.6 million
contractually maturing through 2007 which effectuate a variable to fixed rate
swap at a weighted-average rate of 4.85%. During 2001, the Company has entered
into a series of forward starting swaps with a maximum aggregate notional amount
of $14.0 million contractually maturing through 2007 which effectuate a fixed to
variable rate swap at a weighted-average rate of 5.51%. Variable rates on the
underlying portfolio are indexed to the Commercial Paper Nonfinancial rate.
The Company's derivative transactions do not meet the criteria for
hedge accounting under SFAS 133 since the derivative transactions are designed
to economically hedge the exposure of items remeasured with the changes in fair
value recorded in earnings.
The Company's retained interests in securitized installment loan
receivables are considered hybrid instruments under SFAS 133. Included in the
hybrid instrument is an embedded derivative instrument for the interest and
prepayment components of the risk of the securitized installment loan
receivables.
SFAS 133 requires that the Company's embedded derivative instrument be
separated from the host contract and carried at fair value. Because the Company
is not using the embedded derivative instrument as a hedging instrument, SFAS
133 requires that the Company report the embedded derivative instrument on its
balance sheet and changes in the fair value of the embedded derivative
instrument currently in earnings.
13
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
As of January 1, 2001, the Company recorded its embedded derivative
instrument and its caps and floors on its balance sheet which resulted in an
increase to assets and liabilities of approximately $14.3 million with an
immaterial effect to earnings.
The Company records the gains and losses from its embedded derivative
contracts and other derivatives as a component of revenue. The fair value of the
derivative contracts is included in other assets and other liabilities in the
accompanying unaudited condensed consolidated balance sheets, as applicable.
During the nine months ended September 30, 2001, the Company recorded a
net loss of $.3 million representing the change in fair value of its embedded
derivative contracts offset by the change in fair value of its other derivative
instruments.
12. RESTRUCTURING AND IMPAIRMENT EXPENSE (RECOVERY), NET
During the fourth quarter of 1999, the Company approved a plan to
restructure certain of its operations. The restructuring plan was comprised of
the following major components: (1) exiting the used vehicle megastores business
and (2) reducing the corporate workforce automotive. The restructuring plan also
included divesting of certain non-core franchised automotive dealerships.
Approximately 2,000 positions were eliminated as a result of the restructuring
plan of which 1,800 were megastore positions and 200 were corporate positions.
These restructuring activities resulted in pre-tax charges of $443.7 million in
1999. These pre-tax charges included $286.9 million of asset impairment charges;
$103.3 million of reserves for residual value guarantees for closed lease
properties; $26.2 million of severance and other exit costs; and $27.3 million
of inventory related costs. The $286.9 million asset impairment charge consisted
of: $244.9 million of megastore and other property impairments; $26.6 million of
goodwill impairment reserves for the divestiture of certain non-core franchised
automotive dealerships; and $15.4 million of information systems impairments.
Closed megastores and other properties, including closed lease
properties, are being disposed of through sales to third parties. At September
30, 2001, properties with total net asset value of $87.2 million remain to be
sold of the $285.3 million identified as part of the restructuring plan. These
properties continue to be aggressively marketed. Their ultimate disposition is
expected to be completed in 2002.
The following summarizes the activity and remaining balance in the
Company's restructuring and impairment reserves for the nine months ended
September 30, 2001:
Deductions
Balance Amounts Charged ----------------------- Balance
Reserve December 31, 2000 to Income Cash Non-cash September 30, 2001
------- ----------------- --------------- --------- -------- ------------------
Asset reserves:
Asset impairment........... $ 161.4 $ 3.7 $ -- $ (73.9) $ 91.2
Accrued liabilities:
Severance and other
exit costs.............. 1.2 .3 (.9) -- .6
Finance lease residual
value write-down........ -- 4.1 -- (4.1) --
--------- -------- ------ ------- --------
$ 162.6 $ 8.1 $ (.9) $ (78.0) $ 91.8
========= ======== ====== ======= ========
14
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The following summarizes the components of the $8.1 million charged to
income during the nine months ended September 30, 2001:
Net Gain on Additional Impairment
Sold Properties Charges Other Total
--------------- ---------------------- -------- --------
Asset reserves:
Asset impairment......... $ (1.6) $ 5.3 $ -- $ 3.7
Accrued liabilities:
Severance and other
exit costs............ -- -- .3 .3
Finance lease residual
value write-down...... -- -- 4.1 4.1
--------- --------- -------- --------
$ (1.6) $ 5.3 $ 4.4 $ 8.1
========= ========= ======== ========
During the nine months ended September 30, 2001, the Company recognized
an additional impairment charge totaling $5.3 million based on the re-evaluation
of the fair value of certain properties. Additionally, the Company recognized an
impairment charge totaling $4.1 million associated with the deterioration in
residual values of finance lease receivables. The Company discontinued writing
finance leases in mid-1999 and the majority of the leases terminate in late
2001.
For the nine months ended September 30, 2000, a net $2.2 million was
credited to income as restructuring and impairment recovery consisting of a
credit of $20.7 million for property placed back into service, $3.4 million net
gain on sold properties, and a charge of $21.9 million primarily related to an
impairment charge of $16.6 million due to the deterioration in residual values
of finance lease receivables.
13. COMMITMENTS AND CONTINGENCIES
In October 2000, the California Department of Motor Vehicles
("California DMV") brought action against one of the Company's California
dealerships for alleged customer fraud as well as several other claims. In April
2001, the California DMV action and a related action by the State of California
were settled. As part of the settlement, the dealership closed its sales
operations for six days, agreed to provide restitution to certain customers in
the estimated amount of approximately $1.0 million and paid $1.1 million in
fines, penalties and costs. Three purported civil class actions and other
related lawsuits and claims have been filed or made against the dealership based
on the allegations underlying the California DMV case.
In an action filed in Florida state court in 1999, a wholly-owned
subsidiary of the Company was accused of violating, among other things, the
Florida Motor Vehicle Retail Sales Finance Act and the Florida Deceptive and
Unfair Trade Practices Act by allegedly failing to deliver executed copies of
retail installment contracts to customers of the Company's used vehicle
megastores. In October 2000, the court certified the class of customers on whose
behalf the action would proceed. In July 2001, Florida's Fourth District Court
of Appeals upheld the certification of the class.
Many of the Company's Texas dealerships have been named in three class
action suits brought against the Texas Automobile Dealer's Association ("TADA")
and new vehicle dealerships in Texas that are members of the TADA. The actions
allege, among other things, that since January 1994, Texas dealers deceived
customers with respect to a vehicle inventory tax and violated federal antitrust
and other laws as well. These cases are currently pending in Texas State courts
and federal district court.
15
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company intends to vigorously defend itself and assert available
defenses with respect to each of the foregoing matters. Further, the Company has
certain insurance coverage and rights of indemnification with respect to certain
aspects of the foregoing matters. However, a settlement or an adverse resolution
of one or more of these matters may result in the payment of significant costs
and damages that could have a material adverse effect on the Company's business,
financial condition, results of operations and cash flows.
The Company is also a party to numerous other legal proceedings that
arose in the conduct of its business. The Company does not believe that the
ultimate resolution of these matters will have a material adverse effect on its
business, financial condition, results of operations or cash flows. However, the
results of these matters cannot be predicted with certainty and an unfavorable
resolution of one or more of these matters could have a material adverse effect
on its business, financial condition, results of operations and cash flows.
14. DISCONTINUED OPERATIONS
On June 30, 2000, the Company completed the tax-free spin-off of ANC
Rental. Accordingly, the operating results of ANC Rental have been classified as
discontinued operations for all periods presented in the accompanying unaudited
condensed consolidated financial statements. Income from discontinued operations
during the nine months ended September 30, 2000 is net of previously estimated
losses of $22.1 million which were accrued in the fourth quarter of 1999 and
additional costs associated with the spin-off totaling $11.3 million recorded in
the second quarter of 2000.
In connection with the ANC Rental spin-off, the Company agreed to
continue to provide ANC Rental with certain guarantees and credit enhancements
with respect to financial and other performance obligations of ANC Rental,
including acting as a guarantor under certain motor vehicle and real property
leases between ANC Rental and Mitsubishi Motor Sales of America, Inc. and acting
as an indemnitor with respect to certain surety bonds issued on ANC Rental's
behalf. The Company receives fees for providing these guarantees commensurate
with market rates. The Company also entered into certain agreements with ANC
Rental (the "ANC Rental Agreements") in connection with the spin-off, including
a separation and distribution agreement and a tax sharing agreement. ANC Rental
reported a net loss for the fourth quarter of 2000 of $44.0 million, resulting
in an aggregate net loss for 2000 of $2.0 million, and a net loss of $56.6
million for six months ended June 30, 2001. ANC Rental has announced that, due
in part to the terrorist attacks against the United States on September 11,
2001, it has suffered a significant decline in consumer demand for rental cars
and that it expects to report a substantial loss for the full year of 2001. ANC
Rental also recently indicated that it was under discussions with its creditors
and other parties in order to review liquidity options and other financial
issues. Additionally, ANC Rental announced that it has reached agreements with
its lenders to suspend certain financial covenants under certain credit
agreements until November 15, 2001 and to defer until November 30, 2001 a
principal payment of $70.0 million due October 1, 2001. If ANC Rental is unable
to meet its obligations, the Company will likely be called on to perform under
its credit enhancements and guarantees, which could have a material adverse
effect on its business, financial condition, cash flows and prospects. ANC
Rental has been accounted for as a discontinued operation and, accordingly, the
Company expects that payments made by it pursuant to the foregoing credit
enhancements and guarantees, if any, would not impact its reported results from
continuing operations.
16
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Under the existing terms of the motor vehicle lease agreement with
Mitsubishi referenced above, ANC Rental currently leases approximately 14,000
vehicles from Mitsubishi and may increase the number of vehicles it leases under
the agreement to approximately 27,000. Under this vehicle lease agreement, which
expires at the conclusion of the leases for model year 2002 vehicles, ANC Rental
is responsible for lease payments that the Company believes are currently
between $4.0 million and $5.0 million per month, although such lease payments
may increase to approximately $8.0 million per month in the event that ANC
Rental maximizes the number of vehicles it leases under the agreement. The
Company also believes that ANC Rental typically leases vehicles under this lease
agreement for a period of approximately six to nine months per vehicle.
Additionally, ANC Rental is responsible for the return of all leased vehicles to
Mitsubishi upon the termination of the vehicle lease agreement. Under the real
property leases that the Company guarantees, which expire in July 2017, ANC
Rental leases twelve parcels of property from Mitsubishi at an aggregate rent of
approximately $3.0 million per year. The Company's indemnification obligations
with respect to the surety bonds issued on behalf of ANC Rental are capped at
$29.5 million in the aggregate. In addition, in the event of the bankruptcy of
ANC Rental, the Company's claims against ANC Rental under the term of the ANC
Rental Agreements may be extinguished or unenforceable. These claims could
include indemnification rights with respect to payments made by the Company to
the Internal Revenue Service as a result of audit adjustments in its
consolidated federal income tax returns relating to ANC Rental's automotive
rental businesses prior to the spin-off. In the event that the Company is called
on to perform under the foregoing credit enhancements and guarantees and it has
claims under the ANC Rental Agreements that ANC Rental cannot satisfy, the
Company estimates that, based on its assessment of the risks involved in each
matter, its aggregate obligations under the credit enhancements, guarantees and
ANC Rental Agreements could be in the range of $50.0 million to $150.0 million.
However, the exposure is difficult to estimate and the Company cannot assure
that its aggregate obligations under these credit enhancements, guarantees and
ANC Rental Agreements will not be materially above the range indicated above.
Selected statement of operations data for the Company's automotive
rental discontinued operations for the nine months ended September 30, 2000 is
as follows:
Revenue........................................................... $ 1,721.2
=========
Pre-tax loss...................................................... $ (14.8)
Benefit for income taxes.......................................... (5.8)
---------
Net loss.......................................................... (9.0)
Loss on disposal of segment, net of income taxes.................. (11.3)
Previously estimated and accrued losses, net of income taxes...... 22.1
---------
Income from discontinued operations, net of income taxes.......... $ 1.8
=========
15. NEW ACCOUNTING PRONOUNCEMENTS
On June 30, 2001 the Financial Accounting Standards Board (FASB)
finalized and issued Statements of Financial Accounting Standards No. 141,
"Business Combinations" ("SFAS 141") and No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142").
The Company has adopted the provisions of SFAS 141 which requires all
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method, eliminating the pooling of interests method. Additionally,
acquired intangible assets should be separately recognized if the benefit of the
intangible asset is obtained through contractual or other legal rights, or if
the intangible asset can be sold, transferred, licensed, rented, or exchanged,
regardless of the acquirer's intent to do so.
17
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
SFAS 142, upon adoption, eliminates goodwill amortization over its
estimated useful life. However, goodwill will be subject to at least an annual
assessment for impairment by applying a fair-value based test. Intangible assets
with definitive lives will need to be amortized over their useful lives.
The provisions of SFAS 142 apply immediately to all acquisitions
completed after June 30, 2001. Goodwill and intangible assets with indefinite
lives existing at June 30, 2001 will continue to be amortized until December 31,
2001. Effective January 1, 2002 such amortization will cease, as companies are
required to adopt the new rules on such date. By the end of the first quarter of
calendar year 2002, companies must begin to perform an impairment analysis of
intangible assets. Furthermore, companies must complete the first step of the
goodwill transition impairment test by June 30, 2002. Any impairment noted must
be recorded at the date of adoption restating first quarter results, if
necessary. Impairment charges, if any, that result from the application of the
above tests would be recorded as the cumulative effect of a change in accounting
principle in the first quarter of the year ending December 31, 2002.
Although the Company estimates that the changes in goodwill
amortization as a result of the adoption of SFAS 142 will result in an estimated
$.14 per share increase in 2002 earnings per share, the Company will not be able
to determine the ultimate impact of this proposed Statement on its consolidated
financial statements until such time as it applies its provisions.
In August, 2001, the FASB issued SFAS 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." 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 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.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
unaudited condensed consolidated financial statements and notes thereto included
under Item 1. In addition, reference should be made to the Company's audited
consolidated financial statements and notes thereto and related Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in the Company's most recent Annual Report on Form 10-K.
CONSOLIDATED RESULTS OF OPERATIONS
The following is a summary of the Company's consolidated results of
operations both in gross dollars and on a diluted per share basis for the
periods indicated (in millions, except per share data):
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------------------- -----------------------------------------
2001 2000 2001 2000
------------------ ----------------- ----------------- -----------------
Diluted Diluted Diluted Diluted
Per Per Per Per
Gross Share Gross Share Gross Share Gross Share
------- ------- ------ ------- ------- ------- ------- -------
Income from continuing
operations................ $ 79.2 $ .24 $ 93.1 $ .26 $ 225.4 $ .67 $ 254.4 $ .70
Income from automotive rental
discontinued operations... -- -- -- -- -- -- 1.8 .01
------- ------ ------ ------ ------- ------ ------- ------
Net income................... $ 79.2 $ .24 $ 93.1 $ .26 $ 225.4 $ .67 $ 256.2 $ .71
======= ====== ====== ====== ======= ====== ======= ======
SAME STORE OPERATING DATA
Historical operating results include the results of acquired businesses
from the date of acquisition for acquisitions accounted for under the purchase
method of accounting. Due to the Company's expansion through acquisitions as
well as the impact of divestitures, year over year comparisons of reported
operating results do not necessarily provide a meaningful representation of
internal performance. Accordingly, presented below are operating results for the
three and nine months ended September 30, 2001 and 2000 on a same store basis to
better represent internal performance.
The following table sets forth: (1) the components of same store
revenue, with component percentages of total revenue; (2) the components of same
store gross margin, with gross margin percentages of applicable same store
revenue; (3) same store selling, general and administrative expenses; (4) same
store performance; and (5) retail vehicle same store unit sales ($ in
millions)for the:
19
Three Months Ended September 30, Nine Months Ended September 30,
----------------------------------------- -------------------------------------------
2001 % 2000 % 2001 % 2000 %
--------- ----- --------- ----- ---------- ----- ---------- -----
Revenue:
New vehicle............. $ 2,874.9 59.6 $ 3,149.5 61.5 $ 8,351.7 59.3 $ 9,234.3 61.3
Used vehicle............ 943.9 19.6 936.1 18.3 2,774.1 19.7 2,798.5 18.5
Parts and service....... 590.1 12.2 562.3 11.0 1,723.9 12.3 1,668.0 11.1
Finance and insurance... 123.3 2.6 110.6 2.1 342.3 2.4 316.5 2.1
Other................... 287.3 6.0 362.0 7.1 883.2 6.3 1,051.3 7.0
--------- ----- --------- ----- ---------- ----- ---------- -----
$ 4,819.5 100.0 $ 5,120.5 100.0 $ 14,075.2 100.0 $ 15,068.6 100.0
========= ===== ========= ===== ========== ===== ========== =====
Gross margin:
New vehicle............. $ 225.9 7.9 $ 261.6 8.3 $ 680.8 8.2 $ 773.4 8.4
Used vehicle............ 104.1 11.0 104.4 11.2 305.9 11.0 318.3 11.4
Parts and service....... 255.8 43.4 241.7 43.0 745.4 43.2 711.7 42.7
Finance and insurance... 123.3 100.0 110.6 100.0 342.3 100.0 316.5 100.0
Other................... 18.1 6.3 26.4 7.3 54.3 6.1 68.1 6.5
--------- --------- ---------- ----------
727.2 15.1 744.7 14.5 2,128.7 15.1 2,188.0 14.5
S,G&A - Store............... 502.3 10.4 489.4 9.5 1,461.3 10.4 1,437.7 9.5
--------- --------- ---------- ----------
Store performance........... $ 224.9 4.7 $ 255.3 5.0 $ 667.4 4.7 $ 750.3 5.0
========= ========= ========== ==========
Retail vehicle unit sales:
New vehicle............. 110,000 125,000 317,000 366,000
Used vehicle............ 63,000 62,000 184,000 186,000
--------- --------- ---------- ----------
173,000 187,000 501,000 552,000
========= ========= ========== ==========
Same store revenue was $4.82 billion for the three months ended
September 30, 2001 compared to $5.12 billion for the three months ended
September 30, 2000, a decrease of 5.9%. Same store revenue was $14.08 billion
for the nine months ended September 30, 2001 compared to $15.07 billion for the
nine months ended September 30, 2000, a decrease of 6.6%. Same store gross
margin was $727.2 million for the three months ended September 30, 2001 compared
to $744.7 million for the three months ended September 30, 2000, a decrease of
2.3%. Same store gross margin was $2.13 billion for the nine months ended
September 30, 2001 compared to $2.19 billion for the nine months ended September
30, 2000, a decrease of 2.7%. The primary components of same store revenue and
gross margin changes are described below.
New vehicle same store revenue decreased 8.7% to $2.87 billion during
the three months ended September 30, 2001 due to a unit volume decrease of 12.0%
partially offset by a 3.3% increase in prices. The increase in prices was due in
part to a change in product mix. New vehicle same store revenue decreased 9.6%
to $8.35 billion during the nine months ended September 30, 2001 due to a unit
volume decrease of 13.4% partially offset by a 3.8% increase in prices.
Primarily due to the decline in volume and related floorplan assistance which
has been impacted by declining interest rates, new vehicle same store gross
margin decreased 13.6% to $225.9 million for the three months ended September
30, 2001 and 12.0% to $680.8 million for the nine months ended September 30,
2001.
The Company's new vehicle sales were impacted by the lower demand
experienced in the overall automotive retail industry this year, predominantly
in the domestic product lines. New vehicle sales came to a near standstill
directly following the terrorist attacks of September 11, 2001. The introduction
of significant manufacturer incentives greatly increased the pace of new vehicle
sales during October. However, the Company expects that the industry may
experience a slower pace of new vehicle sales in November and December.
Additionally, the Company currently anticipates that new vehicle sales in the
United States will decrease by an estimated 5% to 10% in 2002.
Used vehicle same store revenue increased .8% to $943.9 million during
the three months ended September 30, 2001. Used vehicle same store revenue
decreased .9% to $2.77 billion during the nine months ended September 30, 2001.
Used vehicle same store gross margin decreased .3% to $104.1 million for the
three months ended September 30, 2001 and 3.9% to $305.9 million for the nine
months ended September 30, 2001.
20
Parts and service same store revenue increased 4.9% to $590.1 million
for the three months ended September 30, 2001 and 3.4% to $1.72 billion for the
nine months ended September 30, 2001 driven by volume as well as price
increases. Parts and service same store gross margin increased 5.8% to $255.8
million for the three months ended September 30, 2001 and 4.7% to $745.4 million
for the nine months ended September 30, 2001, as a result of higher revenue
coupled with margin expansion of 40 and 50 basis points for the three and nine
months ended September 30, 2001, respectively, as a result of the Company's
efforts to increase pricing and manage costs.
Finance and insurance same store revenue and gross margin increased
11.5% to $123.3 million for the three months ended September 30, 2001 and 8.2%
to $342.3 million for the nine months ended September 30, 2001. The increase is
primarily due to a higher percentage of customers buying finance and insurance
products as well as increased pricing.
Same store other revenue decreased by 20.6% to $287.3 million for the
three months ended September 30, 2001 and 16.0% to $883.2 million for the nine
months ended September 30, 2001. This revenue decrease primarily reflects a
reduction in wholesale revenues due to a decrease in the number of units
wholesaled as compared to 2000.
Same store gross margin as a percentage of same store total revenue was
15.1% for both the three and nine months ended September 30, 2001. This
represents a 60 basis point increase as compared to the three and nine months
ended September 30, 2000, primarily driven by a shift in revenue mix as lower
margin new vehicle revenue represented a smaller component of overall revenue.
Same store selling, general and administrative expenses were $502.3
million or 10.4% of same store total revenue and $489.4 million or 9.5% of same
store total revenue for the three months ended September 30, 2001 and 2000,
respectively. Same store selling, general and administrative expenses were $1.46
billion or 10.4% of same store total revenue and $1.44 billion or 9.5% of same
store total revenue for the nine months ended September 30, 2001 and 2000,
respectively. The increase as a percentage of revenue reflects both the shift in
revenue mix as well as increased advertising, compensation, and other
miscellaneous expenses.
Same store performance margins were $224.9 million and $255.3 million
or as a percentage of same store total revenue 4.7% and 5.0% for the three
months ended September 30, 2001 and 2000, respectively. Same store performance
margins were $667.4 million and $750.3 million or as a percentage of same store
total revenue 4.7% and 5.0% for the nine months ended September 30, 2001 and
2000, respectively.
21
REPORTED OPERATING DATA
The following table sets forth the components of the Company's
operating results including revenue percentages of total revenue, the components
of gross margin and retail vehicle unit sales on a reported basis ($ in
millions) for the:
Three Months Ended September 30, Nine Months Ended September 30,
----------------------------------------- -------------------------------------------
2001 % 2000 % 2001 % 2000 %
--------- ----- --------- ----- --------- ----- --------- -----
Revenue:
New vehicle............... $ 2,995.1 59.8 $ 3,258.1 61.0 $ 8,804.0 59.3 $ 9,657.1 60.7
Used vehicle.............. 978.6 19.5 983.3 18.4 2,928.1 19.7 2,995.0 18.8
Parts and service......... 613.2 12.2 586.7 11.0 1,814.2 12.2 1,763.4 11.1
Finance and insurance..... 130.2 2.6 112.9 2.1 363.9 2.5 331.2 2.1
Other..................... 294.4 5.9 397.1 7.5 930.4 6.3 1,161.1 7.3
--------- ----- --------- ----- --------- ----- --------- -----
$ 5,011.5 100.0 $ 5,338.1 100.0 $14,840.6 100.0 $15,907.8 100.0
========= ===== ========= ===== ========= ===== ========= =====
Gross margin:
New vehicle............... $ 234.9 7.8 $ 268.6 8.2 $ 715.9 8.1 $ 805.0 8.3
Used vehicle.............. 107.8 11.0 109.7 11.2 327.0 11.2 341.0 11.4
Parts and service......... 265.8 43.3 252.1 43.0 783.9 43.2 753.0 42.7
Finance and insurance..... 130.2 100.0 112.9 100.0 363.9 100.0 331.2 100.0
Other..................... 20.6 7.0 34.1 8.6 61.7 6.6 83.3 7.2
--------- --------- --------- ---------
759.3 15.2 777.4 14.6 2,252.4 15.2 2,313.5 14.5
S,G&A - Store................. 522.8 10.4 510.6 9.6 1,543.5 10.4 1,530.0 9.6
--------- --------- --------- ---------
Store performance............. 236.5 4.8 266.8 5.0 708.9 4.8 783.5 4.9
S,G&A - Corporate............. 32.0 0.6 36.7 0.7 105.9 0.7 120.4 0.7
Depreciation.................. 18.0 0.4 14.6 0.3 50.0 0.3 42.4 0.3
Amortization.................. 20.4 0.4 20.4 0.3 60.8 0.4 58.7 0.4
Restructuring & impairment
charges, net.............. (0.6) -- (2.2) -- 8.1 0.1 (2.2) --
Other gains................... (0.3) -- -- -- (19.3) (0.1) -- --
--------- --------- --------- --------
Operating income.............. $ 167.0 3.4 $ 197.3 3.7 $ 503.4 3.4 $ 564.2 3.5
========= ========= ========= ========
Retail vehicle unit sales:
New vehicle............... 115,000 130,000 336,000 383,000
Used vehicle.............. 65,000 65,000 194,000 199,000
--------- --------- --------- --------
180,000 195,000 530,000 582,000
========= ========= ========= ========
Total revenue was $5.01 billion for the three months ended September
30, 2001 compared to $5.34 billion for the three months ended September 30,
2000, a decrease of 6.2%. Total revenue was $14.84 billion for the nine months
ended September 30, 2001 compared to $15.91 billion for the nine months ended
September 30, 2000, a decrease of 6.7%. Total gross margin was $759.3 million
for the three months ended September 30, 2001 compared to $777.4 million for the
three months ended September 30, 2000, a decrease of 2.3%. Total gross margin
was $2.25 billion for the nine months ended September 30, 2001 compared to $2.31
billion for the nine months ended September 30, 2000, a decrease of 2.6%. The
primary components of revenue and gross margin changes are described below.
New vehicle revenue decreased 8.1% to $3.00 billion for the three
months ended September 30, 2001. New vehicle revenue decreased 8.8% to $8.80
billion during the nine months ended September 30, 2001. The decrease is
primarily driven by volume decreases of 11.5% and 12.3% for the three and nine
months ended September 30, 2001, respectively. During the three and nine months
ended September 30, 2001, the Company sold 115,000 and 336,000 new vehicles,
respectively, compared to 130,000 and 383,000 new vehicles for the comparable
periods in 2000. Consistent with the decline in volume, new vehicle gross margin
decreased 12.5% to $234.9 million for the three months ended September 30, 2001
and 11.1% to $715.9 million for the nine months ended September 30, 2001.
22
Used vehicle revenue decreased .5% to $978.6 million during the three
months ended September 30, 2001. The decrease reflects lower average prices of
used vehicles. Used vehicle revenue decreased 2.2% to $2.93 billion during the
nine months ended September 30, 2001. This decrease reflects lower unit volumes
which were down 2.5% during the nine months ended September 30, 2001. Used
vehicle gross margin decreased 1.7% to $107.8 million for the three months ended
September 30, 2001 and 4.1% to $327.0 million for the nine months ended
September 30, 2001.
Parts and service revenue increased 4.5% to $613.2 million during the
three months ended September 30, 2001 and 2.9% to $1.81 billion for the nine
months ended September 30, 2001. Parts and service gross margin increased 5.4%
to $265.8 million for the three months ended September 30, 2001 and 4.1% to
$783.9 million for the nine months ended September 30, 2001. As a percentage of
revenue, parts and service gross margin increased 30 and 50 basis points for the
three and nine months ended September 30, 2001, respectively.
Finance and insurance revenue and gross margin increased 15.3% to
$130.2 million for the three months ended September 30, 2001 and 9.9% to $363.9
million for the nine months ended September 30, 2001.
Other revenue decreased 25.9% to $294.4 million during the three months
ended September 30, 2001. Other revenue decreased 19.9% to $930.4 million during
the nine months ended September 30, 2001.
Total gross margin as a percentage of total revenue was 15.2% for both
the three and nine months ended September 30, 2001. Total gross margin as a
percentage of total revenue was 14.6% and 14.5% for the three and nine months
ended September 30, 2000, respectively. This represents 60 and 70 basis point
increases compared to the three and nine months ended September 30, 2000,
respectively.
Store level selling, general and administrative expenses were $522.8
million or 10.4% of total revenue and $510.6 million or 9.6% of total revenue
for the three months ended September 30, 2001 and 2000, respectively. Store
level selling, general and administrative expenses were $1.54 billion or 10.4%
of total revenue and $1.53 billion or 9.6% of total revenue for the nine months
ended September 30, 2001 and 2000, respectively.
Store performance margins were $236.5 million and $266.8 million or as
a percentage of total revenue 4.8% and 5.0% for the three months ended September
30, 2001 and 2000, respectively. Store performance margins were $708.9 million
and $783.5 million or as a percentage of total revenue 4.8% and 4.9% for the
nine months ended September 30, 2001 and 2000, respectively.
Corporate selling, general and administrative expenses decreased by
$4.7 million or 12.8% during the three months ended September 30, 2001 and $14.5
million or 12.0% during the nine months ended September 30, 2001. The decrease
is primarily the result of the continued disposal of excess properties.
Depreciation and amortization were $38.4 million and $110.8 million for
the three and nine months ended September 30, 2001 as compared to $35.0 million
and $101.1 million for the three and nine months ended September 30, 2000,
primarily as a function of acquisitions closed during 2000.
Other gains of $19.3 million for the nine months ended September 30,
2001 consists primarily of the pre-tax gain from the sale of the Flemington
dealer group in April 2001.
DISCONTINUED BUSINESS SEGMENTS
On June 30, 2000, the Company completed the spin-off of its former
automotive rental businesses, which had been organized under ANC Rental
Corporation, by distributing 100% of ANC Rental's common stock to AutoNation's
stockholders as a tax-free dividend. As a result of the spin-off, AutoNation
stockholders received one share of ANC Rental common stock for every eight
shares of AutoNation common stock owned as of the June 16, 2000 record date. As
discussed in Note 14, Discontinued Operations, of the Notes to Unaudited
Condensed Consolidated Financial Statements, ANC Rental has been accounted for
as discontinued operations in the accompanying unaudited condensed consolidated
financial statements.
23
BUSINESS ACQUISITIONS AND DIVESTITURES
From 1996 through 1999, the Company aggressively expanded its
automotive retail operations through the acquisition of franchised automotive
dealerships. Since 1999, the Company has not completed and does not expect to
complete in 2001 acquisitions at the same pace as in the past. Future
acquisitions will primarily target single dealerships or small dealership groups
focused in key existing markets.
During the nine months ended September 30, 2001, the Company acquired
various automotive retail businesses. The Company paid approximately $72.7
million in cash for these acquisitions. During the nine months ended September
30, 2001, the Company also paid approximately $10.5 million in deferred purchase
price for certain prior year automotive retail acquisitions.
In the normal course of business, the Company will periodically divest
of dealerships that do not meet certain operational, financial, and strategic
criteria. Revenue for the operations disposed or to be disposed was $147.5
million and $774.0 million during the nine months ended September 30, 2001 and
2000, respectively. Operating income (loss) for the operations disposed or to be
disposed was ($.2) million and $20.6 million for the nine months ended September
30, 2001 and 2000, respectively.
RESTRUCTURING ACTIVITIES
During the fourth quarter of 1999, the Company approved a plan to
restructure certain of its operations. The restructuring plan was comprised of
the following major components: (1) exiting the used vehicle megastores business
and (2) reducing the corporate workforce. The restructuring plan also included
divesting of certain non-core franchised automotive dealerships. Approximately
2,000 positions were eliminated as a result of the restructuring plan of which
1,800 were megastore positions and 200 were corporate positions. These
restructuring activities resulted in pre-tax charges of $443.7 million in 1999.
These pre-tax charges included $286.9 million of asset impairment charges;
$103.3 million of reserves for residual value guarantees for closed lease
properties; $26.2 million of severance and other exit costs; and $27.3 million
of inventory related costs. The $286.9 million asset impairment charge consisted
of: $244.9 million of megastore and other property impairments; $26.6 million of
goodwill impairment reserves for the divestiture of certain non-core franchised
automotive dealerships; and $15.4 million of information systems impairments.
Closed megastores and other properties, including closed lease
properties, are being disposed of through sales to third parties. At September
30, 2001, properties with total net asset value of $87.2 million remain to be
sold of the total $285.3 million identified as part of the restructuring plan.
These properties continue to be aggressively marketed. Their ultimate
disposition is expected to be completed in 2002.
The following summarizes the activity and remaining balance in the
Company's restructuring and impairment reserves for the nine months ended
September 30, 2001:
Deductions
Balance Amounts Charged ------------------------ Balance
Reserve December 31, 2000 to Income Cash Non-cash September 30, 2001
------- ----------------- ----------------- -------- -------- ------------------
Asset reserves:
Asset impairment........... $ 161.4 $ 3.7 $ -- $ (73.9) $ 91.2
Accrued liabilities:
Severance and other
exit costs.............. 1.2 .3 (.9) -- .6
Finance lease residual
value write-down........ -- 4.1 -- (4.1) --
--------- -------- ------- ------- -------
$ 162.6 $ 8.1 $ (.9) $ (78.0) $ 91.8
========= ======== ======= ======= =======
The following summarizes the components of the $8.1 million charged to
income during the nine months ended September 30, 2001:
Net Gain on Additional Impairment
Sold Properties Charges Other Total
--------------- ---------------------- -------- --------
Asset reserves:
Asset impairment......... $ (1.6) $ 5.3 $ -- $ 3.7
Accrued liabilities:
Severance and other
exit costs............ -- -- .3 .3
Finance lease residual
value write-down...... -- -- 4.1 4.1
--------- --------- -------- --------
$ (1.6) $ 5.3 $ 4.4 $ 8.1
========= ========= ======== ========
24
During the nine months ended September 30, 2001, the Company recognized
an additional impairment charge totaling $5.3 million based on the re-evaluation
of the fair value of certain properties. Additionally, the Company recognized an
impairment charge totaling $4.1 million associated with the deterioration in
residual values of finance lease receivables. The Company discontinued writing
finance leases in mid-1999 and the majority of the leases terminate in late
2001.
For the nine months ended September 30, 2000, a net $2.2 million was
credited to income as restructuring and impairment recovery consisting of a
credit of $20.7 million for property placed back into service, $3.4 million net
gain on sold properties, and a charge of $21.9 million primarily related to an
impairment charge of $16.6 million due to the deterioration in residual values
of finance lease receivables.
NON-OPERATING INCOME (EXPENSE)
Floorplan Interest Expense
Floorplan interest expense was $26.8 million and $107.8 million for the
three and nine months ended September 30, 2001, respectively, compared to $47.8
million and $146.8 million for the three and nine months ended September 30,
2000. The decrease was due to reduced floorplan borrowing rates as well as lower
floorplan debt associated with lower inventory levels. These same factors have
adversely impacted floorplan assistance, which is reflected in new vehicle gross
margin. The Company plans to maintain lower levels of inventory which coupled
with lower interest rates should result in decreased floorplan interest expense
this year.
Other Interest Expense
Other interest expense was incurred primarily on borrowings under
revolving credit facilities and senior unsecured notes sold in August 2001.
Other interest expense was $11.2 million and $30.6 million for the three and
nine months ended September 30, 2001, respectively, compared to $13.8 million
and $36.2 million for the three and nine months ended September 30, 2000. The
decrease was due to lower average borrowings as well as lower interest rates.
Going forward, with the issuance of the senior notes, the Company will be less
sensitive to changing interest rates due to a higher ratio of fixed versus
floating rate obligations.
Interest Income
Interest income was $2.5 million and $6.1 million for the three and
nine months ended September 30, 2001, respectively, compared to $3.0 million and
$11.7 million for the three and nine months ended September 30, 2000. The
decrease is primarily the result of lower average cash and investment balances
throughout the year.
Income Taxes
The provision for income taxes from continuing operations was $50.7
million and $143.3 million for the three and nine months ended September 30,
2001, respectively, compared to $55.9 million and $152.6 million for the three
and nine months ended September 30, 2000. Income taxes have been provided based
upon the Company's anticipated annual effective income tax rate.
FINANCIAL CONDITION
At September 30, 2001, the Company had $89.1 million of unrestricted
cash and cash equivalents. The Company had a multi-year unsecured revolving
credit facility which provided $1.0 billion of financing and was scheduled to
mature in April 2002. This facility was repaid in full and terminated on August
10, 2001. Another facility provided $250.0 million of borrowing capacity until
its termination on June 29, 2001. On August 10, 2001, the Company entered into
two new senior secured revolving credit facilities with an aggregate borrowing
capacity of $500.0 million. The 364-day revolving credit facility provides
borrowings up to $200.0 million at a LIBOR-based interest rate. The five-year
facility provides borrowings up to $300.0 million at a LIBOR-based interest
rate. These facilities are secured by a pledge of the capital stock of certain
subsidiaries of the Company, which directly or indirectly own substantially all
of the Company's dealerships, and are guaranteed by substantially all of the
Company's subsidiaries.
On August 10, 2001, the Company sold $450.0 million of 9.0% senior
unsecured notes due August 1, 2008 at a price of 98.731% of face value. The
notes are guaranteed by substantially all of the Company's subsidiaries.
25
The Company used the net proceeds of the offering to repay outstanding
amounts under the $1.0 billion revolving credit facility and certain other debt.
The Company will use any remaining proceeds as well as any amounts drawn under
the new revolving credit facilities for capital expenditures, strategic
acquisitions, working capital and other general corporate purposes.
At September 30, 2001, the Company had $116.0 million outstanding under
a mortgage facility with an automotive manufacturer's captive finance
subsidiary. This facility has a ten-year term and an aggregate capacity of
$150.0 million. In October 2001, the Company entered into another mortgage
facility with an automotive manufacturer's captive finance subsidiary with a
five-year term and an aggregate capacity of $150.0 million. Both facilities bear
interest at a LIBOR-based interest rate and are secured by mortgages on certain
of the Company's dealerships' real property.
The Company finances vehicle inventory through secured floorplan
facilities at a LIBOR-based rate of interest with manufacturers' captive finance
subsidiaries, as well as independent financial institutions. As of September 30,
2001, capacity under the floorplan credit facilities was approximately $3.50
billion.
The Company securitizes installment loan receivables through a $625.0
million commercial paper warehouse facility with unrelated financial
institutions. In September 2001, the Company decreased the capacity of the
commercial paper warehouse facility from $1.0 billion to $625.0 million. The
warehouse facility has a renewable 364-day term and requires an annual
securitization transaction to reduce the outstanding indebtedness. During the
nine months ended September 30, 2001, the Company sold installment loan
receivables of $397.5 million under this program, net of retained interests. At
September 30, 2001, $75.4 million was outstanding under this program, net of
retained interests.
The Company also securitizes installment loan receivables through a
non-consolidated special purpose entity, which issues asset-backed notes. In
September 2001, the Company completed a subsequent shelf registration providing
an additional $1.5 billion in capacity which, when added to the previous
remaining shelf capacity of $521.5 million, brought total capacity to $2.0
billion. Subsequently, in September 2001, a securitization for $850.0 million
was completed and the proceeds from these notes were used to refinance
installment loans under the warehouse facility and additional loans held by the
Company. The Company provides credit enhancements related to these notes in the
form of 1% overcollateralization, a reserve fund and a third party surety bond.
At September 30, 2001, $1.5 billion in asset-backed notes were outstanding and
there was an additional $1.2 billion authorized to be issued under the current
shelf registration.
The rate at which the Company is originating loans has slowed during
2001 due to the implementation of more restrictive credit policies and, more
recently, unprecedented levels of financing incentives being offered by vehicle
manufacturers. In addition, eroding consumer confidence, increasing
unemployment, and the risk of a further softening economy could increase
consumer credit risk. As such, the Company is currently considering strategic
alternatives to its consumer loan origination business. Management believes that
its retained interests in securitized installment loans of $146.0 million as of
September 30, 2001 are fairly stated. However, a change in strategy regarding
the Company's consumer loan origination business and/or a continuation or
worsening in the economic factors mentioned above could have a material adverse
impact on the value of these retained interests.
During the three months ended September 30, 2001, the Company
repurchased 6.2 million shares of its common stock for an aggregate purchase
price of $63.1 million. During the nine months ended September 30, 2001, the
Company repurchased 21.2 million shares of its common stock for an aggregate
purchase price of $192.2 million. Through September 30, 2001, an aggregate of
148.9 million shares of common stock have been acquired under the Company's
share repurchase programs for an aggregate purchase price of $1.67 billion,
leaving approximately $74.9 million available for share repurchases under the
programs. In October 2001, the Company's Board of Directors authorized an
additional $250.0 million share repurchase program. The Company will evaluate
future share repurchases based on such factors as the market price of its common
stock, the potential impact on its capital structure and the expected return on
competing uses of capital such as strategic dealership acquisitions and capital
investments. The Company's new financing arrangements contain certain
limitations on share repurchases.
26
In connection with the ANC Rental spin-off, the Company agreed to
continue to provide ANC Rental with certain guarantees and credit enhancements
with respect to financial and other performance obligations of ANC Rental,
including acting as a guarantor under certain motor vehicle and real property
leases between ANC Rental and Mitsubishi Motor Sales of America, Inc. and acting
as an indemnitor with respect to certain surety bonds issued on ANC Rental's
behalf. The Company receives fees for providing these guarantees commensurate
with market rates. The Company also entered into certain agreements with ANC
Rental (the "ANC Rental Agreements") in connection with the spin-off, including
a separation and distribution agreement and a tax sharing agreement. ANC Rental
reported a net loss for the fourth quarter of 2000 of $44.0 million, resulting
in an aggregate net loss for 2000 of $2.0 million, and a net loss of $56.6
million for six months ended June 30, 2001. ANC Rental has announced that, due
in part to the terrorist attacks against the United States on September 11,
2001, it has suffered a significant decline in consumer demand for rental cars
and that it expects to report a substantial loss for the full year of 2001. ANC
Rental also recently indicated that it was under discussions with its creditors
and other parties, in order to review liquidity options and other financial
issues. Additionally, ANC Rental announced that it has reached agreements with
its lenders to suspend certain financial covenants under certain credit
agreements until November 15, 2001 and to defer until November 30, 2001 a
principal payment of $70.0 million due October 1, 2001. If ANC Rental is unable
to meet its obligations, the Company will likely be called on to perform under
its credit enhancements and guarantees, which could have a material adverse
effect on its business, financial condition, cash flows and prospects. ANC
Rental has been accounted for as a discontinued operation and, accordingly, the
Company expects that payments made by it pursuant to the foregoing credit
enhancements and guarantees, if any, would not impact its reported results from
continuing operations.
Under the existing terms of the motor vehicle lease agreement with
Mitsubishi referenced above, ANC Rental currently leases approximately 14,000
vehicles from Mitsubishi and may increase the number of vehicles it leases under
the agreement to approximately 27,000. Under this vehicle lease agreement, which
expires at the conclusion of the leases for model year 2002 vehicles, ANC Rental
is responsible for lease payments that the Company believes are currently
between $4.0 million and $5.0 million per month, although such lease payments
may increase to approximately $8.0 million per month in the event that ANC
Rental maximizes the number of vehicles it leases under the agreement. The
Company also believes that ANC Rental typically leases vehicles under this lease
agreement for a period of approximately six to nine months per vehicle.
Additionally, ANC Rental is responsible for the return of all leased vehicles to
Mitsubishi upon the termination of the vehicle lease agreement. Under the real
property leases that the Company guarantees, which expire in July 2017, ANC
Rental leases twelve parcels of property from Mitsubishi at an aggregate rent of
approximately $3.0 million per year. The Company's indemnification obligations
with respect to the surety bonds issued on behalf of ANC Rental are capped at
$29.5 million in the aggregate. In addition, in the event of the bankruptcy of
ANC Rental, the Company's claims against ANC Rental under the term of the ANC
Rental Agreements may be extinguished or unenforceable. These claims could
include indemnification rights with respect to payments made by the Company to
the Internal Revenue Service as a result of audit adjustments in its
consolidated federal income tax returns relating to ANC Rental's automotive
rental businesses prior to the spin-off. In the event that the Company is called
on to perform under the foregoing credit enhancements and guarantees and it has
claims under the ANC Rental Agreements that ANC Rental cannot satisfy, the
Company estimates that, based on its assessment of the risks involved in each
matter, its aggregate obligations under the credit enhancements, guarantees and
ANC Rental Agreements could be in the range of $50.0 million to $150.0 million.
However, the exposure is difficult to estimate and the Company cannot assure
that its aggregate obligations under these credit enhancements, guarantees and
ANC Rental Agreements will not be materially above the range indicated above.
27
At September 30, 2001 and December 31, 2000, the Company had $890.9
million and $877.2 million, respectively, of net deferred tax liabilities. The
Company provides for deferred income taxes in its unaudited condensed
consolidated financial statements to show the effect of temporary differences
between the recognition of revenue and expenses for financial and income tax
reporting purposes and between the tax basis of assets and liabilities and their
reported amounts in the financial statements. Over the past four years, the
Company has engaged in certain transactions that are of a type that the Internal
Revenue Service has recently indicated it intends to challenge. A significant
amount of the Company's deferred tax liabilities relates to these transactions.
The Company believes that its tax returns appropriately reflect such
transactions. At the present time, the Company is unable to predict the outcome
of any challenge if the IRS determines to challenge the tax reporting of such
transactions. An unfavorable settlement or adverse resolution of these matters
could have a material adverse effect on the Company's financial condition,
results of operations, cash flows and assets.
The Company believes that it has sufficient operating cash flow and
other financial resources available to meet its anticipated capital requirements
and obligations as they come due.
CASH FLOWS
Cash and cash equivalents increased (decreased) by $4.5 million and
($102.4) million during the nine months ended September 30, 2001 and 2000,
respectively. The major components of these changes are discussed below.
CASH FLOWS FROM OPERATING ACTIVITIES
Cash provided by operating activities was $409.4 million and $330.9
million during the nine months ended September 30, 2001 and 2000, respectively.
Cash flows from operating activities include purchases of vehicle
inventory which are separately financed through secured floorplan facilities.
Changes in inventory and related financing have been reflected as operating
activities in the Statement of Cash Flows.
CASH FLOWS FROM INVESTING ACTIVITIES
Cash flows from investing activities consist primarily of cash used for
capital additions, business acquisitions and divestitures, property
dispositions, net activity of installment loan receivables, purchases and sales
of investments and other transactions as further described below.
Capital expenditures were $86.3 million and $82.8 million during the
nine months ended September 30, 2001 and 2000, respectively.
Funding of installment loan receivables, net of collections, totaled
$444.2 million and $451.4 million for the nine months ended September 30, 2001
and 2000, respectively. Related proceeds from securitization of installment loan
contracts were $514.0 million and $585.1 million for the nine months ended
September 30, 2001 and 2000, respectively.
Cash used in business acquisitions was $83.2 million and $242.8 million
for the nine months ended September 30, 2001 and 2000, respectively. The
decrease in cash used in business acquisitions was primarily due to the effect
of a planned reduction in acquisition activity for 2001.
During the nine months ended September 30, 2001, the Company invested
restricted cash deposits under various insurance programs in restricted
investments.
The Company intends to finance capital expenditures, business
acquisitions and funding of installment loan receivables through cash flow from
operations, revolving credit facilities, asset-backed securitized facilities and
other financings.
28
CASH FLOWS FROM FINANCING ACTIVITIES
Cash flows from financing activities during the nine months ended
September 30, 2001 and 2000 consisted of revolving credit payments, proceeds
from unsecured senior notes issued, repayments of acquired debt and treasury
stock purchases.
During the nine months ended September 30, 2001 and 2000, the Company
spent approximately $187.2 million and $110.7 million, respectively, to
repurchase shares of common stock under the Company's Board approved share
repurchase programs.
SEASONALITY
The Company's operations generally experience higher volumes of vehicle
sales in the second and third quarters of each year in part due to consumer
buying trends and the introduction of new vehicle models. Also, demand for cars
and light trucks is generally lower during the winter months than in other
seasons, particularly in regions of the United States where dealerships may be
subject to harsh winters. Accordingly, the Company expects its revenue and
operating results to be generally lower in the first and fourth quarters as
compared to the second and third quarters.
FORWARD-LOOKING STATEMENTS
The Company's business, financial condition, results of operations,
cash flows and prospects, and the prevailing market price and performance of its
common stock, may be adversely affected by a number of factors, including the
matters discussed below. Certain statements and information set forth herein in
this Form 10-Q, as well as other written or oral statements made from time to
time by the Company or by its authorized officers on the Company's behalf,
constitute "forward-looking statements" within the meaning of the Federal
Private Securities Litigation Reform Act of 1995. The Company intends for its
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995, and it sets forth this statement and these risk factors in order to
comply with such safe harbor provisions. It should be noted that the Company's
forward-looking statements speak only as of the date of this Form 10-Q or when
made and the Company undertakes no duty or obligation to update or revise its
forward-looking statements, whether as a result of new information, future
events or otherwise. Although the Company believes that the expectations, plans,
intentions and projections reflected in its forward-looking statements are
reasonable, such statements are subject to known and unknown risks,
uncertainties and other factors that may cause actual results, performance or
achievements to be materially different from any future results, performance or
achievements expressed or implied by the forward-looking statements.
The risks, uncertainties and other factors that the Company's
shareholders and prospective investors should consider include, but are not
limited to, the following:
The automotive retail industry is cyclical and is highly sensitive to
changing economic conditions;
The Company is in the midst of an industry and general economic
slowdown that could materially adversely impact its business;
The Company may be required to perform under certain credit
enhancements and guarantees with respect to ANC Rental Corporation;
The Company has engaged in certain transactions that may be challenged
by the IRS and may have a material adverse effect on its results of
operations, cash flows and assets;
The Company is subject to consumer credit risk in connection with its
installment receivables portfolio;
29
The Company's new credit facilities and senior notes contain numerous
financial and operating covenants that place certain restrictions on
the Company;
The Company is substantially dependent on vehicle manufacturers;
The Company faces significant competition in the automotive retail
industry;
The Company is subject to restrictions imposed by vehicle
manufacturers;
The Company needs substantial capital;
The Company is subject to numerous legal and administrative
proceedings;
The Company is subject to extensive governmental regulation;
The Company may not be able to successfully execute its strategy;
The Company may have difficulty expanding through acquisitions of
franchised automotive dealerships in its key markets;
The loss of key personnel could affect the Company's operations; and
The Company is subject to residual value risk and consumer credit risk
in connection with its lease portfolio.
Please refer to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2000, and to the Company's subsequent filings with the
SEC for additional discussion of the foregoing risk factors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following information about the Company's market sensitive
financial instruments constitutes a "forward-looking statement." The Company's
major market risk exposure is changing interest rates. The Company's policy is
to manage interest rate risk through the use of a combination of fixed and
floating rate debt and interest rate derivatives based upon market conditions.
The derivatives consist of interest rate swaps, caps and floors which are
entered into with a group of financial institutions with investment grade credit
ratings, thereby minimizing the risk of credit loss.
Reference is made to the Company's quantitative disclosures about
market risk as of December 31, 2000 included in the Company's Annual Report on
Form 10-K.
The Company uses interest rate swap agreements to manage the impact of
interest rate changes on borrowings under the Company's variable rate vehicle
inventory, mortgages, and revolving credit facilities. At September 2001, the
Company had no derivatives hedging corporate debt with variable interest rate
exposure.
The Company has entered into certain interest rate derivative
transactions with certain financial institutions to manage the impact of
interest rate changes on securitized installment loan receivables. These
derivative transactions consist of a series of interest rate caps and floors at
the same strike price with an aggregate notional amount of $84.6 million
contractually maturing through 2007, which effectuate a variable to fixed rate
swap at a weighted-average rate of 4.85%. During 2001, the Company has
entered into a series of forward starting swaps with a maximum aggregate
notional amount of $14.0 million contractually maturing through 2007 which
effectuate a fixed to variable rate swap at a weighted-average rate of 5.51%.
Variable rates on the underlying portfolio are indexed to the Commercial Paper
Nonfinancial rate.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In October 2000, the California Department of Motor Vehicles
("California DMV") brought action against one of the Company's California
dealerships for alleged customer fraud as well as several other claims. (This
matter was previously discussed in the Legal Proceedings section of the
Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000
and the Company's Quarterly Reports on Form 10-Q for the fiscal quarters ended
March 31, 2001 and June 30, 2001.) In April 2001, the California DMV action and
a related action by the State of California were settled. As part of the
settlement, the dealership closed its sales operations for six days, agreed to
provide restitution to certain customers in the estimated amount of
approximately $1.0 million and paid $1.1 million in fines, penalties and costs.
Three purported civil class actions and other related lawsuits and claims have
been filed or made against the dealership based on the allegations underlying
the California DMV case.
In an action filed in Florida state court in 1999, a wholly-owned
subsidiary of the Company was accused of violating, among other things, the
Florida Motor Vehicle Retail Sales Finance Act and the Florida Deceptive and
Unfair Trade Practices Act by allegedly failing to deliver executed copies of
retail installment contracts to customers of the Company's used vehicle
megastores. (This matter was previously discussed in the Legal Proceedings
section of the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2000 and the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 2001.) In October 2000, the court certified the class of
customers on whose behalf the action would proceed. In July 2001, Florida's
Fourth District Court of Appeals upheld the certification of the class.
The Company intends to vigorously defend itself and assert available
defenses with respect to each of the foregoing matters. Further, the Company has
certain insurance coverage and rights of indemnification with respect to certain
aspects of the foregoing matters. However, a settlement or an adverse resolution
of one or more of these matters may result in the payment of significant costs
and damages that could have a material adverse effect on the Company's business,
financial condition, results of operations and cash flows.
The Company is also a party to numerous other legal proceedings that
arose in the conduct of its business. The Company does not believe that the
ultimate resolution of these matters will have a material adverse effect on its
business, financial condition, results of operations or cash flows. However, the
results of these matters cannot be predicted with certainty and an unfavorable
resolution of one or more of these matters could have a material adverse effect
on its business, financial condition, results of operations and cash flows.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
4.4 Indenture, dated as of August 10, 2001, relating to
the issuance of $450.0 million aggregate principal
amount of senior notes due 2008 (incorporated by
reference to Exhibit 4.4 to the Registration
Statement on Form S-4 (SEC 333-71098) filed on
October 5, 2001).
4.5 The Company is a party to certain long-term debt
agreements where the amount involved does not exceed
10% of the Company's total assets. The Company agrees
to furnish a copy of any such agreements to the
Commission upon request.
(b) Reports on Form 8-K:
Form 8-K, dated July 20, 2001 (filed July 20, 2001), Item 5,
reporting that AutoNation, Inc. proposes to issue
approximately $300.0 million in senior notes due in 2008.
Form 8-K, dated August 1, 2001 (filed August 2, 2001), Item 5,
reporting that AutoNation, Inc. has priced $450.0 million
aggregate principal amount of its 9.0% senior unsecured notes
due 2008 at 98.731% of face value.
32
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant, AutoNation, Inc., has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
AUTONATION, INC.
By: /s/ Patricia A. McKay
----------------------------------
Patricia A. McKay
Senior Vice President-Finance
(PRINCIPAL ACCOUNTING OFFICER)
Date: November 1, 2001
33